Investment Vehicles
Which of the following statements are TRUE when comparing bonds and preferred stock? I Both bonds and preferred stock have a fixed payout rate II Bonds have a fixed payout rate; preferred stock does not III Both bonds and preferred stock can be convertible into shares of common stock IV Bonds can be convertible; preferred stock cannot A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. Both bonds and preferred stock can be convertible and both have a fixed payout rate. Think of preferred stock as a "bond" designed for corporate investment, so that a corporate investor can take advantage of the dividend exclusion from taxation (this tax benefit is not available to individual investors).
A customer owns 200 shares of ABC stock. ABC is having a rights offering where 20 rights are needed to subscribe to 1 new share. The customer will receive: A. 1 rightB. 10 rights C. 100 rights D. 200 rights
The best answer is D. The customer receives a right for each common share held. Since he owns 200 shares, he gets 200 rights. 20 rights are needed to buy 1 new share, so 200 rights / 20 rights per share allows the purchase of 10 new shares.
The interest earned from which of the following is exempt from state and local tax? A. Fannie Mae Certificate B. Ginnie Mae Certificate C. Real Estate Investment Trust D. Federal Farm Credit Funding Corporation Note
The best answer is D. The interest income on U.S. Government obligations and most agency obligations is subject to Federal income tax but is exempt from state and local tax. However, the interest income on mortgage pass through certificates issued by Fannie Mae and Ginnie Mae is fully taxable. Income from REITs is fully taxable as well.
All of the following securities represent ownership of a corporation EXCEPT: A. common stock B. preferred stock C. convertible preferred stock D. warrants
The best answer is D. Warrants do not represent ownership of a corporation; only if they are exercised do they represent ownership, since exercise results in the purchase of the common stock of the issuer. Common stock and preferred stock are both securities that represent ownership.
Which of the following statements are TRUE regarding Federal Funds? I Federal funds are overnight loans between member institutions of the Federal Reserve System II Federal funds are overnight loans of reserves from the Federal Reserve Bank to a member institution III The interest rate charged on Federal Funds is the Federal Funds Rate IV The interest rate charged on Federal Funds is the Discount Rate A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. Federal Funds are overnight loans of reserves from Fed member bank to Fed member bank. The interest rate charged on Fed Funds is the Federal Funds Rate. When the Federal Reserve Bank lends directly to a member bank, it does so at the discount rate.
Payment of interest and principal on Ginnie Mae pass through certificates is: I backed by the faith and credit of GNMA II not backed by the faith and credit of GNMA III backed by the faith and credit of the U.S. Government IV not backed by the faith and credit of the U.S. Government A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. Ginnie Mae Pass through certificates are backed by the faith and credit of both GNMA and the U.S. Government.
A growth fund would likely invest in which of the following securities? I Common stock II Common stock options III Treasury stock IV Treasury bonds A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
The best answer is A. Growth funds invest in common stocks and equivalent securities for capital gains caused by earnings growth of the company. A way for a growth fund to "pump up" returns would be to buy call options on stocks that are viewed as good investments. Treasury stock is only purchased by the issuing corporation, as a means of reducing shares outstanding and increasing the corporation's stock price. Outside investors cannot buy Treasury Stock. Treasury bonds would not be purchased by a growth fund. These provide safety and current income; but would only provide capital gains if interest rates dropped. The fund manager is selecting stocks with growth potential; he or she is not placing a bet on market interest rate movements.
An income fund would likely invest in all of the following securities EXCEPT: A. Income Bonds B. Treasury Bonds C. Preferred Stock D. High Yield Bonds
The best answer is A. Income funds invest primarily in bonds and preferred stocks for a high level of current income. Common stocks are not typically a choice for investment because the dividend yields are comparatively low. Income bonds would not be chosen as an investment because they only pay interest if the corporation has enough income; otherwise no payment is made.
Which of the following can be distributed by an REIT to its shareholders? I Dividends II Interest III Capital Gains IV Capital Losses A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. REITs can distribute net income to shareholders in the form of dividends; and can distribute capital gains under the "conduit" taxation rules of Subchapter M. They cannot distribute capital losses; nor can they distribute "interest."
