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SIE products and risks practice test

Free SIE exam questions for the largest outline section, Understanding Products and Their Risks (44% of the scored items): stocks, bonds, munis, options, packaged products and investment risks.

Tap an answer to check it, or open "Show the answer and rationale" under each question. Customers in the questions are fictional. Exam practice only, not investment advice.

Question 1 of 20

How much federal income tax does a limited partnership itself pay on its profits?

  1. None; its income flows through to partners
  2. The full corporate rate on all its profits
  3. A flat 10% on profits it distributes
  4. Tax only on the income it keeps invested
Show the answer and rationale

Answer: A

A partnership is a pass-through: partners report their shares and pay any tax. It pays no corporate rate, no flat distribution tax and no tax on retained income at the entity level.

📚 Learn it: Limited Partnerships: The Tax Pipe

Question 2 of 20

How are most REIT dividends taxed to shareholders?

  1. Always as long-term gains
  2. Generally as ordinary income
  3. As tax-free returns of capital
  4. Only when shares are later sold
Show the answer and rationale

Answer: B

Because the REIT itself avoids corporate tax on distributed income, most REIT dividends are generally taxed as ordinary income rather than at qualified dividend rates. They are not automatically capital gains, tax-free or deferred.

📚 Learn it: REITs: Owning Buildings Through a Share

Question 3 of 20

A 3(c)(7) fund may sell only to qualified purchasers. For an individual, this generally means owning at least how much in investments?

  1. $5 million
  2. $200,000
  3. $1 million
  4. $2.5 million
Show the answer and rationale

Answer: A

Under the '40 Act, an individual qualified purchaser generally owns at least $5 million in investments. $1 million net worth is an accredited investor test, $200,000 is the individual income test, and $2.5 million is not a threshold here.

📚 Learn it: Hedge Funds and Private Equity: Locked Doors

Question 4 of 20

A private fund relies on Section 3(c)(1) of the Investment Company Act. What is the key limit on its investors?

  1. Only investors with $5 million or more
  2. Only investors living in one state
  3. No investors over the age of 70
  4. No more than 100 beneficial owners
Show the answer and rationale

Answer: D

3(c)(1) excludes a privately offered fund with 100 or fewer beneficial owners. The $5 million investments test relates to qualified purchasers under 3(c)(7); residence and age limits are not part of either exclusion.

📚 Learn it: Structured Notes, ETNs and Volatility Products

Question 5 of 20

A Treasury note is quoted at 101-08, with the fraction in 32nds. What is the price per $1,000 of face value?

  1. $1,010.80
  2. $1,018.00
  3. $1,012.50
  4. $1,002.50
Show the answer and rationale

Answer: C

101-08 means 101 and 8/32, or 101.25 points, so the price is $1,012.50. Reading the 08 as a decimal gives the tempting $1,010.80.

📚 Learn it: Par, Coupon, Maturity: Reading a Bond

Question 6 of 20

For a bond bought at a discount, which yield is the lowest?

  1. Yield to maturity
  2. Current yield
  3. Nominal yield
  4. Yield to call
Show the answer and rationale

Answer: C

Discount order climbs: nominal < current < YTM < YTC. The nominal yield ignores the gain to par entirely, so it is lowest.

📚 Learn it: The Price–Yield Seesaw

Question 7 of 20

In a liquidation, which of these is paid last?

  1. Subordinated debenture holders
  2. Common stockholders
  3. Mortgage bondholders
  4. Debenture holders
Show the answer and rationale

Answer: B

Common stockholders are residual owners and get only what is left after every creditor and preferred holder. Subordinated debt is the lowest-ranking debt but still ahead of stock.

📚 Learn it: Who Gets Paid First: Corporate Bonds

Question 8 of 20

Treasury bonds are currently issued with terms of:

  1. 15 or 30 years
  2. 30 or 50 years
  3. 20 or 30 years
  4. 10 or 20 years
Show the answer and rationale

Answer: C

TreasuryDirect lists Treasury bonds as 20-year and 30-year securities paying interest every six months. Ten-year maturities are notes.

📚 Learn it: Bills, Notes, Bonds, TIPS and STRIPS

Question 9 of 20

Which of the following is wholly owned by the U.S. Department of Housing and Urban Development?

  1. Freddie Mac
  2. Federal Home Loan Banks
  3. Fannie Mae
  4. Ginnie Mae
Show the answer and rationale

Answer: D

Ginnie Mae is wholly owned by HUD. Fannie Mae, Freddie Mac and the Federal Home Loan Banks are government-sponsored enterprises.

📚 Learn it: Ginnie, Fannie, Freddie and the Mortgage Pool

Question 10 of 20

What feature distinguishes a negotiable CD from a standard bank CD?

  1. It is never covered by FDIC insurance
  2. It is issued by a corporation, not a bank
  3. It has no stated maturity date at all
  4. It can be sold to another investor
Show the answer and rationale

Answer: D

Negotiable CDs can be traded in the secondary market before maturity. They are bank obligations with a set maturity, and FDIC rules still apply up to the limit.

📚 Learn it: The Money Market: Short, Safe, Liquid

Practice 10 more understanding products and their risks questions free →

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Question 11 of 20

A bond's call protection period is the time during which:

  1. The issuer may not call the bond
  2. The investor may sell the bond back
  3. The bond trades flat without interest
  4. The rating cannot be lowered
Show the answer and rationale

Answer: A

Call protection is the stretch, usually the first several years, before the first call date when the issuer cannot redeem the bonds. A sell-back right is a put.

