SIE Chapters 1-7 (Part 1)

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In which two of the following options positions may an investor exercise the rights of the contracts?I. Long callII. Long putIII. Short callIV. Short put A) I and II B) I and IV C) II and III D) II and IV

A) I and IIAnswer ExplanationAn investor that buys calls or puts owns the right to exercise the contract. Buying calls secures the right to buy stock at the strike price, while buying puts secures the right to sell stock at the exercise price.Textbook ReferencePlease see textbook section 6.1

An investor that is short 100 shares of XYZ stock could best protect the stock position with which of the following? A) Sell a put B) Buy a call C) Sell a call D) Buy a put

B) Buy a callAnswer ExplanationAn investor that has established a short stock position could best protect the position by purchasing a call. The call holder has the right to buy in the short stock position at the pre-determined exercise price of the call.Textbook ReferencePlease see textbook section 6.2.4

With respect to raising capital, closed-end funds may issue A) bonds only B) Common stock, bonds and preferred stock C) common stock only D) common and preferred stock only

B) Common stock, bonds and preferred stockAnswer ExplanationClosed-end funds may issue 'senior securities', such as preferred stock and bonds, as opposed to open-end funds which may only issue common stock to raise capital. Textbook ReferencePlease see textbook section 4.3.2.5

The proceeds from a corporation's sale of commercial paper must be used to finance A) Long-term financial needs B) Current transactions C) Fixed assets D) Capital projects

B) Current TransactionsAnswer ExplanationProceeds from the sale of commercial paper must be used to finance current transactions, not permanent obligations, fixed assets or long-term financing needs. The maximum maturity allowed is just 270 days.Textbook ReferencePlease see textbook section 3.6.1

A statute that imposes a ceiling on the amount of a municipality's debt is the A) Net revenue pledge B) Debt limit C) Debt service schedule D) Debt statement

B) Debt limitAnswer ExplanationStatutory debt limits impose a ceiling on the amount that a municipality can borrow. Some municipalities have additional rules that limit their borrowing to a percentage of their debt limit, such as 80%.Textbook ReferencePlease see textbook section 3.4.1.1

Which of the following would have the smallest impact on the share price of an OTC listed REIT? A) Lack of liquidity B) Market conditions C) Pending mortgage applications D) Occupancy rates

C) pending mortgage applications Answer ExplanationAn OTC REIT would be impacted by lack of liquidity, occupancy rates, and general market conditions. Pending mortgage applications would not have a significant influence on the shares of an OTC REIT. Textbook ReferencePlease see textbook section 5.1.3

The procedure for dissolving a limited partnership is defined by A) federal law. B) the applicable state statute. C) the partnership agreement. D) nothing, because limited partnerships have continuous life.

CAnswer ExplanationThe dissolution date and procedures for dissolving a limited partnership are established by the partnership agreement, which both general and limited partners must sign.Textbook ReferencePlease see textbook section 5.2.4

If the price of a long-term municipal bond increases over a period of one week, what is the likely impact on yield to maturity (YTM)? A) A decrease in YTM B) No change in YTM C) It depends on the bond's coupon yield. D) An increase in YTM

Correct Answer:A) A decrease in YTMAnswer ExplanationBond yields move inversely to bond prices. Therefore, if prices increase, that indicates falling yields. Textbook ReferencePlease see textbook section 2.2.3

Regulation Best interest (BI) addresses recommendations made about all the following except: A) Rollovers or transfers B) Specific securities C) Banking Services D) Specific account types

Correct Answer:C) Banking ServicesAnswer ExplanationDiscussing banking services generally falls outside the bounds of recommendations as defined by Reg BI. The other three choices are categories that are cited in the regulation. Textbook ReferencePlease see textbook section 7.1.4

A hedge fund that does not disclose the investments it will make, giving full authority to the fund manager, is called a A) Discretionary pool B) Self-directed C) Blind pool D) Blank check fund

Correct Answer:C) Blind poolAnswer ExplanationA blind pool hedge fund permits the fund manager to make the determination of how assets will be invested. The investments that will be made are not disclosed.Textbook ReferencePlease see textbook section 5.3.2

An investor that is short 100 shares of XYZ stock could best protect the stock position with which of the following? A) Sell a put B) Buy a put C) Buy a call D) Sell a call

Correct Answer:C) Buy a callAnswer ExplanationAn investor that has established a short stock position could best protect the position by purchasing a call. The call holder has the right to buy in the short stock position at the pre-determined exercise price of the call.Textbook ReferencePlease see textbook section 6.2.4

Which of the following is a type of risk not commonly associated with ADRs? A) Political risk B) Inflation risk C) Call risk D) Currency risk

Correct Answer:C) Call riskAnswer ExplanationADRs do not carry call risk, as they are equity securities and as such the issuer does not have the right to redeem the shares from the investor.Textbook ReferencePlease see textbook section 1.4.1.1

Intra-day trading is available for both A) Closed-end funds and UITs B) Closed-end funds and hedge funds C) Closed-end funds and ETFs D) Open-end funds and ETFs

Correct Answer:C) Closed-end funds and ETFsAnswer ExplanationIntra-day trading is available for both closed-end funds and ETFs.Textbook ReferencePlease see textbook section 4.6

To reduce loss in a previously established position a call writer will engage in which of the following transactions? A) Opening sale B) Opening purchase C) Closing purchase D) Closing sale

Correct Answer:C) Closing purchaseAnswer ExplanationAn investor that previously established a position by selling an option (writing a call or put) will close the position by purchasing an identical option to reduce or cancel the position.Textbook ReferencePlease see textbook section 6.7.1

An investor that previously established a long position in puts makes an offsetting transaction in an identical put. This transaction is a(n) A) Closing purchase B) Opening sale C) Closing sale D) Opening purchase

Correct Answer:C) Closing saleAnswer ExplanationAn investor that previously established a position by buying an option will close the position by selling an identical option to reduce or cancel the position.Textbook Reference`Please see textbook section 6.7.1

A company has issued 8% preferred stock with a par value of $30 per share. The preferred stock currently is selling for $40 per share. The annual dividend paid to holders of the preferred shares will be A) 1.2 B) 3.6 C) 2.4 D) 3.2

Correct Answer:C) 2.4Answer ExplanationThe annual dividend in preferred stock is expressed as a percentage of par value. "8% preferred stock" would pay 8% of par value annually. 8% x $30 = $2.40 per year. Textbook ReferencePlease see textbook section 1.5.1.3

Which of the following call dates would be LEAST beneficial for an investor? A) 10 years B) 15 years C) 5 years D) 20 years

Correct Answer:C) 5 yearsAnswer ExplanationInvestors prefer a longer call date in order to better protect themselves from call and reinvestment rate risk.Textbook ReferencePlease see textbook section 2.1.9

A bond is selling at a price of 81 with all coupons since July of 2011 attached. This bond is said to be A) Trading and interest B) Trading with recall C) trading flat with unpaid coupons attached D) Trading short

Correct Answer:C) trading flat with unpaid coupons attachedAnswer ExplanationWhen coupons from previous interest payments are attached, the interest has not been paid. Such bonds are termed "trading flat".Textbook ReferencePlease see textbook section 2.4

Authorized stock is best described as common shares that A) All investors currently own in the corporation B) A corporation will sell to the public in the future C) A corporation has sold to the public D) A corporation is permitted to sell to the public

Correct Answer:D) A corporation is permitted to sell to the publicAnswer ExplanationAuthorized stock represents the number of shares a corporation may sell to the public in the future.Textbook ReferencePlease see textbook section 1.1

An investor in a high tax bracket is seeking a tax advantaged investment to deliver additional monthly income. Which of the following choices is most appropriate for this investor? A) A balanced fund B) A high yield bond fund C) A real estate fund D) A municipal bond fund

Correct Answer:D) A municipal bond fundAnswer ExplanationMunicipal bond funds pay federally tax-exempt dividends to shareholders. If the shareholder lives in the state of issue of the investments in the portfolio, income may be exempt from state taxes as wellTextbook ReferencePlease see textbook section 7.3.3

An investor with the goal of income preservation would be most likely to purchase A) 1,000 shares of common stock B) Exchange traded funds C) Commercial paper and T Bills D) Direct participation programs

Correct Answer:C) Commercial paper and T BillsAnswer ExplanationAn individual with a goal of income preservation would be most likely to purchase a money market security, such as commercial paper or Treasury paper.Textbook ReferencePlease see textbook section 7.3.1

Which of the following is a strategy that is used by investors to secure profits from a stock position that an investor had previously purchased? A) Short put B) Uncovered call C) Protective put D) Long call

Correct Answer:C) Protective putAnswer ExplanationA protective put is used to "insure" profits on a long stock position. It gives the buyer the right to sell stock at the exercise price to protect profits that have already been made.Textbook ReferencePlease see textbook section 6.3.4

An investor purchases a 5% bond for 90. Rank the yields for this bond from lowest to highestI. Current YieldII. CouponIII. Yield to callIV. Yield to maturity A) II, I, III, IV B) I, II, III, IV C) I, II, IV, III D) II, I, IV, III

A) II, I, III, IV

All of the following statements are true regarding private REITS EXCEPT A) They are sold to public, accredited and institutional investors B) They lack liquidity C) They do not trade in the public markets D) They are exempt from many disclosure requirements under the Securities Act of 1933

AAnswer ExplanationBecause they are exempt from disclosure requirements under the Securities Act of 1933, private REITs (aka private placement REITs) cannot be traded publically.Textbook ReferencePlease see textbook section 5.1.3

The management and performance fees received by a hedge fund manager are A) usually higher than the fees charged for other types of funds. B) always guaranteed by the investment committee of the fund. C) never less than the weighted average returns of the stock market over a 90- day period. D) typically lower than the same fees paid on other fund classes.

AAnswer ExplanationHedge fund managers receive management and performance fees which are typically higher than the fees charged for other types of funds. Textbook ReferencePlease see textbook section 5.3.2

Mortgage REITs offer investors the potential for all of the following EXCEPT A) An ownership interest in properties held within the portfolio B) Dividends that are paid each year C) The opportunity to participate in the recovery of housing markets and overall economic growth D) A steady income stream

AAnswer ExplanationMortgage REITs offer an ownership interest in mortgages held within a portfolio, not the actual properties. Investors in mortgage REITs own shares that pay relatively high dividends, which provide an income stream to investors. Because mortgage REITs provide financing for homeowners and commercial entities, investors help support the recovery of housing markets and overall economic growth.Textbook ReferencePlease see textbook section 5.1.4

A corporate bond is trading "with" interest. This means that A) there is heightened demand for the bond. B) accrued interest is deducted from the price of the bond. C) accrued interest is included in its price. D) the seller of the bond makes an additional interest payment to the buyer of the bond.

Answer ExplanationA bond is said to be trading "with" interest or "and" interest when accrued interest is included in its price. Textbook ReferencePlease see textbook section 2.4

Which of the following securities carries no reinvestment rate risk? A) Convertible debenture B) 25-year debenture with a 5-year no call feature C) STRIP D) Treasury Note

Answer ExplanationAs an asset category, zero-coupon bonds do not have reinvestment rate risk, as these types of bonds do not make any regular interest payments to investors. Textbook ReferencePlease see textbook section 3.2.1.5

All of the following are covered under T+2 settlement dates EXCEPT A) Municipal securities B) Corporate bonds C) Mutual funds D) Government securities

Answer ExplanationGovernment securities settle T+1.Textbook ReferencePlease see textbook section 2.4

If the price of a bond decreases, what will happen to its current yield? A) impossible to determine B) decrease C) increase D) no change

Answer ExplanationIf the price of a bond decreases, which means that the bond is trading at a discount to par, its current yield will increase. For example, if a bond with a 7.5% coupon that is issued at par trades down to a price of 98, its current yield will be 7.653%. This is calculated as $75/$980. Even though the price has decreased, the investor still receives the 7.5% coupon on the par amount. Textbook ReferencePlease see textbook section 2.2.2

A customer purchased a Treasury bond in a regular way transaction on Monday, April 4th. The bond is a J&J bond. How many days of accrued interest will the seller receive? A) 94 B) 79 C) 80 D) 96

Answer ExplanationTreasury bonds accrue interest on an actual days basis and use a 365 day year. They settle T+1, in this case on Tuesday, April 5th. Interest accrues from the last interest payment date (January 1st), up to, but not including the settlement date: January ‚Äì 31 days February ‚Äì 28 days March ‚Äì 31 days April ‚Äì 4 days 94 daysTextbook ReferencePlease see textbook section 2.4

An investor purchases a T-Bond in the open market, paying 3% interest. The next day, the fed increases the discount rate. In this scenario, the investor would be immediately concerned with A) inflationary risk B) reinvestment rate risk C) market risk D) credit risk

Answer ExplanationWhen interest rates increase, the immediate impact will be a decline in bond prices. Interest rate risk is also referred to as market risk. It is possible that higher rates could also lead to higher inflation, but that would be a longer term concern.Textbook ReferencePlease see textbook section 2.3.1

On March 15, 2011, an investor buys a $1,000 par value 6% J&J 15 bond that can be called away at 103.75. If the bond is called on July 15, 2016, how much would the investor receive at redemption? A) 1030.75 B) 1067.5 C) 1060.75 D) 1037.5

B) 1067.5Answer ExplanationWhen a bond is called away the investor receives a call premium along with any interest accrued since the previous coupon date. In this case, the investor would receive 103.75% of par ($1,037.50) along with the final semi-annual coupon payment of 3% ($30). Textbook ReferencePlease see textbook section 2.1.9

The composition of an exchange-traded note is usually a A) Stock and a bond B) A bond and an option C) Mutual fund and an option D) A stock and an option

BAnswer ExplanationAn exchange-traded note is typically comprised of a bond, for principal protection, plus an option, for equity exposure. Textbook ReferencePlease see textbook section 5.5.1

An individual who writes an uncovered call option believes A) That positive news will be forthcoming. B) That the underlying stock price will rise above the strike price. C) That the underlying stock price will fall below the strike price. D) General stock market values will be very volatile in the coming weeks.

C) Answer ExplanationThe writer of an uncovered call believes that the market price of the underlying stock will remain below the strike of the option, thereby resulting in the option expiring and allowing the writer to retain the option premium.Textbook ReferencePlease see textbook section 6.2.2.1

Which type of investment company product issues a single class of shares only and trades on the market at a discount or premium to its NAV? A) Open end company B) Both closed-end companies and UITs C) Closed-end company D) Unit investment trust

C) Closed-end companyAnswer ExplanationClosed-end companies issue a single share class of securities only; mutual funds commonly issue Class A, B and C shares. Closed-end shares trade on exchanges at a discount or premium to NAV; UITs are redeemed by the trust.Textbook ReferencePlease see textbook section 4.3.2.2

An individual who purchases $100,000 Treasury Bond should be least concerned with A) Gross Domestic Product B) Economic conditions in the U.S. C) Credit risk D) Inflation risk

C) Credit riskAnswer ExplanationAn owner of a Treasury bond should not be concerned with credit, or default, risk. The other items mentioned could certainly be factors in the determination of interest rates and Treasury bond prices. Textbook ReferencePlease see textbook section 3.2

An option strategy that may permit an investor to purchase stock and receive a premium is A) Short calls B) Long calls C) Short puts D) Long puts

C) Short putsAnswer ExplanationThe sale of a put requires an investor to buy shares when assigned. Additionally, when writing a put, an investor earns the premium for selling the option.Textbook ReferencePlease see textbook section 6.3.2

An exchange-traded note is a type of A) Secured corporate bond B) Municipal bond C) Unsecured corporate debt D) Mutual fund

C) Unsecured corporate debtAnswer ExplanationAn exchange-traded note is a type of unsecured corporate debt. Textbook ReferencePlease see textbook section 5.5.1

An investor buys a banker's acceptance (BA) with a 90-day maturity. After holding it 30 days, he needs access to cash. Is there a way to obtain it? A) Only if the borrower agrees to cancel the loan B) Yes, the bank may agree to redeem part of it C) Yes, by selling it on the secondary market D) No, because BAs are non-negotiable and non-redeemable

C) Yes, by selling it on the secondary marketAnswer ExplanationBA's are short-term negotiable debt instruments guaranteed by a commercial bank. Issues usually can be sold on the secondary market at any time prior to maturity.Textbook ReferencePlease see textbook section 3.6.3

Which of the following statements regarding debt securities are true?I. A purchaser of a bond is a creditor of the corporationII. The corporation is a creditor of a bondholderIII. Bonds are generally issued with a par value of $100IV. Bonds are generally issued with a par value of $1,000 A) I and IV B) II and IV C) II and III D) I and III

Correct Answer:A) I and IVAnswer ExplanationInvestors that purchase bonds are creditors of the corporation, because the corporation owes them principal and periodic interest for the use of their money. Bonds are usually issued with a par value of $1,000. The stated rate of interest is a percentage of the bond's par value. Textbook ReferencePlease see textbook section 2.1

The market perceives which two of the following to have the greatest risk?I. bonds with high credit ratingsII. bonds with low credit ratingsIII. bonds with short terms to maturityIV. bonds with long terms to maturity A) II and IV B) I and IV C) II and III D) I and III

Correct Answer:A) II and IVAnswer ExplanationBonds with low credit ratings have a higher degree of default risk. Bonds with long term maturities have a higher degree of interest rate risk. Textbook ReferencePlease see textbook section 2.3.5

An investor holds a bond containing a put feature. This provision A) Requires the issuer to return an investor's principal should the investor decide to sell his bond prior to maturity. B) Can only be exercised if interest rates declined C) Requires the investor to sell his bond back to the company prior to the maturity date of the bond. D) Enables either the issuer or the investor to redeem the bond prior to maturity.

Correct Answer:A) Requires the issuer to return an investor's principal should the investor decide to sell his bond prior to matruity.Answer ExplanationA put feature allows an investor to demand early repayment of their principal, based on the occurrence of some predetermined event. For example, a put feature might be exercised if interest rates were to increase. Textbook ReferencePlease see textbook section 2.1.9.1

An investor is concerned about credit risk. A suitable investment vehicle for this person would be A) A Treasury bond fund B) Preferred stock of an emerging growth company C) A bond of a low rated corporation D) A municipal bond of a financially unstable town

Correct Answer:A) Treasury Bond FundAnswer ExplanationCredit risk is the risk that an issuer will default on its debt payments. Textbook ReferencePlease see textbook section 7.2.4

An airline is involved in a scandal of covering up defects that caused its planes to crash. As a result, the stock price plummets. This is an example of A) systematic risk. B) business risk. C) outlier risk. D) political risk.

Correct Answer:B) business riskAnswer ExplanationNon-systematic risk or business risk is the risk inherent in individual stocks or companies. Changes in corporate management or product recalls, which could impact a single stock, are examples.Textbook ReferencePlease see textbook section 7.2.12

A portfolio manager of a mutual fund anticipates a short-term drop in the market. It might be expected that the manager would A) sell the assets in the fund and use the proceeds to buy call options. B) retain any excess cash or cash equivalents and then make trades once the anticipated drop occurs. C) refrain from any portfolio trading until after the anticipated drop occurs. D) use all available cash in the fund to buy Treasury securities.

Correct Answer:B) retain any excess cash or cash equivalents and then purchase securities once the drop occurs.Answer ExplanationIn this scenario, the portfolio manager would keep excess cash in cash and cash equivalents and then purchase securities once the drop occurs. Textbook ReferencePlease see textbook section 7.5.1

XYZ Inc. declares a $0.45 dividend payable on Monday, July 14, to all shareholders of record as of Monday, July 7. When is the ex-dividend date for a regular way trade in the stock? A) Wednesday, July 2 B) Friday, July 4 C) Thursday, July 3 D) Tuesday, July 1

Correct Answer:C) Thursday, July 3Answer ExplanationFor regular way trades in equities, the ex-dividend date is one BUSINESS day before the record date. In this case, July 4 is a holiday. Therefore, the ex-date will be Thursday, July 3.Textbook ReferencePlease see textbook section 1.7

If an investor wants to build a portfolio that will carry minimal capital risk, they should avoid A) stock index funds B) corporate bonds C) call options D) blue chip stocks

Correct Answer:C) call optionsAnswer ExplanationAn investor who purchases a call option is at risk of losing the entire premium paid for the option, and thus should be avoided in a portfolio that seeks to minimize capital risk. Textbook ReferencePlease see textbook section 7.2.3

Of the following, which investment choice is most appropriate for a high net worth investor with a primary objective of long-term safety of principal? A) A non-investment grade corporate bond B) A C rated general obligation bond C) A highly rated tax anticipation note D) An investment grade revenue bond

Correct Answer:D) An investment grade revenue bondAnswer ExplanationAn investor that wants safety of principal wants to preserve the investment over its life. The higher the rating, the greater the likelihood the investor will achieve safety of principal. Investment-grade municipal revenue bonds will offer safety of principal and tax-exempt income. A highly rated note has a much shorter time horizon. Textbook ReferencePlease see textbook section 7.3.3

Which of the following factors affect a debt obligation's coupon?I. RatingsII. MaturityIII. CovenantsIV. Security A) I, II, and III only B) I only C) I and II only D) I, II, III, and IV

Correct Answer:D) I, II, III and IVAnswer ExplanationCoupon refers to the annual interest rate ("pricing") paid on a debt obligation's principal amount outstanding. It can be based on either a floating rate (typical for bank debt) or a fixed rate (typical for bonds). Bank debt generally pays interest on a quarterly basis, while bonds generally pay interest on a semiannual basis. There are a number of factors that affect a debt obligation's coupon, including the type of debt (and its investor class), ratings, security, seniority, maturity, covenants, and prevailing market conditions. Textbook ReferencePlease see textbook section 2.1.6

In a unit investment trust the party that is responsible for the trust's organization is the A) Trustee B) Administrator C) Investment manager D) Sponsor

Correct Answer:D) SponsorAnswer ExplanationA sponsor initiates the formation of a unit investment trust, and is also responsible for the selection of securities that are held in the portfolio.Textbook ReferencePlease see textbook section 4.4.1

All of the following statements are true about bonds that trade flat EXCEPT A) No accrued interest is added at settlement. B) The issuer may be in default. C) The bond is settled on an interest payment date. D) The bond is trading "and interest".

Correct Answer:D) The bond is trading "and interest"Answer ExplanationBonds that trade flat do not include accrued interest in their settlement price. This could be because the issuer is in default and interest is not being paid, or because the bond is settling on an interest payment date. "And interest" means that accrued interest is included in the settlement price.Textbook ReferencePlease see textbook section 2.4

What date occurs one business day after the ex-dividend date? A) The notification date B) The declaration date C) The payable date D) The record date

Correct Answer:D) The record dateAnswer ExplanationThe record date is one business day after the ex-dividend date.Textbook ReferencePlease see textbook section 1.7

When a bond is called away by the issuer, the investor will likely face A) credit risk. B) holding period risk. C) interest rate risk. D) reinvestment rate risk.

Correct Answer:D) reinvestment riskAnswer ExplanationBonds are typically called during periods of falling interest rates. This means that the investor will be forced to reinvest the proceeds from their bond at a time when interest rates are lower, thus exposing them to reinvestment rate risk.Textbook ReferencePlease see textbook section 2.3.3

No-par value stock is characterized as stock which

Correct Answer:Has not been assigned a par value by the corporationExplanation:No-par value stock is simply shares that have not been assigned a par value by thecorporation. Some states permit this to occur.Textbook Reference:Please see textbook section 1.1

A client owns a portfolio of blue chip stocks that is to fund his retirement in 10 years. Although confident that the market will continue to advance, he is concerned that a market correction of more than 10% could wipe out significant value. Which of the following strategies might benefit this investor? A) Sell index calls B) Sell index puts C) Buy index calls D) Buy index puts

D) Buy index putsAnswer ExplanationBy purchasing index puts the investor would earn cash in an overall market decline. This cash could offset portfolio losses and allow the investor to benefit from continued market growth from the blue chip portfolio.Textbook ReferencePlease see textbook section 6.4

When an investor purchases a 'tranche', he is purchasing a unit of a(n) A) STRIP B) pool of heavily traded equity securities C) open-end investment company D) CMO

D) CMOAnswer ExplanationThe term 'tranche' is associated with CMOs. Many CMOs are comprised of several different components, or tranches, each with unique investment characteristics and objectives.Textbook ReferencePlease see textbook section 3.3.2

An investor purchases an index 452 call for a premium of 9. At expiration the index value is 471. Which two of the followings statements are TRUE?I. The call is in the money at expirationII. The breakeven of the contract is 463III. The investor will receive $1,900 at exercise of the contractIV. The investor will receive $1,000 at exercise of the contract A) I and IV B) II and III C) II and IV D) I and III

D) I and IIIAnswer ExplanationThis long index call was in the money at expiration, so was exercised for cash equal to the intrinsic value. Because the multiplier is $100, the cash amount is $1,900 and settlement takes place the business day after exercise. The BE for this call is 461 (SP + prem). Textbook ReferencePlease see textbook section 6.4

A customer believes that a municipal securities representative has effected transactions that are excessive in size or frequency in her discretionary account. This prohibited practice violates rules of A) Quantitative pricing B) Matched purchasing C) Fair and reasonable pricing D) Quantitative suitability

D) Quantitative suitabilityAnswer ExplanationExcessive trades and activity that are inappropriate for customers are violations of quantitative suitability requirements. This practice was formerly known as churning. Textbook ReferencePlease see textbook section 7.1.3

What is the highest rating that a bond can earn? A) Excellent B) Outstanding C) A+ D) Triple-A

D) Triple-AAnswer ExplanationThe highest bond rating is Triple-A. Only a few premier governments, companies and municipalities qualify for it. Moody's writes the rating "Aaa" and Standard & Poor's uses "AAA."Textbook ReferencePlease see textbook section 2.3.5.1

Hedge fund managers generally employ lock up periods for all of the following reasons EXCEPT A) To keep lower amounts of cash on hand B) To provide greater investment flexibility C) To commit to investments that are not liquid D) To close the fund to new investors

DAnswer ExplanationA lock up period is not used to prohibit new investment into a hedge fund. Instead, it limits liquidity by imposing a time frame during which investors cannot withdraw assets. This allows the fund to pursue higher returns by limiting the amount of cash on hand, facilitating investment in illiquid assets, and permitting greater overall investment flexibility.Textbook ReferencePlease see textbook section 5.3.3.1

Who pays income taxes on profits earned by a limited partnership? A) The general partner B) The partnership C) It depends on how the partnership is structured D) All partners

DAnswer ExplanationAll profits and losses are distributed to individual partners and reported to the IRS on personal income tax returns. The partnership files only an "information return," called a Schedule K-1, with the IRS. Textbook ReferencePlease see textbook section 5.2.5

Registered hedge fund investment managers I. Are always required to register under the Investment Company Act of the 1940II. Are generally exempt from registration under the Investment Company Act of the 1940III. Have fiduciary duty to manage assets on behalf of fund investorsIV. Are exempt from anti-fraud provisions of the Securities Exchange Act of 1934 A) II and III B) II and IV C) I and IV D) I and III

a) II and IIIAnswer ExplanationHedge fund managers are typically exempt from registration under the Investment Company Act of 1940. However, most have fiduciary responsibility for the management of fund assets and are subject to the anti-fraud provisions of the Securities Exchange Act of 1934.Textbook ReferencePlease see textbook section 5.3

Which of the following statements is correct? A) ETFs own the securities in their portfolio, whereas ETNs do not, as they are unsecured debt instruments. B) ETNs own the securities in their portfolio, whereas ETFs do not, as they are unsecured debt instruments. C) Both ETNs and ETFs have ownership interests in specified securities in their respective portfolios. D) Neither ETNs nor ETFs own any securities in their investment portfolios.

AAnswer ExplanationThere are securities owned and held in the portfolio of an ETF. An ETN is an unsecured debt instrument of an issuer. Textbook ReferencePlease see textbook section 5.5.1.1

An investor sells short 200 shares of STP stock for $65 per share and later buys 2 STP 68 calls for 2 when the market price of STP is $64. Which two of the following are TRUE?I. The investor's breakeven is 63II. The investor's breakeven is 67III. The investor's maximum gain is unlimitedIV. The investor's maximum loss is $1,000 A) II and III B) I and IV C) I and III D) II and IV

"B) I and IVAnswer ExplanationWhile a question such as this is unlikely on the SIE there are a couple of important takeaways.Firstly, this is a 2-position options problem. Therefore: takeaway #1 is that ‚Äúcall-up‚Äù and ‚Äúput-down‚Äù wont work for breakeven. Breakeven is therefore a little more annoying to calculate ‚Ä¶ but luckily there is a shortcut for this. Notice that the investor is a) selling short a stock position while b) simultaneously opening up a call option on the same stock. This is a classic short-stock hedge.Breakeven will be: * Price at which the stock is shorted (less) Premium Paid for the call option. * $65 - $2 = $63At a high level what‚Äôs going on for breakeven is this: the investor pocketed $65 per share since they shorted the stock. They have that cash on hand. They also paid $2 per share for a call option. If the stock dips down to $63, the investor can return the borrowed shares by buying back at $63 making a $2 difference on the short sale. $65 per share in cash (less) $63 to buy the shares back and return it to the original owner. The $2 gain (on the short sale of the stock) subtracted from the $2 premium paid to own the call gives a total profit/loss of $0. Aka, breakeven. Key takeaway #2: The more interesting point about a short-stock hedge is the fact that this options position will put a cap on the maximum loss that a short investor will potentially face by hedging the investors risk to the short stock. For a short-stock hedge maximum loss will be: Strike of the call option (less) Short price of the stock plus Premium paid. As the explanation states below, ‚ÄúThe most the investor can lose is limited by the purchase of the call, which allows the stock to be bought in at 68 if the market goes up‚Äù. In other words, if you are short a stock you can buy a call option (the right to buy) at a specific strike (depends on your risk tolerance) that you can exercise in the event the market goes way up ‚Ä¶ add to that a premium (what you pay to own the option). Note: all of the calculations above are on a per-share basis so when calculating max loss don‚Äôt forget to calculate the total for the entire position. There are 200 shares at play here. A $5 max loss per share ($68 - $65 + $2) x 200 shares = $1,000 maximum loss. Thus, answer choices I and IV are correct. Please also reference the short hedge example in the Lesson 6: Options video lecture for an additional overview. Textbook ReferencePlease see textbook section 6.2.3"

A bond has a call feature under which it can be called on May 1 of the years 2024, 2026 and 2028. It matures on May 1 of 2030. The yield to call (YTC) calculation assumes A) the bond is called on 5/1/24. B) the bond is called on 5/1/28. C) the bond is called at the midpoint of the three call dates. D) the bond is called on 5/1/26.