XYZ Corporation has declared a rights offering to stockholders of record on Wednesday, November 15th. Under the offer, shareholders need 5 rights to subscribe to 1 new share at a price of $24. Fractional shares can be rounded up to purchase 1 full share. A customer owning 200 shares wishes to subscribe. The market price of the stock is currently $34. The customer can buy: A. 40 shares for $960 B. 40 shares for $1,360 C. 200 shares for $4,800 D. 200 shares for $6,800
The best answer is A. Since 5 rights are needed to buy 1 new share, the customer receiving 200 rights can buy 200 / 5 = 40 shares at $24 each = $960 total for 40 shares.
Which statements are TRUE regarding Treasury STRIPS? I Interest is accreted annually II Interest is not accreted annually III Interest is subject to Federal income tax annually IV Interest is not subject to Federal income tax annually A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. The accretion of the discount over the bond's life represents the interest earned. Even though no payments of interest are made annually, the discount must be accreted annually and is taxable as interest income earned.
A mutual fund which invests in common stocks, preferred stocks, and bonds of companies in various industries is known as a(n): A. balanced fund B. dual purpose fund C. income fund D. sector fund
The best answer is A. The definition of a "balanced fund" is one that allocates investment among common stocks, preferred stocks, and bonds of companies in various industries, creating a balance of growth and income in the portfolio.
The dividend discount model can be used to determine an approximate market price for: A. common stock B. preferred stock C. bonds D. all of the above
The best answer is A. The dividend discount model takes the projected future dividend stream that a company will pay and "discounts" it back to its net present value, using a discount rate that is adjusted for the risk premium of investing in that company. This net present value gives an indication of what the current market price of the stock should be. It factors in expected growth of dividends over time.In contrast, preferred stock and bonds are "fixed income" securities - the payments made to investors do not grow over time. Their valuation is done by discounting the fixed income stream by the market rate of interest and adding up the present value of all of these cash flows (which for preferred stock, is a perpetuity, since there is no maturity).
The purchaser of an immediate 15-year period certain annuity will receive payments for: A. a 15-year time frame following annuitization, even if the purchaser dies before the end of the 15-year term B. a minimum 15-year time frame, or the life of the annuitant, if this is shorter C. the life of the annuitant, but will pay for a minimum of 15 years if the annuitant dies before this period elapses D. any selected 15-year time frame, even if the purchaser dies before the end of the 15-year term
The best answer is A. The question is simply asking about an immediate 15-year period certain annuity. This would not be an annuity option in a variable annuity contract. It is only available as a fixed annuity. The purchaser makes a lump sum payment, which is immediately annuitized and which will then pay for 15 years. There is no life annuity feature associated with this. It is a type of annuity that can be purchased from an insurance company that only pays for a stated time period - in this case 15 years. These are used most often to bridge a gap between early retirement and when social security payments start. For example, if an individual retired at age 55 and full social security payments started at age 70, he or she could buy this contract to provide payments for that 15-year gap.
To tighten credit, the Federal Reserve will: A. sell U.S. Government securities to bank dealers with an agreement to buy them back at a later date B. buy U.S. Government securities from bank dealers with an agreement to sell them back at a later date C. sell Foreign Government securities to bank dealers with an agreement to buy them back at a later date D. buy Foreign Government securities from bank dealers with an agreement to sell them back at a later date
The best answer is A. To tighten credit, the Federal Reserve will sell government securities to bank dealers (draining the dealers of cash that could be lent out) with an agreement to buy them back at a later date. The sale is being "matched" to a future purchase and is used to temporarily drain cash from the credit markets. This is called a reverse repo or matched sale.
Which of the following statements are true regarding repurchase agreements? I Repurchase agreements are used by dealers to reduce the carrying cost of Government securities held in their inventory II Repurchase agreements are initiated by the Federal Reserve to loosen the money supply III If a repurchase agreement specifies a date and price at which time the trade will be reversed, the agreement is known as a "Reverse" repurchase agreement IV If a repurchase agreement extends for longer than overnight, the agreement is known as a "Due Bill" repurchase agreement A. I and II only B. III and IV only C. II and IV only D. I, II, III, IV
The best answer is A. Under a "repurchase agreement," a government securities dealer sells some of its inventory to another dealer or to the Federal Reserve, with an agreement to buy back the securities at a later date for a pre-established price. In this manner, the dealer gets a temporary inflow of cash. Since government dealers finance their inventory, by reducing the amount of inventory on hand, they are reducing inventory finance charges when such an agreement is employed. Thus, Choices I and II are true. Choice III is false. Under a "reverse repurchase agreement", the dealer is buying securities from the Federal Reserve (instead of selling), draining the dealer of cash. Choice IV is also false. Under any repurchase agreement, the underlying government securities are the collateral. The collateral that underlies the agreement must be transferred from seller to buyer to support the transaction. In the "good old days," dealers could do repurchase agreements that were backed by a promise to deliver the underlying securities (a "due bill" for the securities) instead of making physical delivery. Due bill repurchase agreements are no longer permitted.
