FINRA SIE — Securities Industry Essentials — All Questions

Credit (default) risk is best measured for a corporate bond by looking at its:

• a.Time to maturity, since bonds maturing past ten years carry a speculative rating
• b.Average daily trading volume, which directly measures issuer creditworthiness
• c.Rating from a nationally recognized statistical rating organization✓
• d.Coupon payment frequency, such as semiannual versus quarterly interest

Credit or default risk is the chance the issuer will fail to make interest or principal payments. Rating agencies such as Moody's, S&P, and Fitch assign ratings (for example, AAA down to below investment grade) that summarize an issuer's creditworthiness. Lower-rated (high-yield or 'junk') bonds carry greater default risk and therefore pay higher yields.

An investor in the 32% federal tax bracket is comparing a municipal bond yielding 4% with a corporate bond. The taxable-equivalent yield of the muni is approximately:

• a.6.25%
• b.5.88%✓
• c.3.04%
• d.4.32%

Taxable-equivalent yield = tax-free yield / (1 - tax rate) = 4% / (1 - 0.32) = 4% / 0.68 = about 5.88%. This means a taxable corporate bond would need to yield roughly 5.88% to match the muni's after-tax return, so the muni is more attractive unless the corporate bond yields more than 5.88%.

A single manufacturer's stock drops after the company loses a major product-liability lawsuit. This loss is an example of:

• a.Purchasing-power (inflation) risk
• b.Unsystematic (company-specific) risk✓
• c.Interest rate (bond price) risk
• d.Systematic (market-wide) risk

A lawsuit affecting one specific company is a company-specific, or unsystematic, risk because it does not stem from broad market forces. This type of risk can be reduced through diversification, since holding many different companies dilutes the impact of any single firm's misfortune. Market-wide events, by contrast, would be systematic risk.

A client wants a government-backed security whose cash flow comes from homeowners' monthly mortgage payments and carries the full faith and credit of the U.S. government. The best fit is:

• a.A six-month U.S. Treasury bill sold at a discount
• b.An unsecured long-term corporate debenture
• c.A municipal revenue bond backed by tolls
• d.A Ginnie Mae (GNMA) pass-through security✓

Ginnie Mae pass-throughs pass monthly principal and interest from a pool of home mortgages through to investors and are backed by the full faith and credit of the U.S. government. T-bills are government-backed but not tied to mortgages, and Fannie/Freddie securities are mortgage-based but lack the direct full-faith-and-credit guarantee. GNMA uniquely satisfies both conditions.

Parents want a tax-advantaged account to save for their child's future college tuition, with tax-free withdrawals for qualified education costs. The most appropriate choice is:

• a.A negotiable jumbo bank CD
• b.An ABLE disability account
• c.A 529 college savings plan✓
• d.A rolling commercial paper program

A 529 plan is designed specifically for education savings, offering tax-deferred growth and tax-free withdrawals for qualified education expenses. An ABLE account is for disability-related expenses, not general college saving, and money-market instruments like CDs or commercial paper provide no education-specific tax benefit. The 529 best fits the stated goal.

A U.S. investor buys a bond denominated in euros. The euro then falls sharply against the dollar. The investor has been hurt primarily by:

• a.Legislative (tax law change) risk
• b.Coupon reinvestment rate risk
• c.Issuer credit (default) risk
• d.Currency (exchange rate) risk✓

When the investor converts euro-denominated interest and principal back into dollars, a weaker euro means fewer dollars, reducing the return even if the bond itself performed as expected. This is currency, or exchange rate, risk, which is inherent in holding foreign-currency assets. It is separate from the issuer's credit quality.

An investor in a GNMA pass-through security is most exposed to prepayment risk when:

• a.Interest rates rise and homeowners keep their mortgages much longer
• b.The security reaches its stated final maturity date and repays par
• c.The issuer defaults on all the underlying mortgage loans in the pool
• d.Interest rates fall and homeowners refinance their mortgages early✓

Prepayment risk is the danger that homeowners will pay off their mortgages early, returning principal to investors sooner than expected. This happens most when interest rates fall and borrowers refinance at lower rates. The investor then must reinvest the returned principal at the new, lower prevailing rates, reducing expected income.

