TEST 2
Which is the most common way investors pay a mutual fund's sales charge? A)Front-end load B)Variable load C)Back-end load D)Level load
A)Front-end load Explanation The front-end load is the most common way a mutual fund's sales charge is paid. The sales charge is paid at the time of purchase. Front-end load, or Class A, shares have lower expenses than other classes, because the fund does not have to keep books on sales charge payments. It's already taken care of. Reference: 2.1.4 in the License Exam Manual
A customer of a broker-dealer makes it known that they would like to trade options in their account. The first step to accommodate the request is which of the following? A)The registered representative should determine the suitability of options trading for the customer. B)The firm's registered options principal should approve the account so trades can occur immediately. C)Options Clearing Corporation (OCC) should be apprised to see if other options accounts are maintained at other broker-dealers. D)The registered representative should provide the customer with the options disclosure document.
A)The registered representative should determine the suitability of options trading for the customer. Explanation Once the customer request being able to trade options in their account, the first step would be for the RR to collect all necessary information (financial and nonfinancial) to determine if trading options would be suitable for the customer. Reference: 2.1.3 in the License Exam Manual
For a callable bond priced at a discount, A)YTM will be lower than the YTC B)YTM will equal YTC C)YTC will be lower than the coupon D)YTC will be lower than the CY
A)YTM will be lower than the YTC Explanation For callable bonds trading at a discount, YTC will be the highest possible yield, higher than YTM, CY, and the coupon (stated or nominal) yield. Reference: 2.1.2 in the License Exam Manual
An investor purchases a bond in the secondary market at $950. Assuming $1,000 par value, this bond is trading at A)a discount B)a premium C)par value D)the market
A)a discount Explanation When a bond is priced below par value, it is trading at a discount (discount to par). Reference: 2.1.2 in the License Exam Manual
Each of the following are likely benefits of owning shares of common stock EXCEPT A)interest payments B)voting rights C)dividend payments D)limited liability
A)interest payments Explanation Interest payments are paid to bond holders but not on common stock. Common shareholders may receive dividends if declared by the board of directors. They may also expect to vote on certain critical issues facing the company such as its leadership. Common shareholders have a liability limited to the amount invested. Reference: 2.1.1 in the License Exam Manual
For which of the following investors would Class C shares be most suitable? A) relatively inexperienced investor B)An investor who intends to redeem the shares within a short time C)An investor interested in high-risk, high-potential return speculation D)An investor who intends to leave the money in the fund for many years
B)An investor who intends to redeem the shares within a short time Because Class C shares have no sales charge levied at the time of purchase but rather levy a withdrawal from the customer's account every quarter, they would be most suitable for an investor intending to redeem the shares relatively soon. Mutual funds are not intended for the speculative investor, those who might trade in and out frequently, and no particular share class is especially suited to the inexperienced investor. Reference: 2.1.4 in the License Exam Manual
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. A)II and III B)III and IV C)I and II D)I and IV
B)III and IV The fund pays a small dividend. The market value of the portfolio declines Explanation Paying a dividend would reduce the net assets of the fund without reducing the number of shares outstanding, which would reduce the NAV per share. A decline in the market value of the portfolio would have the same effect. 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. Selling securities for a capital gain simply replaces securities in the portfolio with an equivalent amount of cash, leaving the NAV unchanged. Reference: 2.1.4 in the License Exam Manual
Each of the following is defined as an investment company EXCEPT A)A closed-end management company B)Real estate investment trusts (REITs) C)An open-end management company D)Fixed and nonfixed unit investment trusts (UITs)
B)Real estate investment trusts (REITs) Explanation Real estate investment trusts (REITs) are not investment companies such as UITs and management companies (both open and closed-end). Reference: 2.1.6 in the License Exam Manual
An investor bought a put option and, in time, the underlying security declined below the strike price of the put. The put would probably A)be worthless B)be exercised C)not be exercised D)decline in value
B)be exercised Explanation This is exactly what most put option buyers are looking for. They want the stock to go down. Because the market price of the stock declining would cause the option to be in the money, the investor would either exercise the option or sell it. Reference: 2.1.3 in the License Exam Manual
An LP is a type of A)corporate business entity B)direct participation program C)trust set up for investors D)debt investment