When evaluating the market price of a common share, why would the Price to Sales ratio be used instead of the Price to Earnings ratio? A. Because the calculation of the Price to Sales ratio is simpler than the calculation of the Price to Earnings ratio B. Because the Price to Earnings ratio can be distorted by a non-recurring charge while this has no effect on the Price to Sales ratio C. Because financial accounting rules require the use of the Price to Sales ratio when measuring the valuation of a common share D. Because the Price to Sales ratio is a more reliable measure for computing share value as compared to the Price to Earnings ratio
The best answer is B. As an alternative to the P/E ratio, the Price to Sales ratio can be used to measure stock price valuation. The Price to Sales ratio is used for companies that have no earnings or that are reporting losses. Such a company has no P/E ratio, but the share price still has a value, especially if the company is in a turnaround situation. Another reason why the Price to Sales ratio can be used is because a company can have its reported earnings distorted (either positively or negatively) by a non-recurring charge, such as the sale of a subsidiary. In such a case, the use of the Price to Sales ratio can be a better measure of share price valuation.
ABC 10% $100 par preferred is trading at $120 in the market. The current yield is: A. 5% B. 8.33% C. 10% D. 125
The best answer is B. The formula for current yield is: Annual Income ------------------ = Current Yield Market Price $10/$120 = 8.33%
Which of the following would be considered to be owners of a corporation? I Common Shareholders II Preferred Shareholders III Convertible Bondholders IV Warrant Holders A. I only B. I and II only C. I, II, IV D. I, II, III, IV
The best answer is B. "Owners" have an equity position - and the only owners of a company are shareholders - both common and preferred. Convertible bondholders are creditors of a company as long as they keep their bonds and do not convert to common shares. Warrant holders have a long term option to buy the stock. Warrants are considered equity securities, but they have neither an equity nor creditor stake in the corporation.
Cash value of a universal life insurance policy is: A. premium payments plus cost of insurance B. premium payments minus cost of insurance plus interest C. premium payments, plus or minus growth or loss in the separate account, plus the cost of insurance D. premium payments, plus or minus growth or loss in the separate account, minus the cost of insurance
The best answer is B. Both whole life and universal life are "cash value" policies. Premiums are invested in the general account (not a separate account, which is the case for a variable life policy, making Choices C and D incorrect). From the premium payments made, the cost of insurance is deducted. The cash balance that is left over earns interest.
The earliest that a European style option can be exercised is: A. anytime before the expiration date of the contract B. the business day of the expiration of the contract C. the Wednesday preceding the third Friday of the month D. the Saturday following the third Friday of the month
The best answer is B. European style options can only be exercised on the business day of the expiration of the contract. Contracts expire on the third Friday of the month. Thus, the last time to exercise is the third Friday of the month, up until 5:30 PM ET. In contrast, American style options can be exercised anytime prior to expiration. Stock options are American style; the vast majority of index options are European style.
The securities of which of the following agencies are NOT directly backed by the U.S. Government and pay interest and principal monthly? I GNMA II FNMA III FHLMC IV FLB A. I only B. II and III C. II, III, IV D. I, II, III, IV
The best answer is B. FNMA (Federal National Mortgage Association) and FHLMC (Federal Home Loan Mortgage Corporation) issue pass through certificates which pay monthly, but these are implicitly backed - not directly backed by the U.S. Government. Only GNMA - Government National Mortgage Association - issues pass through certificates that are directly backed by the U.S. Government. FLB (Federal Land Banks) does not issue pass through certificates; it issues conventional bonds that pay semi-annually and are implicitly backed.
