56 Products & Risks Practice Questions & Answers

1. 1. A corporation is liquidated. Which of the following claims is satisfied LAST?

   • A.Common stockholders✓ Answer
   • B.Secured bondholders
   • C.Preferred stockholders
   • D.Holders of subordinated debentures

   Common stock is a residual ownership claim: every creditor class and the preferred stockholders must be paid in full before anything is distributed to common holders. The order is secured creditors, general creditors (including debentures), subordinated debentures, preferred stock, then common stock, which is why the common shareholder's maximum loss is the amount invested but is also the last to be repaid.

   Source: FINRA SIE Content Outline (2025) 2.1.1 — Equity Securities: common stock characteristics and liquidation priorityReport a problem with this question

2. 2. An investor owns 400 shares of a company that uses cumulative voting. Three directors are to be elected. What is the maximum number of votes the investor may cast for a single candidate?

   • A.1,200 votes✓ Answer
   • B.2,400 votes
   • C.133 votes
   • D.400 votes

   Under cumulative voting the total votes equal shares owned multiplied by the number of open seats (400 × 3 = 1,200), and the holder may concentrate all of them on one candidate. That concentration is what makes cumulative voting favorable to minority shareholders; under statutory voting the investor would be limited to 400 votes per candidate.

   Source: FINRA SIE Content Outline (2025) 2.1.1 — Equity Securities: statutory vs. cumulative votingReport a problem with this question

3. 3. A company has 10,000,000 shares authorized and 6,000,000 shares issued, of which it has repurchased 1,000,000 shares and holds them in treasury. Which statement is TRUE?

   • A.6,000,000 shares are outstanding and all issued shares may vote
   • B.10,000,000 shares are outstanding because that is the authorized amount
   • C.5,000,000 shares are outstanding; the treasury shares neither vote nor receive dividends✓ Answer
   • D.Treasury shares continue to receive dividends but may not vote

   Shares outstanding equal issued shares minus treasury shares (6,000,000 − 1,000,000 = 5,000,000). Treasury stock is held by the issuer itself, so it has no voting rights and receives no dividends; authorized shares are only the ceiling the charter permits, not shares in public hands.

   Source: FINRA SIE Content Outline (2025) 2.1.1 — Equity Securities: authorized, issued, outstanding and treasury stockReport a problem with this question

4. 4. An investor owns 200 shares of a stock trading at $60 per share when the issuer declares a 2-for-1 stock split. After the split, which statement is TRUE?

   • A.The investor owns 200 shares at about $30 each, halving the position's market value
   • B.The investor's percentage of ownership in the company doubles
   • C.The investor owns 400 shares at about $60 each, doubling the position's market value
   • D.The investor owns 400 shares at about $30 each; total market value and percentage of ownership are unchanged✓ Answer

   A split changes only the number of shares and the per-share price (and the per-share cost basis); 200 × $60 = $12,000 becomes 400 × $30 = $12,000. Because every shareholder's holding is adjusted by the same ratio, the investor's total economic position and proportional ownership are unaffected.

   Source: FINRA SIE Content Outline (2025) 2.1.1 — Equity Securities: stock splits and stock dividendsReport a problem with this question

5. 5. A 5% preferred stock has a par value of $100 and pays dividends quarterly. If the board declares the full stated dividend, how much will the holder of one share receive each quarter?

   • A.$1.25✓ Answer
   • B.$5.00
   • C.$0.50
   • D.$2.50

   The stated rate on preferred stock is a percentage of its $100 par value, so 5% equals $5.00 per share per year; divided into four quarterly payments that is $1.25. Unlike common stock, where par is only an accounting entry, preferred par is the base used to compute the fixed dividend, which is why preferred behaves like a fixed-income security.

   Source: FINRA SIE Content Outline (2025) 2.1.1 — Equity Securities: preferred stock features and stated dividend rateReport a problem with this question

6. 6. A company has 6% cumulative preferred stock ($100 par) and has paid no preferred dividend for the past two years. Before the board may pay any dividend on the common stock, how much must be paid on each preferred share?

   • A.$12
   • B.$18✓ Answer
   • C.$6
   • D.Nothing; missed preferred dividends are lost

   Cumulative preferred dividends that are missed accumulate as dividends in arrears and must be paid in full, along with the current year's dividend, before any common dividend may be paid: two years of arrears ($12) plus the current $6 equals $18. Only straight (non-cumulative) preferred loses skipped dividends permanently.

   Source: FINRA SIE Content Outline (2025) 2.1.1 — Equity Securities: cumulative preferred stock and dividends in arrearsReport a problem with this question

7. 7. An income-oriented investor wants the preferred stock whose market price will fluctuate the LEAST when market interest rates move. Which type is most appropriate?

   • A.Adjustable-rate (floating-rate) preferred✓ Answer
   • B.Straight (non-cumulative) fixed-rate preferred
   • C.Cumulative fixed-rate preferred
   • D.Callable fixed-rate preferred

   An adjustable-rate preferred resets its dividend as market rates change, so the security keeps paying a competitive yield and its price stays near par instead of adjusting through the price. A fixed-rate preferred has a payment that never changes, so the entire adjustment must come from the price, making fixed-rate (especially straight) preferred the most interest-rate sensitive.

   Source: FINRA SIE Content Outline (2025) 2.1.1 / 2.2 — preferred stock types and interest-rate riskReport a problem with this question

8. 8. Which statement correctly distinguishes preemptive rights from warrants?