An investor purchases 200 shares of STP stock for $64 per share and buys 2 STP 62 puts for 1.50 when the market price of STP is $65. What is the maximum loss? A) $700 B) $350 C) unlimited D) $450

A) $700Answer ExplanationThe investor loses money on the stock when the market price falls. But, the long put allows the investor to sell the stock at 62. Thus, the investor can lose $2 per share on the stock, plus the premium of $1.50 that was paid for a total of $3.50 per share. 200 shares x $3.50 = maximum loss of $700.Textbook ReferencePlease see textbook section 6.2.3

Kyle has written 10 ABC May 20 puts @ .75, while ABC is trading at 20.25. The time value is A) 0.75 B) 1 C) 0.5 D) 0.25

A) 0.75Answer ExplanationThese put options are out of the money, therefore the entire premium will constitute time value.Textbook ReferencePlease see textbook section 6.5.2

An investor plans to purchase a home in the next 6 ‚Äì 12 months and would like to invest funds for a down payment in a mutual fund. Which of the following choices is most suitable? A) A money market fund B) A balanced fund C) A real estate fund D) A U.S. government bond fund

A) A money market fundAnswer ExplanationMoney market funds are appropriate for investments that need to be liquidated for their full value in a short time frame. Although not guaranteed, the value of each share has been held constant at $1, so investors in money market funds do not lose principal and can liquidate their shares for their full value plus interest that was earned.Textbook ReferencePlease see textbook section 7.4

All of the following are positive indicators for analysis of generalobligation bonds EXCEPTA) An increase in fees from the use of the city's convention centerB) The expansion of a local factory which is a large employerC) A high rate of tax collectionsD) An increase in the tax base

A) An increase in fees from the use of the city's convention centerAnswer Explanation:An increase in fees from the use of the convention center is most likelyrelevant to the analysis of revenue bonds, since the user fees pay debtservice expense. Increasing populations and an increasing tax base aregood indicators for GO analysis, as is a high rate of tax collection.Textbook Reference: Please see textbook section 3.4.1

An investor holding a face-amount certificate owns an instrument most similar to a(n) A) bond B) ETF C) Share of common stock D) ADR

A) BondAnswer ExplanationA face-amount certificate is a type of investment company that issues debt securities, obligating the issuer to pay a fixed amount at a specified date.Textbook ReferencePlease see textbook section 4.1

Which options strategy can allow an investor to purchase shares at a predetermined price that is lower than the current market price? A) Buy a call B) Write a put C) Write a call D) Buy a put

A) Buy a callAnswer ExplanationA long call allows an investor to exercise and buy shares at the strike price for stock that has increased in value.Textbook ReferencePlease see textbook section 6.3.2

Which of the following options strategies is considered mildly bullish? A) Covered call B) Uncovered put C) Long put D) Long call

A) Covered callAnswer ExplanationA covered call is a mildly bullish strategy because the investor wants to earn additional income from writing the call. If the price of the call increases too much, the investor will be forced to sell a stock at the strike price. A long call is the most bullish strategy. An uncovered put is also bullish because the investor will be forced to buy stock at the strike price unless the stock price falls. Long puts are bearish.Textbook ReferencePlease see textbook section 6.2.2

Two options contracts would be in the same series when they have common A) Expiration months and strike prices B) Premiums and intrinsic values C) Strike prices and premiums D) Premiums and expiration months

A) Expiration months and strike pricesAnswer ExplanationTwo option contracts are in the same series because they have the same expiration month and strike price.Textbook ReferencePlease see textbook section 6.1.1

A municipal bond backed by the full faith and credit, as well as the taxing authority, of the issuer is called a A) general obligation (GO) bond. B) industrial development bond. C) revenue bond. D) Build America Bond.

A) General Obligation (GO) BondAnswer ExplanationGO bonds are backed by the full faith and credit, and also the taxing authority, of the issuer. This contrasts with revenue bonds, which are backed by specific revenues of the facility financed.Textbook ReferencePlease see textbook section 3.4.3

An investor is long 2 ABC June 70 calls at 4. If just prior to expiration ABC is trading for 73, which two of the following are TRUE?I. The calls will be exercisedII. The calls will expireIII. The investor will purchase stockIV. The investor will sell stock A) I and III B) I and IV C) II and III D) II and IV

A) I and IIIAnswer ExplanationJust prior to expiration, this call is in the money because the market price of 73 is above the exercise price of 70. The investor will exercise the right to buy 200 shares of stock for the exercise price of 70.Textbook ReferencePlease see textbook section 6.2.1.1

An investor buys an S&P 500 2015 call for 12.50. Just prior to expiration the S&P is 2025. Which two of the following statements are TRUE?I. The investor will exercise the contractII. The contract will expireIII. The investor profits in this transactionIV. The investor has a loss in this transaction A) I and IV B) II and III C) I and III D) II and IV

A) I and IVAnswer ExplanationThe investor paid $1,250 to purchase the index call. The call is exercised because the index value is above the exercise price. Index options settle in cash, so the holder makes $1,000 at exercise. Because the premium was $1,250, the investor loses money on this transaction (Paid $1,250, received $1,000). Textbook ReferencePlease see textbook section 6.2.1.1

Which of the following statements are true about the par value of a bond?I. It is also called the face value of the bondII. It fluctuates based on market interest ratesIII. Bonds with a lower par generally pay a higher couponIV. It is the amount of principal the investor will receive at maturity of the bond A) I and IV B) I and III C) II and III D) II and IV

A) I and IVAnswer ExplanationThe par value of a bond is a fixed amount that is also known as its face or principal value. It is the amount of money that an investor will receive at maturity. Par value does not fluctuate based as interest rates change. Textbook ReferencePlease see textbook section 2.1.2

Which of the following trading strategies that is used heavily by hedge funds can typically not be used by mutual funds?I. Short sellingII. LeverageIII. Investment in illiquid securities A) I, II and III B) III only C) I and II only D) II and III only

A) I, II, and IIIAnswer ExplanationWhile hedge funds are free to use a wide combination of trading strategies, mutual funds typically cannot sell short, use leverage or invest in highly illiquid securities.Textbook ReferencePlease see textbook section 5.3.5

As compared to an issuer's non-convertible debt, convertible bondsI. Pay a higher couponII. Pay a lower couponIII. Are typically classified as subordinated debtIV. Are typically classified as non-subordinated debt A) II and III B) I and IV C) I and III D) II and IV

A) II and IIIAnswer ExplanationConvertible bonds provide the holder the choice of converting to shares of common stock. Because of this benefit to investors, convertible bonds pay less interest. When compared to non-convertible bonds, convertibles are classified as subordinated debt, which means they have a lower claim to the assets of the issuer in the event of liquidation. Textbook ReferencePlease see textbook section 3.1.3

A limited partner may be liable for which of the following?I. Lawsuits against the limited partnershipII. A share of recourse debtIII. Losses of invested principalIV. Unlimited losses of the partnerships A) II and III B) I and IV C) I and II D) III and IV

A) II and IIIAnswer ExplanationLimited partners may lose their invested principal and may be responsible for their share of the recourse debt of the partnership. The general partner is responsible for lawsuits against the partnership and unlimited losses of the partnership.Textbook ReferencePlease see textbook section 5.2.3

When a municipal bond trades in the secondary market, any transactions take place I. On an exchangeII. Over the counterIII. Through an auctionIV. Dealer to Dealer A) II and IV B) II and III C) I and IV D) I and III

A) II and IVAnswer ExplanationSecondary trading of municipal securities takes place in the over the counter market. This market is a decentralized dealer to dealer marketplace and includes only firms that are registered with the MSRB.Textbook ReferencePlease see textbook section 3.4

An investor purchases 2 ABC Mar 76 calls for 2.50. Which two of the following statements are TRUE?I. The breakeven is 73.50II. The breakeven is 78.50III. The contract will be profitable if it expiresIV. The investor wants the contract to be exercised A) II and IV B) II and III C) I and III D) I and IV

A) II and IVAnswer ExplanationThe breakeven of a call is the strike price + the premium. The buyer of a call will profit if the stock price is above the breakeven. Exercise of the contract allows the holder to buy stock at the strike price when the market price is higher. A call buyer loses the premium paid if the contract expires.Textbook ReferencePlease see textbook section 6.2.1

A 20-year municipal bond, callable in 5 years, is trading at 101 ¬º. Which two of the following statements are true?I. The bond's YTC is higher than its YTM.II. The bond's YTC is lower than its YTM.III. The bond's CY is greater than its nominal yield.IV. The bond's CY is lower than its nominal yield. A) II and IV B) I and IV C) I and III D) II and III

A) II and IVAnswer ExplanationWhen a bond is trading at a premium, YTC is lower than YTM, and its current yield is lower than nominal yield.Textbook ReferencePlease see textbook section 2.2.5

The agreement between a municipal bondholder and the issuer is found in the A) indenture B) legal opinion C) notice of sale D) official statement

A) IndentureAnswer ExplanationThe agreement between the issuer of the municipal bond and the investor is contained in the bond indenture.Textbook ReferencePlease see textbook section 3.4.2.1

What is the best way to describe an investor's profit potential when writing a call option? A) It is limited to the premium received. B) It is unlimited if the underlying stock increases. C) It is significant if the underlying stock declines. D) It is limited to the premium paid.

A) It is limited to the premium receivedAnswer ExplanationThe maximum gain for the writer of an option is the premium received.Textbook ReferencePlease see textbook section 6.2

An investor sold short ABC stock at 35. In recent weeks the price of the stock has declined to 26. Which of the following would best protect the investor's gain? A) Long 28 call B) Short 28 call C) Short 25 put D) Long 25 put

A) Long 28 callAnswer ExplanationAn investor with a short stock position must eventually buy the stock to cover the short. The investor makes money if the stock can be bought at a lower price than the price at which it was sold. If the price has fallen since the short sale, the investor can buy a call that will lock in the price the investor will need to pay to buy in the position. A long call is the best protection for a short stock position.Textbook ReferencePlease see textbook section 6.2.4

An investor wishes to profit on her belief in a future deep overall market decline. Which of the following strategies is suitable? A) Long index put B) Short index put C) Long index call D) Short index call

A) Long index putAnswer ExplanationAn investor that anticipates a substantial drop in the market overall can profit by buying an index put. If the market declines and the put is assigned, the writer will deliver cash equal to the in the money value. The sharper the market decline, the more the index put is in the money, providing a profit to the bigger of the put index.Textbook ReferencePlease see textbook section 6.4

A customer sells short 200 shares of XYZ stock for 43 and buys 2 XYZ 47 calls for 2.50. The stock price rises to 50 and the option is exercised. The profit or loss to the investor is A) Loss of $1,300 B) Profit of $1,300 C) Profit of $650 D) Loss of $650

A) Loss of $1,300Answer ExplanationThe stock is sold short for $8,600. To protect the position the investor buys 2 calls for $500. The calls are exercised when the market price of the stock rises, so the investor buys the stock to cover the short position for $9,400. The customer received $8,600 from the short sale, but paid a total of $9,900 (premium + stock purchase price) for a loss of $1,300.Textbook ReferencePlease see textbook section 6.2.4

Distributions from a CMO are made A) Monthly and are taxed at all levels B) Quarterly and are taxed at the federal level only C) Monthly and are taxed at the federal level only D) Quarterly and are taxed at all levels

A) Monthly and are taxed at all levelsAnswer ExplanationDistributions from a CMO are made on monthly basis and are taxed at the federal, state, and local level. Their monthly distributions make them appropriate for investors who are seeking income on a monthly basis.Textbook ReferencePlease see textbook section 3.3.1

An investment company where the purchase and redemption price are the same is a A) No-load fund B) Index fund C) Diversified fund D) Value fund

A) No-load fundAnswer ExplanationA "no-load" fund is one which is sold to the public at the NAV, without any sales charge being added. Consequently, the NAV & POP would be the same in this instance.Textbook ReferencePlease see textbook section 4.2.5.2

An investor writes a call to increase income to his portfolio. In establishing this position this investor has engaged in an A) Opening sale B) Closing purchase C) Opening purchase D) Closing sale

A) Opening SaleAnswer ExplanationThis investor enters the market by writing a call. Creating an opening sale to establish the position. Textbook ReferencePlease see textbook section 6.7.1

An investor has placed an order to write 10 put options on ABC stock. This would be the client's initial option trade, after having previously done a few equity trades. The order ticket for the option trade would be marked A) Opening sale B) Opening purchase C) Closing sale D) Closing purchase

A) Opening SaleAnswer ExplanationWhenever an investor initially writes an option (E.g. sells a call or a put) that is referred to as an opening sale. If the investor then buys that option back, then it is a closing purchase.Textbook ReferencePlease see textbook section 6.7.1

In a corporate liquidation, which of the following securities have thehighest priority to receive any remaining assets?A) Senior secured debtB) Mezzanine debtC) Preferred stockD) Common stock

A) Senior secured debtAnswer Explanation:Senior secured lenders are also called "hard asset lenders." They placefirst liens on specific corporate assets, such as equipment, vehicles orbuildings and these assets stand as collateral to make sure loans arerepaid.Textbook Reference: Please see textbook section 3.1.2.3

The option strategy presenting the greatest potential risk to an investor is a A) Short call B) Short put C) Long put D) Long call

A) Short callAnswer ExplanationThe option strategy carrying the greatest potential risk is the short call. The risk on this trade could be unlimited.Textbook ReferencePlease see textbook section 6.2.2

When is the settlement date for physical delivery of stock when options have been exercised? A) The 2nd business day after exercise B) The 5th business day after exercise C) The day of exercise D) The 3rd business day after exercise

A) The 2nd business day after exerciseAnswer ExplanationWhen options have been exercised, settlement date for physical delivery of stock is 2 business days after the exercise date.Textbook ReferencePlease see textbook section 6.7.3.1

What liquidity options are available in a non-negotiable certificate of deposit (CD)? A) The CD may be redeemed by the issuing bank only B) The CD may be resold in the secondary market C) The CD may be redeemed by any bank D) There are none

A) The CD May be redeemed by the issuing bank onlyAnswer ExplanationMost CDs offered to individuals are non-negotiable. This means they can't be re-sold and can only be redeemed by the issuing bank.Textbook ReferencePlease see textbook section 3.6.2.1

An investor has established the following position:Buy 100 ABC at 76Sell 1 ABC 80 call at 1.75. At expiration ABC is 72. Which of the following best describes the impact to this investor? A) The call will expire so the premium received will reduce the cost basis of the ABC stock to $74.25 per share B) The counterparty will exercise the right to buy stock, so the investor will sell stock the stock at 80 and have a profit of $5.75 per share because of the premium received on the short call C) The investor will keep the stock but lose the premium on the option that was written D) The investor will be required to buy stock at 80, but the cost will be reduced by the premium received

A) The call will expire so the premium received will reduce the cost basis of the ABC stock to $74.25 per share Answer ExplanationThis is an example of covered call writing. When the call expires, the premium received on writing the call can reduce the price of the stock. Worst case, the investor would deliver the stock and profit on the difference between the stock price and the exercise price, plus the premium received.Textbook ReferencePlease see textbook section 6.2.2.2

The best way to mitigate prepayment risk is to A) reduce exposure to mortgage-backed securities (MBS). B) reinvest prepayment as soon as they are received. C) invest in mortgage-backed securities (MBS) that cannot be prepaid. D) buy prepayment insurance.

A)Answer ExplanationPrepayment risk is associated with mortgage-backed securities (MBS). When interest rates are falling, homeowners refinance or prepay their mortgages, which causes principal to be repaid faster to MBS investors. Because mortgages are typically refinanced in falling-interest-rate environments, the MBS holder is left to reinvest the capital in the lower-interest-rate environment. Textbook ReferencePlease see textbook section 7.2.7

An investor is short an ABC Jan 65 put for a premium of 7. If at expiration the price of ABC is 53, which of the following statements is TRUE? A) The holder of the contract will exercise the contract B) The investor must deliver stock at expiration C) The contract's breakeven is 72 D) The contract is out-of-the-money at expiration

A) The holder of the contract will exercise the contractAnswer ExplanationA put is in-the-money whenever the price of the underlying stock is lower than the strike price. This contract is in the money, and profitable to the holder at expiration, because the breakeven is 58 (strike price minus premium for puts). The put holder will exercise the contract, and has the right to sell stock at 65. The writer (the party that is short) must buy it, when the current market price is actually 53. The loss to the writer is offset by the premium received.Textbook ReferencePlease see textbook section 6.3.2.1

Whereas a regular stock transaction will settle two business days following the trade, an options transaction will settle A) the next business day B) also on the second business day following the trade C) At any agreed upon date by the buyer and the seller D) that same day

A) The next business day Answer ExplanationOptions transactions settle on the business day following the transaction.Textbook ReferencePlease see textbook section 6.7.3

All of the following statements are true about asset backed securities EXCEPT A) They are not subject to pre-payment risk B) They are debt instruments secured by underlying assets C) They provide a monthly stream of income to an investor D) They may be rated as investment grade or speculative grade

A) They are not subject to pre-payment riskAnswer ExplanationAsset backed securities are typically backed by pooled consumer debt like credit card debt or auto loans. Investors who purchase these debt instruments receive a monthly stream of income. They do subject investors to pre-payment risk, as the underlying debt may be paid off prior to its due date. Textbook ReferencePlease see textbook section 3.3.3

Which of the following is NOT TRUE about an investor that holds an equity LEAPS call contract? A) They are subject to unlimited risk B) Their options might have an expiration as long as three years C) They may close out the position by selling it in the marketplace any time before expiration D) Their contract performance is guaranteed by the OCC

A) They are subject to unlimited riskAnswer ExplanationA holder or buyer of an equity LEAP or equity option contract has maximum loss equal to the amount of the premium paid. Writers of call options are subject to unlimited risk.Textbook ReferencePlease see textbook section 6.2.1

Which of the following is a characteristic of revenue bonds? A) User fees B) Voter referendums C) Full faith and credit of the issuer D) Tax limits

A) User feesAnswer ExplanationRevenue bonds are backed by fees that are generated from the use of the facility. Taxes back general obligation bonds. The full faith and credit of the issuer is backing for GO bonds, and includes the issuer's ability to tax. A vote by taxpayers is often required to authorize a new GO bond issue.Textbook ReferencePlease see textbook section 3.4.2

All of the following investors would benefit from the purchase of an S&P 500 put EXCEPT A) An investor who wishes to generate portfolio income and believes that the market is likely to remain flat B) An investor who wants to take advantage of the leverage that options can provide with a limited dollar risk C) An investor who wants diversify a portfolio with downside exposure of the S&P 500, but does not wish to establish short positions in shares of multiple component issues D) An investor who is highly bearish on the market overall and wants to profit from a decline in its level

A) an investor who wishes to generate portfolio income and believes that the market is likely to remain flat.Answer ExplanationAn Index put allows the investor to profit from a downward move in the level of the market as measured by S&P 500 index, while committing less capital compared to the margin requirements needed for the short sale of a number of component issues. A long put holder is not subject to the unlimited upside risk that applies to investors with short stock positions. The maximum loss to the investor is the premium paid.Textbook ReferencePlease see textbook section 6.4

When comparing liquidity differences between two corporate bonds, the most important factor to be considered is the A) credit ratings of the two bonds B) CUSIP number C) maturity of the two bonds D) coupons of the two bonds

A) credit rating of the two bondsAnswer ExplanationThe credit ratings of the bonds would be the most important factor to examine when comparing the liquidity differences of two corporate bonds.Textbook ReferencePlease see textbook section 3.1.5

Which of the following statements regarding Regulation Best Interest (BI) is false? A) A recommendation complies with Reg BI if it meets the retail client's objectives B) Client interests must be placed ahead of firm and registered representative interests C) Broker-dealers and their registered representatives must make disclosures about their relationship with the retail client D) Reg BI applies to all retail client recommendations

A)Answer ExplanationA recommendation that simply meets the client's objectives does not satisfy the higher standard of Reg BI. Each recommendation must be in the client's best interest. Textbook ReferencePlease see textbook section 7.1.4

All of the following statements regarding the organization of a unit investment trust are true EXCEPT A) An investment manager is hired to actively manage the trust assets B) The securities to be held in the portfolio are selected to meet a specified investment objective C) The Trust Indenture is the document that initiates the formation of the trust D) The trust must register under the Securities Act of 1933

A)Answer ExplanationA unit investment trust is not actively managed. The trust securities are selected by the trust sponsor and held with few exceptions until the trust is terminated.Textbook ReferencePlease see textbook section 4.6

An investor has purchased an ABC 67 put for 4. If ABC stock is trading at 68.50 just prior to expiration, A) The contract will expire and the holder will lose the premium B) The investor will be obligated to sell 100 shares of ABC for 67 C) The investor will have the right to buy 100 shares of stock at 67 D) The investor will exercise the right to sell 100 shares of ABC for 67

A)Answer ExplanationAn investor that has purchased a put has the right to sell stock at the exercise price if the contract is exercised. This contract will not be exercised because it is out of the money (the market price of 68.50 is above the strike price of 67; puts are in the money when the market price is below the strike price).Textbook ReferencePlease see textbook section 6.3.1.1

All of the following are objectives of call buyers EXCEPT A) hedging a long stock position against falling prices B) delaying a decision to buy stock C) diversifying holdings D) speculating for profit on the rise in price of stock

A)Answer ExplanationPurchasing a call option does not hedge an investor with a long stock position, because if the stock goes down in value, the investor will lose money on the long position while the call option will expire worthless and offer no protection.Textbook ReferencePlease see textbook section 6.2.1

A representative is considering the recommendation of a limited partnership interest to a customer seeking portfolio diversification. The recommendation of a partnership interest should be based on A) The overall economic benefit of owning the partnership interest, including the income and the potential for appreciation of the assets held by the partnership B) All of these reasons are equally important in making a suitable recommendation of a limited partnership interest C) Its ability to generate substantial tax losses to shelter income if the client is in a high tax bracket D) The potential for the partnership to pass through income tax credits and expense deductions to offset earnings from other successful investments

AAnswer ExplanationAn interest in a limited partnership should be judged on its economic merits, not its tax benefits. Of primary importance in making a suitable recommendation of a limited partnership interest are its potential to generate income and appreciation of the assets it holds. Textbook ReferencePlease see textbook section 5.2

Features of ETNs include all of the following EXCEPT A) An owner of an ETN holds equity securities with voting rights B) ETNs can be liquidated prior to maturity by selling them on an exchange or to the issuer C) Unlike ETFs or mutual funds, investors in ETNs do not receive an annual distribution D) ETNs have a maturity date and are backed only by the credit of the issuer

AAnswer ExplanationETNs are debt notes that are unsecured and backed by the credit of the issuer. They are designed to blend some of the features of ETFs with debt securities, and track performance of market indices to yield profits for investors. ETNs are traded on major exchanges, but investors can also hold these debt securities until maturity. They are considered more tax efficient than mutual funds or ETFs because there is no annual distribution of capital gains from the fund. Gains or losses are realized only when the investment is sold.Textbook ReferencePlease see textbook section 5.5.1

Which two of the following characteristics best describe LGIPS?I. They are equity securitiesII. They are debt securitiesIII. They were established to provide an investment option for escrow accounts and sinking funds IV. They were established as a safe and liquid investment option for cash held by municipal entities A) I and IV B) II and III C) I and III D) II and IV

AAnswer ExplanationLGIPs are equity securities like mutual funds. Investors own a proportionate share of the investment pool which can be managed by government employees or an external investment firm. They were established to provide safe, liquid and competitive investment options for cash held by municipalities.Textbook ReferencePlease see textbook section 5.6.1

All of the following are characteristics of limited partners in a limited partnership EXCEPT A) The right to bind the partnership into legal contracts B) Limited liability C) Right to receive a share of losses and income from the partnership D) Passive role in management of the partnership

AAnswer ExplanationLimited partners cannot execute or bind contracts on behalf of the partnership. That role belongs to the general partner. Limited partners have limited liability in return for their passive role in managements. They receive a proportionate share in the losses and gains of the partnership based on the units they own.Textbook ReferencePlease see textbook section 5.2.3

Some of the largest universities in the United States are investing 10% or more of their endowments in private equity funds. What do their investment objectives tend to be? A) Long-term capital appreciation and diversification B) Current income and liquidity C) Safety and liquidity D) Tax-sheltered growth and income

AAnswer ExplanationPrivate equity funds are long-term investments that may require holding periods of 10 years or more, and their main objective is capital appreciation. A second objective is diversification, and this is achieved in two ways. Over time, private equity funds can produce different streams of returns than stocks and bonds. They also help investors diversify among the majority of companies in the US that are not public. Textbook ReferencePlease see textbook section 5.4.2

An investment in a private equity fund A) Is most likely owned by accredited and institutional investors and not retail investors B) Is considered a relatively low-risk investment C) Is highly liquid D) Is not subject to registration and disclosure requirements under the Securities Act of 1933

AAnswer ExplanationPrivate equity is subject to registration and disclosure requirements of the Securities Act of 1933. Sold to mostly accredited investors and institutional investors, it is often not accessible to retail investors because of the high dollar investment minimums, lack of liquidity, and long-term time horizons. Private equity is considered relatively high risk because of the high underperformance risk of many startup companies.Textbook ReferencePlease see textbook section 5.4.2

Are hedge funds required to register with the SEC? A) Yes, if they manage private funds with more than $150 million in assets B) Yes, if they have more than 35 investors C) All hedges must register, except those operated for the exclusive benefit of family offices. D) No, because they are exempt from registration under US securities law

AAnswer ExplanationThe Dodd‚ÄìFrank Wall Street Reform Act of 2010 added provisions designed to increase transparency and disclosure in hedge funds. Hedge funds that manage private funds with more than $150 million in assets must register with the SEC.Textbook ReferencePlease see textbook section 5.3.1

Market interest rates have declined since ABC Co. issued a $100,000,000 debenture. To benefit from the change in interest rates, ABC might consider a A) Reorganization B) Repurchase agreement C) Leveraged buy out D) Refunding

Answer ExplanationA refunding is a refinancing strategy that an issuer might utilize when interest rates have declined following the issuance of a bond. The issuer would sell a new bond at the new lower rates and use the proceeds of the sale to redeem the outstanding bonds which are carrying a higher interest rate. The end result is lower financing costs for the issuer. Textbook ReferencePlease see textbook section 2.1.9

An institutional account may be able to qualify for an exemption from A) The quantitative aspect of the suitability rule B) The customer-specific aspect of the suitability rule C) The reasonable basis aspect of the suitability rule D) All components of the securities industry suitability rule

Answer ExplanationAn institutional account may qualify for an exemption from the customer-specific aspect of the suitability rule. The broker must believe the client is able to assess risks independently, and the client must confirm it is exercising independent judgement in evaluating the recommendation.Textbook ReferencePlease see textbook section 7.1.2.1

In the fixed income market, the risk that is created by a downward trend in interest rates is referred to as A) reinvestment rate risk B) interest rate risk C) market risk D) principal risk

Answer ExplanationDownward trends in interest rates cause reinvestment risk because it may be difficult to find comparable yields for reinvestment of principal or interest payments. Interest rate risk occurs as interest rates increase, causing a subsequent decline in bond prices. Textbook ReferencePlease see textbook section 2.3.3

The accrued interest that is calculated for settlement of a Treasury bond A) Is based on actual-day months. B) Is subtracted from the purchase price. C) Starts on the dated date. D) Includes interest paid on the settlement date.

Answer ExplanationFor government bonds, interest starts accruing on the interest payment date before settlement. Interest payable on the settlement date is not included. Dated date applies only to new issues of municipal bonds. Government bond interest is based on actual-day months. Accrued interest is added to the price paid by the purchaser and received by the seller.Textbook ReferencePlease see textbook section 2.4

Falling interest rates can create additional risk for holders of mortgage-backed securities (MBS) because homeowners can refinance into lower-rate mortgages. This risk is called A) mortgage acceleration risk. B) credit risk. C) capital risk. D) prepayment risk.

