Free FINRA SIE Practice Exam with Questions & Answers | Set: 5

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.

Open-end mutual funds do not trade on secondary markets. Instead, shares are continuously issued or redeemed by the fund at the net asset value (NAV), calculated at the market close.

D is correct because investors purchase and redeem shares directly through the fund or authorized brokers.

A is incorrect because mutual funds do not have a predetermined dissolution date.

B is incorrect because mutual fund shares are priced at the NAV calculated once daily after the market closes.

C is incorrect because secondary market trading applies to closed-end funds and ETFs, not open-end mutual funds.

The correct answer is B, A dollar of fiscal stimulus creates more than a dollar of economic growth. This reflects the core Keynesian concept known as the multiplier effect. According to Keynesian economic theory, government spending can stimulate economic activity beyond the initial amount spent. For example, if the government spends money on infrastructure, workers and suppliers receive income, which they then spend, creating additional rounds of economic activity.

Keynesians believe that during periods of economic slowdown or recession, active government intervention through fiscal policy (such as increased government spending or tax cuts) is necessary to boost demand and reduce unemployment. This contrasts with classical or free-market theories.

Choice A reflects classical economic theory, which emphasizes limited government and free markets. Choice C aligns more with supply-side economics, which focuses on incentives for production. Choice D is incorrect because Keynesian theory generally places greater emphasis on fiscal policy rather than monetary policy as the primary tool for economic stabilization.

Thus, the multiplier effect described in choice B is a fundamental principle of Keynesian economics and the best answer.

The correct answer is D, if any amount of money is contributed, no minimum required. This question tests knowledge of MSRB Rule G-37, which governs political contributions by municipal finance professionals (MFPs). The rule is designed to prevent “pay-to-play” practices, where firms make political contributions to win municipal underwriting business.

Under Rule G-37, an MFP is allowed to contribute up to $250 per election to an issuer official only if the MFP is entitled to vote for that official. However, in this scenario, the MFP is not entitled to vote for the issuer official. Therefore, any contribution—regardless of size—triggers restrictions.

Specifically, even a small contribution (e.g., $1) would result in a two-year ban on the broker-dealer’s ability to engage in negotiated municipal securities business with that issuer. This strict rule ensures that firms cannot circumvent regulations by making small contributions.

Choices A, B, and C are incorrect because the $250 threshold only applies when the MFP is eligible to vote. Since that condition is not met here, there is no permissible minimum contribution amount.

Thus, any contribution triggers the restriction, making choice D correct.

Step by Step Explanation:

Definition of Accredited Investor: As per SEC Regulation D, Rule 501, an accredited investor includes:

Individuals with a net worth exceeding $1 million (excluding primary residence equity).

Individuals with an annual income exceeding $200,000 (or $300,000 jointly with a spouse) for the past two years.

Elimination of Incorrect Answers:

$500,000 threshold (option B) is too low to qualify under Regulation D.

Option D is incorrect as it requires assets of $5 million, not $2.5 million.

SEC Regulation D, Rule 501 (Accredited Investor Definition): SEC Regulation D.

The correct answer is A, Common stock. Common stockholders are the true owners of a corporation and have voting rights, which allow them to exercise control over the company. These voting rights typically include electing the board of directors and voting on major corporate matters such as mergers, acquisitions, and other significant policy decisions. This ability to influence corporate governance is what gives common stockholders control.

In contrast, preferred stockholders generally do not have voting rights. While they have priority over common shareholders in receiving dividends and in liquidation, they do not participate in management decisions under normal circumstances.

Corporate bondholders are creditors, not owners. They lend money to the corporation and receive interest payments, but they have no ownership or voting rights, and therefore no control over company decisions.

Convertible bondholders also begin as creditors. Although they have the option to convert their bonds into common stock, they only gain voting rights after conversion. Until that point, they do not have control over the company.

Therefore, only common stock provides direct ownership and voting power, making it the security that entitles the holder to exercise control of the company.

The correct answer is D, YTM is less than coupon rate. When a bond is selling at a premium, it means the bond’s market price is above its par value. This occurs when the bond’s coupon rate is higher than prevailing market interest rates, making the bond more attractive to investors.

Step-by-step, premium bond relationships follow a consistent pattern:

Coupon rate > Current yield > Yield to maturity (YTM)

This happens because investors are paying more than par value for the bond but will only receive par at maturity. The excess paid (premium) reduces the overall return, causing the YTM to be the lowest yield measure.

Choice A is incorrect because a premium bond has a market value greater than par, not less. Choice B is incorrect because the coupon rate is always higher than current yield for premium bonds. Choice C is incorrect because the coupon rate is also higher than YTM, not lower.

Thus, the defining characteristic of a premium bond is that its yield to maturity is less than its coupon rate, making Answer D correct.

A defining characteristic of joint tenants with rights of survivorship (JTWROS) is that when one owner dies, the deceased owner’s interest passes automatically to the surviving owner(s) by operation of law. Because ownership transfers directly to the survivors, the assets in a JTWROS account are generally not subject to probate with respect to the deceased owner’s interest. That is why C is correct. This feature is often a key motivation for choosing JTWROS registration: it can simplify transfer of assets at death and provide continuity of account ownership.

Choice A is incorrect because realized gains in a taxable account are generally taxable regardless of registration type; JTWROS does not create a special exemption from taxation on realized gains. Choice B is incorrect because JTWROS is not limited to two owners; while many joint accounts have two owners, JTWROS can exist with multiple joint tenants depending on firm policy and state law. Choice D is incorrect because required minimum distributions (RMDs) apply to certain retirement accounts (like traditional IRAs and qualified plans), not to standard taxable joint brokerage registrations. JTWROS is an ownership/registration form, not a retirement account type.

For SIE purposes, know the core registration effects:

JTWROS: survivorship feature, bypasses probate for the deceased owner’s share.

Tenants in common (TIC): no survivorship; decedent’s share passes via will/estate (probate).

This question tests those basic estate-transfer and account registration distinctions that matter in customer account setup and expectations.

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.

SEC and FINRA Bond Basics: SEC Discount Bonds.

An unrealized gain occurs when the value of an asset increases but has not yet been sold. If the customer sells the stock, the unrealized gain becomes a realized gain.

B is correct because the increase in value without selling the stock is an unrealized gain.

A is incorrect because interest income refers to earnings from fixed-income securities.

C is incorrect because operating profit relates to a company’s earnings, not an investor’s portfolio.

D is incorrect because " out of the money " is a term used for options, not stocks.