An investor must sell a thinly traded, small-issue municipal bond quickly but can only find a buyer at a price well below fair value. This illustrates:

• a.Liquidity (marketability) risk✓
• b.Credit (issuer default) risk
• c.Coupon reinvestment rate risk
• d.Inflation (purchasing-power) risk

When a security trades infrequently, an investor who needs to sell fast may have to accept a much lower price to attract a buyer. That gap between a quick-sale price and fair value is the hallmark of liquidity, or marketability, risk. It is common in small municipal issues, limited partnerships, and other thinly traded assets.

An investor who wants a portfolio that is LESS volatile than the overall market should favor stocks with:

• a.A beta below 1.0✓
• b.A beta exactly equal to 1.0
• c.A negative dividend yield
• d.A beta above 1.0

Beta measures volatility relative to the market, which has a beta of 1.0. Stocks with a beta below 1.0 tend to move less than the market, so a portfolio built from low-beta stocks is generally less volatile and carries less systematic risk. High-beta stocks (above 1.0) amplify market swings.

Which of the following is a characteristic shared by money-market instruments such as T-bills, commercial paper, and banker's acceptances?

• a.They all pay tax-exempt interest
• b.They are all backed by the full faith and credit of the U.S. government
• c.They all mature in more than 10 years
• d.They are short-term, highly liquid debt instruments✓

Money-market instruments are short-term debt securities (generally maturing in one year or less) that are highly liquid and relatively low risk. T-bills, commercial paper, banker's acceptances, and negotiable CDs are all examples. They differ in issuer and backing, so not all are government-guaranteed or tax-exempt, but all share the short-term, liquid profile.

The ability of a city to repay a general obligation bond depends most directly on its:

• a.Corporate sponsorship and naming-rights fees
• b.Its annual federal transit grant allocation
• c.Net revenue collected from a single toll bridge
• d.Taxing power and overall financial health✓

Because a GO bond is backed by the issuer's full faith and credit, its repayment depends on the municipality's power to levy taxes and on its overall fiscal condition. Analysts review property values, tax collection rates, debt levels, and the local economy. Revenue from a single facility backs a revenue bond, not a GO bond.

A 'double-barreled' municipal bond is one that is backed by:

• a.Guarantees purchased from two separate municipal bond insurance companies
• b.Two different maturity dates within the same bond certificate
• c.Both a specific revenue source and the issuer's general taxing power✓
• d.A federal Treasury guarantee combined with a state guarantee

A double-barreled bond combines features of both a revenue bond and a general obligation bond: it is payable first from a defined revenue source, but is also backed by the issuer's full faith and credit and taxing power if that revenue falls short. This dual backing generally makes it safer than a pure revenue bond.

Municipal notes such as TANs, RANs, and BANs are used primarily to:

• a.Convert into common stock of the municipality after five years
• b.Provide short-term interim financing until longer-term revenue or funds arrive✓
• c.Provide a federally guaranteed retirement benefit to city employees
• d.Offer 30-year permanent financing for major infrastructure projects

Municipal anticipation notes are short-term instruments that bridge timing gaps in a municipality's cash flow. A TAN is repaid from anticipated taxes, a RAN from anticipated revenues, and a BAN from the proceeds of a future long-term bond issue. They mature in a relatively short time and are used for interim, not permanent, financing.

Interest from certain 'private activity' municipal bonds may be:

• a.Exempt from every federal, state, and local tax, including capital gains
• b.Subject to state and local income tax in every state including the issuer's
• c.Taxed at the federal level as ordinary interest income under Section 103
• d.Included as a preference item for the alternative minimum tax (AMT)✓

Some municipal bonds finance private activities and, while their interest is generally exempt from regular federal income tax, that interest can be a preference item that must be added back when computing the alternative minimum tax (AMT). Investors subject to the AMT may therefore owe tax on this otherwise tax-exempt interest, which lowers the bond's after-tax appeal for them.

Some municipal bonds, such as Build America Bonds, are TAXABLE at the federal level because:

• a.They are backed by the full faith and credit of the U.S. Treasury rather than the issuer
• b.They finance religious institutions, which Congress excluded from the exemption
• c.The issuer failed to register the bonds with the SEC before selling them to investors
• d.They were structured to be taxable, often in exchange for a federal interest subsidy to the issuer✓

Not all municipal bonds are tax-exempt. Certain issues, like Build America Bonds, were deliberately structured as taxable to the investor, with the federal government subsidizing part of the issuer's interest cost. Because their interest is taxable, they typically offer higher yields than comparable tax-exempt munis to remain competitive.

