FINRA FINRA-SIE Online Practice Questions and Exam Preparation

FINRA FINRA-SIE Online Questions & Answers

• Question 21:

  An investor who lives on a fixed income and is concerned about inflation is most exposed to which of the following risks?

  A. Market risk
  B. Economic risk
  C. Interest rate risk
  D. Purchasing power risk
  D. Purchasing power risk

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  Explanation

  Purchasing power risk, also known as inflation risk, occurs when inflation reduces the real value of a fixed-income stream. Fixed payments (e.g., bond interest or annuity payments) lose buying power as inflation rises. D is correct because inflation directly affects fixed income by eroding purchasing power. A is incorrect because market risk relates to fluctuations in market prices, not inflation. B is incorrect because economic risk generally refers to broader economic downturns. not inflation.

  References:

  SIE Study Guide, Chapter 3: Risks of Fixed-Income Investments

• Question 22:

  Trades that settle within the period preset by regulators of the particular market are considered to have which of the following types of settlement?

  A. Cash
  B. Rolling
  C. Next day
  D. Regular way
  D. Regular way

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  Explanation

  "Regular way" settlement refers to the standard settlement cycle for securities transactions, which is T+2 for most stocks and bonds. This timeline is set by regulators to ensure orderly processing of trades. D is correct because regular way settlement follows the preset T+2 cycle. B is not a recognized term for settlement types. C is incorrect because next-day settlement applies only to specific securities (e.g., Treasury securities).

  References:

  SEC Rule 15c6-1

• Question 23:

  Publicly traded limited partnership interests are typically considered:

  A. Mutual funds
  B. Equity securities
  C. Fixed-income securities
  D. Derivative investments
  B. Equity securities

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  Explanation

  Publicly Traded Limited Partnerships (PTPs): Represent ownership stakes, which categorize them as equity securities. PTPs often involve sectors like real estate or energy.

  Incorrect Options:

  A: Mutual funds are pooled investment vehicles, not partnerships.

  C: Fixed-income securities are debt instruments like bonds.

  D: Derivatives include options or futures, not ownership stakes.

  SEC Guidance on Publicly Traded Partnerships: SEC PTPs.

• Question 24:

  A customer purchases 100 shares of stock. The customer fears a decline in the share price and would like to protect his investment and minimize loss.

  Which of the following strategies should the customer employ to lock in his profit?

  A. Sell a put
  B. Sell a call
  C. Purchase a put
  D. Purchase a call
  C. Purchase a put

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  Explanation

  Purchasing a put option allows the customer to sell the stock at a predetermined price (the strike price) if the share price declines. This strategy protects against downside risk while maintaining upside potential. C is correct because a put acts as insurance, locking in a minimum sale price. A is incorrect because selling a put exposes the investor to additional risk if the stock declines. B is incorrect because selling a call generates income but does not protect against downside risk.

  D is incorrect because purchasing a call is a bullish strategy unrelated to protecting existing positions.

  References:

  SIE Study Guide, Chapter 8: Protective Put Strategies

• Question 25:

  A customer purchases a corporate bond at a premium.

  Which of the following statements is true regarding the bond's yield to maturity (YTM)?

  A. YTM will be higher than the coupon rate
  B. YTM will equal the coupon rate
  C. YTM will be lower than the coupon rate
  D. YTM is unaffected by purchase price
  C. YTM will be lower than the coupon rate

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  Explanation

  When a bond is purchased at a premium, the investor pays more than par value. As a result, the yield to maturity is lower than the coupon rate because the investor will receive only par value at maturity.

  Incorrect Options:

  A and B: These apply to discount or par bonds.

  D: Yield calculations are directly affected by price.

  References:

  SIE Study Guide, Chapter on Bond Yields

• Question 26:

  The expense ratio of a mutual fund is a measure of:

  A. stability.
  B. liquidity.
  C. profitability.
  D. operating cost.
  D. operating cost.

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  Explanation

  A mutual fund's expense ratio measures the fund's operating costs, making choice D correct. The expense ratio represents the annual cost of running the fund, expressed as a percentage of the fund's average net assets. These ongoing expenses typically include the investment adviser's management fee, administrative costs, transfer agency costs, custody, accounting, legal and audit expenses, and in some cases distribution-related fees such as 12b-1 fees. The expense ratio is deducted from fund assets, which means it directly reduces the fund's returns to shareholders over time.

