SIE Practice Exam.
Free practice test — 709 quality-checked questions, instant feedback.

1. A customer's equity portfolio has a beta of 1.4 measured against a broad market index. The customer states that this means the portfolio should return 1.4 percent more than the index each year. How should the representative respond?

• A. Beta measures the portfolio's dividend yield relative to the index, so the customer should expect proportionally higher income.
• B. Beta measures sensitivity to market movements, so a beta of 1.4 suggests the portfolio tends to move roughly 40 percent more than the index in either direction, amplifying declines as well as advances.
• C. Beta measures the company-specific risk that diversification has failed to remove from the portfolio.
• D. The customer is correct, because beta expresses the expected annual excess return of the portfolio over its benchmark index, which is why higher-beta portfolios are recommended to growth investors.

2. Ranked by original maturity at issuance, how do Treasury bills, notes and bonds line up?

• A. All three are issued only in thirty-year terms
• B. Notes are the shortest; bills the longest
• C. Bills up to a year; notes two to ten years; bonds beyond ten
• D. Bills to five years; notes to twenty; bonds to fifty

3. A dealer separates a Treasury bond's coupons from its principal and sells each piece as its own zero. What has the buyer of a piece acquired?

• A. A share in a bond mutual fund
• B. A STRIPS position that pays a single known amount at its date
• C. A floating-rate government note
• D. A repurchase agreement with the dealer

4. A customer buys 100 shares of a stock on a regular-way trade. Under current settlement rules, when must the seller deliver the securities and the buyer pay the purchase price?

• A. Same day (T+0)
• B. Five business days after the trade date (T+5)
• C. One business day after the trade date (T+1)
• D. Two business days after the trade date (T+2)

5. A broker-dealer's compliance department discovers that a representative has been recommending unsuitable investments to customers—specifically, buying complex derivatives for retirees whose stated investment goal is capital preservation. What is the primary issue with these recommendations?

• A. The representative failed to disclose that derivatives are riskier than stocks
• B. The representative should have asked the customers' permission before implementing a trading strategy
• C. The firm failed to establish a best execution policy for derivative trades
• D. The suitability rule requires that recommendations match the customer's financial situation, objectives, and risk tolerance

6. Which of the following best describes the difference between a market maker and a broker-dealer?

• A. A market maker is a firm that commits to buying and selling securities at quoted prices for its own account, while all broker-dealers perform this function.
• B. A market maker executes customer orders, while a broker-dealer only holds inventory of securities.
• C. A market maker handles only institutional orders, while a broker-dealer handles only retail customer orders.
• D. A broker-dealer is any firm that buys and sells securities; a market maker is a specific type of broker-dealer that continuously quotes bid and ask prices and is willing to trade at those prices.

7. A corporation is planning to raise capital by issuing new common stock. Which of the following statements is accurate regarding the rights of common stockholders?

• A. Common stockholders have voting rights and a residual claim on assets after all debts and preferred claims are satisfied.
• B. Common stockholders have a fixed claim on corporate earnings and must be paid before preferred stockholders in a liquidation.
• C. Common stockholders have priority over bondholders to receive interest payments from the corporation.
• D. Common stockholders receive guaranteed annual dividends set by the board of directors at issuance.

8. An investor holds a bond with a 5% coupon rate issued at par. Market interest rates rise from 5% to 7%. Which of the following will occur?

• A. The bond's coupon rate will adjust to match the new market rate of 7%.
• B. The bond's price will remain at par because the coupon is fixed.
• C. The bond's price will decrease, and the yield to maturity will increase above 5%.
• D. The bond's price will increase, and the yield to maturity will decrease.

9. A customer wishes to purchase 200 shares of stock using a margin account. The customer deposits $5,000 cash. Under Regulation T, what is the minimum loan value (maximum credit) the broker-dealer can extend for this transaction?

• A. $5,500
• B. $5,000
• C. $7,500
• D. $10,000

10. A customer opens a margin account and has a current market value of securities of $40,000 with a debit balance of $20,000. What is the customer's equity, and is the account in compliance with a 30% maintenance margin requirement?

• A. Equity is $20,000; the account has 33% equity, which equals the maintenance margin but may trigger a margin call.
• B. Equity is $20,000; the account has only 20% equity, which falls below 30% and triggers a margin call.
• C. Equity is $20,000; the account has 50% equity, which exceeds the 30% minimum and is in compliance.
• D. Equity is $60,000; the account has 60% equity, which exceeds the 30% minimum and is in compliance.

11. A company issues preferred stock that pays an annual dividend of $8 per share and has a par value of $100. If a new investor purchases this preferred stock when the market price is $80, what is the current yield?

• A. 10%
• B. 12.5%
• C. 8%
• D. 6.4%

12. An investor buys a call option on stock XYZ with a strike price of $60 for a premium of $5. The option has one month to expiration. On the expiration date, XYZ is trading at $70. What is the investor's net profit or loss?

• A. Loss of $5 per share
• B. Loss of $10 per share
• C. Profit of $10 per share
• D. Profit of $5 per share

13. A company announces it will split its stock 2-for-1. An investor currently holds 100 shares trading at $120 per share. Immediately after the split, assuming no change in total market capitalization, what will the investor own and at what price per share?

• A. 100 shares at $120 per share (no change)
• B. 50 shares at $240 per share
• C. 200 shares at $60 per share
• D. 200 shares at $120 per share

14. Which of the following statements is true regarding bonds and interest rate risk?

• A. When interest rates rise, existing bond prices fall, and vice versa
• B. Bonds are immune to interest rate changes if held to maturity
• C. Bond prices and interest rates move in the same direction
• D. Short-term bonds have greater interest rate sensitivity than long-term bonds

15. A preferred stock typically offers which of the following characteristics?

• A. Unlimited upside potential and voting rights equal to common shares
• B. Fixed dividend payments and a claim senior to common stock in liquidation
• C. Lower risk than bonds and guaranteed capital appreciation
• D. The right to convert to common stock at a price set by the issuer at any time

16. A call option gives the holder the right to do what?

• A. Sell the underlying security at a specified price on or before a set date
• B. Buy the underlying security at a specified price on or before a set date
• C. Short the underlying security at a specified price indefinitely
• D. Lend the underlying security to a broker

17. An investor purchases a put option on XYZ stock with a strike price of $45, paying a premium of $3, when XYZ is trading at $48. At expiration, XYZ is trading at $40. What is the investor's profit or loss on this put option?

• A. Profit of $5 (the intrinsic value)
• B. Profit of $2 ($5 intrinsic value minus $3 premium)
• C. Loss of $3 (the premium paid)
• D. Loss of $8 ($45 strike minus $40 current price plus $3 premium)

18. Which of the following statements about mutual funds is accurate?

• A. Investors own shares of the mutual fund, which owns a portfolio of underlying securities
• B. Mutual fund shares are traded on stock exchanges at real-time market prices
• C. Mutual fund investors have direct ownership of all securities held by the fund
• D. The value of a mutual fund share never fluctuates during the trading day

19. An investor is concerned about purchasing power risk. Which of the following investments would most likely help protect against inflation?

• A. Common stock in companies with pricing power
• B. A certificate of deposit with a fixed rate locked in for 5 years
• C. A 30-year Treasury bond with a fixed 2% coupon
• D. A money market fund with stable NAV

20. A corporate bond is trading at 95 (meaning $950 per $1,000 par value) with a 4% coupon and 10 years to maturity. Which of the following best describes the bond's current yield?

• A. Equal to 4% regardless of price
• B. Less than 4% because the bond is trading at a discount
• C. Unable to be calculated without knowing the issuer's credit rating
• D. More than 4% because the bond is trading below par

21. A customer purchases an inverse exchange-traded fund (inverse ETF) that is designed to move opposite to a stock market index. If the underlying index gains 20%, what should the investor expect?

• A. The inverse ETF should decline by approximately 20%
• B. The inverse ETF will maintain a constant value due to its hedging structure
• C. The inverse ETF's performance is unpredictable because it uses derivatives
• D. The inverse ETF will gain 20% to offset the customer's portfolio loss

22. A broker-dealer executes a trade for a customer's account without first obtaining the customer's consent or authorization to trade in that account. Under securities regulations, this action is most directly prohibited by which of the following?

• A. Rules mandating that customers maintain a minimum account balance before any trades can occur
• B. Rules prohibiting unauthorized transactions, which require that customers authorize trading in their accounts
• C. Rules requiring written authorization for discretionary authority over customer accounts
• D. Rules requiring that all trades settle within one business day

23. A customer grants a broker-dealer written authority to make investment decisions and execute trades on the customer's behalf without seeking approval for each individual transaction. What type of account authority arrangement does this represent?

• A. Non-discretionary authority, where the representative may only recommend trades
• B. Discretionary authority, which requires written authorization and carries enhanced supervision requirements
• C. Power of attorney, which grants the same rights as ownership of the account
• D. Limited trading rights, which apply only to fixed-income securities

24. A broker-dealer representative continuously buys and sells stocks in a customer's discretionary account, generating high commissions while the account's value does not grow. The customer expresses concern, but the representative argues that active trading builds long-term wealth. What prohibited practice is most likely occurring here?

• A. Churning, where excessive trading is conducted primarily to generate commissions rather than benefit the customer
• B. Market manipulation, because frequent trades influence stock prices
• C. Short selling without proper disclosure to the customer
• D. Insider trading, because the representative has access to the customer's account information

25. When a broker-dealer accepts a customer order to buy securities, which of the following statements best describes the firm's obligation regarding the execution of that order?

• A. The firm must execute the order at the exact price quoted at the moment the customer places it
• B. The firm is only required to execute the order if it does not conflict with the firm's own trading interests
• C. The firm may hold the order indefinitely while seeking the absolute lowest purchase price available
• D. The firm must use reasonable efforts to execute the order promptly at a fair price under current market conditions

26. A representative shares material nonpublic information about an upcoming corporate acquisition with a friend, who then trades on that information. Which of the following best describes the representative's violation?

• A. Suitability violation, because the friend may not have investment experience to trade on this information
• B. Misappropriation of proprietary trading strategies
• C. Tipping—providing material nonpublic information to someone who uses it to trade, breaching a duty of confidentiality
• D. Unauthorized account activity, because the friend did not have written permission to trade

27. A customer account is registered in the name of the customer's spouse, but the customer directs all trading decisions and provides funds for purchases. The customer does not disclose this arrangement to the broker-dealer. What issue does this create?

• A. The spouse is automatically liable for all trading losses in the account
• B. The account cannot legally be opened in a spouse's name under any circumstances
• C. The customer has engaged in insider trading by using an account in another name
• D. The broker-dealer should have collected beneficial ownership information; the account holder and the decision-maker may not be the same person, creating a discrepancy

28. A broker-dealer firm decides to engage in proprietary trading (trading for its own account) at the same time it is executing customer orders in the same securities. Which regulatory concern is most directly implicated?

• A. Insider trading, because proprietary trading is always based on nonpublic information
• B. Conflict of interest—the firm may prioritize its own trades over customer orders, violating the duty to treat customers fairly
• C. Suitability violation, because proprietary trades may not match the firm's investment objectives
• D. Market manipulation, because the firm's trades will always move prices upward

29. A representative recommends that a customer with a long-term investment horizon invest heavily in penny stocks with high volatility. When the customer asks why, the representative states: 'Penny stocks are low-priced, so you can buy more shares and diversify your holdings.' What issue is present in this recommendation?

• A. The representative failed to obtain written approval from the customer before recommending the stocks
• B. Penny stocks cannot be recommended to any customer under any circumstances
• C. The recommendation may be unsuitable because the reasoning is based on a flawed understanding of diversification; penny stocks carry elevated risk and may not match the customer's profile
• D. Penny stocks are illegal to trade in customer accounts

30. A customer calls a broker-dealer to place a trade but does not have a pre-existing account. The customer provides minimal information, and the firm executes the trade without opening a formal account or collecting required information such as identity, address, and financial situation. What compliance failure has occurred?

• A. The firm failed to establish a best execution policy for the trade
• B. The firm failed to comply with know-your-customer (KYC) obligations by not collecting required customer information before executing trades
• C. The firm violated the suitability rule by executing a trade without assessing the customer's investment objectives
• D. The firm committed unauthorized trading by executing the trade without the customer's explicit consent

31. A broker-dealer receives customer orders to sell stock on behalf of multiple customers in the afternoon. Before executing these customer orders, the firm executes a large proprietary sell order in the same stock. This proprietary trade depresses the stock price, so the customer orders execute at lower prices than they would have otherwise. What rules have been violated?

• A. Only the best execution rule, because the customer orders did not receive the best available prices
• B. Both the duty to prioritize customer orders and the prohibition on putting the firm's trading interests ahead of customer interests
• C. The insider trading rules, because the firm had access to information about customer orders
• D. The market manipulation rule, because the proprietary trade was designed to move prices

32. A broker-dealer discovers that one of its representatives has been recommending the same portfolio allocation to all customers without regard to their individual circumstances. The representative states: 'I use a one-size-fits-all approach because it's efficient and simplifies my workload.' Why is this practice problematic?

• A. Suitability requires individualized analysis of each customer's financial situation, objectives, and risk tolerance; a uniform approach fails to assess fit for each customer
• B. The representative has violated the rule against tied selling by bundling multiple recommendations together
• C. The Securities Act of 1933 prohibits firms from recommending the same investments to more than one customer
• D. Using the same portfolio for multiple customers constitutes unauthorized trading for some of them

33. Which of the following best describes the primary purpose of the regulatory structure governing securities markets in the United States?

• A. To protect investors and maintain fair and efficient markets through disclosure and fraud prevention
• B. To prevent all publicly traded companies from raising capital
• C. To guarantee returns on all securities transactions
• D. To eliminate all risk from investment activities

34. Under the regulatory framework, what is the relationship between the SEC and FINRA?

• A. The SEC replaced FINRA in 2020 and now handles all broker oversight
• B. The SEC and FINRA are completely independent with no oversight relationship
• C. FINRA has authority over the SEC and must approve all SEC regulations
• D. FINRA operates as a Self-Regulatory Organization under SEC oversight

35. A registered representative at a brokerage firm receives a complaint from a customer regarding unsuitable investment recommendations. Which regulatory principle MOST directly applies to this situation?

• A. The self-regulatory status of the firm, which exempts it from all federal rules
• B. Anti-dilution provisions in corporate bylaws
• C. Know Your Customer (KYC) and suitability standards that require brokers to have reasonable basis for recommendations
• D. The Federal Reserve's monetary policy decisions

36. A broker-dealer advertises a new investment product with claims that it is guaranteed to outperform the S&P 500. Under the regulatory framework, what is the PRIMARY concern with this advertisement?

• A. It is only concerning if the product is not registered with the state
• B. It violates anti-fraud rules by making unsupported performance claims
• C. There is no regulatory concern because investment firms can advertise as they wish
• D. It fails to use the required color scheme in the advertisement

37. An investment advisor keeps clients' securities in a general account with other client assets, without segregation, and comingles the funds with firm operating capital. What regulatory principle does this MOST clearly violate?

• A. Client asset protection through segregation and safeguarding requirements
• B. The requirement to maintain a physical office in every state
• C. The prohibition on offering tax-advantaged retirement accounts
• D. The mandate to offer all securities equally to all customers

38. A registered broker-dealer conducts business through both a retail division (serving individual customers) and an institutional division (serving other firms). What regulatory approach BEST describes how this dual structure is addressed?

• A. Both divisions are subject to the same regulatory rules with no distinction
• B. The regulatory framework does not address dual-division structures at all
• C. Both divisions are regulated, but certain protections and disclosure rules are tailored based on the sophistication of the customer
• D. The institutional division is completely exempt from all SEC and FINRA rules

39. A firm conducts a customer survey and discovers that many customers do not understand the risks of a complex investment product the firm is heavily promoting. Under the regulatory framework, what should the firm PRIMARILY consider doing?

• A. Recommend the product only to customers who have already demonstrated expertise in that product type
• B. File a notice with FINRA stating that customer surveys are not binding on the firm's marketing strategy
• C. Continue promotion unchanged because survey results do not constitute regulatory violations
• D. Implement additional disclosure, education, and suitability controls to ensure customers understand risks before purchasing

40. A registered representative discovers that a colleague has been churning customer accounts (executing excessive trades primarily to generate commissions) without the customers' knowledge. What is the registered representative's MOST appropriate next action under regulatory principles?

• A. Ignore it, as it is the firm's compliance department's sole responsibility to detect and address such conduct
• B. Report the conduct to the firm's compliance department or management, as all industry participants share responsibility for detecting violations
• C. Directly contact FINRA before informing anyone at the firm, to ensure the firm cannot suppress the report
• D. Advise the colleague to stop the practice but take no further action if the colleague promises to comply

41. A broker-dealer receives a subpoena from a regulatory agency requesting customer account records. The firm believes the request may be overly broad and potentially violates customer privacy. What is the firm's BEST course of action?

• A. Ignore the subpoena and refuse to comply because customer privacy is paramount
• B. Notify customers that their information has been requested so they can prevent disclosure
• C. Comply immediately without question to avoid any appearance of obstruction
• D. Consult with legal counsel to understand obligations and determine whether to seek modification of the subpoena while ultimately complying with lawful requests

42. A broker-dealer's compliance team identifies that the firm has been unknowingly processing trades through a settlement service that has not been registered with the SEC. Upon discovery, the firm faces a complex remediation scenario: some trades have already settled, new trades are incoming, and the firm's customers are unaware of the technical breach. Which of the following BEST represents how the regulatory framework would address this situation?

• A. The firm may continue using the unregistered service since trades are already settled and customers have not complained
• B. The firm may continue processing trades but should eventually cease using the unregistered service at year-end
• C. The firm should discreetly switch to a registered service without notifying customers or regulators to minimize reputational harm
• D. The firm should immediately halt all new trades, conduct a full audit of affected accounts, notify regulators and affected customers, and implement corrective measures

43. Yields on short-maturity Treasury securities have risen above yields on long-maturity Treasury securities. What does this shape describe, and what is the conventional interpretation among market participants?

• A. An inverted yield curve, conventionally read as a market expectation of slower growth and lower rates ahead, and often observed during periods of tight monetary policy.
• B. A normal yield curve, showing that investors demand additional compensation for committing funds over longer horizons and therefore require higher yields at the long end of the curve.
• C. A humped yield curve, which arises only when the Treasury suspends issuance of its longest-dated bonds.
• D. A flat yield curve, showing that maturity no longer influences pricing and that credit spreads have taken over as the driver of returns.

44. A customer is deciding between a fixed annuity and a variable annuity from the same insurance company. Which statement correctly identifies where the investment risk lies during the accumulation period?

• A. In a variable annuity the purchase payments are held in the insurer's separate account and the contract owner bears the investment risk, while in a fixed annuity the payments are held in the general account and the insurer bears that risk.
• B. In a fixed annuity the contract owner bears the investment risk because the crediting rate is tied to the performance of a market index.
• C. In both contracts the insurance company guarantees the accumulated value against loss.
• D. In a variable annuity the insurer guarantees the value of the separate account during the accumulation period, and only the amount of the eventual payout varies with investment performance after the contract is annuitized.

45. To place its bonds at a lower coupon, a company attaches long-dated certificates letting buyers purchase its stock at a price above today's market. What sweetener is that?

• A. Warrants
• B. Call options written by the company
• C. Preemptive rights
• D. Convertible preferred shares

46. An investor who owns no shares of RST writes an RST call for the premium. What is the worst case?

• A. Loss limited to the premium received
• B. No risk, since no stock is owned
• C. Loss limited to the strike price
• D. Unlimited loss — the stock can rise without ceiling and must be delivered

47. A grandparent wants to set money aside for a grandchild's future college costs while retaining control over withdrawals and the ability to name a different family member as beneficiary later. Which product fits, and how is it categorized for regulatory purposes?

• A. A variable annuity, because earnings accumulate tax deferred and the owner may substitute a different annuitant at will.
• B. An UTMA custodial account, which is regulated as a municipal fund security and permits the custodian to reclaim the assets or redirect them to a different child in the family at any time before majority.
• C. A 529 college savings plan, which is a municipal fund security; the account owner retains control of the account and may change the designated beneficiary to another qualifying family member.
• D. A revocable trust holding mutual fund shares, which qualifies the assets for exclusion from the grandchild's financial aid calculation by statute.

48. An investor is comparing a subscription right distributed to shareholders with a warrant attached as a sweetener to a newly issued corporate bond. Which statement correctly distinguishes the two instruments as of the time each is issued?

• A. Both are issued with exercise prices set below the current market price so that each carries intrinsic value from the moment of issuance, but only the warrant may be transferred to another investor.
• B. A right is long-lived and attached to a debt issue, while a warrant is distributed to existing shareholders and expires within a few weeks.
• C. Both instruments obligate the holder to purchase the underlying shares on or before the expiration date.
• D. A right has a short life and an exercise price set below the current market price, while a warrant has a long life and an exercise price set above the current market price.

49. A corporate bond with a $1,000 par value is convertible into common stock at a conversion price of $25 per share. The common stock is currently trading at $32 per share. Ignoring accrued interest and transaction costs, what is the parity price of the bond?

• A. $800.00
• B. $781.25
• C. $1,600.00
• D. $1,280.00

50. A U.S. investor holds American Depositary Receipts representing shares of a Japanese manufacturer. Over the following year the underlying shares rise 8 percent on the Tokyo exchange, but the yen weakens substantially against the U.S. dollar. What is the most likely effect on the investor's ADR position?

• A. The ADR return will be less than 8 percent and could be negative, because the foreign shares backing the receipt translate into fewer dollars.
• B. The investor is insulated from the currency move because ADRs carry an embedded forward hedge arranged by the depositary bank.
• C. The ADR price will be unaffected by the currency move because ADRs are quoted, traded, and settled in U.S. dollars, which insulates the holder from movements in the underlying local currency.
• D. The ADR return will exceed 8 percent because the depositary bank converts dividends at a fixed contractual rate.

51. A corporation with a preemptive rights provision conducts a rights offering to existing common shareholders at a subscription price below the current market price. One shareholder has no interest in buying additional shares. Which statement best describes that shareholder's position?

• A. The rights necessarily expire worthless because subscription rights are non-transferable and may be exercised only by the shareholder to whom the corporation originally distributed them.
• B. The shareholder may sell the rights in the secondary market before they expire, although the shareholder's proportionate ownership will still be diluted.
• C. The corporation is required to repurchase any unexercised rights at the subscription price.
• D. The rights automatically convert into longer-lived warrants if they are not exercised by the deadline.

52. A customer bought a 6 percent corporate bond that is callable in five years at 102. Three years later, yields on comparable newly issued corporate debt have fallen to roughly 3 percent. Which risk has become the customer's most immediate concern?

• A. Credit risk, because a decline in market yields signals deterioration in the issuer's financial condition.
• B. Purchasing power risk, because the bond's coupon is fixed for the remainder of its life and cannot be adjusted upward as the general level of consumer prices rises.
• C. Liquidity risk, because a callable bond may not be resold before its first call date.
• D. Call risk, and the reinvestment risk that follows it if the issuer redeems the bond and the proceeds must be put to work at today's lower yields.

53. A customer buys Treasury Inflation-Protected Securities at issuance. Over the following year the Consumer Price Index rises steadily. Which statement best describes what happens to the customer's position?

• A. The principal and coupon are unchanged, and the customer instead receives a single inflation catch-up payment at maturity.
• B. The principal is adjusted upward, and because the fixed coupon rate is applied to the higher principal, the semiannual interest payments increase.
• C. Both the stated coupon rate and the principal amount are adjusted upward each period.
• D. The stated coupon rate is increased each period in line with the index, while the principal amount stays fixed at its original face value until the security matures.

54. A customer in a high federal tax bracket is considering buying a corporate zero-coupon bond and holding it to maturity in a fully taxable account. Which characteristic is most likely to work against this customer?

• A. The annual accretion of the discount is taxed as interest income each year even though the customer receives no cash until maturity.
• B. Zero-coupon bonds cannot be redeemed at par and must be sold in the secondary market before maturity.
• C. The bond's price is less sensitive to changes in interest rates than a coupon bond of the same maturity.
• D. The bond exposes the customer to substantial reinvestment risk, because the semiannual coupon payments must be put back to work at whatever rates happen to prevail when each one arrives.

55. A customer is comparing a unit investment trust with an actively managed open-end fund. Which statement accurately describes the unit investment trust?

• A. It is overseen by a board of directors that annually reviews and renews an investment advisory contract.
• B. It continuously offers new units and rebalances its holdings toward a stated target allocation.
• C. Its portfolio is fixed at inception and is not actively managed, it has a stated termination date, and its units are redeemable.
• D. Its units are listed on an exchange and trade throughout the session at a premium or a discount to the value of the underlying portfolio, depending on investor demand for them.

