SIE Security Industry Essentials (Sample Exam)

Squidco, Inc. Is issuing 100 million dollars in 4.5% bonds maturing in 20 years. When purchased at issue, the buyers will receive an additional security that allows them to purchase 20 shares of Squidco common stock at $50 per share anytime in the next 10 years. Squidco common is currently trading at $29.95 a share. This is an example of A. a Warrant B. a stock right C. a follow-on-offering D. a call

A warrant is normally issued attached to a fixed-income security to attract more interest in the debts issue. Warrants are generally longer term (5 or more years) and have an exercise price that is higher than the current stock price. (LO 1.f)

CMOs are backed by A. mortgages B. real estate C. Municipal Taxes D. the full faith and credit of the U.S. Government

A. the "M" in CMO stands for Mortgage (LO 2.n)

The investment return of a variable annuity comes from A. the performance of the selected subaccounts within the separate account B. the assumed rate stated in the policy documents C. computing the excess of the premiums received over the mortality experience D. the insurance company's general account

A. A Key feature of the variable annuity is that most of the premium is invested in the insurance company's separate account rather than the general account. Within the separate account, there are a number of subaccounts that may be selected, depending on the investor's objectives. It is the performance of these subaccounts that provides the annuity's investment return (4.2)

Which of the following would cause a change in the net asset value of a mutual fund share? A. Market value of the portfolio declines B. many shares are redeemed C. Securities in the portfolio are sold for a capital gain D. The fund takes a new position

A. A decline in the market value of the portfolio would reduce the assets of the fund without changing the number of outstanding shares. Sales and redemptions of shares change the net assets but also change the number of shares outstanding to the same degree, leaving the NAV per share unchanged. Buying or selling securities for a capital gain simply replaces securities in the portfolio with an equivalent amount of cash, leaving the NAV unchanged (LO 4.g)

An investor is purchasing $48,000 of Windmill Alternative Energy Fund. the fund has a breakpoint at $50,000. The least appropriate action would be to A. Place the order B. Explain Breakpoints C. explain letters of intent D. discuss combination privilege

A. All the other options introduce breakpoint to the customer. Not disclosing the breakpoint would make this a breakpoint sale. (LO 4)

An investor can take advantage of intraday price changes due to normal market forces when investing in I. closed-end funds II. exchange-traded funds III. hedge funds IV. open-end funds A. I and II B. I and IV C. II and III D. III and IV

A. Both closed-end funds and ETFs trade in the marketplace based on supply and demand. Open-end funds use forward pricing and generally price only once per day(usually at the end of the trading day). Most hedge funds are organized as private investment partnerships and are considered illiquid. Some have minimum holding requirements known as lockup provision s, and in that light, their interests do not reliably trade intraday (LO 4.b)

An investor is long 1 January 15 put at 4. Calculate the Breakeven, maximum gain, and maximum loss. A. BE 11, MG 1100, ML 400 B. BE 19, MG unlimited, ML 400 C. BE 11, MG 400, ML unlimited D. BE 19, MG 1100, ML 400

A. Breakeven = 11 (for a put, BE = strike price [15] - premium[4]) ; Maximum gain (long put is bullish can fall to zero BE point [11] to zero); Maximum loss = $400 most an investor can lose is premium paid. 4 points =$400 (LO 3.g)

Which of the following is NOT true of no-load shares A. They have fees associated with sales and redemptions B. they are redeemed with no charges or fees of any kind. C. They are sold by the fund with no sales charges or fees of any kind D. They offer more return per dollar invested versus load funds if investing results are the same

A. No-load shares have expenses that are not considered sales charges. Some Broker-Dealers may charge fees for transactions, but these fees are not from the fund. (4.3)

Mr. Darcy owns 5,000 shares of English Manor Properties. It is his belief that the company is unlikely to grow much over the next year. he is curious how he might generate some additional income from position because English Manor pays a paltry dividend and asks about covered calls. You tell him that A. writing calls against his stock position is a conservative strategy for generating income. B. writing calls against his stock position is a conservative strategy but is ineffective for generating income C. selling covered calls is very aggressive but has a solid chance of generating some substantial income D. Buy puts is the best hedge against this position

A. Only selling an option will generate income. Selling covered calls is an effective and very conservative way to do so

An investor is long 1 August XYZ 30 put and XYZ has a current market value of 25. Which of the following is TRUE? A. The August put is in the money by 5 points B. The August 30 put is at the money C. The August 30 put is out of the money by 30 points D. The August 30 put has no intrinsic value

A. Options are in the money by the amount of their intrinsic value. This August 30 put has intrinsic value of 5 points and is therefore in the money by 5 points. Puts have an intrinsic value when the current market value of the stock is below the strike price. (LO 3.c)

Mr. Hermosillo would like to save money for his 10-year-old daughter's college tuition costs. She has her heart set on a small liberal arts school with a growing reputation in the arts. His biggest concern is the potential increase in cose over the next several years. The program best suited to hedge against the increasing cost of college tuition at the school is A. a 529 prepaid tuition program B. a 529 college savings program C. a Coverdell ESA account D. a custodial account in the child's name

