FINRA Series 7 / SIE Exams SIE: Securities Products and Their Characteristics Syllabus

Compare T-bills, T-notes, and T-bonds by maturity and form of interest.

T-bills: 1 year or less, issued at a discount (no coupon), pay par at maturity. T-notes: 2-10 years, semiannual coupon, par $1,000. T-bonds: 10-30 years, semiannual coupon. All are direct obligations of the U.S. government, considered default-risk-free.

What is a TIPS and how does it protect investors?

Treasury Inflation-Protected Securities adjust their principal up or down with the CPI. The fixed coupon rate is applied to the inflation-adjusted principal, so interest payments rise with inflation, protecting purchasing power. At maturity the investor receives the greater of adjusted or original principal.

How are U.S. Treasury and most federal agency securities taxed at the state and local level?

Interest on U.S. Treasury securities is exempt from state and local income tax but is taxable at the federal level. (GNMA/Ginnie Mae interest, by contrast, is fully taxable at all levels.)

Distinguish Ginnie Mae (GNMA) from Fannie Mae (FNMA) and Freddie Mac (FHLMC).

GNMA is a wholly owned government corporation; its mortgage-backed securities carry the full faith and credit of the U.S. government. FNMA and FHLMC are government-sponsored enterprises (GSEs), publicly traded, NOT directly backed by the U.S. government. All pass through principal and interest from pooled mortgages and face prepayment risk.

What is prepayment (extension) risk in mortgage-backed securities?

When rates fall, homeowners refinance and prepay, returning principal early so it must be reinvested at lower rates (prepayment risk). When rates rise, prepayments slow and the security's life lengthens (extension risk), locking investors into below-market yields.

What are the two main categories of municipal bonds and how are they backed?

General Obligation (GO) bonds are backed by the full faith, credit, and taxing power of the issuer (require voter approval, backed by taxes). Revenue bonds are backed only by income from a specific project or facility (e.g., toll roads, airports) and do not require voter approval.

What is the principal tax advantage of municipal bonds, and when is muni interest also state-tax-free?

Municipal bond interest is exempt from federal income tax. It is also exempt from state/local tax for residents of the issuing state ('triple tax-free' if the investor lives in the issuing locality/state, or for territorial bonds like Puerto Rico).

How do you calculate the tax-equivalent yield (TEY) of a municipal bond?

TEY = municipal yield / (1 - investor's marginal tax rate). Example: a 4% muni for a taxpayer in the 25% bracket has a TEY of 0.04 / (1 - 0.25) = 5.33%.

What are common money market instruments and their defining characteristics?

Money market instruments are high-quality, short-term debt maturing in one year or less: T-bills, commercial paper, negotiable (jumbo) CDs, banker's acceptances, and repurchase agreements. They are highly liquid, low-risk, and usually issued at a discount.

What is commercial paper?

Commercial paper is unsecured, short-term corporate promissory notes issued at a discount, with a maximum maturity of 270 days (which exempts it from SEC registration). It is used by corporations for short-term financing such as payroll and inventory.

What is a banker's acceptance (BA)?

A banker's acceptance is a short-term time draft guaranteed by a bank, used primarily to finance international trade (imports/exports). It is issued at a discount and typically matures within 270 days.

Distinguish an open-end investment company (mutual fund) from a closed-end fund.

Open-end funds continuously issue and redeem an unlimited number of shares at NAV (forward priced); shares are bought from/redeemed by the fund. Closed-end funds issue a fixed number of shares in an IPO, then trade on exchanges at a market price that can be above (premium) or below (discount) NAV.

How is a mutual fund's Net Asset Value (NAV) per share calculated and when?

NAV per share = (total assets - total liabilities) / number of shares outstanding. It is calculated at least once per business day at the close of trading. Open-end fund orders are filled at the next computed NAV ('forward pricing').

What is the difference between a unit investment trust (UIT) and a management company?

A UIT holds a fixed, unmanaged portfolio of securities with a set termination date; it issues redeemable units and has no board of directors or investment adviser making ongoing trades. A management company (open- or closed-end) actively or passively manages the portfolio under an investment adviser.

What is the difference between a diversified and a non-diversified investment company under the 75-5-10 rule?

A diversified company must invest at least 75% of assets so that no single issuer exceeds 5% of total assets and it owns no more than 10% of any one issuer's voting securities. A non-diversified company is not subject to these limits and may concentrate holdings.

How does the public offering price (POP) of a front-end load mutual fund relate to NAV?

POP = NAV / (1 - sales charge %). The sales charge % = (POP - NAV) / POP. The investor buys at POP and redeems at NAV (or NAV minus any back-end charge).

Describe Class A mutual fund shares.

Class A shares charge a front-end sales load (paid at purchase) but have lower annual 12b-1/expense fees. They typically offer breakpoints (volume discounts) and rights of accumulation, making them cost-effective for large, long-term investments.