📚 Learn it: Who Holds the Option: Calls, Puts, Conversion

Question 12 of 20

The par value of a company's common stock is best described as:

  1. An accounting figure unrelated to market price
  2. The price at which the stock last traded on an exchange
  3. The amount the company must repay holders at maturity
  4. The basis used to calculate a fixed dividend
Show the answer and rationale

Answer: A

Common stock par value is an arbitrary accounting value set in the charter; it has no link to market price. Common stock has no maturity, and par as a dividend basis applies to preferred stock.

📚 Learn it: Common Stock: Owners Last in Line

Question 13 of 20

The dividend on adjustable-rate preferred stock is:

  1. Fixed for the life of the issue at issuance
  2. Set each quarter by a common shareholder vote
  3. Reset periodically based on a benchmark rate
  4. Paid only if the issuer's stock price rises
Show the answer and rationale

Answer: C

Adjustable-rate preferred resets its dividend periodically with a benchmark interest rate, which keeps its price closer to par. A fixed rate describes straight preferred; shareholders do not vote on the rate, and stock price movements do not trigger the payment.

📚 Learn it: Preferred Stock: The Fixed-Dividend Hybrid

Question 14 of 20

Warrants issued with a company's bonds are described as detachable. What does detachable mean?

  1. They must be exercised on the issue date
  2. They expire as soon as the bonds are called
  3. They can trade separately from the bonds
  4. They convert the bonds into preferred stock
Show the answer and rationale

Answer: C

Detachable warrants can be separated from the bonds they came with and sold on their own, so each piece trades at its own price. They are not tied to a call, do not convert bonds into preferred, and are long-term rather than exercisable only at issue.

📚 Learn it: Rights vs Warrants: Short and Cheap, Long and Pricey

Question 15 of 20

The depositary bank's custody fee on an ADR is usually:

  1. Charged only when the ADR is first issued
  2. Deducted from the dividends paid to holders
  3. Added to the stock's exchange listing fee
  4. Paid by the SEC from registration fees
Show the answer and rationale

Answer: B

The SEC notes the custody (depositary services) fee is typically taken out of gross dividends before they reach holders. Regulators do not pay it, and it recurs rather than being charged once.

📚 Learn it: ADRs: Foreign Stock in U.S. Dollars

Question 16 of 20

To receive qualified-dividend treatment on common stock, an investor generally must hold the shares:

  1. More than 60 days in the 121-day period around the ex-date
  2. Until the dividend's payable date, however brief the holding
  3. At least 30 days after the declaration date
  4. At least one full year before the dividend's record date is set
Show the answer and rationale

Answer: A

IRS rules require holding the stock more than 60 days (at least 61) during the 121-day period that begins 60 days before the ex-dividend date. The other periods are not the test.

📚 Learn it: How Stock Pays: Dividends, Gains and Yield

Question 17 of 20

A face-amount certificate company is best described as one that:

  1. Tracks a market index with a fixed portfolio
  2. Pays a stated sum at maturity for payments
  3. Sells exchange-listed shares at a premium
  4. Invests only in short-term government debt
Show the answer and rationale

Answer: B

A face-amount certificate company issues certificates that promise a fixed face amount at maturity in exchange for a lump sum or installment payments; very few exist today. The other choices describe closed-end funds, money market funds and index-like UITs.

📚 Learn it: Open, Closed or Fixed: The 1940 Act Family

Question 18 of 20

What is the main purpose of forward pricing for mutual funds?

  1. To guarantee a stable $1.00 share price
  2. To allow funds to set prices above NAV
  3. To stop trading on prices that are already known
  4. To let investors lock in the prior day's closing NAV price
Show the answer and rationale

Answer: C

Forward pricing keeps investors from buying or selling at a stale, already-known price and so profiting at other shareholders' expense. Locking in yesterday's price is exactly what it forbids; a $1.00 price relates to money market funds, and loads, not pricing rules, put POP above NAV.

📚 Learn it: NAV, POP and the Next Price Rule

Question 19 of 20

An investor signs a letter of intent for $50,000 but invests only $35,000 before it expires. What usually happens?

  1. The fund refunds all sales charges paid
  2. The higher sales charge is collected, often from escrowed shares
  3. The investor keeps the discount with no consequence
  4. The investor must buy the remaining $15,000 at once
Show the answer and rationale

Answer: B

An LOI is not a binding promise to buy. If the target isn't met, the fund applies the sales charge the investor actually qualified for, often by redeeming shares it held in escrow. There's no forced purchase, no refund, and no free discount.

📚 Learn it: A, B, C Shares and the Breakpoint Rules

Question 20 of 20

A growth fund's main objective is:

  1. Preservation of a $1.00 NAV
  2. Tax-free interest income
  3. Steady current income
  4. Capital appreciation
Show the answer and rationale

Answer: D

Growth funds aim to increase the value of the investment over time, usually through stocks of companies expected to grow. Current income describes income funds, a stable $1.00 NAV describes money market funds, and tax-free interest describes municipal bond funds.

📚 Learn it: Fund Flavors, Fees and the Prospectus

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