   • A.Rights are long-term sweeteners attached to a bond issue; warrants expire in 30 to 45 days
   • B.Both rights and warrants pay dividends and carry voting rights until exercised
   • C.Rights are short-term and are issued to existing shareholders with a subscription price below the current market price; warrants are long-term and are issued with an exercise price above the current market price✓ Answer
   • D.Rights are issued with an exercise price above the market; warrants are issued below the market to guarantee exercise

   Rights satisfy the preemptive right: they go to existing shareholders in a rights offering, last roughly 30 to 45 days, and are priced below market so they have intrinsic value immediately. Warrants run for years, are typically attached to a bond or preferred issue as a sweetener that lets the issuer pay a lower coupon, and start with an exercise price above market so they have no intrinsic value at issuance; neither instrument pays dividends or votes.

   Source: FINRA SIE Content Outline (2025) 2.1.1 — Equity Securities: rights and warrantsReport a problem with this question

9. 9. A U.S. investor buys an American Depositary Receipt (ADR) of a foreign corporation. Which statement is TRUE?

   • A.The ADR trades and pays dividends in U.S. dollars, but the holder remains exposed to currency and political risk from the issuer's home country✓ Answer
   • B.ADR holders receive the same full voting rights as holders of the underlying ordinary shares
   • C.Because the ADR is priced in U.S. dollars, the holder has no exposure to exchange-rate movements
   • D.ADRs are issued by the government of the country in which the company is domiciled

   An ADR is a negotiable receipt issued by a U.S. depositary bank against foreign shares held abroad; it is quoted, traded and paid in U.S. dollars, but the underlying shares and their dividends are denominated in the home currency, so a strengthening dollar reduces the value of the position and the converted dividend. ADR holders generally have no voting rights or only limited pass-through voting, and they also bear the political/country risk of the issuer's home market.

   Source: FINRA SIE Content Outline (2025) 2.1.1 / 2.2 — ADRs, currency risk and political riskReport a problem with this question

10. 10. A non-affiliate acquires restricted stock in a private placement of an SEC-reporting issuer. Under SEC Rule 144, what is the minimum holding period before the shares may be resold publicly?

    • A.Twelve months
    • B.30 days
    • C.Six months✓ Answer
    • D.90 days

    Rule 144 imposes a six-month holding period on restricted securities of an issuer that is current in its SEC reporting, and twelve months if the issuer is a non-reporting company. The holding period attaches to the restricted certificate, not to the person: control (affiliate) stock purchased in the open market has no holding period, though an affiliate's sales remain subject to the 90-day volume cap of the greater of 1% of outstanding shares or the average weekly trading volume over the preceding four weeks.

    Source: SEC Rule 144(d)(1); FINRA SIE Content Outline (2025) 2.1.1 — control and restricted securitiesReport a problem with this question

11. 11. A corporate bond is quoted at 98 1/2. What is the dollar price of one bond?

    • A.$98.50
    • B.$980.00
    • C.$9,850.00
    • D.$985.00✓ Answer

    Corporate and municipal bonds have a standard par value of $1,000 and are quoted as a percentage of par, so 98.5% × $1,000 = $985. A quote below 100 means the bond trades at a discount, which is also why its current yield and yield to maturity exceed its nominal coupon rate.

    Source: FINRA SIE Content Outline (2025) 2.1.2 — Debt Instruments: par value and bond pricing conventionsReport a problem with this question

12. 12. A callable corporate bond is trading at a premium. Which ranking of its yields is correct?

    • A.All four yields are equal because the coupon is fixed
    • B.Current yield > nominal yield > yield to call > yield to maturity
    • C.Yield to call > yield to maturity > current yield > nominal yield
    • D.Nominal yield > current yield > yield to maturity > yield to call✓ Answer

    A premium buyer pays more than $1,000 for a fixed coupon, so the current yield is below the nominal rate, and the premium must be amortized as a loss to par, pulling yield to maturity lower still; a call redeems the bond sooner, so that loss is absorbed over less time and yield to call is lowest. The ladder reverses for a discount bond (nominal < current < YTM < YTC), and at par all four yields are equal.

    Source: FINRA SIE Content Outline (2025) 2.1.2 — Debt Instruments: nominal yield, current yield, YTM and YTCReport a problem with this question

13. 13. A bond with a 6% coupon and a $1,000 par value is trading at $800. What is its current yield?

    • A.6.0%
    • B.8.0%
    • C.4.8%
    • D.7.5%✓ Answer

    Current yield equals the annual coupon income divided by the current market price: 6% of $1,000 is $60, and $60 ÷ $800 = 7.5%. Because the bond is at a discount, the current yield exceeds the 6% nominal rate, and the yield to maturity would be higher still since the $200 discount is also earned by maturity.

    Source: FINRA SIE Content Outline (2025) 2.1.2 — Debt Instruments: current yield calculationReport a problem with this question

14. 14. Under which circumstance is an issuer MOST likely to exercise the call provision on its outstanding bonds?

    • A.The bond's conversion value has fallen below its par value
    • B.Market interest rates have risen well above the bond's coupon rate
    • C.The issuer's credit rating has been downgraded to high yield
    • D.Market interest rates have fallen well below the bond's coupon rate✓ Answer

    A call is the issuer's option, and it is valuable only when the issuer can refinance the debt more cheaply, which happens after market rates fall below the coupon it is paying. The holder therefore loses a high-coupon bond precisely when replacement yields are low, which is call risk plus the resulting reinvestment risk, and it is why callable bonds must offer a higher yield than otherwise identical non-callable bonds.

    Source: FINRA SIE Content Outline (2025) 2.1.2 / 2.2 — call provisions, call risk and reinvestment riskReport a problem with this question

15. 15. Which statement accurately describes commercial paper?

