Progress Exam 01A

SIE Exam Practice

When issued, which security has a maturity of one year or less?

Money market instruments.

What are money market instruments?

Short-term debt instruments that mature in one year or less.

Are FNMA bonds money market instruments?

No, FNMA bonds are agency securities and are generally longer term.

What are FNMA bonds?

Federal National Mortgage Association agency securities, generally issued with longer maturities.

Are GNMA bonds money market instruments?

No, GNMA bonds are agency mortgage securities and are generally longer term.

What are GNMA bonds?

Government National Mortgage Association mortgage-backed securities, generally longer term.

Are Treasury notes money market instruments?

No, Treasury notes mature in 2 to 10 years.

What are Treasury notes?

U.S. government debt securities with maturities from 2 to 10 years.

How do you calculate outstanding shares?

Outstanding shares = issued shares - treasury stock.

If a company issued 100,000 shares and has 5,000 treasury shares, how many shares are outstanding?

95,000 shares.

What are authorized shares?

The maximum number of shares a corporation may issue under its charter.

What are issued shares?

Shares that a corporation has sold.

What is treasury stock?

Stock that was issued and later repurchased by the corporation.

Do treasury shares have voting rights or receive dividends?

No, treasury shares have no voting rights and receive no dividends.

Is 900,000 the number of outstanding shares if 1,000,000 shares are authorized and 100,000 are issued?

No, 900,000 is just unused authorized capacity, not outstanding shares.

Why is 105,000 not the number of outstanding shares if 100,000 shares are issued and 5,000 are treasury?

Because treasury stock is subtracted, not added.

Why is 100,000 not the number of outstanding shares if the company has 5,000 treasury shares?

Because 100,000 is issued shares, and treasury shares must be subtracted.

Who helps administer securities dispute arbitration?

FINRA helps administer the process.

Who determines the outcome of securities arbitration?

The arbitrators determine the outcome.

Does the SEC administer dispute arbitration?

No, FINRA administers the arbitration forum.

Does FINRA determine the outcome of arbitration?

No, arbitrators determine the outcome.

What is the SEC’s role compared with FINRA in arbitration questions on the SIE?

The SEC does not administer or determine the outcome of the arbitration process; FINRA administers the process.

What is the OTC Markets Group?

A quotation system for securities not listed on the NYSE or Nasdaq.

Is the OTC Markets Group an exchange?

No, it is a quotation system, not an exchange.

Is the OTC Markets Group an execution system?

No, it provides quotations rather than functioning as the exchange execution venue.

What type of securities are quoted on the OTC Markets Group?

Securities that are not listed on the NYSE or Nasdaq, including those that do not qualify for listing or have been delisted.

What is the third market?

Exchange-listed securities traded over the counter.

Is the OTC Markets Group the same thing as the third market?

No, the third market refers to listed securities trading OTC, while OTC Markets Group is a quotation system for unlisted securities.

During periods of rising interest rates, what generally happens to bond prices?

Bond prices fall.

During periods of rising interest rates, what generally happens to bond yields?

Bond yields rise.

Which bond prices fall more when interest rates rise, long-term or short-term?

Long-term bond prices fall more than short-term bond prices.

Why are long-term bonds more affected by rising interest rates?

Because they are exposed to interest-rate risk for a longer period.

Does the nominal rate on outstanding bonds fall when interest rates rise?

No, the nominal rate or coupon rate is fixed.

Do short-term bond yields fall more than long-term bond yields during rising rates?

No, rising rates generally cause yields to rise, not fall.

Do short-term bond prices fall more than long-term bond prices during rising rates?

No, long-term bond prices fall more than short-term bond prices.

How does interest accrue on Treasury notes and Treasury bonds?

By using the actual number of days in the month and a 365-day year.

What is the settlement cycle for Treasury notes and Treasury bonds?

T+1.

Do Treasury notes use 30 days per month and a 360-day year?

No, that convention is used for corporates and municipals, not Treasuries.

Do Treasury notes settle T+2?

No, Treasuries settle T+1.

What day-count convention is used for corporate and municipal bonds?

30-day month and 360-day year.

