Understanding Products and Their Risks 3

Which of the following expressions describes the current yield of a bond?

Annual interest (coupon) payment divided by current market price

An investor is long a January 30 call at 2. Maximum loss for this position is

$200

LMN Corporation has a 4% preferred class stock currently trading at $45 per share. Its annual dividend is

$4 For preferred shares, the annual dividend is stated as a percentage of par. In this case, 4% of par (always assume $100 for preferred shares unless told differently) equals $4.

A customer writes an MMM January 70 put at 6. The maximum potential gain on this position is

$600

An investor purchases 1 KLP October 95 put at 6.50. What is the investor's maximum potential gain with this position?

$8,850 The maximum gain on a long put is calculated by subtracting the premium from the strike price (95 − 6.50 = 88.50 per share). Because one contract represents 100 shares, the owner's maximum gain is $8,850 and would occur if the stock falls to zero. Remember, put buyers are bearish; therefore, they will make money if the stock falls below the breakeven point—in this case, below 88.50.

Tax-advantaged savings accounts for individuals with disabilities and their families are

ABLE Accounts

A corporate bankruptcy liquidation took place. Of the following—general creditors, secured bondholders, subordinated debenture holders, accrued taxes—who was paid first and who was paid last?

Accrued taxes first, subordinated bondholders last

Regarding sales loads, management fees, and operating expenses for mutual funds, which of the following is TRUE?

All reduce investor returns because they reduce the amount of money available for the fund to invest.

At expiration, for those who trade call options, which of the following is TRUE?

Call buyers want the contract to be in the money.

MJS Corporation has called in its 6% preferred shares. Owners of these shares should expect that

dividend payments will cease on the call date

A bank trustee holds the titles to assets a corporation has purchased and utilizes in its day-to-day business. The corporation issues debt securities backed by these assets. These securities are

equipment trust certificates

A company that is extensively overleveraged using debt financing whenever available would be exposing its investors to

financial risk

Limited partnership programs are categorized as direct participation programs. The term direct participation refers to the

flow-through of profits and losses of the partnership to the individual limited partners

A convertible feature for preferred shares allows the owner to exchange the shares

for a fixed number of shares of the issuing corporation's common stock

All investors and investments are different. Recognizing this, it is TRUE that

no investment should be deemed suitable for every investor

Regarding the purchase of new equity issues (IPOs), restricted persons may

not purchase shares of a new issue

CDT Corporation has issued 4.5% callable preferred shares. If these shares are ever called in, stockholders should expect that the shares would be called in at

par value or higher

The coupon for a bond is calculated as a percentage of

par value, usually $1,000 for a bond

A mutual fund can offer all of the following to investors EXCEPT

physical custody of the fund's portfolio cash and securities

An investor buys 1 DWQ May 70 call at 2, giving the investor the right to buy 100 shares of DWQ at $70 per share. All the specifications of the transaction are set or standardized by the Options Clearing Corporation EXCEPT

premium of 2 Options Clearing Corporation (OCC) sets standard exercise prices and expiration dates for all listed options, but the options premiums that buyers pay are determined by the market.

Which of the following is used to calculate a company's net worth?

Debt - equity

An investor owns a bond purchased several years ago yielding 3%, which at the time was considered a fair return. However, these fixed 3% interest payments have not kept up with the inflation rate. This situation presents the investor with

purchasing power risk

The Securities Act of 1933 exempts all of the following securities from registration EXCEPT

real estate investment trusts

An investor holds shares of a manufacturing company where disposal of the by-products produced during the manufacturing process is necessary. The Environmental Protection Agency (EPA) updates the rules applicable to disposing of the product. For the investor, these changes present a form of

regulatory risk

An investor holding T-bonds will receive interest payments

semiannually

An investor and his mother own 20% and 10%, respectively, of a corporation's outstanding shares, and the mother wants to sell all of her holdings. According to Rule 144, which of the following statements are TRUE? She must file Form 144 to sell the shares She does not have to file Form 144 to sell the shares. She is considered an affiliated person. She is not considered an affiliated person.