    • A.It is a time draft guaranteed by a bank and used to finance foreign trade
    • B.It is an unsecured corporate promissory note issued at a discount with a maximum maturity of 270 days✓ Answer
    • C.It is a bank deposit fully insured by the FDIC regardless of amount
    • D.It is a corporate obligation paying a semiannual coupon with maturities of two to five years

    Commercial paper is short-term unsecured corporate borrowing sold at a discount from face value, and issuers keep the maturity at 270 days or less so the paper qualifies for the Section 3(a)(3) exemption from Securities Act registration. The bank-guaranteed time draft used in import/export financing is a banker's acceptance, and FDIC coverage is limited to $250,000 per depositor per bank, so a jumbo negotiable CD is only partially insured.

    Source: Securities Act of 1933 Section 3(a)(3); FINRA SIE Content Outline (2025) 2.1.2 — money market instrumentsReport a problem with this question

16. 16. A convertible bond with a $1,000 par value is convertible at $25 per share and is currently trading at 110. What is the conversion ratio and the parity price of the common stock?

    • A.40 shares; parity price of $25.00
    • B.44 shares; parity price of $22.73
    • C.40 shares; parity price of $27.50✓ Answer
    • D.25 shares; parity price of $44.00

    The conversion ratio is par divided by the conversion price ($1,000 ÷ $25 = 40 shares), and the parity price of the stock is the bond's market price divided by that ratio ($1,100 ÷ 40 = $27.50). Parity is the stock price at which the shares received on conversion are worth exactly what the bond is worth, and the embedded equity upside is why convertibles carry a lower coupon than comparable non-convertible bonds.

    Source: FINRA SIE Content Outline (2025) 2.1.2 — convertible bonds: conversion ratio and parityReport a problem with this question

17. 17. Four bonds are issued by the same corporation at the same time with the same maturity. Which would be expected to carry the HIGHEST yield?

    • A.Debenture
    • B.Equipment trust certificate
    • C.Subordinated debenture✓ Answer
    • D.First mortgage bond

    Yield compensates for risk, and the subordinated debenture ranks behind every other class shown: the mortgage bond and equipment trust certificate are secured by specific collateral (real property and rolling stock), a debenture is backed only by the issuer's general credit, and a subordinated debenture is paid only after other unsecured debt in a liquidation. Greater loss exposure in default therefore requires the highest yield.

    Source: FINRA SIE Content Outline (2025) 2.1.2 — secured vs. unsecured corporate debtReport a problem with this question

18. 18. Accrued interest on a corporate bond traded in the secondary market is computed using which day-count convention?

    • A.30/360✓ Answer
    • B.30/365
    • C.Actual/actual
    • D.Actual/360

    Corporate and municipal bonds accrue interest on a 30-day-month, 360-day-year basis, while U.S. government notes and bonds use actual days over an actual year — mixing the two is a classic error. The buyer pays the seller the interest accrued since the last coupon date and is made whole at the next payment; zero-coupon bonds and bonds in default trade flat, with no accrued interest.

    Source: FINRA SIE Content Outline (2025) 2.1.2 — accrued interest conventions (30/360 corporate and municipal; actual/actual U.S. government)Report a problem with this question

19. 19. Which pair of ratings represents the LOWEST rating that is still considered investment grade?

    • A.BBB− / Baa3✓ Answer
    • B.BB+ / Ba1
    • C.B / B2
    • D.A− / A3

    BBB− on the S&P/Fitch scale and Baa3 on the Moody's scale are the lowest investment-grade ratings; anything at BB+/Ba1 or below is speculative, high-yield or 'junk' debt. Ratings measure credit (default) risk only, so a AAA-rated long-term bond can still lose substantial value from a rise in interest rates.

    Source: FINRA SIE Content Outline (2025) 2.1.2 — credit ratings: investment grade vs. high yieldReport a problem with this question

20. 20. Which statement is TRUE of U.S. Treasury bills?

    • A.They pay a fixed coupon semiannually and mature in two to ten years
    • B.They are issued at a discount from face value, make no periodic interest payments, and mature in one year or less✓ Answer
    • C.They are issued by government-sponsored enterprises and carry only implied federal backing
    • D.Their principal is adjusted twice a year for changes in the Consumer Price Index

    T-bills are the shortest Treasury instrument, issued at a discount with no coupon; the investor's return is the difference between the discounted purchase price and the face amount received at maturity. Treasury notes (2 to 10 years) and bonds (over 10 years) pay semiannual coupons, and it is TIPS whose principal is indexed to the CPI.

    Source: FINRA SIE Content Outline (2025) 2.1.2 — U.S. Treasury securities; TreasuryDirect (Treasury bills)Report a problem with this question

21. 21. During a sustained period of rising consumer prices, what happens to Treasury Inflation-Protected Securities (TIPS)?

    • A.The principal is reduced so that the investor's real return stays constant
    • B.Both the coupon rate and the principal remain fixed, so TIPS provide no inflation protection
    • C.The coupon rate is increased at each interest payment while the principal remains fixed
    • D.The principal is adjusted upward and the fixed coupon rate is applied to the larger principal, so the dollar interest payment increases✓ Answer

    With TIPS the coupon RATE is fixed for the life of the security and the PRINCIPAL is indexed to the Consumer Price Index, so as prices rise the adjusted principal grows and each semiannual payment (rate × adjusted principal) grows with it. That mechanism is what hedges purchasing-power risk; note that the annual upward principal adjustment is taxable in the year it occurs even though the cash is not received until maturity.

    Source: FINRA SIE Content Outline (2025) 2.1.2 — TIPS; TreasuryDirect (TIPS principal indexation)Report a problem with this question

22. 22. How is the interest paid on U.S. Treasury notes taxed to an individual investor?

