Investment Planning CFP

Which of the following statements is CORRECT? I. If an investor expects a decline in market interest rates, she should attempt to construct a portfolio of long maturity bonds with low coupon rates. II. If the investor expects an increase in market interest rates, he should attempt to construct a portfolio of short maturity bonds with high coupon rates. A) Both I and II B) I only C) II only D) Neither I nor II

A) The answer is both I and II. The portfolio in Statement I will provide the investor with a portfolio that has the maximum interest rate sensitivity to take advantage of the capital gains experienced by bonds from the decrease in market interest rates. The portfolio in Statement II will provide the investor with a portfolio that has the minimum interest rate sensitivity to minimize the capital losses experienced by bonds from the increase in market interest rates.

Which of the following accurately describes the certificate of deposit investment strategy known as laddering? A) Purchasing multiple certificates of deposit (CDs), rather than just one, with equally spaced terms of maturity B) Purchasing certificates in progressively increasing deposit amounts C) Redeeming a certificate of deposit and reinvesting in a new certificate when interest rates increase D) Immediately purchasing another certificate as one certificate matures

A) The answer is purchasing multiple certificates of deposit (CDs), rather than just one, with differing terms of maturity. Investors with relatively large amounts of money to invest should purchase multiple certificates with equally spaced terms to maturity, a strategy known as laddering.

Grant calls his broker and tells her to sell his XYZ stock if it falls to $20, but he does not want less than $19.75 for his shares. Select the type of order that his broker should place to sell the stock. A) Stop limit order B) Good-til-canceled order C) Market order D) Limit order

A) The answer is stop limit order. The stop limit order turns into a limit order when triggered (both the stop order price and the limit order price are specified). However, this type of order will not guarantee execution if the stock leapfrogs past the $19.75 mark.

To be eligible for preferential dividend tax rates A) the stock must be held for more than 60 days during the 121-day period beginning 60 days BEFORE the ex-dividend date. B) the stock must be held for more than 60 days during the 121-day period beginning 60 days AFTER the ex- dividend date. C) the taxpayer must make an election to waive tax deferral on the dividend. D) the stock must have paid dividends for four consecutive quarters.

A) The answer is the stock must be held for more than 60 days during the 121-day period beginning 60 days BEFORE the ex-dividend date. Investors should take special note of the holding period requirement for a stock in order for the dividend to qualify for the preferential rates. The stock must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date.

According to the unbiased expectations theory of interest rates, A) the current long-term rate is the average of today's short-term rate and expected future short-term rates. B) yields are a function of the supply and demand of funds in each maturity segment of the market. C) investors require a higher yield on long-term bonds because they are riskier. D) an upward sloping yield curve indicates that investors require a yield premium to invest in long-term securities.

A) The answer is the current long-term rate is the average of today's short-term rate and expected future short-term rates. The other statements relate to the liquidity premium theory and the market segmentation theory. Under the unbiased expectations theory, an upward sloping yield curve indicates increasing inflation expectations.

Carly purchased $80,000 of JEM stock for $40 per share utilizing her margin account. She used $40,000 in her money market fund plus she borrowed $40,000 from her broker. She acquired a total of 2,000 shares of JEM stock. JEM stock is currently trading at $39.65 per share. Calculate the stock price that Carly would receive a margin call from her broker. Assume a maintenance margin requirement of 35% and an initial margin requirement of 50%. A) $30.77 B) $30.50 C) $30.23 D) $29.68

A) The answer is $30.77. Carly would receive a margin call when the stock fell to $30.77 per share. Margin call = [(1 − initial margin percentage) ÷ (1 − maintenance margin)] × purchase price of the stock = [(1 - 0.50) ÷ (1 - 0.35)] × 40 = 30.7692, or $30.77.

All of the following statements concerning the types of orders used to buy and sell securities are correct except A) a market order has the lowest priority and is subject to the fluctuations and timeliness of the market. B) a good-til-canceled (GTC) order is an order to buy or sell a security at a specific or limit price that lasts until the order is completed or canceled. C) a stop order is an order specifying a certain price at which a market order takes effect. D) a limit order is an order to buy or sell at a specified (or better) price.

A) The answer is a market order has the lowest priority and is subject to the fluctuations and timelines of the market. The market order, which is the most popular and has the highest priority, is subject to the fluctuations and timeliness of the market.

Calculate the present value of a five-year bond with a coupon rate of 5.50% (paid semiannually) if similar quality bonds are currently yielding 4.35%. A) $1,051.18 B) $929.47 C) $950.32 D) $1,026.97

A) The answer is $1,051.18. The present value of the bond is $1,051.18, calculated as follows: N = 10 (5 × 2); I/YR = 2.175 (4.35% ÷ 2); PMT = 27.50 (5.50% × 1,000 ÷ 2); FV = 1,000; solve for PV = 1,051.18, or $1,051.18.

LFM Corporation has an estimated free cash flow to equity (FCFE) of $2.50 per share in the current year. Moreover, its FCFE is expected to grow at a constant rate of 2% per year. Assuming an institutional investor has a required rate of return of 6.5%, calculate the intrinsic value of LFM stock. A) $56.67 B) $133.13 C) $55.56 D) $40.76

A) The answer is $56.67. The formula for the discounted free cash-flow model: V = FCFE1 ÷ (r - g) = ($2.50 × 1.02) ÷ (0.065 - 0.02) = 2.55 ÷ 0.045 = 56.6667, or $56.67

Acme Electric Company announces a cash dividend of $0.50 per share on August 5, to be paid on September 20, the payable date. The company also announces that the record date will be August 25. Bob Johnson purchases 100 shares of Acme on August 24. Based on this information, choose the CORRECT statement regarding the dividend payment. A) Bob will not receive the dividend, because he did not purchase the shares before the ex-dividend date. B) Bob will receive the dividend, because he purchased the shares before the ex-dividend date. C) Bob will receive the dividend, because he purchased the shares before the record date. D) Bob will not receive the dividend, because he purchased the shares after the announcement date.

A) The answer is Bob will not receive the dividend, because he did not purchase the shares before the ex-dividend date. In order to receive the dividend, Bob must purchase the shares before the ex-dividend date. The ex-dividend date is one business day before the record date. To receive the dividend, Bob must have purchased the shares by August 23.

All of the following statements correctly describe a type of money market instrument except A) Eurodollars are Eurodollar-denominated deposits maintained at banks within the United States. B) commercial paper is a short-term, unsecured promissory note issued by large firms and offers a nominally higher yield than T-bills. C) negotiable CDs are deposits of $100,000 or more and are traded in the open market. D) banker's acceptances are short-term drafts drawn on major banks to finance imports and exports.

