SIE – TWELFTH SIMULATION

#1. Which federal law primarily regulates investment companies such as mutual funds?

Investment Company Act of 1940

Securities Exchange Act of 1934

Securities Act of 1933

Bank Secrecy Act

#2. Which of the following is considered an investment company under the Investment Company Act of 1940?

Insurance company general account

Open-end management company

Bank trust department

Broker-dealer trading desk

#3. Which of the following is TRUE of a unit investment trust (UIT)?

It guarantees a fixed rate of return

Its portfolio is traded frequently by a manager

It has a fixed portfolio that is not actively managed

It issues only common stock

#4. Which of the following investments is structured with a fixed portfolio and a set termination date?

Unit investment trust

Open-end mutual fund

Closed-end fund

Exchange-traded fund

#5. Which of the following BEST describes a funded debt instrument?

Long-term corporate bond

Common stock

Short-term commercial paper

Rights and warrants

#6. Which of the following is MOST likely to be issued at a discount and mature at par within one year?

Commercial paper

Preferred stock

Equipment trust certificate

Corporate debenture

#7. Which of the following describes an American-style option?

It can be exercised only on the expiration date

It can only be exercised if it is out-of-the-money

It can be exercised at any time up to and including expiration

It must be exercised immediately after purchase

#8. Which of the following best describes intrinsic value for a call option?

The amount by which the stock price exceeds the strike price

The total time value of the option

The amount of the premium above parity

The difference between bid and ask premium

#9. Which of the following is TRUE about a put option that is at-the-money?

The holder cannot exercise the option

The stock price equals the strike price

The option’s time value is zero

The option has maximum intrinsic value

#10. Which of the following positions has the greatest risk if the underlying stock rises sharply?

Long put

Long call

Short uncovered call

Short covered call

#11. An investor who buys stock and simultaneously buys a put option on that stock has created:

A covered put write

A protective put

A long straddle

A naked put position

#12. A customer who writes a call option against stock already owned is engaged in:

Protective call purchasing

Covered call writing

Short uncovered call selling

Long call speculation

#13. Which of the following is TRUE of long straddle positions?

They are used only for income generation

They profit only if the stock remains stable

They profit from large price movement in either direction

They eliminate market risk entirely

#14. Which of the following is a characteristic of writing a put option?

The writer receives no premium at opening

The writer has no obligation under the contract

The writer has the obligation to buy the stock if exercised

The writer has the right to sell stock

#15. Which of the following terms describes international bonds issued in the currency of the country where they are sold?

Serial bonds

Convertible bonds

Eurobonds

Foreign bonds

#16. Which of the following is considered an advantage of convertible bonds for investors?

They are exempt from interest-rate risk

They always provide higher yields than nonconvertible bonds

They offer potential upside of stock with downside protection of a bond

They pay tax-free interest

#17. Which of the following is TRUE regarding refunding by an issuer?

It involves issuing new bonds to pay off outstanding bonds

It eliminates all call risk for bondholders

It is prohibited for municipal issuers

It always results in higher interest costs

#18. Which of the following describes a sinking fund provision in a bond issue?

The issuer guarantees bond price stability

The issuer sets aside money periodically to retire a portion of the debt

The issuer must pay all principal at final maturity only

The issuer pays interest only at maturity

#19. Which of the following is TRUE about a callable bond?

It is always issued at par

It can be redeemed only at maturity

It may be redeemed by the issuer before maturity at a stated price

It cannot be refunded or refinanced

#20. Which of the following risks is reduced when an investor buys a bond with a shorter maturity instead of a longer maturity?

Market risk

Credit risk

Interest-rate risk

Inflation risk

#21. Reinvestment risk is greatest for which of the following investors?

Investor holding only common stock

Investor in a money market fund in rising rates

Investor in zero-coupon bonds

Investor receiving periodic coupon payments when interest rates are falling

#22. Which of the following is a potential disadvantage of holding long-term bonds in a rising interest-rate environment?

Increase in purchasing power

Automatic conversion to short-term instruments

Significant decline in market value

Elimination of default risk

#23. Which of the following types of risk is MOST associated with political instability in a foreign country?

Political risk

Interest-rate risk

Reinvestment risk

Liquidity risk

#24. Which of the following best describes a broker’s broker in the municipal market?

A firm that acts as trustee for municipal bondholders

A firm that guarantees principal repayment

A firm that sells directly to retail investors

A firm that helps dealers place orders anonymously with other dealers

#25. Which of the following is TRUE about revenue anticipation notes (RANs)?

They are secured only by property taxes

They are short-term municipal securities paid from future revenues

They are long-term GO bonds

They are issued by the federal government

#26. Which of the following securities is MOST likely to be used to finance short-term cash flow needs of a municipality?

Industrial development bond

Double-barreled GO bond

Tax anticipation note

Special assessment bond

#27. Which of the following statements about double-barreled municipal bonds is TRUE?

