Finra Securities Industry Essentials SIE Exam Practice Test
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Question 1
Which of the following rates is the interest rate at which banks borrow and lend to each other on an overnight basis?
Answer : C
Step by Step Explanation:
Federal Funds Rate: The rate at which depository institutions lend reserves to each other overnight. It is set by the Federal Open Market Committee (FOMC).
Other Rates:
Prime Rate: Rate banks charge their most creditworthy customers.
Discount Rate: Rate the Federal Reserve charges banks for borrowing directly from it.
LIBOR: Interbank lending rate used internationally, now being phased out.
Federal Reserve Explanation of Rates: Federal Funds Rate.
Question 2
In a rising interest rate environment, which of the following statements is true regarding the price of fixed-rate corporate bonds?
Answer : D
When interest rates rise, the price of fixed-rate corporate bonds falls because the bond's coupon payments become less attractive compared to new bonds issued at higher rates.
D is correct as bond prices move inversely to interest rates.
A is incorrect because bond prices fluctuate with interest rate changes.
B is incorrect because bond prices revert to par only at maturity.
C is incorrect because prices do not appreciate when rates rise.
Question 3
Which of the following responses describes a common feature of a hedge fund?
Answer : A
Step by Step Explanation:
Low Liquidity: Hedge funds often impose lock-up periods and restrict redemptions, leading to low liquidity for investors.
Incorrect Options:
B: Hedge funds typically have high minimum investment requirements, often $1 million or more.
C: Hedge funds employ diverse strategies, not just fixed income.
D: Hedge funds are generally opaque about their strategies and holdings to protect their competitive advantage.
SEC Investor Bulletin on Hedge Funds: SEC Hedge Funds.
Question 4
Which of the following security types is frequently offered to the public as part of a package or unit that also includes a fixed income obligation?
Answer : B
Step by Step Explanation:
Warrants: Are often issued alongside fixed-income securities, such as bonds, to enhance their appeal to investors. Warrants give the holder the right to purchase company stock at a specific price in the future.
Incorrect Options:
Options: Not typically bundled with fixed-income securities.
Common and Preferred Stock: Usually issued separately, not as part of a package with bonds.
SEC Guide on Warrants: SEC Warrants Information.
Question 5
When is it permissible to exercise European-style options contracts?
Answer : B
Step by Step Explanation:
European-Style Options: Can only be exercised on their expiration date, unlike American-style options, which can be exercised any time before expiration.
Incorrect Options:
A: Not accurate; the exercise must occur specifically on the expiration date.
C: Options cannot be exercised after expiration.
D: The expiration date depends on the option contract, not a specific weekday.
Options Clearing Corporation (OCC) Guidelines: OCC European Options.
Question 6
Which of the following terms describes failure to honor a firm quote?
Answer : B
Step by Step Explanation:
Backing Away: Refers to the failure of a market maker to honor a firm quote when a customer attempts to trade at that price. It is a violation of market rules.
Incorrect Options:
Freeriding: Involves selling securities before paying for them in a cash account.
Interpositioning: Involves unnecessary intermediaries in trades, which can harm customers.
Market Manipulation: Covers a range of deceptive practices, such as wash trading or spoofing, not specific to honoring quotes.
Which of the following terms describes an offer to purchase some or all shareholders' shares in a corporation, usually at a premium to the market price?
Answer : A
Step by Step Explanation:
Tender Offer Definition: A tender offer is an offer to purchase a certain number of shares from shareholders, typically at a price above the current market value. This is often part of mergers, acquisitions, or corporate takeovers.
Stock Split: A stock split increases the number of shares but decreases the price per share without affecting the total value of an investor's holdings.
Redemption: Redemption refers to the repayment of a bond or preferred stock at maturity or at a predetermined date.
Class Action: A class action is a lawsuit filed by a group of people with similar grievances.
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