SIE unit 2 checkpoint exam

The Investment Company Act of 1940 defined the term, "investment company." Which of the following is NOT included in that term? A) Hedge fund B)Face amount certificate company C) Unit investment trust D) Management company

Hedge fund -hedge funds are organized in such fashion as to exclude them from the definition of an investment company. Investment companies include face amount certificates, unit investment trusts, and management companies (both open and closed-end).

(T/F) Treasury bills are the only treasury security issued without a stated interest rate

TRUE

In 2011, RST Corp. had both common stock and $100 par value 4% and noncumulative preferred stock outstanding. The preferred, like the common stock, paid dividends on a quarterly basis. Because of financial difficulties, the company stopped paying dividends after 2011. After resolving its problems in 2015, the company resumed dividend payments in 2016. Before paying the first quarterly common stock dividend that year, the company would have to pay a quarterly dividend to the preferred stockholders of A) $1.00 B) $17.00 C) $4.00 D) $20.00

$1.00 -In the case of a noncumulative preferred stock, skipped dividends are forever lost. So, when the company is able to pay a dividend, as is always the case, it must pay the current preferred dividend prior to paying common. The question states that dividends are paid quarterly. Therefore, the quarterly dividend on a stock paying $4.00 annually would be $1.00—an amount that must be paid before the quarterly common dividend can be paid.

An investor shorts 2 DEF January 55 puts at a premium of 2 each when the market price of DEF is 56.25. What is the investor's maximum potential loss? A) $10,600 B) Unlimited C) $5,425 D) $5,300

$10,600 -When short a put the risk is that the stock falls. The maximum risk occurs if the stock falls to 0. The maximum potential loss therefore is the strike price less the premium received for the put (55 - 2 = 53). The maximum loss per contract is $5,300, but with 2 contracts, the potential loss is $10,600. Note that the market price of the stock at the time of the sale of the put is of no consequence.

An investor can take advantage of intraday price changes due to normal market forces when investing in 1. closed-end funds 2. exchange-traded funds 3. hedge funds 4. open-end funds A) III and IV B) I and II C) II and III D) I and IV

1&2

Under Rule 144, which of the following sales are subject to volume limitations on the number of shares sold? 1. Control person selling registered stock held for 1 year 2. Control person selling restricted stock held for 2 years 3. Non-affiliate selling registered stock held for 1 month 4.Non-affiliate selling restricted stock held for more than 6 months A) II and III B) I and II C) I and IV D) III and IV

1&2 -Control persons are always subject to volume limitations. Non-affiliates have no volume (or any other restrictions) in the sale of registered stock. If the shares are restricted the volume limits for non-affiliates end after 6 months. Registered shares have no Form 144 filing requirement.

An investor considering the differences between purchasing open-end investment company shares or ETFs with a similar objective should understand that 1. each time an investor purchases and sells ETFs, there is a commission 2. the operating expense ratio for an ETF is generally very high because they usually track indexes such as the S&P 500 3. it is possible that an investor liquidating ETF holdings will receive less than the NAV per share 4. the margin requirements to purchase an ETF are higher than that for an open-end investment company A) II and IV B) I and IV C) II and III D) I and III

1&3

Two reasons why a municipality would probably have an easier time issuing revenue bonds instead of general obligation bonds is that 1. revenue bonds do not require voter approval 2. revenue bonds generally have a higher rating than GO bonds from the same issuer 3. revenue bonds are not constrained by a statutory debt limit 4. revenue bonds are supported by ad valorem taxes A) I and III B) II and III C) II and IV D) I and IV

1&3

Which 2 of the following statements regarding options are true? Investors who are bullish on a stock should buy calls Investors who are bullish on a stock should buy puts Investors who are bearish on a stock should buy calls Investors who are bearish on a stock should buy puts A) II and III B) II and IV C) I and III D) I and IV

1&4

Examples of systematic risk would include 1. business risk 2. inflation risk 3. market risk 4. regulatory risk A) I and IV B) I and II C) III and IV D) II and III

2&3

Which of the following trading strategies are employed by hedge funds that are generally prohibited to mutual funds? 1. Limiting their investments to a narrow group of securities 2. Using borrowed money to purchase portfolio securities 3. Taking long positions in speculative stocks 4. Taking short positions in NYSE listed stocks A) II and IV B) I and III C) II and III D) I and IV

2&4

Which of the following securities would likely provide the greatest potential for capital appreciation? A) A U.S. Treasury STRIP B) A common stock C) A convertible bond D) A preferred stock

a common stock

Which of the following positions/actions would cover a client who has shorted a call? A) A long stock position B) Buying a put with a higher strike price C) A short stock position D) Buying a call that expires sooner

a long stock position

Investing in securities entails a large number of potential risks. Diversifying one's portfolio could have the effect of reducing which of the following risks? A) Inflation risk B) Interest rate risk C) Market risk D) Business risk

business risk -It is the nonsystematic risks that are diversifiable. Those would include business, financial, credit, and liquidity risk (among others).

Which of the following securities would be least likely to be issued by a corporation? A) Call and put options B) Debentures C) Common stock D) Preferred stock

call and put options -Corporations issue equity securities (stock) and debt securities (bonds and debentures), but they do not issue options. Options are issued by the Options Clearing Corporation (OCC).

A strategy that blends various types of investment in an effort to reduce nonsystematic risk is called

diversification

Which type of DPP would be most likely to enable the investor to claim a deduction for depletion? A) Oil and gas income program B) Equipment leasing C) Oil and gas exploratory program D) Real estate limited partnership

oil and gas income program -The depletion allowance is a tax benefit to compensate the program for the decreasing supply of oil or gas (or any other natural resource or mineral) after it is taken and sold.

Which of the following statements regarding a 529 plans is correct? A) One person can be both beneficiary and owner B) The assets in the plan belong to the beneficiary C) The beneficiary must be below age 18 D) Contributions are limited to $2,000 annually

one person can be both beneficiary and owner

Included in the term, equity security, would be A) participating preferred B) collateral trust certificates C) equipment trust certificates D) debentures

participating preferred

All of the following statements regarding penny stocks are true EXCEPT A) established customers of the firm need not sign a suitability statement B) the SEC rules require that prospects, before their initial transaction in a penny stock, be given a copy of a risk disclosure document C) if an account holds penny stocks, broker/dealers must provide a monthly account statement to the customer D) penny stock rules apply to both solicited and unsolicited transactions

penny stock rules apply to both solicited and unsolicited transactions -only apply to solicited transactions

All of the following are debt security maturity schedules EXCEPT A) term B) serial C) series D) balloon

series

The investment return of a variable annuity comes from A) the assumed rate stated in the policy documents B) the performance of the selected sub-accounts within the separate account C) the insurance company's general account D) computing the excess of the premiums received over the mortality experience

the performance of the selected sub-accounts within the separate account

One characteristic of an open-end investment company that distinguishes it from a closed-end one is that A) it may be either diversified or non-diversified B) there is a continuous public offering C) it may avoid taxation by distributing all of its net investment income to shareholders D) there are a wide variety of objectives available for investors to select from

there is a continuous public offering

Which of the following instruments is not backed by the full faith and credit of the U.S. government? A) Treasury bills B) Treasury STRIPS C) Treasury bonds D) Treasury receipts

treasury receipts

The Options Clearing Corporation (OCC) assigns exercise notices to broker/dealers with short positions A) using a random selection method B) using any method that is considered fair and reasonable C) on a FIFO basis D) on a LIFO basis

using a random selection method