practice assessments and terms I am unsure about
what is straight debt
Any debt that cannot be changed into something else. For example, a regular bond is straight debt because it contains no special features beyond repayment with interest. Straight debt contrasts with convertible debt which may be exchanged for something else, usually common stock
The type of REIT which generates revenue for investors primarily through rents collected and sale of properties is a(n) A) Mortgage REIT B) Hybrid REIT C) Equity REIT D) Balanced REIT
Equity REITS generate revenues primarily from collecting rents on property they own and also from the sales of properties they have held.
Which two of the following statements correctly state the tax treatment that applies to U.S. Treasury securities? I. Capital gains are fully taxable II. Capital gains are tax deductible III. Interest payments are generally tax free at the federal level IV. Interest payments are taxable at the federal level but exempt at the state level
I and IV U.S. Treasury securities pay interest that is generally tax exempt at the state level, but is taxable at the federal level. Capital gains are fully taxable.
Characteristics of commercial paper include all of the following EXCEPT A) Usually matures within 270 days or less B) Unsecured obligation of the issuer C) Highly liquid D) Issued only by banks and other financial institutions
Issued only by banks and other financial institutions
Before any recommendations can be made in communications, FINRA members must conduct a due diligence investigation on the product recommended. This process is called A) Reasonable basis suitability B) Blue-sky investigation C) Customer-specific suitability D) Supervisory investigation
Reasonable basis suitability is required on a security or product before any specific recommendation can be made. The broker-dealer determines that there is reasonable basis to believe the security/product is suitable for any customer. The process must be documented.
Options contracts are in the same class when A. The issuer and strike price are the same B. The issuer and type are the same
The issuer and type are the same
The tax benefits of a municipal bond apply to: A. any capital gain from the sale of the bond B. interest income generated from the bond C. individual investors only, not institutions high net worth investors, who have a particular need for tax free income D.
The tax benefits of a municipal bond apply to the bond's interest income only, not any capital gains that may be realized.
In April, an investor purchases an October XYZ 75 call for premium of $700. By September the premium is $400. If the investor directs his broker to get out of the options market, which of the following statements is TRUE? A. The transaction will be a closing purchase with a loss of $300 B. The transaction will be a closing sale with a loss of $300 C. the transaction will be an opening purchase with a loss of $300 D. the transaction will be an opening sale with a gain of $300
The transaction will be a closing sale with a loss of $300 This investor opened a position by purchasing a call for premium of $700. A closing transaction is made to offset or cancel potential loss by selling the option at the then current premium of $400, which results in a loss of $300. The investor has chosen to close the position to limit potential loss.
An investor purchases an index 352 call for a premium of 3. At expiration the index value is 344. All the following statements are true EXCEPT A) The investor's call is out of the money at exercise B) The investor paid $300 to establish the position C) The breakeven of the index call is 355 D) The writer of the call will receive $800 at expiration
The writer of the call will receive $800 at expiration This long index call was out of the money at expiration, so was not exercised. Because the contract expired, the call writer was able to keep the premium collected without having to deliver cash at settlement.
When an individual receives a stock dividend, A. ordinary income taxes must be paid on the additional shares. B. the cost basis for the entire position is adjusted downward, with no tax liability for the additional shares upon receipt. C. D.
Upon receipt of a stock dividend, the investor must adjust the cost basis of the entire position downward, and there is no current tax liability incurred for the additional shares.
An institutional portfolio includes commercial paper, variable-rate demand obligations, and in-state AAA municipal bonds. The investment objective of the portfolio could include all of the following EXCEPT A) Safety of principal B) Liquidity C) Tax exempt income D) Capital appreciation
capital appreciation' The securities in this portfolio offer safety of principal, tax exempt income and liquidity. Growth, capital appreciation, and speculation are objectives that are not achieved with this portfolio.
In which of the following events will an open order price not be adjusted?
reverse split Open orders must be cancelled (not adjusted) at or before the close of business on the day before the ex-date for reverse splits.
street name
security is held in "street name" when a brokerage holds it on behalf of a client. The name that appears on the stock or bond certificate is that of the broker, but the person who paid for the securities retains ownership rights.
how are mortgage backed securities taxed?
taxed at all levels
A "breakpoint sale" is a(n) A) Industry recognized sales practice that rewards the efforts of mutual fund salespeople B) A sales practice that registered reps should practice as the result is usually a better deal for the customer C) Prohibited practice that registered reps should refrain from as the result is usually an inferior transaction for the customer D) Illegal practice of selling mutual fund shares to investors without disclosing all of the risks involved when investing.
A "breakpoint sale" is a prohibited sales practice which often results in a customer receiving a disadvantageous price when purchasing mutual fund shares.
Which of the following mutual fund types is most generally associated with clients seeking current income and stability of principal? A) Defensive strategy UIT B) International bond UIT C) Asset allocation UIT D) U.S. Government UIT
A U.S. Government bond fund is associated with an income objective of safety of principal and low risk.
When the Federal Reserve announces a decrease in interest rates the economy is likely to exhibit slower growth or investors are likely to move their funds from the bond market to the equity market
A decrease in interest rates will cause interest income on newly issued bonds to fall, making bonds less attractive as an investment versus equities. This will typically cause a movement from the bond market to the equity market. Businesses are likely to invest in expansion when the cost of money is low, which generally drives economic growth. Also, the general purpose of the Fed's reducing interest rates is to spur economic growth.
what is a floating fund
A floating rate fund invests in bonds and debt instruments whose interest payments fluctuate with an underlying interest rate level. Floating rate funds can include corporate bonds as well as loans made by banks to companies. These loans are sometimes repackaged and included in a fund for investors
Which of the following securities is the least liquid? A) Hedge funds B) Exchange traded common stock C) Treasury bond D) Commercial paper
A hedge fund is not a liquid product. It usually requires a significant investment of capital, and a long-term investment horizon.
An investor writes an ABC January 50 put at 3. At expiration ABC stock is trading for 47. Which of the following statements is TRUE? A) The contract has intrinsic value of $600 B) The contract is at the money at expiration C) The contract has no intrinsic value D) The contract has intrinsic value of $300
A long or short put has intrinsic value whenever the market price is below the strike price. This contract has intrinsic value of $300.
XYZ is trading at 60. Which of these options contracts is trading for time value only? A) May 55 Call B) June 65 Put C) July 50 Call D) August 55 Put
August 55 Put An option will trade for its time value only when it is out of the money. In this example, only the August 55 put option is out of the money. The other options positions are in the money.
An investor that holds 100 shares of XYZ stock expects little short-term movement in the stock's price but desires to generate additional income from the shares. Which strategy meets the objectives of this investor? A) Protective put B) Covered call writing C) Buying an out of-the money call D) Writing an out-of-the money put
B) Covered call writing Covered call writing is a strategy used by investors with long stock positions to generate additional income. By writing calls, premiums are received, and if the market price of the stock does not surpass the exercise price, the call will not be exercised.