What day-count convention is used for Treasury notes and Treasury bonds?

Actual days in the month and a 365-day year.

Which of the following does the MSRB not regulate: municipal issuers, municipal salespersons, municipal advertising, or municipal dealers?

Municipal issuers.

What does the MSRB regulate?

Municipal securities broker-dealers, their personnel, and communications with the public.

Does the MSRB regulate municipal salespersons?

Yes.

Does the MSRB regulate municipal advertising and communications?

Yes.

Does the MSRB regulate municipal dealers?

Yes.

Why does the MSRB not regulate municipal issuers?

Because the MSRB writes rules for market participants in the municipal securities business, not for the governmental entities issuing the bonds.

Which security helps finance importing and exporting operations?

Bankers' acceptances.

What is a banker's acceptance?

A short-term bank-backed instrument used to finance foreign trade.

Are Treasury bills used to finance importing and exporting?

No, Treasury bills are short-term U.S. government debt instruments.

What are Eurodollar CDs?

Dollar-denominated certificates of deposit at foreign banks or foreign branches of U.S. banks.

Are Eurodollar CDs used to finance import/export operations?

No.

What are ADRs?

American Depositary Receipts that facilitate trading foreign securities in U.S. markets.

Do ADRs finance importing and exporting operations?

No, they facilitate trading foreign securities in U.S. markets.

What type of municipal bond permits the issuer to raise property taxes?

A general obligation bond.

What is a general obligation bond?

A municipal bond backed by the full faith and credit and taxing power of the issuer.

What is a revenue bond?

A municipal bond repaid from revenues of a specific project or facility.

Is a sewer bond usually a GO bond?

No, it is typically a revenue or special assessment type bond tied to a project or benefited properties.

What is an agency bond in this context?

It is not the municipal bond category being tested as one backed by property taxes.

What is the main difference between a GO bond and a revenue bond?

A GO bond is backed by taxes and general revenues, while a revenue bond is backed by project income.

When a bond is called, what does the bondholder receive?

The call price plus accrued interest.

What is the call price?

The price the issuer pays to redeem a bond early, either at par or at a premium.

What is accrued interest?

Interest earned since the last coupon payment up to the settlement or call date.

Does a called bondholder receive just the call price?

No, the holder receives the call price plus accrued interest.

Does a called bondholder receive market price?

No, the bond is redeemed at the call price, not market price.

Does a called bondholder receive market price plus accrued interest?

No, they receive the call price plus accrued interest.

What is a common shareholder not entitled to do?

Appoint officers of the corporation.

What can common shareholders vote for?

The board of directors.

Can common shareholders receive dividends?

Yes, if dividends are declared by the board.

Can common shareholders sell or transfer their shares?

Yes, generally they may transfer their shares.

Who appoints officers of a corporation?

The board of directors appoints officers.

What is the difference between shareholders and officers?

Shareholders are owners, while officers are managers appointed to run day-to-day operations.

When warrants are issued, is the exercise price usually lower than, equal to, or higher than the current market price?

Higher than the current market price.

What is a warrant?

A long-term security that gives the holder the right to buy stock at a stated exercise price.

How are warrants usually priced relative to the current market price of the stock?

At a premium, meaning above the current market price.

Are warrants typically issued with an exercise price below the current market price?

No, that is more typical of rights.

Are warrants typically issued at exactly the current market price?

No, the usual exam answer is above market price.

Is a warrant exercise price based on the average stock price over the last year?

No.

Which of the following does not issue securities: GNMA, FRB, FHLB, or FFCB?

FRB.

What is the FRB?

The Federal Reserve Board, which regulates monetary policy and buys and sells securities but does not issue them.

Does GNMA issue or guarantee securities?

Yes.

Does FHLB issue securities?

Yes.

Does FFCB issue securities?

Yes.

What is the key distinction about the FRB on the SIE?

It conducts monetary policy and open market operations but does not issue investment securities.

Where can a bondholder find the details regarding the terms and features of a bond?

In the indenture.

What is a bond indenture?

The bond contract stating terms, features, covenants, and obligations.

What is a Notice of Sale?

A document announcing a new municipal bond offering to prospective underwriters.