They are backed by both project revenues and the full faith and credit of the issuer

They are backed only by user fees

They cannot be issued by states

They are insured by the FDIC

#28. Which of the following terms describes a municipal bond that is secured by a specific tax other than property tax?

Special tax bond

Revenue anticipation bond

General obligation bond

Moral obligation bond

#29. Which of the following is typically TRUE about moral obligation bonds?

They are always backed by ad valorem taxes

They are exempt from market risk

They have a nonbinding pledge of support from a state or municipality

They are federally guaranteed

#30. Which of the following entities enforces MSRB rules for broker-dealers?

Federal Reserve Board only

FINRA and the SEC

FDIC

MSRB directly

#31. Which of the following orders is designed to protect a profit or limit a loss on a short stock position?

Buy limit order

Sell limit order

Buy stop order

Sell stop order

#32. Which of the following statements about market orders is TRUE?

They are only valid for one hour

They are executed immediately at the best available price

They guarantee a specific execution price

They convert to limit orders at activation

#33. Which of the following could cause a limit order not to be executed?

The stock is actively traded

The order is entered prior to market open

The order is a day order

The market never reaches the specified limit price

#34. Which of the following is TRUE regarding not-held orders?

They give the firm discretion over time and price of execution on a given day

They allow discretion over security and quantity

They remain good until canceled

They require written power of attorney

#35. Which of the following describes good-til-canceled (GTC) orders?

They must be reentered each week

They are prohibited for retail customers

They always expire at the end of the day

They remain active until executed or canceled by the customer

#36. Which of the following is TRUE of fill-or-kill (FOK) orders?

They convert to GTC orders after partial fills

They can remain open for several days

They may be partially filled and the balance left open

They must be filled in their entirety immediately or canceled

#37. Regular-way settlement for most corporate securities occurs:

Two business days after the trade date

One business day after the trade date

On the trade date

Three business days after the trade date

#38. Which date is determined by FINRA or the exchange rather than the issuer?

Record date

Payment date

Ex-dividend date

Declaration date

#39. Which of the following is TRUE regarding the record date for a cash dividend?

Shareholders of record on that date are entitled to receive the dividend

It always occurs after the payment date

Trades executed on that date receive the dividend automatically

It is set by FINRA

#40. Which of the following account types requires that all owners sign to permit trading authority?

Custodial UTMA account

Corporate account with a single authorized officer

Joint tenants with rights of survivorship

Individual cash account

#41. Which of the following is TRUE of discretionary accounts?

The representative is permitted to decide one or more of the price, time, or amount absent specific instructions

They are exempt from suitability requirements

They cannot be used for options trading

They require no written authorization

#42. Which of the following statements regarding margin accounts is TRUE?

Customers must receive a risk disclosure document at or before account opening

They may only hold municipal securities

They require no written agreements

They guarantee against losses if the margin call is met

#43. Which document gives a broker-dealer the right to lend a customer’s margin securities to others?

Prospectus

Loan consent agreement

Hypothecation agreement

Credit agreement

#44. Which of the following customers is considered a pattern day trader?

One who executes four or more day trades in five business days

One who places one trade per week

One who trades only municipal bonds

One who trades only mutual funds

#45. A pattern day trader generally must maintain:

At least $100,000 in mutual funds

At least $10,000 in cash-only accounts

At least $2,000 across all accounts

At least $25,000 of equity in the margin account

#46. Which of the following is considered a red flag for possible churning in a customer account?

Periodic rebalancing once a year

High volume of trades inconsistent with the customer’s profile

Customer-initiated trades for diversification

Low turnover in a long-term portfolio

#47. Which of the following is an example of a conflict of interest that must be disclosed?

Firm sending monthly statements

Firm providing trade confirmations

Firm making a market in a security it is recommending

Firm executing customer limit orders

#48. Which of the following BEST describes front-running?

Routing orders for best execution

Trading for the firm’s account ahead of a large customer order

Executing a customer’s market order promptly

Rebalancing a managed account quarterly

#49. Which of the following is a potential indicator of insider trading?

Trading based solely on published research

Unusual trading volume shortly before material news is released

High trading volume following public earnings reports

Increased trading in widely followed index funds

#50. Under the Insider Trading and Securities Fraud Enforcement Act, individuals found guilty may be subject to:

Civil penalties up to three times the profit gained or loss avoided

Automatic lifetime registration as a rep

State tax penalties only

Only a written warning

#51. Which of the following communication types is MOST likely to require filing with FINRA prior to first use in some cases?

Correspondence to a single customer

Institutional-only research report

Retail communication for a new registered investment company

Internal firm memo

#52. A customer’s investment profile must consider which of the following?

Financial situation, tax status, and investment objectives

Number of credit cards held

Preferred vacation destinations

Favorite sports team

#53. A customer whose objective is income and who has a low risk tolerance is LEAST suitable for which of the following?