56. A large corporation covers a seasonal working capital shortfall by selling unsecured promissory notes at a discount from face value, with maturities that do not exceed 270 days. Which statement about this instrument is accurate?

• A. It is commercial paper, it carries no stated coupon, and the investor's return is the difference between the discounted purchase price and the face amount paid at maturity.
• B. It is a negotiable certificate of deposit, and the principal is insured by the FDIC up to the standard deposit limit.
• C. It is a repurchase agreement, and the notes are collateralized by the corporation's inventory and receivables.
• D. It is a banker's acceptance, a short-term instrument that is also sold at a discount from face value, and payment at maturity is guaranteed by the commercial bank that accepted the draft.

57. A customer in the 32 percent federal income tax bracket is comparing a general obligation municipal bond yielding 3.4 percent, whose interest is exempt from federal income tax, against a corporate bond of comparable quality. Approximately what corporate yield would leave the customer equally well off after federal tax?

• A. 6.80 percent
• B. 4.49 percent
• C. 2.31 percent
• D. 5.00 percent

58. A municipality issues bonds to finance a toll bridge, with debt service payable solely from tolls collected at the facility. Compared with the same municipality's general obligation bonds, what is the most significant difference from an investor's standpoint?

• A. Repayment depends on revenue generated by the facility rather than the issuer's taxing power, so the credit analysis turns on projected debt service coverage.
• B. Interest on the toll bridge bonds is subject to federal income tax, while interest on the general obligation bonds is not.
• C. The toll bridge bonds must be approved by a voter referendum before they may be issued, while the general obligation bonds may be authorized by the governing body acting on its own.
• D. The toll bridge bonds are backed by the full faith, credit, and taxing power of the municipality in addition to the tolls.

59. A customer seeking exposure to a commodity index is choosing between an exchange-traded fund that holds futures positions and an exchange-traded note linked to the same index. Which risk is present in the exchange-traded note but not in the exchange-traded fund?

• A. Liquidity risk arising from thin secondary market trading in the product.
• B. Credit risk of the issuing financial institution, because the note is that institution's unsecured obligation rather than a claim on a pool of assets.
• C. Tracking error between the product's reported return and the return of the index it is designed to follow, arising from the costs of maintaining the underlying position.
• D. Market risk arising from movements in the level of the underlying index.

60. A customer is evaluating a publicly traded equity real estate investment trust as a source of current income. Which statement about the REIT's structure and taxation is accurate?

• A. REIT shares are redeemable with the issuer at net asset value on any business day.
• B. To avoid taxation at the trust level a REIT must distribute at least 90 percent of its taxable income, and those distributions are generally taxed to the shareholder as ordinary income rather than as qualified dividends.
• C. A REIT passes both its income and its operating losses through to shareholders, who may apply the losses against other passive income on their own returns in the same manner as a limited partnership.
• D. REIT distributions are exempt from federal income tax to the extent they are derived from rents on real property.

61. A customer facing a large tax bill is shown a direct participation program structured as a limited partnership. Which combination of features best describes what this customer would be accepting?

• A. Daily liquidity through an active secondary market, taxation of the program's income at the entity level before anything is distributed, and unlimited personal liability for the limited partners.
• B. Flow-through of income and losses to the investors, liability for limited partners capped at their investment, and very limited liquidity because there is no active secondary market.
• C. Redeemability at net asset value on demand, flow-through income, and a guarantee of the underlying property values.
• D. Guaranteed quarterly distributions, exchange listing, and general partner liability shared equally among all participants.

62. A customer wants a fund whose shares trade on an exchange throughout the trading day and that can sometimes be bought for less than the value of the fund's underlying holdings. Which structure fits this description, and why is such a discount possible?

• A. A closed-end fund, because its fixed number of shares trades in the secondary market at a price set by supply and demand rather than at net asset value.
• B. A unit investment trust, because its units are continuously offered to the public at a discount to portfolio value.
• C. An open-end fund bought at the bid price, which is by definition below net asset value.
• D. An open-end fund, because its shares are redeemed at net asset value less a redemption fee, and that fee is what creates the discount to the value of the underlying holdings.

63. A customer who will need access to invested funds within about a year asks a representative about placing money in a privately offered hedge fund. Which concern is the most appropriate for the representative to raise first?

• A. Hedge funds are registered investment companies and are therefore required to permit daily redemption at net asset value, which conflicts directly with the customer's stated one-year horizon.
• B. Hedge funds are sold in private offerings and commonly impose lock-up periods and infrequent redemption windows, so the money may be inaccessible when the customer needs it.
• C. Hedge fund interests are listed on an exchange, so the customer would pay a wide bid-ask spread on entry and exit.
• D. Hedge funds are prohibited from employing leverage, so the expected return would be too low to meet the customer's objective.

64. A customer has made monthly purchase payments into a variable annuity for eight years and now elects a straight life payout. What happens to the customer's accumulation units when the contract is annuitized?

• A. They are transferred into the insurer's general account, which then guarantees a level monthly payment amount for the remainder of the customer's lifetime regardless of investment results.
• B. They are exchanged for a fixed number of annuity units, and each monthly payment thereafter varies with the value of those units relative to the assumed interest rate.
• C. They keep accumulating during the payout phase, and the customer receives a level monthly payment based on their value.
• D. They are liquidated for cash and the insurer uses the proceeds to purchase a fixed immediate annuity for the customer.

65. A 30-year-old customer intends to hold a mutual fund position for at least 20 years and will invest $60,000, an amount that exceeds the fund family's first breakpoint. The representative recommends Class C shares. What is the principal problem with this recommendation?

• A. Class C shares may not be purchased in amounts that exceed a fund's first breakpoint.
• B. Class C shares impose a front-end sales charge that would be larger than the Class A charge at this dollar amount, because Class C shares do not participate in the fund family's breakpoint schedule at any investment level.
• C. Class C shares carry an ongoing asset-based distribution fee for as long as the position is held, so over a 20-year horizon their cumulative cost is likely to exceed a breakpoint-reduced Class A front-end load.
• D. Class C shares are not redeemable, so the customer could not exit the position during the 20-year holding period.

66. A representative recommends that a customer surrender a variable annuity bought three years ago and purchase a new contract from a different insurer with substantially similar features and a slightly richer death benefit. What is the primary regulatory concern with this recommendation?

• A. The transaction makes the entire contract value immediately taxable as ordinary income to the customer.
• B. The customer permanently loses the tax-deferred status of the earnings accumulated in the original contract, so every dollar of gain since purchase becomes currently taxable at the moment the replacement contract is issued.
• C. The exchange is prohibited outright, because annuity contracts may not be exchanged between different insurance companies.
• D. The customer may pay a surrender charge on the old contract and start a new surrender charge period, so the representative must be able to demonstrate a benefit to the customer rather than a new commission to the representative.

67. A customer compares a traditional whole life policy with a variable life policy issued by the same insurance company. Which statement accurately describes the variable life contract?

• A. The policy builds no cash value, because the entire premium purchases pure term protection.
• B. The cash value fluctuates with the performance of the separate account subaccounts and is not guaranteed, while the contract generally provides a minimum guaranteed death benefit.
• C. Both the cash value and the death benefit are fully guaranteed by the insurer's general account.
• D. The death benefit is fixed at its original face amount for the life of the contract, and the cash value earns a guaranteed minimum rate of return that is set when the policy is issued.

68. A customer tells a representative she intends to invest $48,000 in a fund family whose sales charge schedule steps down at $50,000. The representative places the full $48,000 without mentioning the breakpoint or the availability of a letter of intent. What has occurred?

• A. Churning, because the representative structured the transaction to generate the largest available sales charge.
• B. Nothing improper, because the customer's stated investment did not actually reach the breakpoint level and a representative may not solicit an order larger than the one the customer requested.
• C. A breakpoint sale, a prohibited practice, because the customer paid a higher sales charge than necessary when a modest increase or a letter of intent would have secured the reduced charge.
• D. A suitability failure only, which is cured when the firm subsequently delivers the fund prospectus.

69. A customer holds a stock position with a large unrealized gain, expects a possible sharp decline over the next few months, but does not want to sell and realize the gain now. Which position most directly addresses this objective, and what does it cost?

• A. Writing a put on the same stock, which obligates the put buyer to take the shares off the customer's hands at the strike price if the price of the stock falls.
• B. Writing a covered call, which fully protects the position against a decline in exchange for the premium received.
• C. Buying a call on the same stock, which offsets losses on the shares if the price falls.
• D. Buying a put on the same stock, which establishes a floor under the position for the life of the option in exchange for the premium paid.

70. A customer who owns 40 stocks spread across many industries complains that the portfolio still fell sharply during a broad market decline. What best explains this outcome, and what does it imply about adding more stocks?

• A. The portfolio still carries substantial unsystematic risk, and adding a further tranche of stocks within the same asset class will remove the remainder of it and protect the portfolio in a broad decline.
• B. Broad market declines affect only concentrated portfolios, so the loss points to an undisclosed concentration in a single sector.
• C. A portfolio of 40 stocks has a beta of zero by construction, so the loss must be attributable to transaction costs.
• D. The decline reflects systematic market risk, which diversifying further within equities cannot eliminate; reducing it requires holding assets whose returns are less correlated with the equity market.

71. A customer owns 500 shares of a stock purchased at $42 per share and writes 5 call contracts with a $50 strike, receiving a premium of $2 per share. Ignoring commissions, what is the customer's maximum gain if the stock rises sharply and the calls are exercised?

• A. $4,000
• B. $1,000
• C. $5,000
• D. Unlimited, because the customer owns the underlying shares.

72. A corporation is liquidated. Its capital structure includes secured mortgage bonds, unsecured debentures, subordinated debentures, cumulative preferred stock, and common stock. In what order are these claims satisfied from the liquidation proceeds?

• A. Preferred stock, secured mortgage bonds, unsecured debentures, subordinated debentures, common stock.
• B. Secured mortgage bonds, unsecured debentures, subordinated debentures, preferred stock, common stock.
• C. Secured mortgage bonds, subordinated debentures, unsecured debentures, preferred stock, common stock.
• D. Unsecured debentures, secured mortgage bonds, subordinated debentures, preferred stock, common stock.

73. An investor expects market interest rates to decline over the next two years and wants the position that will produce the largest percentage price gain. Assuming comparable credit quality, which bond should the investor buy?

• A. A 20-year bond with an 8 percent coupon.
• B. A 2-year bond with an 8 percent coupon.
• C. A 20-year zero-coupon bond.
• D. A 5-year bond with a 6 percent coupon.

74. A customer who lives in a state with a high income tax buys a 26-week Treasury bill. Which pair of statements about that security is correct?

• A. The bill is issued at a discount and makes no periodic interest payments, and its interest income is exempt from state and local income tax.
• B. The bill is issued at a discount from face value, and its interest income is exempt from federal, state, and local income tax because it is a direct obligation of the United States.
• C. The bill pays semiannual coupons, and its interest is fully taxable at every level of government.
• D. The bill pays semiannual coupons, and its interest is exempt from federal income tax but is taxable by the state.

75. A customer wants to hold cash for roughly three months in a vehicle whose primary objective is preservation of principal. Which statement about a retail money market mutual fund is accurate?

• A. The fund invests in short-term, high-quality debt instruments and seeks to maintain a stable share price, but the share price is not guaranteed and an investor can lose principal.
• B. The fund holds long-term government bonds, which removes interest rate risk from the portfolio.
• C. The fund guarantees a minimum yield tied to the federal funds rate set by the Federal Reserve.
• D. The fund's shares are insured by the Federal Deposit Insurance Corporation up to the standard deposit insurance limit for each depositor, because the underlying portfolio consists largely of bank instruments.

76. A customer writes one uncovered put contract on XYZ with a $35 strike and receives a premium of $4 per share. Ignoring commissions, what is the customer's breakeven price at expiration and the maximum possible loss on the position?

• A. Breakeven at $39 per share, maximum loss $400.
• B. Breakeven at $31 per share, maximum loss $3,100.
• C. Breakeven at $31 per share, maximum loss $400.
• D. Breakeven at $35 per share, maximum loss unlimited.

77. A company issued 6 percent cumulative preferred stock with a $100 par value. Because of financial difficulty it paid no preferred dividend for the past two years. The board now wants to resume dividends and also pay a dividend on the common stock this year. How much must be paid per preferred share before any common dividend may be paid?

• A. $6, representing only the current year's dividend.
• B. $18, representing the two years in arrears plus the current year's dividend.
• C. $12, representing only the two years in arrears.
• D. $12 plus accrued interest on the two years of unpaid dividends, compounded annually.

78. A customer asks why an exchange-traded fund tracking a broad index can be traded differently from an index mutual fund tracking the same index. Which statement is accurate?

• A. The exchange-traded fund is redeemable on demand by any retail investor directly with the fund at net asset value computed that day, while a mutual fund investor must instead sell the shares in the secondary market.
• B. Only the mutual fund may be purchased on margin, because exchange-traded fund shares are not marginable.
• C. The exchange-traded fund trades at prevailing market prices throughout the session and may be bought on margin or sold short, while the mutual fund is priced once each day at the next computed net asset value.
• D. Both products execute at the closing net asset value, but only the exchange-traded fund is permitted to impose a sales load.

79. A customer buys a mortgage-backed pass-through security. Market interest rates subsequently fall sharply, and a large share of the homeowners in the underlying pool refinance their mortgages. What is the effect on the customer?

• A. The monthly cash flows are unaffected, because the pass-through carries a guarantee of the timely payment of principal and interest that protects the investor against changes in the timing of payments.
• B. Principal is returned faster than expected and must be reinvested at the new lower rates, so the position appreciates less than a comparable non-callable bond would.
• C. The stated maturity of the security is extended, and the customer receives payments for a longer period than originally expected.
• D. The customer realizes a capital gain equal to the difference between the pool's face amount and the original purchase price.

80. An institutional client's investment policy permits only investment-grade corporate debt. A representative proposes a corporate bond that carries a BB rating from Standard and Poor's. What is the problem, and what does that rating convey?

• A. BB falls below the lowest investment-grade category, so the bond is speculative, and the rating reflects the agency's judgment about the issuer's ability to pay rather than the bond's market risk.
• B. The rating measures the bond's price volatility rather than its credit quality, so it has no bearing on the policy restriction.
• C. The bond is effectively unrated for policy purposes, so the investment-grade restriction does not reach it.
• D. There is no problem, because BB is the second-highest investment-grade rating category, ranking immediately below the AAA tier and therefore comfortably inside the policy's stated restriction.

81. A 24-year-old customer invests in a target date fund with a 2065 target date, notices that it currently holds mostly equities, and asks whether the fund will always be this aggressive. What is the correct response?

• A. No. The fund liquidates its entire portfolio into cash on the stated target date and guarantees the return of at least the total of the customer's original contributions to the account.
• B. Yes, unless the customer instructs the fund company to apply a different allocation to this particular account.
• C. No. The fund follows a glide path that shifts the allocation progressively toward fixed income and cash as the target date nears, although its value at that date is not guaranteed.
• D. Yes. A target date fund maintains a fixed allocation that is simply rebalanced back to its original weights each quarter.

82. A corporate bond indenture contains a sinking fund provision. What does that tell a prospective bondholder about the issue?

• A. Interest payments are deposited into an escrow account and released to holders only at maturity.
• B. The issuer sets money aside on a schedule to retire portions of the issue before maturity, which strengthens the credit but means a given holder's bonds may be redeemed early.
• C. Bondholders may require the issuer to repurchase their bonds at par on stated dates before maturity, and the cash the issuer sets aside under the provision is what funds those repurchases.
• D. The issuer has pledged specific real property as collateral securing the bonds.

83. A customer wants to buy 10,000 shares and instructs the firm that the order must be filled in its entirety immediately or not at all, with no partial fills and no working of the balance. Which order qualifier matches this instruction?

• A. All or none, which requires the full quantity to be executed but permits the order to remain open while the firm works it during the session.
• B. Immediate or cancel, which allows a partial fill and cancels only the unexecuted balance.
• C. Fill or kill, which requires the full quantity to be executed at once, failing which the entire order is canceled.
• D. Good til canceled, which keeps the order alive across sessions until the full size can be accumulated.

84. A customer holding stock trading at $46 enters a sell stop-limit order with a stop price of $40 and a limit price of $40. Overnight the company reports disastrous news, and the stock opens the next session at $34 and continues lower. What is the most likely outcome?

• A. The order is automatically canceled, because the stock never traded at the stop price.
• B. The order is elected when the stock trades through $40, but it may then go unexecuted, because the limit forbids a sale below $40 while the stock is trading in the $34 range.
• C. The order executes at $40, because the limit price guarantees the customer that price.
• D. The order executes at $34, because a stop-limit order becomes a market order to sell as soon as the stop price has been elected, and the limit price applies only to the election of the order.

85. A customer is short 300 shares of a stock sold at $48 and wants to cap the loss if the shares begin to climb. Which order accomplishes this, and what happens when it is triggered?

• A. A buy limit placed below the current market, which executes only if the stock declines from its present level.
• B. A sell stop placed below the current market, which is elected on a decline and becomes a market order to sell.
• C. A buy limit order placed above the current market, which guarantees that the customer will be able to cover the short position at that stated limit price no matter how far or how quickly the shares climb from here.
• D. A buy stop placed above the current market; once the stock trades at or through the stop price the order is elected and becomes a market order to buy, closing the short at the best price then available.

86. A broker-dealer buys 1,000 shares into its own inventory from a market maker and then sells those shares out of inventory to a retail customer at a higher price. Which statement correctly describes the firm's capacity and how it is compensated?

• A. The firm acted as agent, and its compensation must be disclosed to the customer as a commission.
• B. The firm acted as agent, and no compensation disclosure is required because the firm was not a party to the transaction.
• C. The firm acted as principal, or dealer; the confirmation must disclose that it traded for its own account, and its compensation is a markup rather than a commission.
• D. The firm acted as principal and may charge the customer both a markup on the shares it delivered and a separate commission for the service of arranging and executing the trade.

87. A customer telephones her representative and says: 'Buy 500 shares of ABC for me sometime today, but you choose the moment and the price you think is best.' The customer has never signed a trading authorization. May the representative accept this instruction?

• A. Yes, and the representative may continue exercising the same judgment on future ABC orders until the customer revokes the arrangement in writing.
• B. No. An order of this type may be accepted only in a fee-based advisory account rather than a commission-based brokerage account.
• C. Yes. Discretion limited to time and price is not treated as discretionary authority, provided the customer specified the security, the size, and the side, and the order is executed that day.
• D. No. Any instruction that leaves any element of the order to the representative's judgment, including the moment of execution and the price paid, requires prior written discretionary authority.

88. A parent who opened an UTMA custodial account for a 9-year-old child later asks the representative to withdraw funds to pay for a family vacation and to redesignate the account for the child's older sibling. How should the representative respond?

• A. Neither request may be honored, and no assets may leave the account for any purpose whatsoever until the child reaches the age of majority and takes control of the property in her own name.
• B. Both requests may be honored, because the custodian has full discretion over the use and ownership of the account.
• C. The transfer into the account was an irrevocable gift to that child, so the minor cannot be changed, and the custodian may spend the assets only for that child's benefit, not on general family expenses.
• D. The withdrawal may be made for any purpose the custodian chooses, but the named minor cannot be changed.

89. Two unrelated business partners hold a joint brokerage account registered as joint tenants with rights of survivorship. One partner dies. What happens to the account, and how would the result differ if the account had been registered as tenants in common?

• A. Under both registrations the entire account passes to the surviving tenant, but only tenants in common requires the estate to go through probate.
• B. Under joint tenants with rights of survivorship the account is frozen until a court order is obtained, while tenants in common permits the surviving owner immediate and unrestricted access to the entire balance.
• C. The account is split equally between the survivor and the estate under either form of registration.
• D. The deceased partner's interest passes directly to the surviving tenant; under tenants in common that interest would instead pass to the deceased partner's estate for distribution under the will.

90. A company has declared a cash dividend payable to holders of record on a stated date. A customer telephones a representative and asks what she must do to receive that dividend. Which response is correct?

• A. She will receive the dividend only if she holds the shares continuously from the declaration date through the payable date.
• B. She will receive the dividend as long as she buys the shares at any time before the payable date, because the payable date is the date on which the company determines which holders are entitled to it.
• C. She will receive the dividend if she buys on the ex-dividend date, because the trade will settle before the dividend is paid.
• D. She must buy before the ex-dividend date; a purchase on or after that date does not carry the dividend, and the share price typically opens lower by roughly the dividend amount when the stock begins trading ex.

91. A representative makes a securities recommendation to a retail customer. Which statement correctly describes what Regulation Best Interest requires of the representative and the firm?

• A. It imposes an ongoing duty to monitor every retail account continuously for as long as the account remains open.
• B. It requires acting in the retail customer's best interest at the time of the recommendation without placing firm or representative interests ahead of the customer's, through disclosure, care, conflict of interest, and compliance obligations.
• C. It requires the representative to recommend the least expensive product available in the relevant product category in every case, because cost is treated as the controlling factor under the standard's care obligation, regardless of the product's other features.
• D. It applies to every customer of the firm, including institutional accounts and other broker-dealers.

92. A customer who is convinced a stock will decline wants to sell it short in a margin account. Which statement best describes the customer's risk profile and the firm's obligation before executing the sale?

• A. The maximum loss is limited to the margin the customer deposits, and the firm need only document that the strategy is suitable.
• B. The maximum loss equals the proceeds of the short sale, and no borrowing arrangement is necessary because the sale settles in cash.
• C. The loss is theoretically unlimited because there is no ceiling on the stock's price, and the firm must have reasonable grounds to believe the security can be borrowed and delivered by settlement.
• D. The maximum loss equals the difference between the sale price and zero, and the customer may deliver the borrowed shares whenever it is convenient to do so after the trade has been executed in the market.

93. A customer's long margin account holds securities with a current market value of $50,000 against a debit balance of $40,000. Applying the 25 percent minimum maintenance requirement for a long margin account, what is the customer's position?

• A. Equity is $10,000, but no maintenance call can arise, because margin requirements are tested only at the time a position is purchased and not while the position continues to be held.
• B. Equity is $40,000, so the account comfortably exceeds the requirement and no action is needed.
• C. Equity is $10,000, which equals 25 percent of the debit balance, so the account satisfies the requirement exactly.
• D. Equity is $10,000, which is 20 percent of market value, so the account has fallen below the requirement and the customer will receive a maintenance call.

94. A customer is opening a margin account at a broker-dealer. Which statement correctly identifies which components of the margin agreement the customer must sign and which one is optional?

• A. Only the hypothecation agreement is required; every other component is provided for information and need not be signed.
• B. The credit agreement setting out the terms of the loan and the hypothecation agreement pledging the securities as collateral are required, while the loan consent permitting the firm to lend the customer's securities to others is optional.
• C. The credit agreement, the hypothecation agreement, and the loan consent must all be signed by the customer before the firm may open the margin account and extend any credit, because the three documents together form a single indivisible margin agreement.
• D. Only the credit agreement is required; the hypothecation agreement is optional and the loan consent is mandatory.

95. A registered representative agrees to introduce three of his brokerage customers to a friend who is raising capital for a private real estate venture, in exchange for a finder's fee. He tells no one at his firm, reasoning that the venture has nothing to do with the firm and the meetings occur away from its offices. What has occurred?

• A. An outside business activity, which requires only that he notify the firm within a reasonable period after receiving the fee.
• B. Nothing improper, because a transaction conducted away from the firm's premises falls outside the firm's supervisory jurisdiction.
• C. A private securities transaction. He was required to give prior written notice to his firm, and because he will be compensated, the firm must approve the activity in writing and supervise it as though it were the firm's own business.
• D. A permissible referral arrangement, since he is only making introductions and is not recommending, executing, or documenting any securities transaction himself, nor is he handling any of the investors' funds or securities at any point.

96. A customer who normally deposits modest sums brings in a total of $28,000 in currency over four consecutive business days in amounts ranging from $6,800 to $7,400, remarking that he wants to keep each deposit under the reporting threshold. How should the representative proceed?

• A. Escalate the pattern to the firm's anti-money-laundering compliance personnel for evaluation and possible suspicious activity report filing, and say nothing about it to the customer.
• B. Refuse the deposits, close the account, and send the customer a written explanation of the firm's reasons.
• C. Take no action, because each individual deposit falls below the currency transaction reporting threshold.
• D. Accept the deposits but advise the customer that the firm intends to file a currency transaction report, so that he has an opportunity to explain the pattern before the report is submitted.

97. An 81-year-old customer instructs her representative to wire $75,000 overseas to pay a fee she says is required to release a prize she has won. She becomes evasive and agitated when the representative asks who is receiving the funds. What may the firm do?

