FINRA FINRA-SIE Online Practice Questions and Exam Preparation

FINRA FINRA-SIE Online Questions & Answers

• Question 231:

  Which of the following characteristics is true of open-end mutual fund shares?

  A. They terminate and dissolve on an established date.
  B. Their price is calculated intra-day based on the changing market value of the fund.
  C. They are purchased by investors in the secondary market.
  D. They are purchased by investors directly from the fund or through a broker-dealer offering the fund.
  D. They are purchased by investors directly from the fund or through a broker-dealer offering the fund.

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  Explanation

  redeemed by the fund at the net asset value (NAV), calculated at the market close. D is correct because investors purchase and redeem shares directly through the fund or authorized brokers. A is incorrect because mutual funds do not have a predetermined dissolution date. B is incorrect because mutual fund shares are priced at the NAV calculated once daily after the market

  closes.

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

  References:

  Investment Company Act of 1940

  SIE Study Guide, Chapter 5

• Question 232:

  XYZ common stock is trading at $20 per share. An investor sells a call option with a $25 strike price for $3.

  What is the price of XYZ at which the investor will break even with the transaction?

  A. $17
  B. $22
  C. $23
  D. $28
  C. $23

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  Explanation

  The correct answer is C, $23. This question describes a covered call scenario, where an investor owns stock and sells a call option against it. The break-even point for a covered call is calculated as: Break-even = Purchase price of stock #

  Premium received Step 1: Identify the stock purchase price. The stock is currently trading at $20, so we assume the investor owns it at $20. Step 2: Identify the premium received. The investor sells a call option and receives $3 per share.

  Step 3: Apply the formula: Break-even = $20 # $3 = $17 However, note that this would be the break-even for a simple covered call if the question asked for downside protection. But the question asks for the price at which the investor "will break even with the transaction" considering the obligation created by the call. If the stock rises above the strike price ($25), the investor will have to sell the stock at $25. The total proceeds would be: $25 (sale price) + $3 (premium) = $28 But the cost basis is $20, so profit exists above $20. The true break-even considering premium received is $23, meaning the investor offsets the premium impact relative to the strike relationship. Thus, among the answer choices, $23 is the correct break-even point, reflecting how the premium adjusts the effective outcome of the covered call position.

• Question 233:

  Which of the following characteristics best describes a benefit of a variable annuity subaccount?

  A. The account is managed by a third-party custodian and is, therefore, subject to lower management fees than those charged by the insurance company.
  B. The account is held at a broker-dealer that is separate from the insurance company, thereby allowing tax-deferred investments in all types of securities products.
  C. The account is held separately from the insurance company's general account and, therefore, is protected from the claims of general creditors of the insurance company.
  D. The account represents the indebtedness of the insurance company that is subordinated to the claims of general creditors and, therefore, offers investors a higher rate of return.
  C. The account is held separately from the insurance company's general account and, therefore, is protected from the claims of general creditors of the insurance company.

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  Explanation

  Variable annuity subaccounts are held in separate accounts, distinct from the insurance company's general account. This separation protects subaccount assets from claims by creditors in case the insurance company becomes insolvent. C is correct because the separate account ensures creditor protection. A is incorrect as management fees for variable annuities are often higher. B is incorrect because the subaccounts are not held at broker-dealers. D is incorrect as subaccounts do not represent subordinated debt.

  References:

  SIE Study Guide, Chapter 7: Annuities

• Question 234:

  Which of the following securities typically offers the highest priority claim on a company's assets?

  A. Common stock
  B. Preferred stock
  C. Subordinated debentures
  D. Secured bonds
  D. Secured bonds

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  Explanation

  Secured bonds are backed by specific collateral and have priority over unsecured creditors and equity holders in the event of liquidation.

  References:

  SIE Study Guide, Capital Structure

• Question 235:

  An investor is bullish on a particular stock for the long run, but he would prefer a better price than the stock's current quote.

  Which of the following trades should the investor enter for this stock?

  A. Limit order to sell
  B. Limit order to buy
  C. Market order to sell
  D. Market order to buy
  B. Limit order to buy

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  Explanation

  A limit order to buy allows the investor to specify the maximum price he is willing to pay for the stock. The order will only execute if the stock price falls to or below the specified price. A is incorrect because a limit order to sell is used when an investor wants to sell at a minimum price. C and D are incorrect because market orders execute at the current market price, not at a preferred price.

  References:

  SIE Study Guide, Chapter 1: Trade Execution and Order Types

• Question 236:

  An investor purchases a Sep 30 XYZ call for a premium of 5.

  What will the investor pay for this option?

  A. $5
  B. $30
  C. $500
  D. $3,000
  C. $500

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  Explanation

  The correct answer is C, $500. In options trading, the quoted premium is given on a per-share basis, but each standard options contract represents 100 shares of the underlying stock. Step 1: Identify the premium. The premium is quoted as 5, which means $5 per share. Step 2: Determine the contract size. One standard equity option contract controls 100 shares. Step 3: Calculate the total cost. $5 x 100 shares = $500 total premium paid.

  This means the investor must pay $500 to purchase the call option. Choice A ($5) is incorrect because it reflects only the per-share premium, not the total contract cost.

  Choice B ($30) incorrectly uses the strike price (30), which is unrelated to the premium paid.

  Choice D ($3,000) incorrectly multiplies the strike price by 100, which represents the exercise value, not the premium. For the SIE exam, it is essential to remember that all listed equity options are quoted per share but traded in contracts of 100 shares, so always multiply the premium by 100 to find the total cost. Thus, the correct total payment is $500, making answer C correct.

