SIE Full-Length Mock Exam 12

Explanation: A sell stop order is placed below the current market price to limit potential losses if the stock’s price declines to the stop level.

Explanation: Common stock represents equity ownership in a corporation, whereas bonds and notes are debt instruments.

Explanation: The Securities Act of 1933 is the primary federal law requiring full and fair disclosure of material information for new securities offerings.

Explanation: Bonds are quoted as a percentage of par value. A quote of 103 ($1,030) on a $1,000 par bond indicates trading at a premium.

Explanation: Treasury securities are backed by the full faith and credit of the U.S. government, providing the lowest default risk among the choices.

Explanation: Churning is the illegal practice of excessive trading in a customer’s account for the sole purpose of generating commissions.

Explanation: Investors with long time horizons and high risk tolerance generally seek the capital appreciation potential found in growth-oriented equities.

Explanation: Bondholders are creditors of the corporation who lend money in exchange for fixed interest payments; they do not hold voting rights.

Explanation: A put option gives the holder the right to sell the stock at a specified price; it increases in value as the underlying stock price declines.

Explanation: Lowering the federal funds rate is an expansionary monetary policy intended to lower borrowing costs and stimulate economic activity.

Explanation: Revenue bonds are supported by income generated from the specific project (e.g., bridge, utility, or arena) the bond is financing.

Explanation: The bid price is the highest price a buyer is willing to pay for a security, whereas the ask price is the lowest a seller is willing to accept.

Explanation: Treasury bills are short-term, government-backed instruments considered extremely liquid and safe for preserving principal capital.

Explanation: Diversification aims to reduce unsystematic risk (or company-specific risk) by spreading investments across various unrelated assets.

Explanation: Margin trading involves borrowing money to buy securities, which magnifies potential returns but also significantly increases potential losses.

Explanation: An option contract is a derivative because its value is derived from the price movement of an underlying asset.

Explanation: The primary market is the venue where an issuer sells newly created securities to the public for the first time (e.g., an IPO).

Explanation: FINRA rules require a client to provide written authorization before a representative can exercise discretionary authority to trade the account.

Explanation: The unemployment rate is a classic lagging indicator because changes in employment follow changes in the overall economic cycle.

Explanation: A bondholder is a lender who is owed a debt by the issuer, making them a creditor, not an equity owner.

Explanation: Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-producing real estate.

Explanation: FINRA (Financial Industry Regulatory Authority) is a self-regulatory organization (SRO) authorized to protect investors and regulate firms.

Explanation: Unlike stocks, mutual fund shares do not trade on exchanges; they are purchased or redeemed at the current Net Asset Value (NAV).

Explanation: Preferred stock carries a priority claim on dividends, meaning preferred shareholders must be paid before common shareholders receive any dividends.

Explanation: A bear market is defined by a significant, prolonged decline in stock prices, typically falling 20% or more from recent highs.

Explanation: Since an uncovered call writer does not own the underlying stock, they must purchase it at market price if assigned; because stock prices can rise indefinitely, the risk is theoretically unlimited.

Explanation: SIPC (Securities Investor Protection Corporation) protects customers if their broker-dealer becomes insolvent and assets are missing; it does not protect against market losses.

Explanation: The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) to regulate the secondary trading markets.

Explanation: Unlike mutual funds, ETFs are traded on secondary exchanges throughout the day, much like individual stocks.

Explanation: A limit order ensures that a trade only executes at the specified price or better; a buy limit will only trigger if the price drops to or below that limit.

Explanation: Penny stocks are speculative, thinly traded, and lack a long history of earnings, which makes them highly volatile compared to more established securities.

Explanation: Callable bonds allow the issuer to redeem the bond early; this forces the investor to reinvest their money, often when interest rates are lower (reinvestment risk).

Explanation: Joint Tenants with Rights of Survivorship (JTWROS) is an account structure where, upon one owner’s death, their share automatically passes to the remaining joint owner(s).

Explanation: FINRA requires all firms to provide clients with the Options Disclosure Document (ODD) before they are approved for options trading.

Explanation: A prospectus is a formal legal document that provides all material information regarding a new securities offering to potential investors.

Explanation: Issuing bonds allows a company to raise capital without diluting the ownership percentage of existing shareholders.

Explanation: U.S. Treasury securities are supported by the full faith and credit of the U.S. government, which is why they carry the least default risk.

Explanation: An American Depositary Receipt (ADR) is a certificate issued by a U.S. bank that represents shares of a foreign stock, allowing it to trade on U.S. markets.

Explanation: Wash trades (buying and selling the same security to yourself) are illegal because they create the false appearance of active trading volume.

Explanation: Bonds with longer maturities have more future payments, making their market price more volatile when interest rates change.

Explanation: Once the stock hits the stop price, a stop-limit order is activated and transforms into a limit order that fills only at the limit price or better.

Explanation: The ask price (or offer price) is the minimum price a seller is willing to accept to sell their security.

Explanation: Options allow an investor to leverage a small amount of capital to control a larger amount of underlying stock, making them common for speculative traders.