A prepaid tuition plan, a type of 529 plan, primarily allows a family to:

• a.Deduct the full contribution from federal income tax in the year it is made
• b.Withdraw funds tax-free for any purpose, including non-education costs
• c.Lock in future tuition at today's prices for eligible institutions✓
• d.Invest in individual stocks and bonds chosen by the account owner

A prepaid tuition plan lets families pay for future college tuition at current rates, hedging against rising tuition costs at participating schools. This differs from a 529 college savings plan, which invests contributions in market-based portfolios whose value fluctuates. Both are 529 plans, but the prepaid version locks in tuition rather than exposing savings to market returns.

An agency debenture issued by a GSE such as the Federal Home Loan Bank is:

• a.An unsecured debt obligation of the agency, backed by its general credit rather than a specific mortgage pool✓
• b.A federally insured bank deposit, protected by the FDIC for up to $250,000 per depositor at each bank
• c.A share of ownership in the agency, carrying voting rights and a claim on its residual profits
• d.A tax-exempt municipal security whose interest is exempt from federal income tax for the holder

Some agency securities are debentures, meaning unsecured bonds backed by the issuing agency's general creditworthiness rather than a pool of mortgages. They are considered high quality but, as GSE obligations, they are not directly guaranteed by the U.S. government, so they yield slightly more than Treasuries. They differ from mortgage-backed pass-throughs, whose cash flow comes from underlying loans.

A key risk unique to owning a CMO compared with a plain Treasury bond is:

• a.Currency risk, because the underlying mortgage payments arrive in foreign currency
• b.The complete absence of interest rate risk in every tranche of the CMO deal
• c.Exemption from all federal income tax on the interest that is received
• d.Prepayment (extension and contraction) risk from the underlying mortgages✓

Because a CMO's cash flows come from a pool of mortgages, its actual maturity depends on how fast homeowners prepay. When rates fall, prepayments speed up (contraction risk); when rates rise, prepayments slow and the CMO's life extends (extension risk). A plain Treasury bond has a fixed maturity and no such prepayment uncertainty.

An investor holding long-term fixed-rate bonds is most concerned about purchasing-power risk, which means:

• a.Inflation may erode the real value of the fixed interest payments over time✓
• b.The issuer may default on interest or principal before the bonds mature
• c.Exchange rates may move against the investor holding foreign-currency bonds
• d.The bond may be called away early at a set redemption price after rates fall

Purchasing-power (inflation) risk is the danger that rising prices will erode the real value of a bond's fixed coupon and principal. It is especially significant for long-term, fixed-rate bonds, where payments are locked in for many years. Investments like TIPS or equities are often used to help offset this risk.

A broad market decline during a recession causes almost every stock in a diversified portfolio to fall. This is an example of:

• a.Unsystematic business risk
• b.Systematic (market) risk✓
• c.Liquidity/marketability risk
• d.Reinvestment rate risk

A recession-driven, market-wide drop affects nearly all securities regardless of how well individual companies are run, which is the definition of systematic or market risk. Because it hits the whole market, diversification cannot eliminate it. Unsystematic risk, by contrast, would affect only a single company or sector.

Call risk is the danger that:

• a.An issuer will redeem a bond before maturity, usually when interest rates have fallen✓
• b.Rising inflation will erode the real value of the bond's fixed coupon payments
• c.The investor cannot find a buyer for the bond at a fair price in a thin market
• d.An issuer will default and fail to make the bond's scheduled interest and principal payments

Call risk arises when a bond is callable, letting the issuer redeem it early. Issuers most often call bonds after interest rates have dropped, so they can refinance at lower rates. The investor then loses the higher-coupon bond and must reinvest at lower prevailing rates, which links call risk closely to reinvestment risk.

An investor in a structured note linked to a stock index should understand that, even if the index rises, the investor can still lose money if:

• a.The note is simply held to its stated maturity date rather than sold early
• b.The issuing financial institution becomes insolvent and cannot pay✓
• c.The linked index rises on price alone and pays out no dividends
• d.Prevailing interest rates remain unchanged over the note's full term

A structured note is an obligation of the issuing financial institution, so its promised payoff depends on that issuer remaining solvent. If the issuer becomes insolvent, the investor is a general creditor and may lose principal regardless of how the linked index performed. This issuer credit risk is a key, sometimes overlooked, feature of structured products.

Even a well-diversified stock portfolio still carries which type of risk?

