SIE
SIE sample questions, with every answer explained
The list below shows every question of the products section with its answer and explanation. Read it like a workbook, or hide the answers and test yourself.
1.Which right is generally held by common stockholders?
- A. A guaranteed quarterly dividend
- B. Repayment of par value before bondholders in liquidation
- C. The right to vote on the election of the board of directors (right answer)
- D. A fixed maturity date when the company buys back the shares
Common shareholders elect the board and vote on major corporate matters such as mergers. Dividends are paid only if the board declares them, so they are never guaranteed. In liquidation, common stock has the last claim, behind creditors, bondholders and preferred stock, and common shares have no maturity date.
Outline point 2.1.1
2.A corporation is liquidated. Which of the following holders is paid last?
- A. Holders of secured bonds
- B. Holders of debentures
- C. Holders of preferred stock
- D. Holders of common stock (right answer)
In liquidation, creditors come first (secured creditors, then unsecured creditors such as debenture holders), followed by preferred stockholders, and common stockholders receive only what remains. Preferred stock is the tempting answer because it is equity too, but it has priority over common stock for both dividends and liquidation proceeds.
Outline point 2.1.1
3.An investor buys 500 shares of a corporation for $10,000. The corporation later goes bankrupt with large unpaid debts. What is the most the investor can lose?
- A. $10,000 (right answer)
- B. $10,000 plus a share of the unpaid debts
- C. The par value of the shares only
- D. Nothing, because SIPC reimburses stockholders
Stockholders enjoy limited liability: they cannot be held personally responsible for the corporation's debts, so the most they can lose is the amount invested. Par value is an accounting figure, not a cap on loss. SIPC protects customers of failed broker-dealers, not shareholders of failed companies.
Outline point 2.1.1
4.A company has 6% cumulative preferred stock with a $100 par value. It paid no preferred dividends last year or the year before. How much per preferred share must it pay this year before paying any common dividend?
- A. $6
- B. $12
- C. $18 (right answer)
- D. $24
Cumulative preferred carries forward missed dividends. Each year's dividend is 6% of $100, or $6. Two missed years ($12 in arrears) plus the current year ($6) gives $18 per share before common stockholders can receive anything. The $12 trap forgets the current year's dividend.
Outline point 2.1.1
5.Which statement best describes a stock right issued in a rights offering?
- A. A long-term option to buy stock at a price above the market, often attached to bonds
- B. A short-term privilege letting existing shareholders buy new shares, usually below the market price (right answer)
- C. A certificate representing shares of a foreign company
- D. A promise by the company to buy back shares at a set price
Rights come from the preemptive right: existing holders may buy new shares in proportion to their holdings, usually at a subscription price below market, and the rights expire within weeks. The first choice describes a warrant, which is long term and typically priced above the market when issued.
Outline point 2.1.1
6.A corporation issues bonds with warrants attached. The warrants most likely:
- A. give the holder a long-term right to buy common stock at a set price, typically above the market price when issued (right answer)
- B. guarantee the interest payments on the bonds
- C. convert the bonds into preferred stock automatically at maturity
- D. must be exercised within a few weeks or they expire
Warrants are sweeteners that make a bond issue more attractive: they are long-term rights to buy common stock at a fixed exercise price, usually set above the market at issuance. A short life of a few weeks describes rights in a rights offering, not warrants. Warrants do not guarantee interest.
Outline point 2.1.1
7.Which risk remains for a U.S. investor who holds an American Depositary Receipt (ADR) even though it trades in U.S. dollars?
- A. Settlement risk, because ADRs settle in the foreign market
- B. Currency risk, because the value of the underlying foreign shares depends on exchange rates (right answer)
- C. No additional risk, because the depositary bank guarantees the share price
- D. Interest rate risk only, because ADRs pay fixed coupons
An ADR is a receipt for foreign shares held by a U.S. depositary bank. The dollar price follows the foreign share price converted at the exchange rate, so currency moves affect the investor's value and dividends. Trading in dollars is the trap: it changes the quote currency, not the underlying currency exposure.
Outline point 2.1.1
8.An officer (an affiliate) of a reporting company wants to sell control stock under Rule 144. The company has 30,000,000 shares outstanding and weekly trading volume averaged 250,000 shares over the last four calendar weeks. What is the most the officer may sell in a three-month period?
- A. 250,000 shares
- B. 300,000 shares (right answer)
- C. 1,000,000 shares
- D. There is no limit for control stock
For affiliates, Rule 144 limits sales in any three months to the greater of 1% of shares outstanding or the average weekly trading volume over the preceding four calendar weeks. One percent of 30,000,000 is 300,000, which is greater than 250,000, so 300,000 shares is the limit. The 250,000 trap picks the smaller test.
Outline point 2.1.1 · SEC Rule 144(e)
9.An investor bought restricted stock in a private placement from a company that has been an SEC reporting company for several years. Under Rule 144, how long must the stock generally be held before public resale?
- A. 30 days
- B. 90 days
- C. Six months (right answer)
- D. Three years
For restricted securities of an issuer that has been subject to Exchange Act reporting for at least 90 days, Rule 144 requires a six-month holding period from full payment. If the issuer is not a reporting company, the period is one year. The 90-day choice confuses the reporting-history condition with the holding period.