An investor can manage systematic risk through a process of A) Asset allocation B) Hedging with derivatives C) speculation D) diversification
B) Hedging with derivatives
All of the following are advantages of structured product investments EXCEPT: A.Can deliver stronger yields in low interest rate environments B. unlimited upside potential
B. Structured products offer a limit on downside risk. The tradeoff for this protection is a limit on the upside potential.
All of the following are typical trading practices of hedge funds EXCEPT A) Undisclosed investments made with fund capital B) Short securities positions C) Concentration in tangible investments D) High degree of leverage
Concentration in tangible investments Although hedge funds may invest funds in tangible investments like real estate, they typically employ a wide variety of strategies and hold very diverse assets. They are not typically concentrated in real estate. They invest aggressively using high degrees of leverage and often lack transparency which is why they are inappropriate for typical investors.
An investor can avoid reinvestment rate risk by purchasing A) A blue-chip stock fund B) A REIT C) Long-term bonds D) A zero- coupon bond
D) A zero- coupon bond Reinvestment rate risk can be avoided when an investor purchases a zero -coupon bond.
n investor writes 2 Feb 45 calls for 2.25. The stock price at which the investor breaks even is A) 40.5 B) 49.5 C) 42.75 D) 47.25
D) 47.25 The breakeven for the call option writer is the strike price plus the premium. 45 + 2.25 = 47.25. The call writer does not begin to lose money until after the price of underlying stock exceeds this price.
What are the two components of total return in a common stock? A) Dividend income and price change B) Price change and tax loss C) Bid-ask spread and tax loss D) Dividend income and interest income
Dividend income and price change Total return is the average annual positive or negative return for a buy-and-hold equity investor, assuming dividends are compounded. The calculation of total return is dividend income plus any price gain (or, if the stock declined in value, minus any price loss).
Which of following statements regarding equity REITs is TRUE? A. Dividends from equity REITS are typically paid on a monthly basis B. Dividends paid by equity REITs generally consist of both rental income and capital appreciation C. there are very few equity REITS available to investors today D.dividends paid by equity REITS generally consist of both rental income and capital appreciation
Dividends paid by equity REITs consist of both rental income and capital appreciation from the properties that are owned. Dividends are typically paid annually from equity REITS. Equity REITs are the most common type of REIT today; they do not provide a tax shelter as they do not pass through losses to investors.
Interest rates are rising, causing the speed of prepayments to decline. To an MBS investor, this is an example of ___
Extension risk is an issue when interest rates rise. Mortgages are being prepaid at a slower rate, causing the underlying mortgages to remain outstanding longer and consequently locking MBS investors into lower yielding securities.
The frequent trading of securities within hedge funds may subject investors to A) Increased short-term capital gains B) Increased return of capital distributions C) Increased long-term capital gains D) Increased dividend distributions
Frequent trading by hedge fund managers can subject investors to increased short-term capital gains which can be costly because of the higher tax rate that applies to these distributions.
Which two of the following options contracts are subject to automatic exercise at expiration if the market price of ABC is $45.25? I. Long ABC 42 call II. Long ABC 46 put III. Long ABC 48 call IV. Long ABC 44 put A) II and III B) I and II C) I and IV D) II and IV
I and II The Options Clearing Corporation has provisions for the automatic exercise of certain in-the-money options at expiration. Generally, the OCC will automatically exercise any expiring equity call or put in a customer account that is $0.01 or more in-the-money, and an index option that is $.01 or more in-the-money. Calls are in the money when the market price is higher than the exercise price; puts are in the money when the market price is lower than the exercise price.
Which two of the following describe the process of assignment of exercise notice correctly? I. Exercise notices are assigned to one or more clearing members with short positions II. Exercise notices are assigned to one or more clearing members with long positions III. The OCC assigns exercise notice to clearing members on a FIFO basis IV. The OCC assigns exercise notice to clearing members based on its established procedures
I and IV Exercise notices are assigned against short options positions, which are then obligated to deliver. The OCC has written procedures which detail the process for assigning the exercise of options contracts. The clearing member firms then assign exercise notice to customers either randomly or on a first-in, first-out (FIFO) basis.
An investor has purchased a European style put option on the S&P 500 index. Which two of the following statements are TRUE? I. The contract can be traded only on exchanges outside of the U.S. II. At exercise, the holder will receive cash III. The contract may only be exercised on the expiration date IV. The contract may be exercised any time after purchase but prior to expiration
II and III Index options contracts are both American and European style. Options on stock, or equity options, are American style contracts only. American style options may be exercised at any time after purchase but before the contract's expiration date. European style options may only be exercised at expiration. Index options settle in cash.
A quote of 95:07 I. Represents a T-bill trading at a discount II. Represents a T-bond trading at a discount III. Reflects a price of $952.19 IV. Reflects a price of $950.70
II and III The quote 95:07 is read as 95 and 7/32nds a discounted Treasury Note or Treasury Bond. T-notes and T-bonds are quoted in 32nds; Treasury bills are quoted on an annualized discount percentage, or basis. The price of a T-Bond quoted at 95 and 7/32nds of $1,000 = $952.19.
What is the main benefit of money market instruments, compared to long-term bonds?
Liquidity and low risk Money market instruments are considered cash. With maturities of less than a year, they are relatively liquid and low in risk compared to longer-term bonds.
An investor expects an advance in the technology sector and would like to take an aggressive position that could provide a great deal of leverage. Which of the following would accomplish this objective? A) Long index put B) Short index call C) Short index put D) Long index call
Long index call Through buying a call on a technology index, an investor establishes a leveraged position that will benefit from an advancing market. A substantial amount of market upside is needed to recover the cost of the premium paid.
As compared to short term bonds, bonds with a longer time until maturity usually I. have higher interest rates II. have lower interest rates III. are more marketable IV. are less marketable
Longer term bonds are more risky than short term bonds. Because of this risk, they are less marketable, and must pay a higher interest rate to attract purchasers.
A closed-end fund investor that is most concerned with issuer risk in an income portfolio should feel most comfortable with which of the following funds? A) Investment grade corporate bond fund B) An emerging market debt fund C) A high yield bond fund D) A global income fund
Of these choices, the investment grade corporate bond fund is most focused on maintaining a portfolio of highly rated bonds that reduce issuer risk. An investment grade rating means that outside agencies have reviewed the issuer's strength and have identified a low risk of default.
nvestors in REITs can expect all of the following EXCEPT A) Liquidity B) Participation in real estate investments C) Redemption at NAV D) Dividend distributions
Redemption at NAV REITs trade in the secondary market at a premium or discount to their NAV. Investors sell their shares to other investors to through exchange transactions; REITs do not redeem their shares.
what is participating preferred stock
Participating preferred stock is a type of preferred stock that gives the holder the right to receive dividends equal to the customarily specified rate that preferred dividends are paid to preferred shareholders, as well as an additional dividend based on some predetermined condition. Participating preferred stock can also have liquidation preferences upon a liquidation event
A type of stock that offers the possibility of a higher dividend than the stated rate is:
Participating preferred stock offers the possibility of a higher dividend than the stated rate.
