Free FINRA SIE (Securities Industry Essentials) Understanding Products and Their Risks Practice Questions
Understanding products and their risks on the FINRA SIE exam covers equities, fixed income, mutual funds, variable annuities, options, and alternative investments, along with systematic and unsystematic risk, liquidity risk, and credit risk.
Sample Questions
Question 1
Easy
U.S. Treasury bills are BEST characterized as:
Solution
D is correct. Treasury bills (T-bills) are short-term obligations of the U.S. government with maturities of 4, 8, 13, 17, 26, or 52 weeks. They pay no periodic coupon interest; instead, they are auctioned at a discount to their $100 face value and redeemed at par, with the difference representing the investor's interest income. This makes them a pure zero-coupon money-market instrument backed by the full faith and credit of the U.S. government.
Question 2
Medium
A zero-coupon corporate bond is best described as a bond that:
Solution
Choice D is correct because zero-coupon bonds are issued at a significant discount from their face (par) value and make no periodic coupon (interest) payments. The investor's return comes entirely from the difference between the discounted purchase price and the full face value received at maturity. The imputed interest is taxed annually (phantom income) even though no cash is received until maturity.
Question 3
Hard
An investor exercises a long call on the S&P 500 index when the index is at 4,850 and the strike price is 4,800. How is the settlement handled?
Solution
Choice A is correct because index options are cash-settled, not physically settled. There is no delivery of stock when an index option is exercised. Instead, the in-the-money amount is paid in cash. For a standard S&P 500 index option with a multiplier of $100 per point, the cash settlement would be (4,850 - 4,800) x $100 = $5,000 paid to the call holder. Physical delivery of an index is not possible because an index is not a tradeable security itself.