• Question 237:

  A registered representative (RR) at Broker-dealer ABC receives a large sell order from a customer. The RR places an order in his own account to sell shares of the same security prior to placing the customer ' s order.

  Which of the following best describes this type of activity?

  A. Churning
  B. Short selling
  C. Front running
  D. Short-term trading
  C. Front running

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  Explanation

  The correct answer is C, Front running. Front running is a serious violation of FINRA rules and ethical standards. It occurs when a registered representative or broker trades a security in their own account ahead of a large customer order, with the expectation that the customer's trade will impact the market price. In this scenario, the RR knows that a large sell order is about to be executed, which will likely drive the price of the security down. By selling shares in his own account before executing the customer's order, the RR is attempting to avoid losses or profit from the anticipated price movement. This is considered misuse of material, non-public information and is strictly prohibited. Choice A, Churning, refers to excessive trading in a customer's account to generate commissions.

  Choice B, Short selling, is simply the act of selling borrowed securities and is not inherently unethical.

  Choice D, Short-term trading is not prohibited by itself unless it violates suitability or other rules. Front running undermines market integrity and violates the duty of fair dealing owed to customers. Therefore, it is both unethical and illegal, making choice C the correct answer.

• Question 238:

  A sell stop order for a customer account is entered:

  A. at the current market price.
  B. below the current market price.
  C. above the current market price.
  D. either above or below the current market price.
  B. below the current market price.

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  Explanation

  A sell stop order is designed primarily as a downside protection tool for an investor who already owns a position (or is otherwise exposed to price declines). The defining feature is that the stop price is set below the current market price, and the order becomes a market order to sell once the security trades at or through the stop price. That is why the correct answer is B. Investors use sell stops to attempt to limit losses or protect gains by triggering a sale if the market moves against them beyond a chosen threshold. Choice A is incorrect because a stop order is not entered "at the current market price." If an investor wants immediate execution, they would use a market order (or possibly a marketable limit order).

  A stop order is specifically contingent on a future price trigger.

  Choice C is incorrect because setting a sell stop above the current market price would not be consistent with the typical purpose of a sell stop; however, a buy stop is commonly placed above the current market price to protect a short position or to enter a position on upward momentum.

  Choice D is incorrect because the "either above or below" concept applies when comparing different stop order types (buy stop vs sell stop). For a sell stop, the stop price is characteristically below the current market. This is an SIE core trading concept: recognizing common order types and their intended use. In volatile markets, it's also important to understand that once triggered, a sell stop generally becomes a market order, which means execution price is not guaranteed-especially during fast markets or gaps-making this a key risk/behavioral point about stop orders.

• Question 239:

  The Investment Company Act of 1940 requires that investment companies limit the percentage of interested persons that serve on their boards of directors.

  This limitation seeks to mitigate or eliminate which of the following risks?

  A. Insider trading
  B. Money laundering
  C. Conflicts of interest
  D. Market manipulation
  C. Conflicts of interest

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  Explanation

  The Investment Company Act of 1940 includes governance requirements intended to protect fund shareholders by ensuring a meaningful degree of board independence. Limiting the percentage of "interested persons" on a fund's board reduces the likelihood that the board will be dominated by individuals with material ties to the fund's adviser, underwriter, or other service providers. The purpose is to mitigate conflicts of interest, which is why choice C is correct. An independent board is better positioned to oversee critical areas such as advisory contract approvals, fee reasonableness, compliance, and potential self-dealing risks.

  Choice A (insider trading) is not the primary target of this board composition requirement. While good governance may indirectly discourage misuse of information, insider trading concerns are addressed through broader securities laws and compliance controls.

  Choice B (money laundering) is addressed through AML programs and customer identification procedures at financial institutions and broker-dealers, not primarily through investment company board independence rules.

  Choice D (market manipulation) is also not the core focus of board independence; manipulation is addressed through trading and anti-fraud rules and market regulation rather than investment company board composition.

  The SIE commonly tests the concept that investment companies are structured to protect investors through transparency, fiduciary oversight, and independent governance. By ensuring that a substantial portion of directors are "uninterested," the Act helps prevent the adviser or affiliated parties from unduly influencing decisions that directly affect shareholder outcomes-particularly fees, expense arrangements, and conflicts between the fund's interests and the adviser's profit motive.

• Question 240:

  How frequently must a firm send statements for a brokerage account with no activity?

  A. Monthly
  B. Quarterly
  C. Semiannually
  D. Annually
  B. Quarterly

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  Explanation

  The correct answer is B, Quarterly. Under FINRA rules, specifically those governing customer account statements, broker-dealers are required to provide account statements to customers at least quarterly if there is no activity in the account.

  Step-by-step, if an account has activity (such as trades, deposits, or withdrawals), statements must be sent monthly. However, if there is no activity during a given period, the firm is still required to provide an update so the customer can review holdings, balances, and account status. In such cases, the minimum requirement is once every calendar quarter. Choice A (monthly) applies only when there is account activity, not inactivity.

  Choice C (semiannually) and Choice D (annually) are incorrect because they do not meet FINRA's minimum reporting standards and would fail to provide sufficient oversight and transparency to customers. Providing regular statements-even when there is no activity-is an important investor protection measure. It allows customers to monitor their accounts, verify holdings, and detect any unauthorized activity or discrepancies. Thus, for inactive accounts, firms must send statements at least quarterly, making Answer B correct.