Passive losses generated by a limited partnership may be used to reduce which of the following? A) Both ordinary income and passive income B) Passive income only C) Ordinary income only D) Capital gains from the sale of appreciated investments only
Passive losses may be used to offset earnings from other passive sources only.
Political risk may be mitigated when an investor focuses attention A) On mutual funds that have a composition of at least 50% US companies B) On US domestic securities C) On global assets for the widest possible diversification D) On the countries with the strongest economies
Political risk can be reduced by investing in US domestic securities in lieu of overseas investments.
To partially protect a long stock position and increase income to her portfolio, an investor could do which of the following? A) Buy puts B) Buy calls C) Sell calls D) Sell puts
Sell calls Additional portfolio income can be generated by writing calls against a stock position that is currently held. The premium from the calls delivers the additional income.
Which type of options account strategy subjects an investor to the greatest risk and increased disclosure requirements? Short naked calls
Short naked calls subject investors to unlimited risk. Accounts that permit this trading strategy are subject to higher levels of risk disclosure and more stringent account approval requirements.
The stock of a company with no earnings history, but high potential for appreciation is most likely classified as a(n) A) Income stock B) Mid-cap stock C) Cyclical stock D) Speculative stock
Speculative stocks generally have no earnings history, or widely varying earnings, but they have high potential for appreciation because of their future promise.
What is the settlement date that applies to the exercise of index options? A) The 5th business day after exercise B) The business day following the date of exercise C) The 2nd business day after exercise D) The 3rd business day after exercise
The business day following the date of exercise Cash settlement for index options must take place on the business day following the date of exercise.
Which of the following statements about the purchase of a put is TRUE? A. buying a put is often used as an alternative for purchasing a position in stock B. the more out-of-the-money the put purchased, the more bearish the strategy C. a long put is an ideal tool for an investor that wishes to profit in an upward price move in th3 underlying stock D. the purchase of a put offers the investors an unlimited amount of risk
The more out-of-the-money the put purchased, the more bearish the strategy A long put permits the holder to sell stock at the exercise price. The more out of the money the put is (the lower the strike price), the more the underlying stock price will have to decline before the put has value.
The overall objective of asset allocation is to ensure that investors have A) An equally balanced portfolio of stocks, bonds, and cash. B) Sufficient cash available to make investments that are recommended by prominent investment managers. C) A portfolio of securities tailored to their specific goals. D) A blended portfolio of assets that will react differently under different market conditions
The objective of asset allocation is to ensure that the portfolio includes asset categories that react differently under diverse market conditions.
An investor purchases 5 6-month XZY 45 calls for 3.25. Excluding commissions, how much does the investor pay for these calls? A) $450 B) $16.25 C) $1,625 D) $325
The premium of an option contract is based on a single share. A standard contract covers 100 shares. Because this investor purchases 5 contracts, the price is 5 x 3.25 x 100, or $1,625.
The risk that stock cannot be sold easily or promptly is known as A) reinvestment rate risk B) financial risk C) systemic risk D) marketability risk
The risk that a security cannot be easily converted to cash is known as marketability or liquidity risk.
the tax benefits of a municipal bond apply to: A. individual investors only B. any capital gain from the sale of a bond C. high net worth investors who have a particular need for tax free income D. interest income generated from the bond
The tax benefits of a municipal bond apply to the bond's interest income only, not any capital gains that may be realized.
Which of the following statements regarding mutual funds is not correct? A) They are redeemed at the public offer price (POP). B) Investors can choose among many different investment styles within the universe of mutual funds. C) They are inappropriate for investors seeking investments that trade intra-day D) They cannot be purchased on margin
They are redeemed at the public offer price (POP). Mutual fund shares are redeemed at the net asset value (NAV), not the public offer price (POP).
in which of teh following areas are open-end funds and exchange-traded funds similar? A. they both make capital gains distributions to investors B. they both have active secondary markets C. they both issue redeemable share to the public D. they both have static/fixed portfolios
They both make capital gains distributions to investors
An investor in a high tax bracket is subject to federal, state and local income taxes. If the investor is seeking current income with minimum tax liability, which of the following choices is most appropriate? A) US. Virgin Island Utility bonds B) Zero Coupon Treasury Strips C) Double barreled municipal bonds D) Private activity municipal bonds
US. Virgin Island Utility bonds
what are voter referendums
Voter referendums are required in many new issues of general obligation bonds. They are not required for revenue bond.
All of the following are associated with new issues of revenue bonds EXCEPT A. No limitations on taxing authority B. Voter referendums C.
Voter referendums are required in many new issues of general obligation bonds. They are not required for revenue bond. Revenue bonds are backed by user fees, or potentially by fees paid by a private corporation for the use of the facility. Revenue bonds are not subject to limits on the taxing authority of the issuer.
A security that entitles the holder to buy stock of the company that issued it at a specified price, which is usually higher than the stock price at time of issue is a(n)
Warrants, whether issued 'naked' or as a 'sweetener' added to a bond offering to make it more attractive to investors, are usually medium term to long term instruments that allow the holder to purchase the stock at a specified price, which is usually higher than the stock price at the time of issue. The warrant becomes valuable when the stock price appreciates beyond the exercise price.
When your client asks you if risk can be completely eliminated from her portfolio you should respond by saying that
all investments carry some degree of risk, the issue is how the risk is managed
When growth is the primary investment objective, an investor's portfolio would likely be focused on A) Municipal bonds B) Common stock C) Preferred stock D) Treasury bonds
common stock Where growth is the primary investment objective, there would be a focus on equity securities, particularly common stock, which over the course of many years will tend to increase in value.
Asset Backed Securities could be backed by all of the following EXCEPT A) corporate equipment B) student loans C) credit card receivables D) auto loans
corporate equipment: ABS consist of financial assets that are packaged together and sold to investors as bonds. Corporate equipment is not a financial asset and, therefore, would never be securitized into an ABS.
To ensure that suitable recommendations are made to customers, broker-dealers are required to make reasonable efforts to obtain all of the following types of customer information EXCEPT: A) educational background B) investment objectives C) tax status D) financial status
educational background
An 80 -year-old individual would be least likely to purchase a A) Money market fund B) Hedge fund C) Bank CD D) Treasury bond
hedge fund An individual who is retired, or in the later stages of life, would not be likely to make an investment that could result in the complete loss of their capital, or one that would require a long-term investment horizon.