• A. Place a temporary hold on the disbursement based on a reasonable belief that financial exploitation of a specified adult is occurring, notify the trusted contact person the customer previously designated, and escalate the matter internally for review.
• B. Close the account immediately and return the entire balance to the customer by check.
• C. Nothing but execute the wire as instructed, because a customer who retains legal capacity is entitled to direct disbursements from her own account without interference from the firm, whatever the firm may think of the wisdom of her decision or of the identity of the recipient.
• D. Place a permanent hold on the account and take no further action until a court appoints a guardian for the customer.

98. A representative wants to thank a portfolio manager at an institutional client for a year of business by sending a case of wine worth $900 to the manager's home, paid for out of the representative's own pocket rather than expensed to the firm. Under the gifts and gratuities rule, what is the problem?

• A. The gift is permissible so long as the representative discloses it in advance to the compliance department of the recipient's employer and records the disclosure in his own firm's gift log.
• B. There is no problem, because the recipient is a portfolio manager at an institutional client rather than a retail customer of the firm, and the cap reaches only gifts made to retail customers.
• C. Gifts given in relation to the business of the recipient's employer are capped at $300 per person per year, so a $900 case of wine is far above the limit; who paid for it does not change the analysis.
• D. There is no problem, because the representative paid for the gift personally rather than expensing it to the firm, which keeps the gift off the firm's books and outside the reach of the rule.

99. Two traders at different firms privately agree that one will enter buy orders in a thinly traded stock at successively higher prices while the other enters matching sell orders at the same moments, so the tape shows steady volume and a rising price. Neither expects any real change in beneficial ownership. How is this conduct characterized?

• A. Legitimate market making, because both traders are supplying liquidity to a stock that badly needs it.
• B. Front running, because the two traders are deliberately entering their own orders ahead of the public buying interest that they expect their activity in the stock to attract over the following sessions.
• C. Manipulation by matched orders and painting the tape, prohibited because the activity creates a false or misleading appearance of active trading and of genuine price movement.
• D. A permissible cross trade, requiring only that both firms report the transactions to the exchange.

100. A representative is short of cash and asks a long-standing customer, who is not a relative and is not in the lending business, for a $20,000 personal loan at a market rate of interest, documented by a promissory note. Is this permissible?

• A. Yes, because the loan is properly documented by a written promissory note and carries a market rate of interest, so the customer is receiving arm's length terms and cannot be said to have been disadvantaged by the arrangement in any respect.
• B. Yes, provided the representative repays the loan before the firm's next annual compliance review.
• C. Generally no. Borrowing from a customer is prohibited unless the firm maintains written procedures allowing it and the arrangement fits a narrow permitted category, such as a family relationship or a customer in the business of lending money.
• D. Yes, because a loan between two adults is a private matter that falls outside the scope of the firm's rules.

101. A registered representative is offered a paid weekend position keeping the books for a local restaurant. The work involves no securities, no investors, and no customers of his firm. What is he required to do?

• A. Decline the position, because a registered representative may not accept compensation from any employer other than the broker-dealer.
• B. Give prior written notice of the activity to his firm, which may then impose conditions on it or prohibit it outright.
• C. Nothing at all, because the position involves no securities and no customers of the firm.
• D. Obtain approval directly from FINRA before accepting the position.

102. A grateful customer offers to let his representative keep 10 percent of the profits in his account as thanks for the extra attention he receives. The representative would contribute none of the capital in the account. What does the rule require?

• A. Prior written authorization from both the customer and the firm, with the sharing proportionate to the representative's own financial contribution to the account, which here is nothing.
• B. The arrangement is permissible so long as the representative shares only in the profits of the account and never bears any portion of the losses the customer may sustain, since that leaves the customer better off.
• C. Nothing more than the customer's verbal consent, since the arrangement was the customer's own idea.
• D. The representative must first open a joint account with the customer, after which any sharing arrangement they agree on is permitted.

103. A representative drafts a piece for distribution to roughly 100 prospective retail investors. It includes a chart projecting the recommended fund's value five years forward, extrapolated from the fund's historical average annual return. What is wrong with this material?

• A. The piece is correspondence rather than a retail communication, so it requires no principal approval before use.
• B. Projections are acceptable in retail communications as long as the historical data underlying them is accurate.
• C. Nothing is wrong, provided the chart is clearly labeled as an estimate rather than a promise and the historical average annual return used to construct it is accurately stated in the text accompanying the chart.
• D. The piece is a retail communication, which requires principal approval before first use and may not project or predict investment results; past performance may not be presented as an indicator of future results.

104. A broker-dealer fails and is liquidated. A customer's account held $300,000 in securities and $180,000 in cash, and her statement shows the securities have declined 30 percent in value over the past year. What does SIPC protection provide?

• A. SIPC reimburses the customer for the 30 percent decline in the value of her securities, because that decline occurred while the securities were being held in the custody of the firm that has now failed.
• B. SIPC protects only the failed firm's creditors; individual customers must pursue claims through the bankruptcy court.
• C. SIPC guarantees that the customer's securities will be returned to her at their original purchase prices.
• D. SIPC covers the loss of cash and securities held at the failed firm up to $500,000 per customer, of which no more than $250,000 may be cash, and it does not cover declines in market value.

105. A portfolio manager whose compensation depends on quarter-end portfolio valuations asks a representative to enter aggressive buy orders in a thinly traded holding during the final minutes of the last trading day of the quarter. How should the representative respond?

• A. Enter the orders, but spread them across the following session to reduce their price impact.
• B. Enter the orders only after obtaining the manager's written confirmation that the purchases are being made for long-term investment purposes rather than to affect the closing price of the stock on the last day of the quarter.
• C. Enter the orders, because a customer is entitled to choose the timing of transactions in his own account.
• D. Refuse the instruction and escalate it to compliance, because entering orders designed to influence the closing price is marking the close, a manipulative practice, whatever the customer's stated reason.

106. A customer whose account agreement contains a predispute arbitration clause is preparing a claim against her firm alleging unauthorized trading. She asks whether she can attempt an informal resolution first and whether an arbitration decision can later be appealed. What should she be told?

• A. Mediation becomes binding on both parties as soon as they agree to enter it, while arbitration is voluntary and non-binding.
• B. Both processes are non-binding, so either party may afterward take the dispute to court for a full trial.
• C. Mediation is no longer available to either party once an arbitration claim has been filed with FINRA, and the resulting arbitration award may be appealed to a federal court, which will then hold a new hearing on the facts and decide the dispute afresh on the merits.
• D. Mediation is voluntary and non-binding, using a neutral to help the parties craft their own settlement, and it can run alongside a pending arbitration; an arbitration award is binding and final, subject only to very limited grounds for challenge in court.

107. The Federal Open Market Committee directs the purchase of a large quantity of Treasury securities from primary dealers in the open market. What effect is this action intended to have?

• A. Bank reserves rise, the money supply expands, and short-term interest rates tend to fall, which represents an easing of monetary policy.
• B. The reserve requirement is automatically lowered, obliging banks to hold more capital against their deposits.
• C. Bank reserves fall, the money supply contracts, and short-term interest rates are pushed higher, which represents a tightening of monetary policy.
• D. The federal budget deficit is reduced, which constitutes a tightening of fiscal policy.

108. A 45-year-old customer who is leaving her employer asks her representative to have her $200,000 employer retirement plan balance sent directly to her so that she can deposit it into an individual retirement account herself. What should the representative explain?

• A. Only part of the balance may be rolled over, and the remainder is taxed as ordinary income in the year of distribution.
• B. A distribution paid directly to the participant can never be rolled over and is fully taxable in the year received.
• C. She may roll the distribution over at any point during the following calendar year with no adverse tax consequence, because the deadline for completing a rollover runs through the due date of her federal income tax return for the year in which the distribution was received, including extensions.
• D. A distribution paid to her is subject to mandatory 20 percent federal withholding and must be redeposited within 60 days; to roll the full amount she would have to replace the withheld portion from other funds, which is why a direct trustee-to-trustee transfer is the better route.

109. A representative learns that an individual customer with several open good-til-canceled orders has died. The customer's spouse, who held a power of attorney over the account, telephones the next morning to sell a position. How must the representative proceed?

• A. Cancel all open orders, freeze the account pending the required documentation, and decline the spouse's instruction, because the power of attorney terminated at the customer's death.
• B. Retitle the account into the spouse's name at once and continue to accept her instructions as the surviving family member.
• C. Leave the open orders working, since they were validly entered while the customer was alive and represent his stated intentions.
• D. Execute the sell order, because a power of attorney remains fully effective until it is formally revoked in writing by the grantor or is set aside by a court of competent jurisdiction on the application of an interested party.

110. Among the tools available to the Federal Reserve is the authority to change the reserve requirement applicable to depository institutions. If the Federal Reserve were to raise that requirement, what would be the most direct consequence for the banking system, and why has this particular tool historically been used sparingly?

• A. The federal funds rate falls immediately, because banks are left holding more excess reserves available to lend to one another.
• B. Banks may lend a larger share of the deposits they hold, expanding credit throughout the system, and the tool is used sparingly because its effect on lending takes several years to appear and is difficult to reverse.
• C. Only the U.S. Treasury is affected, because reserve requirements apply to government securities dealers rather than to banks.
• D. Banks must retain a larger share of deposits and can lend less, contracting the money supply, and the tool is used sparingly because even a small change forces abrupt balance-sheet adjustments across the entire banking system.

111. A customer reading about monetary policy confuses the discount rate with the federal funds rate. Which statement correctly distinguishes the two?

• A. The discount rate is what the Federal Reserve charges banks that borrow directly from it, while the federal funds rate is what banks charge one another for overnight loans of reserves.
• B. The federal funds rate is what the Federal Reserve charges banks that borrow from it, while the discount rate is what corporations pay on commercial paper.
• C. The discount rate is what banks charge one another for overnight loans of reserve balances, while the federal funds rate is the rate set administratively by the Federal Reserve at its own lending facility.
• D. Both rates are set administratively by the Federal Reserve and are required by statute to move together.

112. An economy has recorded two consecutive quarters of declining gross domestic product, with rising unemployment and weakening consumer demand. Which phase of the business cycle does this describe, and what conventionally follows it?

• A. A trough, which is the phase in which output is growing at its fastest rate.
• B. Contraction, commonly called a recession; the cycle conventionally moves from contraction through a trough into recovery and then expansion.
• C. A depression, which by definition follows any two consecutive quarters of declining output that are accompanied by rising unemployment and weakening consumer demand.
• D. Expansion; the cycle moves from expansion into a peak and then into further expansion.

113. A retired customer holds a portfolio of bonds yielding 4 percent while consumer prices are rising at roughly 5 percent per year. What is happening to the customer's position in real terms?

• A. Nothing changes in real terms, because the bonds will be redeemed at par at maturity.
• B. The customer's real return is negative, so both the interest income and the principal buy less each year; this is purchasing power risk.
• C. The customer is gaining ground, because any positive nominal yield increases purchasing power over time regardless of the rate at which consumer prices are rising.
• D. The customer's credit risk is increasing, because inflation raises the probability that the issuers will default.

114. A customer asks which body is responsible for changing federal income tax rates and federal spending levels as a means of influencing economic activity. What is the correct response?

• A. Congress and the President, acting through fiscal policy; the Federal Reserve instead conducts monetary policy, which works through the money supply and interest rates rather than through taxing and spending.
• B. The U.S. Treasury acting on its own authority, which may adjust income tax rates by regulation.
• C. The Federal Reserve, acting through the Federal Open Market Committee, which sets federal income tax rates and federal spending levels as part of its statutory mandate to promote maximum employment and stable prices.
• D. The Securities and Exchange Commission, which sets tax policy applicable to the capital markets.

115. An issuer negotiating a new stock offering with an investment bank wants certainty that it will receive a specific amount of capital regardless of how investors respond. Which underwriting arrangement fits, and where does the risk of unsold shares sit?

• A. An all or none arrangement, in which the underwriter purchases the entire issue and resells it at its own risk.
• B. A best efforts arrangement, in which the underwriter guarantees the proceeds to the issuer and returns any shares it is unable to place back to the issuer at the close of the offering.
• C. A mini-max arrangement, in which the underwriter is obliged to purchase whatever portion of the issue remains unsold at the public offering price.
• D. A firm commitment underwriting, in which the underwriter buys the entire issue from the issuer and bears the risk of any shares it cannot resell to the public.

116. Which of the following securities is exempt from the registration requirements of the Securities Act of 1933?

• A. Shares of an open-end investment company offered continuously to the public.
• B. A general obligation bond issued by a state government.
• C. Common stock sold by a large listed manufacturer in a follow-on public offering.
• D. A corporate debenture distributed to retail investors through an underwriting syndicate.

117. During the registration period for a new issue, the managing underwriter publishes a tombstone advertisement in a financial newspaper. What is a tombstone permitted to do?

• A. Serve as the offering document, replacing prospectus delivery for any investor who has read it.
• B. Solicit binding purchase commitments from investors in advance of the effective date.
• C. Present the underwriter's projected first-year return on the offering so that investors who read the advertisement are able to evaluate the attractiveness of the issue before the final prospectus reaches them.
• D. Announce the offering with limited information, such as the issuer, the type and amount of securities, the underwriters, and where a prospectus can be obtained; it is an announcement rather than an offer to sell.

118. A registration statement for a new issue has been filed with the SEC but has not yet become effective. During this cooling-off period a prospective investor telephones a representative and says she wants to buy 500 shares. What may the representative do?

• A. Accept a non-binding indication of interest and send the preliminary prospectus; no sale, no funds, and no binding order may be taken until the registration statement is effective.
• B. Accept the order and forward the firm's own research report on the issuer to help the customer evaluate the investment.
• C. Accept the order and hold the customer's funds in escrow until the registration statement becomes effective, at which point the shares are released and the trade is confirmed to the customer.
• D. Decline all contact with the investor, because any communication concerning the issue is prohibited until effectiveness.

119. A privately held company raises capital by selling shares to a small group of accredited investors in a private placement, with no public advertising or general solicitation. Which statement about the investors' position is accurate?

• A. The shares are freely tradable immediately, because the exemption applies to the issuer rather than to the purchasers.
• B. The issuer's exemption is retroactively destroyed if any investor later resells the shares, which would require the original offering to be registered with the SEC after the fact.
• C. The shares are restricted securities and may not be freely resold into the public market until the applicable holding period and other resale conditions have been satisfied.
• D. Each investor must personally register the shares with the SEC before making any resale.

120. A registered representative voluntarily resigns from her member firm to take a position elsewhere. What is the firm's obligation regarding Form U5, and what happens to her registration and to regulatory jurisdiction over her?

• A. Filing the Form U5 immediately extinguishes FINRA's jurisdiction over any conduct that occurred during her employment.
• B. The firm must file a Form U5 terminating the registration, generally within 30 days, stating the reason for termination, and must give her a copy; her registration ends, but she remains subject to FINRA jurisdiction for a period after termination.
• C. The representative files her own Form U5 at the time she becomes associated with her next firm.
• D. A Form U5 is required only where a representative is terminated for cause; a voluntary resignation requires no filing at all, because in that case the representative's registration simply lapses of its own accord when she leaves the firm's employment.

121. An officer of a publicly traded corporation has held a large block of the company's common stock for several years and now wants to sell a substantial portion of it in the open market. Which requirement most directly constrains the size of her sale?

• A. She may dispose of the shares only through a private placement to accredited investors.
• B. None. Because she has held the shares for well over one year, the holding period condition has been satisfied in full and she may sell any quantity she chooses at any time she likes in the open market.
• C. She must first register the shares in a new offering under the Securities Act of 1933 before selling any of them.
• D. As an affiliate she is subject to a volume limitation capping sales in any three-month period at the greater of 1 percent of the outstanding shares of the class or the average weekly reported trading volume over the preceding four weeks.

122. A registered representative is named in a customer's written complaint alleging that he misappropriated funds from her account. What must happen with respect to his Form U4?

• A. Nothing, because the Form U4 records only the representative's employment history, examination results, and registration categories, and not allegations made against him by customers while unresolved.
• B. The form is amended only if the complaint is later substantiated and results in a judgment against the representative.
• C. The representative must file the amendment himself directly with the SEC rather than through his firm.
• D. The form must be amended to disclose the reportable event, generally within 30 days of learning of the facts, and the disclosure becomes part of the representative's permanent regulatory record.

123. An applicant seeking to associate with a member firm discloses that he was convicted of felony securities fraud six years ago. What is the consequence of that disclosure?

• A. He is permanently barred from associating with any broker-dealer in any capacity for the remainder of his life.
• B. He is subject to statutory disqualification and may not become or remain associated with a member firm unless relief is obtained through the applicable eligibility process.
• C. He may associate with the firm only in a clerical capacity, and only with the prior written consent of each customer he assists.
• D. None, provided the conviction is fully disclosed on his Form U4 and the firm agrees to place him under a heightened supervision plan designed and administered by its own compliance department.

124. An unregistered administrative assistant at a branch office is answering telephones while the registered representatives are in a meeting. Which action may she properly take?

• A. Ask the caller about income, net worth, and investment objectives so that a representative can follow up more efficiently.
• B. Accept an unsolicited order from an existing customer, since accepting an unsolicited order involves no recommendation.
• C. Describe the features of a mutual fund the firm is currently recommending, so long as she reads only language taken directly from the fund's current prospectus and adds nothing of her own.
• D. Take a message for a representative to return the call, and supply purely clerical information such as the branch address or the firm's business hours.

125. A customer asks a representative to explain how the Securities Act of 1933 differs in purpose from the Securities Exchange Act of 1934. Which explanation is correct?

• A. The 1933 Act governs secondary market trading among investors and the conduct of the exchanges, while the 1934 Act governs the registration of new issues sold to the public and the delivery of a prospectus in the offering.
• B. Both statutes apply exclusively to municipal securities, which are otherwise unregulated at the federal level.
• C. The 1933 Act created the Securities and Exchange Commission, while the 1934 Act established FINRA as a federal agency.
• D. The 1933 Act governs the registration and full disclosure of new issues offered to the public, while the 1934 Act governs secondary market trading and created the SEC to oversee broker-dealers, exchanges, and market conduct.

126. A newly registered representative asks his supervisor to explain the continuing education requirements that will apply to him. Which description is correct?

• A. Continuing education requirements apply only to registered principals and supervisors, not to registered representatives.
• B. Continuing education is administered entirely by the employing firm, which sets both the content and the schedule of the training according to its own needs analysis, with no regulatory requirements attached to either component.
• C. Continuing education consists of a single Regulatory Element course, taken once, in the second year following initial registration.
• D. Continuing education has two components: the Regulatory Element, which must be completed annually for each registration category held, and the Firm Element, an ongoing training program the firm builds from its own annual needs analysis.

127. The holder of a put she bought exercises it. What must the put's writer now do?

• A. Pay the holder the premium back
• B. Buy the stock from the holder at the strike price
• C. Deliver a new option contract
• D. Sell stock to the holder at the strike price

128. A corporation with surplus cash wants a bank instrument it can resell before maturity if plans change. Which deposit fits?

• A. A retail CD with an early-withdrawal penalty
• B. A passbook savings account
• C. A Treasury bond
• D. A negotiable (jumbo) certificate of deposit

129. An importer's bank guarantees payment on goods arriving in ninety days, and the paper is sold at a discount to investors. What is it?

• A. A corporate debenture
• B. A repurchase agreement
• C. A Yankee bond
• D. A banker's acceptance

130. A school district must pay teachers in June but its property taxes arrive in September. Which security bridges the gap?

• A. A general obligation bond
• B. A tax anticipation note
• C. A zero-coupon municipal bond
• D. A revenue bond

131. Between a GNMA pass-through and an FNMA pass-through, what distinguishes the backing?

• A. GNMA carries the direct full faith and credit of the U.S. government; FNMA does not
• B. Both are direct obligations of the Treasury
• C. Neither has any relationship to the government
• D. FNMA is government-guaranteed; GNMA is purely private

132. A government securities dealer sells Treasuries to a bank and agrees to buy them back next week at a set price. What has the dealer done?

• A. Written a put option on Treasuries
• B. Borrowed short-term cash through a repurchase agreement
• C. Sold the position permanently
• D. Issued commercial paper

133. A fund with a fixed number of shares outstanding trades on the NYSE at $22 while its portfolio is worth $20 per share. What is the customer paying?

• A. A 10% premium to net asset value, set by market supply and demand
• B. A discount imposed by the fund's board
• C. The next NAV computed after the order
• D. Net asset value plus a sales load

134. A customer placing a morning order for open-end fund shares asks the exact price she will pay. Why can't the representative quote one?

• A. The price depends on how many others buy that day
• B. Open-end shares have no price until sold
• C. The trade fills at the next NAV the fund computes, which is not yet known
• D. Fund prices are secret until settlement

135. A customer already holds $45,000 in a fund family whose sales charge drops at $50,000. She now invests $6,000 more. What lowers her load?

• A. Forward pricing of the new shares
• B. Rights of accumulation — existing holdings count toward the breakpoint
• C. Nothing; each purchase is charged independently
• D. A letter of intent filed for future purchases

136. A fund's prospectus shows an annual 12b-1 fee. What is that charge actually paying for?

• A. The portfolio manager's trading commissions
• B. A one-time charge collected at purchase
• C. Distribution and marketing costs, deducted from fund assets
• D. The custodian bank's safekeeping fee

137. Two funds track the same large-cap universe: one simply replicates an index, the other trades actively. Which expense pattern should a customer expect?

• A. Both must charge identical expenses by rule
• B. The index fund is costlier because of licensing
• C. Expense ratios are set by FINRA, not the funds
• D. The index fund's expense ratio is typically much lower

138. A customer buys Class B mutual fund shares. What happens to the charge if she redeems in year two, and to the shares if she stays long enough?

• A. Nothing — Class B shares carry no charges of any kind
• B. She pays a level annual load forever
• C. She pays a declining back-end charge now; the shares later convert to Class A
• D. She pays a front-end load at purchase and nothing after

139. A private fund open only to accredited investors imposes a one-year lockup and reports little to regulators. What is the customer being offered?

• A. A registered open-end mutual fund
• B. An exchange-traded fund
• C. A hedge fund interest — lightly regulated and illiquid
• D. A unit investment trust

140. A trust holds a fixed portfolio of bonds, employs no manager, and will dissolve on a stated date, passing proceeds to holders. Which vehicle is this?

• A. A hedge fund
• B. An index ETF
• C. A unit investment trust
• D. A closed-end fund

141. A customer holds a 2x leveraged ETF for eight months in a choppy, sideways market and is surprised the position lost value. What explains it?

• A. Leveraged ETFs charge no expenses, so losses must be market losses
• B. Daily reset compounding — the fund targets twice each DAY's return, not the period's
• C. The exchange repriced the shares incorrectly
• D. The fund manager shorted the index by mistake

142. An exchange-traded note tracks a commodity index precisely. What risk does the customer bear that an index fund holder would not?

• A. Tracking error from portfolio holdings
• B. The credit risk of the issuing bank — the note is its unsecured debt
• C. Mandatory early redemption at NAV
• D. Forward pricing uncertainty

143. Rates have fallen steeply since a company issued its 7% callable preferred. What should the holder expect, and why?

• A. Nothing; preferred stock cannot be called
• B. A call — the issuer can refinance the dividend at today's lower rates
• C. A dividend increase to reward loyalty
• D. Automatic conversion into bonds

144. Why does a convertible bond typically pay a lower coupon than the same company's plain debt?

• A. Regulators cap coupons on convertibles
• B. Convertibles mature sooner than straight debt
• C. Convertibles are always senior secured claims
• D. The conversion feature gives holders equity upside they accept in place of yield

145. A company's balance sheet lists senior debentures and subordinated debentures. In a failure, how do the two rank?

• A. The two classes share equally
• B. Senior debentures are paid before subordinated ones; both precede stockholders
• C. Subordinated holders recover first, having taken more risk
• D. Preferred stock is paid between the two

146. Commercial paper is routinely issued with maturities of 270 days or less. What does that ceiling accomplish for the issuer?

• A. It keeps the paper exempt from Securities Act registration
• B. It fixes the interest rate by law
• C. It guarantees a higher credit rating
• D. It qualifies the paper for FDIC insurance

147. A money market mutual fund's share price is quoted at $1.00 day after day. What is that stability?

• A. A minimum enforced by the exchange
• B. A price fixed by federal deposit insurance
• C. An objective the fund pursues — not a guarantee
• D. Proof the fund holds only Treasury bills

148. With the stock at $47, a call with a $40 strike trades at $9. How does the premium break down?

• A. $2 of intrinsic value and $7 of time value
• B. $7 of intrinsic value and $2 of time value
• C. No intrinsic value; the option is out of the money
• D. $9 of intrinsic value and no time value

149. Two calls have the same strike and underlying stock, but one expires in nine months and the other in one month. Why does the longer one cost more?