Answer ExplanationPrepayment risk is associated with mortgage-backed securities (MBS). When interest rates are falling, homeowners refinance or prepay their mortgages, which causes principal to be repaid faster to MBS investors. Because mortgages are typically refinanced in falling-interest-rate environments, the MBS holder is left to reinvest the capital in the lower-interest-rate environment.Textbook ReferencePlease see textbook section 7.2.7

Which of the following is not a component of the MSRB Suitability Rule? A) Issuer-specific suitability B) Quantitative suitability C) Customer-specific suitability D) Reasonable-basis suitability

Answer ExplanationThe MSRB suitability rule does not include a provision for issuer related suitability. Textbook ReferencePlease see textbook section 7.1`

An investor purchasing 2 GMAC ZR 12's at 53 1/2 would receive annual interest of A) $53.50 B) $120 C) $12 D) $0

Answer ExplanationThe ZR in the quote indicates that this bond is a zero, it does not make semi-annual interest payments. Zero's sell at a deep discount and mature at par. The difference between the purchase price and the cash received at maturity is interest income.Textbook ReferencePlease see textbook section 2.1.5

DEF Corporate debenture is quoted at 103 and pays a $10 semiannual coupon. What is the current yield of this bond? A) 0.9% B) 1.9% C) 9.7% D) 19.4%

Answer ExplanationThe current yield of a bond is found by dividing the annual interest by the bond‚Äôs market price. In this case, we divide the annual interest, which is $20 ($10 semiannual coupon x2), by the market price of $1,030, to arrive at the current yield of 1.9%. Note that bonds are quoted as a percentage of par, which is $1,000. Therefore, a quote of 103, means 103% of par or $1,030.Textbook ReferencePlease see textbook section 2.2.2

A municipal bond that is quoted with a yield to call that is higher than its coupon rate is recognized as trading A) flat B) At a discount C) At a premium D) At par

Answer ExplanationThe yield to call reflects the impact on an investor's rate of return if the bond is called prior to maturity. The yield to call is higher than the coupon rate when a bond is trading at a discount because the bond holder receives the par value of the bond prior to its original maturity date if the bond is called. Textbook ReferencePlease see textbook section 2.2.5

A corporation will call in some of its outstanding bonds. When the bonds are called, the issuer A) must make one final interest payment to the bondholder. B) will pay the investor the current market value of the bond plus accrued interest to that date. C) will pay the investor par value plus accrued interest to that date. D) will offer the investor another bond with a lower interest rate.

Answer ExplanationWhen an issuer calls in a bond, it will pay the bondholder the par value of the bond, plus any accrued interest to that date. Once the bond is called, there will be no further interest payments made on the bond.Textbook ReferencePlease see textbook section 2.4

What is the main difference between yield to maturity (YTM) and yield to call (YTC)? A) Premiums and discounts are ignored in YTC but not in YTM. B) The time at which the bond terminates are different. C) Premiums and discounts are ignored in YTM but not in YTC. D) The current market price is relevant when calculating YTM but not YTC.

Answer ExplanationYield to maturity reflects the yield earned if the investor holds the bond until maturity, while yield to call reflects the yield earned assuming the issuer calls the bond back prior to maturity.Textbook ReferencePlease see textbook section 2.2.4

A zero coupon municipal security is most appropriate in which two of the following situations?I. A middle aged investor in a high tax bracket who is looking to generate as much tax-free income as possibleII. A grandmother who would like to have a specified amount of money available to pay for her grandchild's college education in 10 yearsIII. A retired investor who holds a diversified portfolio of growth security and wishes to receive tax free income from 20% of his portfolioIV.A head of household who is saving money to purchase a vacation home in 15 years A) I and IV B) I and III C) II and III D) II and IV

Answer ExplanationZero coupon bonds are purchased at a discount and mature to face value. They are most suitable for investors that would like to plan for the availability of a lump sum at a defined date in the future. They do not pay interest income regularly; the interest is considered the difference between the purchase price and the par value. Textbook ReferencePlease see textbook section 2.1.5

Which of the following is a characteristic of a corporate zero-coupon bond? A) They generally have short-term maturities B) Prices generally fluctuate more than other types of bonds in the secondary market C) Imputed interest is not taxable at the federal level D) They typically pay interest semi-annually

Answer ExplanationZero-coupon bonds are generally long-term bonds that are purchased at a deep discount and mature to their face value. Because of the deep discount, their prices generally fluctuate more than prices of other bonds that are traded in the secondary market. They pay interest only at maturity, although imputed interest must be reported for tax purposes each year. Textbook ReferencePlease see textbook section 2.1.5

Call risk is the biggest threat to an investor when interest rates are A) falling B) volatile C) rising D) stable

Correct Answer:A) fallingAnswer ExplanationCall risk is the risk that an investment, typically a bond, may be called by an issuer when interest rates decline. Textbook ReferencePlease see textbook section 7.2.1

A bond has annual coupons totaling $60. What is the highest price that can be paid for the bond to generate at least a 5% current yield? A) 1000 B) 1200 C) 1133 D) 900

B) 1200Answer ExplanationCurrent yield is calculated as the annual coupons divided by current price. One way to solve this problem is to divide $60 by 5% = $1,200 current price. Alternatively, a 5% current yield means an investor can afford to pay up to 20 times total annual coupons = $60 X 20 = $1,200.Textbook ReferencePlease see textbook section 2.2.2

Commercial paper is exempt from securities registration requirements as long as maturities do not exceed A) 180 days B) 270 days C) One year D) 90 days

B) 270 daysAnswer ExplanationCommercial paper is generally exempt from securities registration requirements under the 33 Act, as long as maturities do not exceed 270 days. However, transactions in commercial paper are not exempt from anti-fraud provisions of U.S. securities lawTextbook ReferencePlease see textbook section 3.6.1

What is a repurchase agreement or repo? A) A contractual arrangement between a customer and a broker-dealer, in which the broker-dealer gives a selling customer the right to repurchase sold securities up until the settlement date. B) A contractual arrangement between two parties, in which one party agrees to sell securities to another party at a specified price with a commitment to buy the securities back at a later date for another specified price. C) A contractual arrangement between two parties, in which the broker-dealer can repossess securities pledged as collateral in connection with margin loans. D) A contractual arrangement between a customer and a broker-dealer, in which the broker-dealer gives a selling customer the right to repurchase sold securities for 30 days.

B) A contractual arrangement between two parties, in which one party agrees to sell securities to another party at a specified price with a commitment to buy the securities back at a later date for another specified price.Answer ExplanationA repo is a contractual arrangement between two parties, in which one party (a borrower of cash) agrees to sell securities to another party (lender of cash) at a specified price with a commitment to buy the securities back at a later date for another specified (typically higher) price. This higher price reflects the interest earned by the purchaser (lender).Textbook ReferencePlease see textbook section 3.6.4

Which of the following projects is most likely funded by a revenue bond issue? A) A municipal government building B) A new bus depot C) A city recreation complex D) A new public golf course

B) A new bus depotAnswer ExplanationTransit authorities that generate revenue from the sale of tickets or fares are funded by revenue bond issues. Projects that are free to the public, or for the good of the public, are backed by GO bonds, and include public golf courses, other sports and recreation complexes, public schools and municipal government buildings.Textbook ReferencePlease see textbook section 3.4.2

Most hedge funds are offered to investors through A) A Secondary offering B) A private placement C) A shelf offering D) An IPO

B) A private placementAnswer ExplanationHedge funds are sold through private placements to accredited and institutional investors. They are exempt from the SEC registration process for public offerings. Textbook ReferencePlease see textbook section 5.3.1

Which of the following securities is most protected from credit risk? A) A Fannie Mae pass through certificate B) A U.S. Treasury bond trading at a discount C) A pre- refunded municipal GO bond D) A money market fund with a stable net asset value of $1.00 per share

B) Answer ExplanationDirect obligations of the U.S. Treasury are considered the safest securities in the marketplace, so they have the least amount of credit risk.Textbook ReferencePlease see textbook section 3.2

To qualify for favorable income tax treatment, a REIT must distribute what percentage of its taxable income to shareholders? A) At least 50% B) At least 90% C) At least 75% D) 100%

B) At least 90%Answer ExplanationREITS are required to distribute at least 90% of their taxable income to shareholders. By doing so, they qualify for pass-through tax status ‚Äì i.e., no income tax at the REIT level.Textbook ReferencePlease see textbook section 5.1.5

All of the following are examples of derivative securities EXCEPT A) Warrants B) ETFs C) Futures contracts D) Swaps

B) ETFsAnswer ExplanationOptions, futures contracts, swaps and warrants are common examples of derivative securities. The value of a derivative security is based on the underlying asset, which may be nearly any asset, including stock, debt securities or commodities. ETFs, or exchange traded funds, are like mutual funds, in that the investor owns a proportionate share of the underlying securities. Unlike mutual funds, ETF are exchange-traded and are not redeemed by the fund. Textbook ReferencePlease see textbook section 6.1

Which two of the following options contracts are subject to automatic exercise at expiration if the market price of ABC is 45.25?I. Long ABC 42 callII. Long ABC 46 putIII. Long ABC 48 callIV. Long ABC 44 put A) II and III B) I and II C) II and IV D) I and IV

B) I and IIAnswer ExplanationThe Options Clearing Corporation has provisions for the automatic exercise of certain in-the-money options at expiration. Generally, OCC will automatically exercise any expiring equity call or put in a customer account that is $0.01 or more in-the-money, and an index option that is $.01 or more in-the-money. Calls are in the money when the market price is higher than the exercise price; puts are in the money when the market price is lower than the exercise price.Textbook ReferencePlease see textbook section 6.6.1

Which of the following companies issue a fixed number of shares in their initial public offering? I. Closed end companiesII. Open end companiesIII. REITS A) I, II and III B) I and III only C) I and II only D) II and III only

B) I and III onlyAnswer ExplanationClosed end companies and REITS issue a fixed number of shares in their initial public offering. Open end companies issue shares continually through an ongoing primary offering.Textbook ReferencePlease see textbook section 5.1.2

Which two of the following statements correctly state the tax treatment that applies to municipal securities?I. Capital gains are fully taxableII. Capital gains are tax deductibleIII. Interest payments are generally tax free at the federal levelIV. Interest payments are taxable at the federal level but exempt at the state level. A) II and IV B) I and III C) II and III D) I and IV

B) I and IIIAnswer ExplanationMunicipal securities pay interest that is generally tax exempt at the federal level, and may also be exempt at the state tax level. Capital gains are fully taxable. Textbook ReferencePlease see textbook section 3.4.5.2

Which two of the following options strategies are bullish?I. Long callII. Short callIII. Long putIV. Short put A) I and III B) I and IV C) II and IV D) II and III

B) I and IVAnswer ExplanationA bullish investor is profitable when market prices rise. Call buyers and put sellers are bullish. Call buyers have the right to buy at the exercise price, while put sellers are not assigned when market prices rise. They may keep the premium received without having to buy stock.Textbook ReferencePlease see textbook section 6.3.2

Closed-end funds are subject to regulation by which of the following?I. The Securities Act of 1934II. The Investment Company Act of 1940III. The Investment Advisors Act of 1940 A) I and II only B) I, II, and III C) I and III only D) II and III only

B) I, II, and IIIAnswer ExplanationClosed-end companies are subject to regulation under all major securities Acts, including the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the Investment Advisors Act of 1940. The Securities Act of 1933 also applies when the closed-end fund is first issued.Textbook ReferencePlease see textbook section 4.1

When comparing ETFs and closed-end funds, which two of the following statements are TRUE?I. ETFs typically trade at a deeper discount or higher premium from NAVII. Closed-end fund shares typically trade at a deeper discount or higher premiumIII. Closed-end funds typically experience more volatility then ETFsIV. ETFs typically experience more volatility than closed-end funds A) I and III B) II and III C) I and IV D) II and IV

B) II and IIIAnswer ExplanationClosed-end funds can commonly trade at a discount or premium of 10%‚Äì 20% of their NAV, while ETFs are normally trading within 1% of their NAV. There is much greater market volatility in the price of closed-end shares than in ETFs.Textbook ReferencePlease see textbook section 4.5.1.2

An investor writes 2 ABC Mar 76 calls for 2.50. Which two of the following statements are TRUE?I. The breakeven is 73.50II. The breakeven is 78.50III. The contract will be profitable if it expiresIV. The investor wants the contract to be exercised A) I and III B) II and III C) I and IV D) II and IV

B) II and IIIAnswer ExplanationThe breakeven of a call is the strike price + the premium. The writer of a call will profit if the stock price is below the breakeven and the contract expires. The writer will keep the premium received and is not obligated to sell the stock.Textbook ReferencePlease see textbook section 6.2.2

An investor writes an XYZ June 102 put for 10. Just prior to expiration the price of XYZ is 103. Which two of the following statements are TRUE?I. The contract will be exercisedII. The contract will expireIII. The investor profits in this transactionIV. The investor has a loss in this transaction A) I and IV B) II and III C) I and III D) II and IV

B) II and IIIAnswer ExplanationThe investor received $1,000 to write the XYZ put. The put expires because the stock price is not below the exercise price. Because the option expires, the writer's profit is the amount of the premium received. Textbook ReferencePlease see textbook section 6.3.2.1

An investor wrote an XYZ index 205 put for 4.75. Just prior to expiration, the index is 210. Which two of the following statements are TRUE?I. The contract will be exercisedII. The contract will expireIII. The holder will receive cash equal to the in-the-money amountIV. The writer will keep the premium of $475 A) I and III B) II and IV C) II and III D) I and IV

B) II and IVAnswer ExplanationAn investor that has written an index put is obligated to pay cash equal to the in-the-money amount to the holder if the contract is exercised. Puts are in the money when the market value is below the strike price. This contract will expire because the market price of the index is 210, which is above the strike price of 205; At expiration of the contract the holder will lose the premium paid, but the writer will keep the premium of $475.Textbook ReferencePlease see textbook section 6.4

Which two of the following statements are true about the OCC?I. It is the largest U.S. options exchange II. It guarantees the performance of options contractsIII. It creates listed equity options and makes them available for tradingIV. It is a clearinghouse for equity options and derivatives A) I and IV B) II and IV C) I and III D) II and III

B) II and IVAnswer ExplanationThe Options Clearing Corporation clears transactions in equity options and other derivative contracts. It guarantees the performance of options contracts that are assigned and executed by its clearing membersTextbook ReferencePlease see textbook section 6.6.1

Alice buys Treasury Inflation-Protected Securities (TIPS) with an original principal value of $10,000. She wants to know what the principal will be if she holds to maturity. The answer is A) $10,000 B) It can be higher than $10,000 but not lower C) It can be lower than $10,000 but not higher D) It can be either lower or higher than $10,000

B) It can be higher than $10,000 but not lowerAnswer ExplanationIn TIPS, the interest payments and principal value at maturity are indexed to the Consumer Price Index for All Urban Consumers (CPI-U). At maturity, the TIPS holder can receive more than the original principal if inflation is positive. But he/she can't receive less than original principal if inflation is negative (deflation). Textbook ReferencePlease see textbook section 3.2.1.4

An investor that purchases a put option while holding shares of the underlying stock is A) Increasing profit on the stock position through the use of leverage B) Limiting downside loss of unrealized gains from holding the stock C) Mostly bearish on the underlying stock D) Attempting to generate additional income on the stock that is owned

B) Limiting downside loss of unrealized gains from holding the stockAnswer ExplanationWhen an investor owns stock and then purchases a put, the investor is using the put to protect gains. This is known as a protective put strategy.Textbook ReferencePlease see textbook section 6.3.4

An investor with no other positions sells 1 ABC Jan 50 call at 3.50. The call is exercised when the stock is trading for 55. What is the investors' profit or loss? A) Profit of $150 B) Loss of $150 C) Loss of $850 D) Profit of $850

B) Loss of $150Answer ExplanationThe investor received $350 from the sale of the call. The exercise of the call requires the investor to sell the stock at the strike price, so the writer makes $5,000. However the customer has to buy the stock so it's available to sell (the investor had no other positions). Buying the stock at the current price of $5,500 results in a $150 loss. (Paid $5,500, received $5,350). Textbook ReferencePlease see textbook section 6.2.2.1

An investor with no other positions sells 1 ABC Jan 72 call at 5.25. The call is exercised when the stock is trading for 80. What is the investors' profit or loss? A) Profit of $275 B) Loss of $275 C) Loss of $1,325 D) Profit of $1,325

B) Loss of $275Answer ExplanationThe investor received $525 from the sale of the call. The exercise of the call requires the investor to sell the stock at the strike price, so the investor makes $7,200. However, the investor has to buy the stock to have it available to sell (the investor had no other positions). Buying the stock at the current price of $8,000 results in a $275 loss. (Paid $8,000, received $7,725). Textbook ReferencePlease see textbook section 6.2.2.1

Which one of the following is not a type of money market instrument?A) Certificate of DepositB) Mortgage-backed securityC) Commercial paperD) Banker's Acceptance

B) Mortgage-backed securityAnswer Explanation:Money market instruments have maturities of less than one year. The mostimportant types of money market instruments are U.S. Treasury bills,commercial paper, banker's acceptances and certificates of deposit.Textbook Reference: Please see textbook section 3.6

Clearing member firms that have been assigned exercise notice by the OCC, assign to their customers in what manner? A) Random, FIFO or LIFO B) Random or FIFO only C) Random only D) Random or LIFO only

B) Radom or FIFO onlyAnswer ExplanationWhen the OCC assigns exercise to a clearing member's customers' account, the clearing firm then assigns the exercise to one or more of its customers on a random or first-in, first-out (FIFO) basis to customers that hold short positions in that options series.Textbook ReferencePlease see textbook section 6.6.1

At exercise a customer is obligated to sell stock in which of the following positions? A) Long call B) Short call C) Long put D) Short put

B) Short callAnswer ExplanationShort options positions have obligations that must be performed if the holder exercises the contract. Call writers have the obligation to sell stock when the holder exercises the right to buy at the strike price.Textbook ReferencePlease see textbook section 6.1

A school district has overspent its budget and is in need of funds to meet current expenses for the next 90 days. It will most likely issue A) RANs. B) TANS. C) GOs. D) PHAs.

B) TANS.Answer ExplanationTax anticipation notes (TANs) are short term municipal instruments that are issued in anticipation of an upcoming tax collection. Schools are supported by property taxes, so TANs can be used to provide interim financing until the tax revenue is available.Textbook ReferencePlease see textbook section 3.4.4.1

Which of the following requires a fiduciary to be appointed to act forthe benefit of bondholders?A) The Glass-Steagall Act of 1933B) The Trust Indenture Act of 1939C) The Sarbanes√ÇOxley Act of 2002D) The Securities Exchange Act of 1934

B) The Trust Indenture Act of 1939Answer Explanation:The Trust Indenture Act of 1939 requires that a trustee be appointed to actfor the benefit of bondholders. The Glass-Steagall Act of 1933 (officially theBanking Act of 1933) was a law that established the Federal DepositInsurance Corporation (FDIC) in the United States and introduced bankingreforms. The Securities Exchange Act of 1934 governs the trading of U.S.securities in the secondary market. The SarbanesOxley Act of 2002, alsoknown as the 'Public Company Accounting Reform and Investor ProtectionAct' (in the Senate) and 'Corporate and Auditing Accountability andResponsibility Act' (in the House) is commonly known as SarbanesOxley,Sarbox or SOX.Textbook Reference: Please see textbook section 3.1

The NAV of mutual fund shares will increase in which of the following circumstances? A) Outstanding shares are redeemed B) The fund receives interest from bonds that are held within the portfolio C) Capital gains of the fund are distributed D) Shareholders reinvest dividend and capital gains distributions

B) The fund receives interest from bonds that are held within the portfolioAnswer ExplanationThe NAV of mutual fund shares increases when the value of securities held in the portfolio increases, when the portfolio receives distributions of dividends or interest from securities it owns, or when it sells portfolio securities at a profit. There is no change to NAV when new shares are issued or when shares are redeemed. The NAV of shares falls when the fund makes dividend or capital gains distributions.Textbook ReferencePlease see textbook section 4.2.4

Why would Zach not be interested in purchasing a call option? A) To hedge a short stock position B) To hedge a long stock position C) As a relatively inexpensive way to control 100 shares of the underlying stock D) To lock in a purchase price for the underlying stock

B) To hedge a long stock positionAnswer ExplanationZach would not purchase a call option to hedge a long stock position; he would purchase a put option for this purpose.Textbook ReferencePlease see textbook section 6.3.4

In an effort to combat inflation risk, which of the following investment vehicles should be avoided? A) Common stock B) Top rated corporate bond C) Real Estate Investment Trusts (REITs) D) Treasury Inflation Protected Securities (TIPS)

B) Top rated corporate bondAnswer ExplanationInvestors concerned about inflation risk should focus on products that will offer a hedge against rising prices. One product that would not be helpful in this regard is a bond. The coupon payments on the bond will not change, even though goods and services have become more expensive. Textbook ReferencePlease see textbook section 7.2.5

An investor is interested in an investment opportunity in which he can have an ownership interest in a specific portfolio of bonds for the next 20 years, and does not have to pay high management fees. Which of the following investments is most suitable? A) A structured note B) Units in a bond UIT C) A closed end bond fund D) A fixed income mutual fund

B) Units in a bond UITAnswer ExplanationUnit investment trusts hold a specified portfolio of investments for a defined period that is established at the creation of the trust. Because their portfolios are fixed, investors are not subject to high management fees.Textbook ReferencePlease see textbook section 4.4.3

An investor sells a call option for a premium of $3 and a strike price of $85. If the market value of the underlying stock is $83, the option has an intrinsic value of A) $1.00 B) zero. C) minus $5. D) minus $2.

B) ZeroAnswer ExplanationIntrinsic value is the amount an option is in-the-money, which is the current market value ‚Äì strike price for calls and strike price ‚Äì current market value for puts. If an option is out-of-the-money, as in this example, then intrinsic value is zero.Textbook ReferencePlease see textbook section 6.5.1

An investor is concerned that he may receive his payment of invested principal at a time when interest rates are low. Which of the following is LEAST suitable for the investor? A) A variable rate demand note B) A municipal bond with a call feature C) A municipal bond with a put feature D) A Treasury bond

B) a municipal bond with a call featureAnswer ExplanationThis investor is concerned with reinvestment risk, a risk associated with callable bonds. Issuers call bonds when interest rates have fallen. This allows them to pay principal to bondholders prior to the original maturity date, and refinance their debt at lower rates. While advantageous to issuers, this practice subjects bond holders to payout of principal when the options for reinvestment may not pay attractive rates.Textbook ReferencePlease see textbook section 7.2.2

The type of call option that has unlimited potential for loss is A) a covered call. B) a short call. C) a long call. D) both a long call and a short call.

B) a short callAnswer ExplanationWhen an investor sells a call, they take on an obligation to sell the stock at the strike price. If the price of the stock rises, the investor will be forced to buy the stock in the market and then sell at the strike price. Because there is no limit to how high the stock can rise, the investor's maximum loss is unlimited. Textbook ReferencePlease see textbook section 6.2.3

A type of bond that has no reinvestment rate risk is A) a high-coupon bond. B) a zero-coupon bond. C) a municipal bond. D) a low-quality bond.

B) a zero-coupon bondAnswer ExplanationZero-coupon bonds do not have reinvestment rate risk because, since they do not pay a coupon, there is no interest to reinvest.Textbook ReferencePlease see textbook section 2.3.3

The settlement date for the purchase or sale of an options contract is the A) third business day B) next business day C) same business day D) second business day

B) next business dayAnswer ExplanationOptions transactions settle on the business day following the transaction.Textbook ReferencePlease see textbook section 6.7.3

An investor buys a March 65 call, paying a premium of $3. This position will be profitable if A) the option expires out-of-the-money. B) the underlying stock is above $68. C) the underlying stock is at $62 or above. D) the underlying stock is at $65 or above.

B) the underlying stock is above $68Answer ExplanationTo determine profit in a long call, add the premium paid to the strike price. If the underlying stock rises above this level, the position is profitable. Textbook ReferencePlease see textbook section 6.2

Marketable U.S. Treasury securities include which two of thefollowing?I. SLGsII. Treasury stripsIII. Treasury BillsIV. Series EE BondsA) III and IVB) II and IIIC) I and IIID) II and IV

B). II and IIIAnswer Explanation:Both Treasury Bills and Treasury strips trade actively in the secondarymarkets. SLGs and U.S. Savings bonds, (Series EE and Series HHbonds) are non-negotiable.Textbook Reference: Please see textbook section 3.2.1

In a repurchase agreement (repo), the interest amount is calculated as A) a fixed percentage of the purchase price. B) the difference between the sale price and higher repurchase price. C) a variable percentage of the purchase price, tied to T-bill rates. D) a flat dollar amount, quoted at the time or repurchase.

B)Answer ExplanationA repo is a contractual agreement between two parties, in which securities are sold and then later repurchased at a higher price. The difference in price is interest to the lender.Textbook ReferencePlease see textbook section 3.6.4

An investor establishes the following position: Long 1 XYZ 50 put at 3. All of the following statements about this contract are true EXCEPT A) All XYZ puts with the same strike price and expiration date are included in the same series of options contracts B) The investor holds the obligation to sell the stock C) The investor has paid a premium to establish this position D) It is part of a class of options contracts which includes all puts on XYZ stock

B)Answer ExplanationAn investor that establishes a long put position holds the right, not the obligation, to sell the stock at the strike price, and has paid a premium to acquire this right. A class of options is all calls or all puts on the stock of a particular issuer. A series of option contracts is all options of a given type (call or put) on the same stock, with the same strike price and expiration date. Textbook ReferencePlease see textbook section 6.1.1

An investor has written an ABC 60 put for 2. If ABC stock is trading at 53 just prior to expiration, A) The contract will expire B) The investor will be obligated to buy 100 shares of ABC for 60 C) The investor will have the right to buy 100 shares of stock at 60 D) The investor will have the right to sell 100 shares of ABC for 60

B)Answer ExplanationAn investor that has written a put is obligated to buy stock at the exercise price if the contract is exercised. This contract will be exercised because it is in the money (the market price of 53 is below the strike price of 60). Since only one contract was written, 100 shares must be purchased.Textbook ReferencePlease see textbook section 6.3.2.1

An investor interested in a general obligation bond versus a revenue bond A) Is greatly concerned about the credit risk of the issuer B) Is willing to accept a lower yield in return for taking less risk C) Has already determined that Treasury bonds are an inappropriate investment for them D) Is demanding higher yield in return for greater risk

B)Answer ExplanationGeneral Obligation bonds will offer a lower yield when compared to a revenue bond, in return for the lower amount of risk the investor is willing to take. Textbook ReferencePlease see textbook section 3.4.3

Two weeks after purchasing a May 80 call option, the value of the underlying equity security is 95. In order to benefit from this situation, the investor A) must allow the option to expire. B) can either exercise the option or liquidate the position in the open market. C) must exercise the option in order to realize a profit from this position. D) must place an order to sell the underlying equity security.

B)Answer ExplanationIf an investor owns a call option which is ‚Äúin-the-money‚Äù (has intrinsic value), the investor may choose to either exercise the option, or liquidate the position in the open market. Textbook ReferencePlease see textbook section 6.7.2

All of the following statements regarding broad-based index options are true EXCEPT A) Exercise settlement takes place in cash B) They are usually more volatile than their individual stock components C) Like equity options, the premium is comprised of time value and intrinsic value D) The multiplier is typically 100

B)Answer ExplanationIndex options are usually less volatile than the individual stock components which are included within in them. This is because the ups and downs of individual stocks often cancel each other out in the computation of the index value.Textbook ReferencePlease see textbook section 6.4

The value of the conversion privilege of a convertible bond is based on the A) par value of the bond B) market value of the underlying stock C) parity price of the underlying stock D) conversion ratio of the bond

B)Answer ExplanationThe value of the conversion privilege of a convertible bond is based on the value of the underlying common stock, as the investor can exchange the bond for the shares. The parity price is where investors are indifferent to owing the bond versus the common shares. Textbook ReferencePlease see textbook section 3.1.3

When analyzing the investment quality of a mortgage bond, which of the following would be LEAST useful? A) Information pertaining to the collateral that backs the obligation B) Name of the trustee that holds title to the collateral C) General trends in the economic cycle D) Rating assigned the obligation by a nationally recognized rating service

B)Answer ExplanationWhen analyzing a mortgage bond, the trustee holding title to the collateral has no effect on the investment quality of the bond. The rating, the underlying collateral and the current economic cycle will all yield conclusions about the credit and prepayment risk about the bond in question. Textbook ReferencePlease see textbook section 3.3.1

Advantages of structured products include which two of the following?I. Highly liquidII. Potential for stronger returns in a low-yield marketIII. Limited downside exposureIV. High degree of transparency A) I and III B) II and III C) II and IV D) I and II

BAnswer ExplanationAdvantages of structured products include their upside potential with downside protection that is limited or guaranteed. They can help produce yield in a low rate environment because of the options and derivative strategies they employ. They are often complex, and are not known for their transparency. Liquidity is also limited.Textbook ReferencePlease see textbook section 5.5.1

An investor who purchases an exchange-traded note may expect to receive an interest payment A) On a quarterly cycle. B) If there has been appreciation in the underlying security. C) Whenever the underlying security pays a dividend. D) If the board of directors of the underlying security declares a dividend to holders of record.

BAnswer ExplanationAn exchange-traded note may make an interest payment to an investor if there has been appreciation in the underlying security. If the underlying security has declined in value, the investor will only receive his principal returned at the instrument's maturity.Textbook ReferencePlease see textbook section 5.5.1

Which of the following REITS generate revenues from rental income off properties held by the REIT?I. Equity REITsII. Mortgage REITSIII. Hybrid REITS A) I, II, and III B) I and III only C) I only D) II and III only

BAnswer ExplanationEquity REITs and hybrid REITs both own and rent properties that generate revenue from rental income. Textbook ReferencePlease see textbook section 5.1.4

Which two of the following statements regarding hedge fund registration are TRUE?I. Hedge funds of less than $100 million in assets must register with the SECII. Hedge funds of more than $150 million in assets must register with the SECIII. Hedge funds are exempt from the Investment Company Act of 1940IV. Hedge funds are exempt from the Investment Advisors Act of 1940 A) I and IV B) II and III C) II and IV D) I and III

BAnswer ExplanationHedge funds are subject to the Investment Advisors Act of 1940 due to heightened regulatory requirements established by the Dodd Frank Wall Street Reform Act. Hedge funds with more than $150 million in assets must register with and are regulated by the SEC; those with assets of $100 million or less must register with and are regulated by the states.Textbook ReferencePlease see textbook section 5.3.1

A limited partner in a limited partnership may engage in which of the following? A) An active operations role in the day-to-day management of the partnership B) An exercise of the partnership democracy C) The admission of additional limited partners through a review of subscription agreements D) Responding to a lawsuit on behalf of the limited partnership

BAnswer ExplanationLimited partners are not permitted to play an active role in the management of the partnership. If they overstep their passive role, they risk the loss of limited liability. Responding to lawsuits and accepting new limited partners are responsibilities of general partners.Textbook ReferencePlease see textbook section 5.2.3

Limited Partnership interests are typically regulated A) as private contracts B) as securities, under federal and state laws C) as securities, under state law only D) as insurance products, under state law

BAnswer ExplanationLimited partnership interests are considered securities and are subject to SEC registration and state blue sky laws. Textbook ReferencePlease see textbook section 5.2

A city wishes to take advantage of liquidity and professional management in the investment of excess funds. An investment that is appropriate for this purpose is A) VRDO. B) LGIP. C) BAB. D) COP.

