SIE practice quiz part 1 (sec 4-6)
Risks that are unique to a specific industry, business type, or investment type are known as A) nonsystematic risks. B) security risks. C) systematic risks. D) stock market risk.
A Nonsystematic risks are those that are unique to a specific industry, business enterprise, or investment type.
All of the following would be included in the expense ratio of a fund except A) front-end or back-end load. B) salaries and administrative fees. C) portfolio management fee. D) 12b-1 fee.
A The expense ratio includes ongoing operating expenses but not sales charges. A front- or back-end load is a sales charge.
Mutual fund shares are required to be priced at least A) once per business day. B) each day at the opening of the market. C) continuously throughout the day. D) hourly.
A. once per business day Most funds are priced (calculate a new net asset value) at the close of the day, but the rule just requires that they be priced at least once per business day. They may perform this calculation more than once a day, but that is rare.
In a leasing partnership program, loans are taken to purchase equipment that is then leased to companies in return for the lease payments. This process A) eliminates any possibility of sheltering the income from the lease payments received with deductions or credits. B) allows for the loan interest and equipment depreciation to be taken as deductions that will shelter the income from the lease payments received. C) enables the partners to take tax credits against the income received from the lease payments. D) allows for the equipment to be depreciated, adding to the income realized by the partnership.
B When a leasing program purchases equipment that it will lease to companies in return for the lease payments, the program can deduct over the life of the program any interest costs on the loans to purchase the equipment, as well as any depreciation on the equipment it owns and leases. These deductions shelter the income taken in from the lease payments.
All of the following are nonsystematic risks except A) call risk. B) business risk. C) purchasing power risk. D) capital risk.
C Purchasing power or inflation risk is a systematic risk. Capital risk, business risk, and call risk, among others, are nonsystematic risks, those that portfolio diversification can help to reduce.
The risk that an investor might not be able to sell an investment quickly and at a fair market price is known as A) financial or default risk. B) inflation or purchasing power risk. C) call or reinvestment risk. D) liquidity or marketability risk.
D Having investments that are liquid means being able to divest of them quickly at a fair price. Liquidity risk comes for investors holding assets where doing that might not be possible.
Exchange-traded funds (ETFs) A) can be bought and sold throughout the trading day and have low expense ratios. B) pass on capital gains to investors annually and have high expense ratios. C) pass on capital gains to investors annually but have low expense ratios. D) can be bought and sold throughout the trading day and have high expense ratios.
A Advantages of Exchange-traded funds (ETFs) are that they have low operating costs and expense ratios and can be bought and sold throughout the trading day. While they can pass on capital gains to investors like mutual funds, they rarely do.
Your customer is a limited partner in a real estate partnership. This partner has the right to do all of the following except A) choose which properties the partnership should buy or sell. B) inspect and obtain copies of all partnership records. C) vote with the limited partners to remove the general partner. D) sue the general partner for damages resulting from any business decisions made.
A All of these are rights of the LP, except choosing the assets to be purchased for the partnership. This is a function of the general partner (GP).
All of the following regarding a trust set up for the purpose of holding commercial property, or mortgages on commercial property, are true except A) investors may never purchase shares in these trusts on an exchange or over-the-counter (OTC). B) these investments could not be considered open- or closed-end funds. C) gains can pass through to the owners of these shares. D) ownership of these shares may provide for the receipt of dividends.
A This is a REIT. REIT shares can trade on exchanges or over the counter (OTC). Owners of these shares may receive dividend distributions and have capital gains pass through to them for tax purposes as well. REITS, organized as trusts, are not investment companies (open- or closed-end funds). Shares in REITs are equity securities.
Interest-rate risk A) occurs when interest rates rise, pushing bond prices higher. B) is often called purchasing power risk. C) cannot be reduced by diversification. D) occurs when interest rates fall, pushing bond prices lower.
C Interest-rate risk is one of the systematic risks that cannot be reduced by diversification. It is the risk that fluctuating interest rates will impact bond prices. Primarily, when interest rates are rising, bond prices will be pushed lower.
