mid term

When it comes to issuing a debt security, which of the following features will generally enable the issuing corporation to borrow at the lowest interest rate? A) Convertible B) Callable C) Zero-coupon D) Cumulative

A. Because the convertible feature offers potential growth through the exercise of the conversion option, the interest rate on these securities is generally lower than other debt issues of the same corporation. The call feature increases the reinvestment risk and that is compensated for with a higher coupon. The descriptive adjective cumulative refers to dividend payments on preferred stock, but not to bonds. Because zero-coupon bonds pay nothing until maturity, that added risk requires a higher yield to attract investors.

If ABC Corporation reports a loss for the year, it is obligated to pay interest on all of the following except A) adjustment bonds. B) convertible bonds. C) debentures. D) variable rate bonds

A. Even if a corporation reports a loss, the corporation is obligated to pay interest on all of its outstanding debt except for income (adjustment) bonds. Adjustment bonds require interest to be paid only if ABC has sufficient earnings and the payment is declared by the board of directors. LO 5.a

Among the requirements of Regulation SP is that a broker-dealer must provide an initial and annual privacy policy statement to A) retail customers. B) shareholders. C) business customers. D) retail consumers.

A. Regulation SP deals with protection of client information. Initially, and annually, the firm's privacy policies must be disclosed to its retail (individual) customers. Remember, consumer has a special meaning under SP. It is a one-time relationship, such as someone who received stock as a gift and wants to sell it through the member firm, take the money, and conduct no further dealings. Business and institutional clients are not covered by the regulation. LO 1.d

The Investment Company Act of 1940 contains a number of terms used to describe investment companies. When used as an adjective, the term diversified would apply to which type of investment company? A) Management company B) Face-amount certificate company C) Business development company D) Unit investment trust

A. The Investment Company Act of 1940 divides investment companies into three principal classifications. Those are the face-amount certificate company, the UIT, and the management company. Management companies are further divided into open-end and closed-end companies. The act goes one step further and has management companies divided again into diversified and nondiversified companies. It is not expected that you will have to know what a BDC (business development company) is.

All of the following would be reasons for an employer to choose a nonqualified plan over a qualified plan except? A) the nonqualified plan provides an immediate income tax deduction for the employer. B) the nonqualified plan provides greater flexibility. C) the nonqualified plan can discriminate in favor of highly compensated employees. D) the nonqualified plan is not subject to ERISA reporting and disclosure requirements.

A.. Nonqualified plans do not provide a tax deduction to the employer until the employee receives the economic benefit as income at some point in the future. They are, however, more flexible because they do not have to comply with ERISA reporting and nondiscrimination requirements.

Moody's bond ratings are based primarily on an issuer's A) capitalization. B) financial strength. C) expected trading volume of a bond issue. D) expected marketability of a bond issue.

B. Bond ratings are credit ratings for an issuer and measure the issuer's ability to repay principal and interest and, thus, its financial strength.

In a scheduled premium variable life insurance policy, all of the following are guaranteed except A) the ability to borrow at least 75% of the cash value after the policy has been in force at least three years. B) a minimum cash value. C) the right to exchange the policy for a permanent form of insurance, regardless of health, within the first 24 months. D) a minimum death benefit.

B. In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months, allowing the conversion of the variable policy to a comparable form of permanent insurance, and the 75% cash value loan minimum applies after the third year of coverage.

Each of the following is a defined contribution plan except A) a profit-sharing plan (qualified). B) a stock option plan. C) a 401(k) plan. D) a money-purchase pension plan.

B. Money-purchase pension plans, 401(k) plans, and qualified profit-sharing plans are all examples of defined contribution plans. An employer may offer stock options that give an employee the right to purchase a specified number of shares of the employer's common stock at a stated exercise price over a stated time period. No actual contribution is made, just payment when the employee decides to exercise the option. Unlike the other choices, this is not a qualified plan.

Investors who are subject to AMT must have which of the following preference items added to adjusted gross income to calculate their tax liability? A) Interest on a municipal bond issued to finance highway construction B) Interest on a private purpose municipal bond C) Distributions from a corporate bond mutual fund D) Income from a municipal security issued to finance parking garages

B. On the exam, whenever you see a private purpose municipal bond, the interest on the bond is a tax preference item for the purpose of the alternative minimum tax.

An investor purchases a TIPS bond with a 3% coupon. During the first year, if the inflation rate is 8%, the principal value of the security at the end of that year will be closest to A) $1,030.00. B) $1,081.60. C) $1,080.00. D) $1,030.23.

B. The principal value of a TIPS bond is adjusted semiannually by the inflation rate. The exact calculation would be $1,000 × 104% × 104%, which equals $1,081.60. Each six months, the interest is paid on that adjusted principal and that is why the security keeps pace with inflation. There is a shortcut that will always work on the exam. Just recognize that the principal value increases based on the inflation rate compounded semiannually. Take the simple interest rate and choose the next highest number. In this example, 8% simple interest would be $80 (which would always be one of the choices). Because the computation is done twice per year, the compounding effect makes the correct choice slightly higher.

Which of the following investment companies registered under the Investment Company Act of 1940 can include senior securities in its capital structure? A) Face-amount certificate companies B) Open-end management investment companies C) Closed-end management investment companies D) Unit investment trusts

C. Only the closed-end company is legally permitted to issue senior securities (preferred stock and bonds).