Free SIE Practice Exam — 25-Question Diagnostic

Question 1

Which of the following best describes the protection provided by the Securities Investor Protection Corporation (SIPC)?

Accepted Answer

It protects customers' cash and securities, up to specified limits, if a member broker-dealer fails financially. — Correct. SIPC steps in when a member broker-dealer fails and customer assets are missing, restoring cash and securities up to $500,000 per customer, of which no more than $250,000 may be for cash. It protects the custody function only, not investment performance.

Question 2

A pension fund sells a large block of NYSE-listed stock directly to an insurance company through an electronic trading system, with no broker-dealer acting as an intermediary. In which market did this transaction take place?

Accepted Answer

The fourth market — Correct. The fourth market is direct institution-to-institution trading without a broker-dealer intermediary, typically executed through electronic systems (including venues such as dark pools that offer little pre-trade transparency).

Question 3

In a corporate securities offering, the underwriting syndicate buys the entire new issue from the issuer as principal and resells it to the public, keeping any unsold shares in its own account. This method of distribution is known as:

Accepted Answer

a firm commitment underwriting — Correct. In a firm commitment underwriting the syndicate purchases the whole issue from the issuer as principal, so the underwriters — not the issuer — bear the financial risk of any shares they cannot resell to the public.

Question 4

Which market participant maintains the official record of an issuer's registered shareholders and is responsible for canceling old share certificates, issuing new ones, and replacing certificates that are lost, stolen, or destroyed?

Accepted Answer

A transfer agent — Correct. The transfer agent, acting for the issuer, keeps the shareholder ownership records, cancels and issues certificates when shares change hands, and handles replacement of lost, stolen, or destroyed certificates. Transfer agents register with the SEC under Section 17A of the Securities Exchange Act of 1934.

Question 5

If a corporation is liquidated, which of the following parties has the LAST claim on the corporation's remaining assets?

Accepted Answer

Common stockholders — Correct. Common stockholders hold a residual claim on corporate assets — they are paid only after all creditors (secured, unsecured, and subordinated) and preferred stockholders. This last-in-line position is why common stock carries the greatest capital risk.

Question 6

Market interest rates rise significantly after an investor buys a fixed-coupon corporate bond. Which of the following is the most likely effect on the investor's bond?

Accepted Answer

Its market price falls — Correct. Bond prices and market interest rates move inversely: when new bonds offer higher yields, an existing bond paying a lower fixed coupon must sell at a lower price to offer a competitive yield.

Question 7

A city plans to finance construction of a toll bridge and intends to repay bondholders solely from the tolls the bridge collects. Which type of municipal bond is the city most likely to issue?

Accepted Answer

A revenue bond — Correct. Revenue bonds are repaid from the earnings of the specific facility they finance — such as tolls, user fees, or lease payments — rather than from taxes, and they generally do not require voter approval.

Question 8

Which of the following BEST describes commercial paper?

Accepted Answer

Unsecured short-term corporate debt, typically sold at a discount, with a maturity of 270 days or less — Correct. Commercial paper is a short-term unsecured promissory note usually issued at a discount from face value; when its maturity does not exceed 270 days, it is exempt from registration under Section 3(a)(3) of the Securities Act of 1933.

Question 9

A corporate bond with a $1,000 par value and a 6% coupon is currently trading at $800. What is the bond's current yield?

Accepted Answer

7.5% — Correct. Current yield = annual interest ÷ current market price = $60 ÷ $800 = 7.5%. Because the bond trades at a discount, its current yield exceeds its coupon rate.

Question 10

Which of the following features distinguishes an exchange-traded fund (ETF) from an open-end mutual fund?

Accepted Answer

ETF shares can be bought and sold throughout the trading day at market-determined prices — Correct. ETF shares trade intraday on an exchange at prices set by supply and demand (which may be at, above, or below NAV), whereas open-end fund shares are bought and redeemed directly with the fund at NAV.

Question 11

A customer purchases Class B shares of a mutual fund. Which of the following statements is TRUE?

Accepted Answer

A contingent deferred sales charge may apply at redemption and declines the longer the shares are held — Correct. Class B shares carry a contingent deferred sales charge (CDSC) — a back-end load that declines over a stated holding period, after which the shares typically convert to Class A shares with lower ongoing expenses.

Question 12

Which of the following statements about variable annuities is TRUE?

Accepted Answer

Purchase payments are invested in a separate account, and the contract owner bears the investment risk — Correct. Variable annuity premiums are invested in a separate account divided into subaccounts, and the account value — and ultimately the payout — fluctuates with investment performance, so the owner, not the insurer, bears the investment risk.

Question 13

An investor purchases one ABC 50 put option. This investor has:

Accepted Answer

the right to sell 100 shares of ABC at $50 per share — Correct. An option buyer acquires a right, never an obligation, and a put conveys the right to sell. One standard equity option covers 100 shares, so this investor may sell 100 shares of ABC at the $50 strike price any time before expiration.

Question 14

Which statement correctly compares an exchange-listed real estate investment trust (REIT) with a real estate limited partnership (a direct participation program)?

