FINRA FINRA-SIE Online Practice Questions and Exam Preparation

FINRA FINRA-SIE Online Questions & Answers

• Question 241:

  Which of the following statements is true regarding mutual fund net asset value (NAV)?

  A. It fluctuates throughout the trading day
  B. It is calculated once daily after market close
  C. It includes the sales charge
  D. It is fixed for the life of the fund
  B. It is calculated once daily after market close

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  Explanation

  Mutual fund NAV is calculated once per day after the market closes, based on the value of the fund's assets minus liabilities.

  References:

  Investment Company Act of 1940

  SIE Study Guide

• Question 242:

  Which of the following risks is unique when comparing U.S. municipal bonds against U.S.

  government bonds as an investment?

  A. Credit risk
  B. Currency risk
  C. Inflationary risk
  D. Interest rate risk
  A. Credit risk

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  Explanation

  The correct answer is A, Credit risk. Credit risk, also known as default risk, is the risk that the issuer of a bond will fail to make timely interest payments or repay principal. This risk is a key distinguishing factor between U.S. municipal bonds and U.S. government bonds. Step-by-step, U.S. government bonds (such as Treasury securities) are considered to have virtually no credit risk because they are backed by the full faith and credit of the U.S. government. As a result, they are often referred to as "risk-free" with respect to default. In contrast, municipal bonds are issued by state and local governments, and their ability to repay debt depends on the financial health of the issuing municipality. Therefore, municipal bonds carry varying degrees of credit risk, which is why they are often rated by credit rating agencies. Choice B, currency risk, is incorrect because both investments are denominated in U.S. dollars.

  Choice C, inflationary risk, affects all fixed-income securities since inflation erodes purchasing power.

  Choice D, interest rate risk, also affects both types of bonds equally, as bond prices move inversely to interest rate changes. Thus, the unique risk when comparing municipal bonds to U.S. government bonds is credit risk, making Answer A correct.

• Question 243:

  The price of a company's stock falls several points because of the estimated costs of complying with pending regulations.

  For the company's stockholders, this is an example of which of the following types of risk?

  A. Capital risk
  B. Credit risk
  C. Political risk
  D. Liquidity risk
  C. Political risk

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  Explanation

  This situation is best classified as political risk, specifically regulatory risk, because the stock's decline is driven by the anticipated impact of government action-pending regulations-on the company's future profitability. Political risk includes changes in laws, rules, regulatory enforcement, tax policy, or other governmental decisions that can alter an issuer's operating environment. When a company expects higher compliance costs, investors may reduce expected earnings or cash flow projections, which commonly leads to a lower valuation and therefore a lower stock price. That cause-and-effect relationship-government-driven change leading to a market value adjustment-is the core idea of political risk. It is not credit risk, which focuses on whether a debt issuer can meet interest and principal payments. Stockholders are affected by equity value changes, and the prompt does not indicate an increased likelihood of default or missed payments on debt. It is not liquidity risk, which concerns the ability to sell the stock quickly at a fair price without significantly moving the market; the question does not mention thin trading, wide bid-ask spreads, or difficulty finding buyers. While capital (principal) risk broadly applies to most equity investments because market prices can decline, the question is asking for the specific type of risk causing the decline. Here, the driver is regulatory costs from pending government rules, which points directly to political risk. This aligns with the SIE focus on identifying risk types and recognizing how external forces-especially governmental or regulatory developments-can affect securities markets and issuer valuations.

• Question 244:

  Which of the following statements describes a characteristic of Treasury securities?

  A. They are callable.
  B. They are FDIC-insured.
  C. They are exempt from state, local and federal taxes.
  D. They are backed by the full faith and credit of the U.S. government.
  D. They are backed by the full faith and credit of the U.S. government.

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  Explanation

  The correct answer is D, They are backed by the full faith and credit of the U.S. government. Treasury securities (including Treasury bills, notes, and bonds) are considered among the safest investments because they are guaranteed by the U.S. government's ability to tax and print money. Step-by-step, this "full faith and credit" backing means that the government is legally obligated to pay interest and return principal on time, virtually eliminating credit (default) risk. This is why Treasury securities are often used as a benchmark for "risk-free" rates in financial markets. Choice A is incorrect because Treasury securities are non-callable, meaning the government cannot redeem them prior to maturity.

  Choice B is incorrect because FDIC insurance applies to bank deposits, not securities.

  Choice C is incorrect because while Treasury securities are exempt from state and local taxes, they are still subject to federal income tax. Thus, the defining characteristic of Treasury securities is their government backing, making them extremely low-risk investments and confirming that Answer D is correct.

• Question 245:

  Which of the following product types is used by a portfolio manager utilizing a passive investment strategy?

  A. Bonds
  B. Equities
  C. Alternative Investments
  D. Index exchange-traded funds (ETFs)
  D. Index exchange-traded funds (ETFs)

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  Explanation

  The correct answer is D, Index exchange-traded funds (ETFs). A passive investment strategy is designed to track the performance of a specific market index rather than attempting to outperform it. Portfolio managers using passive strategies typically invest in products that replicate an index, such as the S & P 500 or NASDAQ-100. Index ETFs are specifically structured to mirror the performance of these indices by holding the same or similar securities in the same proportions.

  Passive investing emphasizes low costs, diversification, and minimal trading activity. Index ETFs are ideal for this approach because they generally have lower expense ratios compared to actively managed funds and require less frequent portfolio adjustments. This aligns with the goal of matching market returns rather than beating them. The other options are incorrect because they are too broad or not inherently passive. Bonds and equities are asset classes, not specific passive products, and can be managed either actively or passively. Alternative investments (such as hedge funds or private equity) are typically actively managed and often involve complex strategies aimed at outperforming the market. Thus, index ETFs are the most appropriate product for a portfolio manager implementing a passive investment strategy, making choice D the correct answer.

