Investment Vehicle Characteristics & Trading Markets
Which of the following would you NOT expect to see issued at a discount? A) Bank jumbo CD B) Treasury Bill C) Zero-coupon bond D) Commercial paper
Your answer, Zero-coupon bond, was incorrect. The correct answer was: Bank jumbo CD Of these securities, only the bank jumbo (negotiable) CDs are always interest bearing and issued at par or face value.
ABC's stock has paid a regular dividend every quarter for the last several years. If the price of the stock has remained the same over the past year, but the dividend amount per share has increased, it may be concluded that ABC's: A) current yield per share has been unaffected. B) yield to maturity has gone up. C) current yield per share has decreased. D) current yield per share has increased.
Your answer, current yield per share has decreased., was incorrect. The correct answer was: current yield per share has increased. The current yield would have increased because current yield is the income (dividend) divided by price. A higher dividend divided by the same price results in a higher yield. Stocks do not have a yield to maturity.
During inflationary periods, what would one expect to happen to the market value of non-convertible preferred stock? A) Its market value remains the same B) Its market value increases C) Its market value decreases D) Interest rates and the price of bonds have no impact on the market value of stock
Your answer, Interest rates and the price of bonds have no impact on the market value of stock, was incorrect. The correct answer was: Its market value decreases Inflation invariably leads to higher interest rates. Preferred stocks are interest-rate sensitive, as are other fixed- income investment securities, such as bonds. Thus, if interest rates increase, one would expect the market price to decline.
Bondholders are paid interest: A) after the preferred stockholders receive their dividends, but before the common stockholders are paid. B) at any time determined by the board of directors. C) after the common stockholders are paid, but before the preferred stockholders are paid. D) before both the preferred and the common stockholders are paid.
Your answer, after the common stockholders are paid, but before the preferred stockholders are paid., was incorrect. The correct answer was: before both the preferred and the common stockholders are paid. Dividends are paid to both preferred and common stockholders only after interest has been paid on all of the corporation's outstanding debts and debt securities.
Which of the following orders would be used to protect a short sale profit? A) A buy limit. B) A buy stop. C) A sell short. D) A sell stop.
Your answer, A buy stop., was correct!. For a short sale to earn a profit, the current market value must be lower than the sale price. An investor must buy the stock at a lower price to realize a profit. To protect denotes buying if the market starts to rise. Therefore, a buy stop would be entered above the current market value to protect the profit and trigger a purchase in the event the market starts to rise.
Which of the following debt instruments is unsecured? A) Junior lien mortgage bonds. B) Equipment trust certificates. C) Aaa/AAA rated debentures. D) Collateral trust certificates.
Your answer, Equipment trust certificates., was incorrect. The correct answer was: Aaa/AAA rated debentures. Corporate debentures are unsecured bonds backed by the credit of the issuing corporation; they are not secured by underlying collateral. Mortgage bonds are secured with real estate serving as collateral. Collateral trust bonds are secured by securities that a corporation owns in other companies or bonds. Equipment trust certificates are secured by transportation equipment owned by the corporation.
Which two of the following investments would offer your clients the best chance of minimizing inflation risk? Common stock. Cumulative preferred stock. Money market mutual funds. TIPS. A) III and IV. B) I and II. C) I and IV. D) II and III.
Your answer, I and II., was incorrect. The correct answer was: I and IV. Historically, common stock has been the best hedge against inflation. TIPS (Treasury Inflation Protection Securities) are Government guaranteed debt issues that automatically adjust the principal based upon the inflation rate.
Which of the following statements about bid and asked prices are TRUE? The bid price is the price a dealer is willing to pay to buy a security. The asked price is the price a dealer is willing to accept to sell a security. The bid price for a security is higher than the asked price for the security. A) I, II and III. B) I and III. C) I and II. D) II and III.
Your answer, II and III., was incorrect. The correct answer was: I and II. The bid price is the price at which a dealer will buy a security, and the asked price is the price at which a dealer will sell. A dealer will always bid a lower price to buy a stock than to sell it.
If ABC common stock closed at 20 yesterday and ABC is currently paying a quarterly dividend of $.40, what is the stock's current yield? A) Between 1% and 5%. B) More than 10%. C) Between 5% and 10%. D) Less than 1%.