Which of the following investment products would not be appropriate for an individual who says her current investment objective is growth? A) Exchange-traded fund B) Equity mutual fund C) High-grade municipal bond D) Small-cap stock
high grade municipal bonds Growth oriented investors would be interested in equities and equity mutual funds. Fixed-income products would not be a suitable investment for this investment objective.
Which of the following is a significant risk of a raw land limited partnership program that must be disclosed by a registered representative? A) All of these are risks of raw land partnerships that must be disclosed B) Limited appreciation potential C) Lack of liquidity D) Significant tax losses that are only useful to investors that have other passive income
lack of liquidity A raw land partnership has high appreciation potential. It does not pass through losses because there are no expenses associated with development of the land or depreciation. The lack of liquidity is a risk that must be disclosed.
All of the following are characteristics of general partners in a limited partnership EXCEPT A.The right to borrow money on behalf of the partnership B. limited liability
limited liability
When the XXXX Index is 2125, which of the following positions would be exercised? A) Long 2025 Call B) Short 2150 Call C) Short 2075 Put D) Long 2100 Put
long 2025 call A call option would be exercised when the market price of the security is higher than the strike price. A put option would be exercised when the market price of the security is lower than the strike price.
Broker dealers and their representatives are held to suitability standards that apply to virtually all securities A) Purchases B) Accounts C) Transactions D) Recommendations
recommendations It is the recommendation to buy, sell, exchange or hold securities that triggers suitability rules. When clients direct reps to complete a transaction (without a recommendation), suitability rules may not apply.
The process by which an issuer calls bonds with a high coupon and reissues new bonds with a lower coupon is referred to as A) refunding B) reissuing C) laddering D) redeeming
refunding AKA refinancing
In which of the following positions does the investor face unlimited risk? A) Short call B) Long put C) Long call D) Short put
short call When an investor is short a call with no other positions, the investor is obligated to buy stock if assigned. There is no limit on the price to which the stock can rise, so the investor's risk is theoretically unlimited.
An investor with a relatively high-risk tolerance would like to add a growth fund to his portfolio. Of the following, which type of fund may be most appropriate? A) Junk bond fund B) Hybrid fund C) Commodity fund D) Small cap stock fund
small cap fund A stock fund is most appropriate for a growth objective. Because the investor is not risk averse, a small cap fund will offer the most growth potential of the choices offered.
do general obligation bonds have debt limitations?
yes
Investors who indicate they are seeking current income from an investment would be least likely to consider which of the following products? A) Equity mutual funds B) Zero-coupon bonds C) REITs D) High-grade corporate bonds
zero coupon bonds Zero-coupon bonds do not generate any current income so they would not be appropriate investments for someone whose investment objective is current income.
When a registered rep shifts a customer from one mutual fund to a different fund with a similar investment objective, A) They are performing normal account maintenance, which typically involves the reallocation of cash from one mutual fund to another. B) They are conducting an illegal activity, which may result in a suspension from the securities industry. C) They are engaged in "switching", a sales practice violation. D) They are helping the client to achieve stronger investment returns.
"Switching" occurs when a registered rep moves a customer from one mutual fund to another fund with a similar, or identical, investment objective. There is no benefit to the customer when this occurs, and is usually harmful.
what are bearer bonds
-A bearer bond is a bond or debt security issued by a business entity such as a corporation, or a government. As a bearer instrument, it differs from the more common types of investment securities in that it is unregistered—no records are kept of the owner, or the transactions involving ownership When somebody buys a bond, they "lend" money to the issuer. Just like your bank or mortgage lender, they get repaid in two ways (assuming the bond's issuer does not default on the obligations): -return of principle -intrest payments
All of the following statements about municipal revenue bonds are TRUE EXCEPT: A) The interest and principal are paid from the revenue received from the facility. B) They can be issued by states, political subdivisions, interstate authorities, and intrastate authorities. C) They are not subject to debt limitations established by the issuer. D) The maturity of the revenue bond usually coincides with the useful life of the facility being built.
-The maturity of the revenue bond usually coincides with the useful life of the facility being built. Municipal revenue bonds are issued to support long-term infrastructure projects. Bonds that are issued to build them usually mature before the facility is no longer of use. Municipal revenue bonds do not have debt limitations like general obligation bonds. Revenue bonds can be issued by states, political subdivisions (such as counties or townships), interstate authorities and intrastate authorities. The interest and principal owed to bondholders is paid from the revenue received from the facility.
As compared to U.S. Treasury securities, U.S. Agency securities A) trade actively in the secondary market B) benefit from tax exemptions on interest payments C) have slightly higher yields D) pay interest to investors less frequently
-have slightly higher yields Both U.S. Treasury and U.S. Agency securities are actively traded in the secondary marketplace. U.S. Agency securities often pay interest monthly, while U.S. Treasury Notes and Bonds pay interest every six months. Some agency issues are exempt from taxation at the state and local levels, but mortgage-backed certificates issued by Fannie Mae, Freddie Mac and Ginnie Mae are subject to taxation at all levels. Agency securities yield slightly more than U.S. government securities because they do not share the explicit backing of the U.S. government (other than Ginnie Mae). They are considered second in safety of principal to U.S. Treasury Securities.
Which of the bonds below would subject an investor to the greatest amount of call risk? A) A 6% bond with a call premium of 102 B) A 4% bond with no call premium C) A 6% bond with no call premium D) A 4% bond with a call premium of 102
A 6% bond with no call premium An issuer is most likely to call bonds with a higher coupon when interest rates are falling. An issuer also prefers to call bonds that do not require payment of a call premium.
what are blue chip companies
A blue chip is stock in a corporation with a national reputation for quality, reliability, and the ability to operate profitably in good and bad times
Which of the following bonds typically has the least price volatility? A) A long-term corporate bond B) A convertible corporate bond C) A corporate floating rate bond D) A corporate zero coupon bonds
A corporate floating rate bond Bonds that have a floating interest rate, also known as variable rate bonds, have little price change. The interest rate, not the price, adjusts to reflect current market conditions. Corporate zero bonds are quite volatile, as are bonds that have longer maturities.
An infrastructure project that is free to the public is most likely backed by which of the following? A) A general obligation bond B) A double barreled bond C) Special assessment bond D) An industrial revenue bond
A general obligation bond General obligation bonds are used to fund infrastructure projects that are free to the public.
All of the following mutual fund portfolios would be classified as sector funds EXCEPT A) A global equity fund B) An energy bond fund C) A healthcare equity fund D) A technology high yield bond fund
A global equity fund Unless defined more narrowly by a distinct region or investment type, an emerging markets equity fund is usually not concentrated in a single market sector. Common sector funds are invested in specific industries like healthcare, technology, energy, financial companies, etc.
