Free SIE Practice Exam
Securities Industry Essentials®
Quiz - 1
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Breakeven = Strike Price + Premium
Breakeven = 60 + 6 = 66

A call option gives the buyer the right to buy the underlying security at a fixed price, so call buyers are bullish as they profit if the asset’s price rises. Conversely, a put option gives the buyer the right to sell the underlying security at a fixed price, making put buyers bearish since they benefit if the asset’s price falls. Call sellers expect prices to fall (bearish), while put sellers expect prices to rise (bullish).

Exchange-Traded Notes (ETNs) differ from bonds in that they do not pay regular interest. Instead, ETNs offer a return based on the performance of a specific index or benchmark. Upon maturity, which can be between 10 and 30 years, the amount paid to the ETN holder depends on how well the underlying index performed. This structure contrasts with bonds, which provide fixed interest payments throughout their term.

Annuitants have the option to surrender their variable annuities at any time during the accumulation period, either partially or in full. However, they may incur surrender charges, which are fees determined by how long the annuity has been held. Additionally, any increase in the annuity's value (gains) is subject to taxation when the annuity is surrendered. Therefore, annuitants should consider these potential costs before deciding to surrender their annuity.

The Investment Company Act of 1940 requires an investment company to have a minimum net worth of $100,000 before it can offer its shares to the public, ensuring adequate financial stability for investors.

The inflation-adjusted return is calculated by subtracting the rate of inflation from the actual return:

Inflation-Adjusted Return = Actual Return−Rate of Inflation 

Substitute the values:

Inflation-Adjusted Return = 8% − 3% = 5% 

Therefore, the inflation-adjusted return is 5%.

Total Return = ((EndingValue−BeginningValue)+InvestmentIncome)/ Beginning Value
​Total Return = ((52-40 + 3) / 40
Total Return = .375 or 37.5%

A call provision in a bond allows the issuer to repay the bond before it reaches its maturity date. When a bond is called early, the issuer often pays a call premium above the par value as compensation to the bondholders for the early redemption. This impacts the bondholder's expected return since they receive their investment back sooner than anticipated, potentially with a premium, but lose the future interest payments they would have earned.

Unlike preferred stock, common stock does not guarantee a specific annual dividend. Instead, the company's board of directors decides if and how much to pay as dividends, depending on the company’s financial performance. If declared, these dividends are paid on a per-share basis to shareholders, meaning each share receives the same dividend amount.

Cash Management Bills (CMBs) are unscheduled Treasury debt instruments issued to cover short-term cash needs. They are issued at a discount and mature at face value. CMBs can have very short maturities, sometimes as brief as one day, making them a flexible tool for managing the Treasury’s cash flow. Unlike other Treasury securities, they are not issued on a regular schedule.

The main difference between Treasury Notes (T-Notes) and Treasury Bonds (T-Bonds) is their maturity periods. T-Notes have initial maturities from 2 to 10 years, while T-Bonds are issued with maturities exceeding 10 years. Both securities pay a fixed rate of interest semiannually, are issued electronically, and have a minimum denomination of $100

Credit risk is the possibility that a bond issuer might default and be unable to pay the interest or repay the principal amount to bondholders. When an issuer is seen as high risk, it typically has to offer a higher interest rate to attract investors. If an issuer’s financial outlook worsens, bond prices generally decline due to increased risk. Conversely, if the issuer’s creditworthiness improves, bond prices tend to increase.

The coupon rate is the fixed interest rate that the bond issuer agrees to pay annually based on the bond’s $1,000 par value. This rate is set when the bond is issued and usually remains the same until maturity, providing a stable source of income for bondholders. The coupon rate is not affected by the bond’s market price, which may fluctuate after issuance.

Defensive stocks are stocks in companies that provide essential products and services, like utilities, food, and healthcare, which people continue to buy even in tough economic times. This makes them more stable during recessions. Defense stocks, on the other hand, are linked to companies that make products for the military.

The formula for calculating outstanding stock is Issued Stock – Treasury Stock = Outstanding Stock. In this example, the company issued 2,000,000 shares and repurchased 500,000 shares, which are now held as treasury stock. Therefore, the outstanding stock is 2,000,000 - 500,000 = 1,500,000 shares. Outstanding shares are the shares currently available to investors in the market.

Common stockholders are considered the last in line to receive payment if a corporation goes bankrupt. In the event of liquidation, the company’s assets are distributed first to bondholders (debt holders) and then to preferred stockholders (equity holders with priority). Common stockholders are paid only after all other claims have been satisfied, which means they may not receive any payment if the company’s remaining assets are insufficient. Additionally, common stockholders are not guaranteed dividends; they only receive them after other obligations, such as bond interest and preferred dividends, are met.

The Securities and Exchange Commission (SEC) has authority over securities transactions that cross state lines (interstate transactions). Its Division of Enforcement investigates violations of securities laws and may prosecute these cases on behalf of the SEC in civil court. While the SEC can bring civil actions, any criminal cases fall under the jurisdiction of the Department of Justice (DOJ). The SEC does not have the authority to prosecute criminal cases directly.

The secondary market is where investors buy and sell existing securities among themselves after the initial issuance in the primary market. In the secondary market, the funds do not go to the issuing company; instead, they are exchanged between investors. This is different from the primary market, where funds raised from the sale of new securities go to the issuer. The secondary market includes well-known exchanges like the NYSE and NASDAQ, where both retail and institutional investors can trade.

A retail investor is an individual, rather than an institution or professional entity, who buys securities like stocks or bonds directly through broker-dealers. Retail investors typically have limited assets and income and may hold accounts in their own name, jointly with others, or in retirement and custodial accounts. Unlike institutions or professional investors, retail investors make investment decisions for personal wealth-building rather than managing large pools of funds on behalf of others.

A broker is a person or firm that acts as an agent, facilitating transactions in securities on behalf of clients. Brokers do not trade for their own accounts; instead, they match buyers and sellers and charge a commission for their service. This is similar to a real estate agent who represents buyers or sellers in real estate transactions and earns a commission. In contrast, a dealer buys and sells securities for its own account, while underwriting is the role of investment bankers and does not describe the function of a broker.