A. The 529 prepaid tuition plan is designed to pay tuition costs at today's rate to be used later. It is the best suited to cover tuition inflation. Both the college savings and the ESA account allow for investing that has good growth potential, but not specifically locking down costs in today's dollars. A custodial account has similar issues, plus the account is in the child's name, potentially hamming scholarship and grant eligibility (LO 5)

All of the following are true for an Achieving a Better Life Experience account EXCEPT A. the account must be opened before the beneficiary turns 26 B. the account owner an the beneficiary must be disabled C. the income is tax free D. the onset of the disability must have occurred before the owner turned 26

A. The account does not need to be opened before the owner turns 26, but the qualifying disability does need to have begun before that age. Income from an ABLE account is received tax free. (LO 5.c)

The MOST common type of direct participation program (DPP) in the securities industry is A. a limited partnership B. a real estate investment trust (REIT) C. a collateralized mortgage obligation D. an investment company

A. The most common type of DPP in the securities industry is an LP. (LO 5.e.)

Mr. Perez dislikes Seabird Airlines because of a bad experience on a flight. He thinks the company's stock is overvalues. He is currently short 1,000 shares of the company. He is concerned with the potentially unlimited risk he is exposed to and would like to use options to hedge that risk. His best options would be A. Buy 10 Seabird Airline calls B. Buy 10 OEX(S&P 100 index) calls C. sell 10 Seabird calls D. buy 10 Seabird puts

A. Long calls provide best protection against short stock positions. The calls give the owner the right to exercise and buy the stock at the exercise price, thereby locking in the cost to replace the shares.

An investor is long 1 January 15 put 4. Calculate the breakeven, maximum gain, and maximum loss A. BE 11, MG 1100, ML 400 B. BE 19, MG unlimited, ML 400 C. BE 11, MG 400, ML Unlimited D. BE 19, MG 400, ML unlimited

A. Breakeven = 11 [ for a put, BE = strike price [15] - premium [4]], Maximum gain = $1100 [ Market attitude for a long put is bearish; Stock can fall to zero leaving the investor with the gain from the BE point down to 0], Maximum loss is = $400, ( the most an investor can lose when purchasing options cis premium paid; 4 points = $400) (LO 3.g)

Which of the following statements are TRUE I. Investors who are bullish on a stock should buy calls II. Investor who are bullish on a stock should buy puts III. Investor who is bearish on a stock should sell puts IV. Investor who is bearish on a stock should buy puts A. I and IV B. I and III C. II and III D. II and IV

A. Buying calls is bullish and buying puts is bearish. Buying puts is bearish and selling puts is bullish (LO 3.b)

An investor who is seeking income might choose a corporate bond because A. a corporate bond pays a steady income and are generally reliable B. Bonds pay higher dividend than stocks C. bonds can grow faster than the rate of inflation D. corporate bond interest is tax free

A. Corporate bonds are, depending on rating, generally reliable producers of income through interest payments. Bonds do not pay dividends, nor do they grow in value with inflation. Corporate interest is fully taxable. (LO. 2.g)

If the owner of an option may only issue exercise instructions on the last day of trading, this is an example of A. a European-Style Option B. an American-Style Option C. an expiration-style Option D. a Eurasian-Style Option

A. European- style option may only be exercised on the last trading day. An American-style option may be exercised at any time. The other styles are fake. (LO 3.f)

The Alta Loma High School District is asking voters to approve a bond to fund the purchase of new computers and software. The bond will mature in 40 years, and the interest and principal payments will be funded from real estate taxes. This is an example of A. a Go bond B. a revenue bond C. a debenture D. an equipment trust bond

A. If a municipal bond requires a vote, it is most likely a GO bond. Generally revenue bonds do not require a vote (note that there is no revenue-generating source here). Debentures and equipment trust certificates are issued by corporations, not municipalities. (LO 2.h)

Your customer is in the 30% federal tax bracket. He is considering purchasing a 7% corporate bond. The after-tax yield would be A. 4.9% B. 2.1% C. 10% D. 7%

A. The formula for the calculation is 7% (corporate rate) * (100% - 30%(tax bracket)). (7 * .7) = 4.9%. (LO. 2.i)

All of the following securities are issued by the U.S. Treasury except A. Treasury Reciepts B. STRIPS C. T-Bills D. TIPS

A. Treasury Receipts are created and issued by broker-dealers acting as investment bankers. T-bills, STRIPS, and TIPS are issued by the U.S. Treasury. (LO 2.j.)

If a customer had a large cash position and was interested in purchasing stock at prices below where they are today, and possible generating some income in the process, an option strategy would be to A. Write covered puts that are currently out of the money B. write uncovered calls that are currently out of the money\ C. buy out-of-the money calls D. place a buy stop order below the market

A. Writing puts would generate premium income. If the stock declines in value and the option is exercised, he will buy the stock at a price that's lower than where the market is at the moment. The short calls would force him to sell the shares if exercised. Buying-out-of-the-money calls cost money, and the strike price would be higher than the market. The buy stop does not generate income.