An investor would like to invest in a growth mutual fund that holds the stock of well-known companies with a stable performance history. An appropriate recommendation for this customer is a A) Sector fund B) Large cap stock fund C) Specialty Fund D) Hybrid fund
A large cap stock fund includes the stock of blue chip companies that have large market capitalization. They are usually well recognized names with a strong performance history.
A bond would "trade flat" for all of the following reasons except A) The settlement date coincides with the dated date. B) The settlement date of a trade coincides with an interest payment date. C) The bond is a zero-coupon security. D) A trade occurs 30 days prior to the next coupon date.
A trade occurs 30 days prior to the next coupon date. A bond "trading flat" does not make a regular interest payment. This happens for a variety of reasons, including any trade involving a zero-coupon bond. When the settlement date and an interest payment date are different, there will be accrued interest involved in the trade.
Unlike other investment companies, a unit investment trust does not A) Actively manage its portfolio B) Provide a prospectus to investors C) Offer securities to non-accredited investors D) Have an investment objective
A unit investment trust does not have an actively managed portfolio. The securities are selected based on the trust's investment objective and held to the termination of the trust. Investors in the trust must receive a prospectus. Units may be sold to non-accredited investors.
An investor sells 10 XYZ June 30 puts at 3.5. The breakeven point is A) 26.5 B) 33.5 C) 6.5 D) 13.5 Previous
A) 26.5 The breakeven point for the seller of a put option is the strike price of the option minus the premium received for the option.
A stable share price along with a fluctuating dividend based on market conditions is associated with A) Adjustable-rate preferred stock B) Convertible preferred stock C) Cumulative preferred stock D) Callable preferred stock
A) Adjustable-rate preferred stock
Company A and Company B are multinational corporations whose typical business interests are in the import/export fields. The international transactions in which these businesses engage might be financed through the use of A) BAs B) Negotiable CDs C) ADRs D) T Bills
A) BAs- bankers acceptance International transactions can be financed through the use of banker's acceptances (BA). These are typically checks drawn on a bank by an importer or exporter of goods and represents the bank's promise to pay the face amount of the note at maturity, which is usually within a three month time period. Banker's acceptances are frequent investments in money market funds.
Which of the following statements is true regarding purchases and redemptions of mutual fund shares? A) Both full and fractional shares can be purchased and redeemed B) Customers that want cash can sell all or a portion of their shares in the secondary market C) Purchases and redemptions take place at the NAV next calculated D) Mutual funds raise additional capital through selling previously redeemed shares to new investors
A) Both full and fractional shares can be purchased and redeemed Investors can purchase or redeem full or fractional shares. For example, an investor may want to withdraw $10,000. If the NAV is $25.10 To realize this amount, the investor will redeem 398.41 shares (this number is adjusted if deferred sales charges apply). Mutual fund shares do not trade in the secondary market. Purchases take place at the POP next calculated; redemptions at the NAV next calculated. Redeemed shares are not reissued; they are canceled and destroyed.
It would be inappropriate for an individual with a low net worth to A) Engage in short selling B) Buy US Government bonds C) Buy a broad mixture of stocks and bonds D) Buy mutual funds
A) Engage in short selling
Which of the following mutual funds is most likely a "no-load" fund? A) Index fund B) Target date fund C) Sector fund D) High-yield fund
A) Index fund Most index funds operate as "no-load" funds.
TANS, RANS, and BANS are issued by municipalities for A) Short term financing B) Private purpose non-essential services funding C) Federally subsidized financing D) Pass through financing
A) Short term financing TANs, RANs, and BANs are short term municipal securities that are issued in anticipation of longer term funding from taxes or other forms of municipal revenue. They are not federally subsidized or specifically for funding private purpose facilities.
All of the following are investment benefits of real estate investment trust (REITs) EXCEPT: A) Avoidance of double taxation on dividends B) Ability to pass through losses for investment tax deductions C) Diversification among real estate properties, through a single investment D) Attractive dividends
Ability to pass through losses for investment tax deductions REITs offer diversification, attractive dividends and avoidance of double taxation on dividends. However, REITs can not pass through tax losses to investors.
Accrued interest is calculated from the A) Last interest payment date up to but not including the settlement date B) Trade date up to but not including the settlement date C) Last interest payment date up to but not including the trade date D) Last interest payment date up to and including the settlement date of the trade
Accrued interest is calculated from the last interest payment date up to but not including the settlement date of the transaction. This represents the amount of money the buyer of the bond must pay to the seller of the bond when the bond changes hands.
By endorsing ownership of a stock certificate to a brokerage firm, an investor transfers ownership into A) An omnibus account B) Street name C) Negotiable name D) An escrow account
B) Street name
Why do companies typically participate in "reverse-split" corporate events? A) To pay a special dividend B) To increase a low price per share C) To deter hostile takeovers D) To reward stockholders
B) To increase a low price per share
According to industry rules, the delivery date for stock in a regular way transaction is A) the day of the contract. B) the second business day following the day of the contract. C) within the time specified, but not less than four business days or more than 60 calendar days. D) the business day following the day of the contract.
B) the second business day following the day of the contract.
All of the following Standard & Poor's Ratings are investment-grade EXCEPT: A) AA B) BB C) A+ D) BBB
BB The lowest S&P investment grade rating is BBB- (Triple-B minus). Below that is a non-investment grade (junk) bond.
In a limited partnership a limited partner is permitted to engage in all of the following activities EXCEPT A) Voting on significant changes to the partnership such as a new GP or refinancing of partnership property B) Inspecting the books and records of the partnership C) Borrowing money from the partnership D) Initiating a lawsuit against the GP
Borrowing money from the partnership Neither a limited nor a general partner are permitted to borrow money from the partnership.
Which of the following information must be included in the proxy materials that are filed with the SEC and distributed to shareholders? A) The most recent financial statements B) The most recent tax returns C) All important facts upon which shareholders are asked to vote D) The slate of nominated directors
C) All important facts upon which shareholders are asked to vote
Commercial paper, bankers acceptances and large time deposits are part of what segment of the fixed income market? A) Municipal B) Asset-backed C) Money market instruments D) Corporate bonds
C) Money market instruments Debt maturing in one year or less trades in the money market. Money market investments are attractive to investors because they offer high liquidity. Many investors access this market through money market mutual funds.
