Free and Premium FINRA SIE Dumps Questions Answers

Purchasing a put option allows the customer to sell the stock at a predetermined price (the strike price) if the share price declines. This strategy protects against downside risk while maintaining upside potential.

C is correct because a put acts as insurance, locking in a minimum sale price.

A is incorrect because selling a put exposes the investor to additional risk if the stock declines.

B is incorrect because selling a call generates income but does not protect against downside risk.

D is incorrect because purchasing a call is a bullish strategy unrelated to protecting existing positions.

When bond yields rise, the price of existing bonds falls. This inverse relationship exists because the fixed coupon payments of the bonds become less attractive compared to new bonds issued at higher yields.

B is correct because the bond’s market value decreases as its yield increases.

A is incorrect because bond values decrease, not increase, with rising yields.

C is incorrect because the face value (par value) remains unchanged.

D is incorrect because changes in yield directly affect the bond’s market price.

Step by Step Explanation:

FINRA Rule 3210: Requires registered representatives to obtain written consent from their employing broker-dealer before opening accounts at other financial institutions if securities transactions will occur.

Incorrect Options:

A, B, and C: These accounts are exempt because they do not involve direct securities transactions requiring monitoring.

Step by Step Explanation:

European-Style Options: Can only be exercised on their expiration date, unlike American-style options, which can be exercised any time before expiration.

Incorrect Options:

A: Not accurate; the exercise must occur specifically on the expiration date.

C: Options cannot be exercised after expiration.

D: The expiration date depends on the option contract, not a specific weekday.

Federal Reserve Regulation T mandates that customers must pay for purchases in a cash account within two business days of settlement (T+4). If payment is not made, the brokerage firm must liquidate the securities and place the account on a 90-day restriction.

C is correct because the customer’s account is frozen for 90 days, during which all trades must be paid for in advance.

A is incorrect as closing transactions are still permitted but require prepayment.

B is incorrect because the restriction lasts for 90 days, not 30.

D is incorrect as only the delinquent account, not related accounts, is frozen.

Step by Step Explanation:

Tender Offer Definition: A tender offer is an offer to purchase a certain number of shares from shareholders, typically at a price above the current market value. This is often part of mergers, acquisitions, or corporate takeovers.

Stock Split: A stock split increases the number of shares but decreases the price per share without affecting the total value of an investor's holdings.

Redemption: Redemption refers to the repayment of a bond or preferred stock at maturity or at a predetermined date.

Class Action: A class action is a lawsuit filed by a group of people with similar grievances.

Step by Step Explanation:

Discount Bonds: These are issued or traded below par value. Over time, their price moves closer to par as they approach maturity, assuming yields remain constant.

Other Options:

Par Value Changes: The par value of a bond does not change over time; only its price fluctuates.

Step by Step Explanation:

SIPC Coverage: Protects customers of brokerage firms against the loss of securities and cash due to broker-dealer insolvency, but it does not protect against market losses.

FDIC Coverage: Protects bank deposits (checking, savings, CDs) up to $250,000 per depositor, per institution.

Incorrect Options:

A: SIPC covers both securities and cash held at brokerage firms (within limits).

C & D: Money market mutual funds are not FDIC insured, and securities are not covered by the FDIC.

Step by Step Explanation:

Dividend Reinvestment Plans (DRIPs): These allow investors to automatically reinvest income distributed by the mutual fund to purchase additional shares.

Dollar Cost Averaging: Refers to systematic investments over time, not directly tied to income distributions.

Capital Gains Reinvestment: Involves reinvesting profits from the sale of fund holdings, which is distinct from dividend reinvestment.

Step by Step Explanation:

Warrants: These are long-term options issued by a company that give the holder the right to buy shares at a specific price before expiration. They are typically attached to bond or stock offerings to make them more attractive.

Incorrect Options:

A: Warrants do not pay interest.

B: Refers to callable bonds, not warrants.

D: Describes municipal bonds, not warrants.

FINRA’s Continuing Education (CE) requirements include the Regulatory Element, which must be completed:

Within 120 days of the second anniversary of a registered representative’s initial registration.

Every three years thereafter (changed to every two years as of 2023).

C is correct because registered persons must complete the CE Regulatory Element after their initial requirement and then every two years.

A and B are incorrect because CE is not required annually or semiannually.

D is incorrect because CE is not tied to customer complaints.

Step by Step Explanation:

Nonpublic Information: A customer’s net worth is nonpublic personal information that requires confidentiality under Regulation S-P.

Incorrect Options:

A, B, and D: Names, addresses, and phone numbers may be public unless linked to specific financial or personal details.

