SIE (Securities Industry Essentials) Practice Exam

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Which product is adversely impacted if the issuer's credit rating is downgraded?

Municipal bonds
Common stocks
Exchange-traded notes (ETNs)
Mutual funds

The correct answer is: Exchange-traded notes (ETNs)

Exchange-traded notes (ETNs) are unsecured debt instruments issued by financial institutions that are backed solely by the issuers' credit rating. This means that if the issuer's credit rating is downgraded, the value of ETNs will also decrease. This is because investors view ETNs as riskier investments and demand a higher return for the added risk, causing the price of ETNs to decrease. Municipal bonds, common stocks, and mutual funds are not directly impacted by the issuer's credit rating as their value is determined by factors such as market conditions, company performance, and interest rates. However, a credit rating downgrade may indirectly affect these investments if it leads to a broader economic impact or if the issuer's financial health is closely tied to the performance of these investments.