• A. Longer options carry higher intrinsic value
• B. More time until expiration means more time value in the premium
• C. Exchange fees scale with expiration length
• D. The longer contract controls more shares

150. An annuitant chooses 'life income with ten-year period certain.' She dies in year four. What happens?

• A. The insurer refunds the original premium
• B. Payments continue to her beneficiary through year ten
• C. The beneficiary receives payments for life
• D. All payments stop at her death

151. A customer weighing annuitization hesitates. What is the essential trade she should understand before electing it?

• A. Nothing — annuitization can be reversed at any time
• B. Tax-free income in exchange for surrender charges
• C. Higher returns in exchange for more market risk
• D. Lifetime income in exchange for giving up access to the lump sum — the election is irrevocable

152. Unhappy with her annuity's fees, a client asks how the value can land in a different carrier's product without triggering tax along the way. What does the tax code offer?

• A. Gifting the contract to the new insurer
• B. Surrendering for cash and repurchasing within 60 days
• C. No mechanism — annuity moves are always taxable
• D. A Section 1035 exchange directly between the contracts

153. In a variable annuity's accumulation phase, where does the customer's money sit and who bears the market outcome?

• A. In Treasury securities only
• B. In the insurer's general account, with the insurer bearing all risk
• C. In the insurer's separate account subaccounts, with the customer bearing investment risk
• D. In an FDIC-insured escrow

154. In a variable life policy, what does the cash value do that a whole life cash value never does?

• A. Grow at a rate the state sets annually
• B. Stay fixed at the sum of premiums paid
• C. Convert automatically into paid-up insurance
• D. Fluctuate with separate-account investment performance, without a guaranteed floor

155. A customer compares an equity REIT with a real estate limited partnership and asks what the REIT cannot pass through to her. What is the answer?

• A. Dividend income
• B. Operating losses — REITs pass through income, not losses
• C. Capital gain distributions
• D. Any cash at all

156. In a limited partnership, how do the general partner's exposure and the limited partners' exposure differ?

• A. The general partner risks nothing, having contributed no capital
• B. The general partner has unlimited liability; limited partners risk only their investment
• C. All partners share unlimited liability equally
• D. Limited partners are liable for the partnership's debts personally

157. A U.S. customer buys bonds issued by a developing country's government, denominated in that country's currency. Which pair of risks stands out?

• A. No special risks beyond a Treasury's
• B. Call risk and reinvestment risk
• C. Prepayment risk and extension risk
• D. Currency risk and political risk

158. A pension screen allows only investment-grade bonds. A dealer offers paper rated BB+ by S&P. Does it qualify?

• A. Only if a second agency also rates it BB+
• B. No — investment grade ends at BBB-; BB+ is the top of high yield
• C. Yes — the plus sign makes it investment grade
• D. Yes — anything above B is investment grade

159. One stock sells household staples; another sells vacation cruises. Which label fits each, and which holds up better in a downturn?

• A. Staples are defensive and hold up better; cruises are cyclical
• B. The labels depend only on company size
• C. Both are cyclical because both sell to consumers
• D. Cruises are defensive because travel is essential

160. A bond bought at a discount shows a nominal yield of 5%. Arrange nominal yield, current yield and yield to maturity from lowest to highest.

• A. Yield to maturity, then current, then nominal
• B. All three are equal on a discount bond
• C. Nominal, then current, then yield to maturity
• D. Current, then nominal, then yield to maturity

161. Two bonds have the same maturity date. One carries a 2% coupon, the other 8%. Rates jump a full point. Which price moves more, and why?

• A. Both move identically because maturities match
• B. The 8% bond — bigger coupons mean bigger swings
• C. Neither moves; prices only respond to credit news
• D. The 2% bond — lower coupons mean more of its value sits far in the future

162. A retiree holds one high-coupon bond callable next year and relies on its income. Rates have fallen. Which risk should the representative flag?

• A. Regulatory risk from rule changes
• B. Reinvestment risk — a call would force reinvesting at today's lower yields
• C. Currency risk on the coupon payments
• D. Inflation risk from rising prices

163. A customer inherits a big block of one thinly traded small-cap and asks what could go wrong when she eventually sells. What is the primary concern?

• A. Liquidity risk — a large sale could move the price against her or fail to fill
• B. Exchange-rate losses on the proceeds
• C. Prepayment arriving sooner than expected
• D. The position being called away

164. A 529 education plan and an UTMA account both hold college money for a child. On control, how do they differ?

• A. Neither account permits any control by adults
• B. Both hand the child control at any age on request
• C. The UTMA owner can redirect funds to another child at will
• D. The 529 owner keeps control and can change beneficiaries; UTMA assets belong to the minor irrevocably

165. A customer says: 'Get me out of this position right now — I don't care about the price.' Which order type matches the instruction, and what does it sacrifice?

• A. A stop order — it executes immediately at the stop price
• B. A market order — execution is assured, the price is not
• C. A limit order — both price and execution are assured
• D. A good-till-cancelled order — it guarantees today's close

166. With DEF quoted at $31, a customer enters an order to buy at $28. What has she actually asked for?

• A. A purchase at $28 or lower — which may never happen
• B. An immediate purchase at $28
• C. A purchase at the next print, whatever it is
• D. A purchase triggered once the stock rises to $28

167. An order entered without any time qualifier goes unfilled all session. A good-till-cancelled order does too. What happens to each at the close?

• A. Both carry over indefinitely
• B. Both expire at the close
• C. The day order converts to GTC automatically
• D. The unmarked order dies as a day order; the GTC survives to the next session

168. A seller needs money today and the buyer agrees to a same-day cash settlement instead of regular way. What made that possible?

• A. Mutual agreement of both parties at the time of trade
• B. The seller paying a penalty fee
• C. An exchange waiver filed after execution
• D. Nothing — settlement timing is fixed by law for all trades

169. In a cash account, a customer buys stock, sells it two days later, and only then is asked to pay for the original purchase — which he never does. What has occurred?

• A. Freeriding — and the account faces a 90-day cash-in-advance freeze
• B. A wash sale
• C. Nothing improper, since the sale covered the buy
• D. Ordinary margin trading

170. A customer wants to trade his IRA the way he trades his taxable account — on borrowed money, including short sales. What stands in the way?

• A. Only the short sales are barred; borrowing is fine
• B. Nothing; IRAs trade like any other account
• C. Retirement accounts cannot be margined or used for short selling
• D. He needs written approval from the IRS

171. A widowed customer wants her individual account to pass to her daughter without a court process when she dies. Which registration accomplishes that?

• A. A plain individual account with a will
• B. A numbered account
• C. Tenants in common with the daughter
• D. Transfer on death (TOD) designation

172. An aunt opens an UTMA account for her nephew. How is the account registered, and whose Social Security number does it carry?

• A. In trust with two custodians required
• B. In the aunt's name alone until the child turns 18
• C. One custodian for one minor, under the minor's Social Security number
• D. Jointly in both names with the aunt's number

173. A trustee managing a trust account wants to write uncovered options 'to boost income.' The trust document is silent on strategy. What governs?

• A. Whatever the firm's margin department permits
• B. Fiduciary standards — speculation is out unless the document expressly allows it
• C. The beneficiaries' verbal consent
• D. The trustee's personal risk tolerance

174. A customer requests that her account be identified only by a number on statements and correspondence. What must the firm hold for this to be permitted?

• A. A court order sealing the account
• B. Nothing — numbered accounts are prohibited
• C. Approval from the SEC
• D. A written statement, signed by the customer, attesting to her ownership

175. A customer moving her account to a new broker-dealer worries the transfer will mean selling everything and mailing checks. What actually happens?

• A. All positions are liquidated by rule
• B. Each security requires a separate paper application
• C. Positions move in kind through the automated transfer system (ACATS)
• D. Transfers between firms are not permitted

176. An account has no trades all year. How often must the customer still receive an account statement?

• A. Monthly without exception
• B. Only when activity occurs
• C. At least quarterly
• D. Once a year at tax time

177. A trade confirmation arrives. Beyond identifying the security, what core facts must it disclose?

• A. The firm's profit on the trade in every case
• B. The customer's full trading history
• C. Price and quantity, plus whether the firm acted as agent or principal
• D. Only the settlement date

178. A customer deposits $14,000 in currency in a single day. What does federal anti-money-laundering law require of the firm?

• A. Reporting only if the customer seems nervous
• B. Nothing, as long as the funds are domestic
• C. Refusing the deposit outright
• D. Filing a currency transaction report for cash over $10,000

179. In money-laundering doctrine, dirty cash first enters the financial system, then moves through layers of transfers, then emerges looking legitimate. Name the three stages in order.

• A. Integration, layering, placement
• B. Placement, layering, integration
• C. Structuring, smurfing, wiring
• D. Deposit, withdrawal, transfer

180. A firm's investment bankers are working on an unannounced merger while its retail desk trades the target's stock daily. What keeps this lawful?

• A. Nothing — the arrangement is inherently illegal
• B. A rule that small trades cannot constitute insider trading
• C. Halting all firm trading in every banking client
• D. Information barriers separating banking from trading and sales

181. Routing customer orders, a firm consistently picks the venue paying it the largest rebate rather than the one showing better prices. Which duty is being violated?

• A. No duty; routing is the firm's business alone
• B. Best execution — the customer's outcome must drive routing
• C. Suitability — recommendations must fit the customer
• D. Custody — assets must be segregated

182. A sudden crash drags the broad market down 7% before lunch, and trading stops everywhere at once. What mechanism engaged?

• A. Each firm's voluntary pause
• B. A market-wide circuit breaker triggered by the decline
• C. The SEC revoking exchange licenses
• D. A halt in one stock for pending news

183. Mechanically, what happens to the shares in an ordinary short sale at the moment of the trade?

• A. Borrowed shares are delivered to the buyer; the short must later buy to return them
• B. No shares move until the short covers
• C. The exchange creates new shares temporarily
• D. The buyer receives an IOU instead of shares

184. To calm a nervous prospect, a representative promises to personally cover any losses the account suffers in its first year. What rule does this break?

• A. The rule against sharing in profits
• B. None, if the promise is in writing
• C. Only firm capital rules
• D. The prohibition on guaranteeing customers against loss

185. Before a customer's order goes to the market, the firm prepares an order ticket. Which details belong on it at entry?

• A. The representative's opinion of the trade
• B. Only the customer's name and a dollar amount
• C. The account, the security, buy or sell, quantity, and any price or time terms
• D. The eventual execution price

186. A quote reads 20.00 bid, 20.10 ask. A customer asks what the ten cents between them represents. What is it?

• A. A regulatory fee added to every trade
• B. The commission owed to the representative
• C. The spread — the gap between what buyers pay and sellers receive in the market
• D. An error; both sides must quote one price

187. On one confirmation a customer sees a commission; on another, from a different trade, a markup. What does the difference tell her about the firm's role?

• A. Nothing; the words are interchangeable
• B. Commission means the firm acted as agent; markup means it sold from its own account as principal
• C. Commission means the firm took no compensation
• D. Markup means the trade was on an exchange

188. A firm's cold-calling program reaches prospects at home. Inside which local-time window must those calls stay?

• A. Any hour, provided the caller identifies the firm
• B. 8 a.m. to 9 p.m., the prospect's local time
• C. Weekdays only, with no hour limits
• D. 9 a.m. to 5 p.m., the firm's local time

189. An issuer's underwriter promises only its best efforts, and the deal is styled 'all or none.' What happens if the full amount cannot be sold?

• A. The issuer keeps whatever was raised
• B. The offering is cancelled and investors' funds are returned
• C. The SEC completes the sale
• D. The underwriter buys the unsold balance itself

190. A dealer joins a distribution as a selling group member rather than a syndicate member. What is it spared?

• A. Regulatory oversight of its sales
• B. All compensation on the deal
• C. The need to deliver prospectuses
• D. Liability for unsold shares — it has no underwriting commitment

191. An institution buys NYSE-listed stock, but the trade prints away from any exchange, dealer-to-dealer over the counter. Which market segment is that?

• A. The futures market
• B. The fourth market — direct institution-to-institution
• C. The third market — listed securities traded OTC
• D. The primary market

192. In an IPO the issuer sells new shares; a year later a founder sells her stake in the open market. Who receives money in each case?

• A. The issuer in both transactions
• B. The issuer in the IPO; only the founder in the later sale
• C. The exchange in both transactions
• D. The founder in both transactions

193. The dollar strengthens sharply against other major currencies. Which American businesses feel the squeeze first?

• A. Importers — foreign goods cost them more
• B. No one; exchange rates affect only tourists
• C. Exporters — their goods become more expensive for foreign buyers
• D. Domestic-only retailers

194. Building permits surge and average weekly unemployment claims fall. What kind of economic signal are these series?

• A. Lagging indicators — they confirm past turns
• B. Leading indicators — they tend to move before the broader economy
• C. Coincident indicators — they move with current output
• D. Statistical noise with no forecasting use

195. Starting from a peak, in what order does the business cycle proceed?

• A. Peak, trough, contraction, expansion
• B. Peak, expansion, trough, contraction
• C. The phases occur in no set order
• D. Peak, contraction, trough, expansion

196. Newscasts cite 'headline' inflation and 'core' inflation from the same monthly release. What does the core figure strip out, and why?

• A. Nothing; core is simply last year's number
• B. Imported goods, because they are set abroad
• C. Housing costs, because everyone pays them
• D. Food and energy prices, because their swings obscure the underlying trend

197. An underwriting spread is divided among the participants. Which piece goes to the syndicate manager, and which to the dealer who places shares with customers?

• A. The concession to the manager; the management fee to the dealer
• B. The management fee to the manager; the concession to the selling dealer
• C. Both pieces go to the issuer
• D. The spread is not divided; one firm keeps it all

198. One desk trades 90-day commercial paper; another trades 20-year debentures. Which market does each work in?

• A. The capital market for both
• B. The primary market for the paper; the money market for the debentures
• C. The money market for the paper; the capital market for the debentures
• D. The money market for both

199. Alongside SEC registration, a representative's new firm files her registration in each state where she will do business. Under what authority do states require this?

• A. State blue-sky laws administered under the Uniform Securities Act framework
• B. The Federal Reserve Act
• C. No authority; states cannot regulate securities
• D. The Investment Company Act of 1940

200. Before hiring a financial professional, a retail investor wants to see any disciplinary history. Which public tool provides it?

• A. The Federal Register
• B. FINRA's BrokerCheck
• C. No such tool exists
• D. The firm's internal personnel file

201. A study guide printed in early 2025 says the SIE includes 10 unscored pretest questions. A candidate testing in 2026 asks whether this is still accurate. What is the correct response?

• A. Yes — the exam still includes 10 unscored pretest questions
• B. No — effective October 27, 2025, the exam includes 5 unscored pretest questions instead of 10
• C. No — all pretest questions were eliminated in 2025
• D. No — the pretest questions now count toward the candidate's score

202. A candidate took the SIE in 2025, failed, and retakes it in 2026. Based on FINRA's fee adjustment schedule, how much did she pay in total exam fees across the two attempts?

• A. $160
• B. $180
• C. $200
• D. $100

203. A registered representative tells a hesitant customer: "Go ahead and buy this stock — if it drops, I'll personally reimburse you for any losses." Which of the following best describes this statement?

• A. It is only prohibited if the customer actually suffers a loss and is reimbursed
• B. It is permitted if the firm's principal approves the arrangement in advance
• C. It is permitted as long as the representative documents the promise in writing
• D. It is a prohibited guarantee against loss, regardless of whether the representative intends to honor it

204. An investor writes (sells) an uncovered put option on ABC stock with a strike price of $50, receiving a premium of $4. What is the investor's maximum potential loss per share?

• A. Unlimited, because the stock can rise without limit
• B. $4, the premium received
• C. $50, the full strike price
• D. $46, if the stock falls to zero

205. A customer invests in a limited partnership interest sold through a private placement, with no established secondary market for the interest. If the customer unexpectedly needs cash, which risk is the customer MOST directly exposed to?

• A. Liquidity risk — the interest may be difficult or impossible to sell quickly at a fair price
• B. Interest rate risk — rising rates will reduce the partnership's resale price on the exchange
• C. Currency risk — the interest is denominated in a foreign currency
• D. Call risk — the sponsor may redeem the interest early at par

206. An investor holds shares of a single airline company and worries about a strike by that airline's employees hurting the stock. Which statement about this risk is correct?

• A. It is systematic risk, which diversification cannot reduce
• B. It is inflation risk, best hedged with fixed-rate bonds
• C. It is nonsystematic risk, which can be reduced by diversifying across companies and industries
• D. It is interest rate risk, best hedged with long-term bonds

207. A holder of a collateralized mortgage obligation (CMO) tranche notices that homeowners in the underlying pool are refinancing rapidly as interest rates drop. Which risk is this investor experiencing?

• A. Prepayment risk — principal is returned sooner than expected and must be reinvested at lower rates
• B. Currency risk — mortgage payments arrive in a foreign currency
• C. Regulatory risk — refinancing is prohibited by rule
• D. Extension risk — principal is returned later than expected

208. In the final minutes of the trading day, a portfolio manager enters a series of aggressive buy orders in a thinly traded stock her fund holds, intending to push the closing price higher so the fund's end-of-day valuation looks better. What prohibited practice is this?

• A. Freeriding
• B. Best execution failure
• C. Front-running
• D. Marking the close

209. According to the SIE content outline, how does the number of scored items in 'Knowledge of Capital Markets' compare to 'Understanding Products and Their Risks'?

• A. Capital Markets has 12 items, which is 44% of the exam
• B. The two sections have equal weight on the exam
• C. Capital Markets has more items — 33 versus 12
• D. Capital Markets has 12 items (16%), while Products and Their Risks has 33 items (44%)

210. A college student with no securities industry employment passes the SIE. How long does that passing result remain valid?

• A. Four years
• B. Two years
• C. Three years
• D. Indefinitely, once passed

211. A customer with no cash in his cash account buys shares of a volatile stock, watches the price jump the same week, and sells the position before ever paying for the original purchase — planning to cover the buy with the sale proceeds. What is the consequence of this activity?

• A. The customer owes only the commission on the round trip
• B. This is freeriding, and the firm must freeze the account so that future purchases require cash up front
• C. The account must be converted to a margin account
• D. Nothing, because the sale proceeds fully covered the purchase

212. A registered representative helps a friend's startup raise money by selling its private shares to several of his brokerage customers. He receives a finder's fee but never tells his employing broker-dealer about the sales. Which violation has occurred?

• A. Insider trading, because the startup is not publicly traded
• B. Churning, because he generated compensation from customer trades
• C. Selling away — participating in private securities transactions without notifying and obtaining approval from his firm
• D. No violation, because the shares were sold outside the firm's platform

213. A registered representative asks a wealthy customer for a personal loan to cover a home renovation. The customer is not a family member and is not in the business of lending money. Under industry conduct rules, this arrangement is:

• A. Permitted, because the loan is unrelated to the customer's securities account
• B. Generally prohibited; borrowing from customers is allowed only in narrow situations such as loans from family members or lending institutions, subject to firm procedures
• C. Permitted if the loan is documented in writing
• D. Permitted, as long as the loan is repaid with interest

214. After a customer's account loses value, her representative says: 'Stay invested — if this position loses any more money, I will personally reimburse you for the loss.' Which statement about this promise is correct?

• A. It is prohibited; representatives may not guarantee customers against loss
• B. It is permitted because the representative, not the firm, bears the cost
• C. It is permitted if the customer accepts the offer in writing
• D. It is permitted only for losses caused by market-wide declines

215. Two customers who are married open a brokerage account together under an arrangement in which, if one owner dies, that owner's interest passes automatically to the surviving owner rather than to the deceased owner's estate. Which form of account registration does this describe?

• A. Joint tenants with rights of survivorship
• B. Joint tenants in common
• C. An individual account with limited trading authorization
• D. A custodial account

216. During a period of market decline, a registered representative tells a worried customer: 'Stay invested — if the account loses money over the next year, I will personally reimburse you for the loss.' Which of the following best describes this statement?

• A. It is a prohibited guarantee against loss
• B. It is permitted only in discretionary accounts
• C. It is permitted if the customer agrees in writing
• D. It is permitted because the representative, not the firm, bears the risk

217. A customer wants a place to hold cash for a home purchase expected in three months and asks about a money market mutual fund. Which statement about money market funds is accurate?

• A. They invest primarily in long-term bonds to maximize yield
• B. They guarantee that investors can never lose principal
• C. They invest in short-term, high-quality debt instruments and seek to maintain a stable share price, but are not federally insured
• D. They are insured by the FDIC just like bank savings accounts

218. An investor holds a long stock position with a large unrealized gain and wants an order that will trigger a sale only if the stock falls to a certain level, to protect the gain. Which order type best fits this objective?

• A. A good-til-canceled market order
• B. A sell limit order placed below the current market price
• C. A buy stop order
• D. A sell stop order placed below the current market price

219. A customer complains to his representative about a recent loss on a recommended stock. To retain the relationship, the representative says, 'If this position is still down next quarter, I will personally reimburse you for the loss.' Which statement about this promise is accurate?

• A. It is permitted because the representative is using personal funds, not firm funds
• B. It is permitted if the customer agrees to the arrangement in writing
• C. It is permitted only in discretionary accounts
• D. It is a prohibited guarantee against loss, regardless of whose funds are used

220. A corporation with cumulative preferred stock paying a stated $6 annual dividend skipped its preferred dividend entirely last year. This year the board wants to pay a dividend to common stockholders. Before any common dividend may be paid, how much must a holder of one cumulative preferred share receive?

• A. $6 — only the current year's dividend
• B. $0 — skipped preferred dividends are forfeited
• C. $12 — last year's skipped $6 plus this year's $6
• D. $18 — skipped dividends accrue with a penalty

221. An investor holds a mortgage-backed pass-through security. Interest rates decline sharply, and many homeowners in the underlying pool refinance their mortgages. What effect does this have on the investor?

• A. The investor's payments stop entirely until rates rise again
• B. Principal is returned faster than expected and must be reinvested at lower rates
• C. The security's maturity extends, locking in the higher coupon for longer
• D. The homeowners' refinancing has no effect on the security's cash flows

222. An issuer sells a bond that gives the issuer the right to redeem the bond before maturity at a stated price. Which risk does this feature MOST directly create for the bondholder?

• A. Credit risk — the issuer is more likely to default on interest payments
• B. Call risk — the bond may be redeemed when interest rates have fallen, forcing reinvestment at lower rates
• C. Legislative risk — Congress may prohibit early redemption
• D. Currency risk — the redemption may be paid in a foreign currency

223. Which of the following BEST describes a key difference between an exchange-traded fund (ETF) and an open-end mutual fund?

• A. ETFs may only be purchased directly from the fund sponsor
• B. Open-end mutual funds trade continuously on an exchange during market hours
• C. ETF shares trade throughout the day at market prices, while open-end fund shares are bought and redeemed at the next computed net asset value
• D. ETF shares can only be priced once per day, after the market closes

224. An investor holds shares of XYZ at $50 and is worried about a near-term decline but does not want to sell. Which option strategy MOST directly hedges this position?

• A. Sell an XYZ put
• B. Buy an XYZ call
• C. Buy an XYZ put
• D. Sell the shares short

225. Under the SIE content outline, how many items are allocated to the Knowledge of Capital Markets section?

• A. 75 items
• B. 12 items
• C. 33 items
• D. 5 items

226. Jordan is not associated with a securities firm and has not taken another qualification exam. Jordan wants to take the SIE and believes that passing it will, by itself, result in FINRA registration. Which response is accurate?

• A. Jordan may take the SIE, but passing it alone will not qualify Jordan for registration.
• B. Jordan may not take the SIE until becoming associated with a firm, but passing it will then qualify Jordan for registration.
• C. Jordan may take the SIE, and passing it alone will qualify Jordan for registration.
• D. Jordan may not take the SIE until becoming associated with a firm and completing a prerequisite exam.

227. In the current SIE exam format, how are the additional pretest items treated?

• A. Five unidentified items are included, but they do not affect the candidate's score.
• B. All additional items are identified before the exam begins.
• C. Ten unidentified items are included under the current format.
• D. Five identified items are included and count toward the candidate's score.

228. A grandmother opens a custodial account under the Uniform Gifts to Minors Act (UGMA) for her grandson, naming herself custodian. Which of the following is TRUE of this account?

• A. The gift is irrevocable and the minor is the beneficial owner of the assets
• B. The account may be registered jointly in both the custodian's and the minor's names
• C. The minor may place trades directly once the account is funded
• D. The grandmother may reclaim the assets if she later needs the money

229. The SIE has 75 scored questions, and 33 are assigned to Understanding Products and Their Risks. Approximately what percentage of the scored exam does this section represent?