    • A.It is subject to federal income tax but exempt from state and local income tax✓ Answer
    • B.It is exempt from federal, state and local income tax
    • C.It is exempt from all income tax if the note is held to maturity
    • D.It is subject to state and local income tax but exempt from federal income tax

    Interest on direct obligations of the United States is taxable at the federal level but is exempt from state and local income taxation by federal statute. This is the mirror image of municipal bonds, whose interest is exempt from federal tax but whose capital gains are fully taxable.

    Source: 31 U.S.C. 3124(a); FINRA SIE Content Outline (2025) 2.1.2 — taxation of U.S. government securitiesReport a problem with this question

23. 23. Which statement is TRUE of Treasury STRIPS?

    • A.They carry the greatest reinvestment risk of any Treasury security
    • B.The annual accretion of the discount is free from federal income tax until the security matures
    • C.They have no reinvestment risk because there are no coupons to reinvest, but the greatest price volatility of any Treasury of the same maturity✓ Answer
    • D.They pay semiannual interest at a rate that floats with short-term Treasury yields

    STRIPS are zero-coupon Treasuries bought at a deep discount and redeemed at face value, so there are no interim payments to reinvest and reinvestment risk is eliminated; for the same reason all of the value sits at maturity, giving them the longest duration and the greatest price sensitivity to rate changes. The annual accretion is also taxed currently as imputed interest even though no cash is received, so 'no reinvestment risk' does not mean 'stable' or 'tax-free.'

    Source: FINRA SIE Content Outline (2025) 2.1.2 / 2.2 — zero-coupon Treasuries, reinvestment risk and interest-rate riskReport a problem with this question

24. 24. Which mortgage-backed securities are backed by the full faith and credit of the U.S. government?

    • A.All agency and GSE mortgage securities are equally guaranteed
    • B.FHLMC (Freddie Mac) pass-through certificates
    • C.FNMA (Fannie Mae) pass-through certificates
    • D.GNMA (Ginnie Mae) pass-through certificates✓ Answer

    Ginnie Mae is a wholly owned government corporation within HUD, so its pass-through certificates carry the direct full faith and credit guarantee of the United States. Fannie Mae and Freddie Mac are government-sponsored enterprises whose securities are not directly guaranteed by the federal government, which is why they typically yield somewhat more than comparable Ginnie Mae paper.

    Source: FINRA SIE Content Outline (2025) 2.1.2 — agency and government-sponsored enterprise securities; 12 U.S.C. 1721(g)Report a problem with this question

25. 25. Market interest rates fall sharply and homeowners refinance in large numbers. Holders of mortgage-backed pass-through certificates are MOST directly exposed to which risk?

    • A.Extension risk
    • B.Default risk, because the pool loses its guarantee when rates fall
    • C.Prepayment risk✓ Answer
    • D.Currency risk

    Refinancing returns mortgage principal to certificate holders sooner than scheduled, and that principal must then be reinvested at the new, lower market rates — this is prepayment risk. The mirror image is extension risk: when rates rise, prepayments slow, the average life of the pool lengthens, and the investor is locked into a below-market yield exactly when prices are falling.

    Source: FINRA SIE Content Outline (2025) 2.1.2 / 2.2 — mortgage-backed pass-throughs: prepayment and extension riskReport a problem with this question

26. 26. Which statement correctly distinguishes a general obligation (GO) bond from a revenue bond?

    • A.A GO is payable only from the revenues of the project it finances, while a revenue bond is backed by property taxes
    • B.A revenue bond requires voter approval and is subject to the issuer's statutory debt limit
    • C.A GO is backed by the issuer's full faith, credit and taxing power and normally requires voter approval; a revenue bond is payable only from the revenues of a specific facility and requires no voter approval✓ Answer
    • D.Both are backed by the issuer's taxing power, so they always carry identical yields

    A GO pledges the issuer's taxing power (ad valorem property taxes locally, sales or income taxes at the state level), so it normally requires voter approval and counts against statutory debt limits. A revenue bond is a self-supporting obligation paid solely from the net or gross revenues of the financed facility, supported by a feasibility study rather than a vote, and it generally yields more because there is no taxing-power backstop.

    Source: FINRA SIE Content Outline (2025) 2.1.2 — municipal securities: general obligation vs. revenue bondsReport a problem with this question

27. 27. An investor in the 30% federal marginal tax bracket is considering a municipal bond yielding 4%. What is the tax-equivalent yield?

    • A.5.71%✓ Answer
    • B.2.80%
    • C.4.00%
    • D.6.00%

    Tax-equivalent yield equals the municipal yield divided by (1 − the investor's marginal federal tax rate): 4% ÷ (1 − 0.30) = 4% ÷ 0.70 = 5.71%. A taxable bond would have to yield more than 5.71% to beat the muni after tax, which is why municipal bonds suit high-bracket investors and are inappropriate inside a tax-deferred retirement account.

    Source: FINRA SIE Content Outline (2025) 2.1.2 — municipal securities: tax-equivalent yieldReport a problem with this question

28. 28. An investor buys a municipal bond in the secondary market, holds it for several years collecting interest, and then sells it for more than the purchase price. Which statement is TRUE for federal tax purposes?

    • A.Both the interest received and the gain on the sale are subject to federal income tax
    • B.The interest received was exempt from federal income tax, but the gain on the sale is subject to federal capital gains tax✓ Answer
    • C.The interest was taxable, but the gain on the sale is exempt
    • D.Both the interest received and the gain on the sale are exempt from federal income tax

    The federal tax exemption on municipal securities applies to the INTEREST only — it does not extend to a capital gain realized when the bond is sold above its cost basis, which is taxed like any other capital gain. Interest may also be free of state and local tax for a resident of the issuing state (the 'triple tax-exempt' case), but that exemption likewise never covers the capital gain.