Your answer, More than 10%., was incorrect. The correct answer was: Between 5% and 10%. The annual dividend is $1.60 (4 × $0.40). The current yield is the dividend of $1.60, divided by the current price ($20). Thus, the yield of 8% is more than 5% (1/20) and less than 10% (2/20).
Which of the following is guaranteed by a variable life policy? A) Minimum death benefit. B) Cash value. C) Policy loans after the policy has been in effect for at least 24 months. D) Minimum separate account performance.
Your answer, Policy loans after the policy has been in effect for at least 24 months., was incorrect. The correct answer was: Minimum death benefit. A variable life policy has a minimum guaranteed death benefit, but there is no minimum guaranteed cash value. There is no performance guarantee on separate accounts and policy loans are required after the policy has been in effect for at least 3 years (36 months).
An investor owns 500 shares of RIF, a well-established company with a long history of paying liberal dividends. If this individual wishes to increase his income without any cash outlay and without increasing his risk, it would be most appropriate for him to: A) write five calls on the RIF. B) buy five calls on the RIF. C) write five puts on the RIF. D) exercise his preemptive rights.
Your answer, buy five calls on the RIF., was incorrect. The correct answer was: write five calls on the RIF. This strategy is known as covered call writing, and it enables the investor to increase income without spending any money. The sale of the calls (each call represents 100 shares) generates immediate income and reduces the risk should the stock drop in price.
An investor purchased $10,000 of a 15 year AA rated corporate bond with a 6% coupon in the secondary market 3 years ago at par. The bond matured last week and the investor has just received a check for $10,300. Which of the following is a true statement? A) $300 is taxed as ordinary income. B) $300 is taxed as long-term capital gain. C) The investors cost basis has been reduced to $9,700. D) $300 is considered a return of principal.
Your answer, $300 is taxed as long-term capital gain., was incorrect. The correct answer was: $300 is taxed as ordinary income. At maturity, the bondholder receives both the principal ($10,000) and the final interest check (6% of $10,000 = $600 per year/paid semi-annually) of $300. This interest, like all corporate bond interest, is ordinary income.
Which of the following are characteristics of a REIT? It is traded on an exchange or over the counter. It is professionally managed. It passes through both gains and losses to investors. It is a type of limited partnership. A) III and IV B) I and II C) II and III D) I and IV
Your answer, II and III, was incorrect. The correct answer was: I and II A REIT shares some features with a limited partnership, but it is a different type of business entity. REITs are traded on exchanges and OTC and are professionally managed. Both REITs and limited partnerships provide pass-through of gains to investors, but REITs do not provide pass-through of losses. Please note: We recognize that, over the past few years, there has been an enormous growth in non-traded REITs (exactly what that says - they don't trade; there is no liquidity). However, we have received no feedback about that issue and, unless something in the question refers to a non-traded REIT, assume that all REITs are publicly traded either on the stock exchanges or OTC.
Marianne has a fixed premium variable life policy in which the separate account has been performing extremely well, and the face value has been increasing as a result of the investment performance. However, recently the separate account performance has been negative. If this continues, the face value could decrease: A) to 50% of the original face value. B) to the original face value. C) to 25% of the original face value. D) to 0.
Your answer, to 50% of the original face value., was incorrect. The correct answer was: to the original face value. The face value in an insurance policy is the death benefit. In a variable life policy, the face value will fluctuate with the separate account's performance, but it will never decrease below the original minimum face value.
Hedge funds are issued by A) investment companies B) Administrators C) limited partnerships D) portfolio advisers
Your answer, Administrators, was incorrect. The correct answer was: limited partnerships Almost all hedge funds are issued as limited partnerships with the investment adviser (portfolio manager) having an investment in the fund.
The term, "derivative", would not apply to which of the following? A) Futures. B) LEAPS. C) Forwards. D) REITs.
Your answer, Futures., was incorrect. The correct answer was: REITs. REITs are not based on the value of something other than their own assets. LEAPS are options and futures and forwards are contracts whose value is based on some underlying asset.