Your Customer, Mr. Hernandez, has been saving money in a 529 college savings plans for his three nephews. The oldest nephew is awarded an athletic scholarship valued at $15,000 at a major university. Mr. Hernandez may do any of the following EXCEPT A. withdraw the value of the scholarship tax free B. transfer the account to one of the brothers C. withdraw the value of the scholarship penalty free D. leave the money in the account for that nephew's future use

A. if the money is withdrawn for a nonqualified use, it is still subject to taxes in the growth, but the penalty is waived for the amount if the scholarship. The customer may also move the funds to a 529 plan for a family member of the original beneficiary, or just leave the funds in the account. (LO 5)

All of the following would be considered tax advantages relating to a DPP investment EXCEPT A. depreciation recapture B. depletion C. intangible drilling costs D. accelerated depreciation

A. Depreciation recapture can occur when an investor sells his interest in a real estate program. If , at the time of the sale, the amount of accelerated depreciation taken exceeds the straight-line-depreciation amount, the difference (called recapture) must be reported by the investor as ordinary income (LO 5.g)

In 2011, RST Corporation had both common stock and $100 par value 4% noncumulative preferred stock outstanding. The preferred, like the common stock, pay dividends on a quarterly basis. Because of financial difficulties, the company stopped paying dividends after 2011. After resolving it's problems in 2015, the company resumed dividend payments in 2016. Before paying the first quarterly common stock dividend that year, the company would have to pay a quarterly dividend to the preferred stock holders of A. $1.00 B. $4.00 C.$17.00 D. $20.00

A. In the case of a noncumulative preferred stock, skipped dividends are forever lost. So, when the company is able to pay a dividend, as is always the case, it must pay the current preferred dividend before paying to the common shares. The question states that dividends are paid quarterly. Therefore, the quarterly dividend on a stock paying $4.00 annually would be $1.00 - an amount that must be paid before the quarterly common dividend can be paid (LO. 1.i)

A 6% corporate bond trading on a 7% basis is trading A. at a discount B. at a premium C. with a current yield above 7% D. with a coupon rate below 6%

A. The term "a 7% basis" means that the YTM is 7%. YTM is higher than the coupon rate (6%), so the bond trades at a discount. Current yield must be between the coupon rate and the YTM. (LO 2.b)

Another term for stocks and bonds is A. Equity and Debt B. Shares and Units C. Voting and nonvoting D. Taxable And Tax free

A. Equity and Debt Equity is a common term for securities that represent ownership interest, such as stocks. Bonds are the most common type of debt security. (LO 1.b)

Which of the following statements regarding a general partnership is CORRECT? A. Partners participate in the gains and losses of the business and are fully liable for the businesses actions B. Partners participate in the gains and losses of the business and are partially shielded from the business liabilities C. Partners participate in the gains and losses of the business and are fully shielded from the businesses liabilities D. Partners participate in the gains but not the losses of the business and are fully shielded from the business liabilities.

A. In a general partnership, the results of the business flow through to the partners and there is no liability protection in this type of organization

All of the following are considered securities except: A. U.S. minted gold coins B. Common stock of XYZ Corporation C. 15 British pound put contracts D. Treasury Bonds

A. U.S minted gold coins Stocks, bonds and options are all examples of Securities. Gold and Coins are a commodity, not a security (LO 1.a)

Mrs. Davidson owns 8% of Copper Mountain Mentals Corporation and her husband, Mr. Davidson, owns 4%. Mr. Davidson would like to sell some of his shares. When he files Form 144, he discovers that Copper Mountain has 2,400,000 outstanding shares. The recent trading volume of the company is as follows: Week Ending Volume April 7 23,000 March 31 25,000 March 24 26,000 March 17 24,000 March 10 30,000 How Many shares may Mr. Davidson sell in the next 90 days under Rule 144? A. 24,000 B. 24,500 C. 32,000 D. 26,250

B. 24,500 shares is found by first determining 1% of 2.4 million = 24,000. Next step is to find the simple mean average of the most recent four weeks. In this example march 10 would not be used. The avg is 24,500. The volume limit is the higher of these two numbers, or 24,500 shares

All of the following investors can take advantage of breakpoints except A. an individual B. an investment club C. a trust D. a corporation

B. Breakpoint advantages are available only to individuals. An investment club is not considered an individual, but trusts and corporations are. (Unit 4)

Class B mutual fund shares are also called A .Deferred-load shares B. back-end load shares C. CDSC shares D. Reverse load shares

B. Class B mutual fund shares are bought with no sales charge at the time of purchase. The sales charge is paid instead at the time of redemption, or at the "back end". Hence, they are known as back-end load shares. For this type of share, the sales charge percentage is reduced each year of ownership, typically becoming zero after five years. At this time, they convert to Class A shares

Which of the following securities is NOT backed by the full faith and credit of the U.S. Treasury? A. GNMA B. FNMA C. STRIPS D. Treasury Bills

B. Federal National Mortgage Association is a government sponsored entity. Its debt is not directly backed by the federal government (LO 2.k)

Which of the following positions/actions would cover a client who has 1,000 shares of Seabird Coffee Company (Ticker BCC)? A. A long stock position B. Buying 10 BCC puts C. Buying 10 BCC calls D. A short stock position

B. The best hedge for a long stock position is to won long puts. This gives a bottom price the customer can sell the stock for during the life of the put.