A) The answer is Eurodollars are Eurodollar-denominated deposits marinated at banks within the United States. Eurodollars are U.S. dollar-denominated deposits in banks outside the United States. The average deposit is in the millions and has a maturity of less than six months.

Identify which of these statements regarding bonds is CORRECT. I. If a bond is issued in registered form, payments will be made to the owner of record. II. If a bond is issued in bearer form, payments will be made to whoever holds or possesses the bond. III.A bond acquired in the secondary market at a discount is called a market discount bond. IV. The amount attributable to a market discount is always includable in income in the year of acquisition. A) I, II, and III B) II, III, and IV C) I only D) II and IV

A) The answer is I, II and III. Only statement IV is incorrect. A bond is a debt security obligating the issuer to make periodic interest payments and to repay the principal at the time of maturity. The amount attributable to a market discount is generally not includable in income until sale or disposition of the bond, and then it is treated as interest income.

Limited partnerships are distinguished by which of the following? The general partner controls the business activities of the partnership. The limited partners participate in the business venture with limited liability. The general partner determines when distributions are made to the limited partners. The limited partners may have difficulty selling their interests. A) I, II, III, and IV B) I, II, and III C) II and IV D) I and III

A) The answer is I, II, III, and IV. Limited partnerships are characterized by a partnership entity that consists of a general partner and limited partners.

Which of these statements regarding bond portfolio immunization is CORRECT? I. Immunization allows an investor to ensure that the value of his or her bond portfolio remains the same, regardless of whether interest rates increase or decrease. II. Immunization is accomplished by creating a portfolio whose duration is equal to the investor's investment time horizon. III. Immunization allows investors to earn a current yield that is equal to the yield to maturity. IV. Immunization allows an investor to earn a specific rate of return, regardless of whether interest rates increase or decrease. A) II and IV B) III only C) I and II D) I, III, and IV

A) The answer is II and IV. Immunization attempts to protect the yield of a bond portfolio from changes in interest rates. An immunized portfolio is expected to provide a specific return over the investment time horizon. If interest rates change during the investment period, the capital losses are expected to be offset by the gains on reinvestment income. Immunization is accomplished by creating a portfolio whose duration is equal to the investor's investment time horizon.

Barbara, a Louisiana resident, is in the 35% marginal federal income tax bracket and the 6% marginal state income tax bracket. Select the bond that would provide Barbara with the highest after-tax rate of return. A) Louisiana municipal bond with a coupon rate of 5.5% B) Corporate bond with a coupon rate of 8% C) U.S. Treasury bond with a coupon rate of 6% D) Texas municipal bond with a coupon rate of 5.8%

A) The answer is Louisiana municipal bond with a coupon rate of 5.5%. U.S. Treasury bond (exempt from state income tax): 6% × (1 - 0.35) = 3.90% Corporate bond: 8% × [1 - (0.35 + 0.06)] = 4.72% Texas municipal bond (exempt from federal income tax): 5.8% × (1 - 0.06) = 5.45% Louisiana municipal bond (exempt from both federal and state income tax): 5.5%

LFM Corporation declared a record date of Wednesday, May 16, for its next quarterly cash dividend. Determine the last day an investor can purchase LFM stock and receive the current dividend. A) Monday, May 14 B) Friday, May 11 C) Tuesday, May 15 D) Wednesday, May 16

A) The answer is Monday, May 14. To receive a cash dividend, an investor must be owner of record as of the close of business on the record date. The record date is the first business day after the ex-dividend date. To be listed as an owner, the investor must purchase the stock before the ex-dividend date, or May 15. Hence, the investor must purchase the stock no later than Monday, May 14, to be entitled to receive the dividend.

Identify which of these is NOT a characteristic of a normal yield curve. A) As the maturity date of bonds lengthens, the corresponding bond yield decreases. B) A normal yield curve occurs during periods of economic expansion. C) A normal yield curve indicates that long-term market interest rates are higher than short-term rates. D) The curve has a tendency to slope upward and outward.

A) The answer is as the maturity date of bonds lengthens, the corresponding bond yield decreases. When the maturity date of the bonds lengthen, the corresponding yields will increase.

Which one of these is NOT a typical key element that separates hedge funds from mutual funds? A) Many hedge funds are broadly diversified B) Derivatives are used extensively by hedge funds C) Leverage is often used in hedge funds D) Illiquid securities are often used in hedge funds

A) The answer is many hedge funds are broadly diversified. Hedge funds are private investment vehicles that tend to be more heavily concentrated than mutual funds. They often use leverage, derivatives, employ narrow investment strategies, and invest in nonpublic and illiquid securities.

Identify the yield-curve theory that relies on the laws of supply and demand for various maturities of borrowing and lending. A) Market segmentation theory B) Unbiased expectations theory C) Brownian theory D) Liquidity premium theory

A) The answer is market segmentation theory. Market segmentation theory relies on the laws of supply and demand for various maturities of borrowing and lending. Unbiased expectations theory states that long-term rates consist of many short-term rates and that long-term rates will be the average of short-term rates. The liquidity premium theory is based on the unbiased expectations theory but incorporates a liquidity premium into the model.

Terri has been an active investor for many years, and her present portfolio consists of listed stocks, penny stocks, and options. She earns approximately $175,000 annually, has $35,000 in cash to invest, and is in the 32% marginal income tax bracket. Terri is interested in accumulating wealth for the future and does NOT need current income. Which one of these fixed-income securities best suits Terri's needs at this time? A) A rated, discount, long-term, tax-free, municipal revenue bond B) AAA rated, premium, intermediate-term, tax-free, municipal general obligation bond C) A rated, par value, short-term, corporate debenture bond D) AAA rated, par value, short-term, U.S. Treasury bond

A) The answer is A rated, discount, long-term, tax-free, municipal revenue bond. Because Terri is in a high income tax bracket, an investment-grade municipal bond would be the best choice. The long-term nature of this bond may afford Terri a higher net interest payment than the other bonds.

Exchange-traded funds (ETFs) generally offer which of these? I. Tax efficiency II. Low expense ratios III. Professional management IV. Marketability A) I, II, and IV B) I and II C) I, II, and III D) I, II, III, and IV

A) The answer is I, II, and IV. Tax efficiency, low expenses, and marketability are all characteristics of ETFs. Professional management is incorrect because virtually all ETFs are, in effect, index funds, which are not actively managed.