A company has just conducted a stock offering, by prospectus, through an investment banker. The proceeds of the offering are used to purchase a portfolio of securities. The stock, now in the hands of the public, is freely traded in the secondary market, and the portfolio is managed to generate maximum profit according to a specific investment objective. The company must be A) a fixed UIT. B) a nonfixed UIT. C) a mutual fund. D) a closed-end company.
D A closed-end company, or closed-end management investment company, is much like any other company, just that its source of profit is investments, rather than selling a product or service. Shares of closed-end companies are traded in the secondary markets, while the other choices listed here offer only redeemable securities.
When a limited partnership is liquidated (dissolved), the priority of payments to settle accounts are made from first to last in which order? 1. General partners 2. Limited partners 3. General creditors 4. Secured creditors A) I, IV, III, II B) I, II, III, IV C) IV, III, I, II D) IV, III, II, I Explanation
D Creditors are paid first in a liquidation, with priority given to the secured lenders before general lenders; limited partners are paid first of the partners, with general partners last to be paid.
Regarding the decision to dissolve a LP before its scheduled predetermined dissolution date, it would need to be A) voted on by the general partner(s) only. B) ratified by the IRS because of the tax implications to dissolve earlier than planned. C) made by the general partner with the largest capital contribution with no vote required. D) voted on by the limited partners holding a majority interest.
D In instances where a decision to dissolve a limited partnership before its predetermined date is made, an affirmative vote to do so must be taken by the limited partners.
ll of the following are types of direct participation programs (DPPS) except A) oil and gas. B) leasing. C) real estate. D) retail distribution.
D The most common types of direct participation programs are real estate, oil and gas, and leasing programs.
Regarding oil and gas DPPs, tangible drilling costs are associated with items that 1. have no salvage value at the end of the program. 2. have some salvage value at the end of the program. 3. can be depreciated. 4. cannot be depreciated. A) I and III B) II and IV C) I and IV D) II and III
D. 2 & 3 Costs for items that will have some salvage value at the end of the program are considered tangible drilling costs. These items, such as equipment, can be depreciated and written off over the life of the program.
What limit is placed on the number of outstanding shares a mutual fund may have in the hands of investors? A) The limit varies from state to state. B) The number is specified in the fund's corporate charter. C) Federal law specifies how many shares a mutual fund may sell. D) There is no limit.
D. no limit The reason a mutual fund is also called an open-end investment company is that it may sell an unlimited number of shares to the public. This is referred to as a continuous primary offering. Other stock-issuers are limited to the number of shares specified in the corporate charter. When they reach that limit, no more new shares can be sold unless they change the charter.
Which class of shares use a CDSC as the main sales charge? A) Class B shares B) No load C) Class C shares D) Class A shares
A Class B shares have back-end loads that reduce over time (contingent deferred sales charge, or CDSC). Class A shares charge an upfront load, and class C shares charge a level load as part of the expense ratio. No load funds have no sales charge.
Which of the following securities would most likely have the lowest expense ratio? A) Exchange-traded fund (ETF) B) Nonqualified variable annuity C) Mutual fund D) Qualified variable annuity
A Expenses tend to be lower than those of mutual funds, and the management fee is low as well. Remember that the portfolio is designed to track an index, and just as the securities contained in the index change infrequently, so are the securities in the fund portfolio.
Hedge funds are considered A) a form of private investment company and, therefore, unregulated. B) a form of management company and, therefore, regulated. C) a form of private investment company and heavily regulated. D) a form of mutual fund and, therefore, unregulated.
A Hedge funds are considered to be a form of private investment company. They do not come under the Investment Company Act of 1940 as mutual funds do, and they do not require Securities and Exchange Commission (SEC) registration. They are, therefore, considered unregulated.
All of the following are rights of limited partners in a DPP except A) to make day-to-day business decisions. B) to vote on business objectives. C) to sue the general partners. D) to inspect all books and records.
A Limited partners (LPs) have a number of rights, among them, to vote on business objectives, to inspect all books and records, and if the GPs are not acting in their best interest, to sue them. Making day-to-day business decisions is the responsibility of the GPs, and if an LP were to do so, they could lose their standing as an LP.