All of the following statements are true regarding municipal bonds EXCEPT: A. Revenue bonds have a higher risk of default than general obligation bonds B. Revenue bonds are backed by the full faith and credit of the issuer C. Interest income received from both general obligations and revenue bonds is exempt from Federal income tax D. General obligation bonds cannot be issued in excess of statutory debt limits
The best answer is B. Municipal general obligation bonds are backed by the full faith, credit, and taxing power of the issuer. In contrast, municipal revenue bonds are backed by a revenue pledge from a specific project. Because it is much more probable that a single project backing a revenue bond might fail than it is for everyone not to pay their taxes, revenue bonds have a greater risk of default than general obligation bonds. Interest income from both general obligation and revenue bonds is exempt from federal income tax. General obligation bonds, because they are backed by tax collections, are subject to statutory debt ceilings (people don't want to see their taxes rise to pay the debt service and ever-increasing amount of general obligation debt). In contrast, each revenue bond project must be economically justified, and only the revenues from the project back the related bond issue, so revenue bonds are not subject to debt limits.
Municipal revenue bonds have which of the following characteristics? A. Backing of the full faith and credit of the municipal issuer B. Backing of the pledge of revenues from a specific project of the municipality C. Backing of an insurance pledge from a private municipal bond insurer D. Backing of the moral obligation of the State to pay if municipal issuer defaults
The best answer is B. Municipal revenue bonds are backed by a revenue pledge from a specific project. In contrast, municipal general obligation bonds are backed by the full faith, credit, and taxing power of the issuer.
With regard to closed-end investment companies, which statements are TRUE? I An initial offering must be made with a prospectus II The issuer redeems shares at NAV III Once issued, shares trade on the secondary market at prevailing market prices IV The portfolio of securities is fixed and is not managed A. I & II only B. I & III only C. III & IV only D. I, III & IV only
The best answer is B. The initial public offering of closed-end fund shares is made in the same manner as any registered company. The IPO shares are sold with a prospectus at POP. The shares are then listed and trade in the secondary market like any other stock. The shares are not redeemable, as is the case with open-end fund shares. Both open-end and closed-end fund portfolios are managed (remember, both are management companies).
A customer owns 100 shares of ABC common stock. ABC declares a rights offering, with the terms being that for every 15 rights tendered, a shareholder may purchase one additional share at $25 per share. Any fractional rights holding may be rounded up to buy an additional share. If this shareholder wishes to subscribe, which statement is true? A. The shareholder can buy a maximum of 6 shares by paying $150 B. The shareholder can buy a maximum of 7 shares by paying $175 C. The shareholder can buy a maximum of 15 shares by paying $375 D. The shareholder can buy a maximum of 100 shares by paying $2,500
The best answer is B. The terms of the rights offering are that fractional holdings are rounded up to buy 1 additional share. This person owns 100 shares and thus, will receive 100 rights. 100 rights / 15 rights per share = 6.67 shares, which is rounded up to 7 shares @ $25 each = $175 necessary to subscribe.
Which of the following statements are TRUE regarding payouts from variable annuity contracts? I The payout is determined by the number of annuity units II The payout is determined by the number of accumulation units III When payout commences, unit value is fixed while the number of units varies IV When payout commences, unit value varies while the number of units is fixed A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. When payout is to commence from a variable annuity, the holder's accumulation units are converted into a fixed number of annuity units (based on mortality tables and payout option selected). The monthly payout is determined by taking that fixed number of annuity units times the unit value (which fluctuates as the value of the securities in the underlying separate account fluctuates).
A Prime Banker's Acceptance is one: A. rated AAA by Moody's B. rated P 1 by Moody's C. eligible for trading with the Federal Reserve D. eligible for trading with commercial banks
The best answer is C. A Prime BA is of sufficient quality to be an eligible security for Fed trading.
An investor wishes to buy mutual fund shares with the primary objective of aggressive growth. Based on this information, the appropriate recommendation is a: A. balanced fund B. money market fund C. sector fund D. preferred stock fund
The best answer is C. A sector fund invests in a specific industry and is not as diversified as a balanced fund. Thus, there is greater gain potential, as well as higher risk.