I and III

A put option reaches its expiration date and goes unexercised. This means the buyer gains the premium paid the buyer loses the premium paid the writer gains the premium received the writer loses the premium received

II and III

Regarding oil and gas DPPs, tan¬gible drilling costs are associated with items that have no salvage value at the end of the program have some salvage value at the end of the program can be depreciated cannot be depreciated

II and III

Yield to call (YTC) calculations reflect the early redemption date and acceleration of the discount gain if the bond was originally purchased at a premium acceleration of the discount gain if the bond was originally purchased at a discount accelerated premium loss if the bond was originally purchased at a premium accelerated premium loss if the bond was originally purchased at a discount

II and III

At a shareholders' meeting, a mutual fund investor might be called upon to vote on any of the following EXCEPT changes in membership in the board of directors whether to sell a certain company's stock out of the portfolio approval of the investment adviser's contract changing to a new landscaper for the fund's headquarters

II and IV

Penny stock rules apply to both solicited and unsolicited transactions specify that established customers of the firm need not sign a suitability statement mandate that an account holding penny stocks only need not be provided with a monthly statement require that prospects be given a copy of a risk disclosure document before their initial penny stock transaction

II and IV

Which of the following would cause a change in the net asset value of a mutual fund share? Many shares are redeemed. Securities in the portfolio are sold for a capital gain. The fund pays a small dividend. The market value of the portfolio declines.

III and IV

Which of the following is TRUE for U.S. Treasury-issued securities?

T-bills are purchased at a discount, while T- bonds are purchased as a percentage of par.

What does the mortality guarantee of a variable annuity insure?

That payments will continue for the life of the annuitant

Why is a fixed annuity NOT considered to be a security?

The fixed annuity buyer assumes no investment risk.

A shareholder feels strongly about some of the issues to be voted on at the next shareholder meeting but is unable to attend. Which of the following is TRUE?

The shareholder can vote by proxy.

For ETFs, the phrase "tax efficiency" can best be described by which of the following concepts?

Usually, for ETFs, there are no tax consequences for investors until the shares are sold.

Which of the following are considered intangible drilling costs for an oil and gas DPP?

Wages and insurance

Your customer has purchased 1 February 35 call at 2 on Tuesday, December 4. This transaction will settle on

Wednesday, December 5 Options transactions settle on the next business day after the trade date, T + 1. In this case, an option transaction occurring on Tuesday, December 4, would settle on Wednesday, December 5.

A common stock shareholder's residual right to corporate assets refers to which of the following?

During the dissolution of corporate assets, common shareholders will be paid if there are any funds left after debtholders and preferred shareholders are paid.

Regarding investment products, which of the following is TRUE?

Equity securities represent ownership in an issuing company.

The two classifications of chapters for corporate bankruptcies are liquidations reorganizations bankruptcy failures

I and II

Which of the following positions would give an investor an unlimited loss potential? Short 1 IBS Jul 50 put Short 100 shares of IBS stock Short 1 IBS Jul 50 uncovered call Short 1 IBS Jul 50 covered call

I and II

Put buyers are

bullish

Interest-rate risk

cannot be reduced by diversification

All corporations will issue

common stock

Examples of investments in assets that would be considered illiquid would be all of the following EXCEPT

common stock

Which of following securities is least likely to have an active trading market?

Limited partnership interests

The sales charge for Class A shares may NOT exceed

8.5% of the total investment

Regarding filing for corporate bankruptcy, which of the following is TRUE?

Liquidation means that property will be taken and sold to repay all debts.

An investor asks for a copy of mutual funds Statement of Additional Information (SAI). The request must be satisfied within

3 business days, free of charge

An investor is long a January 30 call at 2. Breakeven is

32

An affiliate holding unregistered shares can sell under Rule 144

4 times a year

A customer purchased 1 MNO Jan 50 call at 2. What is the breakeven point for both the purchaser and the seller?

52 Whether long or short the call, the breakeven for a call is found by adding the premium to the strike price. For the call buyer, the contract is profitable above the breakeven. For a call seller, the contract stands to lose money if the price of MNO rises above breakeven.

A mutual fund's public offering price is $15.23. An investor who wishes to invest $1,000 in the fund will purchase how many shares?

65.66 shares Mutual funds can issue fractional shares. This is an advantage for those who invest in mutual funds because they can think in terms of the dollars they want to invest rather than in the numbers of shares they want to purchase. Wanting to invest $1,000 at the current price of $15.23 allows 65.66 shares to be purchased ($1,000 / $15.23 = 65.66 shares).

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

Local Government Investment Pools

Distinguishing by the issue's term to maturity for those securities issued by the U.S. federal government, which of the following is CORRECT?

Bills represent short-term issues.

Your customer has one position in her account and it poses an unlimited loss potential. Which of the following is it?