Which of the following best describes that which secures a debenture issued by an industrial corporation? A) The assets of a company other than the issuing company. B) The securities of the issuing company. C) The assets of the issuing company. D) The mortgages and real estate of the issuing company.
Your answer, The securities of the issuing company., was incorrect. The correct answer was: The assets of the issuing company. Debentures are general obligations of the issuing company. They are actually backed by the assets of the company. Prior claims to those specific assets by secured debt issues take precedence over the debentures.
Which of the following strategies would be considered most risky in a bull market? A) Writing naked calls. B) Writing naked puts. C) Buying calls. D) Buying a put.
Your answer, Writing naked calls., was correct!. Writing naked calls provides unlimited liability and the most risk. Buying a call would be an attractive strategy in a bull market with risk limited to calls paid. Writing naked puts risks only the difference between the strike price and zero, less any premium received. Buying a put is a bearish strategy with risk limited to the amount paid for the put.
Which of the following strategies would most effectively protect an investor with a short stock position? A) Sell a call. B) Sell a put. C) Buy a put. D) Buy a call.
Your answer, Buy a put., was incorrect. The correct answer was: Buy a call. Purchasing a call on the security protects the customer from a loss in excess of the strike price plus the cost of the call should the security rise in price.
Which of the following are characteristics of commercial paper? Backed by money market deposits. Negotiated maturities and yields. Issued by insurance companies. Not registered with the SEC. A) III and IV. B) I and II. C) II and IV. D) I and III.
Your answer, III and IV., was incorrect. The correct answer was: II and IV. Commercial paper represents the unsecured debt obligations of corporations needing short-term financing. Both yield and maturity are open to negotiation. Because commercial paper is issued with maturities of less than 270 days, it is exempt from registration under the Securities Act of 1933.
Corporate bonds are considered safer than common stock issued by the same company because: A) bonds place the issuer under an obligation but stock does not. B) if there is a shortage of cash, dividends are paid before interest. C) bonds and similar fixed-rate securities are guaranteed by SIPC. D) the par value of bonds is generally higher than that of stock.
Your answer, if there is a shortage of cash, dividends are paid before interest., was incorrect. The correct answer was: bonds place the issuer under an obligation but stock does not. A bond represents a legal obligation to repay principal and interest by the company. Common stock carries no such obligation, and is therefore considered riskier.
A member of a stock exchange who is responsible for maintaining a fair and orderly market by buying and selling for his own account to reduce any temporary disparities between supply and demand is best described as a: A) Nasdaq market maker. B) specialist. C) two-dollar broker. D) trading supervisor.
Your answer, two-dollar broker., was incorrect. The correct answer was: specialist. The specialist's role is to maintain a fair and orderly market in the stocks in which he is appointed specialist. The term, "specialist" has been replaced with Designated Market Maker (DMM), but it is likely that specialist will be the term used on the exam.
Which of the following are characteristics of commercial paper? It represents a loan by the holder to the issuer. It is a certificate of ownership in the corporation. It is commonly issued to raise working capital for a corporation. It is junior in preference to convertible preferred stock. A) II and III. B) I and IV. C) I and III. D) II and IV.
Your answer, I and III., was correct!. Commercial paper instruments are debt securities; they represent loans to the issuing corporation by the holder. They are commonly issued to raise working capital and, as debt obligation, are senior in preference to preferred stock in claims against an issuer.
Which of the following statements about zero-coupon bonds are TRUE? Zero-coupon bonds are sold at a deep discount from face value. Zero-coupon bonds pay periodic interest payments. The owner of a zero-coupon bond receives his return only at maturity. A) I, II and III. B) I and III. C) II and III. D) I and II.
Your answer, II and III., was incorrect. The correct answer was: I and III. A zero-coupon bond is a type of debt security that pays no periodic interest payments. Instead, the investor receives his return only at maturity, when the bonds are redeemed. Zero-coupon bonds are sold at a deep discount from face value, but are redeemed at full face value when they mature.
Which of the following are NOT considered money market instruments? American depositary receipts. Commercial paper. Corporate bonds. Jumbo (negotiable) certificates of deposit. A) I and III. B) II and IV. C) III and IV. D) I and II.
