FSMA 300 Midterm Prep

A short-term debt instrument with an initial maturity of 60 days to one year issued by a major industrial corporation is: A: Commercial paper B: Bankers acceptance C: Certificate of deposit (CD) D: Municipal paper E: None of the above

A: Commercial paper

In addition to the legislation and guidelines that may apply, the investment policy that is decided upon by the investment manager (for a client) include all the following elements EXCEPT: A: Specific goals about continuing education B: The asset classes for investment C: Rate of return expectations (including time frame) and expected volatility D: An investment review process E: A policy review process

A: Specific goals about continuing education

If Moody's Investors Service decreases the bond rating from A to BBB on a corporate bond: A: The price of the bond will likely decrease B: The credit risk of the firm has likely decreased C: The default risk of the bond has likely decreased D: The current yield on the bond will likely decrease E: The coupon on the bond will likely decrease

A: The price of the bond will likely decrease

Frank believes interest rates over the next several years will increase. Since he has a low-risk tolerance, he should invest in A: Treasury bills B: Treasury notes C: Treasury bonds D: AAA-rated corporate bonds E: Equity

A: Treasury bills

Types of municipal bonds include all of the following EXCEPT: A: Treasury notes B: General obligation bonds C: Revenue bonds D: Private purpose bonds E: All of the above are types of municipal bonds

A: Treasury notes

Claire has 200 shares of stock in a firm that just issued 1 right per share. The right gives the holder the opportunity to purchase 0.125 shares of stock. If Claire exercises all her rights, how many addition shares of stock will she be able to obtain? A: 8 B: 25 C: 125 D: 200 E: 1,600

B: 25

Oliver wants to be sure he has sufficient funds to send his daughter to college in 10 years. He is in the 28% combined federal/state tax bracket and is considering investing in one of the following zero-coupon securities. BOND TYPE MATURITY YIELD A: Corporate Strip 10 years 7.8% B: Municipal Strip 10 years 5.8% C: Callable zero-coupon municipal 10 years 5.8% What is the best strategy for Oliver? A: Bond A B: Bond B C: Bond C D: Either bond B or bond C since they are both municipals E: Oliver's time horizon is too long to be investing in bonds

B: Bond B

Rank the following investments from low risk to high risk: A: Money Market Fund, Certificate of Deposit, Promissory Note B: Certificate of Deposit, Money Market Fund, Promissory Note C: Promissory Note, Money Market Fund, Certificate of Deposit D: Promissory Note, Certificate of Deposit, Money Market Fund E: Certificate of Deposit, Promissory Note, Money Market Fund

B: Certificate of Deposit, Money Market Fund, Promissory Note

Electronic trading through online brokerage firms: A: Requires more time than trading through a traditional brokerage firm B: Is popular because of the low cost of such transactions C: Is not popular because the service fees are greater than if you through a traditional brokerage firm D: Cannot be done on a regular basis E: Offers better advice and more personalized service than a traditional brokerage firm

B: Is popular because of the low cost of such transactions

A firm has $10 million to invest in safe securities. The time horizon is five years, and interest rates are anticipated to decrease over this period. What is the best investment for this firm? A: Six-month CDs B: Nonparticipating GICs C: Treasury bills D: Participating GICs E: two-year corporate bonds

B: Nonparticipating GICs

Disadvantages to investing in Treasury bonds include: A: They have a stable market value B: The rate of return is usually lower than other investments C: They have little or no default risk D: They are subject to State and Local taxes for non-residence of a state E: None of the above is a disadvantage to investing in Treasury bonds

B: The rate of return is usually lower than other investments

Warrants: A: are usually issued at an exercise price greater than the current market B: Usually have original expirations of three to five years C: Are issued to current shareholders D: Cannot be traded E: All of the above are true statement about warrants

B: Usually have original expirations of three to five years

A standard stock option contract is for how many shares? A: 1 share B: 10 shares C: 100 shares D: 1,000 shares E: 10,000 shares