• A. 16%
• B. A majority of the scored exam
• C. 44%
• D. The entire scored exam

230. A registered representative offers a private real-estate investment to several of her firm's customers. The deals are arranged entirely outside the firm, and she never notifies her employing broker-dealer or obtains its approval. This conduct is best described as:

• A. Front-running
• B. Churning
• C. Freeriding
• D. Selling away (private securities transactions without firm approval)

231. An individual who is not associated with a firm wants to take the SIE and believes that passing it will immediately produce FINRA registration. Which response is accurate?

• A. The individual must first pass a prerequisite exam, although firm association is unnecessary.
• B. The individual may take the SIE only after becoming associated with a firm, and passing it then guarantees registration.
• C. The individual may take the SIE without firm association, and passing it alone automatically provides registration.
• D. The individual may take the SIE without firm association or a prerequisite exam, but passing it alone does not qualify the individual for registration.

232. After a candidate passes the SIE, how long does the result remain valid?

• A. Only until the end of the same calendar year
• B. Indefinitely
• C. Four years
• D. Until the candidate is no longer associated with a firm

233. Which of the following best describes a feature of cumulative preferred stock?

• A. The issuer must repurchase the shares at par if a dividend is ever missed
• B. The dividend rate increases each year the stock is outstanding
• C. Any skipped dividends accumulate and must be paid before common stockholders receive any dividend
• D. Holders may exchange their shares for a fixed number of common shares at any time

234. A corporate treasurer needs to raise short-term working capital and does not want to pledge any company assets as collateral. Which money market instrument would the corporation most likely issue?

• A. Commercial paper
• B. A banker's acceptance
• C. A negotiable certificate of deposit
• D. A mortgage bond

235. A customer checks a closed-end fund's net asset value at the end of the trading day and notices that the fund's shares closed on the exchange at a market price below that NAV. The customer asks the representative to explain. Which response is accurate?

• A. Closed-end fund shares trade on an exchange at prices set by supply and demand, so they can trade at a discount or premium to NAV
• B. The discount reflects a sales charge that is deducted from every secondary-market trade
• C. The fund must have made a pricing error, because fund shares always transact at NAV
• D. The fund will redeem the shares at NAV by the next business day, eliminating the discount

236. An investor owns 100 shares of ABC stock purchased at $50 per share and writes one ABC 55 call, receiving a premium of $2 per share. At expiration, ABC is trading at $62 and the call is exercised against the investor. Ignoring commissions, what is the investor's overall gain or loss on the combined position?

• A. A gain of $1,200
• B. A gain of $700
• C. A loss of $500
• D. A gain of $200

237. Which of the following activities is a form of market manipulation?

• A. Recommending a security after conducting reasonable research into the customer's investment profile
• B. Entering matched buy and sell orders in the same security to create the false appearance of active trading
• C. Buying a security for a firm's own inventory and later selling it to a customer at a fair price
• D. Executing a customer's unsolicited order to buy a speculative stock

238. A registered representative's neighbor asks him to help raise money for a private startup. Without notifying his broker-dealer, the representative arranges for three of his brokerage customers to invest in the startup, receiving a finder's fee from the company. The trades never appear on his firm's books. Which prohibited practice has the representative engaged in?

• A. Churning — trading excessively to generate compensation
• B. Selling away — participating in private securities transactions without notifying and obtaining approval from his firm
• C. Commingling — mixing customer funds with the firm's own assets
• D. Freeriding — buying securities and selling them before paying for the purchase

239. A college senior with no securities industry experience passes the SIE exam without being associated with any firm. Eighteen months later, she is hired by a broker-dealer and wants to become registered as a General Securities Representative. Which of the following is TRUE about her situation?

• A. She must retake the SIE because association with a firm was required at the time she originally sat for it
• B. Her SIE result is still valid, but she must also pass a representative-level exam such as the Series 7 to register
• C. Passing the SIE alone qualifies her for registration once she associates with a firm
• D. Her SIE result expired because she was not associated with a firm within one year of passing

240. A candidate sits for the SIE exam after the October 27, 2025 change to the exam's composition. In addition to the scored questions, how many unidentified pretest items will appear, and do they count toward the candidate's score?

• A. 5 pretest items, which count toward the score only if answered correctly
• B. 10 pretest items, which do not count toward the score
• C. 5 pretest items, which do not count toward the score
• D. 10 pretest items, which count toward the score

241. A customer enters an order to sell 300 shares of a stock "at the market." Which of the following best describes how this order will be handled?

• A. It will execute only if the stock reaches a price the customer specifies later
• B. It will execute only at the exact price the customer last saw quoted
• C. It will be held until the end of the trading day and executed at the closing price
• D. It will execute immediately at the best available price, with no guarantee of a specific price

242. A college student who is not associated with any broker-dealer passes the SIE exam. She does not join a member firm until three years later, at which point the firm asks her to register as a General Securities Representative. Which of the following is TRUE about her situation?

• A. Passing the SIE alone qualifies her for registration once she associates with a firm
• B. Her SIE result has expired, because SIE results are only valid for two years
• C. Her SIE result is still valid, but she must also pass a representative-level exam such as the Series 7 to register
• D. She should not have been allowed to take the SIE without being associated with a firm

243. A candidate passes the SIE exam and asks whether she is now registered with FINRA and able to conduct securities business. What should she be told?

• A. No — passing the SIE alone does not qualify an individual for registration with FINRA
• B. Yes — passing the SIE alone confers FINRA registration
• C. No — she must retake the SIE after joining a firm
• D. Yes, but only for four years

244. How much time does a candidate have to complete the SIE exam?

• A. 1 hour and 30 minutes
• B. 1 hour and 45 minutes
• C. 2 hours
• D. 3 hours

245. A closed-end fund has a net asset value of $20 per share but trades on the exchange at $18. A customer asks why the fund's price does not equal its NAV. What is the best response?

• A. The fund must be miscalculating its NAV, because shares always trade at NAV
• B. Closed-end fund shares trade in the secondary market at prices set by supply and demand, so they can trade at a discount or premium to NAV
• C. The fund will redeem the shares at $20 upon request, so the market price is irrelevant
• D. The $2 difference is a sales charge deducted by the fund

246. An investor who buys the common stock of a foreign company through American Depositary Receipts (ADRs) is exposed to which risk that a purely domestic stockholder does not face to the same degree?

• A. Market risk
• B. Currency (exchange-rate) risk
• C. Regulatory risk from the SEC
• D. Business risk

247. A representative proposes to a wealthy customer that they trade a joint account together, with the representative contributing a small portion of the capital but taking half of all profits. Under what conditions, if any, could a representative share in a customer's account?

• A. Never — sharing in a customer account is always prohibited
• B. Only with prior written authorization from the customer and the firm, and generally only in proportion to the representative's contribution to the account
• C. Freely, as long as the customer initiates the arrangement
• D. Only if the representative waives all commissions on the account

248. An investor holds a long stock position that has appreciated significantly and wants to protect the unrealized gain while still allowing for further upside. Which order best accomplishes this goal?

• A. A buy stop order placed above the current market price
• B. A sell stop order placed below the current market price
• C. A market order to sell immediately
• D. A sell limit order placed below the current market price

249. Two spouses open a brokerage account together and want the survivor to automatically receive the entire account balance if one of them dies, without the assets passing through the deceased's estate. Which account registration meets this objective?

• A. Joint tenants with right of survivorship
• B. A custodial account naming the spouse as custodian
• C. Tenants in common
• D. An individual account with a power of attorney for the spouse

250. A registered representative offers to personally reimburse a customer for any losses the customer suffers on a recommended stock, telling the customer 'you literally cannot lose money on this.' Which prohibited practice has the representative engaged in?

• A. Commingling customer and firm assets
• B. Churning the customer's account
• C. Guaranteeing a customer against loss
• D. Front-running the customer's order

251. A registered representative privately sells interests in a real estate venture to several of her firm's customers. The venture is not a product offered by her firm, and she never notified the firm or received its approval. What is this conduct called?

• A. Freeriding, because the customers had not yet paid for the interests
• B. Position trading for the firm's proprietary account
• C. Selling away (private securities transactions without firm approval)
• D. An acceptable outside business activity, since it occurred off firm premises

252. Just before the market close on the last trading day of the quarter, a trader enters a series of small buy orders in a thinly traded stock her fund holds, with the purpose of pushing the closing price higher so the fund's quarter-end performance looks better. This activity is best described as:

• A. Dollar-cost averaging, a legitimate investment strategy
• B. Arbitrage between related securities
• C. Best execution of the fund's orders
• D. Marking the close, a form of market manipulation

253. Two traders agree to simultaneously enter offsetting buy and sell orders in the same security with each other. No change in beneficial ownership occurs, but the trades print to the tape and create the appearance of active trading. What have they done?

• A. Engaged in matched orders (wash trading), a form of market manipulation
• B. Performed a riskless principal transaction
• C. Executed legitimate crosses that benefit both parties
• D. Conducted a bona fide block trade negotiation

254. An adult wants to invest for a young child who is legally too young to own a brokerage account directly. The adult opens an account under the state's Uniform Gifts/Transfers to Minors framework. Which statement about this account is accurate?

• A. The minor may place trades in the account once they can sign their own name
• B. The account is managed by a custodian, but the assets belong irrevocably to the minor
• C. The account may have multiple minors as joint beneficiaries to save on paperwork
• D. The gifted assets can be taken back by the donor if the donor later needs the money

255. A representative is short on cash and asks a long-standing customer — who is a retired schoolteacher with no other relationship to the representative — for a personal loan, which the customer agrees to. The representative does not tell his firm. How should this arrangement be viewed?

• A. Acceptable, as long as the representative repays the loan with interest
• B. Acceptable, because the loan was voluntary and between consenting adults
• C. Acceptable, because loans are a banking matter outside securities regulation
• D. Prohibited, because borrowing from a customer is generally not allowed absent a qualifying relationship and compliance with firm procedures

256. An investor owns shares of a stock and worries the price may fall sharply. She wants an order that stays inactive unless the stock trades down to a level she specifies, at which point she wants out of the position even if the fill is somewhat below that level. Which order type fits her goal?

• A. A sell stop order at the specified level
• B. A buy stop order at the specified level
• C. A sell limit order at the specified level
• D. A market order entered immediately

257. A representative deposits checks received from customers for securities purchases into his own personal bank account 'temporarily,' intending to forward the money to the firm later in the week. Which prohibited practice is this?

• A. Churning of the customers' accounts
• B. Rehypothecation, which is always prohibited
• C. An acceptable practice if the funds are forwarded within the week
• D. Commingling — improperly mixing customer funds with personal or firm funds

258. A registered representative asks a longtime customer, who is neither a family member nor employed by a financial institution, for a personal loan to cover a temporary cash shortfall. The representative does not tell the firm. Which statement best characterizes this situation?

• A. It is prohibited only if the loan is larger than the customer's account balance
• B. It is generally prohibited — borrowing from a customer is restricted to narrow circumstances and requires compliance with the firm's procedures
• C. It is permissible as long as the representative repays the loan with interest
• D. It is permissible because the loan is personal and unrelated to any securities transaction

259. How much time is a candidate given to complete the SIE exam?

• A. 3 hours
• B. 2 hours and 15 minutes
• C. 1 hour and 30 minutes
• D. 1 hour and 45 minutes

260. A candidate finishes the SIE exam and wants to know what score is needed to pass. Which of the following is correct?

• A. A score of 72% is required to pass
• B. A score of 75% is required to pass
• C. A score of 65% is required to pass
• D. A score of 70% is required to pass

261. A college student with no ties to any broker-dealer wants to take the SIE exam before applying for industry jobs. Which statement is accurate?

• A. She may take the SIE only after registering as an associated person with FINRA
• B. She must first pass a prerequisite qualification exam
• C. She must first be hired and sponsored by a FINRA member firm
• D. She may take the SIE; association with a firm is not required and there is no prerequisite exam

262. A candidate passes the SIE and asks whether she is now registered with FINRA and able to work as a representative. How should this be answered?

• A. Yes — passing the SIE alone confers full registration
• B. No — she must retake the SIE annually to maintain eligibility
• C. Yes, but only for a probationary period
• D. No — passing the SIE alone does not qualify an individual for registration; it serves as a co-requisite to representative-level exams such as the Series 7

263. On the current SIE content outline, how many scored items are drawn from the Knowledge of Capital Markets section, and what share of the exam does that represent?

• A. 8 items, about 11%
• B. 20 items, about 27%
• C. 12 items, 16%
• D. 33 items, 44%

264. A candidate sitting for the SIE notices she has answered more questions than the 75 she expected to be scored. What explains this?

• A. The exam includes 5 additional unidentified pretest items that do not count toward her score, for a total of 80 items
• B. She was given a different exam form with a longer scored section
• C. The extra questions are bonus items that can raise her score above 100%
• D. FINRA scores 80 questions and drops her 5 worst answers

265. Effective October 27, 2025, FINRA changed the number of unscored pretest questions on the SIE. What was the change?

• A. Pretest items decreased from 10 to 5
• B. Pretest items became scored questions
• C. Pretest items were eliminated entirely
• D. Pretest items increased from 5 to 10

266. A candidate took the SIE in 2025 and her colleague is registering to take it in 2026. Based on FINRA's fee adjustment schedule, how do their exam fees compare?

• A. The 2025 candidate paid $80; the 2026 candidate pays $100 — a $20 increase
• B. The 2025 candidate paid $100; the 2026 candidate pays $80 — a $20 decrease
• C. Both paid $80
• D. Both paid $100

267. A candidate wants to pace herself evenly across the SIE. With 75 scored plus 5 unscored items presented over 1 hour and 45 minutes, roughly how much time can she spend per item on average?

• A. About 45 seconds per item
• B. About 3 minutes per item
• C. Slightly less than 1 minute and 20 seconds per item
• D. About 2 minutes per item

268. A customer with no cash or securities in his account buys shares in a cash account, then sells the same shares two days later and uses the sale proceeds to pay for the original purchase, never depositing his own funds. What has the customer done, and what is the typical consequence?

• A. Legitimate day trading; no consequence applies in a cash account
• B. Freeriding; the firm typically must freeze the cash account for a period, requiring cash up front for subsequent purchases
• C. Churning; the representative is responsible for the violation
• D. Short selling; the customer must locate shares to borrow

269. In addition to its scored questions, the SIE exam includes a number of unidentified pretest items. How do these pretest items affect a candidate's result?

• A. They replace scored questions the candidate leaves blank
• B. They are weighted at half the value of a scored question
• C. They do not contribute toward the candidate's score
• D. They count toward the score only if answered correctly

270. A candidate sits for the SIE exam, which contains 75 scored questions and 5 unscored pretest questions. How many total items will the candidate see, and how much time is allotted to complete them?

• A. 85 items in 1 hour and 45 minutes
• B. 80 items in 1 hour and 45 minutes
• C. 80 items in 2 hours and 30 minutes
• D. 75 items in 1 hour and 45 minutes

271. A representative proposes to split both the profits and losses of a customer's account with the customer, saying this aligns their interests. Under what circumstances, if any, may a representative share in a customer's account?

• A. Never — sharing in a customer account is prohibited in all circumstances
• B. Only if the representative shares in profits but not in losses
• C. Freely, as long as the customer agrees in writing
• D. Only with prior written authorization from the customer and the firm, and generally in proportion to the representative's contribution to the account

272. An individual passes the SIE exam and then takes a two-year break before seeking a job at a broker-dealer. When the individual is later hired, is the SIE result still usable, and does it alone permit registration?

• A. The result is valid for four years and by itself qualifies the individual for FINRA registration
• B. The result never expires, but registration also requires a representative-level exam
• C. The result is still valid because it lasts four years, but passing the SIE alone does not qualify the individual for registration with FINRA
• D. The result expired after two years, so the individual must retake the SIE

273. A candidate wants to become registered as a general securities representative and must pass the Series 7 exam. What is the relationship between the SIE and the Series 7?

• A. The Series 7 must be passed before a candidate is allowed to sit for the SIE
• B. The Series 7 replaces the SIE, so passing it makes the SIE unnecessary
• C. The SIE is an optional study aid with no bearing on Series 7 registration
• D. The SIE is a corequisite to the Series 7 — both must be passed

274. A college student passes the SIE exam in June of Year 1 but does not join a broker-dealer right away. If she remains unassociated, through approximately when does her passing SIE result remain valid?

• A. June of Year 3 (two years)
• B. June of Year 2 (one year)
• C. June of Year 5 (four years)
• D. Indefinitely — the SIE never expires

275. On the SIE exam, the Knowledge of Capital Markets section carries 12 items and Understanding Products and Their Risks carries 33 items out of the 75 scored questions. A candidate who answers every Capital Markets and Products item correctly but nothing else has answered what share of the scored exam correctly, and is that enough to pass?

• A. 70% of the scored questions — exactly the passing score
• B. 60% of the scored questions — below the 70% required to pass
• C. 45 of 80 total items, or about 56% — below the passing score
• D. 60% of the scored questions — enough, since 60% is the passing score

276. A college senior passes the SIE exam in her final year but does not join a broker-dealer until three years later. When she associates with a firm, what is the status of her SIE result?

• A. It is valid indefinitely once earned
• B. It is still valid, because SIE results remain valid for four years
• C. It has expired, because SIE results are valid for only two years
• D. It must be revalidated by retaking a shortened version of the exam

277. During the accumulation phase of a variable annuity, who bears the investment risk of the separate account's performance?

• A. The insurance company, which guarantees the account value
• B. The annuitant (contract owner), whose account value fluctuates with the separate account's investment results
• C. The broker-dealer that sold the contract
• D. A state guaranty fund

278. An investor comparing two corporate bonds notes that one is rated in the highest rating category and the other is rated below investment grade. Which statement about the below-investment-grade (high-yield) bond is MOST accurate?

• A. It is suitable for all investors because higher yield always means higher total return
• B. It carries less credit risk because its higher coupon protects investors
• C. It typically offers a higher yield to compensate investors for greater default risk
• D. Its rating guarantees repayment of principal at maturity

279. Which of the following money market instruments is an unsecured short-term promissory note issued by a corporation to meet its near-term funding needs?

• A. Treasury bond
• B. Common stock
• C. Commercial paper
• D. Mortgage-backed pass-through certificate

280. A retiree needs funds that may have to be withdrawn on short notice. The representative is comparing a thinly traded limited partnership interest against a portfolio of large-cap listed stocks. Which risk most distinguishes the limited partnership interest, and why?

• A. Systematic risk — only partnerships are exposed to overall market movements
• B. Liquidity risk — the partnership interest may be difficult to sell quickly without a significant price concession
• C. Interest rate risk — partnership values move inversely with rates like bonds
• D. Currency risk — partnerships are always denominated in foreign currency

281. A U.S. investor buys an American depositary receipt (ADR) representing shares of a Japanese company. Beyond ordinary market risk, which additional risk does this position carry that a purely domestic stock would not?

• A. No additional risk, because ADRs are guaranteed by the depositary bank
• B. Reinvestment risk unique to equities
• C. Prepayment risk, because the issuer may repay the ADR early
• D. Currency exchange risk, because the underlying shares and dividends are denominated in a foreign currency

282. An individual passes the SIE exam and asks whether she can now open customer accounts as a registered representative. Which response is correct?

• A. Yes — passing the SIE alone qualifies her for FINRA registration
• B. Yes — as long as she passed within the last twelve months
• C. No — passing the SIE alone does not qualify her for registration; the SIE is a co-requisite to representative-level exams such as the Series 7
• D. No — she must first retake the SIE with a firm sponsor

283. A municipality issues bonds to build a toll bridge, with debt service to be paid solely from the tolls collected. What type of bond is this, and what is a key risk to bondholders?

• A. A general obligation bond; voter approval eliminates default risk
• B. A revenue bond; if toll collections fall short, debt service may not be covered
• C. A revenue bond; it is backed by the full faith and credit of the municipality
• D. A general obligation bond; it is backed by the issuer's taxing power

284. A candidate sitting for the SIE notices that the exam presents 80 questions even though only 75 are scored. What explains the difference?

• A. The exam randomly discards the candidate's five worst answers
• B. Five questions are bonus items that can raise the score above 100%
• C. Five questions are optional and may be skipped without penalty
• D. Five questions are unidentified pretest items that do not count toward the score

285. A representative and her customer agree that the representative will personally invest alongside the customer within the customer's account and split the profits. No written authorization is obtained from the customer or the firm, and the split is not proportionate to any capital the representative contributed. This arrangement is best described as:

• A. A permissible informal partnership between the representative and customer
• B. Permissible profit-sharing, since the customer verbally agreed
• C. A discretionary account, requiring only written trading authorization
• D. Prohibited sharing in a customer account, which generally requires prior written authorization and profit sharing proportionate to contributions

286. A candidate who took the SIE in early 2025 tells a friend preparing for a 2026 attempt that the exam includes 10 unscored pretest questions. Is this still accurate?

• A. Yes — but the pretest questions are now identified so candidates can skip them
• B. Yes — the exam still includes 10 unscored pretest questions
• C. No — effective October 27, 2025, the exam includes 5 unscored questions instead of 10
• D. No — all pretest questions were eliminated in 2025

287. A registered representative tells a nervous new client: 'If this stock loses money over the next year, I will personally reimburse you for any losses out of my own pocket.' Which prohibited practice does this statement represent?

• A. Guaranteeing a customer against loss
• B. Front-running
• C. Churning
• D. Commingling of funds

288. A candidate paid the SIE exam fee in 2025, and her brother pays the fee for his own first attempt in 2026. Based on FINRA's fee schedule, how much more does the brother pay than she did?

• A. $0 — the fee is unchanged
• B. $40
• C. $10
• D. $20

289. A registered representative asks a long-standing customer for a short-term personal loan to cover a home repair. The customer is a retiree with no family or business relationship to the representative. Under industry conduct rules, this arrangement is:

• A. Permitted only if the loan is documented in writing
• B. Permitted, because the loan is unrelated to any securities transaction
• C. Permitted, as long as the loan is repaid with interest
• D. Generally prohibited — representatives may not borrow from customers outside narrow exceptions such as immediate family or lending institutions

290. A candidate wants to budget her time evenly across every question presented on the SIE exam. Given 1 hour and 45 minutes for a total of 80 items, roughly how much time can she spend per question?

• A. About 3 minutes per question
• B. About 45 seconds per question
• C. About 79 seconds (just over 1 minute and 15 seconds) per question
• D. About 2 minutes per question

291. A candidate schedules the SIE exam and wants to plan her testing session. How much time is she given to complete the exam?

• A. 1 hour and 15 minutes
• B. 2 hours and 15 minutes
• C. 3 hours
• D. 1 hour and 45 minutes

292. An individual passes the SIE exam and tells a friend she is now 'registered with FINRA' and ready to work as a representative. How should this claim be evaluated?

• A. It is correct — passing the SIE confers full registration
• B. It is incorrect only because her result has already expired
• C. It is correct as long as she took the exam while associated with a member firm
• D. It is incorrect — passing the SIE alone does not qualify an individual for registration with FINRA; the SIE is a co-requisite for representative-level exams such as the Series 7

293. A customer deposits large amounts of cash into a brokerage account, then executes a rapid series of transfers and securities trades among multiple accounts with no apparent investment purpose, making the origin of the funds difficult to trace. In the money-laundering process, this series of transfers represents which stage?

• A. Layering
• B. Integration
• C. Placement
• D. Structuring

294. A candidate sitting for the SIE notices her exam contains 80 items even though she read that only 75 questions are scored. What explains the difference?

• A. The testing center added review questions she may skip
• B. The extra items are bonus questions that can raise her score above 100%
• C. Five of the items are scored at half weight
• D. The exam includes 5 additional, unidentified pretest items that do not contribute toward her score

295. A new hire at a broker-dealer will function as a general securities representative, which requires the Series 7 exam. How does the SIE relate to her Series 7 requirement?

• A. The Series 7 must be passed before the SIE may be attempted.
• B. The SIE is optional if the firm sponsors her for the Series 7.
• C. The SIE is a corequisite to the Series 7 exam.
• D. The SIE replaces the Series 7 entirely.

296. A study group is dividing prep time by SIE content-outline section weightings. Comparing 'Knowledge of Capital Markets' with 'Understanding Products and Their Risks,' how do the sections compare in exam weight?

• A. Knowledge of Capital Markets is the largest section at 44% of the exam
• B. Both sections carry equal weight at roughly 25% each
• C. Knowledge of Capital Markets carries 33 items, and Understanding Products and Their Risks carries 12 items
• D. Knowledge of Capital Markets carries 12 items (16%), while Understanding Products and Their Risks carries 33 items (44%), making the products section nearly three times as heavily weighted

297. A candidate took the SIE in 2025 and paid the exam fee in effect that year. Her colleague registers for the exam in 2026. How much more does the colleague pay in exam fees than the candidate did?

• A. $20
• B. $0 — the fee did not change
• C. $40
• D. $10

298. A candidate finishes the SIE and notices she answered 80 items even though only 75 count toward her score. What explains the extra items?