All of the following correctly describe disadvantages of cash and cash equivalents except A) an investor may quickly convert a money market deposit account to cash to meet short-term needs. B) investments in money market mutual funds are not insured or guaranteed by the U.S. government. C) the rate of return on passbook savings accounts is relatively low when compared to higher risk alternatives such as government bonds. D) investors choosing to redeem their certificates of deposit (CDs) prior to maturity may be subject to a substantial penalty.

A) The answer is an investor may quickly convert a money market deposit account to cash to meet short-term needs. One of the advantages of money market deposit accounts is their liquidity. They may be used by investors as a source of funds to meet emergencies and other short-term obligations.

Two mutual funds have these performance statistics: Fund E Fund F Three-year total return 16.5% 17.2% Standard deviation 18.1 16.4 R-squared 81% 87% Sharpe ratio .58 .68 Alpha 1.1 1.6 Which one of the two funds has the better risk-adjusted performance, and why? A) Fund E, because its coefficient of variation is lower. B) Fund F, because its alpha is higher. C) Fund E, because its Sharpe ratio is lower. D) Fund F, because its R-squared is higher.

B) The answer is Fund F, because its alpha is higher. In this case, the investor should choose the fund with the higher alpha. With an alpha of 1.6, Fund F exhibits the best risk-adjusted performance.

Norma owns ABC Corporation bonds of AA rated quality that mature in seven years, pay semiannual interest, and have a coupon of 8%. Similar bonds (AA rated, seven years to maturity) yield 9%. The ABC Corporation bonds are convertible into common stock at $26 per share, and the current market price of ABC common stock is $23. What is the conversion value of an ABC Corporation bond? A) $923.08 B) $884.61 C) $766.47 D) $851.85

B) The answer is $884.61. The conversion value = conversion ratio × market price of common stock. Therefore, the conversion value equals ($1,000 ÷ $26) × $23 = $884.61.

Which of the following methods can be used in determining the basis in a mutual fund when the shares were acquired at different times? I. Specific identification II. First in, first out (FIFO) III. Average cost method A) II and III B) I, II, and III C) I and III D) II only

B) The answer is I, II, and III. All of these can be used to make this determination.

The yield curve graphically plots A) yield on the y-axis and price on the x-axis. B) yield on the y-axis and time on the x-axis. C) price on the y-axis and time on the x-axis. D) price on the y-axis and yield on the x-axis.

B) The answer is yield on the y-axis and time on the x-axis. Yield on the y-axis, plotted against time, on the x-axis, is the yield curve.

A client has $12,000 of capital gains and $15,000 of capital losses. How much unused loss is carried forward to the following tax year? A) $12,000 B) $0 C) $15,000 D) $3,000

B) The answer is $0. After netting capital gain and losses, the client has a net capital loss of $3,000. Because $3,000 of net losses can be deducted during any one tax year, there is no carryforward.

On December 27, 2020, Jackie sells ABC stock for a loss at $12 a share that she originally purchased for $28 per share. On January 9, 2021, she repurchases the shares for $15 per share. What is her cost basis on the repurchased shares? A) $16 B) $31 C) $27 D) $40

B) The answer is $31. This is a wash sale because the shares were repurchased within 30 days of their sale. The loss is then disallowed for tax purposes, and the disallowed loss is added to the repurchase price to determine the new cost basis. $28 - $12 = $16 disallowed loss, so $16 + $15 = $31 new basis.

Which of these is NOT correct when defining an accredited investor under Rule 501 of Regulation D? A) A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year B) A natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase, including the equity in a primary residence. C) A charitable organization, corporation, or partnership with assets exceeding $5 million D) A director, executive officer, or general partner of the company selling the securities

B) The answer is a natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase, including the equity in a primary residence. The $1 million net worth requirement excludes the equity in the investor's primary residence.

Equity investments made for the launch, early development, or expansion of a business are known as A) mezzanine financing. B) venture capital. C) leveraged buyouts. D) distressed debt investing.

B) The answer is venture capital. Equity financing associated with the early development of a business is called venture capital. Mezzanine financing is provided for expansion and new products. Leveraged buyout financing is provided to allow management to buy all or part of a business; often used when a public company divests a division that it feels is no longer part of its long-term plans. Distressed debt is distressed debt investing in the debt of companies that are in trouble or failing.

LAC Corporation stock is currently trading for $180 per share. If the company institutes a 3-for-2 stock split, calculate the company's stock price following the stock split. A) $100 B) $120 C) $90 D) $240

B) The answer is $120. The company's new stock price will be $120, calculated as follows: $180 ÷ 3 × 2 = $120.

A client is considering the purchase of a $25 par preferred stock to add income to his portfolio. The stock has an 8% stated annual dividend rate and will never change. The investor's discount rate is 12%. What is the most the investor should pay for this stock? A) The value cannot be determined without an appropriate growth rate. B) $16.67 C) $3.20 D) If the required return exceeds the coupon rate, another valuation method must be used.

B) The answer is $16.67. The zero growth or dividend in perpetuity formula would apply: 8% of $25 par is $2.00, so $2.00 ÷ 0.12 = $16.67

ABC Corporation has a P/E ratio of 5.00 and an expected growth rate in earnings for the next year of 9.5%. Assuming an investor's required rate of return is 12%, calculate the firm's PEG ratio. A) 0.8333 B) 0.5263 C) 0.1667 D) 0.4167

B) The answer is 0.5263. Calculate the firm's PEG ratio as follows: 5.00 ÷ (0.095 × 100) = 0.5263. After calculating this ratio, it then would be compared to ABC Corporation's peers to determine whether a purchase is warranted.

XYZ Corporation issues a 20-year callable bond paying a 6% coupon (semiannual payments) selling at par ($1,000). XYZ Corporation has the option to call the bonds in five years for 105% of par value. Calculate the bond's nominal yield. A) 5.00% B) 6.00% C) 4.86% D) 6.86%

B) The answer is 6.00%. The nominal yield (coupon rate) is 6%. The nominal yield is stated as a percentage of the par value of the bond.

Advantages of unit investment trusts include which of these? I. Stable periodic income II. Diversification III. Active management of the portfolio A) I and III B) I and II C) I, II, and III D) II and III

B) The answer is I and II. Because the portfolio is fixed, the income stream is predictable. The number of different bonds in the portfolio provides investors with a diversified portfolio.'