    Source: FINRA SIE Content Outline (2025) 2.1.2 — taxation of municipal securities: exempt interest vs. taxable capital gainsReport a problem with this question

29. 29. Which statement accurately describes a unit investment trust (UIT)?

    • A.It issues a fixed number of shares that trade on an exchange at a premium or discount to NAV
    • B.It actively rebalances its portfolio as market conditions change
    • C.It is a management company that continuously offers new shares at the next computed NAV
    • D.It holds a fixed portfolio of securities and operates without a board of directors or an investment adviser✓ Answer

    The Investment Company Act of 1940 recognizes three types of investment company: face-amount certificate companies, UITs, and management companies. A UIT is unmanaged by definition — it deposits a fixed portfolio, has no board and no investment adviser, issues redeemable units, and terminates on a preset date. Active management and exchange trading at a premium or discount describe management companies instead.

    Source: Investment Company Act of 1940 Sec. 4(2); FINRA SIE Content Outline 2.1.4Report a problem with this question

30. 30. An investor buys shares of a closed-end fund through a broker on an exchange. Which statement is correct?

    • A.The investor may redeem the shares with the fund at NAV on any business day
    • B.The price is set by supply and demand and may be above or below the fund's NAV✓ Answer
    • C.The fund must continuously offer new shares at the next computed NAV
    • D.The purchase price must be NAV plus a sales charge of no more than 8.5%

    A closed-end fund issues a fixed number of shares in a one-time offering; after that the shares trade in the secondary market, where price is determined by supply and demand and can be at a premium or a discount to NAV. Only open-end (mutual) fund shares are continuously offered and redeemable with the issuer at a NAV-based price.

    Source: Investment Company Act of 1940 Sec. 5(a)(2); FINRA SIE Content Outline 2.1.4Report a problem with this question

31. 31. A customer's order to buy shares of an open-end mutual fund reaches the broker-dealer shortly after the fund has computed its daily NAV. At what price is the order executed?

    • A.The next NAV computed by the fund, plus any applicable sales charge✓ Answer
    • B.The average of the day's high and low NAV, plus any applicable sales charge
    • C.The NAV that was just computed, plus any applicable sales charge
    • D.The previous business day's closing NAV, plus any applicable sales charge

    Open-end funds use forward pricing: an order is executed at the next NAV computed after the order is received, never at a price already calculated. This rule exists to prevent investors from trading on stale, known prices; the public offering price is that next NAV plus any sales charge.

    Source: Investment Company Act of 1940 Rule 22c-1; FINRA SIE Content Outline 2.1.4Report a problem with this question

32. 32. An open-end fund's net asset value is $9.20 per share and its maximum sales charge is 8% of the public offering price. What is the public offering price per share?

    • A.$8.46
    • B.$10.00✓ Answer
    • C.$10.09
    • D.$9.94

    The sales charge is stated as a percentage of the public offering price, not of NAV, so POP = NAV / (1 − sales charge %) = $9.20 / 0.92 = $10.00. Checking the answer: the $0.80 charge divided by the $10.00 offering price equals exactly 8%. Multiplying NAV by 1.08 ($9.94) is the classic error because it computes the charge off the wrong base.

    Source: FINRA Rule 2341; Investment Company Act of 1940 Sec. 22Report a problem with this question

33. 33. A 35-year-old customer will invest $200,000 in one fund family and expects to hold the position for at least 20 years. Which share class is generally most appropriate?

    • A.Class B shares, because the contingent deferred charge eventually disappears
    • B.Class C shares, because they have no front-end sales charge
    • C.Class A shares, because a breakpoint reduces the front-end charge and the ongoing 12b-1 fee is lowest✓ Answer
    • D.Whichever class pays the representative the most compensation

    Class A shares carry a front-end load but the lowest ongoing 12b-1 expense, and a $200,000 purchase will reach a volume breakpoint that sharply reduces that load. Class C shares avoid the front-end charge but carry the highest annual asset-based fee, which compounds into the worst outcome over a 20-year horizon; compensation to the representative is never a valid basis for a recommendation.

    Source: FINRA Rule 2341; FINRA Breakpoints key topic; SIE Content Outline 2.1.4Report a problem with this question

34. 34. A customer signs a letter of intent (LOI) to qualify for a Class A breakpoint. Which statement is correct?

    • A.The LOI is a binding contract and the customer can be sued for the unpaid balance
    • B.The customer has 13 months to invest the stated amount, and the LOI may be backdated up to 90 days✓ Answer
    • C.The customer has 24 months to invest the stated amount and the LOI may not be backdated
    • D.The LOI lets holdings in any unaffiliated fund family be combined toward the breakpoint

    An LOI is a non-binding statement of intent that gives the customer 13 months to reach the breakpoint amount, and it may be backdated up to 90 days to capture a recent purchase. If the customer does not complete it, the fund simply liquidates enough of the escrowed shares to collect the higher sales charge — there is no lawsuit, and breakpoints apply only within the same fund family.