• A. The exam includes 5 bonus items that can raise, but not lower, the score.
• B. The 5 extra items are tiebreakers used only for borderline scores.
• C. The exam includes 5 unidentified pretest items that do not contribute to the score.
• D. She was given a longer experimental version of the exam by mistake.

299. A candidate expects to need about 10 months of study access before taking the SIE. She compares Kaplan's SIE Essential Package ($149 with 5 months of access, plus a $49 five-month extension) against Achievable's course ($99 with 12 months of access). Which option covers the full 10 months at the lower total cost, and at what price?

• A. Achievable, at $148 total
• B. Kaplan, at $149 total
• C. Achievable, at $99 total
• D. Kaplan, at $198 total

300. A candidate who took the SIE in early 2025 tells a friend preparing to test in 2026 that the exam includes 10 unscored pretest questions. Why is this information outdated?

• A. The SIE eliminated all unscored questions in 2025
• B. Effective October 27, 2025, the SIE moved to five unscored pretest questions instead of 10
• C. The number of unscored questions increased from 10 to 15
• D. The number of scored questions was reduced to match the pretest change

301. Which of the following best describes call risk for a bondholder?

• A. The risk that the issuer will fail to make scheduled interest payments
• B. The risk that the issuer will redeem the bond early when interest rates have fallen, forcing the investor to reinvest at lower rates
• C. The risk that the bond's price will fall when interest rates rise
• D. The risk that the investor will be unable to sell the bond quickly at a fair price

302. A nervous first-time investor tells her representative she is afraid of losing money in the stock market. To win the account, the representative says: 'If any stock I recommend loses value, I will personally reimburse you for the loss.' Which statement about this promise is accurate?

• A. It is permitted only for conservative, income-oriented recommendations
• B. It is prohibited — guaranteeing a customer against loss is not allowed regardless of documentation
• C. It is permitted because the representative, not the firm, bears the risk
• D. It is permitted if the promise is put in writing and signed by both parties

303. A candidate planning her study schedule compares two SIE content sections: Knowledge of Capital Markets and Understanding Products and Their Risks. Based on the content outline's item counts, which statement is accurate?

• A. Capital Markets has 33 items and Products and Their Risks has 12.
• B. Products and Their Risks has 33 items versus 12 for Capital Markets — nearly three times the weight.
• C. Capital Markets has more items, so it deserves the most study time.
• D. The two sections carry equal weight on the exam.

304. A candidate buys Kaplan's SIE Essential Package but her preparation runs past the standard 5-month online access period, so she purchases one 5-month extension. What is her total spending on the Kaplan course?

• A. $149
• B. $178
• C. $247
• D. $198

305. Which of the following is TRUE regarding eligibility to sit for the SIE exam?

• A. Only individuals associated with a FINRA member firm may take the exam
• B. Candidates must first pass a prerequisite qualification exam
• C. Candidates must hold a sponsorship letter from a registered principal
• D. Individuals who are not associated persons are eligible, and no prerequisite exam is required

306. An individual passes the SIE exam while working outside the securities industry and tells friends she is now 'registered with FINRA.' Is her statement accurate?

• A. Yes — passing the SIE confers FINRA registration
• B. Yes — but her registration is limited to non-solicited business
• C. No — the SIE only counts toward registration if taken after joining a firm
• D. No — passing the SIE alone does not qualify an individual for registration with FINRA

307. A candidate finishes the SIE exam and notices she answered 80 questions, yet her score report reflects only 75. How is this explained?

• A. She was given an extended version of the exam by mistake
• B. The exam includes 5 unidentified pretest items that do not count toward the score
• C. The scoring system drops the candidate's 5 worst-answered questions
• D. Five of her answers were discarded because she left them blank

308. A candidate reviewing the SIE content outline compares two sections: Knowledge of Capital Markets and Understanding Products and Their Risks. Which comparison is accurate?

• A. Understanding Products and Their Risks carries 33 items (44%), while Knowledge of Capital Markets carries 12 items (16%)
• B. Knowledge of Capital Markets is weighted at 44% of the exam
• C. Knowledge of Capital Markets carries 33 items, nearly triple the products section
• D. Both sections carry the same number of items

309. A candidate scheduled her SIE exam for late 2025 but postponed it into 2026. Based on FINRA's fee adjustment schedule, how much MORE will she pay in exam fees by sitting in 2026 rather than 2025?

• A. $20
• B. $25
• C. $0 — the fee did not change
• D. $10

310. An investor holds a callable corporate bond purchased at par several years ago. Market interest rates have since fallen substantially. Which outcome should the investor be most concerned about?

• A. The bond automatically converts into the issuer's common stock
• B. The bond's market price falls sharply below par
• C. The issuer calls the bond, forcing the investor to reinvest the proceeds at the new, lower rates
• D. The issuer is required to raise the coupon to match market rates

311. A recent college graduate who has never worked in the securities industry wants to take the SIE exam before applying to broker-dealers. Which of the following is TRUE about her eligibility?

• A. She may take the SIE without being associated with a firm, and no prerequisite exam is required
• B. She must first be sponsored by a FINRA member firm before sitting for the SIE
• C. She may take the SIE unsponsored, but only after registering as an associated person with FINRA
• D. She must pass a representative-level exam such as the Series 7 before taking the SIE

312. Which risk describes the possibility that an investor will be unable to sell a thinly traded security quickly without accepting a significant price concession?

• A. Currency risk
• B. Credit risk
• C. Reinvestment risk
• D. Liquidity (marketability) risk

313. A candidate passes the SIE exam but takes a job outside the securities industry and never joins a broker-dealer. Which statement correctly describes her regulatory status?

• A. She is fully registered with FINRA and may service retail customers immediately
• B. She is not registered with FINRA, and her passing result remains valid for four years
• C. Her passing result never expires, but she must join a firm within four years to claim it
• D. She is registered with FINRA in a limited capacity until she lets the result lapse

314. A candidate sitting for the SIE exam after October 27, 2025 sees 80 questions on her screen. She panics, believing she must answer 80 scored items in the allotted 1 hour and 45 minutes. Which of the following is accurate?

• A. Only 75 items are scored; the 5 pretest items are clearly labeled so she can skip them
• B. Only 70 items are scored; the other 10 are unidentified pretest items that do not count toward her score
• C. All 80 items are scored; the outline was expanded when the exam was updated in October 2025
• D. Only 75 items are scored; the other 5 are unidentified pretest items that do not count toward her score

315. A representative urges a customer to quickly buy shares of a mutual fund because the fund is about to pay its annual distribution, telling the customer, 'Buy now and you'll collect the dividend — it's free money.' Why is this recommendation improper?

• A. The customer must hold fund shares through a full year before receiving any distribution
• B. Mutual funds are prohibited from paying dividends to new shareholders
• C. It is improper only if the fund also charges a sales load
• D. It is 'selling dividends' — the share price drops by the distribution amount, and the customer receives a taxable payment rather than a genuine benefit

316. A candidate sitting for the SIE will see how many total items on the exam, and how many of those count toward the score?

• A. 75 total items, all scored
• B. 80 total items, all scored
• C. 85 total items, 75 scored and 10 unscored pretest items
• D. 80 total items, 75 scored and 5 unscored pretest items

317. An investor owns a callable corporate bond purchased at par several years ago when interest rates were higher. Market interest rates have since fallen substantially. Which outcome should the investor be MOST prepared for?

• A. The investor must sell the bond back to the issuer at a discount
• B. The issuer is likely to extend the bond's maturity to lock in the low rates
• C. The bond's price will fall sharply because rates have fallen
• D. The issuer is likely to call the bond, forcing the investor to reinvest the proceeds at lower prevailing rates

318. Effective October 27, 2025, FINRA changed the composition of the SIE exam. What changed?

• A. The exam time was extended to 2 hours
• B. The number of unscored pretest questions was reduced from 10 to 5
• C. The number of scored questions increased from 75 to 80
• D. The passing score was lowered from 75% to 70%

319. Of the 75 scored questions on the SIE, how many come from the "Knowledge of Capital Markets" section, and what portion of the exam does that represent?

• A. 12 questions, or 16% of the exam
• B. 33 questions, or 16% of the exam
• C. 12 questions, or 44% of the exam
• D. 33 questions, or 44% of the exam

320. A candidate wants to become a registered representative and plans to take both the SIE and the Series 7. Passing the SIE result remains valid for four years. If she passes the SIE today, which sequencing statement is correct?

• A. The SIE is a corequisite to the Series 7, and her SIE result remains usable for four years
• B. She must pass the Series 7 within 105 days or retake the SIE
• C. Passing the SIE waives the Series 7 requirement entirely
• D. She must take the Series 7 before the SIE

321. A large, creditworthy corporation needs to raise short-term funds for seasonal inventory and issues unsecured promissory notes at a discount, maturing in under nine months so the offering is exempt from SEC registration. What has the corporation issued?

• A. Commercial paper
• B. A banker's acceptance
• C. A negotiable certificate of deposit
• D. A debenture

322. A U.S. investor wants exposure to a large Japanese automaker but wants to trade in U.S. dollars on a U.S. exchange and receive dividends in dollars. A representative suggests American Depositary Receipts (ADRs). Which risk remains even though the investor transacts entirely in U.S. dollars?

• A. The investor loses all rights to dividends
• B. Currency exchange risk, because the underlying shares and dividends originate in yen
• C. Settlement must occur in yen through a foreign broker
• D. No market risk, because ADRs are bank-guaranteed

323. A customer tells his representative he plans to break a single large cash deposit into several smaller deposits made on different days at different branches, explaining that he wants to 'stay under the radar' of currency reporting requirements. From an anti-money-laundering standpoint, how should the firm view this activity?

• A. As acceptable, because each individual deposit is legitimate customer money
• B. As acceptable, provided the customer signs a letter explaining the deposits
• C. As a problem only if the funds are later invested in securities
• D. As structuring — deliberately splitting transactions to evade reporting requirements — which is a red flag that may require reporting suspicious activity

324. Two unrelated business partners want to open a single brokerage account together. They agree that if one of them dies, the deceased partner's share of the account should pass to that partner's own heirs rather than to the surviving account holder. Which account registration fits this instruction?

• A. Tenants in common
• B. Joint tenants with rights of survivorship
• C. A discretionary account in the name of the surviving partner
• D. An individual account with a limited trading authorization

325. A customer is hesitant to buy a volatile stock a representative has recommended. To close the sale, the representative says: "If the position loses money over the next year, I'll personally reimburse you for the loss out of my own pocket." How should this statement be characterized?

• A. It is acceptable if the representative documents the promise in writing and keeps a copy
• B. It is acceptable because the representative, not the firm, is bearing the risk
• C. It is acceptable only in a discretionary account where the representative controls the trading
• D. It is a prohibited guarantee against loss, regardless of whether the representative intends to honor it

326. Two representatives at different firms coordinate a plan for a thinly traded stock: throughout the day, their customers repeatedly buy and sell the same shares to each other at successively higher prices. No party's economic position meaningfully changes, but the printed trades create the appearance of rising demand, and outside investors begin buying. Which prohibited activity does this scheme best illustrate?

• A. Front-running, because the representatives traded ahead of anticipated customer orders
• B. Market manipulation through matched trades intended to create a false appearance of trading activity
• C. Churning, because the accounts show excessive trading relative to the customers' objectives
• D. Insider trading, because the representatives acted on information the public did not have

327. An individual passes the SIE exam but is not hired by a broker-dealer. What is her registration status with FINRA?

• A. She is registered as a representative and may service retail accounts
• B. She is registered only after paying an annual maintenance fee
• C. She is not registered — passing the SIE alone does not qualify her for registration with FINRA
• D. She holds a provisional registration that becomes permanent upon employment

328. A U.S. investor wants exposure to a foreign company's stock without dealing in a foreign market directly, and buys American Depositary Receipts (ADRs) of that company. Which risk does the ADR structure NOT eliminate?

• A. Currency (exchange rate) risk on the value of the investment
• B. The need to hold foreign share certificates directly
• C. The inconvenience of receiving dividends in a foreign currency
• D. The need to trade on a foreign exchange

329. A candidate passes the SIE in March 2026 but does not join a broker-dealer until March 2029. Is her SIE result still usable?

• A. No — SIE results expire after two years without firm association
• B. Yes — an SIE result remains valid for four years
• C. Yes — SIE results never expire
• D. No — SIE results lapse immediately if the candidate is not an associated person

330. A new hire at a broker-dealer wants to become a General Securities Representative. Which statement about the exam requirements is accurate?

• A. The Series 7 replaces the SIE, so only the Series 7 is needed
• B. The SIE is a corequisite to the Series 7 — both must be passed
• C. The SIE alone qualifies her as a General Securities Representative
• D. The Series 7 must be passed before she is allowed to attempt the SIE

331. A candidate sits for the SIE in 2026 and answers all items presented. How many total items did she see, and how many counted toward her score?

• A. 85 total; 75 scored
• B. 80 total; 75 scored
• C. 80 total; 80 scored
• D. 75 total; 75 scored

332. A candidate who wants to become a general securities representative asks how the SIE relates to the Series 7 exam. Which statement is correct?

• A. The SIE and Series 7 are alternative paths to the same registration
• B. The SIE replaces the Series 7 entirely
• C. The SIE is a co-requisite to the Series 7 — both are needed for representative-level registration
• D. The Series 7 must be passed before the SIE may be attempted

333. A candidate sitting for the SIE exam today answers all 80 items presented. How many of those items actually count toward her score?

• A. 75
• B. 78
• C. 70
• D. 80

334. A candidate took the SIE in early 2025 and is retaking it in 2026. Comparing the two sittings, how did the number of unscored pretest items change?

• A. It decreased from 10 to 5, effective October 27, 2025
• B. It stayed at 10 in both years
• C. It increased from 5 to 10
• D. Pretest items were eliminated entirely

335. A customer in a cash account buys shares and, before paying for the purchase, sells those same shares and uses the sale proceeds to cover the original purchase price. Which of the following is the most likely consequence?

• A. The customer must close the account permanently
• B. The account is converted automatically to a margin account
• C. Nothing, because the sale proceeds arrived before settlement
• D. The customer has engaged in freeriding, and the firm must restrict the cash account, typically by requiring cash up front for future purchases

336. The SIE content outline allocates 12 scored items (16%) to Knowledge of Capital Markets and 33 scored items (44%) to Understanding Products and Their Risks. Together, how many of the exam's 75 scored questions do these two sections account for?

• A. 39
• B. 45
• C. 51
• D. 60

337. Under FINRA's approved fee adjustment schedule, a candidate who sat for the SIE in 2025 paid the then-current fee. A colleague sitting in 2026 pays the adjusted fee. How much more does the 2026 candidate pay?

• A. $10
• B. $0 — the fee did not change
• C. $25
• D. $20

338. A candidate passes the SIE and tells a friend she is now 'registered with FINRA and ready to work as a general securities representative.' What is wrong with this statement?

• A. Passing the SIE alone does not qualify her for registration; the SIE is a co-requisite to representative-level exams such as the Series 7
• B. She must retake the SIE after being hired before any registration is possible
• C. Nothing — passing the SIE confers full representative registration
• D. The SIE replaces the Series 7 entirely, so she must only complete firm paperwork

339. A candidate sits for the SIE and is presented with 80 questions. She is confused because she read the exam has only 75 scored questions. What explains the extra items?

• A. The 5 extra questions are scored only if she answers them correctly
• B. She was given an extended version of the exam by mistake
• C. The exam includes 5 additional unidentified pretest items that do not count toward her score
• D. 5 of the questions are bonus items that can raise her score above 100%

340. Two candidates compare their SIE experiences. One tested before October 27, 2025, and the other tested after that date. How did the number of unscored pretest questions differ between their exams?

• A. Both saw no unscored questions after the change
• B. Both saw 10 unscored questions
• C. The earlier candidate saw 10 unscored questions; the later candidate saw 5
• D. The earlier candidate saw 5 unscored questions; the later candidate saw 10

341. A candidate paid the SIE exam fee in 2025. Her colleague registers for the same exam in 2026. Based on FINRA's fee adjustment schedule, how much more does the 2026 candidate pay?

• A. $20
• B. $25
• C. $10
• D. $0 — the fee is unchanged

342. A candidate is budgeting study time by section weight. On the SIE content outline, how does the Knowledge of Capital Markets section compare to Understanding Products and Their Risks?

• A. Capital Markets has 12 items (16%), while Products and Their Risks has 33 items (44%)
• B. Capital Markets has 16 items (12%), while Products and Their Risks has 44 items (33%)
• C. Capital Markets has 33 items (44%), while Products and Their Risks has 12 items (16%)
• D. Both sections carry equal weight at 25% each

343. A candidate buys Kaplan's SIE Essential Package for $149, which includes a 5-month online access period. Her studies run long and she purchases the available 5-month extension for $49. What is her total spend on the course, and how many months of access has she purchased in all?

• A. $247 for 12 months
• B. $198 for 10 months
• C. $198 for 5 months
• D. $149 for 10 months

344. What score is required to pass the SIE exam?

• A. 75%
• B. 60%
• C. 65%
• D. 70%

345. A college student with no ties to any securities firm wants to take the SIE exam before applying for jobs. Which statement is accurate?

• A. She may take the SIE, because association with a firm is not required and there is no prerequisite exam
• B. She may take the SIE only if she is enrolled in a finance degree program
• C. She may not take the SIE until she is hired and sponsored by a member firm
• D. She must first pass a prerequisite qualification exam

346. An individual passes the SIE exam and believes she is now registered with FINRA and able to conduct securities business. How should this belief be corrected?

• A. She is registered, but only to trade equities
• B. She is correct; passing the SIE confers full FINRA registration
• C. Passing the SIE alone does not qualify her for FINRA registration; it is a co-requisite alongside representative-level exams such as the Series 7
• D. She must simply retake the SIE annually to maintain registration

347. A candidate scheduled to take the SIE in 2026 asks about the unscored questions on the exam. Which statement is accurate?

• A. All 80 items on the exam count toward the score
• B. Unscored items are clearly labeled so candidates can skip them
• C. The exam contains 5 unscored pretest items, reduced from 10 effective October 27, 2025
• D. The exam contains 10 unscored pretest items, as it always has

348. A candidate sitting for the SIE will see how many total items on the exam, counting both scored and unscored questions?

• A. 100 items
• B. 75 items
• C. 85 items
• D. 80 items

349. On the SIE content outline, how heavily is the Knowledge of Capital Markets section weighted?

• A. 12 items, 16% of the exam
• B. 8 items, 10% of the exam
• C. 33 items, 44% of the exam
• D. 20 items, 25% of the exam

350. A candidate paid the SIE exam fee in 2025 and a friend pays the fee in 2026. Based on FINRA's fee adjustment schedule, how much more does the 2026 candidate pay?

• A. $10 more
• B. $20 more
• C. $25 more
• D. $0 — the fee did not change

351. A candidate wants to know how many scored questions on the SIE come from the two largest structural sections combined: Knowledge of Capital Markets and Understanding Products and Their Risks. What is the combined item count, and what fraction of the 75 scored questions does it represent?

• A. 45 items, which is 50% of the scored questions
• B. 45 items, which is 60% of the scored questions
• C. 40 items, which is 60% of the scored questions
• D. 33 items, which is 44% of the scored questions

352. A corporation needs to raise short-term working capital and issues an unsecured, short-term promissory note sold at a discount to institutional investors. Which money market instrument is this?

• A. A repurchase agreement
• B. Commercial paper
• C. A negotiable certificate of deposit
• D. A banker's acceptance

353. Which of the following is a money market instrument?

• A. Commercial paper issued by a corporation to fund short-term needs
• B. A 10-year municipal revenue bond
• C. A 20-year corporate debenture
• D. Common stock of a money-center bank

354. An investor holds two bonds of similar credit quality and coupon: one matures in 2 years and the other in 20 years. If market interest rates rise sharply, what should the investor expect?

• A. The 2-year bond's price will fall more than the 20-year bond's price
• B. The 20-year bond's price will rise because long-term bonds benefit from rising rates
• C. Both bonds' prices will fall by the same amount because their coupons are similar
• D. The 20-year bond's price will fall more than the 2-year bond's price

355. A corporation misses two consecutive annual dividend payments on its cumulative preferred stock. The following year, the board decides to pay a dividend to common stockholders. What must the corporation do first?

• A. Pay all missed preferred dividends plus the current preferred dividend before paying any common dividend
• B. Offer preferred holders additional shares in lieu of the missed dividends
• C. Pay only the current year's preferred dividend before paying common
• D. Nothing — missed preferred dividends are forfeited once skipped

356. A convertible bond is convertible at $25 per share. What is the bond's conversion ratio, assuming a $1,000 par value?

• A. 25 shares
• B. 100 shares
• C. 40 shares
• D. 50 shares

357. A U.S. investor wants exposure to a foreign company's stock but wants to trade in U.S. dollars on a U.S. exchange and receive dividends in dollars. Which security best meets this need, and what added risk remains?

• A. A global mutual fund; all foreign risks are eliminated through diversification
• B. An American Depositary Receipt; currency risk is eliminated because trades settle in dollars
• C. An American Depositary Receipt; currency (exchange-rate) risk remains
• D. A Yankee bond; currency risk remains

358. Which feature most distinguishes a general obligation (GO) municipal bond from a revenue municipal bond?

• A. GO bonds pay taxable interest, while revenue bond interest is tax-exempt
• B. GO bonds are backed by the issuer's taxing power, while revenue bonds are paid from income of a specific project or facility
• C. Revenue bonds are backed by the full faith and credit of the U.S. government
• D. GO bonds are issued by corporations, while revenue bonds are issued by municipalities

359. An investor owns 100 shares of ABC purchased at $50 per share and writes one ABC call with a $55 strike price, collecting a premium of $2 per share. At expiration, ABC trades at $60 and the call is exercised. Ignoring commissions, what is the investor's total profit?

• A. $1,200
• B. $200
• C. $500
• D. $700

360. A U.S. investor wants exposure to a foreign company's stock but prefers to trade in U.S. dollars on a U.S. exchange. The representative suggests American Depositary Receipts (ADRs). Which risk remains even though the ADR trades in U.S. dollars?

• A. Currency exchange risk, because the underlying shares and dividends are denominated in the foreign currency
• B. Prepayment risk, because the foreign issuer can redeem the ADRs early
• C. No currency risk, because dollar-denominated trading eliminates exchange rate exposure
• D. Regulation T risk, because ADRs cannot be purchased on margin

361. A convertible bond with a $1,000 par value is convertible at $40 per share. The issuer's common stock is currently trading at $44. What is the parity price of the bond?

• A. $960
• B. $1,040
• C. $1,000
• D. $1,100

362. A corporate treasurer needs to invest excess cash for a very short period and wants an instrument commonly issued by large corporations to meet short-term funding needs. Which money market instrument fits?

• A. Common stock of a blue-chip company
• B. A 30-year corporate debenture
• C. A closed-end fund share
• D. Commercial paper

363. Which statement correctly contrasts preemptive rights with warrants?

• A. Both rights and warrants are always issued with exercise prices above the current market price
• B. Warrants are issued only to existing shareholders in proportion to their holdings
• C. Rights are long-term instruments; warrants expire within weeks of issuance
• D. Rights are short-term and issued to existing shareholders, typically with an exercise price below the current market; warrants are long-term and typically issued with an exercise price above the current market

364. A municipality wants to finance a new toll bridge and repay bondholders solely from the tolls the bridge collects. Which type of municipal bond is being described?

• A. A general obligation bond, backed by the issuer's full faith, credit and taxing power
• B. A Treasury bond, backed by the federal government
• C. A revenue bond, backed by the earnings of the specific project
• D. A debenture, backed only by the issuer's general promise to pay

365. An investor owns a callable corporate bond purchased when interest rates were higher. Rates have since fallen sharply. Which risk is now MOST relevant to this bondholder?

• A. Reinvestment risk, because the issuer is likely to call the bond and the proceeds must be reinvested at lower rates
• B. Credit risk, because falling rates signal deteriorating issuer finances
• C. Interest rate risk, because the bond's price will fall as rates decline
• D. Currency risk, because rate changes affect exchange rates

366. An investor wants a diversified index portfolio but insists on being able to sell the position intraday at a market-determined price and to use limit orders. Which product feature makes an exchange-traded fund (ETF) more suitable than a traditional open-end mutual fund for this requirement?

• A. ETFs guarantee a price at or above NAV, while mutual funds do not
• B. ETF shares trade on an exchange throughout the day at market prices, while open-end fund shares are redeemed only at the next-computed NAV
• C. Open-end funds trade intraday but only through a broker-dealer
• D. ETFs eliminate market risk because they track an index

367. An investor owns 100 shares of stock purchased at $52 per share and is worried the price may fall over the next two months, but does not want to sell the shares. Which options strategy most directly hedges this position?