Portfolio diversifying might be used to reduce which of the following risks? A) Business risk B) Inflation risk C) Interest-rate risk D) Market risk
A Nonsystematic risks can be reduced using diversification. These would include business, financial, credit, and liquidity risk (among others). Market, inflation, and interest-rate risks are types of systematic risks that are considered nondiversifiable because they impact all investments and, therefore, cannot be diversified away or mitigated simply by diversifying.
Which of the following investments would be most susceptible to inflation risk? A) 30-year Treasury bond B) Growth stock C) Value stock D) 10-year corporate bond rated BBB
A Stocks generally have had performance that outpaces inflation. Lower quality bonds with shorter maturities would pay a higher rate than government bonds and have the potential to keep up with inflation. Treasuries have very low yields and do not keep pace with inflation.
The risk that changes in the overall economy will have an adverse effect on individual securities regardless of the company's circumstances is known as A) systematic risk. B) securities risk. C) nonsystematic risk. D) investment risk.
A Systematic risk is the risk that changes in the overall economy will have an adverse effect on individual securities regardless of the company's circumstances. Common causes that can impact all securities or investments might be war, global security threats, and inflation.
Investors face many different risks. Which of the following would be factors of systematic risk? 1. Decreasing GDP 2. Global security threats 3. Call risk 4. Net sales A) I and II B) III and IV C) II and III D) II and IV
A Systematic risk points to changes in the overall economy. It has an adverse effect on individual securities apart from the company's circumstances. It is generally caused by factors that affect all businesses, such as war, global security threats, or rampant inflation. Call risk is dependent on any call features associated with a given security, and net sales are an issue of a company's success. No matter how diversified a portfolio is, it remains subject to systematic risk. An investor cannot diversify systematic risk away.
An investor has purchased Class A mutual fund shares. The net asset value (NAV) per share of the fund is the price the investor A) will receive upon redemption of the shares. B) will use as the cost basis in tax return filings once redeemed. C) knows will be the cost per share when the order is entered. D) has paid for the shares when purchased.
A The NAV per share of a mutual fund is calculated by dividing the net assets of the fund by the number of shares outstanding. When purchasing Class A shares, NAV plus a sales charge is paid. When redeeming the shares, the investor simply receives NAV. Remember that for purchases and redemptions of mutual fund shares, the next calculated NAV per share is used, a practice known as forward pricing. Therefore, when purchasing or redeeming shares, because mutual funds use forward pricing, the investor can never be certain of the exact price that will be paid or received when entering the order.
The Federal Reserve Bank is raising interest rates, this will A) push bond prices lower in the open market. B) push bond prices higher in the open market. C) make bonds trading in the open market more desirable. D) have no impact on bond prices in the open market.
A This is interest-rate risk. When interest rates are rising, bond prices in the open market are pushed down. Rate movements and prices have an inverse relationship. Those already holding the bonds in their portfolios see their investments decrease in value. This also makes bonds trading in the open market less desirable because new issue bonds will be yielding the now higher rates and comparably be more desirable.
The risk when investing, where one has the potential to lose all or part of the investment due to circumstances that are unrelated to the issuer's financial strength or well-being, is known as A) capital risk. B) financial risk. C) business risk. D) call risk.
A This is the definition of capital risk. For example, capital risk might be least when investing in securities backed by the federal government but much more prevalent when investing in derivative products.
Limited partnerships sold publicly via a prospectus offering would be expected to have A) a large group of investors, each contributing a small sum. B) a small group of investors, each contributing a large sum. C) a large group of investors, each contributing a large sum. D) a small group of investors, each contributing a small sum.
A Unlike partnerships sold as private placements, those limited partnerships sold through a public offering via a prospectus would consist of a large group of investors (partners), each contributing a small investment sum to the partnership.
An investor in a direct participation program wishes to divest of a partnership interest purchased some time ago. You would correctly advise that A) there is no secondary market making them highly illiquid. B) they trade in the secondary market and entering an order to sell should suffice. C) there is ample secondary market trading making them highly liquid. D) the interest in the business once purchased, can never be sold.
A While one's interest in a DPP can be sold, there is virtually no secondary market. In this regard, they are considered highly illiquid.
The effect of continually rising retail prices on the investment returns of one's portfolio is best described as A) inflation risk. B) call risk. C) reinvestment risk. D) business risk.
