SIE Exam Questions & Answers (SIA Instructor Verified)

Broker dealers have an affirmative obligation to obtain the best possible prices for clients. When customers are buying stock broker dealers must execute the customer’s order at the best ( lowest ) offer price available at the time. Alternatively, when customers are selling stock, the firm must execute the customer’s order at the best  ( highest ) bid price available at the time. Provided the prices available meet any limit prices on the customer’s order. It is a violation of industry standards to execute a customer’s order at any price deemed to be inferior to the best price. The inside market for a stock consists of the Highest Bid and Lowest Offer displayed by any firm or in any market.. A broker dealer may never place a third party in between the customer and the best market. This is known as Interpositioning. The placing of another broker dealer in between the customer and the best marke.is prohibited unless it can be demonstrated that the customer received a better price because of it.. Here is an example of interpositioning.

A customer gives Broker an order to buy 3,000 shares of ABCD when the stock is quoted $3.75 X $4.25. Instead of buying the stock for their customer Broker A sends the order to Broker B who buys the stock at $4.10, Broker B then sells the stock to Broker A at $.4.15 and Broker A then sells the stock to the client at $4.25 plus a mark up. As a result both Broker A and B made money and the customer paid more than he / she should for the stock.

Bond yields can be a sticking point for many SIE candidates. Understanding the inverse relationship between price and yield is only the first step to mastering this content. Knowing how the nominal yield, current yield, yield to maturity and in some cases how yield to call relate to one another are essential. The bond see saw is a time tested way to ensure you can handle these questions on your SIE Exam. Practice drawing it out for each possible scenario. This will make these questions visual and in most cases simple. All you have to do is look at the drawing and you will be able to quickly answer the questions on your actual SIE exam. Create the seesaw with bonds at a discount, when purchasing bonds at par and when bonds are purchased at a premium and you will be in good shape. It is important to note that the nominal yield never changes. It is printed in ink on the bond certificate . Your current yield is a relationship between the annual interest payments and the price the investor pays for the bond. Once the investor purchases the bond he /she has locked in their current yield The formula is always Annual Income / Current Market Price. An investor’s yield to maturity is the overall return for purchasing the bond; it takes into account the Annual interest payments with the assumption that they are reinvested at the same rate ( not spent by the owner of the bond) and any gain or loss at maturity. For bonds purchased at a discount the investor will have a gain. For a bond purchased at a premium the investor will  have a loss. Don’t worry you will not have to calculate the yield to maturity. If a bond is callable the yield to call will be the highest yield for a bond purchased at a discount and the lowest for a bond purchased at a premium.

Both front running and trading ahead are violations. Both are based on trading using advanced knowledge and the violations are often confused as a result. Front running is the entering of an order for the account of an agent or firm prior to the entering of a large customer order. For example, let's say that a representative received an order from an institutional investor to purchase 500,000 shares of DEF. Prior to entering the order to purchase the large amount of stock, the representative enters an order to purchase 1,000 shares of DEF. for themselves.. After purchasing the share for their own account the representative enters the order to buy 500,000 shares of DEF for the institutional customer. This large order drives the stock price up and the rep sells their shares at a profit.

Trading ahead is the entering of an order for a security based on the prior knowledge of a soon to be released research report. Research reports can have a substantial impact on the price of the stock covered in the report. This is particularly true when the analyst has a large following. It is not uncommon for the price of a stock to move up or down by 10 percent or more on the day the report is released. Questions on the exam often provide scenarios where a rep walks into an elevator and overhears a conversation between two analysts about a report they are going to release with a price target on a stock significantly higher than its current market price. The rep then returns to his or her desk and buys the stock for clients and themselves.. This is a classic example of trading ahead.

The level of interest rates are determined by a number of factors. Including:

• The level of economic activity.
• The supply and demand for capital
• The level of risk perceived to be in the market.

The money supply is controlled by the Federal Reserve Board largely through open market operations. Open market operations consist of the FRB buying and selling Treasury and mortgage backed securities in the secondary market. When the Fed buys securities it increases the money supply and lowers rates. This has a stimulating effect on the economy. When the FRB is a net seller of securities it is removing money from the banking system and interest rates will increase as a result. The discount rate is the interest rate that the Federal Reserve Board charges member banks on loans made directly by the FRB. The Federal Funds rate on the other hand is the rate banks charge each other for short term loans. These loans are typically overnight or for short periods of time. The Federal funds rate is NOT controlled by the Federal; Reserve Board.  The actual rate is determined by the marketplace. The Fed does set a range or target for what it thinks the fed funds rate should be. However, the borrowing and lending banks ultimately determine the rate.

Accumulation units and annuity units both  represent an investor’s ownership in the separate account. However, the units are owned during different phases of the annuity contract. An accumulation unit represents the investor’s proportionate ownership in the separate account’s portfolio during the accumulation or deferred stage of the contract. The value of the accumulation unit will fluctuate as the value of the securities in the separate account’s portfolio changes. As the investor makes contributions to the account or as distributions are reinvested, the number of accumulation units will vary. An investor will only own accumulation units during the accumulation stage, when money is being paid into the contract or when receipt of payments is being deferred by the investor, such as with a single-payment deferred annuity. When an investor changes from the pay-in or deferred stage of the contract to the payout phase, the investor is said to have annuitized the contract. At this point, the investor trades in the accumulation units for annuity units.

The number of annuity units is fixed and represents the investor’s proportional ownership of the separate accounts portfolio during the payout phase. The number of annuity units that the investor receives upon annuitizing a contract is based on the payout option selected, the annuitant’s age and sex, the value of the account, and the assumed interest rate.