Outline point 2.1.1 · SEC Rule 144(d)
10.A stockholder owns 200 shares. Three directors are to be elected. Under cumulative voting, the stockholder may:
- A. cast 200 votes for each director only
- B. cast 200 votes in total, split among the three seats
- C. cast only one vote per director
- D. cast 600 votes in any combination, including all 600 for one candidate (right answer)
Cumulative voting multiplies shares by the number of seats (200 x 3 = 600 votes) and lets the holder concentrate them, which helps minority holders elect a director. Casting 200 votes per seat with no concentration is statutory voting, the tempting confusion.
Outline point 2.1.1
11.Market interest rates rise sharply after an investor buys a fixed-rate bond. What happens to the market price of the bond?
- A. It falls (right answer)
- B. It rises
- C. It stays at par until maturity
- D. It rises only if the bond is callable
Bond prices move inversely to interest rates. When new bonds offer higher coupons, an existing bond with a lower fixed coupon is worth less, so its price drops until its yield matches the market. Staying at par is the trap: a bond is repaid at par only at maturity, and its price floats in between.
Outline point 2.1.2
12.A bond with a 5% coupon and $1,000 par value trades at 80 ($800). What is its current yield?
- A. 4.00%
- B. 5.00%
- C. 6.25% (right answer)
- D. 8.00%
Current yield is annual interest divided by current market price. The coupon pays 5% of $1,000, or $50 a year; $50 divided by $800 is 6.25%. The 5.00% trap is the nominal (coupon) yield, which is based on par and does not change with price.
Outline point 2.1.2
13.For a bond trading at a discount to par, how do its yields rank from lowest to highest?
- A. Yield to maturity, current yield, nominal yield
- B. Nominal yield, current yield, yield to maturity (right answer)
- C. Current yield, nominal yield, yield to maturity
- D. They are all equal
At a discount, the fixed coupon divided by a lower price makes current yield higher than nominal yield, and yield to maturity is higher still because it also counts the gain from the discount price up to par at maturity. At a premium the order reverses, which is what the first choice describes.
Outline point 2.1.2
14.Which statement about U.S. Treasury bills is accurate?
- A. They pay interest every six months
- B. They are issued with maturities of 2 to 10 years
- C. They are backed only by the revenue of a federal agency
- D. They are sold at a discount and pay face value at maturity, with terms of one year or less (right answer)
T-bills are short-term Treasury obligations with terms from a few weeks up to 52 weeks. They pay no coupon; the investor buys below face value and receives face value at maturity. Semiannual interest and 2 to 10 year terms describe Treasury notes, the most common confusion.
Outline point 2.1.2
15.Treasury STRIPS are best described as:
- A. zero-coupon securities created from the separate interest and principal payments of Treasury notes and bonds (right answer)
- B. Treasury bonds whose principal adjusts for inflation
- C. floating-rate notes reset weekly
- D. savings bonds sold only to individuals
STRIPS separate each coupon and the principal of a Treasury note or bond into individual zero-coupon securities, each bought at a discount and paying face value at one date. They have no reinvestment risk but are very sensitive to interest rates. Inflation-adjusted principal describes TIPS.
Outline point 2.1.2
16.How does the inflation protection of Treasury Inflation-Protected Securities (TIPS) work?
- A. The coupon rate is reset monthly to the inflation rate
- B. The principal value is adjusted for changes in the Consumer Price Index, and the fixed coupon rate is applied to the adjusted principal (right answer)
- C. The Treasury pays a bonus at maturity if inflation exceeded the coupon
- D. TIPS are exempt from all federal taxes
With TIPS, the principal is indexed to the CPI; the coupon rate stays fixed but is paid on the adjusted principal, so interest payments rise with inflation. The coupon rate itself does not reset, which is the trap in the first choice. Interest and inflation adjustments are subject to federal income tax.
Outline point 2.1.2
17.Which mortgage-backed securities carry the full faith and credit guarantee of the U.S. government?
- A. Fannie Mae securities
- B. Freddie Mac securities
- C. Ginnie Mae securities (right answer)
- D. Private-label CMOs
Ginnie Mae is a government corporation within the Department of Housing and Urban Development, and its guarantee is backed by the full faith and credit of the United States. Fannie Mae and Freddie Mac are government-sponsored enterprises: their securities carry their own guarantee, not an explicit U.S. government guarantee.
Outline point 2.1.2
18.When mortgage interest rates fall sharply, holders of mortgage-backed pass-through securities face which main risk?
- A. Extension risk
- B. Prepayment risk (right answer)
- C. Currency risk
- D. Political risk
Falling rates lead homeowners to refinance, so principal comes back early and must be reinvested at the new lower rates; this is prepayment risk. Extension risk is the opposite case: when rates rise, prepayments slow and the security's expected life lengthens.
Outline point 2.1.2
19.A general obligation (GO) municipal bond is backed primarily by:
- A. the full faith, credit and taxing power of the issuing government (right answer)
- B. revenue from a specific facility such as a toll road
- C. the U.S. Treasury
- D. a letter of credit from a commercial bank
GO bonds are secured by the issuer's general taxing power (for example property taxes for local governments) and often need voter approval. A specific facility's user fees back a revenue bond, which is the main confusion. Bank letters of credit are a credit enhancement some issues add, not the basic security of a GO bond.
Outline point 2.1.2
20.Bonds issued to build an airport terminal, repaid from landing fees and terminal rents, are:
- A. general obligation bonds
- B. special assessment bonds
- C. moral obligation bonds
- D. revenue bonds (right answer)
Revenue bonds are repaid from the income of the financed project, here landing fees and rents, rather than taxes. A special assessment bond is repaid from a levy on the specific properties that benefit from an improvement, such as sidewalks, which is the closest distractor.