C: 100 shares

Commissions are usually charged when: A: A right is exercised B: A warrant is exercised C: A right is sold D: All of the above will have commissions E: A and B are correct, C is not correct

C: A right is sold

Revenue bonds are: A: Backed by the full faith and credit of the issuer's taxing authority B: Less risky than general obligation bonds C: Backed by user fees from a specified project D: Usually used to finance the general operations of the issuing authority E: Rarely exempted from Federal income taxes

C: Backed by user fees from a specified project

Kate owns 1,000 shares of Pills Drug Firm and has heard rumors that the firm is about to be investigated by the Food and Drug Administration (FDA). She believes the stock value will decline as this news becomes more widespread, but she also believes that this is a good company that can withstand any investigation. Kate should: A: Sell her shares B: Buy a call C: Buy a put D: Buy a warrant E: Buy a bond issued by the firm

C: Buy a put

Investment types can be categorized into broad asset classes such as which of the following? A: Cash B: Value stocks C: Equity investments D: Government bonds E: Real estate

C: Equity investments

Benefits of Guaranteed Investment Contracts (GICs) include all of the following EXCEPT: A: Higher rate of return than CD accounts B: Transferring the management of assets for a retirement account to the insurance company C: Federal insurance D: Transferring the investing of assets for a retirement account to the insurance company E: all of the above are benefits of GICs F: None of the above is correct

C: Federal insurance

"Manufactured" stripped bonds include: A: DOGs B: BRDs C: TIGRs D: ELKs E: All of the above are "manufactured" stripped bonds

C: TIGRs

A brokerage firm charges an annual 0.4% management fee on money market accounts, plus a $10 account fee on accounts with balances less than $10,000. Susan has a money market account with this firm that has a balance of $40,000. What is the annual cost to keep this account with this firm? A: $10 B: $16 C: $27 D: $160 E: $170

D: $160

Simple interest is calculated as rate *principal* time. Charles gave a $50,000 1-year promissory note with 9% simple interest to his cousin to raise funds for his business. The principal and interest are due at maturity. What is the total amount of funds due at maturity? A: $4,500 B: $46,500 C: $50,000 D: $54,500 E: $59,000

D: $54,500

Karen purchased 500 shares of ABC Company for $20 per share. When the stock reached $100 per share, the firm had a 4-for-1 stock split. The price has again reached $100 per share, and another 4-for-1 stock split is planned. How many shares will Karen have after the second stock split? A: 500 shares B: 2,000 shares C: 4,000 shares D: 8,000 shares E: 16,000 shares

D: 8,000

Jason is in the 28% Federal income tax bracket and 7% New York state income tax. He has invested in New York State bonds that yield a 6% return. The taxable equivalent yield on this bond is: A: 6.45% B: 7.32% C: 8.54% D: 9.23% E: 10.61%

D: 9.23%

Advantages of investing in money market funds include: A: Liquidity B: Personalized check writing serviced C: Federally insured D: All of the above are advantages to money market funds investing E: A and B only are advantages; C is not an advantage

D: All of the above are advantages to money market funds investing E: A and B only are advantages; C is not an advantage

A debenture: A: Is unsecured debt B: Has priority over preferred stock if bankruptcy occurs C: Is backed by the general credit of the issuing firm D: All of the above are true E: A and B are true, but C is false

D: All of the above are true

Uses of options include: A: Speculation B: Creating Leverage C: Hedging D: All of the above are uses of options E: A and C are uses, but B is not

D: All of the above are uses of options

Information included in a promissory note includes all of the following EXCEPT: A: Identification of the parties B: Coupon rate C: Method used to calculate the interest D: Current yield E: Maturity date

D: Current yield

Users of strips as an investment alternative include all of the following EXCEPT: A: Investors who need a specified accumulation at the maturity date B: Conservative investors C: Children under the age of 14 D: Investors desiring steady cash inflows E: All of the above are potential strip investors

D: Investors desiring steady cash inflows

Advantages of investing in common stock include: A: Assured regular cash flows through dividends B: Guaranteed higher returns than money market funds C: Low volatility of returns D: Participation in the growth of the firm E: Security of principal