BAnswer ExplanationLocal Government Investment Pools (LGIPS) are formed by states to give local governments a money market like option for investment of excess funds.Textbook ReferencePlease see textbook section 5.6.1

An advantage of investing in a public REIT for a retail investor is that A) The investor can choose to an own an interest in specific properties that are held by the REIT B) There is liquidity and pricing transparency similar to that of publicly traded stock. C) The SEC has approved them for sale D) An investor will not lose principal value

BAnswer ExplanationREIT investors own a share of all the real estate properties that are held in the portfolio. Public REITs trade on exchanges so there is liquidity and pricing transparency for investors. Investors are subject to loss of principal. The SEC does not approve or disapprove investments, even if the securities are registered. The SEC releases them for sale and ensures that enough information is available to investors to make sound investment decisions.Textbook ReferencePlease see textbook section 5.1.3

Which of the following statements about REITs is TRUE? A) Investors may purchase common shares in a REIT, but not preferred stock or debt securities B) A REIT must distribute at least 90% of its taxable income to investors in the form of dividends C) REITS are issued through private placements only D) REITs do not trade in the secondary market

BAnswer ExplanationREITS are required to distribute at least 90% of their taxable income in the form of dividends. REITs issue securities through public offerings and private placements, and their securities trade in the secondary markets. They may issue common shares, preferred shares and debt securities.Textbook ReferencePlease see textbook section 5.1.1

A $10,000 U.S. Treasury bond is quoted as Bid 102.8, Ask 16. How much would an investor pay to buy this bond? A) $11,200 B) $10,216 C) $10,250 D) $10,225

C) $10,250Answer ExplanationInvestors purchase at the ask price of 102.16. Treasuries are quoted in 32nds, so the asked price is actually 102 16/32nds (¬Ω) for each $100 of face value. 102.50 x 100 = $10,250. Textbook ReferencePlease see textbook section 3.2.2

The standard denomination in which banker's acceptances are sold is A) $10,000 B) $1 million C) $100,000 D) $5,000

C) $100,000Answer ExplanationThe standard BA denomination is $100,000. Smaller amounts are called odd-lots Textbook ReferencePlease see textbook section 3.6.3

An investor sells a put option for a premium of $4. The strike price is $120. The investor's breakeven is A) $120.00 B) $128.00 C) $116.00 D) $124.00

C) $116.00Answer ExplanationTo calculate breakeven on a put, subtract the premium from the strike price. ($120 - $4 = $116.)Textbook ReferencePlease see textbook section 6.3.3

An investor that is interested in receiving as much tax exempt interestincome as possible, regardless of his residence location, shouldconsider which of the following securities?A) A 10-year Treasury bondB) A state of California GO bondC) A Puerto Rico GO bondD) An Industrial development Revenue bond issued in his state ofresidence

C) A Puerto Rico GO BondAnswer Explanation:Municipal bonds issued by U.S. territories like Guam, Puerto Rico and U.S.Virgin islands are tax exempt at the federal, state and local levels. Othermunicipal bonds may be tax exempt at the state and local level as well, butonly if the bondholder resides in the state of issue. U.S. governmentsecurities are taxable at the federal level, but tax exempt at the state level.Textbook Reference: Please see textbook section 3.4.5.2

What is a major difference between a retail bank certificate of deposit (CD) and a banker's acceptance (BA)? A) BAs are not money market instruments B) BAs are not backed by banks C) BAs are not FDIC-insured D) BAs have longer maturities

C) BAs are not FDIC-insuredAnswer ExplanationAlthough the bank deposits on which BAs are drawn generally are FDIC-insured, BAs themselves are not FDIC-insured. If both the issuer and bank file bankruptcy, the BA could default.Textbook ReferencePlease see textbook section 3.6.3

Two option contracts of the same issuer having the same exercise price will be priced differently owing to the different A) Earnings potential of the two companies B) Industries that the two companies are in C) Expiration dates of the two contracts D) Size of the two companies

C) Expiration dates of the two contractsAnswer ExplanationThe element of time is a major factor in determining the value of an option premium. The option contract with the later expiration will have the higher premium, all other things being equal. Textbook ReferencePlease see textbook section 6.5.2

A government-sponsored enterprise that purchases and securitizes mortgages to ensure that funds are available for lending to home buyers is A) Department of Housing and Urban Development (HUD) B) Government National Mortgage Association (GNMA) C) Federal National Mortgage Association (FNMA) D) American Depository Receipts (ADRs)

C) FNMAAnswer ExplanationFederal National Mortgage Association (FNMA) is a government-sponsored enterprise that purchases and securitizes mortgages to ensure that funds are available for lending to home buyers. Government National Mortgage Association (GNMA) is government-owned, as opposed to government-sponsored and guarantees investors timely payment of interest and repayment of principal on mortgage-backed securities backed by federally insured or guaranteed loans. The Department of Housing and Urban Development (HUD) is a department of the U.S. government that governs policy pertaining to homeownership, community development, and access to affordable housing. American Depository Receipts (ADRs) are used by non-U.S. companies to enable U.S. investors to purchase shares of the company's stock and to enable that stock to trade on a U.S. stock exchange. Textbook ReferencePlease see textbook section 3.3.1

An investor is long an ABC Jan 65 put for a premium of 7. If at expiration the price of ABC is 53, which two of the following statements are TRUE?I. The contract is profitable to the holder at expirationII. The contract is in-the-money at expirationIII. The contract will not be exercisedIV. The contract's breakeven is 72 A) II and IV B) II and III C) I and II D) I and IV

C) I and IIAnswer ExplanationA put is in the money whenever the price of the underlying stock is lower than the strike price. This contract is in the money, and profitable to the holder at expiration because the breakeven is 58 (strike price minus premium for puts). The put holder will exercise the contract, and has the right to sell stock at 65. The writer (the party that is short) must buy it, when the current market price is actually 53. Textbook ReferencePlease see textbook section 6.3.1.1

The responsibility of the sponsor of a unit investment trust includes which of the following?I. Selection of the securities for the trustII. Organizing the formation of the trustIII. Tax reporting for the trustIV. Recordkeeping for the trust A) II and III B) II and IV C) I and II D) I and IV

C) I and IIAnswer ExplanationThe sponsor of a UIT organizes the trust and is responsible for the selection of the portfolio securities. The trustee handles administrative functions, including the recording keeping, accounting and tax reporting duties.Textbook ReferencePlease see textbook section 4.4.1

An investor has purchased an XYZ index 205 call for 4.75. Just prior to expiration, the index is 210. Which two of the following statements are TRUE?I. The contract will be exercisedII. The contract will expireIII. holder will receive cash equal to the in-the-money amountIV. holder will only pay the premium if the option is exercised A) I and IV B) II and III C) I and III D) II and IV

C) I and IIIAnswer ExplanationAn investor that has purchased an index call has the right to exercise the contract for cash equal to the in-the-money amount. This contract will be exercised because the market price of the index is 210, which is above the strike price of 205; At exercise the holder will receive $500 (5 points in-the-money x multiplier of 100).Textbook ReferencePlease see textbook section 6.4

Limited partnership interests which are sold without specific definition of the assets that are held are I. blind pool programsII. blank check programsIII. More risky than other LP investmentsIV. Less risky of LP investments A) II and IV B) II and III C) I and III D) I and IV

C) I and IIIAnswer ExplanationBlind pool programs are limited partnerships that don't define the assets that are held. Because investors don't know what they are getting into they have higher risk.Textbook ReferencePlease see textbook section 5.2

With the current level of the S&P 500 index at 1815.94, an investor buys a three-month SPX call option with a strike price of 1820 that is currently trading for 54.40. At expiration, the value of the index is 1850. Which two of the following statements are TRUE?I. The investor will receive cash at expirationII. The investor must pay cash at expirationIII. The breakeven is 1761.54IV. The contract is in the money at exercise A) II and IV B) I and III C) I and IV D) II and III

C) I and IVAnswer ExplanationAn SPX index call is in the money when the index value is above the strike price, as in this example. At expiration, the holder of the call receives cash equal to the intrinsic value. The breakeven is calculated by adding the premium to the index strike price. 1820 + 54.40 = BE of 1874.40. Although this contract was in the money, the investor did not profit because the index was not higher than the BE point at exercise.Textbook ReferencePlease see textbook section 6.4

An investor has purchased a call option on XYZ stock. Which two of the following statements are TRUE?I. The contract is an American style contractII. The contract could be either an American or European style contractIII. The contract may be exercised only at a specified time just prior to expirationIV. The contract may be exercised any time after purchase but prior to expiration A) I and III B) II and IV C) I and IV D) II and III

C) I and IVAnswer ExplanationOptions on stock, or equity options, are American style contracts only. This means that the holder may exercise them at any time after purchase but before the contract's expiration date. Index options contracts are both American and European style.Textbook ReferencePlease see textbook section 6.1.1.1

A mutual funds are typically prohibited from engaging in which two of the following activities?I. Short selling of securitiesII. Investing in senior equity and debt securitiesIII. Distributing its own securitiesIV. Borrowing funds to purchase securities A) II and IV B) II and III C) I and IV D) I and III

C) I and IVAnswer ExplanationTypically, mutual funds are prohibited from purchasing securities on margin and short selling. Additionally, mutual funds cannot issue preferred stock or debt securities, but they are permitted to invest in them within their portfolios.Textbook ReferencePlease see textbook section 4.2.3

A conflict of interest exists in a real estate limited partnership if the general partnerI. receives compensation from the partnershipII. borrows from the partnershipIII. owns or leases property adjacent to property of the partnershipIV. is involved in more than one real estate limited partnership A) III and IV B) I and II C) II and III D) I and III

C) II and IIIAnswer ExplanationA general partner must avoid conflicts of interest with the partnership. The general partner cannot borrow from the partnership and, if it is a real estate limited partnership, cannot compete with the partnership by purchasing or leasing adjacent property.Textbook ReferencePlease see textbook section 5.2.3

Which two of the following statements describe closed-end funds?I. They are a continuous primary offeringII. There is a fixed number of sharesIII. Shares are liquidated through exchange tradingIV. Shares are redeemed by the fund A) I and III B) I and IV C) II and III D) II and IV

C) II and IIIAnswer ExplanationClosed-end fund shares issue a limited number of shares through IPOs. To receive cash for their shares, investors sell closed-end company shares in secondary market transactions on exchanges. They are not redeemed by their issuer, like mutual fund shares.Textbook ReferencePlease see textbook section 4.3

A city passes a law that permits it to issue new municipal bonds to fund a new city government building. Which two of the following statements are TRUE? I. This is a revenue bond issueII. This is a general obligation bond issueIII. The issuer used statutory power to authorize this bond issueIV. The issuer cannot proceed with this issue until it receives approval from the state legislature A) I and IV B) I and III C) II and III D) II and IV

C) II and IIIAnswer ExplanationGO bonds are used to build facilities for the public like government buildings. Statutory power refers to passing a law that will authorize a local municipality to proceed with issuance of a general obligation bond. This usually requires a voter referendum, but not approval from the state legislature. Textbook ReferencePlease see textbook section 3.4.1.1

Which two of the following statements regarding exercise of index options is true?I. Exercise settlement requires delivery of stockII. Exercise settlement requires delivery of cashIII. Transactions are settled the business day following the tradeIV. Transactions are settled on the third business day after the trade A) II and IV B) I and IV C) II and III D) I and III

C) II and IIIAnswer ExplanationIndex options are settled in cash equal to the in-the-money amount based on the closing value of the index. Cash settlement takes place on the business day following the settlement date.Textbook ReferencePlease see textbook section 6.4

Which two of the following characteristics apply to structured products?I. Unlimited upside potential with downside protectionII. Limited upside potential with downside protectionIII. Limited liquidityIV. High degree of liquidity A) II and IV B) I and III C) II and III D) I and IV

C) II and IIIAnswer ExplanationStructured products offer a limit on downside risk. The tradeoff for this protection is a limit on the upside potential. Structured products are not highly liquid. Secondary market trading is limited ‚Äì they are generally held until maturity.Textbook ReferencePlease see textbook section 5.5

An investor writes a June 63 put for 1.50. Which two of the following statements are TRUE?I. The investor's breakeven is 64.50II. The investor's breakeven is 61.50III. The investor is bullishIV. The investor is bearish A) I and III B) I and IV C) II and III D) II and IV

C) II and IIIAnswer ExplanationThe breakeven for a long or short put option is the strike price minus the premium. 63 √¢‚Ç¨" 1.50 = 61.50 The put writer does not begin to lose money until after the price of underlying stock falls below this price. The writer of a put is bullish. If the market price of the stock goes up, the buyer of the put will not exercise the right to sell the stock.Textbook ReferencePlease see textbook section 6.3.2

A limited partner in a limited partnership is prohibited from A) Accepting a proportionate share of the recourse loans of the partnership B) Receiving a share of partnership losses C) Investing partnership assets D) Inspecting the books and records of the limited partnership

C) Investing partnership assetsAnswer ExplanationThe investing of partnership assets is a role of the general partner. A limited partner that attempts to take this responsibility is no longer a passive investor. In this case, the limited partner becomes fully liable for the debts of the partnership like the general partners. Limited partners are permitted to inspect the books and records, sue the GP, receive a share of partnership distributions, and take on a proportionate share of the recourse debt of the partnership.Textbook ReferencePlease see textbook section 5.2.1

All of the following are characteristics of listed options EXCEPT A) Exchange trading B) Fixed strike prices C) Limited liquidity D) Standardized expirations

C) Limited liquidityAnswer ExplanationListed options are puts and calls that are exchange traded. They have standardized strike prices and expiration dates which make them marketable and liquid for buyers and sellers.Textbook ReferencePlease see textbook section 6.6.1

U.S. Treasury auctions are dominated by a group of financial institutions authorized to serve as commercial trading counterparties of the New York Federal Reserve. They are called A) Treasury Direct dealers B) Government Syndicate Members C) Primary dealers D) Auction licensees

C) Primary dealersAnswer ExplanationAlthough Treasury auctions are open to the public, they are dominated by large institutions called primary dealers. These institutions are authorized to serve as commercial trading counterparties of the New York Federal Reserve.Textbook ReferencePlease see textbook section 3.2.1.1

Which of the following investment strategies is least appropriate for retail investors? A) Buying a call option B) Selling a put option C) Selling an uncovered option D) Buying a put option

C) Selling an uncovered optionAnswer ExplanationRetail investors are least likely to engage in call writing strategies, especially uncovered call option writing.Textbook ReferencePlease see textbook section 6.2.2.1

All of an issuer's options that are the same type and share the same strike price and expiration month are called a(n) A) Run B) Issue C) Series D) Ladder

C) SeriesAnswer ExplanationThere are two types of options: calls and puts. All of an issuer's 35 April calls would be a series. The same issuer's 35 April puts would be a separate series. Textbook ReferencePlease see textbook section 6.1.1

If ABC stock is trading at $43.25 just prior to expiration, which of the following options positions will expire? A) Long 42.75 call B) Long 44.75 put C) Short 42.75 put D) Short 43 call

C) Short 42.75 putAnswer ExplanationOptions expire when they are out of the money at exercise. A long or short call is in the money when the stock price is above the contract's exercise price. A long or short put is in the money when the stock price is below the contract's exercise price. The short 42.75 put is the only position that is not in the money.Textbook ReferencePlease see textbook section 6.3

A portfolio manager wants to hedge his long equity positions and increase the portfolio's income. Which of the following strategies is appropriate? A) Short index put B) Long index call C) Short index call D) Long index put

C) Short index callAnswer ExplanationIncome is achieved from writing options and receiving premiums. Short index calls provide some downside protection (the amount of premium received), and also increase the income to the portfolio.Textbook ReferencePlease see textbook section 6.4

An investor writes 2 XYZ June 73 calls at 8. Just before expiration XYZ is trading for 66. Which of the following statements is TRUE? A) The investor has a profit of $800 B) The investor receives 200 shares of stock at 73 C) The investor has a profit of $1,600 D) The investor is required to sell 100 shares of stock at 73

C) The investor has a profit of $1,600Answer ExplanationThis call is out of the money and will expire, so the writer is not obligated to sell the stock. The buyer will not exercise the right to buy stock at the strike price of 73 when it could be purchased on the market for 66. The writer profits from the premium of $1,600 received for writing 2 contracts at $800 each.Textbook ReferencePlease see textbook section 6.2.2.1

Which of the following debt instruments is always issued at a discount? A) Subordinated Debentures B) Convertible Bonds C) Treasury Bills D) Treasury Bonds

C) Treasury BillsAnswer ExplanationTreasury Bills are always issued at a discount and mature to their face value, as they are zero coupon securities. All zeroes are issued at a discount. Textbook ReferencePlease see textbook section 3.2.1.1

Your customer owns ABC stock, but does not expect that the price will appreciate rapidly in the near future. To increase the income to his portfolio without adding significant risk, the customer should A) Write ABC puts B) Establish a married put strategy C) Write calls on ABC stock D) Buy ABC Leap calls

C) Write calls on ABC stockAnswer ExplanationBy writing calls on stock that is owned, an investor receives a premium and is not obligated to sell the stock if the call is not exercised. The call writer wants little or no movement in the price of the stock so the obligation to sell it is not exercised by the holder.Textbook ReferencePlease see textbook section 6.2.2.2

Miss Smith buys 1 ABC Jul 70 call at 2.50 when the market is at 71. As time passes, the market price of ABC remains stable at 71. The premium, therefore, will probably A) go up B) stay the same C) go down D) exhibit extreme volatility

C) go down Answer ExplanationThe premium is the sum of the time value and intrinsic value. As the market value of the security remains the same, the intrinsic value does not change. The time value decays as expiration approaches and the chance of the option moving deeper in the money decreases. Therefore, the premium as a whole also decreases.Textbook ReferencePlease see textbook section 6.5.2

A convertible bond's conversion price is A) the number of shares of stock that can be exchanged for each bond. B) the spread between the market price of the convertible bond and the price at which it can be converted. C) the price at which a convertible bond can be converted into shares of the company's stock. D) the current value of the bond if it were converted today.

C) the price at which a convertible bond can be converted into shares of the company's stock.Answer ExplanationThe conversion price is the price at which a convertible bond can be converted into shares of the company's stock. This is calculated as par value of the bond divided by the conversion ratio. A convertible bond's conversion price will be defined in the offering memorandum and the indenture. The conversion premium is the spread between the market price of the convertible bond and the price at which it can be converted, expressed as a percentage. The conversion ratio is the number of shares of stock that can be exchanged for each bond. This is calculated as the par value of the bond divided by the conversion price. The conversion value is the current value of the bond if it is was converted today. Textbook ReferencePlease see textbook section 3.1.3.1

An investor would receive an official statement whenA) making a capital contribution into a company as an equity investor.B) investing in a private placement, or Regulation D offering.C) purchasing a new offering of municipal bonds.D) receiving an allocation of an initial public offering (IPO).

C)Answer Explanation:An official statement is the primary disclosure document an investor wouldreceive when purchasing a new offering of municipal bonds. Among themany disclosure items included are the risks associated with investing inthe bonds.Textbook Reference: Please see textbook section 3.4.5.3

An investor owns one XYZ 70 call, and a 7% stock dividend occurs. As the result of the dividend, the investor will have A) two calls, each with a strike price of 65.42, each call for 100 shares. B) two calls, each with a strike price of 35, each call for 100 shares. C) one XYZ call for 107 shares with a strike price of 65.42. D) one XYZ call for 93 shares with a strike price of 75.27.

C)Answer ExplanationAs the result of a stock dividend, a call option would be adjusted for a new number of shares (higher) and a new strike price (lower). Prior to the dividend, the value of the contract is $7,000 (100 shares x 70). Following the dividend, the new number of shares is 107 with an adjusted strike price of 65.42 ($7,000/107). Important to note that the total value of the contract does not change as the result of a stock dividend (or stock split). Textbook ReferencePlease see textbook section 6.7.3.3

All of the following practices are prohibited in the sales of mutual fund shares EXCEPT A) An investor is encouraged to engage in a trading strategy that involves regularly purchasing and redeeming shares within a short time frame to take advantage of share pricing inconsistencies B) A redemption request that is received today is processed at the NAV calculated at the previous day's close C) A registered representative recommends that an investor make a slightly larger investment to qualify for a breakpoint D) An investor is encouraged to purchase shares in a fund just before the ex-dividend date to receive the dividend distribution

C)Answer ExplanationBreakpoints allow investors to receive a discount on the sales charge based on the dollar amount invested. Registered representatives are required to disclose the existence of breakpoints to clients. Late trading is the prohibited practice of redeeming or purchasing shares at a price previously calculated instead of following the forward pricing rule. Market timing, or executing short term purchase and sales of mutual fund shares is also a prohibited practice. Because of their fee structures, mutual funds should be recommended as a long-term investment. Encouraging the purchase of shares just prior to a dividend distribution is called "selling dividends" and subjects the investor to a taxable event and a reduction in share value, since the NAV of fund shares falls when a dividend is distributed. Textbook ReferencePlease see textbook section 4.2.6

A holder of a call option contract would like to receive a cash dividend declared by the issuer of the underlying stock. In order to receive the dividend, what action must the holder take? A) The holder must exercise the option before the record date B) The holder will receive the dividend automatically, and no action is required C) The holder must exercise the option before the ex-dividend date D) The holder is not entitled to receive the dividend under any circumstances

C)Answer ExplanationCash dividends are paid by issuers to owners of the stock as of the date of record. To receive a cash dividend, a call holder must exercise the option prior to the ex-date of the dividend. For an American-style call option, early exercise is possible and the investor needs to weigh whether the benefit of being long the underlying stock and receiving the dividend outweighs the cost of surrendering the option early. Typically, this makes sense only for call options that are deeply in the money before the dividend is paid.Textbook ReferencePlease see textbook section 6.7.3.2

An investor that wishes to liquidate ETF shares will receive cash A) Equal to the market value of the shares at the end of the trading day B) Equal to the NAV C) In the amount of the market value of the shares at the time the order is executed D) Equal to the POP

C)Answer ExplanationETF shares trade on exchanges, typically the NYSE or NASDAQ. Investors receive the market price of their shares, less any transaction charges, when shares are liquidated. The price of the shares could be a discount or premium to the NAV of the fund's shares.Textbook ReferencePlease see textbook section 4.5.1.2

All of the following statements regarding premiums for index options are true EXCEPT A) Premiums for index options are quoted in points and decimal amounts like equity options B) The premium of an index option is comprised of intrinsic value and time value C) The premium of an index put will generally increase as the level of the underlying index increases D) An index premium point is ordinarily equal to $100

C)Answer ExplanationIndex options premiums are similar to equity option premiums. They are quoted in points and decimal amounts, and multiplier is ordinarily equal to $100, and premium components are intrinsic value (the in-the-money amount) and time value. The premium of a put on either an index option or an equity option increases as the underlying decreases in value.Textbook ReferencePlease see textbook section 6.4`

All of the following statements about private equity investments are true EXCEPT A) Investors play a passive role in the investment selections B) The payoff in private equity firm occurs when a firm is sold or goes public C) Private equity funds are typically invested in public companies D) Most funds are raised from institutional and accredited investors

CAnswer ExplanationNote that this is an EXCEPT question. Private equity funds are usually invested in private companies. The payoff for the investment occurs when the firm goes public or is sold.Textbook ReferencePlease see textbook section 5.4

All of the following statements apply to Alternative Minimum Taxes (AMT) and municipal bonds EXCEPT A) Bond confirmations will identify if AMT applies to the issue B) The AMT must be calculated separately and compared to the normal tax calculation C) The tax that must be paid is the lower of the AMT or normal income tax calculation D) Interest from private activity bonds must be included in the calculation`

C)Answer ExplanationThe alternative minimum tax (AMT) was designed to insure that persons with numerous tax deductions or credits pay a fair amount of income tax. A separate AMT calculation is made and the tax owed based on the greater of the two calculations must be paid. Private activity bonds are included in the AMT calculation. Confirmations include a notation to inform investors of bonds that may be subject to AMT.Textbook ReferencePlease see textbook section 3.4.5.3

What is the main difference between yield to maturity (YTM) and yield to call (YTC)? A) Premiums and discounts are ignored in YTC but not in YTM. B) The current market price is relevant when calculating YTM but not YTC. C) The time at which the bond terminates are different. D) Premiums and discounts are ignored in YTM but not in YTC.

C)Answer ExplanationYield to maturity reflects the yield earned if the investor holds the bond until maturity, while yield to call reflects the yield earned assuming the issuer calls the bond back prior to maturity.Textbook ReferencePlease see textbook section 2.2.4

Which of the following statements regarding a REIT is true? A) It is an investment vehicle that pass through income and losses to investors. B) It is a type of direct participation program (DPP) that gives investors access to a broad range of real estate assets. C) It may be a publicly traded investment product that passes through income but not losses to investors. D) It is a mostly illiquid investment that pass through losses to investors.

CAnswer ExplanationA Real Estate Investment Trust (REIT) is an investment vehicle legally structured as a trust, not a DPP. The trust passes through income to investors, but not losses. Many REITs are liquid investments, meaning they can be traded on securities exchanges. This is an important distinction to make when comparing an REIT to a DPP. Textbook ReferencePlease see textbook section 5.2

A Real Estate Investment Trust (REIT) is a security that is categorized as a(n) A) type of direct participation program (DPP). B) Real estate limited partnership. C) neither an investment company nor a direct participation program (DPP). D) Investment company portfolio.

CAnswer ExplanationA Real Estate Investment Trust is legally structured as a trust; it is not a type of investment company or direct participation program. Textbook ReferencePlease see textbook section 5.1

The document that identifies the general partner and the roles of limited partners in a limited partnership is the A) Sharing Arrangement B) Certificate of Limited Partnership C) Partnership Agreement D) Subscription Agreement

CAnswer ExplanationA limited partnership's partnership agreement identifies the general partner and the roles of the limited partners.Textbook ReferencePlease see textbook section 5.2.2

An investment opportunity that allows investors to hold an ownership interest in real property in many locations and in many economic sectors is a A) Mortgage backed security B) Commodity fund C) Equity REIT D) GNMA

CAnswer ExplanationAn equity REIT allows investors to own a proportionate interest in a portfolio of real estate properties in a variety of locations and sectors for a modest investment. REITs are viewed as a valuable portfolio diversification investment. Textbook ReferencePlease see textbook section 5.1.4

With regard to investment options and management of LGIPs, all of the following statements are true EXCEPT A) LGIP investment managers are often paid from a fee based on the assets under management B) Some LGIPs invest in longer term securities to provide investment growth potential C) Full liquidity and return of principal is guaranteed to investors in LGIP securities D) Stable value LGIPs strive to maintain a constant net asset value per share of $1.00.

CAnswer ExplanationAs with mutual fund and other equity investments, there is no guarantee that LGIPs will be fully liquid or will not suffer loss of principal. There are stable value LGIPs that strive to maintain a net asset value of $1.00 per share like money market mutual funds, but there is no guarantee to investors. Investment managers of LGIPs are typically paid from a fee charged based on the assets under management. Textbook ReferencePlease see textbook section 5.6.1.1

A general partner in a limited partnership is prohibited from A) Loaning money to a limited partnership B) Holding an interest of more than 5% in the partnership C) Competing with the partnership through another entity for personal gain D) Raising capital through recourse loans

CAnswer ExplanationGeneral partners cannot engage in conflicts of interest with the partnership they manage. Competing directly for personal gain with the partnership is a prohibited conflict of interest. GPs may loan money to their partnership, but may not borrow from the partnership. They must hold a minimum interest of 1% in the partnership but are not prohibited from holding a larger interest.Textbook ReferencePlease see textbook section 5.2.3

A REIT is not required to pay tax on the gains it passes through to investors, if it distributes A) the majority of gains earned in any tax year. B) all gains related to completed property sales. C) 90% of its gains to shareholders. D) an equal amount of its gains and losses.