Outline point 2.1.2
21.A resident of State A buys a general obligation bond issued by a city in State B. How is the interest generally taxed?
- A. Exempt from federal income tax and from State A income tax
- B. Exempt from federal income tax but possibly taxable by State A (right answer)
- C. Taxable at the federal level but exempt in State A
- D. Taxable at both levels
Interest on most municipal bonds is excluded from federal gross income. States, however, usually exempt only interest on their own bonds, so a resident of State A buying State B bonds generally owes State A tax on the interest. Assuming double exemption for an out-of-state bond is the trap.
Outline point 2.1.2 · Internal Revenue Code Section 103
22.Commercial paper is best described as:
- A. a long-term secured bond of a corporation
- B. a deposit at a bank insured by the FDIC
- C. an unsecured short-term promissory note issued by a corporation (right answer)
- D. a time draft used to finance international trade
Commercial paper is a short-term unsecured note issued at a discount by corporations with strong credit, used for working capital. A time draft guaranteed by a bank to finance imports and exports is a banker's acceptance, the closest distractor. Commercial paper is not a deposit and is not FDIC insured.
Outline point 2.1.2
23.A banker's acceptance is most commonly used to:
- A. finance international trade (right answer)
- B. fund a state's general budget
- C. provide long-term financing for real estate
- D. pay dividends to preferred stockholders
A banker's acceptance is a time draft that a bank has accepted, guaranteeing payment; it lets importers and exporters trade with confidence. It is a short-term money market instrument. Long-term real estate financing and government budgets are financed with other debt instruments.
Outline point 2.1.2
24.Which bond rating is the lowest considered investment grade by Standard & Poor's?
- A. A
- B. BB
- C. B
- D. BBB (right answer)
On the S&P scale, AAA through BBB (including BBB minus) are investment grade; BB and below are speculative, often called high yield or junk. BB is the trap because it sits directly below the cutoff. Moody's equivalent lowest investment-grade category is Baa.
Outline point 2.1.2
25.Why would an issuer be most likely to call its bonds?
- A. Interest rates have risen since the bonds were issued
- B. Interest rates have fallen, so it can refinance at a lower cost (right answer)
- C. The bonds are trading at a deep discount
- D. Its credit rating has been downgraded
Issuers call bonds when rates drop, replacing expensive debt with cheaper debt. For the investor this creates call risk and reinvestment risk, since the money comes back when rates are low. When rates rise and bonds trade at a discount, an issuer would rather buy them back cheaply in the market than pay the call price.
Outline point 2.1.2
26.Compared with a nonconvertible bond of the same issuer and maturity, a convertible bond usually offers:
- A. a higher coupon, because conversion is a risk to the investor
- B. the same coupon and a higher credit rating
- C. a lower coupon, because the conversion feature has value to the investor (right answer)
- D. no coupon at all
Investors accept a lower interest rate in exchange for the right to convert into common stock and share in its upside. The conversion feature costs the issuer less in interest, not more, so the higher-coupon choice reverses the trade-off. Conversion does not change the credit rating.
Outline point 2.1.2
27.In a competitive municipal bond sale, how is the underwriter selected?
- A. Syndicates submit sealed bids and the issuer awards the bonds to the bid with the lowest interest cost (right answer)
- B. The issuer chooses an underwriter and negotiates the terms privately
- C. The bonds are sold directly to investors through the Treasury
- D. The MSRB assigns an underwriter based on rotation
In a competitive sale, the issuer publishes a notice of sale and syndicates submit bids; the award goes to the bid producing the lowest interest cost to the issuer. GO bonds are often sold this way. Choosing an underwriter and negotiating terms directly is a negotiated sale, common for revenue bonds.
Outline point 2.1.2
28.In a Treasury auction, a noncompetitive bidder:
- A. specifies the lowest yield it will accept
- B. is guaranteed to receive securities at the yield set by the auction (right answer)
- C. can buy only Treasury bonds
- D. pays a higher price than competitive bidders
Noncompetitive bidders agree to accept whatever yield the auction determines and, within limits, are assured of receiving the securities. Specifying a yield is what competitive bidders do, and they risk not being filled if their bid yield is too low. All accepted bidders receive the same yield.
Outline point 2.1.2
29.Two bonds have the same coupon and credit quality. One matures in 3 years and the other in 25 years. If market rates rise by 1%, which is true?
- A. Both prices fall by the same amount
- B. The 3-year bond falls more
- C. Neither price changes until maturity
- D. The 25-year bond falls more (right answer)
Longer-maturity bonds are more sensitive to interest rate changes because the below-market coupon is locked in for more years, so the price must drop further to compensate. Short-term bonds return principal sooner, limiting price changes. This is why long bonds carry more interest rate risk.
Outline point 2.1.2
30.An investor who expects a stock to rise sharply but wants to limit the maximum loss to a known amount would most likely:
- A. buy a call (right answer)
- B. sell a call
- C. buy a put
- D. sell a put uncovered
Buying a call is bullish and the most the buyer can lose is the premium paid. Selling a put is also bullish, which makes it tempting, but the writer's risk runs to the strike price minus the premium if the stock collapses, so the loss is not limited to a small known amount.
Outline point 2.1.3
31.XYZ stock trades at $47. Which option is in the money?
- A. XYZ 50 call
- B. XYZ 45 put
- C. XYZ 50 put (right answer)
- D. XYZ 47.50 call
A put is in the money when the stock price is below the strike; with XYZ at $47, the 50 put has $3 of intrinsic value. A call is in the money only when the stock is above the strike, so the 50 and 47.50 calls are out of the money, and the 45 put is out of the money because the stock is above $45.