Your answer, II and IV., was incorrect. The correct answer was: I and III. A money market instrument is a high-quality, short-term debt security with maturity of less than 1 year. American Depositary Receipts (ADRs) are equity, and corporate bonds are long-term debt instruments.
A bond issued by the GEMCO Corporation has been rated BBB by a major bond rating organization. This bond would be considered: A) a high-yield corporate bond. B) secured. C) an investment grade corporate bond. D) callable.
Your answer, an investment grade corporate bond., was correct!. An investment-grade bond has a bond rating between AAA and BBB. Lower-rated bonds are considered high-yield bonds and are often referred to as junk bonds The bond may or may not be secured: the rating does not indicate that fact.
As interest rates fall, prices of straight preferred stock will: A) remain unaffected. B) become volatile. C) rise. D) fall.
Your answer, become volatile., was incorrect. The correct answer was: rise. Preferred stock is interest rate sensitive. As rates fall, prices of preferred stocks tend to rise, and vice versa.
A hedge fund and a traditional mutual fund are similar in that: A) both typically have low initial investment requirements. B) both use long and short positions, swaps, and arbitrage. C) both offer performance incentives to the fund manager. D) their portfolio managers are likely to follow an active rather than passive management style.
Your answer, both offer performance incentives to the fund manager., was incorrect. The correct answer was: their portfolio managers are likely to follow an active rather than passive management style. As a general practice, both traditional mutual funds (as opposed to index funds and ETFs) and hedge funds are actively traded. Hedge funds always offer performance incentives; it is much less common among mutual funds. Hedge funds have very high initial purchase levels and can engage in speculative trading strategies.
By investing in a REIT, you are provided all of the following EXCEPT: A) pass-through tax treatment of operating losses. B) ownership of real property without management responsibilities. C) diversification of real estate investment capital. D) pass-through tax treatment of income.
Your answer, pass-through tax treatment of income., was incorrect. The correct answer was: pass-through tax treatment of operating losses. REITs cannot pass through losses to investors. It is important to remember that they are not DPPs.
Which of the following is a possible advantage of scheduled premium variable life insurance over whole life insurance? A) Possible inflation protection for the death benefit B) Flexibility of premium payments C) Greater guaranteed cash value D) Less risk in the underlying investment instruments
Your answer, Flexibility of premium payments, was incorrect. The correct answer was: Possible inflation protection for the death benefit Scheduled (fixed) premium variable life has fixed, not flexible, premium payments. The distinguishing factor is the variable death benefit. The insured assumes more risk, not less, in exchange for the possibility that the death benefit will provide protection from inflation.
Which of the following are characteristics of negotiable jumbo CDs? Issued in amounts of $100,000 to $1 million. Typically pay interest on a monthly basis. Always mature in 1 to 2 years. Trade in the secondary market. A) I and III. B) II and III. C) II and IV. D) I and IV.
Your answer, II and III., was incorrect. The correct answer was: I and IV. Negotiable jumbo CDs are issued for $100,000 to $1 million and trade in the secondary market. Most jumbo CDs are issued with maturities of less than a year. These CDs generally pay interest on a semi-annual basis, not monthly.
Variable annuities: A) may invest only in money market mutual funds. B) may have 20 or more sub-account investment options. C) provide a guaranteed minimum annuity payout. D) generally provide more security of principal than fixed annuities.
Your answer, provide a guaranteed minimum annuity payout., was incorrect. The correct answer was: may have 20 or more sub-account investment options. Some variable annuity separate accounts have 50 or more sub-accounts to choose from. There are no guarantees as far as the amount of payout.
For which of the following is there no active secondary market? A) Futures contracts. B) Options. C) ETFs. D) Forward contracts.
Your answer, Futures contracts., was incorrect. The correct answer was: Forward contracts. One of the disadvantages when investing in forward contracts is that there is no active secondary market. Because each contract is between one buyer and one seller and there is no standardization, no exchange trading is possible.
What is the term used to describe a person on the floor of a stock exchange who stands ready to buy or sell shares of specified stocks? A) Specialist. B) Market maker. C) Arbitrageur. D) Floor broker.