Identify which of these statements regarding zero-coupon bonds is NOT correct. I. Zero-coupon bonds are purchased at par and defer interest payments until maturity. II. Because there are no coupon payments for zero-coupon bonds, no current income is recognized. III. A zero-coupon bond is issued at a discount and pays semiannual interest payments. IV. Corporations may favor zero-coupon bonds because they have an extended period to use the money that has been raised by the offering. A) II and III B) I, II, and III C) I and IV D) IV only

B) The answer is I, II, and III. Zero-coupon bonds are issued at a discount and pay only the par value at maturity. Even though no periodic interest payments are made, the bondholder must recognize the accrued interest each year for income tax purposes.

Immunization offsets which two risks in a bond portfolio? A) Liquidity risk and market risk B) Interest rate risk and reinvestment rate risk C) Interest rate risk and default risk D) Reinvestment rate risk and call risk

B) The answer is interest rate risk and reinvestment rate risk. Immunization offsets interest rate risk and reinvestment rate risk.

A risk-averse client, living in Iowa, holds a high proportion of his investment portfolio in cash and cash equivalents in U.S. financial institutions in dollars. The advisor should point out to the client that the portfolio is most subject to which of the following risks? A) Exchange rate risk B) Purchasing power risk C) Reinvestment rate risk D) Market risk

B) The answer is purchasing power risk. Although these vehicles may assist in managing liquidity risk, they do have purchasing power risk because they have limited opportunity for capital appreciation. Exchange rate risk does not apply because this is a U.S. client with investments denominated in dollars.

Financial leverage affects A) earnings per share. B) return on equity, earnings per share, and risk to stockholders. C) return on equity. D) risk to stockholders. Explanation

B) The answer is return on equity, earnings per share, and risk to stockholders. ROE and earnings per share are magnified with leverage, and the risk to stockholders increases as a firm's leverage increase

Which one of these statements is CORRECT regarding exchange-traded funds (ETFs)? A) Because of their unique structure, ETFs cannot offer currency ETFs. B) They also have lower turnover of assets than mutual funds and are, as a result, more tax efficient C) An ETF that buys all the securities in an index uses representative sampling. D) In-kind exchanges typically are made in blocks of 10,000 shares.

B) The answer is they also have lower turnover of assets than mutual funds and are, as a result, more tax efficient. In-kind exchanges are done in blocks of 50,000 shares or more. An ETF that buys all the securities in an index is called a replicate index-based ETF. Futures contracts are taxed at year-end on appreciation at rates of 60% for long-term gains and 40% for short-term gains. ETFs can and do offer currency ETFs.

Marcy may add 100 shares of LKM corporation stock to her investment portfolio. The stock recently paid a dividend of $1.85 per share. The dividend is expected to grow at a constant rate of 2.25% per year. Her required rate of return is 7%. The stock is currently trading for $35.75 per share. Determine whether she should purchase the stock and why. A) No, the stock is overvalued based on an intrinsic value of $32.87. B) Yes, the stock is undervalued based on an intrinsic value of $39.82. C) No, the stock is overvalued based on an intrinsic value of $38.95. D) Yes, the stock is undervalued based on an intrinsic value of $33.46.

B) The answer is yes, the stock is undervalued based on an intrinsic value of $39.82. Using the constant growth dividend discount model, the intrinsic value of the stock is $39.82. V = ($1.85 × 1.0225) ÷ (0.07 - 0.0225) V = 1.8916 ÷ 0.04750 V = 39.8232, or $39.82 Based on this value, the stock is undervalued relative to its price in the secondary market.

What is the holding period requirement for a stock investor for the dividend to qualify for the preferential tax rates? A) The stock must be held for more than 30 days during the 61-day period beginning 10 days before the ex-dividend date. B) The stock must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. C) The taxpayer must make an election to reinvest any cash dividends. D) The stock must have paid dividends for two consecutive quarters.

B) The answer is the stock must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date

Which of the following regarding mutual fund performance is CORRECT? Past performance is a reliable predictor of future performance. Past performance offers some indication as to the competency of fund managers. A) I only B) Both I and II C) II only D) Neither I nor II

C ) The answer is II only. Numerous studies have confirmed that past performance is not a reliable predictor of future performance. Statement II is correct.

John Hawkins began purchasing VNB stock two years ago. He has followed a dollar cost averaging approach by investing $1,500 every six months for the last two years. The following data depicts John's purchases: Date Price per stock # shares puchased 9/30/X7 $25.00 60 9/31/X8 $22.06 68 9/30/X8 $20.83 72 3/31/X9 $26.79 56 What is John's average cost per share of VNB? A) $22.56 B) $24.39 C) $23.44 D) $19.53

C) The answer is $23.44. John purchased 256 shares (60 + 68 + 72 + 56) and invested $6,000 over this period. Divide the total dollars invested by the number of shares purchased to obtain the correct answer.

An investor buys 100 shares of stock at $75 per share, with a 60% initial margin requirement and 40% maintenance margin requirement. Assuming the stock quickly falls to $40 per share, calculate the additional capital that the investor must provide to cover a margin call. A) $400 B) $800 C) $600 D) $200

C) The answer is $600. The current market value of the 100 shares is $4,000. The maintenance margin requires an equity of $4,000 × 0.40, or $1,600. The investor's equity in the account ($1,000) is the market value ($4,000) minus the loan amount ($3,000). A margin call for $600 ($1,600 - $1,000) will be ordered.

Which of these describe similarities between preferred stock and long-term bonds? I. Both dividends and interest are tax-deductible expenses for the issuing corporations. II. Both generally pay a fixed periodic payment. III. Both preferred dividends and interest must be paid before common stock cash dividends are paid. A) I and II B) I and III C) II and III D) III only

C) The answer is II and III. Both preferred stock and long-term bonds generally pay a fixed periodic payment, and both preferred dividends and interest must be paid before common stock cash dividends are paid.

All of these statements correctly describe yield curves except A) an inverted yield curve occurs when the Federal Reserve has tightened credit in an overheating economy. B) a flat yield curve occurs when the economy is peaking and, therefore, no change in future interest rates is expected. C) a positive yield curve can signal an upcoming economic recession. D) a normal yield curve occurs during periods of economic expansion and generally predicts that market interest rates will rise in the future.

C) The answer is a positive yield curve can signal an upcoming economic recession. A positive (or normal) yield curve occurs during periods of economic expansion and generally predicts that market interest rates will rise

Choose the CORRECT statement regarding yield curves. A) A normal yield curve occurs during periods of economic expansion and generally predicts that market interest rates will rise in the future. B) A flat yield curve occurs when the economy is peaking and, therefore, no near-term change in future interest rates is expected. C) All of these statements are correct. D) An inverted yield curve occurs when the Federal Reserve has tightened credit in an inflationary economy.