Outline point 2.1.3
32.ABC stock trades at $62. An ABC 60 call trades at a premium of $5. How much of the premium is time value?
- A. $2
- B. $5
- C. $1
- D. $3 (right answer)
Intrinsic value of a call is the stock price minus the strike when positive: $62 minus $60 equals $2. Time value is the rest of the premium: $5 minus $2 equals $3. The $2 trap is the intrinsic value, not the time value.
Outline point 2.1.3
33.What distinguishes an American-style option from a European-style option?
- A. American-style options trade only in the United States
- B. An American-style option can be exercised at any time up to expiration; a European-style option only at expiration (right answer)
- C. European-style options are always cash settled and American-style never are
- D. American-style options have no expiration date
The labels describe exercise rights, not where the option trades: American style allows exercise on any business day before expiration, European style only at expiration. Many index options are European style and many are cash settled, but settlement method is a separate feature from exercise style, which is the trap in the third choice.
Outline point 2.1.3
34.An investor who owns 100 shares of a stock writes one call on that stock. This position is:
- A. a covered call, which earns premium income but caps the upside (right answer)
- B. an uncovered call with unlimited risk
- C. a protective put
- D. a long straddle
Writing a call against stock already owned is covered: if assigned, the investor delivers the shares held, so there is no unlimited risk. The trade-off is that gains above the strike are given up in exchange for the premium. An uncovered call is written without owning the stock and does carry unlimited risk.
Outline point 2.1.3
35.Which option position has theoretically unlimited risk?
- A. Long call
- B. Long put
- C. Short put
- D. Short uncovered call (right answer)
The writer of an uncovered call must deliver stock at the strike if assigned, and there is no ceiling on how high the stock can rise, so the potential loss is unlimited. A short put is risky but the loss is capped because a stock cannot fall below zero. Option buyers can lose only the premium.
Outline point 2.1.3
36.When must a customer receive the Options Disclosure Document (ODD)?
- A. Within 15 days after the first options trade
- B. Only if the customer asks for it
- C. At or before the time the account is approved for options trading (right answer)
- D. With the first monthly account statement
FINRA Rule 2360 requires the firm to deliver the current ODD, Characteristics and Risks of Standardized Options, no later than the time the account is approved for options trading. The 15-day period is the trap: it relates to the customer's signed options agreement, which can follow approval, not to delivery of the ODD.
Outline point 2.1.3 · FINRA Rule 2360(b)(11)
37.What is the role of the Options Clearing Corporation (OCC) for listed options?
- A. It sets the premium of each option
- B. It acts as issuer and guarantor of listed options, standing between buyers and writers (right answer)
- C. It approves customer accounts for options trading
- D. It insures option buyers against losses
The OCC is the issuer of listed options and guarantees performance: it becomes the buyer to every seller and the seller to every buyer, and assigns exercise notices to member firms. Premiums are set by market trading, and account approval is the job of the broker-dealer's options principal.
Outline point 2.1.3
38.How are broad-based index options typically settled when exercised?
- A. In cash, based on the difference between the index value and the strike price (right answer)
- B. By delivering every stock in the index
- C. By delivering shares of an index mutual fund
- D. They cannot be exercised, only closed
An index cannot be delivered, so index options settle in cash: the assigned writer pays the in-the-money amount times the contract multiplier. Delivering every stock in the index would be impractical, and exercise of index options is permitted, so the last choice is wrong.
Outline point 2.1.3
39.An investor holds a large stock position with big gains and fears a short-term decline but does not want to sell. Which strategy hedges the downside?
- A. Selling an uncovered put
- B. Buying a call
- C. Buying a put on the stock (right answer)
- D. Selling the stock short against the box
A protective put gives the right to sell at the strike, so it sets a floor on the position's value for the cost of the premium while keeping the upside. Selling a put adds downside exposure instead of hedging it, and buying a call adds bullish exposure. Shorting against the box is a different technique with its own tax rules.
Outline point 2.1.3
40.Which feature distinguishes an open-end fund from a closed-end fund?
- A. Open-end shares trade on exchanges at market prices
- B. Closed-end funds continuously issue and redeem shares at NAV
- C. Open-end funds issue a fixed number of shares in a single IPO
- D. Open-end funds continuously issue new shares and redeem them at NAV (right answer)
Open-end (mutual) funds sell new shares and redeem shares on demand at net asset value, so the share count changes daily. Closed-end funds issue a fixed number of shares in an offering, after which shares trade on an exchange at prices that may be above or below NAV. The other choices swap the two structures.
Outline point 2.1.4 · Investment Company Act of 1940, Section 5
41.A mutual fund has total assets of $52 million, liabilities of $2 million and 4 million shares outstanding. What is its NAV per share?
- A. $12.00
- B. $12.50 (right answer)
- C. $13.00
- D. $13.50
Net asset value equals total assets minus liabilities, divided by shares outstanding: ($52 million minus $2 million) divided by 4 million equals $12.50. The $13.00 trap divides total assets by the share count without subtracting liabilities.
Outline point 2.1.4
42.A fund's NAV is $9.40 and its public offering price is $10.00. What is the sales charge as a percentage of the offering price?
- A. 6.0% (right answer)
- B. 6.4%
- C. 5.6%
- D. 4.0%
Sales charge percentage is computed on the offering price: ($10.00 minus $9.40) divided by $10.00 equals 6.0%. The 6.4% trap divides the $0.60 load by the NAV instead of the POP, which is not how mutual fund sales charges are expressed.
