Finra SIE Exam Practice Test Instant Access

Question 1

The provision that allows a bond issuer to purchase bonds from customers prior to the maturity date on the bond is known as a:

APut

BCall

CConversion

DDefeasement

Answer : B

Step by Step Explanation:

Call Provision: This allows the issuer to redeem bonds before their maturity date, usually at a premium to the par value, which benefits the issuer in a declining interest rate environment.

Put Provision: Allows bondholders, not issuers, to sell the bond back to the issuer.

Conversion: Relates to convertible bonds that can be converted into equity.

Defeasement: Refers to the removal of a bond issuer's obligation by setting aside cash or securities to cover the debt.

SEC Guide on Callable Bonds: SEC Callable Bonds.

Question 2

Which of the following products is the most appropriate class of investments for a customer looking for income and capital gains?

AA growth stock

BA money market account

CA blue-chip stock mutual fund

DTreasury Separate Trading of Registered Interest and Principal of Securities (STRIPS)

Answer : C

Step by Step Explanation:

Blue-Chip Stock Mutual Funds: Invest in large, established companies that typically provide stable dividend income and potential for capital appreciation.

Incorrect Options:

A: Growth stocks prioritize capital appreciation, not income.

B: Money market accounts focus on safety and liquidity, not capital gains.

D: STRIPS provide fixed income without capital gains potential.

FINRA Investment Product Education: FINRA Investment Guidance.

Question 3

An investor holds 1,000 shares of a stock with a total cost basis of $5,000 in his account when a 1-for-5 reverse stock split is announced. What will be the investor's total cost basis after the payable date of the reverse split?

A$1,000

B$2,500

C$5,000

D$25,000

Answer : C

Step by Step Explanation:

Cost Basis in Reverse Split: The total cost basis remains unchanged in a reverse stock split. Only the number of shares and price per share adjust.

Pre-Split: 1,000 shares at $5 each = $5,000.

Post-Split: 200 shares at $25 each = $5,000.

Incorrect Options:

A, B, and D: Do not reflect the unchanged total cost basis.

IRS Guidance on Stock Splits: IRS Stock Split Info.

Question 4

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?

ATender

BStock split

CRedemption

DClass action

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.

SEC Rule 14e on tender offers: SEC Tender Offers.

Question 5

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

ACredit risk

BMarket risk

CLiquidity risk

DPrepayment risk

Answer : C

Step by Step 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 6

Pursuant to FINRA rules, which of the following content is inappropriate to link to from a business-related social media site?

AA link to the firm's website discussing its products and services

BA link to an investment's website stating the investment's performance over the next five years

CA link to information on a mutual fund that discusses previous performance over the last five years

DA link to a company's filing on EDGAR that contains information on a press release about the company

Answer : B

Under FINRA Rule 2210, firms must avoid making predictions or projections of future investment performance.

B is correct because it involves prohibited predictive statements.

A, C, and D are acceptable under FINRA guidelines, as they do not involve prohibited content.

Question 7

Which of the following statements is true of the comparison between penny stocks and blue-chip stocks?

APenny stocks are generally less liquid than blue-chip stocks.

BPenny stocks are more likely to pay dividends than blue-chip stocks.

CPenny stock prices are generally more stable than blue-chip stock prices.

DPenny stock issuers are generally better capitalized than issuers of blue-chip stocks.

Answer : A

Step by Step Explanation:

Penny Stocks: These are low-priced, highly speculative stocks often issued by small or distressed companies. They generally have low liquidity, meaning they can be difficult to buy or sell without significantly impacting the price.

Incorrect Options:

Dividends: Penny stocks rarely pay dividends, unlike blue-chip stocks.

Price Stability: Penny stocks are highly volatile compared to blue-chip stocks.

Capitalization: Blue-chip companies are far better capitalized.

SEC Bulletin on Penny Stocks: SEC Penny Stocks.

Finra SIE Securities Industry Essentials Exam Practice Test