Checkpoint Exam U11
The MNO Manufacturing Company, headquartered in Springfield, has just filed for bankruptcy. Under federal bankruptcy law, which of the following would have highest priority with the bankruptcy trustee? A) Employee wages earned within the 180 days prior to the bankruptcy filing B) Holders of mortgage bonds C) Holders of first lien, senior preferred stock D) Property taxes owed to the city of Springfield
B) Holders of mortgage bonds Holders of mortgages on real property securing a bond are senior creditors and have the highest priority claim in a bankruptcy. Under federal bankruptcy law, there are several categories of unsecured claims that have a higher priority than other unsecured ones, but secured debt always comes first. Two of the most common high ranking unsecured claims are employee wages as long as the wages were earned during the 180 days prior to the bankruptcy filing, and certain taxes. No matter how many adjectives are placed ahead of preferred stock, it always comes after everyone who is owed money. U11LO4
Which of the following risks would be associated with long-term, AAA-rated bonds? A) Marketability B) Purchasing power risk C) Ability of the issuing company to pay interest and principal D) Unstable interest payments
B) Purchasing power risk AAA-rated, long-term securities are the highest available quality as far as default or credit risk is concerned. It is highly unlikely that the company would be unable to pay their interest and principal payments on time. Because of their safety, the marketability of the bonds should be strong. However, like all fixed dollar investments, they are subject to purchasing power (inflation) risk. You may wish to note that these bonds would also be subject to interest rate risk. U11LO1
If your client is primarily concerned about the rising cost of living but wishes to limit his exposure to business risk, which of the following securities is most appropriate? A) Small-cap stock fund B) S&P 500 index fund C) AAA intermediate-term corporate bond D) Tax-free municipal bond
B) S&P 500 index fund S&P index funds are growth-oriented investment vehicles that have traditionally outpaced inflation and, because of their diversification, tend to limit business risk. Small-cap stock funds should also outpace inflation but carry too much risk for a client who wishes to limit business risk. Bonds, whether corporate or municipal, as fixed income investments, are generally not suitable for clients whose primary concern is protecting themselves against the rising cost of living. U11LO2
Among the provisions of the Investment Company Act of 1940 designed to protect the interests of investors is the provision that A) selection of company investments must be approved by SEC B) any change in fundamental investment policy must be approved by stockholders C) communications with the public must be approved by FINRA before its use D) for diversification purposes, an investment company may own up to 10% of the shares of another investment company
B) any change in fundamental investment policy must be approved by stockholders One of the requirements of the Investment Company Act of 1940 is that an investment company cannot change its investment policy without approval of a majority vote of the shareholders. For example, the board of directors of a growth fund could not change the fund's investment objective to income without that approval. This has the effect of offering protection to the investors that they won't be "blindsided" by the board or the portfolio manager. On this exam, you shouldn't expect to see anything "approved" by the SEC as a correct answer. An investment company may own up to 3% of another investment company, not 10%. Even though FINRA rules do require approval of investment company communications with the public, such approval is not part of the Investment Company Act of 1940. U14LO1 (idk why tf its a question in Unit 11)
Prior to the opening of the securities markets, KAPCO Chemical Corporation reports quarterly earnings per share of $1.50, exceeding analysts' estimates by more than 10%. By the end of the trading session, KAPCO's stock price has fallen by 5%. This would be an example of A) opportunity cost B) regulatory risk C) market risk D) financial risk
C) market risk Market risk is the uncertainty that a stock's price will move in a manner unrelated to the company's fundamentals. A prime example of this is when earnings go one way and the stock price goes the other. What we are not told in the question is the performance of the stock market. It is likely that the overall market has declined over this period. Financial risk is, as the name indicates, related to financing circumstances. The most common financial risk is when excess leverage has been employed. Another financial risk is lack of cash flow, but nothing in this question indicates that situation. U11LO1