Outline point 2.1.4 · FINRA Rule 2341
43.An investor will invest a large amount in a fund family and plans to hold for many years. Which share class is usually most cost effective?
- A. Class C shares, because they have no front-end load
- B. Class B shares, because the deferred charge eventually disappears
- C. Class A shares, because breakpoints reduce the front-end load and ongoing 12b-1 fees are lower (right answer)
- D. Any class, because total costs are identical
Class A shares charge a front-end load that falls at breakpoints for larger purchases and usually carry lower ongoing 12b-1 fees, so they often cost least for large, long-term investors. Class C shares avoid the upfront load but charge higher annual fees every year, which add up over a long holding period.
Outline point 2.1.4
44.A representative recommends that a customer invest $48,000 in a fund whose sales charge drops at $50,000, without mentioning the breakpoint, to earn a higher commission. This practice is called:
- A. a breakpoint sale, which is prohibited (right answer)
- B. dollar-cost averaging
- C. a letter of intent
- D. rights of accumulation
Steering purchases just below a breakpoint so the customer pays a higher sales charge is a prohibited breakpoint sale under FINRA Rule 2342. The representative should tell the customer about the breakpoint and about a letter of intent, which could let a later purchase reach the reduced charge. ROA and LOI are tools that help customers reach breakpoints.
Outline point 2.1.4 · FINRA Rule 2342
45.A customer already holds $40,000 of a fund family's Class A shares. She now buys $15,000 more, and the family's breakpoint is $50,000. Which feature lets her pay the reduced sales charge on the new purchase?
- A. Letter of intent
- B. Rights of accumulation (right answer)
- C. Exchange privilege
- D. Conversion privilege
Rights of accumulation let the value of existing holdings (here $40,000) count toward the breakpoint for a new purchase, so the $15,000 purchase brings her to $55,000 and qualifies for the lower charge. A letter of intent is a commitment about future purchases over a set period, typically 13 months, not credit for shares already held.
Outline point 2.1.4 · FINRA Rule 2341
46.A customer signs a letter of intent to invest enough to reach a breakpoint but does not complete the purchases within the period. What usually happens?
- A. The customer is fined by FINRA
- B. The fund cancels all prior purchases
- C. Nothing, because the letter is not binding on price
- D. The fund applies the higher sales charge that matches the amount actually bought, often using escrowed shares (right answer)
A letter of intent is not binding on the customer to keep buying, but the reduced charge depends on reaching the stated amount. If the customer falls short, the fund recalculates and collects the higher sales charge, typically by redeeming shares held in escrow. Purchases are not cancelled and FINRA does not fine customers.
Outline point 2.1.4
47.Under FINRA rules, a fund that charges an annual 12b-1 fee of 0.50% of net assets and no front-end or deferred load:
- A. may still be described as no-load
- B. must be called a closed-end fund
- C. may not be described as no-load (right answer)
- D. is prohibited from charging the fee
A fund may be called no-load only if it has no front-end or deferred sales charge and its asset-based sales and service charges do not exceed 0.25% of average net assets per year. At 0.50%, the fund fails the test. The fee itself is allowed; it just limits how the fund can be marketed.
Outline point 2.1.4 · FINRA Rule 2341(d)
48.Which statement about a unit investment trust (UIT) is accurate?
- A. It holds a fixed portfolio and has no board of directors or ongoing active management (right answer)
- B. It is actively managed by an investment adviser who trades daily
- C. It is a type of closed-end fund that must trade on an exchange
- D. It is a separate account of an insurance company
A UIT is organized under a trust indenture, buys a set portfolio that is generally held until the trust terminates, and has no board or investment adviser managing it. Its units are redeemable. Active management describes a management company, and an insurance separate account is the vehicle behind variable contracts.
Outline point 2.1.4 · Investment Company Act of 1940, Section 4
49.In a deferred variable annuity, who bears the investment risk of the subaccounts?
- A. The insurance company
- B. The contract owner (right answer)
- C. The broker-dealer that sold it
- D. The state guaranty association
The premiums of a variable annuity go into a separate account invested in subaccounts chosen by the contract owner, so the owner gains or loses with the investments. That investment risk is why variable annuities are securities. In a fixed annuity, the insurer bears the investment risk, which is the trap.
Outline point 2.1.4
50.A 50-year-old owner of a nonqualified deferred variable annuity withdraws part of the contract value, which includes gains. How is the withdrawal generally taxed?
- A. Tax free, because premiums were paid with after-tax money
- B. As return of premium first, with no tax until all premiums are recovered
- C. As long-term capital gain
- D. Earnings come out first as ordinary income, plus a 10% additional tax because the owner is under 59½ (right answer)
Partial withdrawals from a nonqualified annuity are treated as coming from earnings first, taxed as ordinary income, and before age 59½ an additional 10% tax generally applies to the taxable part. Only after earnings are exhausted does the after-tax cost basis come out tax free. Annuity gains are never capital gains.
Outline point 2.1.4 · Internal Revenue Code Section 72
51.What is the purpose of a surrender charge in a variable annuity?
- A. To pay the mortality and expense guarantees each year
- B. To fund the 12b-1 plan of the subaccounts
- C. To let the insurer recover sales costs if the owner cancels the contract during the early years (right answer)
- D. To penalize withdrawals after age 59½
Surrender charges are contingent deferred charges that apply when money is withdrawn during a surrender period, typically declining each year; they recover distribution costs the insurer paid up front. Mortality and expense charges are separate ongoing fees. The 10% additional tax before 59½ is an IRS rule, not an insurer charge.