When compared to the expenses associated with the purchase of mutual fund shares, the cost of investment in a UIT is A) Usually about the same B) More expensive C) Substantially cheaper D) Less expensive for large purchases only
C.) substantially cheaper The sales charges for investing in UITs are substantially less than comparable mutual fund investments because of the fixed portfolio. There is no management fee.
what is a call premium
Call premium is the dollar amount over the par value of a callable debt security that is given to holders when the security is redeemed early by the issuer. ... In options terminology, the call premium is the amount that the purchaser of a call option must pay to the writer
The pricing characteristics of REIT shares are most like those of shares of a A) Direct participation program B) Closed end fund C) Money market fund D) Growth mutual fund
Closed end fund REIT shares trade in the secondary market at a discount or premium to their NAV like closed end fund shares. Mutual fund shares like growth funds or money market funds are redeemed by the fund at their NAVs. DPPs do not generally trade; there is an extremely limited secondary market for investors who wish to sell their interests.
An investor is interested in purchasing an interest in a bond fund at a price below the asset value of the portfolio holdings. Which of the following investments may be appropriate for this investor? A) A DJIA ETF B) A high yield domestic bond mutual fund C) An Investment grade corporate closed-end fund D) A fixed income UIT
Closed-end fund and ETF shares trade on exchanges at premiums or discounts to their NAV. An investment grade corporate bond CEF trading at a discount to NAV fits this investor's objective. A DJIA ETF is a stock fund.
Preferred stock trades most like which of the following instruments? A) Common stock B) Convertible bond C) Call option D) Straight debt security
D) Straight debt security
Preferred stock is most likely to be called when interest rates are A) volatile B) rising C) stagnant D) falling
D) falling
All of the following are characteristics of American Depositary Receipts EXCEPT A) they may be sponsored or unsponsored. B) they pay dividends in U.S. dollars. C) they represent ownership in shares of a non-U.S. company. D) they trade on exchanges outside of the U.S.
D) they trade on exchanges outside of the U.S.
What investment attributes are offered by virtually all mutual funds? A) Low risk B) Diversified, professionally managed portfolios C) Very low cost of ownership D) Tax-exempt earnings
Diversified, professionally managed portfolios Mutual funds enable investment management firms to pool funds contributed by many investors to create and manage a diversified portfolio of securities. Some mutual funds track indexes and are passively managed, while others are actively managed. Tax benefits, risk levels and costs of ownership vary widely among different mutual funds.
All of the following securities pay interest that is taxable at the federal level and exempt from state taxation EXCEPT A) Treasury Bills B) Federal Home Loan Mortgage corporation notes C) Federal Farm Credit Bank bonds D) TIPS
Federal Home Loan Mortgage corporation notes Issues of the federal government like Treasury notes, bonds, bills and TIPS pay interest that is taxable at the federal level but exempt at the state level. Federal Farm Credit and Federal Home Loan Bank securities follow this same taxation rule. Government National Mortgage Securities, (Ginnie Maes), Federal National Mortgage Association securities (Fannie Maes) and Federal Home Loan Mortgage Corporation securities (Freddie Macs) are taxable at all levels.
A recommendation for a purchase of an interest in a non-traded public REIT would be most appropriate for an investor who A) Has a short-term time horizon and does not need liquidity B) Has a long-term time horizon and needs liquidity C) Has a long-term time horizon and does not need liquidity D) Has a short-term time horizon and needs liquidity
Has a long-term time horizon and does not need liquidity A non-traded REIT, although offered to the public, is not generally liquid. It is most suitable for someone who has a long-term investment time horizon because funds are usually tied up for a lengthy period.
All of the following statements regarding the trading strategies of hedge funds are true EXCEPT A) Lock up periods allow hedge fund managers to invest in illiquid investments without concern for customer withdrawal requests B) Tangible assets are frequently used as investment alternatives within hedge funds C) Hedge funds are limited in the amount of leverage they can employ in accomplishing their investment objectives D) Both short and long positions are heavily used to attempt to produce high returns for investors
Hedge funds are limited in the amount of leverage they can employ in accomplishing their investment objectives The amount of leverage or other trading strategies employed are often left to the discretion of the hedge fund manager.
A bond is quoted at 99 1/8. From this quote, which of the following can be reasonably concluded? I. The bond is a corporate bond II. The bond is a government bond III. An investor would pay $991.25 to purchase the bond at the current market price IV. An investor would pay $99.125 to purchase the bond at the current market price A) I and III B) I and IV C) II and III D) II and IV
I and III -Corporate bonds are quoted in 1/8th increments, so a quote of 99 1/8 represents 99.125% of par ($1,000), or $991.25. Treasuries are typically quoted in 1/32nd increments (e.g. 99 10/32).
Which two of the following positions permit an investor to exercise the contract prior to expiration? I. Long call II. Short call III. Long put IV. Short put A) I and IV B) II and IV C) II and III D) I and III
I and III Buyers of options have rights, sellers have obligations. A call buyer holds the right to buy stock at the exercise price and may exercise that right any time prior to the expiration of the contract. A put buyer holds the right to sell stock at the strike price, and may also exercise that right any time prior to the expiration.
Which of the following securities may be traded on a stock exchange? I. Common stock II. Derivatives III. Mutual Funds IV. Bonds A) I, II and III only B) I, II and IV only C) I only D) I and IV only
I, II and IV only The securities traded on a stock exchange include: common and preferred shares issued by companies, unit trusts, derivatives, pooled investment products (including REITS and closed end shares), and bonds. Mutual funds shares are issued and redeemed only by a mutual fund or one of its sponsors.
Which of the statements are correct regarding taxation of dividends? I. Cash dividends are taxable when received II. Cash dividends are not taxable when received III. Stock dividends are taxable when received IV. Stock dividends are not taxable when received
I. Cash dividends are taxable when received and IV. Stock dividends are not taxable when received
Issuing stock is advantageous for a company because I. It does not require the company to pay back the money II. It is less expensive to issue III. Shareholders are not permitted to influence the operations of the corporation IV. It does not require the company to make periodic interest payments
I. It does not require the company to pay back the money IV. It does not require the company to make periodic interest payments
Which two of the following options strategies are bearish? I. Long call II. Short call III. Long put IV. Short put A) II and III B) I and IV C) I and III D) II and IV
II and III A bearish investor profits when market prices fall. Call writers and put buyers are bearish. Put buyers have the right to sell at the exercise price in a declining market, while call sellers are not assigned when market prices fall. They may keep the premium received without having to sell stock.
In June, an investor purchases a December XYZ 60 call for a premium of $500. By September the premium is $800. If the investor directs his broker to close out the transaction, which two of the following are TRUE? I. A closing purchase will take place II. A closing sale will take place III. The investor will realize a profit of $300 IV. The investor will realize a loss of $300
II and III An investor that purchases an option can close the transaction to realize a profit prior to expiration by selling the option when the premium is higher. To close out a long option position, a closing sale transaction is executed. The investor will realize a profit because the option is sold for more than the purchase price of $500.
Which of the following investment opportunities offer a flow through of losses to investors? I. Closed end funds II. Direct participation programs III. Hedge funds IV. ETFs
II and III Both direct participation programs and hedge funds offer a flow through of losses that can be used to offset passive income. Limited partnerships are a common form of a direct participation program that provide this tax feature.