Your answer, Market maker., was incorrect. The correct answer was: Specialist. This is the basic definition of the specialist. If the question had said the over-the-counter market, it would have been a market maker. A more correct answer would be the DMM (Designated Market Maker), but sometimes NASAA is slow to make changes.
In a scheduled premium variable life insurance policy, all of the following are guaranteed EXCEPT A) a minimum death benefit B) a minimum cash value C) the ability to borrow at least 75% of the cash value after the policy has been in force at least 3 years D) the right to exchange the policy for a permanent form of insurance, regardless of health, within the first 24 months
Your answer, the ability to borrow at least 75% of the cash value after the policy has been in force at least 3 years, was incorrect. The correct answer was: a minimum cash value In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months allowing the conversion of the variable policy to a comparable form of permanent insurance and the 75% cash value loan minimum applies after the third year of coverage.
Corporate bonds that are issued on the general credit of the issuer and are NOT otherwise secured are called: A) convertible. B) consolidated mortgages. C) participating. D) debentures.
Your answer, participating., was incorrect. The correct answer was: debentures. Debentures are corporate bonds issued on the general credit of the corporation and are not backed by any specific assets.
A client purchased an index annuity from you three years ago and made an initial deposit of $100,000. The contract calls for a 90% participation rate with a 15% cap. The index had a return of + 20% in the first year, - 5% the second year, and +10% the third year. The investor's current value is approximately A) $126,500 B) $117,829 C) $128,620 D) $125,350
Your answer, $128,620, was incorrect. The correct answer was: $125,350 In the first year, the index gained 20%. With a 90% participation rate, the investor might have earned 18%, but was limited by the 15% cap. So, after one year the value was $115,000. In the second year, the index lost money. However, with an index annuity there are never any reductions in a down market so the account remained at $115,000. In the third year, the investor received 90% of the 10% growth and that increased the account value to $125,350. This resulted in an overall gain of 25.35%, or an average return of almost 8.5% per year.
Which of the following is considered to be an advantage of annuitization? A) Once annuitized, the client's draw from the annuity is limited to the annuity payment. B) It guarantees income that will last for the client's lifetime. C) A fixed, level periodic payment tends to lose buying power over time due to inflation. D) Payments under a variable annuity could be reduced if there is a declining market.
Your answer, A fixed, level periodic payment tends to lose buying power over time due to inflation. , was incorrect. The correct answer was: It guarantees income that will last for the client's lifetime. Annuities offer a guarantee of income that will last for a client's lifetime. The other statements, while true, represent disadvantages of annuitization. Annuitization does limit liquidity and flexibility.
A company has paid a dividend every quarter for the past 20 years. If the stock's price has fallen dramatically over the past quarter, but the dividend has remained the same, it may be concluded that: A) current dividend yield has increased. B) dividend yield to maturity has decreased. C) current dividend yield has remained the same. D) current dividend yield has decreased.
Your answer, current dividend yield has remained the same., was incorrect. The correct answer was: current dividend yield has increased. Current dividend yield is income dividend divided by price. If the price of a stock decreases and the dividend remains the same, dividend yield will increase.
Which of the following statements regarding corporate zero-coupon bonds are TRUE? Interest is paid semiannually. The discount is in lieu of periodic interest payments. The discount must be accreted and is taxed annually. The discount must be accreted annually with taxation deferred until maturity. A) II and IV. B) II and III. C) I and IV. D) I and III.
Your answer, II and III., was correct!. The investor in a corporate zero-coupon bond receives the return in the form of growth of the principal amount over the bond's life. The bond is purchased at a deep discount and redeemed at par at maturity. That discount from par represents the interest that will be earned at maturity date. However, the discount is accreted annually and the investor pays taxes yearly on the imputed interest.
Which of the following statements about stock exchanges is TRUE? A) A stock exchange buys and sells stocks itself. B) A securities exchange market is an auction market in which prices are established by auction. C) A securities exchange market is one in which prices are established by negotiations between buyers and sellers. D) Any stock can be listed on any exchange.
Your answer, A securities exchange market is one in which prices are established by negotiations between buyers and sellers., was incorrect. The correct answer was: A securities exchange market is an auction market in which prices are established by auction. A stock exchange does not buy or sell stocks itself; it simply supplies the facilities for its members to trade. Prices are established in an auction process rather than by direct negotiations between buyer and sellers, as occurs in the over-the-counter (OTC) market. Only stocks that satisfy the exchange's standards can be listed on the exchange.