Outline point 2.1.4 · FINRA Rule 2330
52.In a 529 college savings plan, who controls the account, including investment choices and the ability to change the beneficiary?
- A. The beneficiary, once the beneficiary turns 18
- B. The account owner (right answer)
- C. The state treasurer
- D. The college the beneficiary attends
The account owner, often a parent or grandparent, keeps control of a 529 account: choosing investments, timing withdrawals and naming or changing the beneficiary. Unlike an UTMA custodial account, the assets do not pass to the beneficiary at the age of majority, which is the trap in the first choice.
Outline point 2.1.5
53.An owner withdraws money from a 529 savings plan and uses it for a vacation. How is the withdrawal generally treated for federal tax purposes?
- A. The earnings portion is taxable income and generally subject to a 10% additional tax (right answer)
- B. The entire withdrawal, including contributions, is taxed and penalized
- C. The withdrawal is tax free because contributions were after tax
- D. Only a state penalty applies
In a nonqualified 529 withdrawal, contributions come back tax free because they were made with after-tax money, but the earnings portion is included in income and generally hit with a 10% additional tax. Taxing the whole amount is the trap: contributions are never taxed a second time.
Outline point 2.1.5 · Internal Revenue Code Section 529
54.How does a 529 prepaid tuition plan differ from a 529 savings plan?
- A. A prepaid plan invests in mutual funds chosen by the owner
- B. A prepaid plan can be used for any expense with no restriction
- C. A prepaid plan locks in future tuition at participating schools at today's prices, while a savings plan's value depends on investment performance (right answer)
- D. A prepaid plan is a federal program, while savings plans are state programs
Prepaid tuition plans let families buy tuition credits now for later use at eligible schools, protecting against tuition inflation. Savings plans are investment accounts whose value rises or falls with the chosen portfolios. Both are state-sponsored programs, so the federal-versus-state choice is wrong.
Outline point 2.1.5
55.Local government investment pools (LGIPs) are designed for investment by:
- A. retail investors saving for retirement
- B. parents saving for college
- C. foreign central banks
- D. state and local government entities managing their short-term cash (right answer)
LGIPs are municipal fund securities through which states, cities and other public entities pool their cash for short-term investment, usually in money-market-like portfolios. They are not open to individual retail investors. Parents saving for college would use a 529 plan, the other main municipal fund security.
Outline point 2.1.5 · MSRB Rule D-12
56.An ABLE account is a tax-advantaged savings account intended for:
- A. individuals with disabilities, to pay qualified disability expenses (right answer)
- B. small business owners, to fund employee pensions
- C. first-time homebuyers
- D. any child under 18
ABLE accounts, authorized under Section 529A, let eligible individuals with disabilities save for qualified disability expenses with tax-free growth, generally without losing eligibility for certain means-tested benefits. They are municipal fund securities, like 529 plans, which is why they sit under MSRB rules.
Outline point 2.1.5 · Internal Revenue Code Section 529A
57.Compared with a direct-sold 529 plan, an adviser-sold 529 plan typically:
- A. has no investment options
- B. includes sales charges or higher fees to compensate the selling broker-dealer (right answer)
- C. is not a municipal fund security
- D. is available only to state residents
Adviser-sold 529 plans are distributed through broker-dealers and usually have share classes with sales charges and 12b-1-type fees, similar to mutual funds. Direct-sold plans are bought straight from the plan and usually cost less. Both types are municipal fund securities, and many plans of either type accept out-of-state investors.
Outline point 2.1.5
58.What is meant by pass-through (flow-through) tax treatment in a direct participation program?
- A. The program pays corporate income tax and then distributes dividends
- B. Taxes are paid by the general partner only
- C. Income, gains, losses and deductions flow directly to the partners, who report them on their own returns (right answer)
- D. Distributions are always tax free
A limited partnership is not taxed at the entity level; each partner reports a share of the income, losses and deductions, avoiding double taxation. Paying corporate tax and then distributing dividends describes a C corporation, the opposite structure. Distributions can be taxable depending on the partner's basis.
Outline point 2.1.6
59.In a limited partnership, which statement about the general partner is accurate?
- A. The general partner has limited liability and no management role
- B. The general partner manages the business and has unlimited liability for its debts (right answer)
- C. The general partner may never invest in the partnership
- D. The general partner's role is to provide capital only
The general partner runs the partnership and carries unlimited liability. Limited partners provide capital, have liability limited to their investment, and lose that protection if they take part in management. The first and last choices describe the limited partner's position, which is the usual mix-up.
Outline point 2.1.6
60.Which risk is most characteristic of direct participation programs?
- A. Liquidity risk, because there is usually no active secondary market for the units (right answer)
- B. Currency risk, because DPPs invest only abroad
- C. Call risk, because units are redeemed when rates fall
- D. Prepayment risk
DPP interests are generally unlisted, and transfers often need general partner consent, so investors may be unable to sell before the program ends. That makes liquidity the defining risk. Call and prepayment risk relate to debt securities, and DPPs are not limited to foreign assets.
Outline point 2.1.6 · FINRA Rule 2310
61.In a tenants in common (TIC) real estate program, each investor owns:
- A. shares of a corporation that owns the property
- B. a debt claim secured by the property
- C. units of a publicly traded REIT
- D. an undivided fractional interest in the property itself (right answer)
In a TIC program, each investor holds an undivided fractional ownership interest directly in the real property, often used in like-kind exchanges. Holding shares of an entity that owns the property, such as a REIT or corporation, is indirect ownership, which is the distinction this question tests.