A Inflation Risk Inflation, or continually rising prices, reduces the purchasing power that one's investment returns will have. This is the essence of inflation risk.
Your customer is a limited partner in a real estate partnership. This partner has the right to do all of the following except A) sue the general partner for damages resulting from any business decisions made. B) choose which properties the partnership should buy or sell. C) inspect and obtain copies of all partnership records. D) vote with the limited partners to remove the general partner.
B All of these are rights of the LP, except choosing the assets to be purchased for the partnership. This is a function of the general partner (GP).
Which of the following would you expect to have the lowest expense ratio? A) The QRS Stock Income Fund B) The ABC Corporate Bond Fund C) The MNO Small Cap Growth Fund D) The XYZ Aggressive Growth Fund
B Bond mutual funds typically have lower expense ratios than stock funds, which tend to be riskier and require more sophisticated investment strategies. The ABC Bond fund is the only bond mutual fund listed. Growth funds involve equities (stock), and of course, the stock income fund specifies equities as well.
A company is about to introduce a new product. While confident in the product's appeal and market, it is still an unknown factor until sales results are viewed later. Investors holding stock in the company are at this time specifically exposed to A) reinvestment risk. B) business risk. C) financial risk. D) call risk.
B Business risk is an operating risk related to poor or untimely management decisions. Decisions regarding if and when to introduce new products are one example of those that might expose investors specifically to business risk.
Those holding the securities of a company where rules might change that impact or upset the way the company does business are exposed to A) liquidity risk. B) regulatory risk. C) financial risk. D) currency risk.
B Changes in the overall regulatory climate or specific rule changes that impact an individual company's business model can have an effect on the company's performance or ability to operate profitably. Those holding the securities of such companies are exposed to regulatory risk.
Which class of shares have a 12b-1 fee as the primary sales charge? A) No load B) Class C shares C) Class B shares D) Class A shares
B Class C shares charge a level load built into the expense ratio, usually as a 12b-1 fee. Class B shares have back-end loads that reduce over time (contingent deferred sales charge, or CDSC). Class A shares charge an upfront load. No load funds have no sales charge.
If a registered representative allows a customer to unknowingly buy investment company shares in an amount just under a dollar bracket that would qualify for a reduced sales charge, or encourages such a purchase, this is known as A) markup violation. B) a breakpoint sale violation. C) short sale violation. D) market manipulation violation.
B In a breakpoint sale, a customer unknowingly buys investment company shares in an amount just under a dollar bracket that would qualify for reduced sales charges. As a result, the registered representative receives a somewhat higher commission but the customer pays higher sales charges, reducing the number of shares purchased and resulting in a higher cost per share.
In order for a business entity to qualify as a limited partnership, the LP must have A) any number of limited partners only. B) at least one general partner and one limited partner. C) no general partners and at least one limited partner. D) any number of general partners and no limited partners.
B Limited partnerships are required to have at least one general partner and one limited partner.
As an investment vehicle, and regarding the tax consequences, Real Estate Investment Trusts (REITs) are organized as A) corporations. B) trusts. C) mutual funds. D) debt instruments.
B REITs, as their name tells us, are organized as trusts. Assets held in the trust and the distributions made can impact the tax consequences for the trust. As an investment vehicle, shares are sold to investors and these shares sometimes trade on exchanges. Whether traded or nontraded, the shares are considered to be equity (not debt) securities.
Deductions for depletion would most likely apply to which of the following direct participation programs (DPP)? A) Real estate limited partnership B) Oil and gas income program C) Equipment leasing program D) Oil and gas exploratory program
B The depletion allowance is a tax benefit reflecting the decreasing supply of oil or gas (or any other natural resource or mineral) after it is taken and sold. With income programs, the wells have been drilled and are already producing and, therefore, being depleted. By contrast, exploratory programs have a low expectation of success and it is therefore more likely that there will not be anything found to deplete.
A diversified growth fund charging 0.4% of net assets per year as a 12b-1 fee may not make which of the following statements? A) The fund will have a calculated fully disclosed expense ratio. B) The fund is a no-load fund. C) The fund will pay its investment adviser a specified percentage of funds under management. D) The fund will have a diversified portfolio with a stated investment objective.