Regarding assignment of exercises notices, which of the following are true? I. The Options Clearing Corporation (OCC) assigns short BDs randomly. II. The OCC assigns short BDs using the first-in, first out (FIFO) accounting method III. Short BDs can assign their short customers randomly only IV. Short BDs can assign their short customers randomly, using the FIFO accounting method or by any other fair method A. I and III B. I and IV C. II and III D. II and IV

B. When an exercise notice is recieved, the OCC assigns short BDs on a random basis only. In turn, a short BD may exercise its short customers in 1 of 3 ways: randomly, using the FIFO accounting method, or by any other fair method. (LO 3.K)

All of the following are true for exchange-traded Funds (ETFs) EXCEPT A. ETFs can be bough or sold throughout the day B. ETFs are not marginable securities C. ETF share prices are subject to market forces like supply and demand D. ETF transactions are commissionable trades

B. ETFs trade as all other exchange-traded products (ETPs) do. Commissionable transactions can occur throughout the trading day where prices are subject to all normal market forces. They can be purchased on margin. (LO 5.m)

Each Limited Partner's share of partnership losses A. may be used to reduce ordinary income B. may be used to offset passive income C. is deductible up to 3,000 per year D. cause a dollar-for-dollar decrease in the market value of the limited partnership units

B. It is important to remember that passive losses can be used to offset only passive income. An investor with $500,000 of passive income could write off up to $500,000 of passive loss (if he had that much loss). Do not confuse this with the $3,000 maximum deduction against income for capital losses. There is no maximum passive loss that can be written off against passive income.

All of the following are types of real estate investments trusts EXCEPT A. mortgage B. oil and gas C. equity D. hybrid

B. Oil and gas limited partnerships are common. The others are all types of REITs (LO 5.h)

Before making an investment, it is wise to evaluate the potential risk involved. It is safe to assume that I. the greater the risk the greater the potential reward II. the greater the risk, the lower the potential reward III. the lower the risk, the greater the potential loss IV. the lower the risk, the lower the potential reward

B. One of the primary axioms of investing is the relationship between risk and reward. Basically, when an investor takes more risk, it is in the expectation of a greater reward. Reducing the risk should result in a lower reward.

Listed options transactions settle regular way A. on the third Friday of the expiration month B. on the next business day after trade date (T+1) C. on the third business day after the trade date (T+3) D. when the option finally expires

B. Options transactions settle on the next business day after the trade date (T+1) (LO 3.K)

A BB-rated 6% corporate callable bond that matures in 12 years that is trading at 100.25 is priced at A. a discount B. a premium C. with a current yield above 7% D. with a coupon rate below 6%

B. There are a lot of words, but the only thing you need to understand in order to answer this question is that the bond is trading at a price above par (100), so it's at premium.

Which of the following money market instruments are routinely use in import/export activities? A. GNMA B. BAs C. T-Bills D. Repurchase agreements

B. Banker's Acceptances (BAs) are used for this purpose (LO 2.m)

Which of the following would NOT be included in a mutual fund's list of expenses? I. Shareholder records and service II. Investment adviser's fee III. Broker-dealer sales charges IV. Underwriter's sales loads A. I and II B. III and IV C. I and III D. II and IV

B. Cost to maintain shareholder records, costs to provide services to shareholders, and the investment adviser's fees are all expenses to the fund. The cost paid in the form of sales charges (loads) to an underwriter or broker-dealers selling mutual funds to the public may never be treated as an expense to the fund. They are expenses to the investor (LO 4.h)

An investor is long 1 XYZ May 40 call and XYZ stock has a current market value of 44. Which of the following is TRUE? A. The May 40 call is at the money B. The May 40 call is in the money C. The May 40 call is out of the money D. The May 40 call has no intrinsic value

B. Options are in the money by the amount of their intrinsic value. This May 40 call has an intrinsic value of 4 points and is therefore in the money by 4 points. Calls have an intrinsic value when the current market value of the stock is above the strike price

An investor writes a September 65 ABC put for $3 when the stock is trading at $63 Which of the Following is TRUE? A. The intrinsic value is $3 B. The intrinsic value is $2 and the time value is $1 C. The intrinsic value is $1 and the time value is $2 D. The investor has the right to purchase ABC stock at 65

B. Puts are in the money when the price of the stock is lower than strike price. In this example, the stock is at $63 and the strike price is $65; the put is $2 in the money (intrinsic). The premium is $3. Using the formula, IV + TV = Pr, we know the time value is $1. As the writer of a put the investor has an obligation to buy stock if the option is exercised. (LO 3.d)

Which of the following positions/actions would cover a client who has 1,000 shares of the seabird coffee company (Ticker BCC)? A. A long stock position B. Buying 10 BCC puts C. Buying BCC calls D. a short stock position

B. The best hedge for a long stock position is to own long puts. This gives a bottom price the customer can sell the stock during the life of the put.