An investor owns a portfolio of large capitalization blue chip stocks, each of which happens to be in the Dow Jones Industrial Average. He wishes to protect his portfolio from a market downturn without selling the positions. The best recommendation is to: A. buy a narrow based index put B. sell a narrow based index put C. buy a broad based index put D. sell a broad based index put
The best answer is C. Buying an index put, specifically the DJX option (Dow Jones Industrial Average), is the best way to protect the portfolio. The DJX is broad-based, because even though it only has 30 stocks, they are in differing industries. A narrow based index option is either industry specific or country specific.
Common stockholders have all of the following rights EXCEPT: A. voting for the Board of Directors B. transferring share ownership without restriction by the issuer C. inspecting minutes of executive meetings D. maintaining proportionate ownership in the company
The best answer is C. Common stockholders do not get to inspect the minutes of executive meetings. They do have the right to vote; to sell their shares without issuer restriction; and to maintain proportionate ownership in the company.
Which of the following statements are true about the Government National Mortgage Association (GNMA)? I GNMA is a publicly traded corporation II GNMA is owned by the U.S. Governmen tIII GNMA pass through certificates are guaranteed by the U.S. Government IV GNMA pass through certificates are not guaranteed by the U.S. Government A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. GNMA performs the same function as Fannie Mae except that its pass through certificates are guaranteed by the U.S. Government; and it remains an agency of the government. It has not been "sold off" as a private company, like Fannie Mae, which, since it is bankrupt and is in government conservatorship, now trades OTC. For as long as the government continues to guarantee Ginnie Mae securities, it cannot be a publicly traded company.
A growth fund would likely invest in which of the following securities? I Common stocks II Preferred stocks III Convertible bonds IV Non-convertible bonds A. I and II only B. III and IV only C. I and III only D. II and IV only
The best answer is C. Growth funds would likely invest in common stocks for capital gains; they could also invest in convertible bonds, since they are an "equivalent" to the common stock; and if the common stock price rises substantially, their price will rise as well (because the market will force them to trade at parity with each other). Preferred stocks and non-convertible bonds give a higher rate of current income; but little in the way of capital gains potential (unless interest rates fall by a large amount). In this case, the fund manager is not attempting to profit from market interest rate moves - he or she is simply attempting to select stocks that have excellent growth potential.
During a period of falling interest rates, which investment would be most profitable? A. 2X (Leveraged) S&P 500 Index ETF B. Inverse (Short) S&P 500 Index ETF C. 2X (Leveraged) 20+ Year Treasury ETF D. Inverse (Short) 20+ Year Treasury ETF
The best answer is C. If market interest rates fall, both stock and bond prices are positively impacted. However, fixed income security prices rise more than stock prices. Furthermore, the longer maturity and lower coupon issues rise the fastest as market interest rates fall. A bond ETF profits when prices rise. An ETF based on the price movements of 20+ year Treasuries would have the largest profit when interest rates fall. This type of ETF is long 20+ year Treasuries in the hopes that prices will rise, and because it is a 2X leveraged ETF, it has margined the bond positions so that as interest rates fall, the price should rise at 2 times the normal rate of increase of a similar maturity unleveraged bond portfolio.
A municipality is at its constitutional debt limit. Voter approval would be required for a municipality to float a(n): A. revenue bond B. industrial revenue bond C. general obligation bond D. moral obligation bond
The best answer is C. Municipalities impose debt ceilings on the dollar amount of bonds that can be issued backed by ad valorem taxing power (G.O. bonds). To raise this limit requires a public referendum. Debt limits do not apply to self supporting debt such as revenue bonds. They also do not apply to moral obligation bonds, which the issuer does not legally have to pay (though the issuer is "morally" obligated to pay).
Preferred stock market valuation is based primarily upon: A. future earnings expectations for the issuer B. short term market interest rate levels C. long term market interest rate levels D. future dividend payment expectations for the issuer
The best answer is C. Preferred stock prices are based on market interest rates. Preferred stock is a fixed income security, and hence, when market interest rates move, the yield on the security adjusts to the market rate. When interest rates rise, preferred stock prices fall, increasing the yield on the security; and when interest rates fall, preferred stock prices rise, decreasing the yield on the security.
A corporation has issued 10% convertible debentures, convertible into 40 shares of common stock. The current market price of the common stock is $25.25. If the bonds are trading at 5 points above parity, they are priced at: A. 100B. 101 C. 106 D. 107
The best answer is C. The bonds are convertible into 40 shares of stock. The current market value of the stock is $25.25, so the parity price of the bonds is 40 x $25.25 = $1,010. Since the bonds are trading at 5 points ($50) above parity, they are priced at $1,010 + $50 = $1,060 per bond = 106.