• Question 246:

  Comparative performance statistics of competing mutual funds are available through which of the following sources?

  A. The prospectus
  B. Shareholder reports
  C. Independent fund rating services
  D. The statement of additional information
  C. Independent fund rating services

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  Explanation

  Comparative performance statistics-especially across competing mutual funds-are most commonly obtained from independent fund rating services, making C correct. These services compile standardized fund performance data, risk metrics, category comparisons, peer rankings, and sometimes risk-adjusted measures, allowing investors to compare funds across managers and fund families. Because they are designed specifically for cross-fund comparisons, they are the best source among the choices. A fund's prospectus (choice A) contains important disclosures about that specific fund-objectives, strategies, risks, fees, and past performance-but it is not primarily a comparative document across multiple competing funds. Shareholder reports (choice B) provide periodic information about a specific fund (financial statements, portfolio holdings summaries, management discussion), and while they include performance figures, they typically do not provide broad comparisons of "competing mutual funds." The statement of additional information (choice D) supplements the prospectus with expanded technical details about that particular fund; it is not meant to be a comparative performance source across the market. For SIE purposes, recognize the roles of fund documents: prospectus/SAI/shareholder reports are issuer-specific disclosure documents, while independent rating services are built for industry-wide comparisons. This distinction helps you answer questions about where an investor would go for peer group performance, ranking, and objective comparative data rather than reading each fund's disclosures individually.

• Question 247:

  A mother wants to set up an account for her son so she can make yearly gifts but not allow her son to withdraw funds to pay for his living expenses.

  Which of the following account types best meets this objective?

  A. A trust account
  B. A separately managed account
  C. A Coverdell Education Savings Account
  D. A joint tenants with right of survivorship (JTWROS) account
  A. A trust account

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  Explanation

  A trust account best meets the mother's objective because a trust can be structured to control distributions and restrict the beneficiary's access to funds. By establishing a trust, the mother (as grantor) can define terms such as when the son may receive distributions, what the funds may be used for (e.g., education only), and who has the authority to approve withdrawals (the trustee). This directly addresses the stated goal: making annual gifts while preventing the son from withdrawing funds for living expenses. Therefore, A is correct. A separately managed account (choice B) is an investment management arrangement, not a legal structure designed to restrict a beneficiary's access. It focuses on portfolio management and customization, but it does not inherently prevent the account owner (or someone with authority) from accessing funds, and it does not solve the "no withdrawals for living expenses" objective the way a trust can. A Coverdell ESA (choice C) is intended for education expenses and has tax-advantaged features, but it is not the best answer because the mother's objective is broader: she wants to make yearly gifts and restrict withdrawals generally (especially for living expenses). While a Coverdell can constrain qualified use and impose penalties for nonqualified withdrawals, it is still an education account with specific rules and limits rather than a flexible legal mechanism to restrict access across circumstances. A JTWROS account (choice D) is especially wrong for this objective because a joint owner typically has immediate rights to the assets, meaning the son could withdraw funds. SIE-wise, this is an account registration/control question: trusts are the primary tool for controlling who can access assets and under what terms, making them ideal when the goal is to give assets but restrict the beneficiary's spending access.

• Question 248:

  Which of the following statements is true regarding 529 savings plans?

  A. 529 contributions are tax deductible in all states.
  B. There are income limitations for contributing to a 529 savings plan.
  C. The account beneficiary has control over the assets in a 529 savings plan.
  D. Assets are transferable to another 529 savings plan tax-free if the new beneficiary is a family member of the current beneficiary.
  D. Assets are transferable to another 529 savings plan tax-free if the new beneficiary is a family member of the current beneficiary.

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  Explanation

  529 savings plans are state-sponsored education savings accounts that offer tax-advantaged growth. Key features include: Contributions are not federally tax deductible (some states offer state-level deductions). No income limitations for contributions. The account owner, not the beneficiary, controls the plan. Assets can be transferred tax-free to another family member's 529 plan. D is correct because tax-free rollovers are allowed for family members of the current beneficiary.

  A is incorrect as contributions are not universally tax deductible. B is incorrect as there are no income limitations for contributing. C is incorrect because the account owner, not the beneficiary, controls the assets.

  References:

  IRS Publication 970: Tax Benefits for Education

• Question 249:

  A customer owns 100 shares of ABC with a current market value of $5.00 per share. The company undergoes a 1-for-2 reverse split of the stock.

  Which of the following statements is true of the customer's holdings and the price of the stock?

  A. The customer will have 50 shares at $10.00 per share.
  B. The customer will have 100 shares at $5.00 per share.
  C. The customer will have 200 shares at $2.50 per share.
  D. The customer will have 1,000 shares at $0.50 per share.
  A. The customer will have 50 shares at $10.00 per share.

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  Explanation

  Reverse Split Calculation: A 1-for-2 reverse split reduces the number of shares by half while doubling the price per share.

  Pre-Split Holdings: 100 shares at $5.00 = $500.

  Post-Split Holdings: 50 shares at $10.00 = $500.

  Incorrect Options: The total value remains unchanged; only the number of shares and price per share adjust.

• Question 250:

  Which of the following investments is most sensitive to changes in interest rates?

  A. Short-term Treasury bills
  B. Long-term zero-coupon bonds
  C. Money market funds
  D. Certificates of deposit with short maturities
  B. Long-term zero-coupon bonds

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  Explanation

  Interest Rate Risk: Long-term zero-coupon bonds are highly sensitive because they have no interim interest payments and longer duration.

  Incorrect Options:

  A, C, and D: Short-term instruments have lower interest rate sensitivity.