SIE Exam Questions & Answers
2023/2024
purpose of securities industry - ANSWER-matching investors with money to issuers that need that money
to finance
issuer - ANSWER-legal entity that sells securities in order to finance its operations (business,
governments) ie. us treasury, us gov agencies, foreign governments, state and local governments, corps,
banks
methods issuers use to raise capital - ANSWER-1) issue debt securities (bonds) and 2) issues equity
securities (stocks)
debt securities - ANSWER-publically traded loans = bonds, notes, or debt instruments. The person
loaning money/buying a bond is considered a creditor to the issuer and the amount they paid for is the
principal that the issuer owes them and also makes interest payments throughout the duration of the
loan
-can be issued by banks, corps, etc
equity securities (common vs preferred) - ANSWER-raise capital by issuing stock (equity), this time when
you buy this, you have ownership in the company and if the company is profitable then you may be
entitled to a portion of the profits (this is received through dividend distribution). differs from bonds bc
1) typically no maturity date and 2) dividend payments are optional
-only banks/corporations sell these and can do so publically or privately to specific group of investors
preferred=paid a predetermined dividend (usually received first and higher than those of common
holders, but don't get a vote in company matters)
common=paid a dividend based on company fortunes
broker dealer = brokerage firm (2 capacities) - ANSWER-2 capacities
,1) broker= (ABC - agency, broker, commission)engages in agency transactions in security accounts of
others. they match up buys and sells and earn a commission for their work (like a real estate broker,
acting on behalf of customers to make commission). no risk to firm, they find party willing to take other
side of trade
2) dealer= (PDM - principal, dealer, markup/markdown) firms buying and selling securities for its own
accounts. buy securities from clients and hold them in inventory and allow clients to buy from them. like
a car dealer... buys for its inventory and sells from its inventory and can mark up and down accordingly.
acts as principal and can take other side of the trade, MARK UP OR MARK DOWN
-risk & Inventory
broker-dealer departments/structure of firms (5) - ANSWER-1) investment banking
2) research
3) sales/private client
4) trading
5) operations
broker dealer - Investment banking - ANSWER-referred to as underwriters of securities... they provide
advise to issuers in who are looking to issue stocks, bonds, or a combo (structure/arrange security
offerings)
also can assist with M&A or restructuring for bankruptcy
broker dealer - research - ANSWER-analysts!! study market and issuers to make reccomendations (buy,
sell, hold)
broker dealer - sales (stock or bond brokers aka registered representatives RR or investment advisor
representatives IAR) - ANSWER-financial professionals who market bonds, stocks, but also packaged
products such as mutual funds to people and institutions
broker dealer - trading - ANSWER-execute trades for the firm and the firm's clients and occur in
electronic market places NASDAQ or hybrid ones such as NYSE
,broker dealer - operations - ANSWER-make sure things are up to standard (paperwork, trades, etc) also
generate statements, etc
info barriers - ANSWER-barrier where info shouldn't be shared with other side/other departments
(investment banking on one side and research, sales/private client, trading, ops on the other)
market maker - ANSWER-**applies to equity not bonds**
when broker dealer decides to display quotes on a trading system indicating they want to buy and sell at
specific prices... required to do so on a REGULAR basis. stands ready to buy and sell at any given time
-maintain inventory
-these market makers are two sided... indicating a price they are willing to sell at (ASK/OFFER) and buy at
(BID)
-usually a min of 100 shares at those prices=ROUND LOT
odd lot=anything but groups of 100 shares
spread (ask, bid, etc) - ANSWER-spread=difference between ask and bid price=profitability of market
maker, larger the spread=more MM makes
bid=what firm will buy at/what client sells at
ask=what firm will sell at/what client buys at
-more actively traded securities tend to have more narrow spreads
**markup (sell price/ask)/markdown (buy price/bid) is in addition to the spread
comp for broker dealer, investment advisor, - ANSWER-1) broker dealer receives $ bc of transaction
based compensation (broker receives commission)
2) investment advisor charges fees for managing portfolio, usually based on assets under management
traders --> proprietary trading - ANSWER-trade for the firm without setting price markers like a market
maker = no quotes entered. simply execute trades on the quotes made from a market maker
investment advisor vs broker dealer - ANSWER-broker-dealers earn commission for executing trades
while investment advisors charge fees for providing advise to their clients (based on % of assets under
management AUM) and are charged whether trades are executed or not
, municipal advisors - ANSWER--provides advice to or on behalf of municipalities (state, city, council)
usually the issuer. usually related to municipal finance offering
-municipal advisor is an entity that advices municipalities on bond offerings (middle man between
municipality itself and broker firm (underwriter potentially)
types of investors (4) - ANSWER-retail, accredited, institutional, QIB
retail investors - ANSWER-(any investor that is not an inst. advisor) regular individuals with regular
accounts buying stock and bonds from broker-dealers with limited assets/income
accredited investors (what are the qualifications) - ANSWER-these are people with more assets/income
and can assume more risk. These includes directors, exec officers, firms, and individuals with assets/net
worth over 1 mil (not including prim. residence), or those who make 200k (or 300k with spouse) each
year and have for the lsat two and expect to continue making that much
-can be individuals and inst.
institutional investors - ANSWER-large investors that pool money to purchase securities (banks,
insurance companies, pension plans, endownments, hedge funds which are referred to as qualified
institutional buyers (QIBS)
-defined by value of assets invested, usually not individuals
QIB (3 qualifiications) - ANSWER-QIBS=qualified institutional buyers
criteria
--QIB=qualified inst. buyer=entity that must own/invest $100 million of securities & CANNOT be a natural
person
1) certain types of investors qualify (NEVER WILL BE AN INDIVIDUAL): insurance companies, registered
investment advisors or companies, small business development companies, private/pension plans,
certain bank trust funds, corps, some non-profit, etc
2) must manage over 100 mil of securities unrelated to them
3) must be purchasing for their own account or account of another QIB