An investor is short stock at 60. The current market price of the stock is 35, and he anticipates it will continue to decline. If he thinks the price will rise temporarily and if he does not wish to close out his short position, his best strategy to prevent a loss would be to: A) Sell an XYZ 35 put. B) Sell an XYZ 35 call. C) Buy an XYZ 35 put. D) Buy an XYZ 35 call.
Your answer, Buy an XYZ 35 put., was incorrect. The correct answer was: Buy an XYZ 35 call. This client is temporarily bullish on the stock, but, in the long term, feels that it will continue to decline so the short stock position is to be maintained. If the client is correct, a near-term rise in the price of XYZ will cause the long 35 call to be in the money and the investor can sell the call at a profit. When it comes to hedging a short stock position, buying a call is always the best strategy.
A customer has expressed interest in exchange-traded funds (ETFs) and wishes to discuss them with you. You could tell him all of the following EXCEPT: A) Selling short and trading on margin are available transactions with ETFs. B) ETFs have a NAV, calculated at the end of the trading day, that serves as the trading price until the next NAV is calculated. C) A share of an ETF represents an entire portfolio, or a specific selection, of securities. D) Real time quotes are available for ETFs.
Your answer, ETFs have a NAV, calculated at the end of the trading day, that serves as the trading price until the next NAV is calculated., was correct!. While a NAV can be calculated for an exchange-traded fund, the price is set by the market and changes throughout the trading day.
When a broker/dealer engages in a customer transaction from its own account, which of the following statements are TRUE? Partners of the broker/dealer are trading in their personal accounts. The broker/dealer is trading from its inventory with customers. The broker/dealer must disclose its capacity as a principal in the transaction. The broker/dealer must disclose its capacity as agent in the transaction. A) I and III. B) I and IV. C) II and III. D) III and IV.
Your answer, II and III., was correct!. The Uniform Securities Act defines a broker/dealer as a legal person (entity) engaging in the business of effecting securities transactions for the account of others or for its own account. In this context, trading for its own account means that the broker/dealer is trading from its inventory with customers. The broker/dealer has an ethical responsibility to disclose its capacity as a principal in the transaction. When trading for its own account, a broker/dealer is functioning as a principal or dealer. When trading for the accounts of others with no participation as a direct party to the trade, a broker/dealer functions in an agency capacity.
Which of the following statements concerning hedge funds are TRUE? Purchasers of hedge funds are generally required to be accredited investors. Short sales by the fund are not allowed. It is not uncommon for there to be a lock-up period that may last for as long one year or even longer. It would be unusual for the fund managers to have an ownership interest in the fund. A) II and III B) II and IV C) I and IV D) I and III
Your answer, II and IV, was incorrect. The correct answer was: I and III Purchasers of hedge funds are usually required to be accredited investors. Hedge funds often have high liquidity risk due to the lock-up provision which can restrict an investor's ability to liquidate the position. An advantage of hedge funds is their ability to sell securities short during bear markets, adopt risky arbitrage strategies, and otherwise take direct steps to maximize returns in both up and down markets. In almost all cases, the fund managers have a significant ownership position in the fund, or as the phrase goes, they have "skin in the game."
Which of the following best describes the death benefit provision of a variable annuity? A) The principal amount at death is the greater of the total of premium payments or the current market value. B) If death should occur prior to age 59½, the 10% early withdrawal penalty does not apply. C) Upon death, the proceeds pass to the beneficiary free of federal income tax. D) Upon death, the beneficiary has a choice of settlement options.
Your answer, If death should occur prior to age 59½, the 10% early withdrawal penalty does not apply., was incorrect. The correct answer was: The principal amount at death is the greater of the total of premium payments or the current market value. The death benefit insures that the investor will never receive back less than the original amount contributed to the account. Unlike life insurance proceeds, with annuities, anything above the cost basis is taxed as ordinary income.