If a bond has a feature that allows the issuer to pay off bondholders prior to maturity, the bond has a A. put feature B. a call feature C. a conversion feature D. a presale feature

B. A feature allows an issuer to pay a bond off earlier than the maturity date is a call feature. a put feature allows the holder of the debt to force the issuer to pau off the bond. A conversion feature allows the owner to convert the bond to the issuer's common stock. A presale feature has nothing to do with the bonds (LO 2.d)

A newly issued treasury security that matures in 5 years is A. A T-bill B. a T-note C. a T-bond D. a treasury receipt

B. T- notes are issued with maturities between 2 - 10 years. T -bills longest maturity is 1 year and T-bonds have maturities over 10 years. Treasury receipts are not issued by the Treasury (LO 2.j)

For this election cycle, Big Trucks, Inc., has three open board seats. Big Trucks operates under a cumulative voting system. Your customer owns 300 participating preferred shares of Big Trucks. He has A. 900 votes he can divide any way he wants among the three seats B. no voting rights C. 300 votes each for the open seats D. 300 votes total to spread among the three open seats

B. Your customer owns preferred stock. Preferred stock carries no voting rights. (LO 1.i)

Under Rule 144, which of the following sales are subject to volume limitations on the number of shares sold? I. Control Person selling registered stock held for 1 year II. Control Person selling restricted stock held for 2 years III. Nonaffiliate selling registered stock held for 1 month IV. Non affiliate selling restricted stock held for more than 6 months A. III and IV B. I and II C. I and II D. I and IV

B. Control persons (insiders) are always subject to volume limitation. Nonaffiliates have no volume (or any other restrictions) in the sale of registered stock. if the shares are restricted, the volume limits for nonaffiliates end after six months. Registered shares sold by nonaffiliates have no Form 144 filling the requirement. (LO 1.g)

One of the advantages of a security being traded on a listed stock exchange is the ready availability of buyers and sellers. This has the tendency to reduce or even eliminate. A. inflation Risk B. Liquidity Risk C. Market Risk D. price risk

B. Liquidity risk is the uncertainty that an investor will be able to find a buyer for security when the need to sell arises. Listed securities virtually always have ready marketability.

All Big company, Inc., an NYSE-listed manufacturer of large objects, has declared a 50-cents-a -share dividend payable next month. All Big also has options available for trade. The actual ex-dividend date will be declared by A. the OTC B. the NYSE C. FINRA D. the CBOE

B. The NYSE Ex-dates are set by the market center where trades will likely take place. In this case of an NYSE-listed Stock, the NYSE will determine the ex-date. The fact that All Big has listed options is not relevant to the question.

Which of the following statements regarding a letter of intent and breakpoints are TRUE? I. The Letter of intent can be backdated a maximum of 30 days II. The letter of intent is valid for 13 months III. The investor is legally bound to meet the terms of the agreement IV. The fund holds the additional shares in escrow A. I and II B. II and III C. II and IV D. III and IV

C The letter of intent may be backdated 90 days. The investor is not required by law to satisfy the letter of intent, although in case of default, he will pay a higher sales charge

Your Client is considering the Newport Land and Farming REIT and notes that the description that it is listed. What does 'Listed" in this context mean? A. The REIT is registered and likely trades OTC B. The REIT is unregistered and trades only in the primary market C. The REIT is registered and likely trades on an exchange D. The REIT is unregistered and is likely trading OTC bulletin board

C. A listed security is one that has been accepted for trading on an exchange. Only registered securities are listed.

In order to qualify as a conduit a mutual fund must pay out a minimum of A. 90% of gross investment income B. 90% of net expenses C. 90% of net investment income D. 95% of net investment income

C. An investment company must distribute a minimum of 90% of net investment income in order to qualify for the tax break given to conduits (LO 4.k)

the decision to annuitize a variable or fixed annuity may be reversed within how many days of election? A. 30 days B. 7 days C. 0 days D. 90 days

C. Annuitization is a one-times irrevocable action (4.2)

All of the following are benefits for the limited partners in a direct participation program (DPP) EXCEPT A. passive losses B. flow-through of income C. unlimited Liability D. an investment managed by the general partner (GP)

C. As the name implies, a limited partner has limited liability. In other words, a limited partner can't lose more than what was initially invested. The same cannot be said, however, of the GP. (LO 5.e.)

All of the following are true except A. breakeven (BE) is always the same number for both buyer and seller of an option contract. B. the maximum loss for options buyers is the premium paid C. the maximum gain for options buyers is always unlimited D. BE is calculated using the same formula for both buyer and seller

C. BE is calculated using the same formula for both buyers and seller of an option contract. Therefore, BE is always the same number for both buyer and seller. The formula for calls is price plus premium, and the formula for puts is strike price minus premium. The most any options buyer (ML) for a call or a put is premium paid. However, MG while unlimited for a call buyer, is limited for a put buyer. (LO 3.g)

Your customer would like current monthly income from a very safe investment. Which of the following do you recommend? A. T-Bonds B. FNMA C. GNMA D. T-notes

C. GNMA Certificates pay monthly income and principal payments and are directly backed by the federal government. (LO 2.k)

An investment established by states to provide other government entities such as cities or counties a place to invest funds short term is A. an FDIC B. an ABLE C. an LGIP D. a REPO

C. Local government investment pools (LGIPs) are established by states to provide other government entities such as cities, counties, school districts, or other state agencies with a short-term investment vehicle to invest funds (LO 5.b)

Under the Investment Company Act of 1940 all of the following are examples of management companies EXCEPT A. S&P 500 Index Trust ETF B. Growth Fund option for a VA C. Windmill Income UIT D. Windmill Income Fund, an exchange-listed closed-end fund

