SIE Understanding Products and Their Risks Practice Test 4

1. Which of the following risks is most related to the successful operation of an issuer of a security?

A. Currency risk

B. Inflationary/purchasing power risk

C. Credit risk

D. Interest rate/reinvestment risk

2. Which of the following correctly states the typical relationship between a change in the general level of interest rates and a change in the market value of bonds?

A. When interest rates stay the same, corporate bond values rise and treasuries decline.

B. When interest rates stay the same, long-term bond values decline and short-term bond values rise.

C. When interest rates decline, bond values rise.

D. When interest rates decline, dollar-denominated bonds remain the same and foreign bond values decline.

3. Which of the following is considered difficult to mitigate in the short term through diversification, portfolio rebalancing, or hedging?

A. Political/geopolitical risk

B. Prepayment risk

C. Market/systematic risk

D. Non-systematic risk

4. Which of the following acts included a security future in the definition of an equity security?

A. 1933 Securities Act

B. 1934 Securities Exchange Act

C. 2000 Commodity Futures Modernization Act

D. 2002 Sarbanes-Oxley (SOX) Act

5. Which of the following describes a requirement in FINRA Rule 2261 - Disclosure of Financial Condition?

A. When requested by a customer, the member broker firm provides its financial condition from its most recent balance sheet.

B. When a customer purchases securities representing a 10% increase in his portfolio, the broker dealer automatically provides its most recent year-to-date income statement.

C. When the member broker firm is owned by a parent company, whenever the parent company declares a dividend, the broker firm automatically provides the amount of dividend per share.

D. When a customer opens a margin account, the broker dealer discloses the total amount of loans the broker dealer has outstanding to all customers.

6. Which of the following is true?

A. Preferred shareholders typically are most interested in prospects of growth in share value.

B. Bondholders typically are most interested in prospects of interest rates decreasing.

C. Common shareholders typically are not interested in prospects of growth in share value.

D. Creditors are typically not interested in the financial strength of the company.

7. Which of the following conversions typically occurs?

A. Convertible preferred stock converts to senior bonds.

B. Convertible senior bonds convert to subordinated debentures.

C. Convertible preferred stock converts to common stock.

D. Convertible common stock converts to preferred stock.

8. Which of the following scenarios represents a stockholder fully exercising the Right of First Refusal?

A. Of 1,000,000 common shares issued, a shareholder owns 500,000 common shares and purchases 5,000 shares of a new issue.

B. Of 1,000,000 common shares issued, a shareholder owns 500,000 common shares and purchases 5% of a new issue.

C. Of 1,000,000 common shares issued, a shareholder owns 500,000 common shares and purchases 50% of a new issue.

D. Of 1,000,000 common shares issued, a shareholder owns 500,000 common shares and purchases 500,000 shares of a new issue.

9. Which may typically occur with a rights issue?

A. The subscription price will typically be higher than the current market price.

B. The market value will typically rise when a rights offering is announced.

C. Multiple rights may be needed to purchase a share of stock.

D. Non-renounceable rights may be sold by current shareholders.

10. Which of the following is a typical scenario for a company providing an incentive for current bondholders or stockholders to purchase additional preferred stocks or bonds?

A. Offered in combination with the bond or preferred stock, a stock call warrant provides an opportunity, but not an obligation, for the purchaser to exercise the warrant, but not resell the warrant to anyone else.

B. Offered in combination with the bond or preferred stock, a stock call warrant provides an opportunity, but not an obligation, for the purchaser to exercise the warrant at a price lower than the current market price.

C. Offered in combination with the bond or preferred stock, a stock call warrant provides an opportunity, but not an obligation, for the purchaser to exercise the warrant within a specific period, beginning at some point, as much as six months or a year after the issue.

D. Offered in combination with the bond or preferred stock, a stock call warrant provides an obligation for the purchaser to exercise the warrant within a specific period, beginning at issuance and lasting as much as six months or a year.

SIE Understanding Products and Their Risks Practice Test 4

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