• A. Buy one put option on the stock
• B. Sell one put option on the stock
• C. Sell one call option and one put option on the stock
• D. Buy one call option on the stock

368. An investor notices that shares of a closed-end fund are trading on an exchange at a price below the fund's net asset value (NAV) per share. What explains this?

• A. Closed-end fund shares trade in the secondary market at prices set by supply and demand, which can be above or below NAV
• B. The exchange has halted redemptions, temporarily depressing the price
• C. The fund must be violating securities rules, because funds are required to trade at NAV
• D. The fund is imposing a deferred sales charge that reduces the quoted price

369. Which statement correctly distinguishes a warrant from a preemptive right issued to existing shareholders?

• A. A warrant is long-term and issued with an exercise price above the stock's current market price, while a right is short-term with a subscription price below the current market price
• B. Rights obligate the holder to buy stock, while warrants merely permit it
• C. Both are identical except that warrants are issued only to bondholders
• D. A warrant is short-term and priced below the market, while a right is long-term and priced above the market

370. Which of the following is an unsecured, short-term debt instrument issued by a corporation, typically to meet near-term funding needs such as payroll or inventory?

• A. A mortgage bond
• B. An equipment trust certificate
• C. Commercial paper
• D. A banker's acceptance

371. In a corporate liquidation, in what order are claimants generally paid?

• A. Secured creditors, then unsecured creditors (including debenture holders), then preferred stockholders, then common stockholders
• B. Preferred stockholders, then secured creditors, then common stockholders, then unsecured creditors
• C. Common stockholders, then preferred stockholders, then bondholders
• D. All creditors and stockholders share the proceeds equally on a pro rata basis

372. Which of the following securities represents an ownership interest in a corporation rather than a loan to it?

• A. Common stock
• B. A debenture
• C. Commercial paper
• D. A mortgage bond

373. In a corporate liquidation, which of the following claimants is paid LAST?

• A. Preferred stockholders
• B. General (unsecured) creditors
• C. Common stockholders
• D. Secured bondholders

374. An investor owns 100 shares of a stock and writes one call option against that position. What is the primary purpose and trade-off of this covered call strategy?

• A. It creates unlimited profit potential in both directions
• B. It exposes the investor to unlimited loss because the call is uncovered
• C. It generates premium income and provides limited downside cushion, in exchange for capping the upside if the stock rises above the strike price
• D. It fully protects the position against any decline in the stock's price

375. A customer is considering an investment in a direct participation program (limited partnership). Compared with exchange-listed stocks, which risk is MOST characteristic of this product?

• A. Liquidity risk, because there is no ready secondary market and interests are difficult to sell
• B. Currency risk, because partnerships are denominated in foreign currencies
• C. Interest rate risk, because partnership values move inversely with rates
• D. Call risk, because the general partner can redeem interests when rates fall

376. An investor holds a single long-term corporate bond and plans to sell it before maturity. The investor is worried she may have to sell quickly at a price well below its fair value because few buyers trade this issue. This concern best describes which risk?

• A. Credit risk
• B. Liquidity risk
• C. Currency risk
• D. Reinvestment risk

377. A retiree holds a portfolio of callable corporate bonds purchased when interest rates were higher. Rates have since fallen sharply and several bonds are called. Which risk has the retiree MOST directly experienced?

• A. Credit risk, because the issuer failed to make scheduled payments
• B. Reinvestment risk, because the returned principal must now be reinvested at lower prevailing rates
• C. Interest rate risk, because the bonds' market prices fell when rates fell
• D. Inflation risk, because the call reduced the bonds' purchasing power

378. A corporation has cumulative preferred stock that pays a $6 annual dividend per share. The company paid no preferred dividends last year and has paid nothing so far this year. Before the company may pay any dividend to common stockholders this year, how much must it first pay per share to the cumulative preferred holders?

• A. $6 — only the current year's stated dividend
• B. $0 — skipped preferred dividends are permanently forfeited
• C. $18 — the arrears must be paid with a one-year penalty dividend
• D. $12 — the $6 in arrears from last year plus this year's $6

379. A college student passes the SIE exam but does not join a broker-dealer until several years later. For how long does the passing SIE result remain valid?

• A. Three years
• B. Two years
• C. It never expires
• D. Four years

380. A customer wants broad stock market exposure and the ability to buy and sell throughout the trading day at market-determined prices. The customer also wants to be able to sell the position short. Which pooled investment vehicle best meets these needs?

• A. A variable annuity subaccount
• B. An open-end mutual fund
• C. A unit investment trust that only redeems units at NAV
• D. An exchange-traded fund (ETF)

381. An individual passes the SIE exam and asks whether she is now registered to sell securities. Which response is correct?

• A. No — passing the SIE alone does not qualify an individual for registration with FINRA
• B. No, unless she passed with a score above the minimum passing standard
• C. Yes — passing the SIE alone confers full FINRA registration
• D. Yes, but only for transactions in exchange-listed securities

382. On the SIE content outline, how heavily is the "Knowledge of Capital Markets" section weighted?

• A. 33 items, or 44% of the scored exam
• B. 12 items, or 16% of the scored exam
• C. 20 items, or 27% of the scored exam
• D. 8 items, or 11% of the scored exam

383. An investor writes (sells) one uncovered call option on a stock, receiving the premium. Which statement best describes the writer's risk?

• A. There is no risk as long as the option expires in the money
• B. The potential loss is theoretically unlimited because the stock can rise without limit
• C. The maximum loss is the premium received
• D. The maximum loss is the strike price times 100 shares

384. A high-income investor in a top tax bracket wants bond income that is generally exempt from federal income tax. Which security is MOST appropriate?

• A. A general obligation municipal bond
• B. A Treasury note
• C. A corporate debenture
• D. A negotiable certificate of deposit

385. A candidate sitting for the SIE notices the exam presents more questions than the 75 that will be scored. How many total items appear, and why?

• A. 80 items — 5 bonus items can raise, but not lower, the score
• B. 80 items — 5 unidentified pretest items are included but do not count toward the score
• C. 85 items — 10 identified experimental items are scored at half weight
• D. 75 items — every question presented is scored

386. A study group compares notes: one member who tested in early 2025 recalls 10 unscored questions on the SIE, while another testing in 2026 saw only 5. Which explains the difference?

• A. The first member is misremembering — the SIE has always had 5 unscored items
• B. Effective October 27, 2025, FINRA reduced the SIE's unscored pretest items from 10 to 5
• C. Candidates testing at different centers receive different numbers of pretest items
• D. The number of unscored items varies randomly by test session

387. A general obligation (GO) municipal bond differs from a revenue bond in that the GO bond is backed by which of the following?

• A. Insurance from the federal government
• B. The full faith, credit, and taxing power of the issuing municipality
• C. A pledge of the underwriting syndicate
• D. The earnings of a specific facility, such as a toll road

388. A U.S. investor buys American Depositary Receipts (ADRs) representing shares of a foreign company. In addition to the ordinary risks of owning stock, which additional risk does the ADR holder assume?

• A. Prepayment risk, because the underlying shares amortize principal
• B. Currency (exchange rate) risk, because the underlying shares and dividends are denominated in a foreign currency
• C. Call risk, because ADRs may be redeemed early by the issuer at par
• D. No additional risk, because ADRs are guaranteed by the depositary bank

389. A candidate wants to pace herself on the SIE. Given 105 minutes to answer a total of 80 items (75 scored plus 5 unscored), approximately how much time can she budget per item on average?

• A. About 45 seconds per item
• B. About 2 minutes per item
• C. About 79 seconds per item
• D. About 3 minutes per item

390. An investor is comparing a fixed annuity and a variable annuity. Which statement correctly identifies who bears the investment risk in each product?

• A. The insurance company bears the investment risk in a fixed annuity, while the annuitant bears it in a variable annuity
• B. The insurance company bears the investment risk in both products
• C. The annuitant bears the investment risk in both products
• D. The annuitant bears the investment risk in a fixed annuity, while the insurance company bears it in a variable annuity

391. Which of the following best describes a warrant issued by a corporation?

• A. A long-term instrument giving the holder the right to buy the issuer's stock at a price set above the market price at issuance
• B. A certificate representing shares of a foreign company trading on a U.S. exchange
• C. An obligation requiring the holder to purchase shares if the stock falls below a set price
• D. A short-term right to buy new shares at a discount to the current market price, typically expiring within weeks

392. An investor owns cumulative preferred stock with a stated annual dividend of $6 per share. The issuer skipped the entire preferred dividend last year and now wishes to pay a dividend to common shareholders. Before any common dividend may be paid, how much must the preferred holder receive per share?

• A. $12, covering the skipped year plus the current year
• B. Nothing; skipped preferred dividends are permanently forfeited
• C. $6, covering only the current year
• D. $6 plus interest on the missed payment

393. Which of the following best describes the key tax feature that distinguishes most municipal bonds from corporate bonds?

• A. Municipal bond interest is taxable only at the federal level
• B. Interest on municipal bonds is generally exempt from federal income tax
• C. Municipal bonds pay dividends rather than interest
• D. Capital gains on municipal bonds are never taxable

394. An investor wants a pooled, diversified equity investment that she can buy and sell at market prices throughout the trading day. Which product best fits this objective?

• A. An open-end mutual fund
• B. A unit investment trust redeemed only through the sponsor
• C. A variable annuity subaccount
• D. An exchange-traded fund (ETF)

395. A customer places an order at 11:00 a.m. to redeem shares of an open-end mutual fund. At what price will the redemption be executed?

• A. The public offering price next calculated after the order is received
• B. The net asset value calculated at the market close preceding the order
• C. The current bid price quoted on the exchange at 11:00 a.m.
• D. The net asset value next calculated after the order is received

396. A city issues a callable bond. Several years later, market interest rates have fallen sharply and the issuer calls the bond. Which risk has the bondholder most directly experienced?

• A. Liquidity risk
• B. Currency risk
• C. Reinvestment risk
• D. Credit risk

397. An investor owns 100 shares of a stock and sells one call option against that position to generate income. Which of the following best describes this strategy?

• A. A naked call, which exposes the investor to unlimited loss
• B. A covered call, which limits the upside of the stock position in exchange for the premium received
• C. A protective put, which insures the stock against a decline
• D. A long straddle, which profits from volatility in either direction

398. Compared with an open-end mutual fund tracking the same index, an index exchange-traded fund (ETF) offers which of the following advantages to an investor?

• A. Shares are guaranteed to trade exactly at net asset value at all times
• B. Shares cannot be sold short or purchased on margin, reducing risk
• C. Shares can be bought and sold throughout the trading day at market prices
• D. The fund must redeem shares directly from any investor on demand

399. A municipality issues bonds to build a toll bridge, with debt service to be paid solely from the tolls the bridge collects. Which statement about these bonds is accurate?

• A. They are general obligation bonds backed by the issuer's taxing power
• B. They are revenue bonds, and repayment depends on the earnings of the facility financed
• C. They typically require voter approval before issuance
• D. They are backed by the full faith and credit of the federal government

400. A corporation gives its existing shareholders short-term instruments allowing them to buy new shares below the current market price before the shares are offered to the public. Separately, it attaches to a bond offering long-term instruments to buy its stock at a price above the current market. What are these two instruments, respectively?

• A. Rights, then warrants
• B. Rights, then convertible bonds
• C. Warrants, then rights
• D. Call options, then rights

401. An investor holds cumulative preferred stock. The issuer skipped its preferred dividend for two consecutive periods but now wants to pay a dividend to common shareholders. What must the issuer do first?

• A. Pay only the current period's preferred dividend; skipped dividends are forfeited
• B. Obtain a shareholder vote to cancel the arrears
• C. Nothing — preferred and common dividends are independent of each other
• D. Pay all skipped preferred dividends plus the current preferred dividend before paying any common dividend

402. Interest rates have fallen significantly since a corporation issued its callable bonds at par. A holder of these bonds should be most concerned about which risk?

• A. Credit risk, because falling rates signal the issuer is likely to default
• B. Currency risk, because rate changes alter the exchange value of the coupons
• C. Interest rate risk, because the bond's price will fall as rates decline
• D. Reinvestment risk, because the issuer is likely to call the bonds and the proceeds must be reinvested at lower rates

403. An investor owns 100 shares of ABC stock purchased at $50 per share and writes one ABC 55 call, receiving a premium of $2. Which statement best describes this position?

• A. It obligates the investor to buy an additional 100 shares at $55 if assigned
• B. It is a naked call, exposing the investor to unlimited loss potential
• C. It is a covered call; the investor's upside is limited but income is generated from the premium
• D. It is a protective strategy that fully hedges the stock against a market decline

404. A U.S. investor buys American depositary receipts (ADRs) of a Japanese company. In addition to normal market risk, which risk does this investor take on that a holder of a comparable U.S. company's stock does not?

• A. Liquidity risk, because ADRs may not be sold before a five-year holding period ends
• B. Currency exchange risk, because the underlying dividends and share values are denominated in yen
• C. Interest rate risk, because ADRs are debt instruments
• D. Settlement risk, because ADRs cannot settle through U.S. clearing systems

405. A high-earning client in a top tax bracket wants bond income that is generally exempt from federal income tax. Which product BEST fits this objective?

• A. A municipal bond issued by a state or local government
• B. An investment-grade corporate bond
• C. A mortgage-backed security issued by a government agency
• D. A Treasury note

406. A company with cumulative preferred stock paying a stated $6 annual dividend skipped its preferred dividend entirely last year. This year the board wants to pay a dividend to common stockholders. How much must the company first pay per share of cumulative preferred?

• A. $0 — skipped preferred dividends are forfeited
• B. $18 — arrears accrue with a penalty
• C. $6 — only the current year's dividend
• D. $12 — the $6 in arrears plus this year's $6

407. A customer with a large position in DEF stock at $80 per share fears a near-term decline but does not want to sell. The customer buys one DEF 75 put for a premium of $3. If DEF falls to $60 at expiration, what is the effective result of the hedge, ignoring commissions?

• A. The customer must deliver the stock at $60 and loses $20 per share
• B. The stock can be sold at $75 via the put, so the maximum loss from $80 is limited to $5 per share plus the $3 premium
• C. The put expires worthless and the customer loses the full decline from $80 to $60 plus the premium
• D. The customer profits $15 per share because the put gains offset the entire stock loss

408. A U.S. investor buys an American Depositary Receipt (ADR) representing shares of a Japanese company. Beyond ordinary market risk, which additional risk does this investor bear even though the ADR is priced in U.S. dollars?

• A. Prepayment risk, because the issuer may repay the shares early
• B. Currency exchange risk, because the underlying shares and dividends are denominated in yen
• C. No additional risk, because dollar pricing eliminates foreign exposure
• D. Reinvestment risk, because ADR dividends cannot be reinvested

409. An investor in a real estate limited partnership (a direct participation program) wants to exit the investment after two years. Which risk is this investor most likely to encounter?

• A. Exchange rate risk, because DPPs are priced in foreign currency
• B. Interest rate risk, because partnership interests trade inversely to bond yields
• C. Liquidity risk, because there is no active secondary market and interests are difficult to sell
• D. No meaningful risk, because the general partner must repurchase interests on demand

410. Which statement correctly compares stock rights and warrants?

• A. Rights are long-term instruments; warrants expire within weeks of issuance
• B. Warrants are given only to existing shareholders in proportion to their holdings
• C. Both are issued with exercise prices above the stock's current market price
• D. Rights are short-term and issued to existing shareholders below the current market price; warrants are long-term and issued with an exercise price above the current market price

411. A convertible bond with a $1,000 par value is convertible into common stock at a conversion price of $40 per share. How many shares does the bondholder receive upon conversion?

• A. 40 shares
• B. 50 shares
• C. 20 shares
• D. 25 shares

412. A retiree in a high federal tax bracket wants income and asks a representative why anyone would accept a municipal bond's lower stated coupon compared with a similar corporate bond. What is the best response?

• A. Municipal bond interest is generally exempt from federal income tax, so the after-tax yield may exceed that of a comparable taxable corporate bond
• B. Municipal bond capital gains are tax-exempt, which offsets the lower coupon
• C. Municipal bonds always pay dividends in addition to interest
• D. Municipal bonds are guaranteed by the federal government, so investors accept less yield

413. An investor holds 100 shares of ABC purchased at $75 and worries about a near-term decline but wants to keep the shares and their upside. Which options position BEST addresses this objective?

• A. Write one ABC call
• B. Write one ABC put
• C. Buy one ABC call
• D. Buy one ABC put

414. Which feature distinguishes an exchange-traded fund (ETF) from a traditional open-end mutual fund?

• A. ETF investors redeem shares directly with the fund at NAV at any time during the day
• B. ETF shares trade throughout the day on an exchange at market prices, while open-end mutual fund shares are priced once daily at NAV
• C. ETFs are prohibited from tracking an index
• D. ETFs may only hold bonds, while mutual funds may hold any asset class

415. A U.S. investor buys American Depositary Receipts (ADRs) of a foreign company. Beyond ordinary market risk, which additional risk does this investor take on that a purely domestic stockholder would not?

• A. Reinvestment risk, because ADRs cannot pay dividends
• B. Currency (exchange-rate) risk, because the underlying shares and dividends are denominated in a foreign currency
• C. Prepayment risk, because the issuer may repay principal early
• D. No additional risk, because ADRs are U.S.-dollar instruments

416. Interest rates have fallen sharply. An investor holds a callable corporate bond purchased at par with an above-market coupon. Which risk is MOST pressing for this investor right now?

• A. Credit risk — falling rates signal that the issuer is about to default
• B. Market risk — the bond's price will fall as rates decline
• C. Inflation risk — falling rates mean rising inflation will erode purchasing power
• D. Call risk — the issuer is likely to redeem the bond early, forcing reinvestment at lower prevailing rates

417. A corporate treasurer needs to invest excess cash for 60 days with minimal price fluctuation. Which of the following instruments is MOST appropriate?

• A. Commercial paper
• B. A long-term zero-coupon bond
• C. A 20-year corporate bond
• D. Common stock of a blue-chip company

418. During a rights offering, an existing shareholder receives subscription rights. How do these rights typically differ from warrants?

• A. Rights are short-term and usually allow purchase below the stock's current market price, while warrants are long-term and are issued with an exercise price above the current market price
• B. Rights are long-term instruments, while warrants expire within weeks
• C. Rights and warrants are identical except for their name
• D. Rights are issued only to bondholders, while warrants go only to stockholders

419. A client holds a large position in a thinly traded small-cap stock and also owns shares of a broad-market index fund. She asks which holding carries greater liquidity risk and why. What is the best answer?

• A. Neither carries liquidity risk, because liquidity risk applies only to bonds
• B. The index fund, because diversified holdings are harder to value
• C. The thinly traded small-cap stock, because a large position may be difficult to sell quickly without accepting a significantly lower price
• D. Both are equally liquid because both are equity investments

420. A corporation is liquidated after bankruptcy. In what order are the corporation's stakeholders generally paid from the remaining assets?

• A. Preferred stockholders, bondholders, common stockholders
• B. Common stockholders, preferred stockholders, bondholders
• C. Bondholders, common stockholders, preferred stockholders
• D. Bondholders, preferred stockholders, common stockholders

421. An issuer of cumulative preferred stock skips its scheduled preferred dividend for two consecutive periods. The issuer now wishes to pay a dividend to common stockholders. What must happen first?

• A. All skipped preferred dividends plus the current preferred dividend must be paid before any common dividend
• B. Nothing; skipped preferred dividends are permanently forfeited
• C. Only the current period's preferred dividend must be paid
• D. The preferred shares must be converted to common shares

422. A customer holds a callable corporate bond purchased at par. Market interest rates fall substantially. Which risk is now MOST relevant to this customer?

• A. Credit risk, because falling rates signal issuer weakness
• B. Currency risk, because rate changes affect exchange rates
• C. Interest rate risk, because the bond's price will fall as rates fall
• D. Reinvestment risk, because the issuer is likely to call the bond and the proceeds must be reinvested at lower rates

423. A registered representative notices that a longtime customer, recently widowed and showing signs of confusion, has begun wiring large sums to an individual she met online who claims to need money for 'customs fees.' Which of the following actions is the firm best positioned to take to address possible financial exploitation of this senior customer?

• A. Immediately close the account without informing the customer
• B. Transfer the account balance to the representative's personal account for safekeeping
• C. Reach out to the trusted contact person the customer named on her account and consider placing a temporary hold on the suspicious disbursements
• D. Complete the wires as instructed, since a firm must always follow customer instructions without question

424. Which of the following is a key structural difference between a unit investment trust (UIT) and an open-end mutual fund?

• A. A UIT has a fixed, unmanaged portfolio and typically a termination date, while a mutual fund is actively managed and continuously offered
• B. A UIT may not hold bonds, while a mutual fund may
• C. A UIT's units can never be redeemed before termination
• D. A mutual fund has a board of directors while a UIT employs a full-time portfolio manager

425. Interest rates have fallen sharply since a corporation issued a callable bond at par. The issuer calls the bond. Which risk has the bondholder most directly experienced?

• A. Default risk, because the issuer failed to pay
• B. Liquidity risk, because the bond cannot be sold
• C. Inflation risk, because prices rose faster than the coupon
• D. Reinvestment risk, because the returned principal must now be reinvested at lower prevailing rates

426. A corporation wants to let existing shareholders maintain their proportionate ownership when it issues new stock, offering them a short-term chance to buy new shares below the current market price. Which security accomplishes this?

• A. Call options
• B. Convertible bonds
• C. Warrants
• D. Preemptive (subscription) rights

427. A customer compares an exchange-traded note (ETN) tracking an index with an exchange-traded fund (ETF) tracking the same index. Which risk applies to the ETN that is largely absent from the ETF?

• A. Interest rate risk on the fund's bond holdings
• B. Credit risk of the issuing institution
• C. The risk that the ETN cannot be sold during market hours
• D. Market risk of the underlying index

428. A customer holds a convertible bond that can be exchanged for the issuer's common stock. Compared with a similar nonconvertible bond from the same issuer, the convertible bond will generally offer which of the following?

• A. No coupon, because convertibles are always zero-coupon instruments
• B. A higher coupon, to compensate for the conversion feature
• C. The same coupon, since conversion does not affect yield
• D. A lower coupon, because the conversion feature is valuable to the holder

429. An investor in a high tax bracket wants interest income that is generally exempt from federal income tax. Which product is designed to provide this?

• A. Corporate debentures
• B. Municipal bonds
• C. Bank certificates of deposit
• D. Treasury bonds

430. A customer wants a pooled, diversified equity investment that can be bought and sold at intraday market prices and can be sold short. Which product best fits this request?

• A. A unit investment trust held to termination
• B. A variable annuity
• C. An exchange-traded fund (ETF)
• D. An open-end mutual fund

431. A U.S. investor buys American Depositary Receipts (ADRs) representing shares of a foreign company. In addition to ordinary market risk, which risk does the ADR holder retain even though the security trades in U.S. dollars?

• A. Call risk, because the depositary bank can call the ADRs at par
• B. Prepayment risk, because ADRs amortize principal
• C. No additional risk, because dollar denomination removes all foreign exposure
• D. Currency (exchange rate) risk, because the underlying shares and dividends originate in a foreign currency

432. An investor owns 100 shares of a stock and is worried about a near-term price decline but does not want to sell the position. To hedge, the investor buys one put option on that stock. If the stock instead rises and the put expires worthless, what is the investor's loss on the hedge?

• A. Unlimited, because puts have unlimited loss potential for buyers
• B. The premium paid for the put
• C. The full strike price of the put
• D. Nothing, because unexercised options are refunded

433. An issuer's outstanding bond includes a provision allowing the issuer to redeem the bond before maturity at a stated price. Which risk does this provision create for the bondholder, and when is the issuer most likely to exercise it?

• A. Reinvestment risk is eliminated because the bondholder receives principal early
• B. Call risk; the issuer is most likely to redeem when market interest rates have fallen below the bond's coupon rate
• C. Call risk; the issuer is most likely to redeem when market interest rates have risen above the bond's coupon rate
• D. Put risk; the issuer is most likely to redeem when the bond trades at a discount

434. Which statement correctly distinguishes preemptive rights from warrants?

• A. Rights allow the holder to sell shares back to the issuer; warrants allow the holder to convert debt into equity
• B. Rights are long-term instruments attached to bond offerings; warrants expire within weeks of issuance
• C. Both rights and warrants are issued only to institutional investors and cannot be traded
• D. Rights are short-term and issued to existing shareholders, typically with a subscription price below the current market price; warrants are long-term and typically issued with an exercise price above the current market price

435. A U.S. investor wants to own shares of a foreign company but prefers to trade in U.S. dollars on a U.S. exchange and receive dividends in dollars. Which security best fits this objective?

