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Investment bankers help issuers raise capital by structuring offerings, underwriting, and distributing securities. They perform due diligence, assist with registration filings, and may stabilize prices in the aftermarket. They do not set dividends (corporate boards do) or dictate municipal interest rates (determined by market demand). Market-making is related but not their primary role in underwriting. For the SIE exam, candidates should understand the underwriter’s role in both primary market offerings and syndicate distribution.

A broker acts as an agent, connecting buyers and sellers, and earns a commission for services. A dealer acts as principal, buying and selling securities for the firm’s inventory. Underwriters guarantee new issues, while structured products are typically designed by investment banks. For the SIE exam, candidates must differentiate between broker vs. dealer capacity, and know how broker-dealers may act in both roles depending on the trade.

An uncovered (naked) short call obligates the seller to deliver stock at the strike price if exercised, but since the stock price can rise indefinitely, potential losses are unlimited. A long call’s risk is limited to the premium paid. A long put’s risk is limited to the premium. A short put’s risk is substantial but limited (stock can only fall to zero). The SIE exam emphasizes option risk profiles and suitability considerations.

Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) are zero-coupon securities created by stripping coupons and principal from Treasury bonds and selling them separately. They are sold at deep discounts and mature at par, with no interim interest. T-bills are short-term but not stripped. TIPS are inflation-adjusted bonds. The SIE requires familiarity with Treasury securities, their structures, and how they are used for investment and liability-matching strategies.

In a firm commitment underwriting, the underwriter purchases the entire issue from the issuer and assumes full responsibility for unsold shares, exposing it to financial risk. Best efforts and all-or-none offerings act on an agency basis with less underwriter risk. A standby underwriting involves rights offerings where the underwriter buys unsubscribed shares but still carries less risk than firm commitment. The SIE exam stresses recognizing risk allocation between issuers and underwriters in various underwriting arrangements.