Purchasers of options can have a number of different objectives. One of your clients who is a soft drink fan already has a long position in KO. What would be a possible reason for this client to go long a KO call option? A) Owning a long call on stock you already own offers a hedge against a market decline. B) To fix the cost of acquiring additional stock to the portfolio. C) To complete the other side of a spread. D) This would generate additional income.
Your answer, To complete the other side of a spread., was incorrect. The correct answer was: To fix the cost of acquiring additional stock to the portfolio. Those who are bullish on a stock, but don't have sufficient funds at this time to purchase the stock, can "lock-in" their future cost by going long a call. Income is generated only through selling options. Since a long call is on the same side of the market as long stock, there is no hedge. A spread involves a long and short option.
Which of the following securities would most likely have the lowest expense ratio? A) Exchange-traded fund. B) Variable annuity. C) Hedge fund. D) Balanced mutual fund.
Your answer, Variable annuity. , was incorrect. The correct answer was: Exchange-traded fund. Generally, most ETFs have a lower expense ratio than do comparable mutual funds. ETFs have other advantages over mutual funds in that they can be bought or sold at any time during the trading day (as opposed to end of day pricing), they can be bought on margin, and they can be sold short. Variable annuity expense ratios tend to be higher than mutual funds and those for hedge funds are the highest of all.
Under the Securities Exchange Act of 1934, a market maker is: A) a marketplace to bring together buyers and sellers of securities. B) a dealer who holds itself out as being ready at all times to buy or sell shares of a specified security at a quoted price. C) a security in high demand. D) any person who buys and sells securities for his own account or for the accounts of others.
Your answer, a security in high demand., was incorrect. The correct answer was: a dealer who holds itself out as being ready at all times to buy or sell shares of a specified security at a quoted price. A market maker is a dealer who holds itself out as being willing to buy or sell a security at a quoted price on a regular and continuous basis.
It is often said that the backbone of the over-the-counter market is the market-maker. A good description of a market maker would be: A) an investment banker who participates in a firm underwriting. B) a subscriber to the Nasdaq system. C) a broker/dealer who stands ready to buy or sell at least the standard unit of a specific stock traded on a listed exchange. D) a broker/dealer who stands ready to buy or sell at least the standard unit of a specific stock traded in the over-the-counter market.
Your answer, a subscriber to the Nasdaq system., was incorrect. The correct answer was: a broker/dealer who stands ready to buy or sell at least the standard unit of a specific stock traded in the over-the-counter market. This is the basic definition of a market maker. Specialists perform essentially the same service on the listed exchanges.
A client of an IAR mentions that he has received a prospectus for a variable annuity, but does not really understand the product. It would be reasonable for the IAR to explain that a variable annuity offers an investor A) the opportunity to invest in equity securities on a tax-deferred basis B) lifetime income guaranteed never to drop below the initial rate C) a product very similar to a mutual fund, but with lower costs and expenses D) the insurance company's backing of the annuity' performance
Your answer, lifetime income guaranteed never to drop below the initial rate, was incorrect. The correct answer was: the opportunity to invest in equity securities on a tax-deferred basis One of the most attractive features of variable annuities is that all earnings are tax-deferred until withdrawal. The sub-accounts are usually invested in equities (although there are some with fixed income as the primary component of the portfolio), but the expenses are generally higher than for a mutual fund with similar goals. There are no guarantees on the amount of income when the VA is annuitized.
When one invests in a common stock, the opportunity cost of doing so exposes him to all of the following risks EXCEPT: A) systematic risk. B) credit risk. C) market risk. D) business risk.
Your answer, market risk., was incorrect. The correct answer was: credit risk. Opportunity cost is the opportunity given up when an economic decision is made. In the investment field, it generally refers to the risks taken versus keeping money in a risk-free investment such as the 90-day Treasury bill. When one invests in common stock, there is no credit risk because there is no credit - stock is equity, not a debt.
An investor owns a long-term U.S. Treasury bond with a 5% coupon and 15 years to maturity. The client wishes to sell and receives a quote from a dealer of 104.22. This number represents the: A) premium. B) bid price. C) yield to maturity. D) offer price.