• A. A real estate investment trust (REIT)
• B. An American Depositary Receipt (ADR)
• C. A Eurodollar bond
• D. A closed-end fund's preferred shares

436. A company has cumulative preferred stock that calls for a $4 annual dividend per share. The company paid no preferred dividend last year and paid only $1 per share the year before that (when $4 was due). Before the company may pay any dividend to common shareholders this year, how much must it pay per share to the cumulative preferred holders, including the current year's dividend?

• A. $4
• B. $8
• C. $7
• D. $11

437. An investor owns 100 shares of RST stock, purchased at $50 per share, and writes one RST call with a $55 strike price, collecting a $2 premium. Which statement best describes this position?

• A. It is a covered call: the premium provides limited downside cushion, but the upside is capped near the strike price if the stock rises and the call is exercised
• B. It is a protective strategy that fully insures the stock against a decline
• C. It guarantees the investor a profit as long as the stock does not fall below $50
• D. It is a naked call with unlimited loss potential if the stock rises

438. An investor holds shares of only one pharmaceutical company. A representative explains that adding many stocks across different industries would reduce a particular kind of risk. Which risk can diversification reduce, and which can it not?

• A. Diversification reduces interest rate risk only
• B. Diversification reduces systematic risk but cannot eliminate nonsystematic risk
• C. Diversification reduces nonsystematic (company-specific) risk but cannot eliminate systematic (market) risk
• D. Diversification eliminates both market risk and company-specific risk

439. An investor writes (sells) an uncovered put option on ABC stock with a strike price of $50, receiving a premium of $4. At expiration, ABC is trading at $38 and the put is exercised. Ignoring commissions, what is the writer's net result per share?

• A. A loss of $4 per share
• B. A loss of $8 per share
• C. A loss of $12 per share
• D. A gain of $4 per share

440. Which of the following risks affects an entire market and cannot be eliminated by diversifying across many different stocks?

• A. Regulatory risk affecting one industry
• B. Business risk
• C. Credit risk of a single issuer
• D. Systematic (market) risk

441. An American depositary receipt (ADR) allows a U.S. investor to do which of the following?

• A. Vote directly in place of the foreign company's board of directors
• B. Buy U.S. Treasury securities through a foreign bank
• C. Avoid all currency risk when investing internationally
• D. Buy an interest in a foreign company's shares in U.S. markets, priced in U.S. dollars

442. A company that issued cumulative preferred stock skipped its preferred dividend for two straight years. This year it wants to pay a dividend to common stockholders. What must happen first?

• A. Preferred and common holders must be paid equal amounts
• B. Only the current year's preferred dividend must be paid
• C. All skipped preferred dividends plus the current preferred dividend must be paid before any common dividend
• D. Nothing — skipped preferred dividends are permanently forfeited

443. A client wants the ability to buy and sell a diversified index-tracking fund at intraday market prices, including using limit orders. Which product feature distinguishes an exchange-traded fund (ETF) from a traditional open-end mutual fund for this purpose?

• A. ETFs may only be purchased directly from the fund sponsor
• B. Open-end mutual fund shares can be sold short, while ETF shares cannot
• C. ETF shares trade on an exchange throughout the day at market prices, while open-end mutual fund orders are executed at the next computed net asset value
• D. Mutual funds trade intraday while ETFs price only once daily

444. An investor owns 100 shares of a stock and writes one call option against that position to generate premium income. Which statement about this covered call strategy is accurate?

• A. The premium provides income and limited downside cushion, but the investor gives up gains above the strike price if the stock is called away
• B. The strategy requires the investor to buy additional shares if the option is exercised
• C. The strategy eliminates all downside risk on the stock position
• D. The investor's potential profit is unlimited because the stock is owned

445. A corporate bond is trading above its par value. How do its nominal (coupon) yield, current yield, and yield to maturity rank relative to one another?

• A. All three yields are equal because the coupon is fixed
• B. Yield to maturity is highest, current yield is lower, and nominal yield is lowest
• C. Nominal yield is highest, current yield is lower, and yield to maturity is lowest
• D. Current yield is highest, followed by yield to maturity, then nominal yield

446. An investor holds a large position in a stock that trades only a few hundred shares per day. The investor needs to raise cash quickly. Which risk is most directly illustrated by this situation?

• A. Liquidity risk — the investor may be unable to sell quickly without accepting a significantly lower price
• B. Interest rate risk — rising rates will reduce the stock's value
• C. Legislative risk — a change in law may harm the company
• D. Credit risk — the company may default on its obligations

447. An issuer's outstanding bonds are trading well above par after market interest rates have fallen sharply. The bonds contain a provision allowing the issuer to redeem them before maturity. Which risk is MOST relevant to a holder of these bonds?

• A. Interest rate risk, because falling rates reduce the bond's market price
• B. Default risk, because early redemption signals financial weakness
• C. Call risk, because the issuer is likely to redeem the bonds and the holder must reinvest at lower prevailing rates
• D. Inflation risk, because falling rates indicate rising inflation

448. A U.S. investor wants exposure to a large foreign company but prefers to trade in U.S. markets, in U.S. dollars, with dividends paid in dollars. Which security BEST meets this objective?

• A. An American depositary receipt (ADR) representing the foreign company's shares
• B. Shares purchased directly on the foreign company's home exchange
• C. A Eurodollar bond issued by the foreign company
• D. A currency forward contract on the foreign company's home currency

449. A corporate treasurer needs to invest excess cash for a very short period and wants an unsecured, short-term debt instrument issued by a highly rated corporation to fund its near-term obligations. Which money market instrument fits this description?

• A. A corporate debenture
• B. A repurchase agreement collateralized by Treasuries
• C. A banker's acceptance
• D. Commercial paper

450. A company distributes to its existing shareholders short-term instruments allowing them to buy new shares below the current market price so they can maintain their proportionate ownership in an upcoming offering. Separately, as a financing sweetener attached to a bond issue, it sells long-term instruments to buy stock at a price above the current market. What are these two instruments, respectively?

• A. Convertible bonds and call options
• B. Call options and preemptive rights
• C. Warrants and preemptive rights
• D. Preemptive rights and warrants

451. A customer is comparing a corporation's convertible bond with its otherwise similar nonconvertible bond. Which statement BEST explains a trade-off of the convertible feature?

• A. Conversion is at the issuer's option, so the holder bears the timing risk
• B. The convertible typically offers a lower coupon than a similar nonconvertible bond because the conversion privilege has value to the holder
• C. The convertible's price is unaffected by the underlying stock's price
• D. The convertible pays a higher coupon to compensate for the risk of forced conversion

452. A 62-year-old investor is considering a variable annuity for retirement income and asks how it differs from a fixed annuity. Which response is MOST accurate?

• A. A variable annuity's separate account is invested in the insurer's general account
• B. In a variable annuity, the insurer guarantees the payment amount, so the insurer bears the investment risk
• C. In a variable annuity, payments depend on the performance of separate account subaccounts, so the investor bears the investment risk
• D. A variable annuity is not a security and requires no securities registration to sell

453. A corporation grants its existing shareholders the ability to purchase newly issued shares at a set price for a period of about 45 days, at a price below the current market price. Separately, the same corporation attaches to a bond offering a long-term certificate allowing the purchase of its stock at a price above the current market. Which statement correctly distinguishes the two instruments?

• A. Both are warrants; the only difference is who receives them
• B. Both are rights; warrants may only be issued to bondholders of other companies
• C. The first is a preemptive right, which is short-term and issued below market; the second is a warrant, which is long-term and issued with an exercise price above market
• D. The first is a warrant and the second is a preemptive right

454. A U.S. investor wants exposure to a large Japanese company but prefers to trade in U.S. dollars on a U.S. exchange and receive dividends in dollars. Which security best fits this objective, and what risk remains even though it trades in dollars?

• A. A Eurodollar bond; the investor retains interest rate risk only
• B. A closed-end fund; the investor eliminates both market and currency risk
• C. An American Depositary Receipt; the investor retains currency (exchange-rate) risk
• D. An American Depositary Receipt; all currency risk is eliminated because it is dollar-denominated

455. An investor owns 100 shares of a stock and, seeking additional income, sells one call option against the position. Which statement best describes this covered call strategy?

• A. It obligates the investor to buy additional shares if the option is exercised
• B. It generates premium income but caps the upside on the stock at the strike price; the stock can still lose value on the downside
• C. It is the riskiest options strategy because the potential loss is unlimited
• D. It eliminates all downside risk on the stock in exchange for the premium

456. A customer invests in a non-traded limited partnership program and, two years later, needs cash for an emergency. The customer is surprised to learn the interest cannot easily be sold. Which risk did the customer fail to consider before investing?

• A. Currency risk — partnerships are denominated in foreign currencies
• B. Liquidity risk — direct participation program interests have no ready secondary market
• C. Call risk — the general partner can redeem the interest at any time
• D. Interest rate risk — partnership values move inversely with rates

457. A company has cumulative preferred stock outstanding with a stated annual dividend of $6 per share. Because of financial difficulty, the company paid no preferred dividend last year and only $2 per share this year. Next year the company recovers and wants to pay a dividend to common stockholders. How much must it first pay each cumulative preferred share (including next year's stated dividend)?

• A. $10 — arrears are owed but next year's dividend is not required before paying common
• B. $6 — only the current year's dividend is ever owed
• C. $16 — the $6 missed last year, the $4 shortfall from this year, and next year's $6
• D. $0 — skipped preferred dividends are permanently forfeited

458. A city issues bonds to build a toll bridge, and the bonds are payable solely from the tolls collected from drivers using the bridge. If toll collections fall short, bondholders have no claim on the city's tax revenues. What type of municipal bond is this?

• A. Tax anticipation note
• B. Revenue bond
• C. General obligation bond
• D. Double-barreled bond

459. A corporation files for liquidation in bankruptcy. Rank the following claimants in the order they are paid, from first to last: common stockholders, secured bondholders, preferred stockholders, general (unsecured) creditors.

• A. Secured bondholders, preferred stockholders, general creditors, common stockholders
• B. Preferred stockholders, secured bondholders, general creditors, common stockholders
• C. Secured bondholders, general creditors, preferred stockholders, common stockholders
• D. General creditors, secured bondholders, common stockholders, preferred stockholders

460. A U.S. investor buys American Depositary Receipts (ADRs) representing shares of a Japanese automaker. Beyond the ordinary market risk of the underlying stock, which additional risk does this investor bear that a holder of a comparable U.S. stock would not?

• A. Currency exchange risk, since the value of the underlying shares and dividends is affected by movements between the yen and the dollar
• B. The requirement to settle all trades in Japanese yen
• C. Unlimited liability for the foreign company's debts
• D. The inability to receive any dividends, since ADR holders forfeit dividend claims

461. A corporation needs to finance its inventory for the next several months and issues short-term, unsecured promissory notes at a discount to institutional buyers. Which money market instrument is being described?

• A. Commercial paper
• B. Repurchase agreement
• C. Banker's acceptance
• D. Negotiable certificate of deposit

462. At 11:00 a.m., a customer wants to lock in a price immediately on a diversified basket of large-cap stocks. She is choosing between an exchange-traded fund (ETF) tracking a large-cap index and an open-end index mutual fund tracking the same index. Which statement correctly describes the pricing difference?

• A. The ETF can be bought at its current market price intraday, while the mutual fund order will be executed at the next net asset value calculated after the market closes
• B. The mutual fund can be bought intraday at market price, while the ETF prices only once per day
• C. Neither can be purchased until the following business day
• D. Both will execute immediately at the current net asset value

463. A customer purchases a variable annuity during the accumulation phase. Which of the following statements about this product is TRUE?

• A. The product is exempt from securities regulation because it is issued by an insurance company
• B. The insurer guarantees a fixed rate of return on the customer's contributions
• C. The customer's payments are held in the insurer's general account alongside fixed annuity assets
• D. The customer's payments are invested in the insurer's separate account, and the customer bears the investment risk

464. An investor owns 100 shares of ABC purchased at $50 per share. To generate income, the investor writes one ABC 55 call and collects a premium of $2 per share. If ABC rises to $70 at expiration and the call is exercised, what is the investor's maximum gain on the overall position, and why is it capped?

• A. Unlimited, because the stock price has no ceiling
• B. $2,200 per 100 shares, because the investor keeps both the stock's rise to $70 and the premium
• C. $700 per 100 shares, because the stock is delivered at the strike price of $55: a $5 gain on the stock plus the $2 premium
• D. $200 per 100 shares, because the writer keeps only the premium

465. A retiree holds a large position in a thinly traded small-cap stock and also owns a Treasury note. She asks her representative why she was warned that selling the small-cap position quickly could be costly, while the Treasury note could be sold at any time near its quoted price. Which risk explains the difference?

• A. Regulatory risk — small-cap stocks may be delisted by regulators
• B. Credit risk — the small-cap company is more likely to default
• C. Interest rate risk — the small-cap stock is more sensitive to rate changes
• D. Liquidity (marketability) risk — the small-cap stock trades infrequently, so a quick sale may require accepting a significantly lower price

466. Which of the following securities gives an existing shareholder the short-term ability to buy additional shares of the issuer, typically at a price below the current market price, so the shareholder can maintain a proportionate ownership interest during a new issue?

• A. A call option purchased on an exchange
• B. A preemptive right
• C. A convertible debenture
• D. A warrant

467. Interest rates have fallen sharply since a corporation issued its 20-year bonds. The bonds are callable. Which statement best describes the position of an investor holding these bonds?

• A. The call feature protects the investor from interest rate changes in either direction
• B. The investor benefits, because the call feature guarantees the bonds will appreciate without limit
• C. The investor faces default risk, because falling rates signal issuer weakness
• D. The investor faces call risk: the issuer is likely to redeem the bonds, forcing reinvestment at lower prevailing rates

468. A corporation needs to raise short-term working capital and issues unsecured promissory notes at a discount, maturing in 90 days. What type of security has the corporation issued?

• A. A banker's acceptance
• B. Commercial paper
• C. A negotiable certificate of deposit
• D. A corporate debenture with a sinking fund

469. An investor places an order to sell shares of a closed-end fund and, on the same day, an order to redeem shares of an open-end mutual fund. Which statement correctly describes how the prices of these two transactions are determined?

• A. The closed-end fund shares sell at the current market price set by supply and demand, which may be above or below NAV; the open-end fund shares redeem at the next computed NAV
• B. The open-end fund shares sell at a discount to NAV, while the closed-end fund shares redeem at NAV plus a sales charge
• C. Both transactions occur at the fund's next computed net asset value
• D. Both transactions occur at the current market price, which always equals NAV

470. A customer comparing an exchange-traded note (ETN) with an index ETF asks why the ETN might carry a risk the ETF does not. Which response is most accurate?

• A. The ETF exposes the investor to the fund sponsor's credit risk, while the ETN does not
• B. ETNs cannot be sold before maturity, while ETFs trade intraday
• C. The ETN holds the underlying index securities directly, making it riskier to trade
• D. The ETN is an unsecured debt obligation of the issuing institution, so the investor bears the issuer's credit risk in addition to market risk

471. A corporation is liquidated in bankruptcy. After secured creditors are paid, in what order do the remaining claimants generally receive any distribution?

• A. Unsecured bondholders, preferred stockholders, then common stockholders
• B. Unsecured bondholders, common stockholders, then preferred stockholders
• C. Common stockholders, preferred stockholders, then unsecured bondholders
• D. Preferred stockholders, unsecured bondholders, then common stockholders

472. A closed-end fund has a net asset value (NAV) of $20 per share but trades on an exchange at $17. Which statement best explains this situation?

• A. The $3 difference is the fund's sales charge
• B. The fund must redeem shares at $20 upon the investor's request
• C. This is impossible; investment company shares must always trade at NAV
• D. The fund is trading at a discount to NAV, which can occur because closed-end shares are priced by supply and demand in the secondary market

473. Which statement accurately describes a zero-coupon bond held in a taxable account until maturity?

• A. It pays semiannual interest that the holder can reinvest at the original yield
• B. It carries less price volatility than a coupon bond of the same maturity when interest rates change
• C. It is purchased at a discount to face value, makes no periodic interest payments, and the holder may owe tax each year on accreted interest even though no cash is received
• D. It is purchased at a premium and returns par at maturity

474. A client asks how buying shares of an exchange-traded fund (ETF) that tracks a broad index differs from buying an open-end index mutual fund. Which response is accurate?

• A. ETF shares can be bought and sold throughout the trading day at market prices, while open-end fund orders are executed at the next calculated NAV
• B. ETFs cannot be sold short or bought on margin, while mutual fund shares can be
• C. Mutual fund shares trade continuously on an exchange, while ETFs price once daily
• D. ETF shares may only be purchased directly from the fund at NAV once per day

475. Which of the following best describes a corporate bond's call feature?

• A. The right of the bondholder to sell the bond back to the issuer at a set price
• B. The right of the issuer to redeem the bond before maturity at a specified price
• C. The right of the bondholder to convert the bond into common stock
• D. An obligation of the issuer to increase the coupon if interest rates rise

476. An investor holds a callable corporate bond purchased at par with a 6% coupon. Market interest rates fall sharply. Which risk is the investor MOST directly exposed to?

• A. Reinvestment risk, because the bond may be called and the proceeds reinvested at lower rates
• B. Currency risk, because the coupon payments lose exchange value
• C. Interest rate risk, because the bond's price will fall
• D. Default risk, because the issuer's finances have weakened

477. Which statement correctly distinguishes a right from a warrant?

• A. Warrants are issued only to existing shareholders in proportion to their holdings
• B. Rights are short-term instruments given to existing shareholders, typically exercisable below the current market price; warrants are long-term, typically issued with an exercise price above the current market price
• C. Rights can be traded in the secondary market, but warrants cannot
• D. Rights are long-term instruments issued with an exercise price above the current market price; warrants are short-term and priced below market

478. A high-tax-bracket investor asks why a municipal bond can offer a lower stated yield than a corporate bond of similar quality yet still be attractive. What is the best response?

• A. Municipal bonds are guaranteed by the federal government, so they need not pay as much
• B. Interest on most municipal bonds is exempt from federal income tax, so the after-tax yield can exceed that of a higher-coupon taxable bond
• C. Municipal bonds trade only among institutions, which accept lower yields
• D. Municipal bonds always mature sooner than corporate bonds, reducing risk

479. An investor writes (sells) an uncovered call option on a stock. Which statement about the investor's risk is accurate?

• A. Maximum loss is theoretically unlimited because the stock can rise without limit
• B. Maximum loss is the strike price times the number of shares
• C. Maximum loss is limited to the premium received
• D. There is no risk because the writer keeps the premium in all cases

480. Which statement correctly compares an open-end mutual fund with a closed-end fund?

• A. Open-end fund shares trade on an exchange at prices that may be above or below net asset value; closed-end shares are redeemed by the fund at NAV
• B. Open-end fund shares are purchased from and redeemed by the fund at net asset value (plus any sales charge); closed-end fund shares trade in the secondary market at prices that may be at a premium or discount to NAV
• C. Closed-end funds may not use leverage, while open-end funds routinely do
• D. Both types continuously issue new shares to meet investor demand

481. A retiree holds a large position in mortgage-backed pass-through securities. Market interest rates drop significantly and many homeowners refinance their mortgages. What is the MOST direct consequence for the retiree?

• A. Prepayment risk: principal is returned faster than expected and must be reinvested at lower rates
• B. Extension risk: principal will be returned more slowly than expected
• C. Liquidity risk: the securities can no longer be sold
• D. Default risk: refinancing increases the chance homeowners stop paying

482. A corporation with cumulative preferred stock paying a stated $6 annual dividend skipped its preferred dividend entirely last year. This year the board wants to pay a dividend to common stockholders. How much must first be paid to each cumulative preferred share?

• A. Nothing — skipped dividends on preferred stock are permanently forfeited
• B. $6, covering only the current year
• C. $6 now, with the skipped $6 payable only if the company is later liquidated
• D. $12, covering the skipped year plus the current year

483. A U.S. investor wants to own shares of a foreign company but prefers to trade in U.S. markets, in U.S. dollars, and receive dividends in dollars. The investor buys an American depositary receipt (ADR). Which risk remains even though the ADR trades in dollars?

• A. Prepayment risk, because the foreign issuer may redeem the ADR early
• B. No foreign-related risk, because dollar denomination eliminates exposure to the home country
• C. Reinvestment risk, because ADR dividends cannot be reinvested
• D. Currency risk, because the underlying shares and dividends are denominated in the foreign currency

484. An investor is deciding between an open-end mutual fund and an exchange-traded fund (ETF) tracking the same index. Which statement correctly describes a difference between the two?

• A. The mutual fund trades intraday on an exchange, while the ETF prices only once per day
• B. The ETF must always trade exactly at its net asset value
• C. Only the mutual fund can be sold short and bought on margin
• D. The ETF can be bought and sold throughout the trading day at market prices, while the mutual fund is purchased and redeemed at the next-computed net asset value

485. An investor owns a callable corporate bond purchased at par with an 8% coupon. Market interest rates have since fallen significantly. What is the primary risk the investor now faces?

• A. The issuer will be required to raise the coupon to match market conditions
• B. The bond's market price will fall sharply because rates have declined
• C. The bond will automatically convert into common stock
• D. The issuer may call the bond, forcing the investor to reinvest the proceeds at the new, lower rates

486. A customer asks how a unit investment trust (UIT) differs from a managed mutual fund. Which response is accurate?

• A. A UIT may hold only municipal bonds
• B. A UIT holds a fixed portfolio that is not actively traded and typically has a termination date, whereas a mutual fund is continuously managed
• C. A UIT issues common stock that trades on an exchange like a closed-end fund
• D. A UIT employs a board-appointed investment adviser to trade the portfolio daily

487. An investor holds shares of a thinly traded small-cap stock and needs to raise cash quickly. When she tries to sell, she finds few buyers and must accept a price well below recent quotes to complete the sale. Which risk has she experienced?

• A. Credit risk
• B. Legislative risk
• C. Liquidity (marketability) risk
• D. Inflation (purchasing power) risk

488. Which money market instrument is an unsecured, short-term promissory note issued by a corporation to meet immediate financing needs such as payroll or inventory?

• A. Commercial paper
• B. Negotiable certificate of deposit
• C. Banker's acceptance
• D. Repurchase agreement

489. A municipality wants to build a toll bridge and repay bondholders solely from the tolls collected. Which type of municipal bond is it most likely to issue?

• A. Treasury bond backed by the federal government
• B. Revenue bond backed by income from the facility being financed
• C. General obligation bond backed by the issuer's taxing power
• D. Debenture backed by the municipality's general credit

490. A corporation is liquidated in bankruptcy. Rank the following claimants from FIRST to LAST in priority of payment: common stockholders, secured bondholders, preferred stockholders, unsecured (debenture) holders.

• A. Secured bondholders, preferred stockholders, unsecured debenture holders, common stockholders
• B. Common stockholders, preferred stockholders, unsecured debenture holders, secured bondholders
• C. Secured bondholders, unsecured debenture holders, preferred stockholders, common stockholders
• D. Preferred stockholders, secured bondholders, unsecured debenture holders, common stockholders

491. An issuer is most likely to exercise the call feature on its outstanding callable bonds in which environment, and what is the resulting risk to the bondholder?

• A. When interest rates fall; the holder must reinvest the proceeds at lower prevailing rates
• B. When interest rates rise; the issuer refinances at the higher rate
• C. When interest rates rise; the holder must reinvest at lower rates
• D. When interest rates fall; the holder's bond price falls below par

492. An investor owns 100 shares of ABC stock purchased at $50 per share and writes one ABC call with a $55 strike, collecting a $2 premium. At expiration ABC trades at $70 and the call is exercised. What is the investor's overall gain, and what did the strategy sacrifice?

• A. $2,200 gain; the investor keeps the stock's full appreciation plus the premium
• B. $700 gain; the strategy gave up all appreciation above the $55 strike
• C. $700 gain; the strategy sacrificed nothing
• D. $500 gain; the premium was forfeited on exercise

493. An investor holds a large position in a thinly traded small-cap stock and needs to raise cash quickly. The chief risk the investor faces when selling is that:

• A. the sale may only be possible at a price well below the last quoted price, because few buyers are available
• B. the position will be called away by the issuer
• C. rising interest rates will reduce the stock's coupon income
• D. the issuer may default on interest payments

494. Which feature distinguishes a unit investment trust (UIT) from an actively managed open-end mutual fund?

• A. A UIT holds a fixed portfolio selected at creation and is not actively managed, with units that are redeemable
• B. A UIT's units trade on an exchange at a premium or discount to NAV
• C. A UIT may only invest in equity securities
• D. A UIT continuously issues new shares and hires a portfolio manager to trade the portfolio

495. Which of the following securities gives its holder the RIGHT, but not the obligation, to buy the issuer's common stock at a fixed price over a long period, and is often attached to a bond offering as a "sweetener"?

• A. A preemptive right
• B. A warrant
• C. A repurchase agreement
• D. A put option