• a.No risk at all, since diversification removes every source of loss
• b.Company-specific risk from one firm's own operating problems
• c.Systematic (market) risk that affects the entire market✓
• d.Unsystematic risk only, since market risk is diversified away

Diversification reduces or removes unsystematic (company-specific) risk, but it cannot eliminate systematic risk, which stems from market-wide forces such as recessions or interest rate changes. Therefore, even a broadly diversified portfolio remains exposed to systematic risk. This is why diversification lowers, but never fully removes, total portfolio risk.

A conservative client wants to minimize credit risk and default risk in the fixed-income portion of her portfolio. Which security best fits that goal?

• a.Commercial paper from a lower-rated company
• b.A short-term U.S. Treasury bill✓
• c.A BBB-rated revenue bond
• d.A high-yield ('junk') corporate bond

A U.S. Treasury bill is backed by the full faith and credit of the U.S. government and is considered essentially free of credit and default risk, making it the best match for a client who wants to minimize those risks. High-yield bonds and lower-rated commercial paper carry substantial default risk, and even a BBB revenue bond has more credit risk than a Treasury. The trade-off is that the safest security typically offers the lowest yield.

An investor wants to buy XYZ stock, currently trading at $52, but is only willing to pay $50 or less per share. Which order type best fits this goal?

• a.A market order to buy at once
• b.A buy limit order at $50✓
• c.A sell stop order at $50
• d.A buy stop order at $50

A buy limit order sets the maximum price the buyer is willing to pay, so it executes only at $50 or lower. A market order would fill immediately near $52. A buy stop is a trigger order placed above the market, not a price ceiling.

In a quoted market, the bid-ask spread represents which of the following?

• a.The daily change between the stock's opening price and its final closing price on the listing exchange
• b.The difference between the highest price a buyer will pay and the lowest price a seller will accept✓
• c.The dividend yield of the security, computed as the annual dividend divided by the current market price
• d.The commission that the broker charges the customer for executing an order in the security

The spread is the gap between the highest bid (best buying price) and the lowest ask/offer (best selling price). A narrow spread generally signals a liquid, actively traded security, while a wide spread suggests lower liquidity.

An investor bought a stock at $30 and it now trades at $45. She wants to limit her downside by triggering a sale if the price falls to $40. Which order should she enter?

• a.A market order at $40
• b.A sell stop order at $40✓
• c.A sell limit order at $40
• d.A buy limit order at $40

A sell stop order placed below the current market becomes a market order to sell once the stock trades at or through the $40 stop price, protecting accumulated gains. A sell limit at $40 would execute only at $40 or higher and would not protect against a decline.

Under current regular-way settlement for corporate stocks, when does settlement occur relative to the trade date?

• a.One business day after the trade (T+1)✓
• b.Same day as the trade (T+0)
• c.Three business days after the trade (T+3)
• d.Two business days after the trade (T+2)

Regular-way settlement for equities, corporate bonds, and municipal securities is T+1, meaning one business day after the trade date. The industry moved from T+2 to T+1 to reduce counterparty risk and speed the exchange of cash and securities.

A broker-dealer fills a customer's buy order by selling shares out of its own inventory and adds a markup to the price. In what capacity did the firm act?

• a.As an agent (broker) earning a commission
• b.As a principal (dealer)✓
• c.As a syndicate underwriter
• d.As the issuer's transfer agent

When a firm fills a customer order out of its own inventory and charges a markup or markdown, it acts as a principal, or dealer. An agent (broker) instead arranges the trade between the customer and a third party and earns a commission, which is not what happened here because the firm itself was the seller. A syndicate underwriter distributes new issues for an issuer, not an inventory trade with a customer, and an issuer's transfer agent only records changes in ownership.Securities Exchange Act of 1934

When a company sells newly issued shares to the public for the first time and receives the proceeds, this transaction takes place in which market?

• a.The fourth market
• b.The third market
• c.The primary market✓
• d.The secondary market

The primary market is where issuers raise capital by selling new securities directly to investors, as in an IPO; the proceeds go to the issuer. The secondary market is where investors trade already-issued securities among themselves, with proceeds going to the selling investor.

A stock closed at $40 the day before its ex-dividend date, and the company declared a $1 cash dividend. All else equal, what is the expected opening price on the ex-dividend date?

• a.$41
• b.$39✓
• c.$38
• d.$40

On the ex-dividend date, a buyer is not entitled to the upcoming dividend, so the market typically reduces the stock's opening price by the dividend amount. A $40 stock paying a $1 dividend is expected to open around $39, all else equal.

Which organization acts as the central counterparty that nets and guarantees the settlement of most U.S. broker-to-broker equity trades?