  Choice A (stability) is incorrect because the expense ratio does not describe volatility, risk consistency, or portfolio behavior; it's about costs.

  Choice B (liquidity) is incorrect because liquidity refers to how readily investors can redeem or sell fund shares; open-end mutual funds generally redeem at NAV, but liquidity is not captured by the expense ratio.

  Choice C (profitability) is also incorrect because the expense ratio is not the fund's profit margin. Mutual funds are pass-through investment vehicles where investor returns come from portfolio performance net of costs; the expense ratio is a drag on performance, not a measure of the fund company's profitability. SIE exams often test the practical implication: all else equal, higher expense ratios make it harder for a fund to outperform lower-cost alternatives, especially over long time horizons. Expense ratios are distinct from sales charges (loads), which are transaction-based and may be paid when buying or selling certain share classes. By contrast, the expense ratio is an ongoing annual cost embedded in the fund's daily NAV calculations, impacting long-term compounding and total return.

• Question 27:

  At least how often Is a firm required to provide a customer with a statement In writing as to the availability of an Investor brochure posted on the MSRB website?

  (AC?

  )

  A. Monthly
  B. Quarterly
  C. Annually
  D. Once every three years
  C. Annually

• Question 28:

  The financial risk that a given security is not readily tradable in the market without impacting the market price is known as:

  A. Credit risk
  B. Market risk
  C. Liquidity risk
  D. Prepayment risk
  C. Liquidity risk

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  Explanation

  Liquidity Risk: Refers to the difficulty of selling a security quickly without significantly affecting its price. This is common in thinly traded securities or complex instruments.

  Other Risks:

  Credit Risk: Relates to the possibility of default by the issuer.

  Market Risk: Pertains to overall price changes due to market conditions.

  Prepayment Risk: Associated with mortgage-backed securities and early repayment of loans.

  SEC Investor Bulletin on Risks: SEC Risk Guidance.

• Question 29:

  Which of the following debt security classes has the highest claim priority ranking?

  A. Secured debt
  B. Subordinated debt
  C. Senior unsecured debt
  D. Second lien secured debt
  A. Secured debt

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  Explanation

  The correct answer is A, Secured debt. In the event of a company's liquidation or bankruptcy, creditors are paid based on a strict priority of claims hierarchy. Secured debt has the highest priority because it is backed by specific collateral, such as property, equipment, or other assets. If the issuer defaults, secured creditors have a legal claim to seize and sell the collateral to recover their investment, giving them the strongest protection. Next in priority would typically be senior unsecured debt, which has no collateral backing but still ranks ahead of other unsecured obligations. Below that is subordinated debt, which explicitly ranks lower in priority and is only repaid after senior creditors have been satisfied. Second lien secured debt is still secured, but it has a secondary claim on the same collateral behind first lien (primary) secured debt. This means it is riskier than first lien secured debt because those creditors are paid first from the collateral proceeds.

  Therefore, among the choices, secured debt (specifically first lien secured debt) holds the highest claim priority, making it the safest from a repayment standpoint and the correct answer for this question.

• Question 30:

  Which of the following terms defines when a corporate outsider acquires material, nonpublic company information and uses that information for her personal benefit?

  A. Tipping
  B. Churning
  C. Front running
  D. Insider trading
  D. Insider trading

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  Explanation

  The correct answer is D, Insider trading. Insider trading occurs when an individual uses material, nonpublic information (MNPI) to make investment decisions for personal gain. Importantly, insider trading is not limited to corporate insiders like executives or directors-it also applies to corporate outsiders who improperly obtain such information and trade on it. In this scenario, the outsider acquires confidential information and uses it for personal benefit, which is a direct violation of securities laws and SEC regulations. This undermines market fairness because it gives an unfair advantage over other investors who do not have access to the same information. Choice A, Tipping, refers to the act of sharing MNPI with another person, who may then trade on it. Both the tipper and tippee can be held liable, but tipping itself is distinct from personally trading on the information.

  Choice B, Churning involves excessive trading in a customer's account to generate commissions and is unrelated.

  Choice C, Front running involves trading ahead of a known customer order, not using inside information. Thus, using material nonpublic information for personal trading-whether by an insider or outsider-is classified as insider trading, making choice D correct.