Step by Step Explanation:

Temporary Hold Period: Under FINRA Rule 2165, a firm can initially place a hold on disbursements for up to 10 business days if financial exploitation is suspected.

Additional Holds: The period may be extended by an additional 10 business days if warranted and allowed by state law.

Incorrect Options:

A & B: These are shorter than the permissible period.

D: The initial hold period is capped at 10 business days.

Step by Step Explanation:

Ex-Dividend Date Pricing: On the ex-dividend date, the mutual fund's price is adjusted downward by the amount of the dividend.

Closing Price: $10.00

Dividend: $0.25

Adjusted Opening Price: $10.00 - $0.25 = $9.75.

Incorrect Options:

A: $9.25 subtracts more than the dividend amount.

C: $10.00 does not reflect the dividend adjustment.

D: $10.25 adds to the price rather than subtracting the dividend.

XYZ bonds have a yield higher than the coupon rate, indicating that their market price has decreased due to concerns about the issuer's creditworthiness.

A is correct because the high yield suggests elevated credit risk.

B is incorrect because domestic utility companies are unlikely to face political risk.

C is irrelevant as the bonds are denominated in U.S. dollars.

D is incorrect as prepayment risk is associated with callable bonds, not noncallable bonds.

Step by Step Explanation:

Blue-Chip Stock Mutual Funds: Invest in large, established companies that typically provide stable dividend income and potential for capital appreciation.

Incorrect Options:

A: Growth stocks prioritize capital appreciation, not income.

B: Money market accounts focus on safety and liquidity, not capital gains.

D: STRIPS provide fixed income without capital gains potential.

A private securities transaction involves the sale of securities outside the scope of a registered representative’s employment with their member firm. Such transactions must be disclosed to and approved by the firm under FINRA Rule 3280.

B is correct because raising money for a startup involves the sale of securities and must be reported as a private securities transaction.

A is incorrect because soliciting charitable donations does not involve securities.

C is incorrect because selling term life insurance policies is not a securities transaction.

D is incorrect because investing personal money does not involve soliciting or selling securities to others.

Step by Step Explanation:

REIT Requirements: REITs must invest at least 75% of their total assets in real estate to qualify for favorable tax treatment under IRS regulations.

90% Rule: Refers to the distribution requirement for taxable income, not asset allocation.

100% Rule: There is no requirement to allocate 100% of assets to real estate.

Step by Step Explanation:

Escalation Requirement: The RR must promptly notify their supervisor or compliance department about the customer’s complaint as required by FINRA rules. Supervisors handle customer complaints according to firm procedures.

Incorrect Options:

B: Reimbursing the customer is not permissible without firm approval and may create compliance issues.

C: Complaints requiring Form U4 updates involve specific allegations such as fraud, not general dissatisfaction.

D: The RR should not contact FINRA directly; the firm will handle communications.

Step by Step Explanation:

Tenants in Common: In this arrangement, each tenant owns a fractional interest in the account's assets, which can be unequal depending on the agreement.

Income Distribution: Income is distributed based on ownership percentage, not necessarily equally.

Redemption Requests: Only the owner of the fractional interest has authority to request redemption for their portion.

Estate Taxation: Upon the death of a tenant, only their fractional interest is taxable in their estate.

Step by Step Explanation:

Regulatory Element Requirement: Newly registered persons must complete the Continuing Education (CE) Regulatory Element on the second anniversary of their initial registration and every three years thereafter.

Incorrect Options:

A: The requirement begins on the second anniversary, not the following calendar year.

D: The cycle is every three years, not five.

An option is considered "at the money" when the current price of the underlying asset (or index level) equals the option’s strike price.

B is correct because the index level equals the strike price.

A is incorrect because "in the money" requires the option to have intrinsic value (e.g., for a call, the index level must be above the strike price).

C is incorrect because "out of the money" applies when the index level is below the strike price (for calls) or above it (for puts).

D is incorrect because "at the money" options have no intrinsic value.

Step by Step Explanation:

Rebalancing: Ensures that a portfolio remains aligned with its target allocation. Without rebalancing, outperforming assets can become overweighted, increasing exposure to specific risks.

Incorrect Options:

Inflation: Impacts purchasing power but isn’t tied to rebalancing.

Marketability: Refers to liquidity and isn’t linked to allocation models.

Interest Rate Risk: Relates to fixed-income investments and isn’t directly addressed by allocation models.

A limit order to buy allows the investor to specify the maximum price he is willing to pay for the stock. The order will only execute if the stock price falls to or below the specified price.

B is correct because a limit order to buy aligns with the investor’s desire to secure a better price.