B The fund would be expected and required to make statements regarding its diversification status, its expense ratio, and the rate at which it pays its adviser. It definitely may not, however, claim to be a no-load fund if it charges a 12b-1 fee, fees charged to market the fund's shares, of more than 0.25% of net assets.
The general partner of a limited partnership has responsibility for all the following except A) paying partnership's debts. B) providing all of the partnership capital. C) managing the day-to-day operations. D) organizing the business.
B The general partner organizes and manages the partnership and assumes unlimited liability, responsible for paying all partnership debts. While some capital may also be provided by the general partners (GPs), it is the limited partners who provide the bulk of the capital.
A mutual fund can offer all of the following to investors except A) the ability to do transfers by telephone or online. B) physical custody of the fund's portfolio cash and securities. C) acting as custodian for retirement accounts. D) check-writing privileges for redemptions.
B The services mutual funds offer may include retirement account custodianship, investment plans, check-writing privileges, transfers by telephone or online, withdrawal plans, and a number of other services and privileges. However the Act of 1940 requires that each investment company place portfolio cash and securities with a custodian for safekeeping.
The ratings on the debt instruments of a foreign country with outstanding loans from a number of other countries worldwide have been downgraded. The impact felt due to the risk of possible default is known as A) legislative risk. B) sovereign risk. C) interest-rate risk. D) political risk.
B While it can be noted that sovereign risk is a type of political risk, the risk of default by a country on its debt instruments is specifically recognized as sovereign risk.
How often may funds be rolled over from one state's Section 529 plan to another's? A) No more than twice per calendar year B) Once per semester C) Once every 12 months D) As often as necessary
C A rollover involves actually withdrawing funds from one account for reinvestment in another. The investor thus has constructive receipt of the money and could be liable for taxes on any growth or earnings withdrawn if the rollover is not completed. The rollover procedure, when completed, protects from tax liability but may only be done once every 12 months.
Holding a callable bond with call protection is least impactful for the investor when A) interest rates are stable. B) interest rates are falling. C) interest rates are rising. D) interest rates are nonvolatile.
C Bonds are more likely to be called when interest rates are falling. Call protection, a length of time during which the bond cannot be called, protects the investor during these times. Therefore, the call protection is least impactful when interest rates are rising—in other words, least impactful during times when the bond wouldn't likely be called.
Which of the following statements best describes financial risk? A) The risk that when interest rates decline, it is difficult to invest proceeds from redemptions B) A risk generally caused by poor management and operating decisions C) The risk that an issuer will be unable to meet interest and principal payments on debt obligations D) The risk that a security with a call feature might be called before maturity
C Financial risk emanates from the use debt financing (leverage). It represents the potential inability to meet interest and principal payments on debt obligations, which can lead to bankruptcy. It is sometimes called credit risk or default risk.
Under the Investment Company Act of 1940, which of the following is not considered and investment company? A) Unit investment trust B) Management company C) Hedge fund D) Face-amount certificate company
C Investment companies include face-amount certificates, unit investment trusts, and management companies (both open- and closed-end). Hedge funds are organized as private investment companies, which are excluded under the definition of investment company und the Act of 1940.
Which of the following incur a fiduciary responsibility in a limited partnership? A) Both the general and the limited partners B) The limited partners C) The general partners D) Each individual partnership investor
C It is the investors in an LP who are the partners. Only the general partners, however, incur a fiduciary responsibility to run the partnership and use the invested capital in the best interest of all the investors (partners).
An example of securities that are established by states to provide other government entities such as cities, towns, school districts or state agencies with a short-term investment vehicle to invest funds include A) money market instruments. B) tax anticipation notes (TANs). C) local government investment pools (LGIPS). D) bond anticipation notes (BANs).
C LGIPs are established by states to provide other government entities within its borders such as cities, counties, school districts or other state agencies with a short-term investment vehicle to invest funds
Systematic risk would include all of the following except A) inflation risk. B) interest rate risk. C) business risk. D) market risk.
C Nonsystematic risks are those associated with the issuer (like a bad business strategy). Systematic risks impact large portions of the market and are difficult to reduce by diversification.
