Free FINRA SIE Practice Exam with Questions & Answers | Set: 2

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 correctbecause inflation directly affects fixed income by eroding purchasing power.

Ais incorrect because market risk relates to fluctuations in market prices, not inflation.

Bis incorrect because economic risk generally refers to broader economic downturns.

Cis incorrect because interest rate risk involves changes in bond prices due to interest rate movements, not inflation.

FINRA prohibits the payment of referral fees or splitting of commissions with individuals who are not registered with a broker-dealer. However, taking a friend out to dinner as a gesture of gratitude is allowed, as it does not involve cash or monetary compensation directly tied to the referral.

C is correctbecause non-monetary expressions of gratitude (like a dinner) are permitted under FINRA rules.

Ais incorrect because commission splitting with unregistered individuals is prohibited.

Bis incorrect because paying referral fees is also prohibited without registration.

Dis incorrect because giving prepaid credit cards tied to commission income violates compensation rules.

A stock dividend increases the number of shares owned without affecting the total cost basis. The new cost basis per share is calculated by dividing the original total investment by the new number of shares:

Original total investment = 100 shares × $50.00 = $5,000

After a 10% stock dividend, the investor owns 110 shares.

New cost basis = $5,000 ÷ 110 shares =$45.45per share.

B is correctbecause it reflects the adjusted cost basis per share.

An option is considered "at the money" when the current price of the underlying asset (or index level) equals the option’s strike price.

B is correctbecause the index level equals the strike price.

Ais incorrect because "in the money" requires the option to have intrinsic value (e.g., for a call, the index level must be above the strike price).

Cis incorrect because "out of the money" applies when the index level is below the strike price (for calls) or above it (for puts).

Dis incorrect because "at the money" options have no intrinsic value.

Coverdell Education Savings Accounts (ESAs) require that all funds be distributed by the time the beneficiary reaches 30 years old. If the funds are not used for qualified educational expenses, they may be subject to taxes and penalties.

B is correctbecause funds must be distributed by age 30 unless transferred to another eligible family member.

Ais incorrect as age 21 is not relevant for Coverdell ESAs.

Cis incorrect because age 59 ½ applies to retirement accounts like IRAs.

Dis incorrect because there is a distribution deadline for Coverdell accounts.

Step by Step Explanation:

Debentures: Corporate bonds not backed by physical assets or collateral. They rely on the issuer’s creditworthiness.

Incorrect Options:

B: Trust certificates are a legacy term for bonds backed by a trust.

C: Collateral trust bonds are secured by financial assets.

D: GO bonds are issued by municipalities, not corporations.

References:

SEC Guide on Corporate Bonds:SEC Corporate Bonds.

Step by Step Explanation:

Definition of Accredited Investor: As perSEC Regulation D, Rule 501, an accredited investor includes:

Individuals with a net worth exceeding $1 million (excluding primary residence equity).

Individuals with an annual income exceeding $200,000 (or $300,000 jointly with a spouse) for the past two years.

Elimination of Incorrect Answers:

$500,000 threshold (option B) is too low to qualify under Regulation D.

Option D is incorrect as it requires assets of $5 million, not $2.5 million.

References:

SEC Regulation D, Rule 501 (Accredited Investor Definition): SEC Regulation D.

The primary market deals with the issuance of new securities, which is regulated under the Securities Act of 1933. This act requires issuers to provide full disclosure of material information to investors to ensure transparency and fairness in new offerings.

A is correctbecause the Securities Act of 1933 governs initial offerings.

Bis incorrect because the Securities Exchange Act of 1934 regulates secondary market trading.

Cis incorrect because the Investment Advisers Act of 1940 pertains to investment advisers.

Dis incorrect because the Investment Company Act of 1940 governs mutual funds and other investment companies.

The announcement of negative regulatory changes introducesunsystematic risk, specific to the technology sector. Diversification into unrelated sectors can reduce exposure to this risk.

A is correctbecause uncorrelated holdings reduce portfolio risk.

Bis incorrect because adding more microchip companies increases exposure to sector-specific risk.

Cdoes not address the core issue of over-concentration.

Dis the opposite of mitigating risk.

Step by Step Explanation:

Short Sale Definition: Involves selling borrowed securities with the expectation of repurchasing them at a lower price.

Investor Ownership: Short sales do not involve securities already owned by the seller.

Other Options: None of the other choices accurately define a short sale.

References:

SEC Regulation SHO (Short Selling): SEC Short Sales.