CAnswer ExplanationIf a REIT passes through 90% of its gains to shareholders, it is not required to pay tax on the amount it passes through.Textbook ReferencePlease see textbook section 5.1.5

The type of REIT that loans money to help purchase property or purchases other forms of property indebtedness from other lenders is a(n) A) Equity REIT B) Agency REIT C) Mortgage REIT D) Hybrid REIT

CAnswer ExplanationMortgage REITs loan money for mortgages to buyers of real estate and also purchase existing mortgages or mortgage-backed securities from other lenders. Textbook ReferencePlease see textbook section 5.1.4

Which of the following types of REITs is most likely to generate interest income for investors? A) Balanced REIT B) Equity REIT C) Mortgage REIT D) Hybrid REIT

CAnswer ExplanationMortgage REITs pass through interest that has been earned on mortgages in the portfolio as income to investors.Textbook ReferencePlease see textbook section 5.1.4

In order to qualify under "pass through" rules, REITS must do which two of the following?I. Derive at least 75% of their income from dividends, interest and property incomeII. Derive at least 90% of their income from dividends, interest and property incomeIII. Distribute at least 75% of their taxable income to shareholders as dividendsIV. Distribute at least 90% of their taxable income to shareholders as dividends A) I and III B) II and IV C) I and IV D) II and III

CAnswer ExplanationTo qualify for the pass through of income under IRS rules, REITs must derive at least 75% of their income from dividends, interest and property income, and distribute at least 90% of their taxable income to shareholders as dividendsTextbook ReferencePlease see textbook section 5.1.1

Which of the following statements about warrants are TRUE?I. They may be sold with a bond as a sweetenerII. They have shorter expiration periods than optionsIII. They function very much like call optionsIV. They trade exclusively on exchanges A) II and III B) I and IV C) I and III D) II and IV

Correct Answer C) I and IIIAnswer ExplanationWarrants are often added to bonds as sweeteners to make the issue more attractive to investors. Like a call option, they give the holder the right to buy a specified number of shares of stock at a specified price. However, they have a longer expiration period than options √Ç- sometimes up to 15 years. Though some warrants are listed on exchanges, most trade over-the-counter.Textbook ReferencePlease see textbook section 1.1.1.7

A corporate bond that is currently trading at 95 pays a semi-annual coupon of $25. What is the current yield? A) 0.05 B) 0.0526 C) 0.025 D) 0.0263

Correct Answer: 0.0526Answer ExplanationA bond's current yield is calculated by dividing the annual interest income by the current market price. $50/$950 = 5.26%.Textbook ReferencePlease see textbook section 2.2.2

An investor writes an S&P 500 2025 put for 10. Just prior to expiration the S&P is 1980. Which two of the following statements are TRUE?I. The contract will be exercisedII. The contract will expireIII. The investor profits in this transactionIV. The investor has a loss in this transaction A) I and IV B) II and III C) I and III D) II and IV

Correct Answer: A) I and IVAnswer ExplanationThe investor received $1,000 to write the index put. The put is exercised because the index value is below the exercise price. Index options settle in cash so the writer must pay $4,500 (2025 √¢‚Ç¨" 1980 x 100 multiplier) at exercise. The investor's loss on this transaction is $3,500 (Paid $4,500, received $1,000). Textbook ReferencePlease see textbook section 6.3.2.1

The downside of increased prepayment risk in mortgage-backed securities (MBS) is that A) MBS investors must reinvest principal in a lower interest rate environment. B) MBS investors lose liquidity. C) MBS investors lose principal. D) MBS securities have their credit ratings downgraded.

Correct Answer: A) MBS investors must reinvest principal in a lower interest rate environmentAnswer ExplanationHomeowners tend to refinance (pay down) their mortgages in falling rate environments. This increases prepayment risk as principal is returned to MBS investors faster than expected. This principal must be reinvested in a lower-rate environment.Textbook ReferencePlease see textbook section 7.2.7

The process of a shareholder assigning voting rights to a third party is A) Voting by proxy B) Surrogate voting C) Voter assignment D) Absentee ballot

Correct Answer: A) Voting by proxyAnswer ExplanationA common shareholder often casts votes by proxy, or through a third party that is representing the shareholder's votes. Textbook ReferencePlease see textbook section 1.1.1.2

What option does a shareholder receive under a "stock rights" event? A) To sell shares back to the company B) To maintain proportional ownership C) To participate in a stock dividend D) To vote shares in a special election

Correct Answer: B) To maintain proportional ownershipAnswer ExplanationStock rights give shareholders the right, but not the obligation, to maintain proportionate share ownership, rather than be diluted when new shares are issued.Textbook ReferencePlease see textbook section 1.1.1.6

A corporate bond valued at "300 over" comparable treasury securities is A) less risky than treasury securities B) yielding 300 basis points more than treasury securities C) selling at $300 over the price of treasury securities D) trading at a premium

Correct Answer: B) yielding 300 basis points more than treasury securitiesAnswer ExplanationThe expression "300 over" refers to the yield of a bond being 300 basis points greater than that of a comparable security.Textbook ReferencePlease see textbook section 2.1.7

Correct Answer: C) II and IIIAnswer ExplanationLimited partners may lose their invested principal and may be responsible for their share of the recourse debt of the partnership. The general partner is responsible for lawsuits against the partnership and unlimited losses of the partnership.Textbook ReferencePlease see textbook section 5.2.3

All of the following statements about hedge fund investments are true EXCEPT A) They usually employ a high degree of leverage to magnify returns B) They have highly aggressive trading strategies C) They are inappropriate for most retail investors D) If a hedge fund goes bankrupt the investors have the potential to lose more than their investment

Correct Answer: D) If a hedge fund goes bankrupt the investors have the potential to lose more than their investmentAnswer ExplanationThe legal structure of a hedge fund protects investors from losing more than their investment in the event of bankruptcy. They are typically established as limited partnerships or limited liability companies or offshore corporations.Textbook ReferencePlease see textbook section 5.3

A computer company develops a product which contains significant flaws, resulting in a diminished share price. This is an example of A) Faulty engineering B) Systematic risk C) Negative correlation D) Non-systematic risk

Correct Answer: D) Non-systematic riskAnswer ExplanationNon-systematic risk, also called business risk, is a risk specific to an individual company, rather than the market as a whole.Textbook ReferencePlease see textbook section 1.3.2

During a period of falling interest rates which of the following is likely to occur? A) Callable bonds will appreciate more than the noncallable bond B) Both callable and noncallable bonds will fall in value C) Both callable and noncallable bonds will appreciate in value equally D) Noncallable bonds will appreciate more than callable bonds

Correct Answer: D) Noncallable bonds will appreciate more than callable bondsAnswer ExplanationBond prices increase during periods of falling interest rates. Callable bonds are likely to be called when interest rates are falling so issuers can refinance at lower rates. An investor will lose future interest payments when the bonds are called and face reinvestment risk, so this is not favorable to the investor. Therefore, callable bonds will trade at less of a premium than noncallable bonds when interest rates are falling.Textbook ReferencePlease see textbook section 2.1.9

In order to receive a cash dividend payment based on regular way settlement process, an investor must purchase stock no later than A) The record date B) The business day before the record date C) The ex-dividend date D) The business day before the ex-dividend date

Correct Answer: D) The business day before the ex-dividend dateAnswer ExplanationTo own stock by the record date, it must be purchased before the ex-dividend date which is 1 business day before the record date. By purchasing before the ex-date, there are two business days for settlement to occur, in accordance with regular way settlement process. Textbook ReferencePlease see textbook section 1.7

An investor would like to achieve monthly income from a mutual fund investment that has the highest level of principal protection available. A suitable recommendation is a A) Balanced fund B) High yield bond fund C) Money market fund D) U.S. Government Bond fund

Correct Answer: D) U.S. Government Bond fundAnswer ExplanationBond funds are used to meet income objectives. U.S. government bond funds offer the lowest level of credit risk so meet the objectives of this investor.Textbook ReferencePlease see textbook section 7.4

What is the nominal yield of a bond with par value of $1,000, market value of $800, and interest payments of $40 per year? A) 4% B) It depends on prevailing interest rates. C) 2% D) 5%

Correct Answer:A) 4%Answer ExplanationNominal yield is the coupon rate, which is the annual interest paid divided by par value. It does not change over the life of a bond.Textbook ReferencePlease see textbook section 2.2.1

A municipal bond would be inappropriate for A) A 25 year -old investment banking intern earning $50,000. B) A physician at a medical clinic whose total compensation package exceeds $400,000 C) A 35 year- old college professor with a salary of $150,000, plus a bonus and benefits package D) The CEO of a local power company, earning a mid- six-figure salary

Correct Answer:A) A 25 year-old investment banking intern earning $50,000Answer ExplanationIn general, the lower an investor's tax bracket, the less suitable municipal bonds are. Such an investor would benefit more from a higher yielding corporate bond.Textbook ReferencePlease see textbook section 7.3.3

Which of the bonds listed below would have the greatest price volatility? A) A long-term zero coupon bond B) A variable rate bond C) A short-term investment grade bond D) A Treasury note

Correct Answer:A) A long-term zero coupon bondAnswer ExplanationBecause zero coupon bonds pay no interest until maturity, their prices fluctuate more than other types of bonds in the secondary market. Variable bonds have little price fluctuation because their rates adjust to current interest rates. Also, long term bonds are generally more volatile than short term bonds. Textbook ReferencePlease see textbook section 2.3.1

A share in a foreign corporation that underlies an ADR is known as a(n) A) ADS B) GDS C) GDR D) ADP

Correct Answer:A) ADSAnswer ExplanationAn American Depositary Share (ADS) is the name given to the shares of the foreign corporation that are held by the depositary institution. These shares are packaged to create the ownership interests known as American Depositary Receipts. A Global Depositary Share (GDS) is the underlying for a Global Depositary Receipt (GDR) Textbook ReferencePlease see textbook section 1.4.1

Who is allowed to buy stock rights during the ex-rights period? A) Any interested investor B) Only holders of warrants C) Only preferred shareholders D) Only shareholders of record

Correct Answer:A) Any interested investorAnswer ExplanationThe ex-rights period begins on the ex-rights date and continues until the rights expire, usually several weeks later. During this period, the rights are detached from the stock and trade separately, under their own symbol. Anyone can buy them.Textbook ReferencePlease see textbook section 1.1.1.6

With the market price at $67.25 at expiration, a long XYZ 65 call will A) Be automatically exercised according to OCC provisions B) Be exercised only if the holder gives exercise instruction C) expire D) Be exercised only if the counterparty to the contract has met the initial margin requirement for purchase of the stock

Correct Answer:A) Be automatically exercised according to OCC provisionsAnswer ExplanationThe Options Clearing Corporation has provisions for the automatic exercise of certain in-the-money options at expiration. This procedure is also referred to as "exercise by exception." Generally, the OCC will automatically exercise any expiring equity call or put in a customer account that is $0.01 or more in-the-money, and an index option that is $.01 or more in-the-money. However, the customer's broker-dealer may have a different threshold for automatic exercise which may or may not be the same as the OCC's.Textbook ReferencePlease see textbook section 6.6.1

The inputs for calculating yield to call (YTC) include the bond's current market price, par value, and what else? A) First call date and any call premium B) First call date C) Maturity date D) Maturity date and call premium

Correct Answer:A) First call date and any call premiumAnswer ExplanationYTC is calculated the same as yield to maturity (YTM) with two exceptions. First, the first call date is used instead of maturity date. Second, any call premium on the first call date must be added to par value. Textbook ReferencePlease see textbook section 2.2.4

A broker must have a reasonable basis to make a recommendation, meaning the recommendation must be suitable A) For some investors B) For most investors C) For reasonable investors D) For at least a few investors

Correct Answer:A) For some investorsAnswer ExplanationInitially it seems that some answer choices are the same. However, in the case of this question one is more correct than the other. In fact, this question is testing the exact wording that FINRA uses in reference to reasonable basis suitability. In this instance, you will have to memorize the use of the word 'some' in relation to when a broker must have a reasonable basis to make a recommendation. Key takeaway: The standard of reasonable basis suitability states that a recommended security or strategy should be suitable for at least 'some' investors.Textbook ReferencePlease see textbook section 7.1.1

An investor in a high tax bracket is interested in achieving the highest level of income from a mutual fund investment. Of these choices, which may be appropriate? A) High yield municipal bond fund B) An aggressive growth value fund C) An international index fund D) A commodity fund

Correct Answer:A) High yield municipal bond fundAnswer ExplanationMunicipal bond funds provide income that is exempt from taxation at the federal level and possibly the state level. These funds may be appropriate for meeting the income objectives of high income investors. High yield municipal bond funds offer greater income potential and higher risk because they primarily invest assets in municipal securities that are either not rated or that have been given a non-investment grade rating by a major agency.Textbook ReferencePlease see textbook section 7.3.3

Which of the following companies issue a fixed number of shares in their initial public offering? I. Closed end companiesII. Open end companiesIII. REITS A) I and III only B) I and II only C) I, II and III D) II and III only

Correct Answer:A) I and III onlyAnswer ExplanationClosed end companies and REITS issue a fixed number of shares in their initial public offering. Open end companies issue shares continually through an ongoing primary offering.Textbook ReferencePlease see textbook section 5.1.2

An investor who owns shares in ABC company is notified of a rights offering. If the investor decides to participate in this offeringI. her stake in company ownership will not be dilutedII. she must sell all her ABC shares III. she will acquire more ABC sharesIV. she will convert her equity holdings to a senior debt position A) I and III B) II and III C) I and IV D) II and IV

Correct Answer:A) I and IIIAnswer ExplanationA rights offering raises new equity capital by giving existing shareholders the right to acquire more shares in proportion to their current holdings. Shareholders who exercise their rights will not have their ownership stakes in the company diluted. Textbook ReferencePlease see textbook section 1.1.1.6

Which two statements correctly compare ETFs and closed-end funds?I. Both are investment company productsII. Closed-end funds are investment company products; ETFs are notIII. Both have a stable pool of capitalIV. Closed-end funds have a stable pool of capital; ETFs offer shares continuously A) I and III B) II and IV C) II and III D) I and IV

Correct Answer:A) I and IIIAnswer ExplanationClosed-end funds are actually considered a type of ETF by some. These are both classified as closed-end investment companies because they have a stable pool of capital that is raised through their initial public offering.Textbook ReferencePlease see textbook section 4.6

A buyer is not responsible for paying a seller any accrued interest since the last coupon payment in a bond that trades A) flat. B) thin. C) ex-coupon. D) round lot.

Correct Answer:A) flatAnswer ExplanationIf a bond trades "flat," the buyer is not responsible for paying interest that has accrued since the last interest payment. Textbook ReferencePlease see textbook section 2.4

A RR opens an account for a client. The RR should ask about the client'sI. tax statusII. investment objectivesIII. net worthIV. education A) I, II and III only B) I and II only C) II and III only D) I, II, III and IV

Correct Answer:A) I, II and III onlyAnswer ExplanationA Registered Rep does not need to ascertain the client's level of education to open an account. Tax status, investment objectives and net worth are necessary information for making suitable recommendations.Textbook ReferencePlease see textbook section 7.1.5

Which two of the following statements about hedge fund regulation are TRUE?I. They are subject to the Investment Company Act of 1940II. They are exempt from the Investment Company Act of 1940III. Large hedge funds must usually register with the SECIV. They are usually exempt from the Investment Advisors Act of 1940 A) II and III B) I and IV C) II and IV D) I and III

Correct Answer:A) II and IIIAnswer ExplanationHedge funds are different than most packaged products because they are exempt from the Investment Company Act of 1940 if they follow limitations on the number and types of purchasers. This allows then much greater flexibility in trading strategies and operations. The Investment Advisors Act of 1940 requires that large hedge fund advisors register with the SEC while smaller funds are registered and regulated by the states. Textbook ReferencePlease see textbook section 5.3.1

An investor purchases a 6% bond for 115. Rank the yield computations for this bond from highest to lowest.I. Current yieldII. Nominal yieldIII.Yield to callIV. Yield to maturity A) II, I, IV, III B) II, IV, I, III C) II, IV, III, I D) II, I, III, IV

Correct Answer:A) II, I, IV, IIIAnswer ExplanationWhen a bond is trading at a premium, the nominal yield (i.e. coupon) is the highest rate, followed by the current yield, yield to maturity, and yield to call. Textbook ReferencePlease see textbook section 2.2.5

Which two of the statements below define settlement terms of U.S. government and municipal securities?I. Regular way settlement for U.S. Treasury securities is T + 3.II. Regular way settlement for municipal securities is T + 1.III. Cash settlement for municipal securities is the same day as the trade.IV. The terms of cash settlement for municipal securities and U.S. Treasury securities are the same A) III and IV B) II and IV C) I and III D) I and II

Correct Answer:A) III and IVAnswer ExplanationRegular way settlement for U.S. Treasury securities is trade date + 1 business day; for municipal securities regular way settlement is T + 2. Cash settlement for both U.S. Treasury and municipal securities is the same day as the trade date.Textbook ReferencePlease see textbook section 2.4

When must proxy materials be filed with the SEC? A) In advance of the shareholder solicitation B) Within ten days of posting proxy materials online C) Within five days after the shareholder vote D) There is no requirement to file proxy materials

Correct Answer:A) In advance of the shareholder solicitationAnswer ExplanationThe information contained in proxy materials must be filed with the SEC in advance of the shareholder solicitation, and it must disclose all important facts upon which shareholders are asked to vote. Textbook ReferencePlease see textbook section 1.1.1.2

The fixed rate of return offered by preferred stock or bonds is a primary factor when considering A) Inflation risk B) Interest rate risk C) Credit risk D) Reinvestment rate risk

Correct Answer:A) Inflation riskAnswer ExplanationFixed income securities carry inflation, or purchasing power risk. When inflation occurs, the value of the returns generated by a fixed income product will be diminished. Textbook ReferencePlease see textbook section 7.2.5

An investor holds 10 warrants in XYZ Company. The company's common stock currently sells for $30.00 per share. What are the warrants worth? A) It depends on the warrants' exercise price. B) $300 C) $3,000 D) $30,000

Correct Answer:A) It depends on the warrants' exercise priceAnswer ExplanationWarrants have value only if the stock appreciates over time to a level above the warrant's exercise price. Profit then is approximately the stock price less the exercise price. In this example, if the exercise price is $30.00 or above, the warrants may have little value. However, any appreciation above the exercise price can generate profit.Textbook ReferencePlease see textbook section 1.1.1.7

Which of these bond features is the most attractive to a corporate issuer? A) Low call premium B) High sinking fund requirement C) Nonrefundable D) High interest rate

Correct Answer:A) Low call premiumAnswer ExplanationLow call premiums are attractive to issuers because it allows the issuer to call the bond away from investors for a lower price. High interest rates require a larger interest expense for issuers, nonrefundable bonds do not allow an issuer to reissue bonds if interest rates decrease, and a high sinking fund require an issuer to maintain a large reserve of cash to maintain the bond. Only the low call premium is beneficial to issuers.Textbook ReferencePlease see textbook section 2.1.9

An investor writes a call to increase income to his portfolio. In establishing this position this investor has engaged in an A) Opening sale B) Opening purchase C) Closing sale D) Closing purchase

Correct Answer:A) Opening saleAnswer ExplanationThis investor enters the market by writing a call. Creating an opening sale to establish the position. Textbook ReferencePlease see textbook section 6.7.1

Zach, a member of your sales team, suggested that his client Monica purchase the Apple County GO bonds, maturing 20XX, first call date 20XX. CUSIP HMK202024. This recommendation resulted from a careful review of Monica's investment profile. In carrying out his due diligence, Zach likely paid the least amount of attention to Monica's A) prior residential history B) need for current liquidity C) date of birth D) prior investment experience

Correct Answer:A) Prior residential historyAnswer ExplanationMSRB rules require that a municipal securities dealer have a reasonable basis to believe that a recommended transaction in a municipal security is suitable for the customer, based upon information obtained through the reasonable diligence of the firm to learn of the customer's investment profile. A customer's investment profile takes many variables into account. Key among these are the client's age, overall financial situation, tax status, investment objectives, investment experience, and risk tolerance. Of lesser significance in this analysis would be the client's prior residential history. Textbook ReferencePlease see textbook section 7.1.5

In a book-entry format, ownership of the security is recorded by A) Clearing house B) Central depository C) The issuer D) Corporate counsel

Correct Answer:B) Central depositoryAnswer ExplanationWhen a book-entry format is used, ownership is recorded by a central depository, rather than by the issuer. This has become the most common method of tracking ownership.Textbook ReferencePlease see textbook section 2.1.1

A customer buys 100 shares of XYZ stock for 57 and writes a 60 call for 4. The stock price rises to 65 and the option is exercised. The profit or loss to the investor is A) Profit of $700 B) Loss of $400 C) Profit of $300 D) Loss of $100

Correct Answer:A) Profit of $700Answer ExplanationThe stock is purchased for $5,700 and sold for $6,000. In addition, the customer received a premium of $400 for writing the call. The investor has a profit of $700.Textbook ReferencePlease see textbook section 6.2.2.2

An investor writes a 6-month XYZ 45 put for 4.75. Excluding commissions, this investor A) Receives $475 for the put B) Pays $475 for the put C) Pays $450 for the put D) Receives $450 for the put

Correct Answer:A) Receives $475 for the putAnswer ExplanationAn investor that writes puts receives a premium. The premium for a standard option contract is a price per share, and 100 shares are included in the contract. $4.75 x 100, or $475 is what this investor receives.Textbook ReferencePlease see textbook section 6.1.1.2

Retiring an outstanding bond issue at maturity by using money from the sale of a new offering is known as A) Refunding B) Serial Retirement C) Restructuring D) Redeeming

Correct Answer:A) RefundingAnswer ExplanationWhen issuers sell new bonds to retire an outstanding bond issue they are engaged in refunding. Pre-refunding or advance refunding occur if the issuers sells the new bonds in advance of the first available call date, typically to lock in a lower interest rate. Textbook ReferencePlease see textbook section 2.1.9

Investors whose bonds have been called as interest rates have fallen are now facing A) reinvestment rate risk B) inflation risk C) capital risk D) credit risk

Correct Answer:A) Reinvestment rate riskAnswer ExplanationInvestors would now be facing reinvestment rate risk, as bonds have been called and it will be difficult to find another investment offering the same return that was available prior to the bond being called. Textbook ReferencePlease see textbook section 7.2.2

In which type of economic environment are bond investors most vulnerable to interest rate risk? A) Rising interest rates B) Recessions C) Falling interest rates D) Declining inflation

Correct Answer:A) Rising interest ratesAnswer ExplanationBond prices move opposite interest rates. Therefore, interest rate risk is the risk that bond prices will fall during times when interest rates are rising. Textbook ReferencePlease see textbook section 7.2.6

In which form of registration is the broker-dealer identified as the nominal owner of the securities? A) Street name B) Book entry C) DWAC D) DRS

Correct Answer:A) Street nameAnswer ExplanationWhen securities are held in street name the broker-dealer is the nominal, or named, owner, and holds the securities for the benefit of the customer. Book entry is not a type of registration; it is an electronic method of tracking ownership of securities.Textbook ReferencePlease see textbook section 1.6.2

An issuer will send proxy statements directly to the beneficial owner of the securities when they are held in all of the following forms EXCEPT A) Street name B) DRS C) Registered physical certificates D) DWAC

Correct Answer:A) Street nameAnswer ExplanationWhen securities are held in street name the broker-dealer is the nominal, or named, owner, and the issuer sends proxy statements and all other information about the securities to the firm, which must then distribute the information to the customer, who is the beneficial owner. DRS, DWAC and registered physical securities all list the customer as the named owner, so the issuer can communicate with the customers directly.Textbook ReferencePlease see textbook section 1.6.2

The regular-way trade cycle for most trades is A) T+2 B) T+1 C) T+3 D) T+5

Correct Answer:A) T+2Answer ExplanationThe regular-way trade cycle for most trades settles on the second day after trade execution - T+2.Textbook ReferencePlease see textbook section 1.7

Who is the owner of a bearer bond? A) The bearer of the bond certificate B) The underwriter C) The registered principal D) The purchaser

Correct Answer:A) The bearer of the bond certificateAnswer ExplanationBearer bonds, which were issued in the U.S. for many decades, functioned much like cash in that the bearer of the bond certificate was considered the rightful owner. Unlike other investment securities, the ownership and transactions involving ownership of bearer bonds are not formally recorded. In 1982, Congress passed legislation that eliminated new bearer bonds. Now, there is only one form of note issued in the U.S. in bearer form √Ç‚Äì a Federal Reserve Note √Ç‚Äì i.e., the cash or currency in your wallet. Textbook ReferencePlease see textbook section 2.1.1

In order to receive a cash dividend payment based on regular way settlement process, an investor must purchase stock no later than A) The business day before the ex-dividend date B) The record date C) The business day before the record date D) The ex-dividend date

Correct Answer:A) The business day before the ex-dividend dateAnswer ExplanationTo own stock by the record date, it must be purchased before the ex-dividend date which is 1 business day before the record date. By purchasing before the ex-date, there are two business days for settlement to occur, in accordance with regular way settlement process. Textbook ReferencePlease see textbook section 1.7

The advantages of owning American Depositary Receipts include all of the following EXCEPT A) The owner of the shares does not have foreign currency risk B) The owner of the shares does not have to deal with foreign currency conversions C) The owner of the shares does not have to deal with cross border administrative hassles D) The owner of the shares is able to trade them in domestic markets

Correct Answer:A) The owner of the shares does not have foreign currency riskAnswer ExplanationOwning American Depositary Receipts (ADRs) shares enables U.S. investors to access shares of foreign companies through U.S. markets. When purchasing these shares, investors do not have to deal directly with rules of the foreign country and the shares are denominated in U.S. dollars. Although shareholders do not have to deal with currency conversions, there is foreign currency risk, as the exchange rate between the U.S. Dollar and the foreign currency will affect the price of shares as well as any dividend payments, which must be converted into U.S. dollars. Textbook ReferencePlease see textbook section 1.4.1.1

Liquidity risk may be avoided if an investor takes a position in A) Penny stocks B) Exchange traded funds C) Limited partnerships D) Municipal bonds

Correct Answer:B) Exchange traded fundsAnswer ExplanationInvestments that should be made in the interest of avoiding liquidity risk include exchange listed stocks, treasuries, and exchange traded funds (ETFs).Textbook ReferencePlease see textbook section 7.2.8

An investor buys a 6.0% coupon bond to yield 6.1%. What will most likely happen to the price of the bond as maturity approaches? A) The price will increase towards par. B) The price will fall to zero. C) The price will remain constant. D) The price will decrease towards par.

Correct Answer:A) The price will increase towards parAnswer ExplanationThis bond has a coupon of 6.0% and a yield-to-maturity of 6.1%, indicating that the bond is trading at a discount. The price of a bond will always trend towards par as maturity approaches. Given that this bond is trading at a discount (e.g. 90% of par), the price would need to increase to arrive at par value.Textbook ReferencePlease see textbook section 2.1.8

Hedge funds are best suited for sophisticated and institutional investors for all of the following reasons EXCEPT A) Their investment strategies are narrowly defined and highly complex B) They often require minimum investments of $100,000 or more C) They may have long periods of illiquidity D) There is often a lack of transparency into their trading practices

Correct Answer:A) Their investment strategies are narrowly defined and highly complexAnswer ExplanationThe investment strategies of hedge funds are typically not narrowly defined. Instead the fund managers are given a broad range of authority to invest in numerous types of assets and employ complex trading strategies and high degrees of leverage to magnify returns. These factors limit their suitability for typical investors. Hedge funds are generally appropriate for sophisticated and institutional investors that are qualified to understand these risks.Textbook ReferencePlease see textbook section 5.3.4

Which of the following are true about Exchange Traded Funds? A) They are marginable B) They are actively managed C) They can only be purchased as new issues D) They cannot be sold short

Correct Answer:A) They are marginableAnswer ExplanationExchange Traded Funds are a type of exchange traded products mirrors a stock index. They are not actively managed, they are supervised. ETF's can be sold short; they can be purchased as new issues or on exchanges in the secondary market, and are marginable. Textbook ReferencePlease see textbook section 4.5.1.2

A UIT sells units to investors A) Through representatives of broker dealers with which selling agreements have been established B) In private placements only C) Through the trustee that administers the trust D) Directly through the sponsor

Correct Answer:A) Through representatives of broker dealers with which selling agreements have been establishedAnswer ExplanationThe units of UITs are typically distributed by the representatives of broker dealers. A broker dealer must have a selling agreement with the UIT to distribute the UIT's shares through its representatives.Textbook ReferencePlease see textbook section 4.4.2

For a bond trading at a discount, how does yield to call (YTC) compare to yield to maturity (YTM)? A) YTC is greater B) YTC and YTM are equal C) YTM is greater D) It depends on the size of the discount.

Correct Answer:A) YTC is greaterAnswer ExplanationFor a bond trading at a discount, yield to call is higher than yield to maturity, as the investor receives the discount back at an accelerated rate (at the first call date rather than waiting until the maturity date).Textbook ReferencePlease see textbook section 2.2.4

A registered representative sends 10 clients a letter recommending that they sell shares of ABC Pharmaceuticals before the company declares bankruptcy. This is based on the rep's own opinion and research, and the firm has not investigated the potential for bankruptcy. Is this a compliance problem? A) Yes, because it violates suitability requirements B) Yes, because it is based on speculation, in the eyes of regulators C) No, because the rep is exercising free speech D) No, because the rep has research to support the recommendation

Correct Answer:A) Yes, because it violates suitability requirementsAnswer ExplanationThis is a suitability violation. Specifically, it violates the requirement that the firm perform reasonable basis suitability before any recommendation is made. The client to whom communication containing a recommendation is sent has a right to request information supporting the recommendation. This will be the information uncovered in the firm's reasonable basis suitability investigation. It must reflect views of the firm, not a specific rep.Textbook ReferencePlease see textbook section 7.1

Which of the following bonds is most vulnerable to interest rate risk? A) Zero-coupon bond with 25 years to maturity B) Corporate bond with 20 years to maturity and a 6.5% coupon C) Municipal bond with 8 years to maturity and a 3.5% coupon D) US Treasury with 8 years to maturity and a 5% coupon

Correct Answer:A) Zero-coupon bond with 25 years to maturity Answer ExplanationInterest rate risk is increased by long maturities and low coupons. Long-term zero-coupon bonds are the most vulnerable to interest rate risk.Textbook ReferencePlease see textbook section 7.2.6

Collecting information to assess a client's investment profile is paramount to being able to provide appropriate advice and recommendations. Knowledge of which of the following items is least important towards achieving this goal? A) age of primary residence B) life insurance policies C) security holdings D) credit worthiness

Correct Answer:A) age of primary residenceAnswer ExplanationThe age of a client's home is not a significant factor when gathering information about a client's investment profile.Textbook ReferencePlease see textbook section 7.1.5

An investor is evaluating the purchase of a corporate bond with 12 years to maturity. Under a call feature, it can be called in 8 years. Another feature that can impact the amount of call risk is A) any premium to par payable on the call date. B) the credit standing of the issuer. C) any penalty the investor will pay for calling the bond early. D) the amount of common stock into which the bond may convert.