A corporation has issued 10% convertible debentures, convertible into 5 shares of common stock. The current market price of the common stock is $205. If the bonds are trading at parity, they are priced at: A. 100 B. 101 3/4 C. 102 1/2 D. 105
The best answer is C. The bonds are convertible into 5 shares of stock. The current market value of the stock is $205, therefore the parity price of the bonds is 5 x $205 = $1,025 = 102 1/2 per bond.
Which of the following are rights of a common shareholder? I Right to manage II Right to transfer shares III Right to receive a dividend IV Right to vote A. I and III only B. II and IV only C. II, III, IV D. I, II, III, IV
The best answer is C. The common shareholder does not manage the company! All the other choices - the right to transfer shares, the right to receive a dividend and the right to vote, are rights of the common shareholder.
On the death of a majority corporate shareholder, which of the following occur?I The corporation must dissolveII The corporation continues as beforeIII The deceased individual's shares pass to a beneficiary by will or State law if there is no will (the individual died "intestate")IV The deceased individual's shares revert back to the corporation at the market value on date of death A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. The corporation has continuous life and a shareholder's death (either minority or majority shareholder) has no impact on this. The deceased person's shares are either passed by will or by the laws of the State if the person died without a will (died "intestate" - as in no "last will and testament").
Which statements are TRUE regarding taxation of distributions from municipal bond funds? I Dividend distributions representing interest are taxable II Dividend distributions representing interest are tax-free III Dividend distributions representing capital gains are taxable IV Dividend distributions representing capital gains are tax-free A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. While the interest income from a municipal bond (or municipal bond fund) is exempt from Federal Income Tax, any capital gains on the sale of the bonds (or redemption of the bond fund shares) are still taxable. Dividends distributed by municipal bond funds are broken out on the IRS Form 1099 into the portion that represents interest (tax free) and the portion that represents capital gains (taxable). It makes no difference if the dividends are reinvested or not.
An options strategy where the maximum potential loss is equal to the difference between the increase in value of the underlying short securities position and the premiums received is a: A. naked call writer B. covered call writer C. naked put writer D. covered put writer
The best answer is D. A covered put writer sells a put contract against the underlying short physical security position. If the market rises, the put expires unexercised and the writer keeps the premium. However, as the market rises, he loses on the short security position. Thus, the maximum potential loss is the rise in value of the short security position, net of collected premiums.
Which of the following are NOT considered to be direct obligations of the U.S. Government? I Federal Land Bank Bonds II Banks for Cooperative Notes III Federal National Mortgage Association Bonds IV Federal Home Loan Bank Bonds A. I and II only B. III and IV only C. I, III, IV D. I, II, III, IV
The best answer is D. All of the choices - Federal Land Bank Bonds; Banks for Cooperative Notes; Federal National Mortgage Association Bonds; and Federal Home Loan Bank Bonds - are implicitly backed by the U.S. Government. the only agency issues that are directly backed are those of GNMA - Government National Mortgage Association.
Which of the following statements are true about commercial paper? I Commercial paper has a maximum maturity of 270 days II Commercial paper matures on a pre-set date at a pre-set price III Commercial paper is quoted on a yield basis IV Commercial paper is an unsecured promissory note A. I and IV only B. II and III only C. I, II, IV D. I, II, III, IV
The best answer is D. Commercial paper has a maximum maturity of 270 days. Commercial paper is quoted on a yield basis; matures at a pre-set date and price; and is an unsecured promissory note of the issuer.
Corporate dividend payments can be made in all of the following ways EXCEPT: A. cash or company products B. additional common shares of that company C. additional common shares of another company D. listed options of that company
The best answer is D. Corporations can pay dividends as cash or in stock, and can also distribute products produced by that company as a dividend to shareholders. For example, Proctor & Gamble used to send soap products to shareholders. A company can make a distribution of additional shares of that company (a stock dividend); or can issue a dividend consisting of shares of another company (typically a wholly owned subsidiary whose shares are distributed to owners of the parent company). Corporations cannot make dividend distributions consisting of listed options in that company, since the contracts are created and issued by the Options Clearing Corporation - NOT the company.