• a.The National Securities Clearing Corporation (NSCC)✓
• b.The Municipal Securities Rulemaking Board (MSRB)
• c.The Securities and Exchange Commission (SEC)
• d.The Federal Reserve's Fedwire funds service

The NSCC, a subsidiary of the DTCC, provides central clearing, multilateral netting, and settlement guarantees for equity trades between broker-dealers. The SEC is a regulator, not a clearing house, and the Federal Reserve handles the banking payment system.Securities Exchange Act of 1934

An investor wants his order executed immediately and is not concerned about getting a specific price. Which order type should he use?

• a.A limit order
• b.A market order✓
• c.An all-or-none order
• d.A stop order

A market order is executed promptly at the best available price, prioritizing speed and certainty of execution over price. A limit order prioritizes price and may not execute at all if the limit is not met.

An investor sells stock short. Under what condition does the position become profitable?

• a.When the stock's price falls✓
• b.When the company pays a dividend
• c.When the stock's price rises
• d.When the stock splits

A short seller borrows shares and sells them, hoping to buy them back later at a lower price. The position profits when the stock's price falls; if the price rises, the short seller faces a loss that is theoretically unlimited.Securities Exchange Act of 1934

A company sets Wednesday as its dividend record date. Under T+1 regular-way settlement, what is the last day an investor can buy the stock regular way and still be entitled to the dividend?

• a.Tuesday✓
• b.Wednesday (the record date)
• c.Thursday
• d.Monday

To be a holder of record on Wednesday, the trade must settle by Wednesday. Under T+1, a purchase made on Tuesday settles Wednesday, so Tuesday is the last day to buy and receive the dividend; Wednesday is the ex-dividend date.

A stop-limit order combines the features of which two order types?

• a.A market order and an all-or-none order
• b.A stop order and a limit order✓
• c.A limit order and a fill-or-kill order
• d.Two separate market orders

A stop-limit order uses a stop price to trigger the order and a limit price to cap the execution price once triggered. This gives price protection that a plain stop order lacks, but it risks non-execution if the market moves past the limit.

What is the primary function of a market maker in the secondary market?

• a.To audit and certify the annual financial statements of the issuers whose shares trade there
• b.To provide liquidity by continuously quoting both bid and ask prices and standing ready to buy or sell✓
• c.To set the short-term interest rate policy of the Federal Reserve at each quarterly meeting
• d.To review and approve securities registration statements filed with the SEC before an IPO

A market maker (a dealer) commits capital to continuously quote firm bid and ask prices, standing ready to buy at the bid and sell at the ask. This adds liquidity and helps ensure that investors can trade even when there is no immediate counterparty.Securities Exchange Act of 1934

A firm receives a customer order, locates another party in the market to take the other side, and charges a commission for arranging the trade. In what capacity did the firm act, and what did it charge?

• a.As a principal, charging a markup
• b.As an agent, charging a commission✓
• c.As a dealer, charging a markdown
• d.As an underwriter, charging a spread

By arranging a trade between the customer and a third party without using its own inventory, the firm acts as an agent (broker) and is compensated with a commission. Markups and markdowns apply only when a firm acts as a principal from its own account.Securities Exchange Act of 1934

An investor owns 100 shares of a stock trading at $80 when the company declares a 2-for-1 forward stock split. After the split, what does the investor own?

• a.200 shares worth $80 each
• b.100 shares worth $40 each
• c.200 shares worth $40 each✓
• d.50 shares worth $160 each

In a 2-for-1 forward split, share count doubles and price halves, leaving total market value unchanged. The investor now holds 200 shares at about $40 each, for the same $8,000 total value.

Which statement best describes the over-the-counter (OTC) market?

• a.It is a decentralized network of dealers who negotiate trades electronically or by phone✓
• b.It is a physical trading floor where an auction takes place
• c.It is where listed securities are matched by a designated market maker on an exchange floor
• d.It handles only the initial sale of new securities

The OTC market has no central physical location; it is a dealer-driven, negotiated market connected electronically and by telephone. Exchanges, by contrast, are centralized auction markets where buyers and sellers compete through posted bids and offers.Securities Exchange Act of 1934

An investor needs the proceeds from a stock sale available the same day the trade is executed. Which settlement type should be specified?

• a.Regular-way settlement
• b.Seller's option settlement
• c.Cash settlement✓
• d.When-issued settlement

A cash (same-day) settlement requires delivery of securities and payment on the trade date itself, making the funds available immediately. Regular-way settlement for equities is T+1, one business day after the trade.