Correct Answer:A) any premium to par payable on the call dateAnswer ExplanationA call is always at the option of the issuer, never the investor. Normally, a call feature creates extra risk by shortening the investor's holding period, especially in times of falling rates. Issuers may agree to pay an additional price (call premium) above par for the call option. Textbook ReferencePlease see textbook section 2.3.2

An investor owns ten warrants of XYZ Co. These warrants are considered A) equity securities, as they may be exercised for shares in XYZ. B) call options, which can always be exercised for their intrinsic value. C) stock rights, as they give the holder the ability to convert into the equity securities of XYZ for an indefinite period of time. D) convertible bonds, making regular interest payments, which may be exercised at any time.

Correct Answer:A) equity securities, as they may be exercised for shares in XYZ.

Preferred stockholders are entitled to certain rights, including A) having a claim on corporate assets before common stockholders if the corporation is dissolved B) receiving dividends based on a specified percentage of the current market value of the stock C) receiving dividends after common stockholders D) the right to vote for directors

Correct Answer:A) having a claim on corporate assets before common stockholders if the corporation is dissolvedAnswer ExplanationPreferred stockholders receive dividends before common stockholders, preferred dividends are based on a percentage of par value (usually $100), and have a claim on assets before common stockholders. Textbook ReferencePlease see textbook section 1.5.1.2

To earn a profit on a short sale position, the short sale transaction price must be A) higher than the buy-to-cover price. B) lower than the buy-to-cover price. C) higher than the option premium earned. D) lower than the option premium earned.

Correct Answer:A) higher than the buy-to-cover price.Answer ExplanationA short sale is a bet that a stock's price will fall ‚Äì i.e., the price at which the short sale is covered (buy-to-cover price) is lower than the short sale transaction price.Textbook ReferencePlease see textbook section 1.8

When compared to ownership rights of common stock, owners of preferred stock generally A) receive higher dividends B) are able to vote on more corporate issues C) are guaranteed to receive dividend payments regularly D) are junior in claim to assets of a corporation in bankruptcy

Correct Answer:A) receive higher dividendsAnswer ExplanationPreferred stock is typically purchased for the income stream it delivers; so owners of preferred stock usually receive higher dividends than owners of common stock. Preferred stock has seniority over common in corporate liquidations, but usually does not have voting rights. Dividends for common or preferred shares are not guaranteed; they must be declared by the Board of Directors. Textbook ReferencePlease see textbook section 1.5.1.3

A US investor buys shares in a Canadian company that trade in Toronto and are denominated in Canadian dollars. The currency risk of this position can rise if A) the US dollar strengthens against the Canadian dollar. B) the Canadian dollar strengthens against the US dollar. C) the Canadian dollar does not change in value against the US dollar. D) the US dollar weakens against the Canadian dollar.

Correct Answer:A) the US dollar strengthens against the Canadian dollarAnswer ExplanationWhen making investments denominated in a foreign currency, currency risk increases with the US dollar's strength or the foreign currency's weakness.Textbook ReferencePlease see textbook section 7.2.10

All of the following statements about call risk are true except A) the risk is greatest when interest rates are rising. B) bond buyers, not bond issuers, are vulnerable to call risk. C) call risk jeopardizes the investor's ability to realize the stated bond yield to maturity. D) the risk is greatest in callable bonds and callable preferred stocks.

Correct Answer:A) the risk is greatest when interest rates are rising

Today, Vladimir sold 15 Landmark Inc. May 65 puts for 2.15. On settlement date, Vladimir A) will receive a total of $3,225 B) will receive $2.15 per share when he delivers his Landmark shares to his broker-dealer C) must pay a total of $3,225 D) must pay $65 per share

Correct Answer:A) will receive a total of $3,225Answer ExplanationSince Vladimir sold 15 put options for 2.15 each, he will receive a total of $3,225 in his account when this trade settles.Textbook ReferencePlease see textbook section 6.1.1

An investor owns a 9% coupon bond with par value of $1,000. The bond can be called after 5 years for a call premium of 104.5. Assuming the bond is called away at the earliest possible date, how much money will the investor receive upon redemption? A) 1045 B) 1090 C) 1135 D) 1000

Correct Answer:B) 1090Answer ExplanationWhen a bond is called away, an investor receives the call premium (104.5 percent of par, or $1,045) plus the final semi-annual coupon payment: 9% x $1,000 par / 2 = $45. Therefore, $1,045 call premium + $45 interest = $1,090 Textbook ReferencePlease see textbook section 2.1.9

A share in a foreign corporation that underlies an ADR is known as a(n) A) ADP B) ADS C) GDS D) GDR

Correct Answer:B) ADSAnswer ExplanationAn American Depositary Share (ADS) is the name given to the shares of the foreign corporation that are held by the depositary institution. These shares are packaged to create the ownership interests known as American Depositary Receipts. A Global Depositary Share (GDS) is the underlying for a Global Depositary Receipt (GDR) Textbook ReferencePlease see textbook section 1.4.1

An investor owns a security which carries currency risk but not interest rate risk. This investor is likely holding a(n) A) Treasury bond. B) American depository receipt (ADR). C) Eurodollar CD. D) convertible debenture.

Correct Answer:B) American depository receipt (ADR).Answer ExplanationAn American Depository Receipt is an equity instrument which facilitates the trading of a foreign security in the US. This asset category carries currency risk but not interest rate risk, because it is an equity, and not a debt instrument. Textbook ReferencePlease see textbook section 1.4.1.1

Individuals who cite current income as their investment objective are most likely A) Recent college graduates B) Approaching retirement C) Young professionals in the workforce D) Middle aged investors with diversified stock portfolios

Correct Answer:B) Approaching retirementAnswer ExplanationIndividuals approaching, or in retirement would likely identify current income as one of their investment objectives. This is probably not an objective of a younger person who is starting out in their career. Textbook ReferencePlease see textbook section 7.3.2

When must a broker-dealer ensure that a recommended security is suitable for its customer? A) At the point of sale and for one year following the sale B) At the point of sale C) As long as the customer stays with the firm D) For the life of the investment

Correct Answer:B) At the point of saleAnswer ExplanationBroker-dealers must apply suitability and fair-dealing standards and rules at the point of sale. The sale can be a recommendation to purchase, hold or sell a security. However, broker-dealers and their representatives usually do not have responsibilities to monitor customers' investments beyond the point of sale. Textbook ReferencePlease see textbook section 7.1

In a cash transaction on the record date, when does the ex-dividend date occur? A) Four days following the record date B) Business day following the record date C) Four business days preceding the record date D) Record date

Correct Answer:B) Business day following the record dateAnswer ExplanationFor a cash transaction, the ex-dividend date is the business day after the record date. For a non-cash transaction, the ex-dividend date is one business day before the record date. Textbook ReferencePlease see textbook section 1.7.1

On Monday, January 2nd, ABC Inc. declares a $0.10 dividend payable on Monday, Jan 16 to all shareholders of record as of Thursday, Jan 12. When will be the ex-dividend date for cash settled trades in the security? A) Wednesday, Jan 11 B) Friday, Jan 13 C) Thursday, Jan 12 D) Tuesday, Jan 10

Correct Answer:B) Friday, Jan 13Answer ExplanationCash settled trades settle on the same day. Therefore, an investor could buy stock on the record date and still settle in time to receive the dividend. Therefore, the ex-dividend date for a cash settled trade will be the business day after the record date.Textbook ReferencePlease see textbook section 1.7.1

Common stock is most often purchased to satisfy which of the following investment objectives? A) Principal protection B) Growth C) Tax Minimization D) Income

Correct Answer:B) GrowthAnswer ExplanationCommon stock is typically recommended to satisfy growth or capital appreciation objectives. Income objectives are met with fixed income instruments such as bonds or preferred stock. Government securities are often recommended when there is concern for loss of principal, and municipal securities are used to achieve tax minimization. Textbook ReferencePlease see textbook section 1.1.1.5

A bond's par value is lower than its market price. This bond A) Is trading at a discount. B) Has a nominal yield that is greater than its yield to maturity. C) Has a current yield that is more than its coupon rate of interest. D) Has a yield to maturity that is greater than its current yield.

Correct Answer:B) Has a nominal yield that is greater than its yield to maturityAnswer ExplanationWhen a bond is priced higher than par, it is trading at a premium. Its nominal yield is then more than its current yield, which is more than its YTM. This is a good one to make up some numbers for. Par value ($1,000) is lower than market value ($1,200), which means a premium bond.Textbook ReferencePlease see textbook section 2.2.5

Correct Answer:B) I and IIAnswer ExplanationA put is in the money whenever the price of the underlying stock is lower than the strike price. This contract is in the money, and profitable to the holder at expiration because the breakeven is 58 (strike price minus premium for puts). The put holder will exercise the contract, and has the right to sell stock at 65. The writer (the party that is short) must buy it, when the current market price is actually 53. Textbook ReferencePlease see textbook section 6.3.1.1

A bond that was yielding 3.65% yesterday is currently yielding 3.75%. Which two of the following statements are true?I. The bond's price went down since yesterdayII. The bond's price went up since yesterday III. The bond's yield is 10 basis points more today. IV. The bonds yield is 1/10th basis point more today. A) I and IV B) I and III C) II and IV D) II and III

Correct Answer:B) I and IIIAnswer ExplanationThere is an inverse relationship between bond prices and bond yields. Because the bond's yield is more today, its price fell. Basis points measure the change in interest rate. Each basis point equals 1/100 of a percent. (A change of 1 percent = 100 basis points). A change from 3.65% to 3.75% is a change of 10 basis points.Textbook ReferencePlease see textbook section 2.1.7

A 4% municipal bond is trading in the secondary market for 96. Which two of the following statements about the bond's current yield are true? I. The bond's current yield is 4%II. The bond's current yield is 4.17%III. The bond's CY is less than its YTMIV. The bond's CY is greater than its YTM A) I and IV B) II and III C) II and IV D) I and III

Correct Answer:B) II and IIIAnswer ExplanationCurrent yield is calculated by dividing the annual interest rate of the bond (4%) by the current price (96). Because the bond is trading at a discount its current yield is greater than the coupon rate, and its YTM is greater than its current yield.Textbook ReferencePlease see textbook section 2.2.5

Correct Answer:B) II and IIIAnswer ExplanationStructured products offer a limit on downside risk. The tradeoff for this protection is a limit on the upside potential. Structured products are not highly liquid. Secondary market trading is limited ‚Äì they are generally held until maturity.Textbook ReferencePlease see textbook section 5.5

Correct Answer:B) II and IVAnswer ExplanationThe breakeven of a call is the strike price + the premium. The buyer of a call will profit if the stock price is above the breakeven. Exercise of the contract allows the holder to buy stock at the strike price when the market price is higher. A call buyer loses the premium paid if the contract expires.Textbook ReferencePlease see textbook section 6.2.1

When interest rates fall in the marketplace, there is a(n) A) Reduced incentive for borrowers in general to refinance their loans, such as mortgages B) Increasing likelihood that an issuer will call in its outstanding bonds C) Decreasing fear of credit downgrades D) Expectation that inflation will become more prominent

Correct Answer:B) Increasing likelihood that an issuer will call in its outstanding bondsAnswer ExplanationWhen market interest rates decline, there will be an increased probability that an issuer will call in its outstanding bonds, especially if those bonds carry higher interest rates. Textbook ReferencePlease see textbook section 2.1.9

An investment in a private equity fund A) Is not subject to registration and disclosure requirements under the Securities Act of 1933 B) Is most likely owned by accredited and institutional investors and not retail investors C) Is highly liquid D) Is considered a relatively low-risk investment

Correct Answer:B) Is most likely owned by accredited and institutional investors and not retail investorsAnswer ExplanationPrivate equity is subject to registration and disclosure requirements of the Securities Act of 1933. Sold to mostly accredited investors and institutional investors, it is often not accessible to retail investors because of the high dollar investment minimums, lack of liquidity, and long-term time horizons. Private equity is considered relatively high risk because of the high underperformance risk of many startup companies.Textbook ReferencePlease see textbook section 5.4.2

Which of the following equity type instruments will give an investor the longest amount of exposure to the future price movements of the underlying common stock? A) Convertible bond B) LEAP C) Stock rights D) Traditional equity option contract

Correct Answer:B) LEAPAnswer ExplanationA LEAP is a long-term equity option contract. This longer maturity, as compared to a traditional short-term contract, can provide an investor with exposure to the price movement of the underlying common stock for a greater period of time. Textbook ReferencePlease see textbook section 6.1.1.1

An investor believes ABC stock will increase in value. What is the most profitable options position that this investor can utilize? A) Long puts B) Long calls C) Short calls D) Short puts

Correct Answer:B) Long callsAnswer ExplanationA long call would be the most profitable option position an investor can hold if the value of a particular stock increases in value. Textbook ReferencePlease see textbook section 6.2.1

An investor should expect the greatest price increase in which of the following if interest rates decline? A) Long-term bonds selling at a premium B) Long-term bonds selling at a discount C) Short-term bonds selling at a discount D) Short-term bonds selling at a premium

Correct Answer:B) Long-term bonds selling at a discountAnswer ExplanationBecause of the inverse relationship between price and yield, when interest rates fall, bond prices rise. Longer maturities have more market risk, so their prices rise more than shorter maturities. Bonds selling at a discount also rise more sharply than those selling at a premium.Textbook ReferencePlease see textbook section 2.3.1

Which of the following securities carries the highest degree of purchasing power risk? A) Convertible cumulative preferred stock B) Long-term, high-grade bond C) Blue chip stock D) Short-term note

Correct Answer:B) Long-term, high-grade bondAnswer ExplanationLong-term debt carries the highest degree of purchasing power risk because the interest and principal received does not appreciate in value as inflation causes prices to increase. Thus, the purchasing power of the semi-annual interest payments decreases over time. Additionally, inflation causes interest rates to increase, subsequently lowering the price of outstanding bonds. Equity securities provide more protection against inflation.Textbook ReferencePlease see textbook section 2.3.4

Which of the following statements best describes the risk and reward profile of preferred stock versus common stock? A) Preferred stock is not risky and has no growth potential. B) Preferred stock is less risky than common stock and has less growth potential. C) Preferred stock is more risky than common stock but has about the same growth potential. D) Preferred stock is less risky than common stock and has about the same growth potential.

Correct Answer:B) Preferred stock is less risky than common stock and has less growth potential.Answer ExplanationPreferred stock has both risk and growth potential. However, both are lower than in common stock, making preferred stock a more conservative investment.Textbook ReferencePlease see textbook section 1.5.3

An investor concerned about interest rate risk might be advised to A) Sell covered call options B) Purchase common stock C) Purchase preferred stock D) Purchase high grade corporate bonds

Correct Answer:B) Purchase common stockAnswer ExplanationAn investor concerned about interest rate risk should purchase common stock or convertible bonds.Textbook ReferencePlease see textbook section 7.2.6

All of the following statements about the structure of a REIT are true EXCEPT A) REITs must be jointly owned by a minimum of 100 persons B) REITS must have a minimum of 90% of their total assets invested in real estate C) REITS must have transferable interests D) REITS must be set up as a corporation

Correct Answer:B) REITs must have a minimum of 90% of their total assets invested in real estateAnswer ExplanationREITS are required to have a minimum of 75% of their asset invested in real estate and must derive at least 75% of their gross income from rents or mortgages. Except qTextbook ReferencePlease see textbook section 5.1.1

With regard to the price of closed-end fund shares held by investors which of the following statements is TRUE? A) Shares are sold at the price calculated at the close of business on that day B) Shares may be sold at a discount or premium to their NAV C) Shares are sold at a discount when the securities in the fund have increased in value relative to their NAV D) The price is set by formula each business day

Correct Answer:B) Shares may be sold at a discount or premium to their NAVAnswer ExplanationClosed-end company shares trade in the secondary market on exchanges. Their prices are determined by supply and demand and may be priced at a premium or discount to their NAV.Textbook ReferencePlease see textbook section 4.3.2.2

An investor that is subject to high federal and state income taxes would benefit most from purchasing which of the following? A) Treasury STRIPs B) State issued GO bonds C) Treasury bonds D) Private activity bonds

Correct Answer:B) State issued GO bondsAnswer ExplanationBonds issued by the U.S. Treasury and Treasury STRIPS are subject to federal income taxes. Interest on private activity bonds may be subject to alternative minimum taxes, so the general obligation bond is most beneficial. A GO bond is exempt from taxation at the federal level and possibly at the state level as well (if the purchaser is a resident of the state of issue).Textbook ReferencePlease see textbook section 7.3.3

Which statement is true when a bond is in default? A) It is trading at par. B) The bond trades flat. C) The price of the bond remains relatively stable regardless of market conditions. D) There is no commission payable on the transaction.

Correct Answer:B) The bond trades flat.Answer ExplanationBonds in default trade flat, meaning they do not trade with accrued interest.Textbook ReferencePlease see textbook section 2.4

Two bonds have relatively equal credit quality and terms to maturity. Which of the following statements is true? A) The bonds will have equal coupon rates. B) The bond with the higher coupon is more marketable. C) The bond with the higher coupon will trade at a lower price. D) The bond with the lower coupon is more liquid.

Correct Answer:B) The bond with the higher coupon is more marketableAnswer ExplanationAll other factors being equal, bonds with higher coupons are more marketable, and more attractive to investors than bonds with lower coupons. Investors will pay more for the bond with the higher coupon unless it is more risky. Bonds of equal credit quality and terms to maturity will likely have similar yields, but their coupon rates of interest may be very different.Textbook ReferencePlease see textbook section 2.1.4

Which of the following factors would be least relevant in determining the suitability of a customer? A) The client's liquidity needs B) The client's educational background C) The client's investment experience D) The client's tax status

Correct Answer:B) The client's educational background Answer ExplanationA client's tax status, investment experience, liquidity needs, time horizon, and objectives are all relevant factors in determining the suitability. The customer's educational background would not be relevant. Textbook ReferencePlease see textbook section 7.1.5

The files of a customer who received a recommendation to purchase an interest in a public oil and gas program must include A) A signed attestation that the customer has reviewed the risks of the partnership with a purchaser representative B) The documents collected to support the determination of suitability of recommended partnership interest C) A signed statement that the customer does not hold the general partner responsible for potential financial loss related to the partnership business D) Written approval from the principal approving the recommendation before it was delivered to the customer

Correct Answer:B) The documents collected to support the determination of suitability of recommended partnership interestAnswer ExplanationFINRA rules require that representatives maintain in the files of the customer the documents that support the determination of suitability of the partnership interest for the customer.Textbook ReferencePlease see textbook section 7.1.2

What is accrued interest? A) The annual interest payments received by a bondholder B) The interest that has accumulated on a bond since the last interest payment C) The total amount payable on the bond's maturity date D) The total dollar value of interest paid on the bond to date

Correct Answer:B) The interest that has accumulated on a bond since the last interest paymentAnswer ExplanationAccrued interest is the interest that has accumulated on a bond since the last interest payment. Interest accrues up to, but not including, the settlement date. The buyer of a bond will pay the seller of a bond any accrued interest at the time of the transaction. The buyer will then collect and retain the entire next interest payment as the seller of the bond has already received any interest owed prior to the sale. Textbook ReferencePlease see textbook section 2.4

Who maintains records of the change in ownership of securities, whenever they are transferred or sold? A) The corporate secretary B) The transfer agent C) The custodian D) The escrow agent

Correct Answer:B) The transfer agentAnswer ExplanationWhen securities are transferred or sold, the transfer agent records the change in ownership on the books of the securities issuer. In many cases, the transfer agent doubles as registar for the same company.Textbook ReferencePlease see textbook section 1.6.1

What does yield to maturity (YTM) measure in a bond, assuming the bond is held to its scheduled maturity? A) Yield discounted by time value B) Total return C) The value of interest payments D) Yield

Correct Answer:B) Total returnAnswer ExplanationYTM measures the total return of a bond, held from the current date through scheduled maturity. It includes both scheduled interest payments and any capital gain or loss ‚Äì i.e., the difference, if any, between the current price and maturity value. The denominator in YTM is the current bond price. So, YTM changes as current bond prices change.Textbook ReferencePlease see textbook section 2.2.3

A company "reverse splits" its stock on a 1-for-10 basis. If an investor holds 800 shares before the event, what will be the impact of the split, if any, on the total value of the investors' shares? A) Total value will decline by 90% B) Total value will not change C) Total value will decline by 10% D) Total value will increase by 10 times

Correct Answer:B) Total value will not changeAnswer ExplanationStock splits and reverse splits don't change the total value of investors' holdings. For example, if the investor owned 800 shares at $1 per share before the 1-for-10 reverse split, he/she will own 80 shares at about $10 per share after the event.Textbook ReferencePlease see textbook section 1.7.4

If Janice sells short 100 shares of Microsoft stock at $20 per share, what is the maximum she can lose on the trade? A) $20 per share B) Unlimited C) $10 per share D) $5 per share

Correct Answer:B) UnlimitedAnswer ExplanationPotential losses on short sales are unlimited. If the stock price soars, the investors must buy back the stock at a very high price, to replace the shares borrowed. This is why short-selling can be so risky.Textbook ReferencePlease see textbook section 1.8

A cash dividend will be paid to shareholders of record on Thursday, June 24. What is the ex-dividend date? A) Thursday, June 24th B) Wednesday, June 23rd C) Monday June 21st D) Tuesday, June 22nd

Correct Answer:B) Wednesday, June 23rdAnswer ExplanationThe ex-dividend date normally is one business day before the dividend record date. For transactions on or after the ex-date, the buyer will not receive the dividend.Textbook ReferencePlease see textbook section 1.7

An issuer is most likely to call a bond which has A) a low coupon and a call premium when interest rates are rising B) a high coupon and no call premium when interest rates are falling C) a high coupon and a call premium when interest rates are falling D) a low coupon and no call premium when interest rates are rising

Correct Answer:B) a high coupon and no call premium when interest rates are fallingAnswer ExplanationIssuers strive to keep their cost of borrowing as low as possible. To do this, they call bonds with high coupons when rates are have fallen. They can then issue new bonds at a lower rate and reduce borrowing costs. A call premium is an additional amount that must be paid to call the bonds. To keep costs as low as possible, the issuer would prefer to call a bond with no call premium.Textbook ReferencePlease see textbook section 2.1.9

An issuer is most likely to call a bond which has A) a low coupon and a call premium when interest rates are rising B) a high coupon and no call premium when interest rates are falling C) a low coupon and no call premium when interest rates are rising D) a high coupon and a call premium when interest rates are falling

An investor is evaluating the purchase of a corporate bond with 12 years to maturity. Under a call feature, it can be called in 8 years. Another feature that can impact the amount of call risk is A) any penalty the investor will pay for calling the bond early. B) any premium to par payable on the call date. C) the amount of common stock into which the bond may convert. D) the credit standing of the issuer.

Correct Answer:B) any premium to par payable on the call dateAnswer ExplanationA call is always at the option of the issuer, never the investor. Normally, a call feature creates extra risk by shortening the investor's holding period, especially in times of falling rates. Issuers may agree to pay an additional price (call premium) above par for the call option. Textbook ReferencePlease see textbook section 2.3.2

A proven strategy for mitigating the systematic risk in a portfolio of US stocks is to A) emphasize dividend-paying stocks. B) buy put options on a broad-based stock market index. C) diversify among many different stock issues. D) reduce stock holdings gradually during market downturns.

Correct Answer:B) buy put options on a broad-based stock market indexAnswer ExplanationBuying put options on a broad-based index can generate profits when all stocks are falling, that helps to mitigate market risk.Textbook ReferencePlease see textbook section 7.2.11

A proven strategy for mitigating the non-systematic risk in a portfolio is to A) purchase only blue-chip stocks. B) diversify broadly among many individual stocks. C) focus on dividend-paying stocks. D) buy put options on a leading stock market index.

Correct Answer:B) diversify broadly among many individual stocksAnswer ExplanationNon-systematic or business risk is the risk inherent in individual stocks or companies. It can be greatly reduced by diversifying broadly among many individual stocks or buying diversified equity mutual funds and exchange-traded funds.Textbook ReferencePlease see textbook section 7.2.12

An investor purchases a T-Bond in the open market, paying 3% interest. The next day, the fed increases the discount rate. In this scenario, the investor would be immediately concerned with A) reinvestment rate risk B) market risk C) credit risk D) inflationary risk

Correct Answer:B) market riskAnswer ExplanationWhen interest rates increase, the immediate impact will be a decline in bond prices. Interest rate risk is also referred to as market risk. It is possible that higher rates could also lead to higher inflation, but that would be a longer term concern.Textbook ReferencePlease see textbook section 2.3.1

The NAV of a mutual fund share will decrease by the amount of the dividend A) at the start of trading on the morning the dividend is announced. B) on the ex-dividend date. C) when announced by the board of directors of the fund. D) on the payable date.

Correct Answer:B) on the ex-dividend dateAnswer ExplanationThe NAV of the fund will decrease on the ex-dividend date. Textbook ReferencePlease see textbook section 4.2.5

On a day when the Dow Jones Industrial Average loses 3%, market analysts expect most individual US stocks to lose value because of A) political risk. B) systematic risk. C) business risk. D) interest rate risk.

Correct Answer:B) systematic riskAnswer ExplanationSystematic risk reflects that the performance of an individual security will be impacted by the performance of the stock market as a whole. Textbook ReferencePlease see textbook section 7.2.11

An investor bought a June 65 call when the stock price was $63. It will be exercised only if A) the underlying stock is below $65 before expiration date. B) the underlying stock is above $65 before expiration date. C) the underlying stock is above $63 before expiration date. D) the underlying stock is below $63 before expiration date.

Correct Answer:B) the underlying stock is above $65 before expiration date.Answer ExplanationCall options contracts are exercised only when they are in-the-money ‚Äì i.e., the market value of the stock is above the strike price before expiration date. Textbook ReferencePlease see textbook section 6.2

All of the following statements regarding variable rate bonds are true EXCEPT A) the lender assumes interest rate risk B) they typically have greater price volatility than fixed rate bonds C) an index or other common base rate such as LIBOR is usually used to determine the rate payable for each period D) the amount of interest paid varies over the life of the loan

Correct Answer:B) they typically have greater price volatility than fixed rate bondsAnswer ExplanationThe price of a variable rate bond remains relatively stable because the interest rate adjusts to prevailing conditions. As the name implies, the rate of interest paid will vary over the life of the bond. The amount of interest is tied to an underlying index; LIBOR + a spread is frequently used as the base rate. Lenders take on the interest rate risk because the interest payments they receive are subject to fluctuation.Textbook ReferencePlease see textbook section 2.1.4.1

At the time of the issuance of a warrant by a corporation, the warrant A) may be exercised by the issuer into shares of the preferred stock of the company. B) will not have any intrinsic value. C) will have a strike price lower than the current market value of the underlying stock. D) will have a call feature that the issuer may immediately exercise.

Correct Answer:B) will not have any intrinsic valueAnswer ExplanationA warrant is a type of equity instrument issued by a corporation, where at the time of issuance the exercise price of the warrant will be higher than the current market price of the company's common stock. In other words, warrants are not issued with intrinsic value. Textbook ReferencePlease see textbook section 1.1.1.7

Adjustable-rate preferred stock pays dividends that are determined A) by the registrar of the corporation B) based on an underlying benchmark C) based on the latest GDP figures D) by the US Treasury Department

Correct Answer:B)Answer ExplanationAdjustable -rate preferred stock pays dividends that are determined based on an underlying benchmark, typically the US Treasury bill. Textbook ReferencePlease see textbook section 1.5.2

An individual indicates that his investment objective is growth. This individual is most likely in what age category? A) 50 - 64 B) 65 + C) 18 - 34 D) 35 - 49

Correct Answer:C) 18-34Answer ExplanationGrowth may be a common investment objective for a younger individual, who will be better positioned to withstand occasional volatility in the securities markets. Textbook ReferencePlease see textbook section 7.3.4

On Monday, March 1st a customer purchases a Treasury bond for regular way settlement. The bond pays semi-annual interest on January 1 and July 1. How many days of accrued interest are added to the buyer's price? A) 61 days B) 63 days C) 60 days D) 59 days

Correct Answer:C) 60 daysAnswer ExplanationRegular way settlement for government bonds is T+1, and the accrued interest calculation is based on actual day months. There are 31 days in January, 28 in February, and 1 day in March (the buyer's price includes interest that goes up to, but does not include the settlement date).Textbook ReferencePlease see textbook section 2.4

An investor seeking to avoid call risk due to falling interest rates should purchase A) a callable bond B) An interest rate sensitive security C) A bond without a call feature D) a call option

Correct Answer:C) A bond without a call featureAnswer ExplanationFor investors trying to avoid having a bond called due to falling interest rates, a bond, or preferred stock that does not carry a call feature would be an appropriate choice. Textbook ReferencePlease see textbook section 7.2.1

An individual that invests in a unit investment trust holds A) An interest in a variable portfolio of securities that is held for a specified period of time B) An interest in a variable portfolio of securities that will terminate at the discretion of the sponsor C) A fixed interest in a portfolio that is held for a specified period of time D) A fixed interest in a portfolio that will terminate at the discretion of the sponsor

Correct Answer:C) A fixed interest in a portfolio that is held for a specified period of timeAnswer ExplanationInvestors in UITs purchase a share of a portfolio of securities that will be held until its date of termination which is defined at the inception of the trust.Textbook ReferencePlease see textbook section 4.4.1.2

An investor plans to purchase a home in the next 6 ‚Äì 12 months and would like to invest funds for a down payment in a mutual fund. Which of the following choices is most suitable? A) A U.S. government bond fund B) A real estate fund C) A money market fund D) A balanced fund

Correct Answer:C) A money market fundAnswer ExplanationMoney market funds are appropriate for investments that need to be liquidated for their full value in a short time frame. Although not guaranteed, the value of each share has been held constant at $1, so investors in money market funds do not lose principal and can liquidate their shares for their full value plus interest that was earned.Textbook ReferencePlease see textbook section 7.4

An issuer may use LIBOR as a benchmark to A) Determine the tax liability of an interest payment to an investor B) Calculate the amount of new debt that it needs to issue to raise capital for the next fiscal year. C) Adjust the coupon rate that it will pay to an investor D) Calculate the capital gains tax from the sale of a bond

Correct Answer:C) Adjust the coupon rate that it will pay to an investorAnswer ExplanationLIBOR is sometimes used as the benchmark to set a new coupon rate on a bond. These are examples of variable rate bonds, as opposed to a fixed-rate instrument, where the coupon rate remains the same until maturity.Textbook ReferencePlease see textbook section 2.1.4.1

An investor would like to invest a lump sum inheritance she received for a three month period and will use the funds for a down payment on a home purchase at that time. All of the following may be appropriate EXCEPT A) A bond anticipation note B) A tax anticipation note C) An auction rate security D) A variable rate demand obligation

Correct Answer:C) An auction rate securityAnswer ExplanationTax anticipation notes and bond anticipation notes are short-term securities which meet this investor's objective. VRDOs are issued as long term securities but are puttable for their par value at interest reset dates, which provides short-term liquidity. Auction rate securities are long-term and do not include a put feature, so they do not meet this investor's objectives.Textbook ReferencePlease see textbook section 7.3.5

A customer in a high tax bracket would like to establish a well diversified, tax advantaged portfolio with a $25,000 investment. The investor also wishes to protect the investment from principal risk. Which of the following is most appropriate? A) A municipal bond laddering strategy that is protected from risk with the purchase of portfolio insurance B) An investment in a U.S. government money market fund C) An investment in a municipal bond fund D) The purchase of several municipal bonds of different issuers, geographic locations and maturities

Correct Answer:C) An investment in a municipal bond fundAnswer ExplanationOf the choices provided, the municipal bond fund is likely to provide the best diversification for an investment of this size. The large pools of these funds offer more issuers, credit qualities, maturities, and other individual characteristics, than can be obtained with investments in individual bonds.Textbook ReferencePlease see textbook section 7.3.3

Money market funds are most appropriate for investors who A) Are willing to take high degrees of risk. B) Have no alternative investment choices available to them. C) Are seeking safety and stability in their investment portfolio. D) Are looking for tax deferred investments owing to their high tax bracket.