D: participation in the growth of the firm

A portfolio of Treasury bonds with coupon payment dates of February 15 and August 15 that matures in 10 years may be stripped into how many zero-coupon bonds? A: 0 since Treasury securities and not eligible for stripping B: 1 C: 10 D: 11 E: 21

E: 21

A right gives the holder the option to purchase a specified number of a company's share at the: A: Exercise price B: Par value C: Strike price D: All of the above are correct E: A and C are correct, but B is incorrect

E: A and C are correct, but B is incorrect

Betty has saved $60,000 for a down payment on a home. She is now actively looking for her dream house and anticipates making an offer on a home within the next two months. If the offer is accepted, it will take up to three additional months to close on the house. Betty will need to deposit about $1,000 in an escrow account as "good faith" money when she makes the offer. The rest of the down payment is made at closing. The best place for Betty to deposit her funds now is: A: The stock market B: A municipal bond C: A six-month certificate of deposit (CD) D: $1,000 in a two-month certificate of deposit (CD) and the remainder in a six-month CD E: A money market mutual fund

E: A money market mutual fund

Factors that should be considered in selecting a convertible bond issue for investments include all of the following EXCEPT which of the following? A: Investment banking firm that underwrites the issue B: Growth potential of the firm C: Payback period D: Earnings record over the past five years E: All of the above are factors that should be considered

E: All of the above are factors that should be considered

Investors in corporate zero-coupon bonds include all of the following EXCEPT: A: Tax-exempt retirement plans B: Conservative investors who want to lick-in their returns C: Investors who are saving for their children's college education D: Investors who do not need current cash flows E: All of the above are potential zero-coupon investors

E: All of the above are potential zero-coupon investors

Factors that should be considered in taking a stock option position include: A: The dividend paid on the underlying stock B: The volatility of the underlying stock C: The time to expiration D: The anticipated direction of market movement E: All of the above are relevant factors in the option decision

E: All of the above are relevant factors in the option decision

Investment information is now available on the Internet, offering easy access to: A: Annual reports B: Press releases C: Security analysis tools D: Information on common stocks E: All of the above can be found online

E: All of the above can be found online

Advantages to investing in convertible securities include all of the following EXCEPT: A: A high degree of security of both principal and income B: Securities typically pay a higher rate of return in the form of interest or dividends than is available from its common stock C: Bonds convertible into common stock usually have higher cash flow yields than the common stock itself D: The investor controls the form of investment and the timing of the conversion E: Convertible bonds are less liquid than straight bonds

E: Convertible bonds are less liquid than straight bonds

A market order specifies the price a stock is purchased or sold. (T/F)

False

A rights offering usually has a three to six month life. (T/F)

False

A stock dividend increases an investor's proportional ownership in the firm. (T/F)

False

All bonds are treated equally if bankruptcy occurs. (T/F)

False

An American option may be exercised only at maturity. (T/F)

False

An option provides a right to the writer and an obligation to the buyer. (T/F)

False

Bonds are more likely to be called if rates increase. (T/F)

False

Bonds sold for more than their par value are called discounted bonds. (T/F)

False

Convertible securities have the same upside potential as the underlying asset. (T/F)

False

Corporate bonds are an appropriate alternative for an investor with a short-term time horizon. (T/F)

False

Costs to invest in unit trusts are similar to costs to invest in mutual funds. (T/F)

False

Due to their safety of principal, most cash equivalent assets earn returns slightly less than passbook type accounts. (T/F)

False

I bonds earn a fixed rate of return, while EE bonds earn a combined rate composed of a fixed rate of return known when the bond is purchased and an inflation rate that the Treasury calculates twice a year based on the Consumer Price Index for all Urban Consumers (CPI-U). (T/F)

False

Income from money market funds specializing in state tax free investments are exempt from Federal and State income taxes. (T/F)

False

Income received from a convertible bond or preferred stock is not subject to ordinary income tax rates. (T/F)

False

Interest earned on Treasury securities are exempt from Federal income taxes. (T/F)

