TAKING THE SIE EXAM? ARE YOU ABLE TO WORK PROBLEMS REGARDING INTEREST RATE RISK?

When you go to sit for the Securities Industry Essentials (SIE) exam, be prepared for questions on interest-rate risk. FINRA publishes a Content Outline for the SIE exam, and includes Investment Risks that you should know under Section 2.2. One of those required-to-know risks is investment-rate risk.

Bob Eder has full coverage of investment risks in his Study for the Securities Industry Essentials Exam on pages 145-151. Here is a sample of Bob Eder's discussion of interest-rate risk:

Interest Rate Risk                                          (2.2)

This is the risk that interest rates will go up and cause bond prices to go down. If interest rates go up, the prices of bonds will go down. This happens because a bond that pays four percent will lose value if other bonds pay a higher rate, say, five percent. A change in interest rates also affects stock prices. If rates go up, investors tend to pull money out of stocks to invest in bonds which yield higher returns. 


Additionally an applicant for the SIE exam needs to know how to work problems regarding interest-rate risk. For example, can you answer the following practice question correctly?

Suppose Investor Henry purchases a T-bill at a yield of 3.14 percent and then sells the T-bill before maturity at a yield of 3.29 percent. Investor Henry has realized a:

a.    profit

b.    loss

c.    neither a profit or a loss

The answer is (b). Henry has suffered a loss. Why? Because T-bills are quoted in yields, and yields are inversely related to dollar price. Henry purchases the T-bills at a yield of 3.14, then he sells the T-bills at a yield of 3.29 percent. This results in a loss, because yields and dollar prices are inversely related.

Here is the link to FINRA's Content Outline for the SIE exam. See the references to Investment Risks in FINRA's Content Outline, section 2.2.

Study for the Securities Industry Essentials (SIE) Exam is available from Amazon in both paperback and Kindle e-book versions. Here is the link to Bob Eder's book on Amazon.

For questions about Bob Eder's SIE manual, Study for the Securities Industry Essentials (SIE) Exam, or questions in general about the SIE exam, or about Interest Rate Risk, feel free to email Bob Eder at bobeder@bobeder.net.

Bob Eder received his Juris Doctor (J.D.) degree from the University of Utah, Quinney College of Law, in 2001. See Bob Eder's Author Page on Amazon.com.




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