Series 65 Unit 11

The STU Corporation has issued common stock, preferred stock, promissory notes, and mortgage bonds. Should STU enter bankruptcy proceedings, the order of payment against claims would be A) the mortgage bonds, the promissory notes, the preferred stock, and the common stock. B) the preferred stock, the common stock, the mortgage bonds, and the promissory notes. C) the promissory notes, the mortgage bonds, the preferred stock, and the common stock. D) the mortgage bonds, the preferred stock the common stock, and the promissory notes.

A. In a bankruptcy, secured creditors, such as those with a mortgage against real property, have the first priority. They are followed by unsecured creditors, such as holders of promissory notes, with stockholders coming last. Preferred stock is "preferred" over common in both liquidation priority and payment of dividends.

Steve and Haley, ages 48 and 45, respectively, invest in large-cap stocks, international stock mutual funds, and real estate. They consider themselves moderately aggressive investors. Their investment portfolio is subject to all of the following risks except A) default risk. B) business risk. C) systematic risk. D) currency risk.

A. Their investment portfolio is subject to all of these risks except default risk. Default risk primarily applies when holding debt securities. A portfolio heavily concentrated in equity securities is going to have market (systematic) risk. Business risk is the risk that a company's managerial decisions or even factors out of its control, such as expiration of a patent, may negatively affect the value of an equity investment. By holding investments in international stock mutual funds, they are subject to exchange rate risk.

f you had expectations of high inflation, you would A) increase fixed-income exposure and reduce tangible asset exposure B) increase fixed-income exposure and reduce commodity exposure C) increase equity exposure and reduce fixed income exposure D) increase fixed-income exposure and reduce equity exposure

C.

An investor originally purchased a debt security at par value. Unfortunately, the value has fallen to $920, even though the company has reported record earnings. This decline in value would be representative of what type of risk? A) Timing risk B) Purchasing power risk C) Interest rate risk D) Credit risk

C. This decline in value is most likely due to interest rate risk, which indicates that as prevailing interest rates rise, the price of existing debt instruments declines.

You recently took a trip to Warsaw, Poland, and when you received your credit card statement, you noticed that your vodka purchase for 100 Polish Zlotys resulted in a $30 charge on your statement. Based on this exchange rate, each dollar was worth approximately A) 3 Zlotys B) $.33 C) 3.33 Zlotys D) $3.33

C. When making an investment (or a transaction) in a foreign currency, it is important to be able to translate that into the exchange rate for your home currency. To do so, we divide the purchase in the foreign currency by the charge in U.S. dollars. In this case, 100 Zlotys only cost us $30, so that makes each dollar worth 3.3 Zlotys. 100/30=3.33

A country decides to nationalize its sugar industry. This is an example of A) business risk. B) sovereign risk. C) financial risk. D) political risk.

D.

An agent for a well-known broker-dealer has taken it upon herself to look for investment opportunities for her clients. Her research indicates that, in spite of record earnings, the stock of GEMCO, Inc., is poised for a price reversal. Should this analysis prove correct, this would be an example of A) financial risk B) regulatory risk C) reinvestment risk D) market risk

D.

The common stock of companies within which industry sector would be most adversely affected by an increase in the general level of interest rates? A) The clothing industry B) The electronics industry C) The food industry D) The utilities industry

D.

All of the following are examples of unsystematic risk EXCEPT A) purchasing power risk B) political risk C) tenure risk D) financial risk

A.

The Federal Reserve Board has just taken action leading to an increase in interest rates. Which of the following industries is most likely to be affected adversely by this action? A) Utilities B) Defensive industries C) Cyclical industries D) Heavy industries such as steel

A.

Which of the following industries is most exposed to regulatory risk? A) Publishing companies B) Public utilities C) Entertainment companies D) Consumer retailers

B.

ou have a 45-year-old client wishing to save for retirement. The client does not have a great deal of investment sophistication and inquires about the risks you have exposed him to by placing the majority of his portfolio in listed common stocks. You would respond that one risk he should not concern himself with is: A) systematic risk B) liquidity risk C) inflation risk D) business risk

B. A portfolio of listed common stocks will have little to no liquidity risk because listed shares are easily traded.

The risk of not being able to convert an investment into cash at a time when cash is needed is what type of risk? A) Market B) Liquidity C) Reinvestment D) Legislative

B. Liquidity risk is the measure of how quickly and easily a security can be converted to cash without a significant change to its market price.

U.S. Treasury bonds are generally subject to all of the following risks except A) reinvestment risk. B) liquidity risk. C) inflation risk. D) purchasing power risk.

B. The market for U.S. Treasury bonds is highly liquid. As safe and as liquid as they are, they, like all fixed-income investments, are subject to purchasing power (also known as inflation) risk and reinvestment risk.

Which of the following is a risk common to all fixed-income securities? A) Market risk B) Liquidity risk C) Opportunity cost D) Interest rate risk

D.

Which of the following securities are the most interest rate sensitive? Utility stocks Growth stocks Preferred stocks Common stocks A) I and II B) III and IV C) II and IV D) I and III

D. Utility and preferred stocks are the most interest rate sensitive. Utility stocks are interest rate sensitive because they are highly leveraged. Preferred stocks are interest rate sensitive because they have a set dividend and fluctuate in price like bonds when interest rates change.