    Source: FINRA Rule 2341; FINRA Breakpoints guidance (13-month LOI, 90-day backdating)Report a problem with this question

35. 35. A fund reduces its sales charge on purchases of $50,000 or more. A representative recommends that a customer with $52,000 available invest $49,000. This practice is:

    • A.Permitted, because a customer is never required to invest all available funds
    • B.A prohibited breakpoint sale, because it denies the customer a reduced sales charge✓ Answer
    • C.Permitted if the customer signs a letter of intent afterward
    • D.Permitted as long as the breakpoint schedule appears in the prospectus

    FINRA Rule 2342 prohibits selling investment company shares in a dollar amount just below a breakpoint when the effect is a higher sales charge for the customer and higher compensation for the firm. The violation is judged by the recommendation itself, so neither prospectus disclosure nor a later LOI cures it — the correct action is to disclose the breakpoint and, if the customer wishes, use an LOI in advance.

    Source: FINRA Rule 2342 (Breakpoint Sales)Report a problem with this question

36. 36. Which statement about a 12b-1 fee is correct?

    • A.It is an annual asset-based fee for distribution and shareholder servicing that must be approved at least annually by the fund's board✓ Answer
    • B.It is imposed only when shares are redeemed within a stated number of years
    • C.It is paid by the investment adviser out of its own profits and does not affect the fund's expense ratio
    • D.It is a one-time charge deducted from the investor's initial purchase

    Rule 12b-1 under the Investment Company Act lets a fund pay distribution and shareholder-servicing costs out of fund assets under a written plan that the board must re-approve at least annually. Because it is charged against assets every year it is part of the expense ratio and reduces return; a fund generally may not describe itself as no-load if its 12b-1 charges exceed 0.25% of average net assets.

    Source: Investment Company Act of 1940 Rule 12b-1; FINRA Rule 2341(d)Report a problem with this question

37. 37. Which feature distinguishes an exchange-traded fund (ETF) from a traditional open-end mutual fund?

    • A.The ETF trades throughout the day at a market price that may differ from its NAV✓ Answer
    • B.The ETF may not be sold short or bought on margin
    • C.The ETF is prohibited from tracking an index
    • D.The ETF must be bought directly from the sponsor at the next computed NAV

    An ETF is a registered investment company whose shares trade intraday on an exchange, so an investor pays a market price plus commission or spread rather than a forward-priced NAV; that price can sit at a small premium or discount to NAV, kept close by authorized participants' in-kind creation and redemption. ETFs can also be margined and sold short, and most are index-tracking, though actively managed ETFs exist.

    Source: FINRA SIE Content Outline 2.1.9 (Exchange-traded products)Report a problem with this question

38. 38. Which risk exists in an exchange-traded note (ETN) but not in an exchange-traded fund that holds a portfolio of securities?

    • A.Market risk from movements in the reference index
    • B.The credit risk of the issuing bank, because the ETN is an unsecured debt obligation✓ Answer
    • C.Currency risk on foreign-denominated holdings
    • D.Liquidity risk if trading volume declines

    An ETN is an unsecured, unsubordinated debt obligation of an issuing bank that promises the return of an index; the holder owns no underlying portfolio and no collateral and is simply a general creditor, so if the issuer's credit deteriorates or it defaults the investor can lose money even if the index performs well. An ETF, by contrast, holds the securities themselves in a registered fund.

    Source: FINRA SIE Content Outline 2.1.9; SEC Investor Bulletin on Exchange-Traded NotesReport a problem with this question

39. 39. A customer wants to buy a 2x leveraged ETF and hold it for a year because he expects the underlying index to rise about 10% over that period. What should the representative explain?

    • A.Leveraged ETFs remove market risk because the loss is capped at the amount invested
    • B.Over one year the fund is designed to deliver approximately 20%
    • C.The fund resets its leverage daily, so results over periods longer than one day can differ substantially from twice the index return✓ Answer
    • D.The fund guarantees twice the index return if it is held for a full calendar year

    Leveraged and inverse ETPs are designed to deliver their stated multiple of the index for a single trading day and then reset, so compounding of daily returns causes the long-run result to drift from the stated multiple — in a volatile market a holder can lose money even when the index ends higher. That makes them generally unsuitable as buy-and-hold positions.

    Source: FINRA SIE Content Outline 2.1.9; FINRA Regulatory Notice 09-31 (non-traditional ETFs)Report a problem with this question

40. 40. Which statement correctly compares a fixed annuity with a variable annuity?

    • A.In a variable annuity the contract owner bears the investment risk of the separate account, while in a fixed annuity the insurance company bears the investment risk✓ Answer
    • B.In a fixed annuity the contract owner bears the investment risk of the insurer's general account
    • C.Both are securities that must be sold with a prospectus
    • D.Neither contract may impose a surrender charge

    A variable annuity's value depends on securities held in the insurer's separate account, so the contract owner bears investment risk; that is why the contract is a security registered under the Securities Act and the Investment Company Act and sold with a prospectus. A fixed annuity guarantees a stated rate from the general account — the insurer bears the investment risk — so it is an insurance product, not a security, though both types can carry surrender charges.

    Source: FINRA SIE Content Outline 2.1.4 (variable contracts); Investment Company Act of 1940 Sec. 2(a)(37)Report a problem with this question

41. 41. After a variable annuity contract is annuitized, which statement is correct?

    • A.Both the number of annuity units and the payment amount are fixed for life
    • B.The contract owner keeps buying accumulation units with each payment received
    • C.The number of annuity units varies each period while the payment stays level
    • D.The number of annuity units is fixed, and the payment varies with separate account performance relative to the assumed interest rate✓ Answer

    At annuitization the accumulation units are converted into a fixed number of annuity units, and that number never changes for the rest of the contract. Each payment equals that fixed number multiplied by the current annuity unit value, so the payment rises when separate account performance exceeds the assumed interest rate (AIR) and falls when it lags — the reverse of what most candidates guess.