Revenue bonds are: I issued by municipalities II issued by municipal authorities III backed by an insurance pledge from a private municipal bond insurer IV backed by a pledge of revenues from a specific project A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. Municipal revenue bonds are backed by a revenue pledge from a specific project. A municipality established an "authority" to build the facility (such as a bridge or tunnel), manage the facility's operations, and pay the bondholder's their interest and principal as due. Only the revenues from the facility back the issue. In contrast, municipal general obligation bonds are backed by the full faith, credit, and taxing power of the issuer.
Listed REITs offer all of the following benefits to purchasers EXCEPT: A. Diversification of investments B. Ready marketability of shares C. Capital gains potential D. Preferential taxation of dividends received
The best answer is D. REITs offer diversification of investments similar to investment companies, except that the investments are being made in various types of real estate. REIT shares are listed and trade on an exchange (like a closed-end fund), so they are readily marketable. If real estate does well as an investment, the shares will appreciate, giving the investor a capital gain. Finally, REIT dividend taxation is truly "not that great." While dividends received from common stock investments, including mutual funds, qualify for the lower 15%-20% tax rate, the tax law specifically denies this benefit to REIT dividend distributions. These are taxed at ordinary income tax rates of up to 37%.
An investor in a "Ginnie Mae" mutual fund assumes which of the risks? I Prepayment Risk II Extension Risk III Fluctuation of Net Asset Value IV Reinvestment Risk A. I and II only B. III and IV only C. I, III, IV D. I, II, III, IV
The best answer is D. Since Ginnie Mae only issues mortgage backed pass-through certificates, in periods of declining interest rates, prepayment risk exists. Homeowners tend to prepay their "old" high rate mortgages when rates have declined by refinancing at the new lower rates. When these prepayments are reinvested by the fund, the monies earn lower current rates, so reinvestment risk is also present. Conversely, if interest rates rise, then homeowners tend not to move and the expected repayment rate falls. As this occurs, the life of the certificates lengthens beyond the expected life, and the certificate holder earns a lower than market return for a longer than expected time period. This is extension risk. As with any mutual fund (other than a money fund which has a constant $1 per share NAV), there is the risk that NAV can decline - which would occur if interest rates rise, forcing Ginnie Mae certificate values down.
Which statements are TRUE about structured products? I The bond component pays interest based on an index rate such as the performance of the NASDAQ 100 Index II The interest rate paid is typically capped to an annual maximum rate III The derivative component establishes the payment at maturity and protects principal IV The security may be listed on a national securities exchange, but trading is typically very thin A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
The best answer is D. Structured products are securities based on, or derived from, a basket of securities, an index, or other securities, commodities or currencies. There are many types of structured products, but generally they consist of a "bond" portion, which pays interest based on the performance of a well known index such as the S&P 500 Index or NASDAQ 100 Index. However, there is most often a cap on the maximum annual return. For example, if there is a 15% cap, and the NASDAQ 100 Index goes up by 18% that year, the structured product will only yield 15%. In addition, structured products have a derivative component (an embedded option) that allows the holder to sell the security back to the issuer (at par) at maturity, protecting principal. These are often marketed as debt instruments, but that is not really the case. Structured products are created by many different brokerage firms and each firm's version is somewhat different. They can be exchange listed, though trading is typically pretty thin.
Why do investors obtain the benefit of diversification with an investment in a mutual fund? A. The fund buys investments in large quantities and receives quantity discounts B. The fund is managed by a professional adviser who selects the investments C. The shares of the mutual fund can be redeemed with the fund at net asset value D. The investor owns an undivided interest in a portfolio of investment securities
The best answer is D. The benefit of diversification comes from the investor's ownership of an undivided interest in an investment portfolio that is a pool of investment securities.
Which of the following is MOST likely to fluctuate for an annuitant during the payout period of a fixed annuity? A. Death benefit B. Benefit payments C. Investment return D. Purchasing power
The best answer is D. With a fixed annuity, the investment return and benefit payments are guaranteed and fixed. During the payout period, there is no death benefit - the insurance company simply promises to make the fixed monthly payments until the annuitant dies. (Note that there can be a death benefit offered while the purchaser is making payments into the contract.) Because the benefit payments are fixed once the annuity payments start, the purchasing power of those fixed payments will fluctuate depending on the rate of inflation.