Accepted Answer

The listed REIT offers ready liquidity, and unlike the limited partnership, it does not pass losses through to investors — Correct. Listed REIT shares trade on an exchange like other stocks, giving investors liquidity, and a REIT passes through income (as dividends) but not losses. A limited partnership DPP, by contrast, passes through both income and losses but is unlisted and generally illiquid.

Question 15

An investor owns Ginnie Mae (GNMA) mortgage-backed pass-through certificates. If market interest rates decline sharply, which risk should concern this investor MOST?

Accepted Answer

Prepayment risk — Correct. When rates fall sharply, homeowners refinance their mortgages, returning principal to MBS holders earlier than expected. The investor must then reinvest that principal at the new, lower prevailing rates — the essence of prepayment risk.

Question 16

An investor bought shares of RST common stock at $40 per share, and the stock currently trades at $62. The investor wants to protect most of the unrealized gain if the stock declines but does not want to sell at the current price. Which order should the investor enter?

Accepted Answer

Sell stop order at $58 — Correct. A sell stop order placed below the current market price is triggered only if the stock falls to the stop price, at which point it becomes a market order to sell. This locks in most of the gain while letting the investor stay in the position if the stock keeps rising.

Question 17

A customer buys shares of a listed common stock, and the trade is executed on a Tuesday during a week with no market holidays. Under regular way settlement, the trade settles on which day?

Accepted Answer

Wednesday, one business day after the trade date — Correct. Under SEC Rule 15c6-1, regular way settlement for corporate stocks and bonds is T+1 — one business day after the trade date — so a Tuesday trade settles Wednesday.

Question 18

A customer purchases $20,000 of a marginable listed common stock in a margin account. Under Federal Reserve Regulation T, what is the minimum initial deposit the customer must make for this purchase?

Accepted Answer

$10,000 — Correct. Regulation T, issued by the Federal Reserve Board, sets the initial margin requirement for equity securities at 50% of the purchase price. 50% of $20,000 is $10,000; the broker-dealer may lend the customer the other half.

Question 19

A married couple wants a single brokerage account that both spouses own and may trade, and in which a deceased spouse's interest passes automatically to the surviving spouse. Which account registration meets this objective?

Accepted Answer

Joint tenants with right of survivorship — Correct. In a joint tenants with right of survivorship (JTWROS) account, each owner has an undivided interest, both may trade, and a deceased owner's interest passes automatically to the surviving owner.

Question 20

After illicit cash has been deposited into several bank and brokerage accounts, an individual conducts a rapid series of wire transfers among multiple domestic and offshore accounts designed to obscure the origin of the funds. These wire transfers are an example of which stage of money laundering?

Accepted Answer

Layering — Correct. Layering is the stage in which launderers separate funds from their criminal source through complex chains of transactions — such as repeated wire transfers among accounts, often offshore — to disguise the audit trail.

Question 21

A registered representative learns that her firm is about to execute a large institutional block purchase of XYZ stock that is likely to move the market price. Before the block order is entered, she buys XYZ call options in her personal account. This activity is BEST described as:

Accepted Answer

Front running — Correct. Front running is trading for one's own benefit ahead of a known, pending block order (including using options on the same security) to profit from the anticipated price movement. FINRA Rule 5270 prohibits it as a manipulative practice.

Question 22

A FINRA member firm emails a written market commentary to 80 of its existing retail customers over a 10-day period. Under FINRA Rule 2210, how is this communication classified?

Accepted Answer

Retail communication — Correct. A retail communication is any written or electronic communication distributed or made available to more than 25 retail investors within any 30-calendar-day period. Sending to 80 retail customers within 10 days exceeds that threshold, triggering principal-approval and content standards.

Question 23

Under SEC Regulation Best Interest (Reg BI), when a broker-dealer or its registered representative recommends a securities transaction to a retail customer, the firm and representative must:

Accepted Answer

Act in the retail customer's best interest, without placing their own interests ahead of the customer's — Correct. Reg BI's general obligation requires broker-dealers and their associated persons, when recommending securities transactions or investment strategies to retail customers, to act in the customer's best interest at the time of the recommendation without placing their own financial or other interests ahead of the customer's. It is satisfied through the disclosure, care, conflict-of-interest, and compliance obligations.

Question 24

A FINRA member firm employs an unregistered individual in its call center. Under FINRA rules, which of the following activities may this individual perform?

Accepted Answer

Invite prospective customers to attend a firm-sponsored investment seminar — Correct. Unregistered persons may perform purely clerical or ministerial functions, including extending invitations to firm-sponsored events and asking whether a prospect wants to receive literature, as long as they do not discuss investments, prequalify prospects, or solicit business.

Question 25

A registered representative of a member firm accepts a paid position teaching evening business courses at a local community college. Under FINRA rules, before beginning this activity, the representative must

Accepted Answer

provide prior written notice to the member firm — Correct. Under FINRA Rule 3270, a registered person who will be an employee, contractor, officer, or partner of another business, or who will be compensated for an outside activity, must give the employing member firm prior written notice. The firm may then evaluate and restrict the activity, but the rule itself requires notice, not approval.

Free SIE Practice Exam — with an explanation for every answer

Which of the following best describes the protection provided by the Securities Investor Protection Corporation (SIPC)?

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