C. Unit Investment trusts are investment companies, but not management companies, under the act. Closed-end funds, ETFs , and separate accounts are all types of management companies. (LO 4.a)

Your client is considering the Newport Land and Farming REIT and notes in the description that is listed. What does "listed: mean in this context? A. The REIT is registered and likely trades OTC B. The REIT is unregistered and trades only in the primary market C. The REIT is registered and likely trades on an exchange D. The REIT is unregistered and is likely trading OTC bulletin Board

C. A listed security is one that has been accepted for trading on an exchange. Only registered securities are listed (LO 5.i)

Which of the following has unlimited risk? A. Short 5 BCC puts B. Long 500 BCC and short 5 BCC calls C. Short 500 BCC and short 5 BCC puts D. Short 500 BCC and long 5 BCC calls

C. A put, whether long or short, does not generate unlimited risk. A long stock and short call is a covered call and not unlimited risk. Short stock and a long call is a covered short and has limited risk. A short stock and short put is exposed to unlimited risk because the put income provides very limited protection against a potentially unlimited loss.

An investor has placed money in a debt-like instrument issued by a financial institution and linked to the performance of the S&P Index. From the investment, which has a stated maturity date but makes no interest payments, the investor anticipates receiving a cash payment minus any applicable management fees when the instrument matures. This describes which of the following investments? A. Municipal Bond B. Direct participation program (DPP) C. Exchange-traded note (ETN) D. Variable Annuity

C. ETNs are debt-like instruments issued by banks and other financial institutions that trade on exchanges. Their performance is generally linked to a specific market index. At maturity of the note, investors receive a cash payment minus any management fees (LO 5.n)

Which of the following bonds would have the MOST price volatility? A. 3% 10-year T-note B. 2% 5-year T-note C. 5% 20-year T-Bond D. 5% 15-year corporate bond

C. The more time left to maturity, the more volatile the bond tends to be. Even though the 20-year T-bond is safer than the corporate, its price will be more volatile. (LO 2.c)

A Security that is a contractual obligation between two parties and whose value is based on the specifics of the contract in relation to a different security is A. a contractual plan B. An investment company C. a derivative D. a hedge fund

C. A contact that derives its value from its relationship to another security is a derivative. A contractual plan is a type of investment company that is no longer issued. (LO 3.a)

Interest from a zero-coupon bond A. Pays monthly and is taxed annually B. pays annually and is taxed at maturity C. pays at maturity and is taxed annually D. pays and taxed on maturity

C. A zero is purchased at a deep discount and pays no interest until it matures; however, interest is taxed on an annual basis, called "Phantom Income" (LO 2.e)

Your Customer has carefully researched the purchase of stock in Green shoe Company. After the purchase, the equity markets dropped 20%, and Green Shoe stocked dropped along with it. Green Shoe gave up 15% during the drop. This is an example of A. business Risk B. interest rate risk C. market risk D. nonsystematic Risk

C. All stocks in the market are effected when the market moves. The sensitivity of a given security to its market is measured by beta.

All of the following are true EXCEPT A. Breakeven (BE) is always the same number for both buyer and seller of an option contract. B. the maximum loss for options buyers is the premium paid C. the maximum gain for options buyers is always unlimited D. BE is calculated using the same formula for both buyer and seller

C. BE is calculated using the same formula for both buyer and seller. Therefore, BE is always the same number for both buyer and seller. The most any options buyer can lose for a call or a put is premium paid. (LO 3.g)

An investor is long 1 January 30 call at 2. Calculate the breakeven, maximum gain, and maximum loss. A.BE 30, MG unlimited, ML 200 B. Be 32, MG 200, ML unlimited C. BE 32, MG unlimited, ML 200 D. BE 2, MG 500, ML 32

C. Breakeven = 32 (for a call, BE = strike price [30] + premium[2]), Maximum gain = unlimited (Long calls could go to infinity; Maximum loss = $200 (the most an investor can lose when purchasing options the premium paid; 2 points = $200). (LO 3.g)

An investor is long 1 January 30 call at 2. Calculate the breakeven, maximum gain, and maximum loss. A. BE 30, MG unlimited, ML 200 B. BE 32, MG 200, ML unlimited C. BE 32, MG unlimited, ML 200 D. Be 2, MG 500, ML 32

C. Breakeven = 32 [for a call, BE = strike price (30) + premium (2) ], Maximum gain = unlimited (Market attitude for a long call is bullish; the stock could go to infinity) ; Maximum loss = $200 [ the most an investor can lose when purchasing option is the premium paid; 2 points = $200] (LO 3.g)

Before an order to purchase a mutual fund can be taken, an investor must be provided with I. a full prospectus II. a statement of additional III. a rule 482 prospectus IV. a summary prospectus A. I and IV B. II or III C. I or IV D. III and IV

C. Either a full or summary prospectus is required to solicit and accept a mutual fund order. You may deliver both, but that is not the requirement (LO 4.i)

An investor might make money in a strong bull market by A. Selling Shares short B. Buying equity index puts C. Buying equity index calls D. Selling equity index calls