C) The answer is all of these statements are correct. The yield curve is a graph of interest rate yields for bonds of the same quality, ranging in maturity from 31 days to 30 years. An inverted yield curve predicts interest rates will fall and sometimes can signal an upcoming recession.

Brett bought 500 shares of WCA stock at $27 per share on margin (50% initial margin percentage) with an annual margin interest rate of 5.25%. After one year, he sold the shares for $44 per share. The stock did not pay dividends during his holding period. Calculate Brett's holding period rate of return using margin. A) 57.42% B) 125.93% C) 120.68% D) 60.00%

C) 500x44=22,000 500x27=13,500 50%x13,500=6,750 $6,750 × 0.0525=354.38 The answer is 120.68%. Brett's holding period rate of return using margin is 120.68% [($22,000 - $13,500 - $354.38) ÷ $6,750]. With a margin account, Brett's initial investment will be 50% of the total purchase price of $13,500. Margin interest for the year is $354.38 ($6,750 × 0.0525).

John made these investments over a four month period into ABC Growth and Income fund. What is the average cost per share? January $600 $2030 February $600 $2425 March $600 $3020 April $600 $4015 Total $2,400 $11490

C) The answer is $26.67. The average cost per share equals $2,400 (the total investment) ÷ 90 (the total number of shares purchased), or $26.67 per share, whereas the average price per share is $28.50 ($114 ÷ 4).

Henry owns a 10-year bond with a coupon rate of 4.85% (paid semiannually). Assuming the comparable yield for this quality bond is currently 5.5%, calculate the intrinsic value of his bond. A) $929.67 B) $930.51 C) $950.51 D) $847.03

C) The answer is $950.51. The intrinsic value of his bond is $950.51, calculated as follows: N = 20 (10 × 2); I/YR = 2.75 (5.5% ÷ 2); PMT = 24.25 (4.85% × 1,000 ÷ 2); FV = 1,000; solve for PV = 950.51, or $950.51.

Identify which of these statements regarding unit investment trusts (UITs) is CORRECT. I. Units are sold at net asset value plus a commission for the broker executing the transaction. II. Like stocks, UITs are traded on the major exchanges. III. During the term of the trust, unit holders are taxed in the same manner as owners of variable annuities. IV. Upon maturity, the securities are generally liquidated and the proceeds distributed to the investor or trust beneficiaries. A) III and IV B) I and II C) I and IV D) I, III, and IV

C) The answer is I and IV. Statements II and III are incorrect. UITs are sold in the secondary market, but not on the major exchanges. During the term of the trust, unit holders are taxed in the same manner as shareholders of mutual funds with capital gains earned by the trust passed through and taxed to the unit holders. Dividends are taxed as ordinary income in the year earned.

Which of these is a correct justification for use of an investment in a client's portfolio? I. Blue chip common stocks because they provide a hedge against inflation II. FNMA (Federal National Mortgage Association) securities because they are backed by the full faith and credit of the U.S. government III. Aggressive growth stocks because they perform better during economic contractions A) I and II B) II and III C) I only D) I and III

C) The answer is I only. Stocks generally are considered an inflation hedge; in periods of hyper-inflation, this may not be true, but the question does not ask about periods of hyper-inflation. FNMA securities are not backed by the full faith of the government (the government did step in as a result of the credit crisis of 2008, but there has not been a commitment to permanently back FNMAs in the same way that GNMAs (Government National Mortgage Association) have historically been backed).

Identify which of these methods may be used to trade exchange-traded funds (ETFs). I. Investors can buy or redeem shares from the fund family in lots of 1,000. II. Investors can trade ETFs in the secondary market by using a broker. III. ETFs can be purchased on margin. IV. ETFs may be sold short. A) I and II B) I and III C) II, III, and IV D) II only

C) The answer is II, III, and IV. Some ETFs may be redeemed through the fund family but usually in lots of 50,000 shares or more.

Identify the entity that issues guaranteed investment contracts (GICs). A) Open-end investment companies B) Commercial banks C) Insurance companies D) Credit unions

C) The answer is insurance companies. GICs are issued by insurance companies. They are called guaranteed investment contracts because their rate of return is guaranteed by the insurance company for a fixed period.

All of these statements correctly explain warrants except A) a warrant differs from a traditional option security in terms of maturity. B) a warrant typically has a maturity date of several years. C) issuing a bond with an attached warrant may permit the corporation to increase the coupon rate to entice investors to make the investment. D) a warrant is a long-term call option issued as a sweetener with a new bond issue.

C) The answer is issuing a bond with an attached warrant may permit the corporation to increase the coupon rate to entice investors to make the investment. Warrants give the bond purchaser a sweetener, which makes the issue more attractive. Issuing a bond with a warrant will typically allow the corporation to lower the coupon rate necessary to entice the investor to make the investment.

Which one of these is an advantage of investing in convertible bonds? A) The interest income available is higher than the interest income on the same firm's nonconvertible bonds. B) There is minimal business and financial risk. C) Its value as a bond, assuming it did not have the convertible feature, provides downside protection. D) The potential for capital gains is greater than the potential for capital gains on the underlying stock.

C) The answer is its value as a bond, assuming it did not have the convertible feature, provides downside protection. If the bond did not have the convertible feature, the bond would still trade at its straight value, therefore, offering an investor some downside protection. In other words, the difference between the current market value and the investment value (downside risk).

Choose the form of the efficient market hypothesis that supports technical analysis. A) Strong B) Weak C) None of these D) Semistrong

C) The answer is none of these. The efficient market hypothesis is in direct contradiction to technical analysis because the efficient market hypothesis is founded on the notion that all historical price and volume data, which is used by technical analysts, is already accounted for in the current stock price.

Which of the following are correctly defined bond classifications? I. Foreign bonds II. High-dividend-paying common stocks III. Commodities A) I and II B) I, II, and III C) I only D) II and III

C) The answer is I only. Multisector bond funds typically purchase three types of bonds: U.S. government bonds, high-yield corporate bonds, and foreign bonds.

What is one disadvantage of investing in convertible bonds? A) The likelihood of a call increases as the price of the underlying stock decreases. B) There is substantial business and market risk. C) The yield to maturity tends to be lower than that of similar nonconvertible bonds. D) The dividend yield on the underlying stock is usually greater than the interest income on the bonds.

C) The answer is the yield to maturity tends to be lower than that of similar nonconvertible bonds. A disadvantage of investing in a convertible bond is that its yield to maturity tends to be lower than a similar nonconvertible bond due to the conversion feature.