Describe Class B mutual fund shares.

Class B shares have no front-end load but carry a contingent deferred sales charge (CDSC/back-end load) that declines the longer they are held, plus higher annual 12b-1 fees. They often convert to Class A after the CDSC period expires.

Describe Class C mutual fund shares and when they are least suitable.

Class C shares have no front-end load, a small (often 1%) CDSC for the first year, and high ongoing 12b-1/annual expenses (level load) that never decline. Because the recurring fees never go away, they are least suitable for long-term investors and best for short holding periods.

What is a 12b-1 fee?

A 12b-1 fee is an annual asset-based charge deducted from fund assets to cover distribution, marketing, and shareholder-servicing costs. A fund cannot call itself 'no-load' if its 12b-1 fee exceeds 0.25% of average net assets.

What is a breakpoint, and what is a prohibited 'breakpoint sale'?

A breakpoint is a reduced sales charge for investing a larger dollar amount. A breakpoint sale is the unethical/prohibited practice of selling shares in an amount just below a breakpoint to earn a higher commission, denying the investor the volume discount.

What is a Letter of Intent (LOI) in mutual fund investing?

A Letter of Intent lets an investor qualify for a breakpoint discount by pledging to invest the required total within 13 months. It can be backdated up to 90 days, and the fund holds some shares in escrow until the commitment is met.

What is an Exchange-Traded Fund (ETF) and how does it differ from a mutual fund?

An ETF is typically an index-tracking fund whose shares trade intraday on an exchange at market prices like a stock. Unlike open-end mutual funds, ETFs can be bought/sold throughout the day, sold short, and bought on margin, and they generally have lower expense ratios and are more tax-efficient.

What is a REIT and what are its key tax/distribution requirements?

A Real Estate Investment Trust pools capital to invest in real estate (equity REITs) or mortgages (mortgage REITs). To qualify, it must distribute at least 90% of taxable income to shareholders, invest at least 75% of assets in real estate, and derive at least 75% of income from real estate. REIT dividends are generally taxed as ordinary income (not qualified).

What is a DPP (Direct Participation Program) and its defining tax feature?

A DPP (often a limited partnership) is a pass-through entity in which income, gains, losses, deductions, and credits flow directly to investors (avoiding double taxation). Limited partners have limited liability and passive income/loss treatment; the general partner manages and has unlimited liability.

Define the four basic options positions and the right or obligation each carries.

Long call: right to BUY the underlying at the strike. Short call: obligation to SELL if assigned. Long put: right to SELL the underlying at the strike. Short put: obligation to BUY if assigned. Buyers (long) pay premium and hold rights; writers (short) receive premium and hold obligations.

What are the standard contract size and key terms of a listed equity option?

One listed equity option covers 100 shares. Key terms: strike (exercise) price, premium (price of the option), expiration date, and type (call/put). Total premium cost = quoted premium x 100. American-style options can be exercised any time before expiration.

How do you calculate the intrinsic value of a call and a put, and what is time value?

Call intrinsic value = market price - strike (when positive; in-the-money). Put intrinsic value = strike - market price (when positive). Premium = intrinsic value + time value, so time value = premium - intrinsic value. Options with no intrinsic value (out-of-the-money) consist entirely of time value.

For a long call, give the maximum gain, maximum loss, and breakeven.

Long call: maximum gain is unlimited (stock can rise indefinitely), maximum loss is the premium paid, and breakeven = strike price + premium. The buyer is bullish.

For a long put, give the maximum gain, maximum loss, and breakeven.

Long put: maximum gain = strike price - premium (stock can fall only to zero), maximum loss = premium paid, breakeven = strike price - premium. The buyer is bearish.

What is a covered call and why is it written?

A covered call is writing (selling) a call against stock you already own (long 100 shares + short 1 call). It generates premium income and provides limited downside cushion, but it caps the upside at the strike price. It is a suitable income strategy in a flat-to-slightly-bullish market.

What is a protective put and what is its purpose?

A protective put is buying a put on stock you own (long stock + long put) to hedge against a price decline, functioning like insurance. Maximum loss is limited to (purchase price - strike) + premium, while upside remains unlimited; the cost is the premium paid.

Distinguish a forward contract from a futures contract.

A forward is a private, customized, OTC agreement to buy/sell an asset at a set price on a future date, carrying counterparty risk and no daily settlement. A futures contract is exchange-traded, standardized, centrally cleared, and marked-to-market daily, greatly reducing counterparty risk.

What is a swap, and give an example of an interest-rate swap?

A swap is an OTC derivative in which two parties exchange cash-flow streams. In a plain-vanilla interest-rate swap, one party pays a fixed rate and receives a floating rate (e.g., SOFR-based) on a notional principal, typically to hedge or alter interest-rate exposure. Only net cash flows are exchanged; notional principal is not.