C. If the market is going up, you should own the bullish position, a long calls (LO 3.e)

A customer of a BD is opening a new options account. The customer must return the options agreement A. signed before the account can be approved B. before the first transaction can occur C. signed and not later than 15 days after the account approval D. before he will be allowed to view the options disclosure document

C. Once the account is approved by a principal of the BD, the customer has 15 days to return the signed options agreement. Remember that the customer must be given

Your customer is a large exporter of electronic devices. They are delivering a large shipment to Japan and are concerned that the value of the Japanese yen may drop before they receive the payment. In order to hedge the currency risk, your customer should A. Buy yen calls B. sell yen calls C. Buy yen puts D. sell yen puts

C. U.S. Exporters are concerned about the currency they will be paid dropping in value against the U.S. Dollar. The best hedge against an asset dropping in price is to own puts. (LO 3.e)

Your customer, Mr. Garcia, lives in Scottsdale, Arizona. He owns a general obligation bonds by the city if San Juan, Puerto Rico. The interest from the bonds will be taxed at A. federal, but not the state level B. the state, but not federal level C. neither the state nor the federal level D. both the state and federal levels

C. U.S. Taxpayers pay no income tax on interest paid by U.S territories and municipalities of those territories (LO 2.I)

Your client holds ADRs of Daikon Motors, Inc. , an automobile manufacturer based in Asia. All of the following are true about the position except A. they will receive dividends in U.S. Dollars B. the security may be traded in U.S markets C. they have the same voting rights as an owner of the common stock D. they have the right to request the underlying common shares be issued to them directly

C. It is important to remember that ADRs are issued by a depository bank and the bank is the registered owners of the shares. Depository banks are not required to pass voting proxies through the ADR holders. (LO 1.h)

When the interest rate paid on a debt security is less than the current inflation rate, the investor suffers from which of the following risks? A. Liquidity Risk B. Call Risk C. Purchasing Power Risk D. Currency Risk

C. Purchasing power risk is a systemic risk that impacts fixed income investments. It is the risk that a fixed payment from an investment will lose purchasing power due to inflation.

Treasury Bills may be issued with all of the following maturities except A. 4 weeks B. 13 weeks C. 39 weeks D. 52 weeks

C. T-bills may be issued with 4, 13, 26, and 52 week maturities. They are not issued with a 39-week maturity (LO 2.j)

Which of the following securities would likely provide the greatest potential for capital appreciation? A. A preferred stock B. A U.S. Treasury STRIP C. A common stock D. A convertible bond

C. A Common Stock

Which of the following is NOT a security that an investor would purchase? A. Common Shares of ABC Petroleum, Inc. B. Debt Isuue by ABC Petroleum, Inc C. Bitcoins D. Windmill Growth Fund

C. Bitcoin Bitcoin ,like other crypto, is considered a commodity, not a security. (LO 1.a)

American Liquidators Corporation (Ticker LQDT) has 100 million outstanding common shares. The company would like to raise capital by selling 100 million new share. In order to accomplish this, they would A. offer warrants to existing shareholders B. suggest that existing shareholders go to the market and double their existing position C. offer stock rights to existing shareholders D. perform a stock split

C. LQDT would give the right to purchase a portion of the newly issued shares to existing shareholders sufficient to maintain their current percentage of ownership via a stock rights offering. Warrant are long term and normally attached to a fixed-income offer. Neither stock split nor investors buying the market generates capital for the company. (LO 1.f)

Class A shares are best for investors with A. larger investment amounts and short time frames B. smaller investment amounts and long time frames C. larger investment amounts and long time frames D. smaller investment amounts and short time frames

C. The one-time cost and lower expense ratios make A shares better for investors with larger investments (to get breakpoints) and long time frames (to spread the impact of the front-end cost over many years)

Which of the following are considered sources of debt service for GO bonds? I. Personal property taxes II. Real estate taxes III. Fees from delinquent property taxes IV. Liquor license fees A. I and IV B. II and III C. II, III, and IV D. I, II , III, and IV

D. All of these are taxes or fees that pay into the general fund of a municipally and may be used to service GO debt (LO 2.h)

According to Standard and Poor's Rating system, the 4 highest grades of bonds (from best to lowest grade) are A. Aaa;Aa;A;Baa B. A;Aa:Aaa:B C. B;A;AA;AAA D. AAA;AA;A;BBB

D. Figure 2.2 has the chart

A private, unregulated investment company organized in such a way so as to invest and achieve high returns utilizing debt leverage and derivative products such as options and margin is best described as A. a mutual fund B. a direct participation program (DPP) C. a real estate investment trust (REIT) D. a hedge fund

D. Hedge funds are unregulated investments with a goal of achieving high returns. They do this by primarily utilizing strategies associated with risk, such as trading in commodities, currencies, and derivatives, and utilizing debt leverage and margin (LO 5.6)

When a customer chooses to annuitize a variable annuity, all of the following are factors the insurance company will use in calculating the initial payout amount EXCEPT A. age of annuitant B. gender of annuitant C. balance of the separate account D. historic inflation rate

D. Insurance Companies do not consider inflation when making this calculation. The components are GAAPI: gender, age, account balance, payout option, and interest rate (AIR)