A is incorrect because a limit order to sell is used when an investor wants to sell at a minimum price.

C and D are incorrect because market orders execute at the current market price, not at a preferred price.

The primary market deals with the issuance of new securities, which is regulated under the Securities Act of 1933. This act requires issuers to provide full disclosure of material information to investors to ensure transparency and fairness in new offerings.

A is correct because the Securities Act of 1933 governs initial offerings.

B is incorrect because the Securities Exchange Act of 1934 regulates secondary market trading.

C is incorrect because the Investment Advisers Act of 1940 pertains to investment advisers.

D is incorrect because the Investment Company Act of 1940 governs mutual funds and other investment companies.

Step by Step Explanation:

Diversification: Spreads investments across multiple securities, industries, or asset classes to reduce exposure to a single security or sector.

Other Options:

Use of Leverage: Increases, not decreases, portfolio risk.

Dollar-Cost Averaging: Reduces timing risk but does not address concentration.

Dividend Reinvestment: Enhances returns but does not mitigate concentration risk.

Technology stocks are considered high-risk investments due to their volatility and sensitivity to economic cycles, regulatory changes, and technological advancements. While they may offer significant growth potential, they carry greater risk than blue chip stocks, corporate bonds, or government bonds.

C is correct because technology stocks are subject to high volatility and risk.

A is incorrect because blue chip stocks are generally stable and lower-risk.

B is incorrect because corporate bonds carry moderate risk, depending on the issuer’s creditworthiness.

D is incorrect because government bonds are considered low-risk due to the backing of the issuing government.

When an economy operates near full capacity, additional money in circulation leads to inflation, as demand exceeds the economy’s ability to increase supply.

B is correct because inflation is the primary impact when supply cannot keep up with excess demand.

A is incorrect because output does not significantly increase when capacity is already maximized.

C is incorrect because velocity measures the rate at which money circulates, not the impact of oversupply.

D is incorrect as unemployment is already low when the economy is at full capacity.

Buying a call option gives the investor the right to purchase the stock at a fixed price (strike price). If the stock’s price rises significantly, the value of the call option increases, allowing the investor to profit.

B is correct because a call option profits directly from a stock price increase.

A is incorrect because a put option profits from a stock price decline.

C and D are incorrect because selling options limits profit potential and exposes the seller to significant risk if the stock moves unfavorably.

Currency devaluation reduces the value of a country’s currency relative to others, making its exports cheaper and more competitive internationally. This stimulates demand for the country’s goods and services.

D is correct because devaluation reduces export costs, encouraging foreign buyers.

A is incorrect because devaluation can increase inflation by raising the cost of imported goods.

B is incorrect because GDP often rises due to increased export demand.

C is incorrect because imports become more expensive after devaluation, reducing demand.

High-income bond mutual funds typically invest in lower-rated (junk) bonds that offer higher yields. These bonds are exposed to significant credit risk, as issuers may default on their payments.

A is correct because credit risk is the primary concern with high-yield bonds.

B is incorrect as political risk is more relevant for international investments.

C is incorrect because taxability risk is not specific to bond mutual funds.

D is incorrect because purchasing power risk is more relevant for fixed-income investments during inflationary periods but is not the primary risk here.

Step by Step Explanation:

Call Option Writer: When writing (selling) a call option, the writer has the obligation to sell the underlying stock at the strike price if the buyer exercises the option.

Incorrect Options:

A & B: Only the option buyer has rights, not the writer.

D: Obligations to buy stock apply to put option writers, not call option writers.

Step by Step Explanation:

MSRB Rule G-10: Requires municipal securities dealers to notify customers annually about the availability of the MSRB investor brochure, which explains investor protections and complaint filing procedures.

Incorrect Options:

A and B: Address and financial standing are not specifically required disclosures.

C: FINRA violations are not a required disclosure under MSRB rules.

Step by Step Explanation:

Secondary Offering: Involves the sale of shares by an existing shareholder, such as an insider, rather than the company itself issuing new shares.

Incorrect Options:

A: Rights offerings involve giving existing shareholders the opportunity to buy additional shares.

B: Private offerings are not registered with the SEC and involve limited investors.

C: An exempt offering refers to securities exempt from SEC registration, such as Regulation D offerings.

Step by Step Explanation:

SEC Registration Statements: The SEC reviews registration statements for completeness and compliance but does not judge the merits, approve, or endorse the securities being offered.

Other Options:

A, B, and C: Misrepresent the SEC’s role in the registration process.

A stock dividend increases the number of shares owned without affecting the total cost basis. The new cost basis per share is calculated by dividing the original total investment by the new number of shares:

Original total investment = 100 shares × $50.00 = $5,000

After a 10% stock dividend, the investor owns 110 shares.