    Source: FINRA SIE Content Outline 2.1.4; FINRA Rule 2330 (deferred variable annuities)Report a problem with this question

42. 42. A customer withdraws $10,000 from a non-qualified variable annuity whose value has grown to $80,000 on $50,000 of contributions. How is the withdrawal generally taxed?

    • A.The entire $10,000 is a tax-free return of principal
    • B.The entire $10,000 is treated as earnings and taxed as ordinary income, because earnings come out first✓ Answer
    • C.Only $6,250 is taxable, prorated between principal and earnings
    • D.The entire $10,000 is taxed as long-term capital gain

    Contributions to a non-qualified annuity are made with after-tax dollars, so the $50,000 basis is never taxed again; withdrawals, however, follow LIFO ordering — the $30,000 of earnings comes out first and is taxed as ordinary income, not capital gain. A 10% penalty on the taxable portion also applies before age 59½. Tax-deferred is not the same as tax-qualified.

    Source: IRC Sec. 72(e) (LIFO ordering, non-qualified annuities); FINRA SIE Content Outline 2.1.4Report a problem with this question

43. 43. An investor pays a premium of $3 for one XYZ 40 call. What is the investor's maximum possible loss?

    • A.$3,700
    • B.$300, the premium paid✓ Answer
    • C.$4,000
    • D.Unlimited

    The buyer of an option acquires a right, not an obligation, and pays for it up front, so the most that can be lost is the premium — $3 × 100 shares per contract = $300. If the stock never rises above the $40 strike the investor simply lets the contract expire worthless; unlimited loss belongs to the uncovered call writer, not the buyer.

    Source: FINRA SIE Content Outline 2.1.3 (Options); OCC equity option specificationsReport a problem with this question

44. 44. Which position exposes an investor to theoretically unlimited loss?

    • A.Writing an uncovered (naked) call✓ Answer
    • B.Buying a call
    • C.Buying a put
    • D.Writing a covered call

    An uncovered call writer is obligated to deliver stock he does not own, and because a stock's price has no theoretical ceiling the cost of buying it in to satisfy assignment is unlimited while the gain is capped at the premium received. Both long positions risk only the premium paid, and a covered writer already owns the shares needed for delivery.

    Source: FINRA SIE Content Outline 2.1.3; FINRA Rule 2360 / Options Disclosure DocumentReport a problem with this question

45. 45. An investor buys one ABC 50 call for a premium of $4. At expiration ABC trades at $52 and the investor exercises. Which statement is correct?

    • A.The option is in the money but the investor still has a net loss of $200, because breakeven is $54✓ Answer
    • B.The option is at the money and the investor breaks even
    • C.The option is out of the money and expires worthless
    • D.The option is in the money and the investor has a net profit of $200

    Moneyness ignores the premium: a call is in the money whenever the market price exceeds the strike, so at $52 versus a $50 strike the contract has $2 ($200) of intrinsic value and is worth exercising. Profitability, however, uses breakeven = strike + premium = $54, so recovering $200 of intrinsic value against a $400 premium leaves a $200 net loss — an in-the-money option can still be a losing trade.

    Source: FINRA SIE Content Outline 2.1.3 (moneyness; call breakeven = strike + premium)Report a problem with this question

46. 46. A customer owns 500 shares of a stock with a large unrealized gain, fears a decline over the next few months, and does not want to sell the shares. Which options strategy most directly hedges that risk?

    • A.Writing puts on the stock
    • B.Writing uncovered calls on the stock
    • C.Buying calls on the stock
    • D.Buying puts on the stock✓ Answer

    Buying puts against a long stock position is the protective put — it gives the owner the right to sell at the strike no matter how far the stock falls, so the strike acts as a floor and the cost is limited to the premium, while all remaining upside is retained. Writing calls only cushions the decline by the premium received, and writing puts or buying calls adds downside or bullish exposure instead of hedging it.

    Source: FINRA SIE Content Outline 2.1.3 (hedging vs. speculation)Report a problem with this question

47. 47. How is income taxed in a direct participation program organized as a limited partnership?

    • A.All distributions are taxed to investors as qualified dividends
    • B.Income, gains, losses and deductions flow through to the investors and the partnership pays no federal income tax✓ Answer
    • C.The partnership pays tax on its income and investors pay tax again on distributions
    • D.Only income flows through to investors; losses stay at the partnership level

    A DPP is a flow-through (conduit) entity: income, gains, losses, deductions and credits pass directly to the limited partners on Schedule K-1 and are reported on their own returns, so there is no entity-level tax and no double taxation. Note that passive losses may generally only offset passive income, and tax benefits alone never justify an economically unsound program.

    Source: FINRA SIE Content Outline 2.1.6 (DPPs); IRC Subchapter KReport a problem with this question

48. 48. In a limited partnership, which statement about a limited partner is correct?

    • A.The limited partner may sell the interest on an exchange at any time at a quoted market price
    • B.The limited partner is paid ahead of secured lenders when the program is liquidated
    • C.The limited partner runs day-to-day operations and has unlimited liability
    • D.The limited partner's liability is generally limited to the amount invested plus any recourse debt, as long as the partner does not take part in management✓ Answer

    The general partner manages the program and has unlimited liability, while limited partners are passive investors whose liability is capped at their investment plus any recourse debt — a limited partner who participates in management can forfeit that protection. DPP interests are also unlisted and illiquid, and in liquidation limited partners rank behind secured lenders and general creditors.