Which two of the following describe the typical investment in a private equity firm? I. Can range from a small to large investment minimum II. Typically a large minimum investment III. Generally committed for a long period of time IV. Generally committed for a relatively short timeframe
II and III Most private equity is raised through large investments from institutional investors and accredited investors that are committed for a long period of time typically about 10 years.
A 10-year municipal bond, callable in 5 years, is trading at 97 7/8. Rank the following yields from lowest to highest. I. Current yield II. Nominal yield III. Yield to call IV. Yield to maturity
II, I, IV, III
The shares of which of the following investment companies are NOT redeemed by the issuing companies? I. UITs II. Open end companies III. Closed-end companies IV. ETFs
III and IV The shares of mutual funds and units of UITs are redeemed by their issuing companies. The shares of closed-end companies and ETFs are traded on exchanges, and are not redeemed by their issuers.
A hedge fund in which the fund manager is given complete authority to decide on the assets in which to invest is a A) Full discretion fund B) Blind pool fund C) Blank check fund D) Absolute authorization fund
In a blind pool hedge fund, there is not disclosure of the investments that will be made.
Investors that purchase Ginnie Mae, Fannie Mae or Freddie Mac mortgage-backed securities will benefit from which of the following?
Income that is slightly higher than income from U.S. Treasury securities Investors purchase mortgage-backed securities for the monthly income stream that is very safe from default. Should these issuers ever default, the government would probably use its creditworthiness to guarantee investors' payments of interest and principal. Some agency securities receive exemptions from state and local taxation, but mortgage-backed agency securities are subject to taxation at all levels.
All of the following statements about corporate bonds are true EXCEPT A) They generally yield more than U.S. government and U.S. Agency securities B) Interest is typically exempt from taxation at the state and local level C) They typically are issued with par value of $1,000 D) Most bonds pay interest every 6 months
Interest is typically exempt from taxation at the state and local level Interest on corporate bonds is usually taxable at all levels. As compared to U.S. government securities, corporate bonds usually yield more because they have credit risk. Most are issued with par values (face amounts) of $1,000 and typically pay interest every 6 months.
An investor anticipates a decline in the broad market and expects profit potential based on the degree of the decline. This investor's position is which of the following? A) Long index call B) Short index call C) Short index put D) Long index put
Long index put An investor that is bearish on the overall market benefits by buying index puts. There must be a substantial decline in the stock to profit, because the investor must recover the premium paid.
The secondary market for ETFs is generally A) More liquid than ETNs B) Less liquid than ETNs C) The same as ETNs D) Limited to high net worth investors only, making them inaccessible to most retail investors
More liquid than ETNs While both ETFs and ETNs offer secondary market trading, the market for ETNs tends to be more limited than that for ETFs.
All of the following statements are true of the municipal securities market EXCEPT A) Most municipal securities are readily available in the secondary market B) The number of municipal securities that trade is far larger than the number of equity securities that are listed on U.S. exchanges C) Dealers must register as market makers to participate in trading municipal securities trading with other firms D) The MSRB is responsible for improving municipal market transparency and efficiency
Most municipal securities are readily available in the secondary market -The chances of a specific municipal bond issue being available in the secondary market at any given time is relatively small because there are such a large number of municipal issues outstanding.
A comparison of a mutual fund and a hedge fund will show that A) Both mutual funds and hedge funds can trade on margin in their respective portfolios, and both can use leverage and derivatives to finance their activities. B) Hedge funds are typically suitable for a broad range of investors, while mutual funds are only appropriate for more sophisticated investors C) Mutual funds may invest in various types of securities, including both debt and equities, while hedge funds can invest in a broad array of securities, as well as other alternative products, such as real estate and commodities. D) Mutual funds tend to be illiquid investments, while hedge funds are often very liquid.
Mutual funds may invest in various types of securities, including both debt and equities, while hedge funds can invest in a broad array of securities, as well as other alternative products, such as real estate and commodities. Mutual funds will use more traditional securities products, as their federal regulations will limit the types of investments they can employ to achieve their stated investment objectives. Hedge funds, owing to lighter federal regulation, can use far more expansive styles and products to achieve their investment goals.
Which of the following investment company types does not have an investment advisor? A) REIT B) Closed end company C) Unit investment trust D) Open end company
Of the three basic types of investment companies, unit investment trusts are without an investment advisor. They are not actively managed. REITs are not defined as investment companies under the investment company Act of 1940 because they invest in real estate not securities.
When evaluating the investment potential of a limited partnership, an investor should be most concerned with the A) Potential benefits of the partnership as a tax shelter B) Amount of loss the partnership can pass through C) Amount of recourse debt the investor needs to assume D) Overall economic viability of the partnership
Overall economic viability of the partnership The most important factor in choosing a direct participation or limited partnership investment is its economic potential, not its tax benefits or loss pass throughs.
A private equity firm is most likely to invest in which of the following companies? I. Underperforming private companies II. Large and successful public companies III. Public companies that want to go private A) I and III only B) I, II, and III C) II and III only D) I and II only
Private equity firms typically look for investment opportunities in underperforming private companies that they can take public, or in public firms they can take private.
All of the following are true of both mutual funds and REITS EXCEPT A) A prospectus must be made available to potential purchasers B) Investors own a proportionate share of diverse assets that is professionally managed on their behalf C) Both have a Board of Directors to establish their strategic direction D) Secondary market trading offers liquidity to investors
Secondary market trading offers liquidity to investors Mutual fund shares do not trade on the secondary market. They are redeemed by the fund. There are both publicly traded, and private, but non-traded REITS.
When an issuer makes periodic payments to a trustee who retires parts of the issue periodically by purchasing bonds in the open market, the money paid to the trustee is set aside in a(n) A) advance refund account B) debt retirement provision C) sinking fund D) escrow account
Sinking funds are commonly used to retire corporate debt. Issuers set aside money each year by making payments to a trustee who retires part of the issue by purchasing the bonds in the open market.
All of the following statements about mutual fund 12b-1 fees are true EXCEPT A) The maximum 12b-1 fee allowed by the Investment Company Act of 1940 is 2% of the fund's NAV B) They are charged to recover marketing and distribution costs C) The 12b-1 fee is included in the calculation of the fund's expense ratio D) They must be originally and annually approved by the fund's Board of Directors
The Investment Company Act of 1940 permits a maximum 12b-1 fee of 1% of the fund's NAV. 12b-1 fees are charged to recover marketing and distribution costs, and are included in a fund's expense ratio. They must be approved initially and are subject to annual approval by the fund's board of directors.
