SIE Knowledge of Capital Markets Practice Questions
Knowledge of Capital Markets makes up 8 of every 50 questions on a Tigertest SIE practice test. Here are 10 of the 32 questions on it, each with the answer and the reason.
Updated by the Tigertest team. Based on FINRA's Securities Industry Essentials content outline. Original questions; 50 per test, weighted like the real 75-question exam, 70% to pass.
1. Which law governs the registration of new securities offered to the public?
- A.Trust Indenture Act of 1939
- B.Securities Act of 1933
- C.Securities Exchange Act of 1934
- D.Investment Company Act of 1940
Answer: B. The 1933 Act covers new issues in the primary market and requires registration and a prospectus. The 1934 Act regulates the secondary market and created the SEC.
2. Which law created the Securities and Exchange Commission?
- A.Investment Advisers Act of 1940
- B.Glass-Steagall Act of 1933
- C.Securities Act of 1933
- D.Securities Exchange Act of 1934
Answer: D. The Securities Exchange Act of 1934 created the SEC and regulates trading in the secondary market, broker-dealers and exchanges.
3. In which market does an issuer receive the money from the sale of its securities?
- A.The primary market
- B.The fourth market
- C.The secondary market
- D.The third market
Answer: A. Only primary market sales (IPOs and other new offerings) raise money for the issuer. Secondary market trades move existing shares between investors.
4. In a firm commitment underwriting, who bears the risk of unsold shares?
- A.The investors
- B.The SEC
- C.The underwriters
- D.The issuing company
Answer: C. In a firm commitment the underwriters buy the whole issue from the issuer and resell it, so they keep any shares they cannot sell. In a best efforts deal the issuer bears that risk.
5. In a best efforts underwriting, the underwriter acts as:
- A.A guarantor of the proceeds
- B.A transfer agent
- C.An agent for the issuer
- D.A principal buying the issue
Answer: C. A best efforts underwriter sells as much as it can as agent and returns the unsold securities to the issuer. It does not buy the issue.
6. What is the minimum length of the cooling-off period after a registration statement is filed?
- A.20 days
- B.30 days
- C.90 days
- D.10 days
Answer: A. Under the 1933 Act a registration statement normally becomes effective 20 days after filing unless the SEC accelerates or delays it. Firms may take indications of interest but may not sell during this period.
7. During the cooling-off period, a firm may give investors:
- A.A firm price commitment
- B.A final sales confirmation
- C.A signed purchase order
- D.A preliminary prospectus
Answer: D. The preliminary prospectus (red herring) may be distributed during the cooling-off period. It has no final price and no sales may be made until the registration is effective.
8. Why is a preliminary prospectus called a red herring?
- A.It lists risky distractions
- B.A red legend on its cover
- C.It omits the issuer's name
- D.It is printed on red paper
Answer: B. The cover carries a legend in red stating that the registration is not yet effective and the information may change.
9. Which security is exempt from registration under the Securities Act of 1933?
- A.Shares of a new mutual fund
- B.A U.S. Treasury bond
- C.Common stock in an IPO
- D.A corporate debenture
Answer: B. Government securities, municipal bonds, short-term commercial paper and bank securities are exempt securities. Corporate stock, corporate bonds and fund shares must be registered unless a transaction exemption applies.
10. Commercial paper is exempt from registration if its maturity is no more than:
- A.1 year
- B.2 years
- C.90 days
- D.270 days
Answer: D. Commercial paper with a maturity of 270 days or less is an exempt security under the 1933 Act.
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