Series 65 Economics & Risk Practice Questions
Economics & Risk makes up 4 of every 50 questions on a Tigertest Series 65 practice test. Here are 10 of the 16 questions on it, each with the answer and the reason.
Updated by the Tigertest team. Based on NASAA's Series 65 test specifications. Original questions; 50 per test, weighted like the real 130-question exam. Not affiliated with NASAA or FINRA.
1. An adviser sees rising inventories, falling factory orders and slowing hiring after a long expansion. The economy is most likely nearing:
- A.A deflationary bottom
- B.A peak
- C.A trough
- D.An early recovery
Answer: B. Late in an expansion, orders slow and inventories build before output turns down, which marks a peak. A trough comes at the end of a contraction, when these indicators start to improve.
2. To cool rapid inflation, the Federal Reserve is most likely to:
- A.Cut the federal funds target
- B.Lower the discount rate
- C.Buy Treasuries from dealers
- D.Sell Treasuries to dealers
Answer: D. Selling securities drains bank reserves and pushes short-term rates up, which slows borrowing and spending. Buying securities and cutting rates are easing moves.
3. A cut in income tax rates paired with higher government spending is an example of:
- A.Expansionary fiscal policy
- B.Quantitative tightening
- C.Contractionary fiscal policy
- D.Tight monetary policy
Answer: A. Fiscal policy is taxing and spending by Congress and the President; lower taxes plus more spending add demand. Monetary policy is the Federal Reserve's job.
4. A U.S. investor owns a euro-denominated bond. The euro falls 8% against the dollar while the bond's euro price is unchanged. The investor's dollar return is:
- A.Zero
- B.About -4%
- C.About -8%
- D.About +8%
Answer: C. With the bond flat in euros, the dollar return comes entirely from the currency, and a weaker euro buys fewer dollars. That is currency (exchange rate) risk.
5. A country's government debt is downgraded and its bond yields jump. Which risk has the bondholder experienced?
- A.Purchasing power risk
- B.Call risk
- C.Sovereign credit risk
- D.Reinvestment risk
Answer: C. Sovereign debt carries the risk that a national government cannot or will not pay. A downgrade raises the yield investors demand and lowers existing bond prices.
6. A bond pays 5% while consumer prices rise 3.5%. The bond's approximate real return is:
- A.1.5%
- B.3.5%
- C.5.0%
- D.8.5%
Answer: A. The real return is roughly the nominal return minus inflation: 5% - 3.5% = 1.5%. Adding the two (8.5%) is the most common slip.
7. Deflation is most damaging to which borrower?
- A.One with no debt at all
- B.One with mostly floating-rate debts
- C.One holding Treasury bills
- D.One with large fixed-rate debts
Answer: D. When prices fall, each dollar owed is worth more in real terms, so fixed debts become heavier. Lenders and holders of cash gain purchasing power.
8. Short-term Treasury yields rise above long-term yields. Many analysts read this as a sign of:
- A.Falling credit spreads
- B.A coming slowdown
- C.Accelerating inflation
- D.Strong long-term growth
Answer: B. An inverted curve shows markets expecting lower rates ahead, which usually happens when a slowdown or recession is expected.
9. The credit spread between corporate bonds and Treasuries of the same maturity usually widens when:
- A.Treasury yields are rising fast
- B.Investors fear a recession
- C.The economy is expanding
- D.Corporate defaults are falling
Answer: B. In a downturn investors demand more yield for default risk, so spreads widen. In expansions, default worries ease and spreads narrow.
10. Gross Domestic Product measures:
- A.Total household income after tax
- B.The value of exports minus imports
- C.Output of the nation's citizens abroad
- D.Output produced within the country
Answer: D. GDP is the market value of final goods and services produced inside a country in a period. Net exports are one of its components, not the whole measure.
Practice all 16 economics & risk questions, and the rest of the 200-question bank, in the free Series 65 training sets. Questions you miss come back until you have mastered them.
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