Explanation: Variable annuities are tax-deferred investment vehicles, meaning investors do not pay taxes on earnings until the money is withdrawn.

Explanation: Systematic risk is market-wide risk (like economic changes or geopolitical events) that affects all assets and cannot be avoided through diversification.

Explanation: To be entitled to receive a dividend payment, an investor must have purchased the stock before the ex-dividend date.

Explanation: A market order prioritizes speed and guarantees that the order will be filled (executed), but it provides no guarantee regarding the final execution price.

Explanation: Municipal bonds are highly favored because the interest they pay is generally exempt from federal income taxes.

Explanation: When the Federal Reserve increases reserve requirements, banks have less money available to loan out to customers, thereby reducing lending capacity.

Explanation: Investors who want current income rely on blue-chip stocks that have a long history of paying out reliable dividends to their shareholders.

Explanation: Open-end investment companies are the official structure of mutual funds, which stand ready to redeem shares from investors at any time.

Explanation: Front-running is an illegal act where a broker executes orders for their own account before executing a pending customer order to profit from the expected price movement.

Explanation: Zero-coupon bonds make no periodic interest payments and are sold at a deep discount from their par value.

Explanation: Rating agencies evaluate the issuer’s financial strength to determine its credit quality and the probability that it will default on debt payments.

Explanation: Unlike an auction exchange like the NYSE, NASDAQ is a dealer market where market makers compete to provide liquidity.

Explanation: Fixed-income investments lose purchasing power as inflation rises, making long-term bonds particularly undesirable for those fearing high inflation.

Explanation: Tenants in common allows joint owners to hold different proportions of the account assets, unlike JTWROS which implies equal splits.

Explanation: Call options provide the right to buy stock at a fixed price, so the buyer profits when the stock price increases.

Explanation: The SEC’s mandate is focused on protecting investors and ensuring that securities markets are fair, transparent, and orderly.

Explanation: These funds are designed for safety and liquidity, investing in high-quality, short-term debt instruments like commercial paper and T-bills.

Explanation: Regulation T (Reg T) establishes the initial margin requirements for the purchase of securities by customers.

Explanation: In a 2-for-1 split, the investor receives double the shares, but each share is worth approximately half the pre-split price, keeping the total value equal.

Explanation: Variable annuities are structured to allow for tax-deferred accumulation and often include insurance features like a minimum death benefit.

Explanation: Unlike open-end funds (mutual funds), closed-end funds have a fixed number of shares that trade on an exchange, similar to a regular stock.

Explanation: Confidential merger discussions are highly material; they are not known to the public and would impact the stock price, making them illegal for insider trading purposes.

Explanation: This act established the framework for the regulation of investment companies, including mutual funds and other collective investment products.

Explanation: Inflation erodes the purchasing power of money. Those living on fixed-dollar interest payments (bondholders) are most impacted.

Explanation: When a bond’s market price exceeds its $1,000 par value, it is referred to as trading at a premium.

Explanation: Convertible bonds provide the owner with the right to convert the debt into a pre-determined number of shares of the company’s common stock.

Explanation: A market maker is a dealer that carries an inventory of securities and quotes bid/ask prices to provide liquidity to the market.

Explanation: A sell limit order sets a minimum price; the broker will only execute the trade if the stock price reaches or exceeds $55.

Explanation: Diversification helps mitigate company-specific (unsystematic) risks, but it cannot remove systematic market risk, which affects the entire economy.

Explanation: FINRA rules prohibit reps from borrowing from customers, unless there are specific exemptions, such as immediate family members or established financial lending institutions.

Explanation: The principal value of TIPS is adjusted up or down based on the Consumer Price Index (CPI), which serves as a hedge against inflation.

Explanation: Mutual fund shares are not exchange-traded; they must be sold back to the fund company at the current Net Asset Value (NAV).

Explanation: To curb high inflation and slow an overheating economy, the Federal Reserve typically raises interest rates.

Explanation: Blue-chip companies are large, well-known firms that have established themselves through years of stable earnings and growth.

Explanation: The coupon rate is the annual interest rate expressed as a percentage of the bond’s face (par) value.

Explanation: Penny stocks are often illiquid due to low trading volume, making them the most difficult asset to exit quickly without a price impact.

Explanation: While the Federal Reserve handles monetary policy, the U.S. Congress and the President control fiscal policy through spending and taxation.

Explanation: A limit order establishes a maximum buy price or minimum sell price, ensuring that if it is executed, it meets the client’s price requirements.

Explanation: Investors in foreign securities face currency exchange risk, where fluctuations in foreign currency values impact the investment’s return in the investor’s home currency.

Explanation: Under the Uniform Transfers to Minors Act, the assets in the account are legally owned by the minor, even though the custodian controls them.

Explanation: Callable bonds contain a provision that gives the issuer the right to redeem the bond from the investor before its scheduled maturity date.

Explanation: The primary market refers to the initial issuance of securities, where capital is raised by selling new shares or bonds directly to the public.