Your answer, offer price., was incorrect. The correct answer was: bid price. If you are looking to sell, the dealer will pay you his bid price. Had the question said the client wanted to buy, then the quote would have been the offer (ask) price. What does the 5% coupon and the 15 years to maturity have to do with the question? NOTHING. And, knowing that treasuries are quoted in 32nds has nothing to do with it either. And, one more thing. The price quote is above 100 so it is at a premium, BUT, the better answer is bid price because the question is referring to the quote.
Due to an escalating trade war, the portfolio manager of an equity mutual fund anticipates a negative impact on his fund's assets. To protect his investment portfolio, the fund manager would: A) sell S&P 500 index calls. B) sell S&P 500 index puts. C) buy S&P 500 index calls. D) buy S&P 500 index puts.
Your answer, sell S&P 500 index puts., was incorrect. The correct answer was: buy S&P 500 index puts. A portfolio manager who expects a decline in the market as a result of a trade war (or any factor that might hurt stock prices) would buy puts on a broad market index such as the S&P 500 to protect his position. Selling calls limits upside potential, and only protects the portfolio to the extent of the income received from the sale of the calls.
The main benefit that variable life insurance has over whole life insurance is: A) the potential for a higher cash value and death benefit. B) an adjustable premium. C) a lower sales charge. D) the availability of policy loans.
Your answer, the availability of policy loans., was incorrect. The correct answer was: the potential for a higher cash value and death benefit. Premiums of variable life insurance policyholders are invested in the insurer's separate account. This allows the policyholder the opportunity (though there are no guarantees) to enjoy significant returns and substantially higher cash values than are obtainable through a whole life policy.
All of the following are true of REITs EXCEPT: A) they must be organized as trusts. B) they must pass along losses to shareholders. C) they must distribute at least 90% of their net investment income in order to qualify for the special tax treatment afforded under Subchapter M of the IRC. D) they must invest at least 75% of their assets in real estate-related activities.
Your answer, they must distribute at least 90% of their net investment income in order to qualify for the special tax treatment afforded under Subchapter M of the IRC., was incorrect. The correct answer was: they must pass along losses to shareholders. REITs engage in real estate activities and can qualify for favorable tax treatment if they pass through at least 90% of their net investment income to their shareholders. While they can pass through income, they cannot pass through any losses; they are not DPPs.
A client has a TIPS with a coupon rate of 3.5%. The inflation rate has been 4% for the last year. What is the inflation-adjusted return? A) 4.00% B) -0.50% C) 3.50% D) 7.50%
Your answer, 3.50%, was correct!. Treasury Inflation Protected Securities (TIPS) adjust the principal value each 6 months to account for the inflation rate. Therefore, the real rate of return will always be the coupon.
A similarity between common and preferred stock is: A) both are evidence of corporate indebtedness. B) the dividend is fixed. C) the dividend must be declared by the board of directors. D) they have an equal vote.
Your answer, the dividend must be declared by the board of directors., was correct!. All dividends, both common and preferred, must be declared by the board of directors. Preferred shares usually have a fixed dividend rate and usually have no (or very limited) voting powers. Both types of stock are equity, not debt, securities.
A TIPS bond is issued in the principal amount of $1,000, paying 3.5%. Over the security's 5-year term, the inflation rate is 4%. What is the principal value of the bond at the end of 5 years? A) $1,219. B) $1,440. C) $1,000. D) $1,200.
Your answer, $1,440., was incorrect. The correct answer was: $1,219. In addition to paying interest, a TIPS bond increases its principal value semiannually by the amount of inflation. If the inflation rate is 4% for 5 years, the principal value of the bond increases semiannually by that inflation rate. Allowing for compounding, the best choice would be the $1,219. This is computed by multiplying $1,000 by 102% 10 times.
An investor with a short position enters an order marked, "buy DMF at 25.50 stop." It would be most correct to state A) the order need not be triggered, but it must be executed at 25.50 B) this order cannot be executed C) the order will be triggered if the market price goes below 25.50 D) the order will be triggered if the market price goes to or above 25.50
Your answer, the order will be triggered if the market price goes below 25.50, was incorrect. The correct answer was: the order will be triggered if the market price goes to or above 25.50 Buy stop orders are usually entered to protect short sales. The stop would trigger the order when DMF reached 25.50 or higher.