Outline point 2.1.6
62.A REIT that meets the Internal Revenue Code tests and distributes at least 90% of its taxable income to shareholders generally:
- A. passes its losses through to shareholders
- B. pays corporate tax on all income before distributions
- C. avoids corporate-level tax on the income it distributes (right answer)
- D. must invest only in mortgages
A qualifying REIT deducts the dividends it pays, so income distributed to shareholders is not taxed at the corporate level; shareholders pay tax on the dividends. A REIT is not a partnership, so losses do not pass through to investors, which is the trap in the first choice.
Outline point 2.1.7 · Internal Revenue Code Section 857
63.Which statement best describes the main risk difference between a listed REIT and a registered non-listed REIT?
- A. Non-listed REITs are not registered with the SEC
- B. Non-listed REIT shares do not trade on an exchange, so investors may have limited ways to sell (right answer)
- C. Listed REITs are not required to distribute income
- D. Non-listed REITs are guaranteed by the sponsor
A registered non-listed REIT files with the SEC but its shares are not exchange traded; investors depend on limited share repurchase programs or a future listing to get out. Listed REIT shares can be sold daily on an exchange. Registration status is the trap in the first choice, since private REITs are the unregistered kind.
Outline point 2.1.7 · FINRA Rule 2310
64.A REIT that earns most of its income from interest on loans secured by real estate is a(n):
- A. mortgage REIT (right answer)
- B. equity REIT
- C. hybrid REIT
- D. real estate limited partnership
Mortgage REITs hold real estate debt and earn interest, so they are sensitive to interest rates and credit. Equity REITs own properties and earn rents, and hybrid REITs combine both. A limited partnership is a different structure with pass-through of losses.
Outline point 2.1.7
65.Which statement about typical private hedge funds is accurate?
- A. They are registered investment companies sold to any retail investor
- B. They must keep their portfolios fully liquid
- C. They are prohibited from using leverage or short selling
- D. They are usually limited to accredited or other qualified investors and often impose lock-up periods (right answer)
Private hedge funds are usually offered through private placements to accredited or other qualified investors, often set high minimum investments, are commonly organized as limited partnerships, and may lock up capital. They frequently use leverage, short selling and derivatives, so the prohibition in the third choice is wrong.
Outline point 2.1.8
66.How is the price of an exchange-traded fund (ETF) determined during the trading day, compared with a mutual fund?
- A. Both are priced once a day at NAV
- B. ETF shares trade continuously at market prices, while mutual fund orders are filled at the next computed NAV (right answer)
- C. ETFs are priced weekly
- D. Mutual funds trade at market prices that may differ from NAV
ETFs trade on exchanges throughout the day like stocks, at market prices that are usually close to but may differ from NAV. Open-end mutual fund orders receive forward pricing at the next NAV calculated, typically after the close. The last choice confuses mutual funds with closed-end funds or ETFs.
Outline point 2.1.9 · SEC Rule 22c-1
67.Which risk is specific to an exchange-traded note (ETN) and not to an ETF holding the same index stocks?
- A. Market risk
- B. Liquidity risk
- C. Credit risk of the issuing institution (right answer)
- D. Inflation risk
An ETN is an unsecured debt obligation of its issuer, usually a bank, promising a return linked to an index; if the issuer defaults, holders may lose money even if the index rises. An ETF owns the underlying securities, so it does not carry that issuer credit exposure. Market risk applies to both.
Outline point 2.1.9
68.Why do passively managed index ETFs generally have lower expense ratios than actively managed funds?
- A. They track an index and trade less, so research and trading costs are lower (right answer)
- B. They are exempt from management fees by law
- C. They pay no brokerage commissions
- D. They are guaranteed by the exchange
Passive funds simply replicate an index, which needs little research staff and produces low portfolio turnover, keeping costs down. No law exempts them from fees, and investors usually still face trading costs such as commissions or the bid-ask spread when buying or selling ETF shares.
Outline point 2.1.9
69.Which type of risk can be reduced by diversifying across many companies and industries?
- A. Systematic (market) risk
- B. Interest rate risk
- C. Purchasing power risk
- D. Non-systematic (company-specific) risk (right answer)
Non-systematic risk comes from events specific to one company or industry, such as a failed product, and diversification spreads it away. Systematic risk affects the whole market, so holding more stocks does not remove it; it is managed with hedging or asset allocation instead.
Outline point 2.2
70.An investor buys a zero-coupon bond and holds it to maturity. Which risk is eliminated?
- A. Credit risk
- B. Inflation risk
- C. Reinvestment risk (right answer)
- D. Liquidity risk
A zero-coupon bond pays no periodic interest, so there are no coupons to reinvest at uncertain future rates; the return is locked in if held to maturity. Credit and liquidity risk remain, and a fixed nominal payment far in the future is fully exposed to inflation risk.
Outline point 2.2
71.A retiree holds only long-term fixed-rate bonds for income. Over 20 years, which risk is she most exposed to?
- A. Purchasing power (inflation) risk (right answer)
- B. Currency risk
- C. Call risk only
- D. Political risk
Fixed payments buy less as prices rise, so over long periods inflation steadily erodes the real value of the income and principal. Call risk may exist for some bonds, but the dominant long-term danger for an all-fixed-income portfolio is loss of purchasing power. Currency and political risk apply mainly to foreign investments.
Outline point 2.2
72.A U.S. investor buys bonds of a foreign government that pay interest in euros. Besides credit risk, which risk does the investor take on?