    Source: FINRA SIE Content Outline 2.1.6; FINRA Rule 2310 (DPP suitability)Report a problem with this question

49. 49. To avoid taxation at the entity level under the conduit rules, a REIT must:

    • A.Distribute 100% of its taxable income every quarter
    • B.Distribute at least 90% of its taxable income to shareholders✓ Answer
    • C.Invest at least 90% of its assets in mortgage loans
    • D.Register as an investment company under the Investment Company Act of 1940

    Under the REIT provisions of the Internal Revenue Code a trust that distributes at least 90% of its taxable income to shareholders is taxed only on what it retains, so the distributed income escapes double taxation and is taxed once in the shareholders' hands — generally as ordinary income rather than as qualified dividends. A REIT is not an investment company under the 1940 Act.

    Source: IRC Sec. 856-858 (REIT distribution requirement); FINRA SIE Content Outline 2.1.7Report a problem with this question

50. 50. How does a REIT differ from a real estate direct participation program?

    • A.A REIT passes through both income and losses, while a DPP passes through neither
    • B.A REIT passes through income to shareholders but not losses, while a DPP passes through both income and losses✓ Answer
    • C.REIT dividends are always qualified dividends, while DPP income is entirely tax-free
    • D.Both pass operating losses through to investors

    Both structures avoid entity-level tax on distributed amounts, but only the partnership form of a DPP passes losses through to investors; a REIT's conduit treatment covers income alone, so shareholders cannot deduct the trust's operating losses. This is the single most commonly confused distinction between the two products.

    Source: FINRA SIE Content Outline 2.1.6 and 2.1.7Report a problem with this question

51. 51. Which statement is characteristic of a hedge fund?

    • A.It is prohibited from using derivatives or holding concentrated positions
    • B.It is registered under the Investment Company Act of 1940 and offered by prospectus
    • C.It offers daily redemption at NAV in the same way an open-end fund does
    • D.It is typically sold in a private offering to accredited investors, may use leverage and short selling, and often imposes lock-up periods✓ Answer

    Hedge funds are usually limited partnerships or LLCs sold through private placements under Regulation D to accredited investors and qualified purchasers, so they are neither registered under the Securities Act nor regulated as investment companies. That exemption is what lets them use leverage, short selling, derivatives and concentrated positions, and it comes with high minimums, limited transparency and illiquidity through lock-ups and redemption gates.

    Source: FINRA SIE Content Outline 2.1.8; SEC Regulation D and Rule 501(a)Report a problem with this question

52. 52. An investor holds 40 different stocks spread across many unrelated industries. Which risk is essentially unaffected by that diversification?

    • A.Business risk of a single issuer
    • B.Concentration risk
    • C.Market (systematic) risk✓ Answer
    • D.Industry-specific (non-systematic) risk

    Diversification works by spreading exposure across issuers and industries, which neutralizes non-systematic risks such as a single company's failure or an industry downturn. Market risk affects the entire market at once, so no amount of stock diversification removes it; investors mitigate systematic risk by hedging with options or short positions, or by shifting asset allocation.

    Source: FINRA SIE Content Outline 2.2 (systematic vs. non-systematic risk; diversification)Report a problem with this question

53. 53. Beta is used to measure a security's:

    • A.Sensitivity to movements of the overall market, that is, its systematic risk✓ Answer
    • B.Trading volume relative to shares outstanding
    • C.Sensitivity to changes in foreign exchange rates
    • D.Likelihood that its issuer will default on an obligation

    Beta compares a security's price movement with that of the overall market: a beta above 1.0 means the security has historically moved more than the market and a beta below 1.0 means less, so it is a measure of systematic (market) risk. Default likelihood is captured by credit ratings, not beta.

    Source: FINRA SIE Content Outline 2.2 (market/systematic risk)Report a problem with this question

54. 54. A retiree's entire income comes from a fixed annuity that pays a level monthly amount for life. Which risk is greatest for this retiree?

    • A.Currency risk
    • B.Inflationary (purchasing power) risk✓ Answer
    • C.Prepayment risk
    • D.Market risk of the separate account

    Purchasing-power risk is greatest where payments are fixed and long-dated, because a level monthly check buys less each year as prices rise. A fixed annuity is funded from the insurer's general account, so there is no separate account market risk, no mortgage prepayments and no foreign currency exposure to worry about.

    Source: FINRA SIE Content Outline 2.2 (inflationary/purchasing power risk)Report a problem with this question

55. 55. A customer places a large portion of her savings in a non-traded REIT and in a hedge fund with a two-year lock-up. Which risk should the representative emphasize?

    • A.Liquidity (marketability) risk✓ Answer
    • B.Prepayment risk
    • C.Reinvestment risk
    • D.Political risk

    Liquidity risk is the inability to convert an investment to cash quickly at a fair price, and both products are built that way: the non-traded REIT has no exchange listing and only limited repurchase programs, while the hedge fund contractually bars redemption during the lock-up. Concentrating a large share of savings in such positions makes the suitability problem worse.

    Source: FINRA SIE Content Outline 2.2 (liquidity risk); 2.1.7 and 2.1.8Report a problem with this question

56. 56. Interest rates fall sharply and homeowners refinance their mortgages. For an investor in mortgage-backed securities, this illustrates:

    • A.Political risk, because of a change in government policy
    • B.Credit risk, because the homeowners have defaulted
    • C.Prepayment risk, because principal is returned early and must be reinvested at lower rates✓ Answer
    • D.Extension risk, because the average life of the securities lengthens

    When rates fall, borrowers refinance and pay off their loans early, so the MBS holder receives principal back sooner than expected and must reinvest it in a lower-rate market — that is prepayment risk, and it also cuts short the higher-yielding income stream. Its mirror image is extension risk, which appears when rates rise, prepayments slow, and the average life lengthens.

    Source: FINRA SIE Content Outline 2.2 (prepayment and extension risk)Report a problem with this question

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