An investor is short 100 shares of a stock at $30 and wants to limit potential losses if the price rises. Which order should be placed?

• a.A sell limit order above $30
• b.A sell stop order below $30
• c.A buy limit order below $30
• d.A buy stop order above $30✓

A buy stop order placed above the current price triggers a buy-to-cover once the stock rises to the stop, capping the short seller's loss. Because a short position loses money as the price rises, a buy stop is the standard protective order.

Which entity serves as the central securities depository that holds securities in electronic (book-entry) form and facilitates their transfer between members?

• a.The Financial Industry Regulatory Authority (FINRA)
• b.The Depository Trust Company (DTC)✓
• c.The Securities Investor Protection Corporation (SIPC)
• d.The Options Clearing Corporation (OCC)

The DTC, a subsidiary of the DTCC, immobilizes securities in book-entry form and enables ownership to be transferred by electronic bookkeeping rather than physical certificate delivery. The OCC clears options, and SIPC provides limited customer account protection.Securities Exchange Act of 1934

An investor owns stock trading at $25 and is willing to sell only if she can get $28 or more per share. Which order should she enter?

• a.A sell limit order at $28✓
• b.A sell stop order at $28
• c.A market order to sell at once
• d.A buy limit order at $28

A sell limit order sets the minimum acceptable price, executing only at $28 or higher. A sell stop at $28 is a trigger, not a price floor: once touched it becomes a market order that can fill below $28, so it does not guarantee her price. A market order sells immediately at the current $25, and a buy limit is the wrong side of the trade.

A company with shares trading at $2 declares a 1-for-10 reverse stock split. What happens to an investor holding 1,000 shares?

• a.The investor holds 100 shares worth about $20 each✓
• b.The investor holds 1,000 shares worth about $20 each
• c.The investor holds 10,000 shares worth about $0.20 each
• d.The investor holds 100 shares worth about $2 each

A 1-for-10 reverse split reduces share count tenfold and multiplies the price tenfold, leaving total value unchanged. The 1,000 shares become 100 shares priced near $20, still worth about $2,000. Reverse splits are often used to raise a low share price.

Compared with a stock that has a wide bid-ask spread, a stock with a very narrow spread most likely indicates:

• a.An upcoming dividend payment
• b.Higher liquidity and active trading✓
• c.Lower liquidity and infrequent trading
• d.A pending stock split

A narrow spread typically reflects high liquidity, tight competition among market makers, and heavy trading volume. A wide spread is more common in thinly traded, less liquid securities where the cost of trading is higher.

In the sequence of dividend dates, which date is when the board of directors formally announces that a dividend will be paid?

• a.The dividend payable date
• b.The declaration date✓
• c.The ex-dividend date
• d.The dividend record date

The declaration date is when the board announces the dividend and sets the record and payable dates. The ex-dividend date determines who is entitled, the record date identifies shareholders of record, and the payable date is when the dividend is actually paid.

Which of the following best distinguishes a securities exchange from the OTC market?

• a.An exchange has no market makers under SEC Rule 15c3-5, while every OTC trade needs a dealer
• b.An exchange operates unregulated, while only the OTC market answers to FINRA rules
• c.An exchange lists only bonds, while the OTC market trades only common stocks and ETFs
• d.An exchange is a centralized auction market, while the OTC market is a decentralized negotiated market✓

An exchange operates as a centralized auction market where competing bids and offers meet, whereas the OTC market is a decentralized, dealer-negotiated market. Both are regulated, and both trade a range of securities.Securities Exchange Act of 1934

Under T+1 regular-way settlement, how does the ex-dividend date relate to the record date?

• a.The ex-dividend date is one business day after the record date
• b.The ex-dividend date is two business days before the record date
• c.The ex-dividend date is one week before the record date
• d.The ex-dividend date is the same day as the record date✓

Because regular-way trades now settle in one business day (T+1), a purchase made on the record date would not settle until the next day, too late to be a holder of record. As a result, the ex-dividend date now falls on the same day as the record date.

When a retail customer places a market order to buy stock from a dealer, at which price will the customer generally buy?

• a.At the bid price
• b.At the previous day's closing price
• c.At the ask (offer) price✓
• d.At the midpoint of the spread

A customer buys at the dealer's ask (offer) and sells at the dealer's bid. The dealer, conversely, buys at the bid and sells at the ask, earning the spread as compensation for providing liquidity.