- A. Prepayment risk
- B. Currency (exchange rate) risk (right answer)
- C. Call risk
- D. None, because government bonds are risk free
Payments in euros must be converted to dollars, so a rising dollar reduces the investor's return even if the bond pays as promised. Foreign government debt also carries political and credit risk; it is not risk free. Prepayment risk is typical of mortgage-backed securities.
Outline point 2.2
73.An investor's target mix is 60% stocks and 40% bonds. After a strong stock market, the portfolio is 75% stocks. Selling stocks and buying bonds to return to 60/40 is called:
- A. hedging
- B. dollar-cost averaging
- C. market timing
- D. portfolio rebalancing (right answer)
Rebalancing restores the intended asset allocation, which keeps the portfolio's risk level consistent with the investor's plan. Hedging uses an offsetting position such as an option to protect against loss, and dollar-cost averaging means investing a fixed amount at regular intervals.
Outline point 2.2
74.Which investment exposes the buyer to the greatest risk of losing the entire amount invested in a short time (capital risk)?
- A. A Treasury bill
- B. An insured bank CD
- C. A short-term out-of-the-money call option (right answer)
- D. A money market fund
An out-of-the-money option that is still out of the money at expiration expires worthless, so the buyer can lose the whole premium within weeks. Treasury bills, insured CDs and money market funds are designed for capital preservation and carry very low risk of total loss.
Outline point 2.2
75.A bond portfolio manager is worried that the issuer of a bond she holds may fail to make its interest and principal payments. Which risk is she concerned about?
- A. Credit (default) risk (right answer)
- B. Reinvestment risk
- C. Liquidity risk
- D. Market risk
Credit risk is the risk that the issuer cannot pay interest or repay principal, measured in part by credit ratings. Liquidity risk is about being able to sell quickly at a fair price, and reinvestment risk concerns the rate at which cash flows can be reinvested; neither is about the issuer failing to pay.
Outline point 2.2
SIE, section 2: Products and their risks
75
questions in this section, 187 for the SIE in all
Open a question to see the four options, the right answer, the reasoning and the outline point it trains. Written by Radif Partners; not questions from the real exam.
Every SIE item is a multiple-choice question with four answer choices, and the exam counts 75 of them toward the score. The sample questions on this page come from our own bank, written by Radif Partners from the topics of FINRA's content outline; they are not taken from any exam, which FINRA keeps confidential. The list opens on section 2, products and their risks, because it is by far the largest part of the test: 33 scored questions, about 44% of the total, and 75 questions in our pool. Each item shows the right answer and a short explanation of why it is right and why the others are not. Reading a full section this way is a fast method to see the range of what can be asked, from the rights of a common stockholder to the tax treatment of a 529 plan, before you start practicing under correction. The other three sections each have a page of their own with a five-question set and study notes.
Your score · SIE
0 / 0
0 / 5 answered
Choose an answer to begin
| Pass: scaled score of 70; here 4 of 5 correct (70%), an approximation |
| You can still miss 1 |
Practice questions written by Radif Partners from the official outline topics. They are not questions from the real exam. Progress is kept in this browser only (local storage) and never sent.
Questions, formats and fees by Radif Partners · Editorial policy · Method
How SIE questions are built
Most items fall into one of three shapes. A definition question asks what a term means or which product has a given feature. A scenario gives a customer, a trade or a corporate event in two or three sentences and asks what follows. A rule question asks what a representative or a firm may, must or may not do. The scenario shape is the most common in the larger sections, and it hides the topic: a question about a customer who wants income without credit risk is really a question about Treasury securities.
Wording to read twice
- EXCEPT and NOT: three choices are true and you are looking for the false one. Rephrase the question in your head before reading the options.
- Best, most, first: several choices can be acceptable, and only one fits the facts given. Look for the detail in the stem that rules out the others.
- Absolute words: an option that says always or never is often wrong in a field full of exceptions, but not every time.
A worked example from the products section
A company has 6% cumulative preferred stock with a $100 par value. It paid no preferred dividends last year or the year before. How much per preferred share must it pay this year before paying any common dividend?
- A. $6
- B. $12
- C. $18
- D. $24
Answer: C. $18. Cumulative preferred carries forward missed dividends. Each year's dividend is 6% of $100, or $6. Two missed years ($12 in arrears) plus the current year ($6) gives $18 per share before common stockholders can receive anything. The $12 trap forgets the current year's dividend.
The method carries over to most product questions: name the feature the stem is about (here, the cumulative right of a preferred holder), recall the rule attached to it, then do the small calculation. The arithmetic on the SIE is rarely harder than this; the trap is applying the wrong rule, for instance treating the stock as noncumulative and paying only the current year.
Every section, with our question count
| Section | Scored on the exam | Questions in our pool |
|---|---|---|
| Capital markets | 12 | 36 |
| Products and their risks | 33 | 75 |
| Trading, accounts and prohibited activities | 23 | 58 |
| Regulatory framework | 7 | 18 |
Some questions in the pool are shared with the Series 7 or the Series 6 when the topic is the same in both outlines, such as the order of payment in a liquidation or the meaning of a stop order. They count once in each exam's pool.
From reading to practicing
Reading answers is efficient for a first pass, but recognition is not recall: an answer looks obvious once you see it. After a section has been read, switch to the practice sets, where the answer stays hidden until you commit, and let the five-question set under this text give you a quick measure across the whole outline. Questions you miss there are kept in your browser and come back on the review page. The products material is also covered in plain language, with the traps that cost the most points, on the products and risks page.