False

Interest is paid if a cumulative dividend is not paid as scheduled. (T/F)

False

Interest on private purpose bonds is never exempt from Federal income taxes. (T/F)

False

Most preferred stock investors are individual investors. (T/F)

False

Once an investment plan has been implemented, the advisor does not need to monitor a client's portfolio. (T/F)

False

Participants in a GIC account are debtors to the insurance company. (T/F)

False

Promissory notes are rarely used by businesses to raise capital. (T/F)

False

Since zero-coupon bonds receive no interest, there are no cash flows associated with these bonds until maturity. (T/F)

False

Stock ratings provided by investment services such as Standard & Poor's and Moody's are a function of the stock's price. (T/F)

False

The future exchanges in the U.S. do not allow future contracts on individual stocks. (T/F)

False

The indenture is an unsecured debt. (T/F)

False

The majority of activity is in long-term futures with maturities greater than one year. (T/F)

False

The option writer determines when/if an option is exercised. (T/F)

False

The promissory note market is heavily regulated. (T/F)

False

There are 6 steps in the investment planning process. (T/F)

False

There is no risk of lost of principal when investing in cash equivalents such as certificates of deposits (CD) and money market funds. (T/F)

False

Treasury bills and bonds receive semiannual interest payments. (T/F)

False

Treasury bonds have a minimum face value of $1,000. (T/F)

False

Warrants and rights are both long-term call options to purchase shares of the stock of the corporation issuing the warrants or rights. (T/F)

False

Warrants have little/no speculative premiums. (T/F)

False

Zero-coupon bonds sell at a premium. (T/F)

False

A floating-rate contract, for a predetermined period of time, is sometimes issued in addition to a fixed-rate contract. (T/F)

True

A futures contract is another instrument, similar to options, that allows investors to speculate on the future direction of an asset's price. (T/F)

True

A portfolio should be designed to provide sufficient return to meet a client's various objectives while managing the risk to a level acceptable to the client. (T/F)

True

A preferred stock is a security that combines some of the features of both bonds and common stocks. (T/F)

True

A put option is a contract that gives the holder the right to sell a specified number of shares of common stock at a set price for a given period of time. (T/F)

True

Alternatives to investing in index futures include index mutual funds and the direct purchase of the stocks in the index. (T/F)

True

Corporate stock represents an ownership interest in a corporation. (T/F)

True

Direct purchase of Treasury bills is an investment similar to certificates of deposit. (T/F)

True

Equity warrants on convertible bonds may be traded separately from the bond itself. (T/F)

True

Exercising a warrant is not a taxable event. (T/F)

True

For tax purposes, "short term" is considered to be 12 months or less. (T/F)

True

GICs are riskier than certificates of deposits. (T/F)

True

In the futures market, every time one investor earns a gain, another investor loses the same amount of money. (T/F)

True

Investors in higher income tax brackets benefit more from municipal bonds. (T/F)

True

Investors should purchase multiple certificate of deposits (CDs) with different maturities rather than invest in one large CD. (T/F)

True

LYONs (Liquid Yield Option Notes) are convertible securities. (T/F)

True

Market interest rates and bond prices are inversely related. (T/F)

True

Most convertible bonds are callable. (T/F)

True

Options are not an actual security. (T/F)

True

Some zero-coupon bonds issued by state and municipal governments are tax-exempt. (T/F)

True

Stripped bonds are discounted bonds. (T/F)

True

Tax-exempt stripped bonds are excellent for children under age 19 and some students up to age 23 who are subject to their parents' tax rate on unearned income. (T/F)

True

The current rate of return on corporate bonds is usually higher than stock dividend yields. (T/F)

True

The major national brokerage firms do not have an inventory of bonds themselves so will not try to sell you bonds that they own. (T/F)

True

The preferred stock market is not as active as the common stock market. (T/F)

True

There are usually no capital gains on promissory notes. (T/F)

True

Treasury Inflation-Protected Securities (TIPS) adjust for inflation on a semi-annual basis. (T/F)

True