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| Section | Weight | Objectives |
|---|---|---|
| Regulatory Framework | 9% | - Securities regulation
|
| Understanding Products and Their Risks | 44% | - Investment vehicles
|
| Knowledge of Capital Markets | 16% | - Economic factors
|
| Trading, Customer Accounts, and Prohibited Activities | 31% | - Regulated and prohibited conduct
|
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NEW QUESTION # 21
Under FINRA rules, which of the following activities is not considered an outside business activity (OBA)?
Answer: C
Explanation:
Step by Step Explanation:
* Outside Business Activity Definition: Per FINRA Rule 3270, an OBA involves compensated business activities outside the scope of the RR's role at their firm. Passive investments are excluded because they do not require active involvement.
* Incorrect Options:
* A, B, and C: Selling real estate, selling insurance, and refereeing are considered OBAs as they involve active participation and compensation.
References:
* FINRA Rule 3270 (Outside Business Activities): FINRA Rule 3270.
NEW QUESTION # 22
For a customer thinking about purchasing a high-income bond mutual fund, which of the following is considered the primary risk of the underlying securities in the portfolio?
Answer: D
Explanation:
High-income bond mutual funds typically invest in lower-rated (junk) bonds that offer higher yields. These bonds are exposed to significant credit risk, as issuers may default on their payments.
* A is correctbecause credit risk is the primary concern with high-yield bonds.
* Bis incorrect as political risk is more relevant for international investments.
* Cis incorrect because taxability risk is not specific to bond mutual funds.
* Dis incorrect because purchasing power risk is more relevant for fixed-income investments during inflationary periods but is not the primary risk here.
NEW QUESTION # 23
Assuming yields are held constant, which of the following statements describes what will occur as a discount bond reaches maturity?
Answer: B
Explanation:
Step by Step Explanation:
* Discount Bonds: These are issued or traded below par value. Over time, their price moves closer to par as they approach maturity, assuming yields remain constant.
* Other Options:
* Par Value Changes: The par value of a bond does not change over time; only its price fluctuates.
References:
* SEC and FINRA Bond Basics: SEC Discount Bonds.
NEW QUESTION # 24
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
Explanation:
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.
NEW QUESTION # 25
An increase in interest rates has which of the following effects on a municipal bond?
Answer: A
Explanation:
When interest rates rise, existing bond prices generally fall, and this relationship applies to municipal bonds just as it does to Treasuries and corporate bonds. The reason is competitive pricing in the market: newly issued bonds come to market offering higher yields (because prevailing rates are higher). To remain attractive, older bonds with lower coupon rates must trade at discounted prices so that their yield to an investor purchasing them today rises to a competitive level. Therefore, an increase in interest rates typically causes a decrease in the market price of an existing municipal bond, making choice A correct.
Choice B is the opposite of the correct interest-rate/price relationship. Choice C and D are incorrect because the question asks about the effect on a municipal bond already issued. The bond's coupon rate (the stated interest rate on the bond) is fixed at issuance for most standard municipal bonds; market interest rates changing does not retroactively change the bond's coupon. What changes is the bond's market price and therefore its yield in the secondary market.
This concept is core SIE bond math/relationships: price and yield move inversely, and bond sensitivity to rate changes increases with longer maturities and lower coupons (i.e., more duration). Municipal bonds also carry other risks (credit, call/prepayment features, liquidity), but the direct effect of a general rise in interest rates is a market-price decline due to the need to adjust yields to current levels. The SIE outline specifically expects understanding of debt instruments and the relationship between price and interest rates.
NEW QUESTION # 26
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