A lot of people get tripped up on this very point. The difference between the 5 and 10 percent rule is an important difference. The goal of diversification is to reduce risk by spreading investments over many different holdings. Mutual funds are designed to help investors achieve diversifications through a single investment in the fund. Mutual funds that market themselves as diversified funds must adhere to the 75-5-10 rule.  the requirements are as follows:

• 75%: Seventy-five percent of the fund’s assets must be invested in securities of other issuers. Cash and cash equivalents are counted as part of the 75 percent. A cash equivalent may be a Treasury bill or a money market instrument.
• 5%: The investment company may not invest more than 5 percent of its assets in any one company.
• 10%: The investment company may not own more than 10 percent of any company’s outstanding voting stock.

Let's look at an example to help you understand this concept better:
XYZ fund markets itself as a diversified mutual fund. It has $10,000,000,000 in net assets. The fund’s investment adviser thinks that the ABC Company would be a great company to acquire for $300,000,000. Because XYZ markets itself as a diversified mutual fund, it would not be allowed to purchase the company, even though the price of $300,000,000 would be less than 5 percent of the fund’s assets. The investment company must meet both the diversification requirements of 5 percent of assets and 10 percent of ownership in order to continue to market itself as a diversified mutual fund.

This can be a bit confusing for test takers. While mutual funds and UITs are both types of investment companies and both are registered under the Investment Company Act of 1940 a UIT is NOT a mutual fund. A Unit Investment Trust is a non managed pooled investment. A unit investment trust (UIT) will invest either in a fixed portfolio of securities or a nonfixed portfolio of securities. A fixed UIT will traditionally invest in a large block of government or municipal debt. The bonds will be held until maturity, and the proceeds will be distributed to investors in the UIT. Once the proceeds have been distributed to the investors, the UIT will have achieved its objective and will cease to exist. A nonfixed UIT will purchase mutual fund shares in order to reach a stated objective. A nonfixed UIT is also known as a contractual plan. Both types of UITs are organized as a trust and operate as a holding company for the portfolio. UITs are not actively managed, and they do not have a board of directors or investment advisers. Both types of UITs issue units or shares of beneficial interest to investors, which represent an undivided interest in the underlying portfolio of securities. UITs must maintain a secondary market in the units or shares to offer some liquidity to investors.

Every transaction in the market consists of 2 parties: a buyer and a seller. No one would be able to buy a stock, bond or option if another party was not willing to sell it to them. The purchaser of the put is absolutely bearish and is betting that the stock price is going to fall. The put buyer pays the premium to acquire the right to sell the stock at the strike price. The premium is paid to the seller of the put contract. In exchange for the premium, the seller takes on an obligation to purchase the stock. Because the seller is now obligated to purchase the stock, the seller is considered to be bullish on the price of that stock. If the seller was bearish and thought the stock price was likely to decline they would not want to buy the stock and would not sell a put. Commit this to memory, the right to sell is bearish and an obligation to buy is bullish.

Most Bonds are designed to provide investors with regular interest payments and are most suitable for investors who have an income investment objective. Matching the particular type of bond to the investor’s profile is the key to answering the questions correctly. In the question there will be keys that help you identify which bond is the most appropriate and therefore correct choice. Key factors include such things as are they looking for maximum income or safety of principal. If they are seeking maximum income corporate bonds are going to be the best choice. Investors who are seeking safety of principal should be placed in the highest rated bond choice in the question. Treasury securities are often the correct choice here. Keep in that shorter term investments carry less interest rate risk. For the most risk adverse investors a money market fund may be the correct choice. There is no market risk and the money market fund will provide some level of income. Treasury bills are not the correct choice for investors seeing income. Remember that Treasury bills are issued at a discount and mature at the par value. Municipal bonds are best for investors who have an income objective but who do not want to incur additional tax obligations. Investors in higher tax brackets benefit the most from investments in municipal bonds. Investors who are in lower tax brackets will be better off investing in corporate bonds of equal quality.

Corporations declare forward and reverse stock splits for very different reasons. When the price of a stock increases to the point where the price makes it too high for many retail investors to purchase a round lot ( typically 100 shares) corporations will often declare a forward stock split. The impact of the forward stock split reduces the market price of the stock making it more attractive to individual investors. For example, let's assume XYZ is tracking in the market at $100 per share and the company declares a  2 for 1 split. As a result of the split XYZ will now be priced at $50 per share. Making it more attractive to individual investors. An investor who owned 100 shares of XYZ before the split value at $100 per share would now own 200 shares of XYZ valued at $50 each. The value of their holdings would not change. Their ownership would be valued at $10,000 before and after the split. To calculate the ownership take the number of shares and multiply it by the split as a fraction 2/1 and you multiply the share price by the reciprocal of the split as a fraction ½. If they are going to test you on an uneven split it will probably be a  3:2 split. Reverse splits on the other hand are effected to increase the price of a stock to make the stock more attractive to institutional investors. Many institutions do not want to purchase shares of stock trading below $5 or $10 per share. In these cases the reverse stock split reduces the number of shares and increases the market price of the stock For example, If ABC was trading in the market at $4 per share and ABC declared a 1 for 10 reverse split ABC would now be trading in the market at $40 per share. An investor who owned 1,000 shares at $4 per share before the split would now own 100 shares at $40 each. The value of the investor’s holdings remained unchained. Their ownership is $4,000 before and after the split.