TheoryFree Series 66 Practice Test PDF
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Free Series 66 PDF with 30 questions
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Q1Which economic theory holds that business cycles are caused primarily by changes in the money supply and credit conditions rather than real sector shocks?
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✓ Correct answer: Austrian Business Cycle theory
Austrian Business Cycle theory attributes booms and busts to credit expansion by central banks that distort interest rates and lead to malinvestment. Real Business Cycle theory attributes cycles to technology shocks.
Q2Which type of security is specifically designed to protect investors against inflation risk?
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✓ Correct answer: Treasury Inflation-Protected Securities (TIPS)
TIPS have their principal adjusted by changes in the CPI. As inflation rises, the principal increases, so interest payments (a fixed percentage of adjusted principal) also rise, protecting purchasing power.
Q3When the Federal Reserve raises the discount rate, the most direct immediate effect is:
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✓ Correct answer: Borrowing from the Fed becomes more expensive for banks
The discount rate is what the Fed charges banks for short-term loans at the discount window. Raising it makes emergency borrowing from the Fed more costly, encouraging banks to seek funds elsewhere and generally tightening credit.
Q4Which of the following relationships between interest rates and bond prices is correct?
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✓ Correct answer: When interest rates rise, existing bond prices fall
Bond prices and interest rates have an inverse relationship. When market rates rise, existing bonds paying lower coupons become less attractive, so their prices fall. Long-term bonds are MORE sensitive (higher duration) to rate changes, not less.
Q5The yield curve normally slopes upward because:
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✓ Correct answer: Investors require higher yields to compensate for greater uncertainty and lower liquidity of longer maturities
A normal (upward-sloping) yield curve reflects liquidity preference: investors demand a risk premium for tying up capital longer. Greater price volatility, reinvestment risk, and uncertainty over time justify higher long-term yields.
Q6The Federal Reserve's 'dual mandate' refers to its goals of:
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✓ Correct answer: Maximum employment and stable prices
The Fed's dual mandate from Congress is to promote maximum employment and stable prices (price stability/low inflation). A third implicit goal is moderate long-term interest rates, sometimes called a triple mandate.
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