Portfolio immunization is designed to protect bondholders from which of the following risks? I. Interest rate risk II. Reinvestment rate risk III. Default risk A) I, II, and III B) I and III C) I and II D) II and III

C) The answer is I and II. Portfolio immunization protects bondholders from fluctuations in interest rates and from reinvestment rate risk but does not protect against default risk.

Your client, Ralph, has $15,000 of capital gains and $20,000 of capital losses in the current tax year. How much unused loss may Ralph carry forward to the following tax year? A) $3,000 B) $0 C) $12,000 D) $2,000

D) The answer is $2,000. After netting capital gain and losses, the client has a net capital loss of $5,000. Because $3,000 of net losses can be deducted during any one tax year, the client will carry over the remaining $2,000 capital loss.

Identify the CORRECT statements regarding warrants. I. Warrants give the owner the right to purchase a specified number of shares for a specified period at a specified price. II. Warrants are typically written with a maturity date of nine months. III. Warrants must include standardized terms required by the Options Clearing Corporation. IV. Warrants are issued by a corporation rather than written by an individual. A) I and II B) I, II, III, and IV C) III and IV D) I and IV

D) The answer is I and IV. Warrants typically have a maturity date of several years, not months, and are customized to fit the needs of the issuing corporation.

Identify which of the following statements regarding money market deposit accounts (MMDAs) are NOT correct. They are FDIC insured. They offer unlimited check writing privileges. They are primarily offered by open-end investment companies. They require a minimum balance. A) I and II B) I and IV C) III and IV D) II and III

D) The answer is II and III. MMDAs provide limited check writing privileges and are offered by banks and savings and loans. MMDAs require a minimum balance. Unlike money market mutual funds, MMDAs are FDIC insured.

If a bond is immunized against interest rate risk, a dollar decline in the bond's price, resulting from rising interest rates, will be approximately offset by a dollar increase in the A) bond's call price. B) bond issuer's common stock. C) price of comparable bonds in the market. D) income from coupons reinvested over the investment horizon.

D) The answer is income from coupons reinvested over the investment horizon. By investing in bonds that have a duration equal to the investor's investment time horizon, any bond price/value changes caused by interest rate fluctuations will be approximately offset by changes in the interest earned on the reinvested coupons.

An investor would consider converting a convertible bond into common stock if the bond's A) yield to call is the same as a comparable municipal bond. B) yield to maturity is less than its conversion premium. C) duration exceeds 10 years. D) market price is less than the conversion value.

D) The answer is market price is less than the conversion value. An investor would consider converting a convertible bond into common stock if the bond's conversion value exceeds its market price.

Which of the following statements regarding cash distributions of ordinary and capital gains dividend distributions to mutual fund investors is CORRECT? A) They decrease the taxable gain or increase the loss on sale of the shares after taxes are paid B) They are added to the tax basis of the shares once taxes on the distributions are paid C) They decrease the cost basis of the shares whether or not taxes are paid D) They are fully taxable to the investor

D) The answer is they are fully taxable to the investor. Ordinary and capital gain dividend distributions are taxable. If these distributions are reinvested, the individual receives an increased tax basis. If the distributions are made in cash, there is no increase in the tax basis of the underlying securities.

Identify the incorrect statement regarding passbook savings accounts. A) Accounts are established with a commercial bank or savings and loan B) Depositors are permitted to withdraw their savings at any time without penalty C) They offer a relatively low interest rate D) They require a minimum balance of $500

D) The answer is they require a minimum balance of $500. Passbook savings accounts do not require a minimum balance.

Which of the following statements regarding certificates of deposit (CDs) is CORRECT? I. CDs are deposits made with a bank or savings and loan for a specified period, commonly one month to five years. II. Negotiable CDs are deposits of $100,000 or more placed with commercial banks at a specified interest rate for a term of up to one year. A) I only B) Neither I nor II C) II only D) Both I and II

D) The answer is both I and II. Both of these statements accurately describe CDs.

JEM Technologies, Inc. has assets of $500 million and $50 million in liabilities. For the past year the company earned $125 million, and paid out $50 million in dividends. Calculate the company's return on equity (ROE). A) 52% B) 20% C) 38% D) 28%

D) The answer is 28%. $500,000,000 - $50,000,000 = $450,000,000 in equity. $125,000,000 profit ÷ $450,000,000 equity = 0.2778, or 28% ROE.

Which of these statements correctly describes differences between preferred stock and long-term bonds? I. Interest paid by firms is a tax-deductible expense; dividends paid on preferred stock are not tax deductible. II. Bonds usually have a finite maturity; preferred stock is usually perpetual. III. Bonds pay a fixed amount of interest; preferred stock pays a fluctuating dividend based on earnings. IV. Interest on bonds and preferred stock dividends are legal obligations of a firm that must be paid. A) II and III B) I, II and IV C) I and III D) I and II

D) The answer is I and II. Bonds pay a fixed periodic interest that is tax deductible by the firm; preferred stock dividends are fixed, but they are not tax deductible. Only the interest on bonds is a legal obligation that must be paid; dividends on preferred stock can be deferred (if there is a cumulative feature) or skipped.

Which of these statements are CORRECT of mutual fund dividend distributions? I. The fund pays dividends from net investment income. II. A single taxpayer may exclude $100 worth of dividend income from taxes annually. III. An investor is liable for taxes on distributions whether a dividend is a cash distribution or is reinvested in the fund. IV. An investor is not liable for taxes if he or she automatically reinvests distributions. A) I, II and III B) I and II C) II and IV D) I and III

D) The answer is I and III. Mutual funds pay dividends from net investment income, and shareholders are liable for taxes on all distributions, whether reinvested or taken in cash

Equity income funds may hold which of these types of securities? I. Income-producing common stocks II. Convertible bonds III. Convertible preferred stocks A) II and III B) I and III C) I and II D) I, II, and III

D) The answer is I, II, and III. All three types of securities may be in an equity income fund.

Which of these describe differences between preferred stock and long-term bonds? I. Preferred stock usually has a shorter maturity than long-term bonds. II. Corporations receive more favorable tax treatment when investing in preferred stock than when investing in long-term bonds. III. Preferred stock dividends are a stronger legal obligation to the firm than interest payments on long-term bonds. IV. The market price of preferred stock tends to fluctuate more than the market price of long-term bonds. A) I and III B) II and III C) I and IV D) II and IV

D) The answer is II and IV. Corporations receive preferential tax treatment when investing in preferred stock. The market price of preferred stocks is more volatile than long-term bonds when interest rates fluctuate.