All of the following are provisions of the Trust Indenture Act of 1939 EXCEPT A) Issuers are required to create a written document that discloses the terms and conditions under which the securities are issued, including legal obligations and any restrictions B) It applies to issues of corporate debt securities in excess of $1 million C) Issuers must name a trust corporation to carry out the terms of the indenture D) If a bond issuer becomes insolvent, the appointed trustee may be given the right to seize the bond issuer's assets and sell them in order to recoup the bondholders' investments
The Trust Indenture Act of 1939 applies to corporate issues of $50 million and above, and requires a formal written agreement (an indenture), signed by both the bond issuer and the bondholder, that fully discloses the particulars of the bond issue. The act also requires that a trustee be appointed for all bond issues, so that the rights of bondholders are not compromised.
The par value of a bond is lower than the market value of the bond. Which of the following statements is true? A) The current yield of the bond is higher than the nominal yield B) The YTM of the bond is higher than the YTC C) The YTC is higher than the nominal yield D) The nominal yield of the bond is lower than the YTM
The YTM of the bond is higher than the YTC This bond is currently trading at a premium, since the market value of the bond is greater than $1,000. As such, the highest yield on this bond will be its nominal yield, followed by the current yield, yield to maturity (YTM), and finally yield to call (YTC), in descending order.
The benefit investors receive for reinvestment of mutual fund dividend and capital gains distributions is A) Tax exempt growth B) Tax deferred growth C) Reduced sales charge on reinvestment D.) breakpoints
The opportunity to reinvest distributions from the securities held within a mutual fund is compounded earnings. Unless the shares are held in a qualified retirement plan, taxation will apply on the distributions, whether reinvested or taken in cash. Reinvestment of distributions is permitted at no sales charge.
A letter of intent includes all of the following features EXCEPT A) A reduction in sales charges that is applicable from the first covered purchase B) A term of 13 months C) The option for the mutual fund to discontinue the contract with 30 days prior notice D) The option to include a prior purchase that was made up to 90 days before the contract was established
The option for the mutual fund to discontinue the contract with 30 days prior notice A letter of intent is a unilateral contract that can be canceled at any time by the customer, but cannot be canceled by the fund. If the contract is canceled, shares from an escrow account are redeemed to pay for the sales charge that would have applied without the letter of intent.
A call option is out of the money when A) The strike price is above the market price of the underlying security B) The market price of the underlying security is above the strike price C) The option is exercised D) The strike price is below the market value of the underlying security
The strike price is above the market price of the underlying security
Dividend and capital gains distributions are made to investors in A) Neither open-end funds nor unit investment trusts B) Unit investment trusts but not open-end funds C) Open-end funds but not unit investment trusts D) Both open-end funds and unit investment trusts
These distributions are made for both open-end funds and unit investment trusts. These are among the benefits of investing in these products.
All of the following statements describing REITs are true EXCEPT A) They generally invest in residential real estate only B) They offer ownership in a pool of assets much like a mutual fund C) Shares trade in the secondary market at a discount or premium to their net asset value D) Public REITs are first offered to the market through an IPO
They generally invest in residential real estate only REITS generally invest their assets in commercial real estate, but also hold residential real estate mortgages. The ownership interest held by an investor reflects a share in all properties held by the fund much like ownership of mutual fund shares. REIT shares trade in the secondary market at a premium or discount to their NAV. REITs raise capital through an initial public offering.
Which of the following is characteristic of bearer bonds? A) They always pay interest quarterly. B) They have voting rights. C) They come in registered form. D) They have interest coupons attached.
They have interest coupons attached. Bearer bonds have interest coupons attached. The interest is payable to the individual who presents the appropriate coupon.
All of the following statements about structured products are true EXCEPT A) They can offer retail investors exposure to hard to access asset classes B) They often are based on derivative or option strategies for producing income and providing downside protection C) They offer a high degree of liquidity D) They must be sold with an offering document for investor disclosure
They offer a high degree of liquidity Structured products typically do not trade after they are issued. There is generally a significant discount when they are sold before their maturity.
Which of the following securities is quoted on a discounted yield basis? A) Treasury bill B) Treasury bond C) Treasury note D) CMO
Treasury bills are quoted on a discounted yield basis. Treasury notes & bonds are quoted as a percentage of par.
An investor who lives in the state of Minnesota purchases municipal bonds that are issued in the state of Wisconsin. The interest on the bonds A) Will probably be more than the investor would have received from an investment in US government bonds. B) Will cause the bond to trade at a premium if it is lower than new and comparable bonds issued by the same issuer. C) Will fluctuate based on the market value of the bonds. D) Will be tax exempt at the federal and state level.
Will probably be more than the investor would have received from an investment in US government bonds. -Interest on municipal bonds is generally higher than US Government bonds because munis are considered less safe than government bonds. The interest payments on municipal bonds do not fluctuate; they are fixed at issue. If the interest on an outstanding bond is more than the coupon for similar new issues, the outstanding bond will trade at a premium; if less, the bond will trade at a discount. The interest on municipal bonds may be exempt if the bondholder lives in the state of issue only.
Which income producing options strategy allows an investor to purchase shares at a predetermined price? A) Write a put B) Write a call C) Buy a call D) Buy a put
Write a put The sale of a put requires an investor to buy shares when assigned. The income is earned through the receipt of the premium.
All of the following statements are true about convertible bonds EXCEPT A) convertible bonds help issuers achieve lower fixed costs for borrowing. B) a bond cannot be both callable and convertible. C) the bond indenture explains the terms under which conversion can occur. D) the conversion ratio specifies the number of shares the bond holder will receive per bond exchanged.
a bond cannot be both callable and convertible. Issuers may add call provisions to convertible bonds. The bond indenture specifies the terms under which a bond can be converted. The conversion ratio specifies the number of shares a bond holder will receive per bond exchanged; the conversion price is the price of the underlying stock at which the bond can be converted to common. Because convertible bonds offer a choice to bondholders, issuers can pay a lower rate, and reduce their fixed costs for borrowing money from investors.
A bond that is trading flat A) does not pay semi-annual interest B) includes accrued interest in its trading price C) trades at par value D) does not include accrued interest in its trading price
does not include accrued interest in its trading price In certain bond markets accrued interest is included in the trading price, and in other markets it is added on after trading. A bond trading with accrued interest is trading at its "full" price; a bond trading without accrued interest is trading "flat." Examples of bonds that trade flat include zero coupon bonds and bonds in default.
Interest rates are rising, causing the speed of prepayments to decline. To an MBS investor, this is an example of A) Inflation risk B) Extension risk C) Prepayment risk D) Interest rate risk
extension risk
Which of the following options position provides the most protection for an investor's short stock position? A) Long call B) Short call C) Long put D) Short put
long call An investor that is short stock must eventually buy the stock to deliver it. A long call provides the best protection for a short stock position because the investor has locked in the price at which the stock can be purchased.