Correct Answer:C) Are seeking safety and stability in their investment portfolioAnswer ExplanationMoney market funds are suitable for investors who are seeking safety and stability in their investment portfolio. These products will often provide a high degree of liquidity.Textbook ReferencePlease see textbook section 4.2.4.2

A municipal bond that is quoted with a yield to call that is higher than its coupon rate is recognized as trading A) flat B) At par C) At a discount D) At a premium

Correct Answer:C) At a discountAnswer ExplanationThe yield to call reflects the impact on an investor's rate of return if the bond is called prior to maturity. The yield to call is higher than the coupon rate when a bond is trading at a discount because the bond holder receives the par value of the bond prior to its original maturity date if the bond is called. Textbook ReferencePlease see textbook section 2.2.5

Which of the following best suits an investor seeking interest income and growth potential? A) Investment grade bond fund B) Asset allocation fund C) Balanced fund D) Small cap fund

Correct Answer:C) Balanced fundAnswer ExplanationA balance fund is the best choice because it invests in stocks, which provide growth potential, and bonds, which generate interest income. A bond fund generates income but has limited growth potential. A small cap fund has growth potential, but little current income. An asset allocation fund is best for an investor seeking an appropriate mix of all asset classes. Textbook ReferencePlease see textbook section 7.3

A risk of investing in an international bond UIT that is not commonly associated with other bond UITs is A) Reinvestment risk B) Interest rate volatility C) Currency risk D) Liquidity risk

Correct Answer:C) Currency riskAnswer ExplanationInternational bond UITs hold debt in foreign companies and governments that is denominated in foreign currencies and then converted into U.S. dollars. The dollar does not always hold strong value against other foreign currencies.Textbook ReferencePlease see textbook section 4.4.3.1

Nigel owns stock certificates that he inherited from his grandfather. How can he continue to hold the stock without having responsibility for lost or damaged certificates? A) Register the certificates with the Secretary of State B) Sell the certificates to a trust C) Endorse the certificates to a brokerage firm D) Convert the certificates to registered form

Correct Answer:C) Endorse the certificates to a brokerage firmAnswer ExplanationEndorsing stock certificates to a brokerage firm transfers ownership into street name. The brokerage firm maintains a record of ownership, and the investor may sell the stock without the need to deliver a paper certificate.Textbook ReferencePlease see textbook section 1.6.2

Two options contracts would be in the same series when they have common A) Premiums and intrinsic values B) Strike prices and premiums C) Expiration months and strike prices D) Premiums and expiration months

Correct Answer:C) Expiration months and strike pricesAnswer ExplanationTwo option contracts are in the same series because they have the same expiration month and strike price.Textbook ReferencePlease see textbook section 6.1.1

With regard to investment options and management of LGIPs, all of the following statements are true EXCEPT A) Stable value LGIPs strive to maintain a constant net asset value per share of $1.00. B) LGIP investment managers are often paid from a fee based on the assets under management C) Full liquidity and return of principal is guaranteed to investors in LGIP securities D) Some LGIPs invest in longer term securities to provide investment growth potential

Correct Answer:C) Full liquidity and return of principal is guaranteed to investors in LGIP securitiesAnswer ExplanationAs with mutual fund and other equity investments, there is no guarantee that LGIPs will be fully liquid or will not suffer loss of principal. There are stable value LGIPs that strive to maintain a net asset value of $1.00 per share like money market mutual funds, but there is no guarantee to investors. Investment managers of LGIPs are typically paid from a fee charged based on the assets under management. Textbook ReferencePlease see textbook section 5.6.1.1

Which of the following is NOT a primary responsibility of a broker-dealer's transfer agent? A) Acts as intermediary for the issuer B) Issues and cancels certificates on behalf of the issuer C) Guarantees the signature of the parties involved in the transfer D) Validates mutilated certificates and assists in tracking lost or missing securities

Correct Answer:C) Guarantees the signature of the parties involved in the transferAnswer ExplanationThe transfer agent reviews all information for accuracy and completeness. It checks to ensure signatures are authentic, but does not guarantee them. The guarantee of the signature is handled by the broker-dealer through the Medallion Stamp process.Textbook ReferencePlease see textbook section 2.1.1

An investor purchased a City of Seattle 4% municipal bond that matures 3-25-2019, at 98 3/8. From this information you can tell that the bond A) Is trading at par value B) Will yield less than 4% if it is called. C) Has a yield to maturity that is greater than its nominal yield. D) Is priced at $980.38

Correct Answer:C) Has a yield to maturity that is greater than its nominal yieldAnswer ExplanationMunicipal bonds are priced in points, and 1 point is equal to $10. The price of this bond is $980 plus $3.75 (3/8 x $10) or $983.75. The bond is trading at a discount, so if it was called, its YTC would be greater than 4%. Bonds trading at a discount have YTM that is greater than their coupon, or nominal, yield.Textbook ReferencePlease see textbook section 2.2.5

Brunswick issues a Series A $2.40 cumulative convertible preferred voting stock. This stockI. is convertible into common stockII. pays dividends in arrearsIII. receives excess dividends on a pro rata basis with common stock A) I only B) I, II and III C) I and II only D) I and III only

Correct Answer:C) I and II onlyAnswer ExplanationCumulative convertible preferred stock can be converted into common stock. Additionally, all dividends in arrears from cumulative stock must be paid before any dividends are paid on the common stock. Participating preferred stock may receive excess dividends based on better than expected earnings for the company. Textbook ReferencePlease see textbook section 1.5.2

Correct Answer:C) I and IIAnswer ExplanationThe Options Clearing Corporation has provisions for the automatic exercise of certain in-the-money options at expiration. Generally, OCC will automatically exercise any expiring equity call or put in a customer account that is $0.01 or more in-the-money, and an index option that is $.01 or more in-the-money. Calls are in the money when the market price is higher than the exercise price; puts are in the money when the market price is lower than the exercise price.Textbook ReferencePlease see textbook section 6.6.1

An exchange-traded note is a combination of which two of the following?I. a bondII. a pool of commoditiesIII. a derivativeIV. a pool of real estate A) III and IV B) II and III C) I and III D) II and IV

Correct Answer:C) I and IIIAnswer ExplanationAn ETN combines a bond for the protection of principal with a derivative to boost returns.Textbook Reference

Correct Answer:C) I, II, and IIIAnswer ExplanationClosed-end companies are subject to regulation under all major securities Acts, including the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the Investment Advisors Act of 1940. The Securities Act of 1933 also applies when the closed-end fund is first issued.Textbook ReferencePlease see textbook section 4.1

Investors who diversify their portfolios with companies in different industries are typically able to avoid A) market risk B) systemic risk C) non-systemic risk D) marketability risk

Correct Answer:C) non-systemic riskAnswer ExplanationNon-systemic risk is company or industry specific risk that is inherent in each investment. No systemic risk can be reduced through appropriate diversification.Textbook ReferencePlease see textbook section 7.2.12

Correct Answer:C) II and IIIAnswer ExplanationThe breakeven of a call is the strike price + the premium. The writer of a call will profit if the stock price is below the breakeven and the contract expires. The writer will keep the premium received and is not obligated to sell the stock.Textbook ReferencePlease see textbook section 6.2.2

A share of a REIT has a current NAV of $10.00. The NAV isI. The per share market value of the company's assets as of the date of the initial public offeringII. The per share measure of the market value of the company's net assetsIII. The price investors will receive when they sell REIT sharesIV. Not necessarily the price investors will receive when they sell REIT shares A) II and III B) I and IV C) II and IV D) I and III

Correct Answer:C) II and IVAnswer ExplanationThe NAV of a REIT is the per share measure of the market value of the company's assets. Shares trade on exchanges at a discount or premium based on market supply and demand. Investors will receive the market value when shares are sold.Textbook ReferencePlease see textbook section 5.1.2

Which of the following items about a customer is least important pursuant to the Know-you-customer rule? A) Net worth B) Employment status C) Investment knowledge D) Risk tolerance

Correct Answer:C) Investment KnowledgeAnswer ExplanationA client's investment knowledge would be the least important item among these choices when considering the Know-your-customer rule.Textbook ReferencePlease see textbook section 7.1.5

When a municipal bond is sold, the amount of accrued interest A) Includes the settlement date when calculated B) Is calculated based on actual day months C) Is added to the price paid to the seller D) Is only included in the price if the bond is trading flat

Correct Answer:C) Is added to the price paid to the sellerAnswer ExplanationThe calculation of accrued interest for municipal bonds is based on 360 day years and 30 day months. It is added to the price paid to the seller, and includes interest payable up to the settlement date only. Bonds that trade flat do not include accrued interest. Textbook ReferencePlease see textbook section 2.4

Which of the following is TRUE of the yield of a bond that is trading at a price that is $80 more than its face value? A) Its current yield will be the same as its coupon yield B) Its current yield will be higher than its coupon yield C) Its coupon yield will be higher than its current yield D) Its current yield will be $80 less than its coupon yield

Correct Answer:C) Its coupon yield will be higher than its current yieldAnswer ExplanationCoupon yield stays constant over the life of a bond while current yield changes with bond's market price. If a bond is trading above face value, its current yield will be lower than its coupon yield. If a bond is trading below face value, current yield will be the greater of the two. Current yield goes up as bond prices decrease, and vice versa.Textbook ReferencePlease see textbook section 2.2.5

An investor should expect the greatest price increase in which of the following if interest rates decline? A) Short-term bonds selling at a premium B) Short-term bonds selling at a discount C) Long-term bonds selling at a discount D) Long-term bonds selling at a premium

Correct Answer:C) Long-term bonds selling at a discountAnswer ExplanationBecause of the inverse relationship between price and yield, when interest rates fall, bond prices rise. Longer maturities have more market risk, so their prices rise more than shorter maturities. Bonds selling at a discount also rise more sharply than those selling at a premium.Textbook ReferencePlease see textbook section 2.3.1

A customer sells short 100 shares of XYZ stock for 72 and buys one XYZ 75 call for 1.50. The stock price rises to 77 and the option is exercised. The profit or loss to the investor is A) Profit of $450 B) Profit of $650 C) Loss of $450 D) Loss of $650

Correct Answer:C) Loss of $450Answer ExplanationThe stock is sold short for $7,200. To protect the position the investor buys a call for $150. The call is exercised when the market price of the stock rises, so the investor buys the stock to cover the short position for $7,500. The customer received $7,200 from the short sale, but paid a total of $7,650 (premium + stock purchase price) for a loss of $450.Textbook ReferencePlease see textbook section 6.2.4

A new 60-year-old customer is concerned with capital preservation and is uncomfortable with taking on substantial investment risk. As a result, you would be most likely to recommend which of the following investments for this customer's investment portfolio? A) Exchange traded note (ETN) B) Stock index Fund C) Money market Fund D) Exchange traded fund (ETF)

Correct Answer:C) Money market FundAnswer ExplanationAn investor who is not comfortable taking significant risk should avoid investments that may jeopardize his capital. This investor will want to focus on safe, conservative products like a money market fund. An exchange-traded note, which is an unsecured debt instrument of an issuer, may expose the investor to a greater degree of risk than he is comfortable taking. Likewise, the stock index fund and ETF are both risk assets that could lose capital and have signfiicant risk.Textbook ReferenceSee textbook section 7.3.1

A recommendation to a married couple with three young children to purchase units of a direct participation program A) Must be approved by a principal B) May be made by a registered representative only after the rep determines that the couple understands the risks of the investment C) Must meet appropriate suitability standards D) Must first be approved by FINRA

Correct Answer:C) Must meet appropriate suitability standardsAnswer ExplanationAll recommendations to customers must be suitable for that customer. Recommendations do not need to be approved by FINRA or a principal.Textbook ReferencePlease see textbook section 7.1.2

A security that can be freely transferred, assigned or delivered to another entity is called A) Marketable B) Viable C) Negotiable D) Fungible

Correct Answer:C) NegotiableAnswer ExplanationA negotiable security is one that can be freely transferred, assigned or delivered to another entity. Listed equities are negotiable when they are traded or assigned by an authorized owner, unless they are encumbered as debt or collateral.Textbook ReferencePlease see textbook section 1.6

A privilege that applies to mutual fund shareholders and allows them to receive sales charge discounts based on a prior purchase is A) Conversion privilege B) A Breakpoint schedule C) Rights of accumulation D) Dollar cost averaging

Correct Answer:C) Rights of accumulationAnswer ExplanationThe rights of accumulation privilege allows mutual fund investors to receive breakpoint discounts based on purchases made at a prior time, in different accounts, by other close family members, and for purchase of other funds within the same family. For example, if a mutual fund offers a breakpoint for purchases of $25,000 or more, an investor with shares worth $20,000 could get a reduced sales charge on a $5,000 investment.Textbook ReferencePlease see textbook section 4.2.5.6

The accrued interest that is calculated for settlement of a newly issued municipal bond A) Is based on actual-day months. B) Is subtracted from the price that will be paid by the purchaser. C) Starts on the dated date. D) Includes interest paid on the settlement date.

Correct Answer:C) Starts on the dated dateAnswer ExplanationFor newly issued municipal bonds, the issuer designates a date that interest starts accruing. This date is the dated date. Municipal bond interest is based on 30 day months. The calculation does not include the settlement date, and is added to the purchase price.Textbook ReferencePlease see textbook section 2.4

An individual who writes an uncovered call option believes A) That the underlying stock price will rise above the strike price. B) General stock market values will be very volatile in the coming weeks. C) That the underlying stock price will fall below the strike price. D) That positive news will be forthcoming.

Correct Answer:C) That the underlying stock price will fall below the strike price.Answer ExplanationThe writer of an uncovered call believes that the market price of the underlying stock will remain below the strike of the option, thereby resulting in the option expiring and allowing the writer to retain the option premium.Textbook ReferencePlease see textbook section 6.2.2.1

An investor has purchased an ABC 93 call for 9. If ABC stock is trading at 88.50 just prior to expiration, A) The investor will exercise the right to sell 100 shares of ABC for 93 B) The investor will exercise the right to buy 100 shares of stock at 88.50 C) The contract will expire and the investor will lose the premium D) The investor will be obligated to sell 100 shares of ABC for 88.50

Correct Answer:C) The contract will expire and the investor will lose the premiumAnswer ExplanationAn investor that has purchased a call has the right to buy stock at the exercise price if the contract is exercised. This contract will not be exercised because it is out of the money (the market price of 88.50 is below the strike price of 93; calls are in the money when the market price is above the strike price). Textbook ReferencePlease see textbook section 6.2.1.1

When comparing rights and warrants, which of the following statements is TRUE? A) Warrants have shorter expiration periods than rights B) Warrants protect shareholders against dilution, rights do not C) The exercise price of a right is generally below the price of the stock when the right is issued; the exercise price of the warrant is generally above the price of the stock when it is issued D) Rights are often added to bond issues as sweeteners; warrants are offered to existing shareholders to permit them to maintain their proportionate interest in the company when additional shares are issued

Correct Answer:C) The exercise price of a right is generally below the price of the stock when the right is issued; the exercise price of the warrant is generally above the price of the stock when it is issued...Answer ExplanationRights are short-term instruments that allow a shareholder to purchase the stock below its market price for a period that usually expires after 4-6 weeks. They are issued to existing shareholders in proportion to their ownership interest, so that if exercised, they allow the shareholder to maintain their percentage of ownership, or protect against dilution. Warrants are long term instruments and are often used as sweeteners in corporate bond issues. They do not protect shareholders from dilution. Textbook ReferencePlease see textbook section 1.1.1.8

An investor writes 3 XYZ June 65.35 puts at 4.50. Just before expiration, XYZ is trading for 66. Which of the following statements is TRUE? A) The investor is required to sell 100 shares of stock at 65.35 B) The investor has a profit of $450 C) The investor has a profit of $1,350 D) The investor receives 200 shares of stock at 73

Correct Answer:C) The investor has a profit of $1,350Answer ExplanationThese puts are out of the money and will expire, so the writer is not obligated to purchase the stock. The buyer will not exercise the right to sell stock at the strike price of 65.35 when it could be sold on the market for 66. The writer profits from the premium of $1,350 received for writing 3 contracts at $450 each. Textbook ReferencePlease see textbook section 6.3.2.1

A refunding occurs when A) Interest rates have increased since the issuer's last bond offering was made. B) The issuer of the bond repays the principal prior to its maturity date. C) The issuer replaces a high coupon bond with a low coupon bonds in the wake of falling interest rates. D) An investor sells his bond prior to its maturity date.

Correct Answer:C) The issuer replaces a high coupon bond with a low coupon bonds in the wake of falling interest rates.Answer ExplanationAn issuer might engage in a refunding when interest rates have declined. The issuer will sell a bond with a lower coupon now that rates have fallen, and redeem the bond with the higher coupon.Textbook ReferencePlease see textbook section 2.1.9

When a bond's market price increases, what is the impact on its nominal yield? A) Nominal yield will increase. B) Nominal yield will decline. C) There will be no change in nominal yield. D) There will be increased volatility in the nominal yield.

Correct Answer:C) There will be no change in nominal yieldAnswer ExplanationNominal yield is the bonds annual interest or coupon rate. It is a percentage of par value and fixed over the life of the bond.Textbook ReferencePlease see textbook section 2.2.1

What must be done with open limit orders at the close of business on the day before the ex-date for a reverse stock split? A) They must be adjusted in number of shares only, not price B) They must be adjusted in price only, not number of shares C) They must be cancelled D) They must be adjusted in both price and number of shares

Correct Answer:C) They must be cancelledAnswer ExplanationFor reverse stock splits, all open orders must be cancelled before the ex-date. Textbook ReferencePlease see textbook section 1.7.4

A mutual fund sponsor receives a request for redemption just after market close and redeems the shares at the NAV just calculated at the close. Which of the following statement is TRUE? A) Since the order was received after market close, the redemption should have taken place at market opening on the next business day B) This is standard practice for the redemption of fund shares since redemption must be made on the day of request C) This is a prohibited practice known as late trading D) This is a permitted practice known as late trading

Correct Answer:C) This is a prohibited practice known as late tradingAnswer ExplanationThis is an example of the prohibited practice of late trading. Mutual fund redemptions are to be made following the forward pricing convention, which means they are to receive the next calculated price. An information advantage may be available if forward pricing is not followed, and a number of large fines have been assessed on firms that engaged in this practice.Textbook ReferencePlease see textbook section 4.2.6

A municipal bond's coupon rate is 3%. The same issuer is now issuing bonds of similar quality and maturity with a coupon rate of 3.5%. The 3% bond will A) Trade at its par value because the issuer will increase the coupon on the 3% bond to ensure parity with newly issued bonds B) Trade at a premium in the secondary market C) Trade at a discount in the secondary market D) Continue to trade in the secondary market at its par value with no adjustment to the coupon rate

Correct Answer:C) Trade at a discount in the secondary marketAnswer ExplanationA bond trades at a discount in the secondary market when its coupon rate is lower than prevailing interest rates.Textbook ReferencePlease see textbook section 2.1.6

On Monday, January 2nd, ABC Inc. declares a $0.10 dividend payable on Monday, Jan 16 to all shareholders of record as of Thursday, Jan 12. When will be the ex-dividend date for regular way trades in the security? A) Friday, Jan 13 B) Tuesday, Jan 10 C) Wednesday, Jan 11 D) Thursday, Jan 12

Correct Answer:C) Wednesday, Jan 11Answer ExplanationFor regular way trades, the ex-dividend date is one business day before the record date. Investors who buy the stock two business days before the record date will receive the dividend. Investors who purchase the stock on or after the ex-dividend date will not receive the dividend.Textbook ReferencePlease see textbook section 1.7

A technology company commits millions of dollars to advertising that fails to attract attention, causing its stock price to drop. This is an example of A) credit risk. B) political risk. C) business risk. D) market risk.

Correct Answer:C) business riskAnswer ExplanationBusiness risk, also called non-systematic risk, is created by negative events that impact one company or stock, such as management changes, poor business execution, or failure to reach profit targets. Textbook ReferencePlease see textbook section 1.3.2

In fixed income investing, the most reliable strategy for reducing or eliminating call risk is to A) avoid naked short calls. B) buy bonds with long maturities. C) buy non-callable securities. D) buy short puts.

Correct Answer:C) buy non-callable securitiesAnswer ExplanationThe investments with the greatest call risk vulnerability are callable bonds and callable preferred stock. The best strategy for mitigating this risk is to purchase non-callable securities.Textbook ReferencePlease see textbook section 7.2.1

An assessment by an independent agency of an issuers ability and willingness to make full and timely payments of amounts due on its debt obligations is known as a A) growth profile B) stock rating C) credit rating D) assessment rating

Correct Answer:C) credit ratingAnswer ExplanationA credit rating is an assessment by an independent rating agency of a company's ability and willingness to make full and timely payments of amounts due on its debt obligations. Credit ratings are typically required for companies seeking to raise debt financing in the capital markets as only a limited class of investors will participate in a corporate debt offering without an assigned credit rating on the new issue. The three primary credit rating agencies are Moody's, S&P, and Fitch. Nearly every public debt issuer receives a rating from Moody's, S&P, and/or Fitch. Moody's uses an alphanumeric scale, while S&P and Fitch both use an alphabetic system combined with pluses (+) and minuses (-) to rate the creditworthiness of an issuer. Textbook ReferencePlease see textbook section 2.3.5.1

An investor purchased a 5 1/2% bond to yield 6 1/2%. If the company calls the bond at par before maturity, the investor's return would be A) 5.50% B) less than 5 1/2% C) greater than 6 1/2% D) 6.50%

Correct Answer:C) greater than 6 1/2%Answer ExplanationFor this bond, NY = 5.5% and YTM = 6.5%. With YTM>NY, this indicates that the bond is sold at a discount, and for a discount bond, YTC > YTM.Textbook ReferencePlease see textbook section 2.2.5

ABC Corporation is planning to do a $50,000,000 debenture offering in the next few months and hopes to make the offering as attractive as possible to investors. To achieve this goal, ABC Corporation would most likely A) market the offering to accredited investors only. B) structure the offering with a call feature, allowing investors to sell their bonds back to the issuer based on a specific schedule. C) include a detachable warrant as a sweetener with the bond offering. D) provide a pre-emptive right with the bond offering.

Correct Answer:C) include a detachable warrant as a sweetner with the bond offering.Answer ExplanationThe inclusion of a warrant with the bond deal makes the offering more attractive to investors. The warrants can be detached later and sold in the open market or exercised for the shares of the company at a pre-set price. This would enable the issuer to sell their bond to the public at a lower interest rate than would otherwise be possible. Warrants typically have long expirations, giving investors flexibility as to how they would like to use the warrant to their best advantage. Textbook ReferencePlease see textbook section 1.1.1.7

All of the following risks are common with ADR ownership EXCEPT A) political risk. B) interest rate risk. C) inflationary risk. D) exchange rate risk.

Correct Answer:C) inflationary riskAnswer ExplanationInterest rate risk is typically more common with debt instruments; ADRs are equity investments. Political risk, exchange rate risk and inflationary risk are all risks that must be evaluated by ADR owners. Inflationary risk can be significant because it can cause devaluation of the currency in the home country of the ADR. Textbook ReferencePlease see textbook section 1.4.1.1

An individual investor at a broker-dealer has assets over $50 million. Under FINRA rules, this individual is considered a(n) A) established customer. B) accredited investor. C) institutional account. D) qualified institutional buyer.

Correct Answer:C) institutional accountAnswer ExplanationUnder FINRA rules, any party (retail or institutional) with at least $50 million in assets is defined as an institutional account. Textbook ReferencePlease see textbook section 7.1.2.1

A corporation will call in some of its outstanding bonds. When the bonds are called, the issuer A) will offer the investor another bond with a lower interest rate. B) must make one final interest payment to the bondholder. C) will pay the investor par value plus accrued interest to that date. D) will pay the investor the current market value of the bond plus accrued interest to that date.