Which of these statements regarding unit investment trusts (UITs) are CORRECT? A bond UIT has a yield to maturity. UIT sponsors must make a secondary market in the UITs they create. UITs do not have management fees. A bond UIT does not replace bonds that are called. A) II and III B) I and II C) I and IV D) III and IV

D) The answer is III and IV. A bond UIT has an estimated return but cannot offer a yield to maturity because various bonds in the UIT have different maturities and some of the bond issues might be called before maturity. UIT sponsors are not required to make a secondary market in the UITs they create. UITs are not managed and, therefore, do not have management fees. If a bond issue is in a UIT and subsequently called, that issue is not replaced.

Dividend reinvestment plans offer which of these advantages? A) An increase in the stock's par value B) A means for the company to repurchase some of its shares C) A means for the company to retain more earnings D) A convenient means to accumulate shares

D) The answer is a convenient means to accumulate shares. The advantage to an investor is the saving of commissions by using a dividend reinvestment plan (DRIP). The advantage is to an investor, not to the company. The use of a DRIP has no effect on the stock's par value. A dividend reinvestment program has no effect on the company's ability to retain more earnings.

When a company issues an option to buy its stock at a specified price within a specified time period, it is known as a A) short put option. B) long call option. C) rights offering. D) warrant.

D) The answer is a warrant. A warrant can only be created by corporations and is an option to buy its stock at a specified price within a specified time period

To be on a corporation's books as holder-of-record (and thus have a right to the next dividend payment), the investor must purchase stock A) on or after the ex-dividend date. B) on the declaration date. C) before the payment date. D) before the ex-dividend date.

D) The answer is before the ex-dividend date. Ex-dividend means "without dividend." Therefore, all purchases made on or after the ex-dividend date are not entitled to the next dividend to be paid. The ex-dividend date is one trading day before the record date.

Rhett recently purchased a bond with attached warrants that afford him the opportunity to participate in the appreciation of the underlying stock. Which of the following statements correctly describes warrants? Warrants are customized to fit the needs of the issuing corporation. Warrants typically have a maturity date of several years. A) Neither I nor II B) I only C) II only D) Both I and II

D) The answer is both I and II. If corporations issue warrants, they usually do so in conjunction with new bond issues or preferred stock issues. These warrants give the bond or stock purchaser a sweetener or equity kicker, making the issue more attractive to buyers.

Identify which of these statements regarding rights and warrants is CORRECT. I. Rights provide current common stockholders with the ability to retain their ownership percentage when new shares of stock are issued. II. Warrants are typically attached to new bond issues to attract investors. A) I only B) II only C) Neither I nor II D) Both I and II

D) The answer is both I and II. Rights provide current stockholders with the ability to maintain their percentage ownership interest in the corporation when new stock is issued. Warrants give the bond purchasers a sweetener, making the issue more attractive to buyers.

The interest rate theory that focuses on the demand for bonds due to investors having different maturity preferences is known as A) rate preference theory. B) preferred habitat theory. C) unbiased expectations theory. D) market segmentation theory.

D) The answer is market segmentation theory. The market segmentation theory relies on the laws of supply and demand for various maturities of borrowing and lending. These different maturities of borrowing and lending make up different markets.

Which one of these is a general characteristic of hedge funds? A) Little or no use of leverage B) High marketability C) Full transparency and disclosure D) May sell short a variety of securities beyond the standard stocks and bonds.

D) The answer is may sell short a variety of securities beyond the standard stocks and bonds. Hedge funds charge both a management fee and a carried interest fee. Hedge funds are characterized by a lack of marketability, significant use of leverage, and limited transparency.

FER stock has a current dividend of $0.75 per share that has been growing at a rate of 1.25% per year. If an investor's required rate of return is 15% and the stock is currently selling for $6.34 per share, determine whether the investor should purchase the stock. A) Yes, the stock is undervalued based on the constant growth dividend discount model. B) Yes, the stock is undervalued using the perpetuity dividend discount model. C) No, the stock is not a wise purchase based on the risk-return trade-off. D) No, the stock is overvalued based on the constant growth dividend discount model.

D) The answer is no, the stock is overvalued based on the constant growth dividend discount model. Based on the constant growth dividend discount model, the intrinsic value of the stock is $5.52, calculated as follows: [0.75 × (1 + 0.0125)] ÷ (0.15 - 0.0125) = 0.7594 ÷ 0.1375 = 5.5227, or $5.52. Because FER is currently trading at a price of $6.34 per share, it is overvalued, and the investor should not buy the stock.

All of the following are features of limited partnerships except A) the general partner determines when distributions are made to the limited partners. B) the general partner controls the business activities of the partnership. C) the limited partners have limited liability. D) the limited partners may participate in the management of the partnership.

D) The answer is the limited partners may participate in the management of the partnership. The disadvantages of limited partnerships include: (1) they are generally riskier than bonds or exchange-traded equities; (2) they are generally illiquid; (3) limited partners cannot participate in the management; and (4) the sale of partnership interest may be restricted. In addition, the general partner has unlimited liability.

Which of the following statements regarding wash sales is CORRECT? I. A wash sale occurs if the taxpayer sells or exchanges stock or securities for a loss and, within 30 days before or after the date of the sale or exchange, acquires similar securities. II. The wash sale rules are easily avoided in the case of fixed-income securities by substituting a bond with the same or similar characteristics as long as it is issued by a different company. A) I only B) II only C) Neither I nor II D) Both I and II

D) The answer is both I and II. Both of these statements describe characteristics of wash sales.

Which of the following statements regarding duration is CORRECT? I. Risk-averse investors should consider bonds with low durations. II. Aggressive investors should consider bonds with low durations when they anticipate that interest rates will rise. A) II only B) Neither I nor II C) I only D) Both I and II

D) The answer is both I and II. Risk-averse investors should consider bonds with low durations. Aggressive investors should consider bonds with high durations when they anticipate that interest rates will decline, and they should consider bonds with low durations when they anticipate that interest rates will rise.

George Jones owns a convertible bond that has a conversion price of $50 per share and an annual coupon rate of 6.0%. Interest is paid semiannually. The current market price of the stock is $51 per share. The investment value of the bond is $890, and the bond currently sells for a market price of $1,080. What is the downside risk of this bond? A) $210 B) $130 C) $190 D) $155

The answer is $190. The downside risk of a convertible bond is the dollar or percentage decline from the current market price of the convertible bond to the investment value of the bond: $1,080 - $890 = $190.