A mutual fund's public offering price is $10.50. An investor who wishes to invest $1,000 in the fund will purchase how many shares? A. 95 shares with $2.50 left B. 96 and owe $8.00 C. Partial shares not allowed D. 95.238

D. Mutual funds may be purchased in even dollar amounts, and partial shares may be issued (LO 4.f)

A REITs is Taxed as A. a corporation B. a partnership C. a municipal bond D. as a conduit

D. REITs fall under the conduit (or pipeline) tax theory (LO 5.h)

An investor writes (sells) a July 25 ABC call. Which of the following is TRUE? A. The investor has the right to purchase ABC stock at 25 B. The investor has the right to sell ABC stock at 25 C. The investor will be obligated to purchase ABC stock at 25 if the call is exercised by the owner (buyer) D. The investor will be obligated to sell the ABC stock at 25 if the call is exercised by the owner (buyer)

D. Writers of options incur an obligation if the option is exercised by the other party to the contract (owner or buyer). If the buyer of a call exercises her right to purchase the stock, the writer will be obligated to sell the stock. Therefore, this investor will be obligated to sell ABC stock at strike price (25) if the call is exercised by the owner (buyer). (LO 3.C)

How many primary offerings can a corporation issue? A. 1 primary offering B. 2 primary offerings C. 3 Primary offerings D. Unlimited

D. A corporation can sell as many shares, and have as many offerings, as it can get people to buy the stock (LO 7.b)

Lando Entertainment, Inc issues a bond collateralized by a trust holding the company's Las Vegas headquarters. This type of bond is called A. a collateral trust bond B. a guaranteed bond C. a headquarters debenture D. a mortgage bond

D. A secured bond backed by real estate is called a mortgage bond. Collateral trust bond hold other securities in trust as collateral. A guaranteed bond is an unsecured bond backed by a third party. A headquarters debenture is not a thing (LO 2.f)

All of the following would most likely be found in a money market fund's portfolio except A. T-Bills B. T-Bonds with less than one year to maturity C. negotiable CDs D. Common stock

D. Common stock does not meet the criteria for a money market. Though highly liquid, it has no maturity date nor is it relatively safe compared to debt instruments (LO 2.m)

Which of the following does NOT have regulatory jurisdiction over the structure or sale of 529 plans? A. SEC B. IRS C. MSRB D. Department of Education

D. The Department of Education does define what is or is not a school, but that is it as far as a 529 plan goes. The 529 plan is a type of securities account (SEC) that is sponsored by the individual states (MSRB), and provides certain tax incentives (IRS). (LO 5)

One characteristic of an open-end investment company that distinguishes it from a closed-end one is that A. it may avoid taxation by distributing all of its net investment income to shareholders B. it may be either diversified or nondiversified C. there are a wide variety of objectives available for investors to select from D. there is a continuous public offering

D. The key difference between open-end investment companies and closed end is the fact that new shares are continuously being offered for open-end companies. In the case of the closed-end, once the IPO is over, the only way to acquire shares us in the secondary market. Both types of funds may operate as regulated investment companies and avoid taxation, both may choose to be diversified or not, and both offer a wide variety of investment objectives (LO 4.b)

Your customer, Mr. Newsome, recently purchased one put contract on Napa Valley Spirits, Inc Stock. The strike price is $50 and the premium was $4.50. He later executed the contract. How much did he pay for the contract? A. $5,000 B. $500 C. $4,550 D. $450

D. The question asks what he paid for the contract, not what he received when he executed it, or the breakeven price. One contract of 100 shares at $4.50 a share is $450 (LO 3.c)

Your customer calls you with a question. The customer tells you that they received a phone call form the bond desk telling the customer that a trade to purchase 20 bonds at 100 has been executed for the customer's account. The customer would like to know how much they paid for the bonds before any commission or other charges. The answer to the customer's question is A. $2,000 B. $200,000 C. $1,000 D. $20,000

D. Paying "100" means they paid 100% of par ($1,000) per bond. They purchased 20 bonds so total of 20,000. Note that the question concerned "how much they paid for the bonds," not the price per bond. (LO 2.a)

Ms. Johnasen purchased 100 shares of Natasha Publishing two years ago for $40 a share. The stock has risen to $62 a share. She is concerned that the recent death of the founder and CEO might negatively impact the stock. As a hedge she buys a 60 put on the stock for $2. Her breakeven price on the position is A. $64/share B. $62/share C. $58/share D.$42/share

D. The formula for breakeven on a long stock plus long put position is the cost of the stock plus the cost of the option on a per share basis. The original cost of the stock is $40 and the put cost $2, for a breakeven of $42/share.

Which of the following would MOST likely require shareholder approval? A. Declaring a dividend B. Firing the CEO C. Hiring a new CFO D. Changing the Corporation's name

D. Changing the Corporation's name Changing the corporations name is a significant matter that will likely need shareholder approval. Declaring a dividend and the hiring/firing of a senior executive is well within the board's power. (LO 1.C)

Below which of the following S&P ratings would a bond be considered speculative? A.A B. B C. BB D. BBB

D. The investment grade ratings from highest to lowest are AA,AA,A and BBB. All ratings below BB are speculative bonds (LO 2.c)