New cost basis = $5,000 ÷ 110 shares = $45.45 per share.

B is correct because it reflects the adjusted cost basis per share.

Step by Step Explanation:

Telemarketing Rules (FINRA Rule 3230): Require firms to check the National Do Not Call Registry before contacting individuals, even if those individuals provide their contact information voluntarily.

Incorrect Options:

A: Approval isn’t required for individual follow-ups; compliance with the registry is.

B: While calls must be limited to appropriate hours, the registry check is still mandatory.

C: Written consent does not override the registry requirement.

Step by Step Explanation:

Summary Prospectus Content: Must include key information such as the fund’s investment objectives, risks, fees, and past performance. This helps investors make informed decisions.

Incorrect Options:

A: Projected returns are speculative and not included in the prospectus.

C & D: Detailed portfolio holdings and control persons are included in the full prospectus, not the summary.

Step by Step Explanation:

ETF Expense Ratios: ETFs generally have lower expense ratios compared to mutual funds due to their passive management style.

Incorrect Options:

A: ETFs do not have sales loads; they are traded like stocks.

B: ETFs can be purchased on margin, like other equities.

C: ETFs are traded throughout the day at market prices, not NAV.

Step by Step Explanation:

Credit Downgrade: Increases perceived risk, causing bond prices to drop and yields to rise.

Yield-Price Relationship: Yields move inversely to bond prices. Lower prices lead to higher yields as investors demand more return for increased risk.

Step by Step Explanation:

Publicly Traded Limited Partnerships (PTPs): Represent ownership stakes, which categorize them as equity securities. PTPs often involve sectors like real estate or energy.

Incorrect Options:

A: Mutual funds are pooled investment vehicles, not partnerships.

C: Fixed-income securities are debt instruments like bonds.

D: Derivatives include options or futures, not ownership stakes.

Treasury stock refers to shares that were issued by a company and subsequently repurchased by the company. These shares are held in the company’s treasury and are not considered outstanding.

C is correct because treasury stock is stock reacquired by the issuer.

A is incorrect because authorized but unissued stock has never been issued.

B is incorrect because restricted stock refers to shares issued with restrictions on transferability, not reacquired stock.

D is incorrect because it incorrectly refers to government securities, not corporate stock.

Step by Step Explanation:

National Securities Clearing Corporation (NSCC): A subsidiary of the Depository Trust & Clearing Corporation (DTCC), the NSCC handles the clearance and settlement of broker-to-broker equity, corporate bond, municipal bond, and UIT transactions.

Incorrect Options:

A: The SEC oversees regulatory compliance but does not settle trades.

B: FINRA is a self-regulatory organization, not a clearing entity.

C: The Federal Reserve manages monetary policy and banking but is not involved in securities settlement.

Step by Step Explanation:

Settlement of the Transaction: Refers to the finalization of a trade, where the buyer pays for the securities, and the seller delivers them. For most securities, regular-way settlement occurs T+2 (trade date plus two business days).

Incorrect Options:

Clearing the Trade: Refers to matching trade details to prepare for settlement.

DVP Transactions: A specific type of settlement involving simultaneous payment and delivery, often used for institutional clients.

Corporate Action: Refers to events like stock splits or dividend declarations.

Step by Step Explanation:

Short Sale Definition: Involves selling borrowed securities with the expectation of repurchasing them at a lower price.

Investor Ownership: Short sales do not involve securities already owned by the seller.

Other Options: None of the other choices accurately define a short sale.

Step by Step Explanation:

Prohibition on Signing Customer Names: It is never permissible to sign a customer's name without written authorization (POA) due to legal and ethical concerns. Unauthorized signing constitutes forgery and violates FINRA rules.

Incorrect Options:

A: Firm principal approval does not override this prohibition.

B: Verbal authorization is insufficient.

C: Discretionary authority does not allow unauthorized signing.

The cost basis of a stock represents the purchase price and does not include dividends received. Taxes paid on dividends also do not affect the cost basis.

Original purchase price per share = $20.00.

Dividends and taxes on dividends do not adjust the stock’s cost basis.

A is correct because the cost basis remains $20.00.

B, C, and D incorrectly assume that dividends or taxes change the cost basis.

Step by Step Explanation:

Cost Basis in Reverse Split: The total cost basis remains unchanged in a reverse stock split. Only the number of shares and price per share adjust.

Pre-Split: 1,000 shares at $5 each = $5,000.

Post-Split: 200 shares at $25 each = $5,000.

Incorrect Options:

A, B, and D: Do not reflect the unchanged total cost basis.