B)direct participation program Explanation A limited partnership (LP) is the most common form of direct participation program (DPP). LPs are business entities allowing for the economic consequences of the business to flow through to the individual investors (partners). Reference: 2.1.5 in the License Exam Manual
The risk that changes in the overall economy will have an adverse effect on individual securities regardless of the company's circumstances is known as A)nonsystematic risk B)systematic risk C)securities risk D)investment risk
B)systematic risk Explanation Systematic risk is the risk that changes in the overall economy will have an adverse effect on individual securities regardless of the company's circumstances. Common causes that can impact all securities or investments might be war, global security threats, and inflation. Reference: 2.2.1 in the License Exam Manual
A Japanese computer chip manufacturer wants to attract U.S equity investors. Which of the following securities would help the issuer to accomplish this goal? A)Yen-based Stocks B)Foreign Depositary Receipts C)American Depositary Receipts D)Global Stocks
C)American Depositary Receipts Explanation ADRs are a type of equity security designed to simplify foreign investing for Americans. An ADR is created when shares are purchased in the foreign company's home market. These shares are then deposited in a foreign branch of a U.S. bank and a receipt (the ADR) is created. The ADR provides U.S. investors with a convenient way to diversify their holdings beyond domestic companies. Reference: 2.1.1 in the License Exam Manual
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 A)current market value B)par value or lower C)par value or higher D)par value
C)par value or higher Explanation In return for the call privilege, the corporation may pay a premium exceeding the stock's par value at the time of the call. It's reasonable that a shareholder would expect to receive at least par value or higher in the event of a call. Reference: 2.1.1 in the License Exam Manual
A customer writes (sells) a call. This customer will realize the maximum gain if A)the price of the option contract rises B)the customer is assigned on the contract C)the option contract expires without being exercised D)the price of the underlying stock rises
C)the option contract expires without being exercised Explanation Those who write options contracts realize the maximum gain if the contract goes unexercised at expiation. The maximum gain is the premium received. If the contract is not exercised by the owner, the writer keeps the premium. For calls, remember that as the underlying security rises in price, so will the price of the call contract; while good for the call owner, it is not good for the call writer. Reference: 2.1.3 in the License Exam Manual
To the benefit of the issuer, a callable bond is likely to be called A)when interest rates rise B)when interest rates remain stable for long periods of time C)when interest rates fall D)when interest rates are volatile moving both up and down over short periods of time
C)when interest rates fall Explanation Bonds with call features are most likely to be called by an issuer when interest rates fall. For example, if an issuer has an outstanding bond paying 6% and interest rates have fallen to 4%, why pay out 6% when prevailing market rates are only 4%? Better to call in the 6% bond and reissue a new bond at the current rate of 4%. In this way, call features benefit the issuer. Reference: 2.1.2 in the License Exam Manual
At expiration, for those who trade put options, which of the following is TRUE? A)Put writers want the contract to be in the money. B)Put buyers want the contract to be out of the money. C)Put writers want the contract to be trading with intrinsic value. D)Put buyers want the contract to be in the money.
D)Put buyers want the contract to be in the money. Explanation At expiration, put buyers (like call buyers) want the contracts to have intrinsic value and, therefore, to be in the money. Put writers (like call writers) want the contracts to be either at or out of the money and, therefore, have no intrinsic value. Reference: 2.1.3 in the License Exam Manual
An investor owns 1 November 15 put at 5. The 15 in this contract represents A)the premium, the price the investor can purchase stock at B)the premium, the price the investor has paid for the contract C)the strike price, the price the investor has paid for the contract D)the strike price, the price the investor can sell stock at
D)the strike price, the price the investor can sell stock at Explanation For this put contract, 15 is the strike price, which represents the price at which the investor has the right to sell stock, and 5 represents the $500 premium paid for the contract. Reference: 2.1.3 in the License Exam Manual
Each of the following is considered a control person under SEC Rule 144 EXCEPT A)corporate officers and directors B)those persons who own 10% or more of the total beneficial interest of a company's common stock C)another company that owns 10% or more of the company's equity securities D)those persons who own 5% or more of the total beneficial interest of a company's common stock
D)those persons who own 5% or more of the total beneficial interest of a company's common stock Explanation Control securities are those owned by directors, officers, or persons (which include corporations, trusts, etc.) who own or control 10% or more of the issuer's equity securities. Those persons who own 5% or more of the total beneficial interest of a company's common stock are not deemed control persons under this rule. Reference: 2.1.1 in the License Exam Manual