Investment-grade corporate bond fund

Government bond fund

High-yield bond fund

Blue-chip dividend stock fund

#54. Which of the following is MOST suitable for an investor who wants broad exposure to the U.S. stock market at low cost?

Sector-specific leveraged ETN

Single small-cap stock

Index ETF tracking a major market index

Illiquid limited partnership

#55. Which of the following BEST describes a conservative allocation for an older investor relying on portfolio income?

All assets in small-cap growth stocks

All assets in cryptocurrencies

All assets in emerging market stocks

Higher percentage in bonds and cash equivalents, lower in equities

#56. Which of the following is MOST appropriate for an emergency fund that may be needed at any time?

Highly liquid money market instruments

Private equity partnership

Long-term zero-coupon bonds

Direct real estate investment

#57. Which of the following is a primary objective of a growth mutual fund?

Long-term capital appreciation

Tax-free interest only

Current income only

Capital preservation only

#58. Which of the following is TRUE regarding sector funds?

They involve higher concentration risk than broadly diversified funds

They are exempt from market risk

They may only invest in government securities

They are required to invest in all industries equally

#59. Which of the following is a potential disadvantage of investing in a hedge fund?

Requirement to invest only in index funds

Limited liquidity and high minimum investment

FDIC insurance limits on balances

Guaranteed principal protection

#60. Which of the following investors is MOST appropriate for a high-yield bond fund?

Investor who cannot tolerate any loss of principal

Investor seeking higher income and able to accept greater credit risk

Investor seeking only tax-exempt income

Investor saving for a near-term purchase in one year

#61. Which of the following would be LEAST appropriate for a conservative investor seeking capital preservation?

Bank savings account

Emerging markets equity fund

Short-term investment-grade bond fund

Treasury money market fund

#62. Which of the following properly describes systematic risk?

Risk that only affects foreign bonds

Risk that affects the entire market and cannot be diversified away

Risk that arises solely from leverage

Risk specific to one company or industry

#63. Which of the following client characteristics would MOST justify a higher equity allocation?

Short time horizon and low risk tolerance

Immediate need for income and stability

No investment experience and low tolerance

Long time horizon and high risk tolerance

#64. Which of the following BEST describes dollar-cost averaging?

Investing only when prices are rising

Investing a fixed dollar amount at regular intervals, regardless of price

Investing only when prices have fallen sharply

Investing a fixed number of shares at each purchase

#65. Which of the following is an appropriate use of margin?

For a first-time investor with no financial cushion

For funding a short-term emergency reserve

For investors who refuse to accept any loss

For an experienced investor aware of leverage risks

#66. Which of the following BEST describes the tax treatment of qualified dividends from common stock?

They are always tax-free at all levels

They may be taxed at favorable long-term capital gains rates for eligible investors

They are always taxed at ordinary income rates for everyone

They are taxed only when the stock is sold

#67. Which of the following is typically TRUE of long-term capital gains realized on securities held more than one year?

They are taxed only if reinvested

They are always tax-free

They are taxed at the same rate as interest income

They are usually taxed at a lower rate than short-term gains

#68. Which of the following is TRUE regarding 529 plan withdrawals used for nonqualified expenses?

Earnings are subject to income tax and possibly a penalty

No taxes or penalties ever apply

Contributions become taxable, but earnings are tax-free

Only state taxes apply, never federal

#69. Which of the following is a primary benefit of a Roth IRA compared to a traditional IRA?

Qualified withdrawals may be tax-free

Contributions are always tax-deductible

Roth IRAs guarantee a fixed return

Roth IRAs require higher RMDs

#70. Which of the following is TRUE regarding suitability obligations?

They apply only to options and not to other securities

They apply only to unsolicited orders

They apply only to institutional accounts

They apply to recommended securities transactions and investment strategies

#71. Which of the following is the BEST example of an unsuitable recommendation?

Recommending a money market fund for short-term cash

Recommending frequent trading in a buy-and-hold investor’s account

Recommending diversification for a concentrated portfolio

Recommending a bond fund for income needs

#72. Which of the following is TRUE regarding time horizon in the suitability analysis?

Time horizon has no relevance to risk level

Short horizons justify speculative strategies

Shorter time horizons typically support more conservative allocations

Longer time horizons always require 100% equities

#73. Which of the following is a key reason to update a customer’s profile?

A significant change in financial situation or objectives

A minor change in contact preferences only

A one-time small trade request

A routine monthly statement generation

#74. Which of the following describes the primary purpose of a new account form?

To guarantee performance of recommended investments

To waive all regulatory protections

To replace all prospectus disclosures

To collect essential customer information for suitability and supervision

#75. Which of the following is TRUE regarding ERISA plans?

They must invest only in government securities

They must be operated for the exclusive benefit of plan participants and beneficiaries

They may favor highly compensated employees instead of rank-and-file staff

They are exempt from fiduciary standards

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