Short call

Municipal revenue bonds do not require voter approval generally have a higher rating than GO bonds from the same issuer are not subject to statutory debt limits are backed and supported by ad valorem (property) taxes

I and III

Which of the following are included in the semiannual financial reports a mutual fund must provide to its shareholders? Balance sheet showing assets, liabilities, and net assets Separate listing of physical property held by the fund Income statement detailing profit and loss for the period Personnel list detailing any changes in staff or position titles

I and III

A bond with a 4.5% stated yield might make annual interest payments of $45 annual interest payments of $450 semiannual interest payments of $2.50 semiannual interest payments of $22.50

I and IV

Common stockholders of a publicly traded corporation have which of the following rights and privileges? Residual claim to assets at dissolution Right to a vote for stock dividends to be paid Right to receive an audited financial report on an annual basis Claim against dividends in default

I and IV

Which of the following are the most likely to make monthly or quarterly payments for the life the investor? Fixed annuity UIT Mutual fund Variable annuity

I and IV

Which of the following is an example of an unsecured debt security? Debenture Preferred stock Mortgage bond Income bond

I and IV

For revenue bonds issued by a state or municipality, which of the following is TRUE?

Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve.

Which of the following is TRUE for mutual funds and those who invest in them?

Investors must be provided with specific information when purchasing mutual funds.

Water and sewer facilities are most likely to use what kind of debt financing to fund expansion plans?

Municipal revenue bonds

Which of the following are fixed at the time a bond is issued?

Nominal yield

Regarding municipal general obligation (GO) bonds, which of the following is TRUE?

The lower the statutory debt limit, the safer for bondholders

If an officer of a bank with the authority to purchase and sell securities on behalf of the bank wants to purchase new issues, which of the following statements is TRUE?

The officer may not purchase a new issue because he is considered a restricted person.

What might happen if a limited partner begins making day-to-day business decisions for the partnership?

The partner might jeopardize the limited liability status held as an LP.

Which of the following statements best describes financial risk?

The risk that an issuer will be unable to meet interest and principal payments on debt obligations

What limit is placed on the number of outstanding shares a mutual fund may have in the hands of investors?

There is no limit.

What is the tax status of a dividend paid to a U.S.-based ADR investor?

These dividends may be taxed by both the foreign country and the U.S.

Which of the following would be least likely to directly impact a bonds yield?

Time to maturity

Of the following strategies, which is considered most risky in a strong bull market?

Writing calls

An investor holds a debt security backed by ad valorem taxes. This security is issued by

a city or local municipality

An investment that allows for a share in the income, gains, losses, deductions, and tax credits of the business entity to pass through to investors is known as

a general partnership

An issuer has issued bonds with a call feature. It is likely that these bonds have

a higher coupon than similar bonds without the feature

With money market securities held in one's portfolio, relative to other, longer-term debt securities, an investor should expect

a higher degree of safety with lower returns

An unsecured promissory note issued by a bank that can be traded in the secondary market is known as

a negotiable CD

By electing a board of directors (BOD), stockholders have

a say in the company's management but are not involved in the day-to-day details of its operations

Treasury bills pay

all interest at maturity

All of the following are considered control persons (owning control stock) EXCEPT

an unaffiliated shareholder owning 8% of the outstanding shares

Class B mutual fund shares are also known as

back-end load shares

Intangible drilling costs associated with oil and gas DPPs can generally

be deducted completely in the first year of the program

Each of the following are likely benefits of owning shares of common stock EXCEPT

interest payments

Holding a callable bond with call protection is least impactful for the investor when

interest rates are rising

A statutory debt limitation imposed on a municipality restricts its authority regarding

issuing general obligation (GO) bonds

At expiration CDT stock is trading at 43. A January 40 put would be

left to expire unexercised

When an investor purchases a corporate bond, the investor is

lending money to and becoming a creditor of the corporation

A March 25 put purchased at 1.5 has expired without being exercised. The owner of the put

loses the $150 premium paid

Repurchase agreements and reverse repurchase agreements are

money market instruments

An investor who buys and sells options on stock is

neither an owner of nor a debtor of the company

The rate on an adjustable preferred stock would most likely be indexed to

the Treasury bill (T-bill) rate

An investor purchases a T-bill for $9,925 that will mature at $10,000. The difference between the $9,925 paid and the $10,000 that will be received is

the discount to par and will be considered interest received at maturity

An investor holds a Treasury note with a stated interest of 6%. The investor will receive

two $30 interest payments per year Treasury note (T-note) annual interest is stated as a percentage of par value ($1,000) and is paid in semiannual payments. Therefore, a 6% T-note pays $60 per year in 2 payments of $30 each.

An investor is short a January 30 call at 5. Maximum loss for the investor is

unlimited

In a real estate limited partnership (DPP), the general partner has

unlimited liability and an active role

The buyer of an option contract can be known as all of the following EXCEPT

writer