Nellie has accumulated $500,000 in a money market deposit account at ABC Bank and Trust. She is worried about the number of bank failures in the recent years and transfers $250,000 into a money market mutual fund paying a slightly higher return offered by her friend's investment firm. Determine the amount she has insured by the Federal Deposit Insurance Corporation (FDIC). A) $0 B) $250,000 C) $200,000 D) $500,000

The answer is $250,000. Nellie's FDIC insured funds remain at $250,000. The money market deposit account is insured up to $250,000, but the money market mutual fund is not FDIC insured.

Cosmo has a margin account with a balance of $50,000 with a national broker-dealer. The initial margin requirement on this account is 50%. Cosmo is interested in purchasing shares of Aardvark Inc., which is currently selling at $40 per share. Assuming the maintenance margin is 40%, what would the price of Aardvark be before Cosmo would receive a margin call? $16.00 B) $24.00 C) $37.50 D) $33.33

The answer is $33.33. Margin call = (50% × $40) ÷ (1 - 0.40) = $33.33.

Your client has just opened a margin account with your brokerage firm and purchased 500 shares of stock for $60 per share. The firm has a 55% initial margin and 35% maintenance margin policy. Calculate the stock price at which your client will receive a margin call. A) $27.00 B) $31.43 C) $50.76 D) $41.54

The answer is $41.54. The client will receive a margin call when the price of the stock drops below $41.54, calculated as follows: Margin call = ($60 × 0.45) ÷ (1 - 0.35) Margin call = $27.00 ÷ 0.65 = $41.5385, or $41.54

On December 18, 20X9, John sells some stock for a loss at $15 a share that he originally purchased for $40 per share. On January 9, 20X0, John repurchases the shares for $22 per share. What is his cost basis on the repurchased shares? A) $15 B) $40 C) $22 D) $47

The answer is $47. This is a wash sale because the shares were repurchased within 30 days of their sale. The loss is then disallowed for tax purposes, and the disallowed loss is added to the repurchase price to determine the new cost basis. $40 - $15 = $25 disallowed loss, so $25 + 22 = $47 new basis.

Amanda buys 75 shares of BR Enterprise stock for $67 per share on margin. The initial margin is 55%, and the maintenance margin is 40%. Calculate the market price at which Amanda will receive a margin call. A) $33.00 B) $50.25 C) $21.54 D) $56.95

The answer is $50.25. Margin call = debit balance ÷ (1 − maintenance margin): ($67 × (1 − 0.55)) ÷ (1 − 0.40) = $30.15 ÷ 0.60 = $50.25

Patrice Patterson began investing last year in the Apex Fund. She is investing $500 every quarter and wants to know what her average cost per share (basis) has been. These are the prices of the Apex fund at the end of each quarter when she made her purchases: $35.50, $38.90, $65.70, $72.50, and $89.00. What is her average cost per share? A) $41.44 B) $60.32 C) $63.88 D) $53.12

The answer is $53.12. It is calculated as follows: $amt share price #shares purchased $500 $35.50 14.0845 $500 $38.90 12.8535 $500 $65.70 7.6104 $500 $72.50 6.8966 $500 $89.00 5.6180 TOTAL 47.063 shares $2,500 ÷ 47.063 shares = $53.12

Alice Vinton began purchasing a mutual fund several years ago. She has followed a dollar-cost averaging approach by investing $2,400 each year for five years. The following data depict Alice's purchases: Year Investment Share Price 1 $2,400 $65 2 $2,400 $70 3 $2,400 $75 4 $2,400 $66 5 $2,400 $77 What is Alice's average cost per share? A) $70.60 B) $70.28 C) $96.58 D) $36.92

The answer is $70.28. Year Investment Share Price Shares 1 $2,400 $65 = 36.92 2 $2,400 $70 = 34.92 3 $2,400 $75 = 32 4 $2,400 $66 = 36.36 5 $2,400 $77 = 31.17 $12,000 = 170.74 12,000: 170.74= $70.80

Assume a 3-year, $1,000 par value corporate bond is currently trading for $959.53. The bond has a coupon rate of 4% (paid once per year) and a yield to maturity of 5.50%. Calculate the duration for this bond. A) 3.4680 years B) 3.5871 years C) 1.4418 years D) 2.8835 years

The answer is 2.8835 years. The duration for this bond is 2.8835 years, calculated as follows: To solve for the PV of a given CF (example Year 1): FV = 40, N = 1, PMT = 0, 5.5 = I/YR, solve for PV. Divide the sum in the last column (2,766.83) by the total PV/market price of the bond (959.53) to derive the duration of 2.8835 years.

Identify which of these statements regarding revenue bonds is NOT correct. They are secured by a specific pledge or property. They are a type of full faith and credit bond. Their interest is tax-exempt at the federal level. They are analyzed by the project's ability to generate earnings. A) II and IV B) III and IV C) I and III D) I and II

The answer is I and II. Revenue bonds are not secured by property and are not a type of general obligation bond. They are only secured by user fees.

Sam holds a considerable amount of both Series EE and Series HH savings bonds. He is nearing retirement and likes the fact that his Series HH bonds pay interest semiannually and would like to exchange most of his Series EE bonds for Series HH bonds to increase his cash flow. Choose which of these statements regarding such an exchange is CORRECT. A) Only Sam's Series EE bonds issued prior to 2004 may be exchanged. B) Sam may exchange the bonds but will be subject to a three-month interest penalty. C) Sam may exchange the bonds but must recognize the Series EE accrued interest at the time of exchange. D) Series EE bonds may no longer be exchanged for Series HH bonds.

The answer is Series EE bonds may no longer be exchanged for Series HH bonds. Until September 2004 (when Series HH bonds were no longer issued by the Treasury), the exchange of EE bonds for HH bonds was a popular way of continuing the income tax deferral on the accrued interest portion of the EE bonds. Such changes are no longer possible.

Select which of these is NOT a primary risk associated with a coupon-paying bond. A) Purchasing power risk B) Interest rate risk C) Debenture risk D) Default risk

The answer is debenture risk. A coupon-paying bond is also subject to reinvestment rate risk.

When considering the purchase of a limited partnership interest, an investor should be most concerned with A) potential tax shelter. B) economic viability. C) loss pass-through. D) short-term trading opportunities.

The answer is economic viability. Economic viability is the number one reason for the purchase of an interest in a limited partnership. Tax sheltering and loss pass-through are also considerations but should not be the primary motive to invest. Short-term trading opportunities do not exist. The investor should expect to hold the interest until the partnership is dissolved or liquidated.

Income or dividends produced by which of the following securities is exempt from federal income tax? A) U.S. Treasuries B) Corporate debt C) Municipal bonds D) Common stock

The answer is municipal bonds. Income produced by municipal bonds is exempt from federal income tax.