Which of the following is true for exchange-traded funds (ETFs)? A) The SEC has classified them as a type of open-end fund, and they have operating costs and expenses that are higher than most mutual funds. B) The SEC has classified them as mutual funds, and they have operating costs and expenses that are higher than most mutual funds. C) The Securities and Exchange Commission (SEC) has classified them as a type of open-end fund, and they have operating costs and expenses that are lower than most mutual funds. D) The SEC has classified them as mutual funds, and they have operating costs and expenses that are lower than most mutual funds.
C The SEC has classified ETFs as a type of open-end fund but not a mutual fund. ETFs traditionally have operating costs and expenses that are lower than most mutual funds because they do not have to purchase and sell holdings within the portfolio to accommodate investors purchasing shares or redeeming shares, as is the case with mutual funds.
Hedge funds attempt to A) mitigate all risk using hedging as an investment strategy. B) achieve modest returns and are, therefore, associated with being low-risk investments. C) achieve high returns and are, therefore, associated with high-risk investments. D) mitigate all risks making them suitable for most investors.
C While hedging is the practice of attempting to limit or mitigate risk, most hedge funds specify generating high returns as their primary investment objective. In attempting to achieve these returns, they tend to entail a substantial amount of risk for those who own shares.
Partners in direct participation leasing programs can receive write-offs for all the following except A) depreciation. B) operating expenses. C) depletion. D) interest expenses.
C Write-offs (deductions) associated with leasing programs are those taken for operating expenses, depreciation of the equipment owned and leased, and interest costs on the loans to purchase the equipment. Depletion, however, is a deduction associated with natural resources programs, such as oil and gas.
Exchange-traded funds (ETFs) A) can be bought and sold throughout the trading day and have high expense ratios. B) pass on capital gains to investors annually but have low expense ratios. C) pass on capital gains to investors annually and have high expense ratios. D) can be bought and sold throughout the trading day and have low expense ratios.
D Advantages of Exchange-traded funds (ETFs) are that they have low operating costs and expense ratios and can be bought and sold throughout the trading day. While they can pass on capital gains to investors like mutual funds, they rarely do.
Which of the following issues only common stock? A) An equity unit investment trust B) A face-amount certificate company C) A closed-end management investment company D) An open-end management investment company
D An open-end (mutual fund) management investment company may only issue redeemable common stock. A unit investment trust offers units of beneficial ownership. A closed-end management investment company may also issue bonds and preferred stock, while a face-amount certificate company offers a contract, as opposed to units or shares.
Which of the following are the two basic types of Section 529 plans, which are products used for funding higher education? 1. Savings plans 2. Education savings accounts 3. Secondary school funding plans 4. Prepaid tuition plans A) II and III B) I and III C) II and IV D) I and IV
D The savings plan allows the investor to accumulate money for use later in funding someone's education. The prepaid tuition plan allows the purchaser to pay the tuition for a particular K-12 or higher education institution at current rates, either in a lump sum or by periodic payments. The beneficiary of the plan then attends the institution, perhaps many years later, tuition-free. Note that Education Savings Accounts (ESAs) are not a type of 529 plan.
Which of the following are the two basic types of Section 529 plans, which are products used for funding higher education? Savings plans Education savings accounts Secondary school funding plans Prepaid tuition plans A) II and III B) I and III C) II and IV D) I and IV
D The savings plan allows the investor to accumulate money for use later in funding someone's education. The prepaid tuition plan allows the purchaser to pay the tuition for a particular K-12 or higher education institution at current rates, either in a lump sum or by periodic payments. The beneficiary of the plan then attends the institution, perhaps many years later, tuition-free. Note that Education Savings Accounts (ESAs) are not a type of 529 plan.
A REIT can avoid being taxed as a corporation would by A) receiving less than 50% of its income from real estate and distributing 50% or more of its net investment income to its shareholders. B) receiving less than 75% of its income from real estate and distributing 100% of its net investment income to its shareholders. C) receiving 100% of its income from real estate and distributing 90% or more of its net investment income to its shareholders. D) receiving 75% or more of its income from real estate and distributing 90% or more of its net investment income to its shareholders. Explanation
D Under the guidelines set by the Internal Revenue Code, a REIT can avoid being taxed as a corporation by receiving 75% or more of its income from real estate and distributing 90% or more of its net investment income to its shareholders.