Correct Answer:C) will pay the investor par value plus accrued interest to that date.Answer ExplanationWhen an issuer calls in a bond, it will pay the bondholder the par value of the bond, plus any accrued interest to that date. Once the bond is called, there will be no further interest payments made on the bond.Textbook ReferencePlease see textbook section 2.4

An investor purchased shares of a mutual fund two years ago for $3,500 and has since reinvested dividend distributions of $375 and $325. The investor‚Äôs total cost basis in this fund is now A) $700.00 B) $2,800.00 C) $3,500.00 D) $4,200.00

Correct Answer:D) $4,200.00Answer ExplanationThe investor‚Äôs cost basis in this mutual fund is their original purchase price ($3,500) plus the reinvested dividends ($700), for a total of $4,200. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes.Textbook ReferencePlease see textbook section 4.2.5.7

REITs are required to distribute what percentage of their net income to shareholders? A) 0.75 B) 1 C) 0.5 D) 0.9

Correct Answer:D) 0.9Answer ExplanationTo qualify as a REIT, a U.S. company must distribute at least 90% of its net income to shareholders as dividends. Textbook ReferencePlease see textbook section 5.1.1

According to SEC rules, an issuer must give advance notice of a dividend distribution to the exchange where the security trades A) 5 business days prior to the record date B) 10 business days prior to the payable date C) 5 business days prior to the payable date D) 10 business days prior to the record date

Correct Answer:D) 10 business days prior to the record dateAnswer ExplanationAn issuer is required to give advance notice of a dividend distribution 10 business days prior to the record date. This notice is required for all such distributions, including stock dividends, stock splits, reverse stock splits and rights or other subscription offerings. Textbook ReferencePlease see textbook section 1.7

ABC stock is traded on the New York Stock Exchange. If a dividend is declared by the ABC Board of Directors, the NYSE must be notified no later than A) 2 business days prior to the payable date B) 10 business days prior to the payable date C) 2 business days prior to the record date D) 10 business days prior to the record date

Correct Answer:D) 10 business days prior to the record dateAnswer ExplanationThe exchange must be notified 10 business days before the record date when a dividend is to be paid. Textbook ReferencePlease see textbook section 1.7

A customer that purchases closed-end fund shares may pay all of the following EXCEPT A) Fund expenses B) Commissions to a sales representative C) Management Fees D) 12b-1 fees

Correct Answer:D) 12b-1 feesAnswer ExplanationClosed-end company shares do not have 12b-1 fees. These are marketing fees incurred by the investor.Textbook ReferencePlease see textbook section 4.3.2.3

An investor who wishes to avoid reinvestment risk would be unlikely to purchase a A) 60-day commercial paper B) 7 -year Treasury Strip C) 20-year zero coupon bond D) 15-year AAA debenture

Correct Answer:D) 15-year AAA debentureAnswer ExplanationNote that this question is asking for which purchase is UNLIKELY. Reinvestment risk can be avoided through the ownership of a zero-coupon bond. A debenture will make regular interest payments to the investor, which will then need to be reinvested at current interest rates. A coupon paying bond would not be appropriate for an investor who wants to avoid reinvestment risk.Textbook ReferencePlease see textbook section 7.2.5

Correct Answer:D) 2.4Answer ExplanationThe annual dividend in preferred stock is expressed as a percentage of par value. "8% preferred stock" would pay 8% of par value annually. 8% x $30 = $2.40 per year. Textbook ReferencePlease see textbook section 1.5.1.3

Which of the following call dates would be MOST beneficial for an investor? A) 15 years B) 10 years C) 5 years D) 20 years

Correct Answer:D) 20 yearsAnswer ExplanationInvestors prefer a longer call date in order to better protect themselves from call and reinvestment rate risk.Textbook ReferencePlease see textbook section 2.1.9

The price of which of the following bonds will be most adversely affected by a sharp increase in interest rates? A) Money market instrument B) 5-year bond C) 10-year bond D) 30-year bond

Correct Answer:D) 30-year bondAnswer ExplanationThe longer a bond's maturity, the more sensitive its price will be to a change in interest rates. A rate change normally has a greater impact on long-term bond prices than on short-term.Textbook ReferencePlease see textbook section 2.3.1

A shareholder owns 1,000 shares of a corporation's stock with pre-emptive rights. There are a total number of 100,000 shares outstanding. If 5,000 new shares are issued the shareholder may purchase A) 100 additional shares B) 5 additional shares C) 10 additional shares D) 50 additional shares

Correct Answer:D) 50 additional sharesAnswer ExplanationPre-emptive rights enable a current shareholder to maintain proportionate ownership interest when new shares are issued. The shareholder in this example may purchase 1% of the new shares or 50 shares. Textbook ReferencePlease see textbook section 1.1.1.6

On Friday September 1st a customer purchases a municipal bond for regular way settlement. The bond pays semi-annual interest on December 1 and June 1. How many days of accrued interest are added to the buyer's price? A) 93 days B) 95 days C) 96 days D) 94 days

Correct Answer:D) 94 daysAnswer ExplanationRegular way settlement for municipal bonds is T+2 business days, and the accrued interest calculation is based on 30-day months. There are 30 days in June, 30 days in July, 30 days in August, and 4 in September due to the weekend (settlement date is Tuesday September 5th). The buyer's price includes interest that goes up to, but does not include the settlement date.Textbook ReferencePlease see textbook section 2.4

With regard to evaluating quantitative suitability, which of the following statements is TRUE? A) MSRB rules include specific guidelines for determining when turnover rates, transaction costs and other trading techniques are inappropriate for a customer's account B) A transaction should not be considered suitable unless a large concentration of the security is appropriate for the account C) Recommendations must be evaluated individually and should not be viewed in conjunction with other portfolio activity. D) A recommendation is unsuitable if the customer does not have the financial ability to support it

Correct Answer:D) A recommendation is unsuitable if the customer does not have the financial ability to support itAnswer ExplanationThe customer's financial ability to pay for a transaction is a key quantitative suitability factor. The MSRB does not have specific guidelines to test for quantitative suitability. Individual transactions should be evaluated in terms of their size and impact on the total portfolio in determining suitability.Textbook ReferencePlease see textbook section 7.1.3

A zero coupon municipal security is most appropriate for which of the following investors? A) A retired individual who would like a regular income stream to supplement pension income B) A middle aged investor in a high tax bracket who is looking to generate as much tax-free income as possible C) A parent who is planning a college education fund for a child and wants access to funds that will not be taxed if used for qualified education expenses D) A working adult who would like funds available to pay off her mortgage in 10 years so that she can retire

Correct Answer:D) A working adult who would like funds available to pay off her mortgage in 10 years so that she can retireAnswer ExplanationZero coupon bonds are purchased at a discount and mature to face value. They are most suitable for investors that would like to plan for a lump sum to be available at a defined date in the future.Textbook ReferencePlease see textbook section 2.1.5

The individual shares of non-U.S. companies that are listed on U.S. stock exchanges are known as A) Global Depository Shares B) Global Depository Receipts C) American Depository Shares D) American Depository Receipts

Correct Answer:D) American Depository ReceiptsAnswer ExplanationAmerican Depository Shares (ADSs) refer to the individual shares of an ADR held by the bank, but the ADRs are actually listed on an exchange. American Depository Receipts (ADRs) are used by non-U.S. companies to enable U.S. investors to purchase shares of their company's stock and for that stock to trade on a U.S. stock exchange. ADRs are issued by a U.S. depository bank and are quoted and pay dividends in U.S. dollars. Global Depository Receipts (GDRs) are blank certificates issued by a bank that represent shares of a stock that are traded on a foreign stock exchange. Global Depository Shares (GDSs) refer to the individual shares of a GDR. Textbook ReferencePlease see textbook section 1.4.1

A company can declare dividends in which of the following ways? A) Cash B) Stock or stock of a subsidiary company C) Goods produced by the company D) All of the above

Correct Answer:D) Answer ExplanationA company may pay a dividend in cash, stock or stock of a subsidiary company, or even goods produced by the companyTextbook ReferencePlease see textbook section 1.7.3

Concerning cumulative preferred stock, A) These shareholders are paid before any other preferred stockholder in the event of a corporate bankruptcy B) All dividends accumulate on a tax deferred basis C) All future dividends for the year must be paid on these shares before any common dividends may be paid D) Any missed dividends must be paid before any common shareholders are paid

Correct Answer:D) Any missed dividends must be paid before any common shareholders are paidAnswer ExplanationWith respect to cumulative preferred stock, any missed dividends have to be paid to these shareholders before any common dividends are paid.Textbook ReferencePlease see textbook section 1.5.2

A municipal bond that is offered at a yield to maturity higher than its coupon rate is recognized as trading A) At a premium B) flat C) At par D) At a discount

Correct Answer:D) At a discountAnswer ExplanationIf a bond's yield to maturity is more than its coupon rate, the bond is trading at a discount. The YTM calculation reflects the impact on the investor's return of the amount of premium or discount paid when the bond is purchased. If the bond is purchased at a discount, the investor's rate of return on the bond at maturity is more than the stated rate, or coupon, of the bond when it was issued. Textbook ReferencePlease see textbook section 2.2.5

An investor buys call options that expire worthless, out-of-the-money. This is an example of A) systematic risk. B) volatility risk. C) non-systematic risk. D) capital risk.

Correct Answer:D) Capital RiskAnswer ExplanationCapital risk is the risk that an investor could lose an entire investment. This is most common in speculative investments such as options, penny stocks and direct participation programs.Textbook ReferencePlease see textbook section 7.2.3

Which of the following features is associated with mutual fund shares but NOT ETFs? A) Professionally managed pool of securities B) Securities held by investors represent an equity interest C) Exchange traded D) Continuous primary offering

Correct Answer:D) Continuous primary offeringAnswer ExplanationMutual fund shares are issued through a continuous primary offering, which means shares are available when investors want to purchase them. Closed-end company shares are limited because there is a fixed pool of capital. ETFs are traded on exchanges, mutual fund are not. Textbook ReferencePlease see textbook section 4.6

The type of voting that enables a shareholder to pool their votes together and cast them as desired is A) Statutory voting B) Standard voting C) Proxy voting D) Cumulative voting

Correct Answer:D) Cumulative votingAnswer ExplanationThis is known as cumulative voting. The alternative process is statutory voting.Textbook ReferencePlease see textbook section 1.1.1.2

If a bond declines in price, which of the following results in yield will occur? A) Coupon yield will rise B) Current yield will fall C) Coupon yield will fall D) Current yield will rise

Correct Answer:D) Current yield will riseAnswer ExplanationCoupon yield, or nominal yield, doesn't change over the life of the bond, so it isn't sensitive to price changes. Current yield is the sum of annual coupon (interest) payments divided by the bond's current price. It moves inversely with prices. As bond prices decline, the current yield rises; as bond prices increase, the current yield falls.Textbook ReferencePlease see textbook section 2.2.2

The accrued interest that is added to the price the seller receives at settlement of a municipal bond that was purchased in a secondary market transaction A) Starts on the dated date. B) Is calculated based on actual day months. C) Starts on the day following the prior interest payment date. D) Does not include interest paid on the settlement date.

Correct Answer:D) Does not include interest paid on the settlement date.Answer ExplanationAccrued interest for municipal bonds is calculated based on 30-day months, and starts on the date of the prior interest payment. It does not include interest payable on the settlement date. The dated date is only relevant for the calculation of accrued interest on newly issued municipal bonds.Textbook ReferencePlease see textbook section 2.4

Which two of the following are characteristics of closed-end companies and their shares?I. May be purchased on marginII. Issue multiple share classesIII. May be purchased with stop or limit ordersIV. Are redeemed by the fund A) II and IV B) I and IV C) II and III D) I and III

Correct Answer:D) I and IIIAnswer ExplanationClosed-end funds are traded on exchanges and may be purchased or sold with specified pricing terms through stop and limit orders. They may be purchased on margin, unlike open end company shares. They issue a single class of shares only, and they are not redeemed by the fund. Shareholders must sell their shares on exchanges to liquidate their positions.Textbook ReferencePlease see textbook section 4.3.2.6

An investor buys an S&P 500 2025 put for 15. Just prior to expiration the S&P is 1980. Which two of the following statements are TRUE?I. The investor will exercise the contractII. The contract will expireIII. The investor profits in this transactionIV. The investor has a loss in this transaction A) I and IV B) II and III C) II and IV D) I and III

Correct Answer:D) I and IIIAnswer ExplanationThe investor paid $1,500 to purchase the index put. The put is exercised because the index value is below the exercise price. Index options settle in cash, so the holder realizes $4,500 (2025 ‚Äì 1980 x 100 multiplier) at exercise. The investor's profit on this transaction is $3,000 (Paid $1,500, received $4,500). Textbook ReferencePlease see textbook section 6.3.1.1

ABC corporation will elect 2 members of the Board of Directors at its annual meeting. A shareholder that owns 200 shares of stock mayI. Vote 200 shares of stock for each director under statutory votingII. Vote 100 shares of stock for each director under statutory votingIII. Split a total of 200 votes any way between the two directors under cumulative votingIV. Split a total of 400 votes any way between the two directors under cumulative voting A) I and III B) II and IV C) II and III D) I and IV

Correct Answer:D) I and IVAnswer ExplanationUnder statutory voting, a shareholder has one vote per share for each director that is to be elected. Under cumulative voting, the shareholder may pool together the total votes (400 in this example, 2 directors x 200 votes) and cast them as preferred. Textbook ReferencePlease see textbook section 1.1.1.2

Which of the following statements regarding preferred stock are TRUE?I. Like common, preferred shares generally have voting rightsII. Unlike common, preferred shares generally do not have voting rightsIII. Preferred shares typically have greater appreciation potential than commonIV. Preferred shares typically have less appreciation potential than common A) II and III B) I and IV C) I and III D) II and IV

Correct Answer:D) II and IVAnswer ExplanationPreferred shares differ from common shares in that they do not typically have voting rights. There are exceptions, however, which permit voting under unique circumstances like a takeover or merger. Preferred stock typically does not have as much appreciation potential as common. Textbook ReferencePlease see textbook section 1.5.1

A customer with an income objective believes that interest rates are likely to fall over the next 10 years. Of the following, which two are most suitable for this customer? I. TANSII. A 10-year non-callable bondIII. Floating rate notesIV. A long term bond with a put feature after 5 years A) I and III B) I and IV C) II and III D) II and IV

Correct Answer:D) II and IVAnswer ExplanationThis customer is concerned with locking in the highest possible interest payments for the next 10 years. The noncallable bond will lock in current returns and will not be called away before maturity. The long-term puttable bond will also lock in the current interest rate, but give the investor the option of redemption at par if rates have increased in 5 years. A TAN is a short-term security and a floating rate note's interest rate adjusts periodically with current interest rates, so neither will lock in the current rate.Textbook ReferencePlease see textbook section 7.2.1

Arrange the dates below in the order in which they occur, first to last, in a typical cash dividend payment process for a regular way transaction.I. Ex-dividend dateII. Record dateIII. Declaration dateIV. Payable date A) I, II, III, IV B) III, I, IV, II C) II, III, I, IV D) III, I, II, IV

Correct Answer:D) III, I, II, IVAnswer ExplanationThe process of cash dividend payment typically takes place over approximately a three week period. They must first be declared, and they will be paid on the payable date, which is the last date in the process. They are paid to persons who own the stock on the date of record. In order to own the stock on date of record, an investor must buy the stock before the ex-date (regular way settlement requires 2 business days), which is 1 business day before the record date. Textbook ReferencePlease see textbook section 1.7

The calculation of accrued interest for government bonds A) Is subtracted from the price owed to the seller B) Is based on 360 day years C) Is not included on the confirmation D) Includes the last interest payment date

Correct Answer:D) Includes the last interest payment dateAnswer ExplanationThe accrued interest calculation for a government bond is based on actual day years and months. It is added to the price the seller receives at settlement and included in the total price. The calculation includes interest on the prior coupon date up to, but not including, the settlement date.Textbook ReferencePlease see textbook section 2.4

When one of an investor's goals when purchasing mutual funds is to minimize fees, consideration should be given to A) Actively managed funds B) Hedge funds C) Target date funds D) Index funds

Correct Answer:D) Index fundsAnswer ExplanationIndex funds are appropriate for investors seeking to minimize fees. The other choices will generate more significant fees due to their active management.Textbook ReferencePlease see textbook section 4.2.4.6

Equity REITS offer the potential for all of the following EXCEPT A) Market transparency B) Inflation hedging C) Liquidity D) Interest income paid on a monthly basis

Correct Answer:D) Interest income paid on a monthly basisAnswer ExplanationEquity REITs do not produce interest income. They pay dividends to investors that represent their proportionate share of the rental income and capital appreciation earned by the portfolio. Because they trade on exchanges, they offer liquidity and transparency. Real estate is also a natural hedge against inflation, and has historically appreciated at a rate that exceeds the rate of inflation. Textbook ReferencePlease see textbook section 5.1.6

A 20-year U.S. Treasury bond was bought at a price of $945 in July. By the end of the year, its price had increased to $1,075. What most likely caused the price to rise? A) The U.S. Treasury called in older bonds B) The U.S. Treasury issued new bonds C) Interest rates rose D) Interest rates fell

Correct Answer:D) Interest rates fellAnswer ExplanationThe most likely factor that caused a change in the trading value of a bond is a change in prevailing market interest rates. The inverse relationship between bond price and interest rates instructs that when interest rates go down, bond prices go up. Likewise, if rates go up, bond prices go down. Textbook ReferencePlease see textbook section 2.1.6

Which of these bond features is the most attractive to a corporate issuer? A) High sinking fund requirement B) Nonrefundable C) High interest rate D) Low call premium

Correct Answer:D) Low call premiumAnswer ExplanationLow call premiums are attractive to issuers because it allows the issuer to call the bond away from investors for a lower price. High interest rates require a larger interest expense for issuers, nonrefundable bonds do not allow an issuer to reissue bonds if interest rates decrease, and a high sinking fund require an issuer to maintain a large reserve of cash to maintain the bond. Only the low call premium is beneficial to issuers.Textbook ReferencePlease see textbook section 2.1.9

XYZ Co. has engaged in a 4:1 stock split. As a result, holders of XYZ shares will now have A) Fewer shares with a greater per share value B) Fractional shares with a pro-rated value per value C) The same number of shares at the same per share value D) More shares with a lower per share value

Correct Answer:D) More shares with a lower per share valueAnswer ExplanationUpon the occurrence of a forward stock split, an investor will have more shares with a lower per share value. The important point with a stock split is that the investor does not gain or lose any absolute value with respect to their holdings in the company. Textbook ReferencePlease see textbook section 1.7.4

When is a mutual fund allowed to buy securities on margin? A) Only with special permission from the SEC B) Only after opening a margin account C) Only in the first 10 trading days of each month D) Never

Correct Answer:D) NeverAnswer ExplanationMutual funds are prohibited from selling securities short and also from buying securities on margin or with borrowed funds.Textbook ReferencePlease see textbook section 4.2.3

The goal of portfolio rebalancing is to ensure that A) All investment categories are equally weighted. B) The registered representative handling the portfolio always has an opportunity to make changes in the investor's portfolio. C) The allocation of stocks, bonds, and cash is reviewed at least once each year to ensure that the best performing assets over the past year are given additional weighting in the portfolio. D) No asset class becomes over-weighted in a portfolio

Correct Answer:D) No asset class becomes over-weighted in a portfolioAnswer ExplanationThe goal of portfolio rebalancing is to ensure that the portfolio is returned to its original proportionate investment mix. This may involve selling an asset that has become over-weighted due to recent strength in that sector. Textbook ReferencePlease see textbook section 7.5.1

An investor in a high tax bracket is seeking an investment opportunity that will generate income, but with as much protection from taxation as possible. Which of the following choices may be appropriate? A) Municipal Zero coupon B) GNMA pass-through certificates C) Treasury notes D) Puerto Rico bonds

Correct Answer:D) Puerto Rico bondsAnswer ExplanationBonds issued by the Commonwealth of Puerto Rico are referred to as triple-tax-exempt since they are exempt from federal, state, and local taxes. Municipal zero coupon bonds do not generate income, as they are purchased at a discount and mature to their face value. Treasury notes are subject to federal tax and exempt from state and/or local taxes. GNMA securities are subject to federal, state, and local tax.Textbook ReferencePlease see textbook section 7.3.3

Investors who indicate they are seeking current income from an investment would be mostly likely to consider which of the following products? A) Exchange traded notes B) Non-dividend paying preferred stock C) Limited partnerships D) Real estate investment trusts

Correct Answer:D) Real estate investment trustsAnswer ExplanationIf the investment objective is current income, a real estate investment trust may be a suitable product, as these investments will pay dividends in many instances. Textbook ReferencePlease see textbook section 7.3.2

In order to receive a dividend, a shareholder must own stock as of the A) Payable date B) Declaration date C) Ex-dividend date D) Record date

Correct Answer:D) Record dateAnswer ExplanationAn investor must own stock as of the date of record in order to receive a dividend payment. To own stock by the record date, it must be purchased before the ex-dividend date which is 1 business days before the record date. By purchasing before the ex-date, there are two business days for settlement to occur, in accordance with regular way settlement process. Textbook ReferencePlease see textbook section 1.7

When does settlement normally occur for government securities? A) T B) T+2 C) T+3 D) T+1

Correct Answer:D) T+1Answer ExplanationSettlement for government securities usually occurs on the day after trade date (T+1).Textbook ReferencePlease see textbook section 2.4

An investor buys an 8.0% coupon bond to yield 7.0%. What will most likely happen to the price of the bond as maturity approaches? A) The price will remain constant. B) The price will fall to zero. C) The price will increase towards par. D) The price will decrease towards par.

Correct Answer:D) The price will decrease towards par.Answer ExplanationThis bond has a coupon of 8.0% and a yield-to-maturity of 7.0%, indicating that the bond is trading at a premium. The price of a bond will always trend towards par as maturity approaches. Given that this bond is trading at a premium (e.g. 105% of par), the price would need to decrease to arrive at par value. Textbook ReferencePlease see textbook section 2.1.8

According to industry rules, which of the following evidence supports the suitability of an investment recommendation? A) The firm has evidence indicating that customers are satisfied with the investment. B) The recommendation was based on an evaluation of the latest research reports. C) The investment product has a history of long-term gain. D) The recommendation was based on facts disclosed by the customer.

Correct Answer:D) The recommendation was based on facts disclosed by the customerAnswer ExplanationThe recommendations of a registered representative must be suitable for each particular client; suitability is determined based on facts disclosed by the customer.Textbook ReferencePlease see textbook section 7.1.5

All of the following are characteristics of limited partners in a limited partnership EXCEPT A) Passive role in management of the partnership B) Right to receive a share of losses and income from the partnership C) Limited liability D) The right to bind the partnership into legal contracts

Correct Answer:D) The right to bind the partnership into legal contractsAnswer ExplanationLimited partners cannot execute or bind contracts on behalf of the partnership. That role belongs to the general partner. Limited partners have limited liability in return for their passive role in managements. They receive a proportionate share in the losses and gains of the partnership based on the units they own.Textbook ReferencePlease see textbook section 5.2.3

Open-end and closed-end company investments share all of the following characteristics EXCEPT A) Professionally managed by an investment manager subject to registration under the Investment Company Act of 1940 B) The NAV per share is calculated by subtracting the fund liabilities from the fund's assets and dividing by the number of shares outstanding C) Shareholders own an undivided interest in all securities with the portfolio D) They issue a single class of shares

Correct Answer:D) They issue a single class of sharesAnswer ExplanationOpen-end companies commonly issue A, B and C shares which reflect different types of sales charges. Closed-end funds issue one type of share class only.Textbook ReferencePlease see textbook section 4.6

An investor would most likely buy a floating rate security issued by the U.S. Treasury for which of the following reasons? A) To hedge a portfolio from systemic risk B) To receive interest that is tax exempt at the federal level. C) To benefit from interest rate arbitrage D) To protect against interest rate volatility

Correct Answer:D) To protect against interest rate volatilityAnswer ExplanationFloating rate securities feature an interest rate that varies or "floats" based on the performance of an underlying benchmark rate. Investors purchase them to protect against volatile interest rates, as these securities can help reduce the risk of locking in a low rate for a long period of time. Textbook ReferencePlease see textbook section 2.1.4.1

Which of the following securities is the most liquid? A) Highly-rated municipal bond B) Alternative investments traded OTC C) Limited partnerships D) Treasury bill

Correct Answer:D) Treasury billAnswer ExplanationNext to cash, a Treasury security is the most highly liquid security. Textbook ReferencePlease see textbook section 7.3.5

In addition to management companies and face-amount certificates, what is the third basic investment company type regulated under the Investment Company Act of 1940? A) Private Equity funds B) REITs C) Direct participation programs D) Unit Investment Trusts

Correct Answer:D) Unit Investment TrustsAnswer ExplanationThe three basic types of investment companies that are regulated under the Investment Company Act of 1940 are management companies, face-amount certificates and unit investment trusts.Textbook ReferencePlease see textbook section 4.4

Which of the following instructions is NOT a recommendation that is addressed by Regulation Best Interest (BI)? A) Don't liquidate an existing stock position B) Open a 529 plan rather than an UTMA C) Consolidate two former workplace retirement plans into one IRA D) Use PDQ Commercial Bank for wiring trade payments

Correct Answer:D) Use PDQ Commercial Bank for wiring trade paymentsAnswer ExplanationGiving administrative instructions regarding trade payment procedures is NOT a call to action that would influence a client's investment behavior. The other three instructions meet Reg BI's definition of a recommendation to a retail customer.Textbook ReferencePlease see textbook section 7.1.4

Which of the following does not pay a dividend? A) ADR B) Mutual fund C) Unit investment trust D) Warrants

Correct Answer:D) WarrantsAnswer ExplanationWarrants do not pay dividends. UITs, Mutual Funds, and ADRs all pay dividends from the underlying securities.Textbook ReferencePlease see textbook section 1.1.1.7

Saving for the future is a primary investment goal for many people. Which of the following products may help an investor achieve this goal? A) Money-market mutual funds B) Defensive stocks C) High-yield bonds D) Zero-coupon bonds

Correct Answer:D) Zero-coupon bondsAnswer ExplanationZero-coupon bonds may be beneficial to help people save for future events, such as a child's college education, or retirement. Textbook ReferencePlease see textbook section 2.1.5

A bond with ten years to maturity is bought at a price of $860. The annual adjustment to its cost basis will be A) amortization of $70. B) amortization of $14. C) accretion of $70. D) accretion of $14.

Correct Answer:D) accretion of $14Answer ExplanationBonds purchased at a discount are accreted, meaning adjusted upwards towards par value each year. The accretion is calculated on a straight-line basis, by dividing the discount off par ($140) by the number of years to maturity (10). Assume a bond's par value is $1,000. Textbook ReferencePlease see textbook section 2.5

Pre-emptive rights are available to current shareholders of a company as a means of A) locking in a profit over the next 60 days. B) purchasing additional shares at the discretion of the issuer. C) receiving additional shares as awarded by the board of directors. D) avoiding dilution.

Correct Answer:D) avoiding dilutionAnswer ExplanationPre-emptive rights are available to current shareholders. They give shareholders the right to maintain their proportionate interest when a company does a follow-on offering. This, in effect, helps prevent dilution. Textbook ReferencePlease see textbook section 1.1.1.6

Sal has written ten XYZ May 120 put options. At expiration, XYZ is trading at 122. Sal will A) receive an exercise notice and collect $12,000 in cash proceeds B) be required to purchase 1000 shares of XYZ at 122 per share C) tender an exercise notice and make full payment for 1,000 shares of XYZ D) realize a profit for writing the puts as these contracts will expire

D)Answer ExplanationAs these put options are out of the money, Sal will benefit since the contracts will expire and he will realize a profit through the captured premiums.Textbook ReferencePlease see textbook section 6.3.2.1

Regarding Treasury securities, they A) are exempt from purchasing power risk, but are subject to credit risk and interest rate risk. B) are subject to all of the same risks as any other fixed-income security. C) are subject to credit risk and purchasing power risk, but not interest rate risk. D) carry no credit risk but are subject to purchasing power and interest rate risk.

Correct Answer:D) carry no credit risk but are subject to purchasing power and interest rate riskAnswer ExplanationTreasury bonds do not carry credit risk (as the US Government can print money), but they do carry purchasing power (inflation) and interest rate risk. Textbook ReferencePlease see textbook section 2.3.5

An investment is most likely to have currency risk if it is A) subject to changes in international politics. B) denominated in US dollars. C) located in a foreign country. D) denominated in a foreign currency.

Correct Answer:D) denominated in a foreign currencyAnswer ExplanationWhen US investors buy investments denominated in foreign currencies, they incur currency risk. Some investments located in foreign countries may be denominated in dollars ‚Äì thus, would have little or no currency risk.Textbook ReferencePlease see textbook section 7.2.10

In financial markets, the risk created by volatility in stock prices, bond prices, currency rates, interest rates and dividends are most often hedged with transactions in A) foreign currency B) interbank securities C) fungible assets D) derivatives

Correct Answer:D) derivativesAnswer ExplanationThe derivatives market has grown into a marketplace for tools that are used to hedge or reduce the risk of many other investments. The countercyclical nature of certain derivative instruments and their highly leveraged status has made them suitable for this purpose. Textbook ReferencePlease see textbook section 7.2.11

In mortgage-backed securities, prepayment risk accelerates when A) housing prices rise. B) housing prices fall. C) homeowners pay off their mortgages on schedule. D) homeowners refinance their mortgages.

Correct Answer:D) homeowners refinance their mortgagesAnswer ExplanationWhen homeowners refinance their mortgages, mortgage principal is repaid to mortgage-backed securities (MBS) pools faster than anticipated. This tends to happen when interest rates are falling.Textbook ReferencePlease see textbook section 7.2.7

An investor who has purchased a new municipal bond issue notices a ‚Äúdated date‚Äù of June 15. This is the date that A) the bond will first become available for investors to purchase. B) represents the first semi-annual intertest payment date for the bond, the other being December 15. C) all future interest payments will be made on the bond. D) interest begins to accrue for a new issue, and will only be important for the first interest payment on the bond.

Correct Answer:D) interest begins to accrue for a new issue, and will only be important for the first interest payment on the bond.Answer ExplanationThe ‚Äúdated date‚Äù is the date when interest begins to accrue on a new municipal bond issue. This date is used in determining the amount of the first interest payment only. Subsequent interest payments will be based on the semi-annual interest (coupon) payment dates for the bond. The dated date will no longer be relevant at this point. Textbook ReferencePlease see textbook section 2.4

A bond has a call provision, effective three years following the original issuance date. This call feature is likely to be utilized if A) Interest rates have gradually risen over the ensuing three- year period B) The issuer is not considering a refunding of its debt for the next few years C) The issuer's sinking fund commitment has not been fulfilled D) interest rates have declined since the original issuance date

Correct Answer:D) interest rates have declined since the original issuance dateAnswer ExplanationAn issuer would be inclined to exercise a call feature on a bond when interest rates have declined from what they were when the bond was originally issued. When the bond is called, the issuer can either retire that particular issue, thereby eliminating any further obligation to make interest payments, or may elect to do a refunding, which would effectively replace a higher coupon bond with a lower coupon bond, based on whatever level interest rates have declined to. Textbook ReferencePlease see textbook section 2.1.9

An investor holds a callable bond that has been called by the issuer. This investor now faces A) credit risk B) interest rate risk C) call risk D) reinvestment risk

Correct Answer:D) reinvestment riskAnswer ExplanationIssuers call bonds when interest rates decline, so they can refinance their debt at a lower rate. An investor who has a bond called away is subject to reinvestment risk, because the investor may have difficulty finding as good a deal for the money.Textbook ReferencePlease see textbook section 2.3.3

Penny stocks present added risk to customers because of A) their high surrender charges. B) their low potential for return. C) their potential for exposure to adverse tax consequences. D) their potential lack of liquidity.

Correct Answer:D) their potential lack of liquidityAnswer ExplanationPenny stocks, or stocks priced below $5 per share that do not trade on an exchange, are frequently thinly traded, which means that there may be no market for the stock if customers want to liquidate their positions. Because of this market risk additional disclosure must be made to all buyers of penny stock.Textbook ReferencePlease see textbook section 1.2.2

What date occurs one business day after the ex-dividend date? A) The declaration date B) The payable date C) The notification date D) The record date

Correct Answer:D)Answer ExplanationThe record date is one business day after the ex-dividend date.Textbook ReferencePlease see textbook section 1.7

An investor sells 5 March 45 ABC put option contracts for a premium of $2.50. After the position turns bad, the investor wishes to cut losses and close out the contracts prior to maturity. How can this be done? A) Sell 5 March 45 ABC calls B) Buy 5 March 45 ABC calls C) Sell 5 March 45 ABC puts D) Buy 5 March 45 ABC puts

Correct Answer:D)Answer ExplanationTo close out a contract, an investor takes the opposite side (buy or sell) of the same put or call contract, in the same number of contracts. The opposite side of this trade (sell puts) is to buy puts.Textbook ReferencePlease see textbook section 6.7.2

The stock of an issuer that reinvests most of its earnings back into the business is most likely classifiedas a(n) A) Growth stock B) Small cap stock C) Cyclical stock D) Income stock

Correct Answer:Growth stockExplanation:Growth stocks are stocks of companies that reinvest most of their earnings into theirbusiness. Because of their high potential for growth, they generally do not pay dividends.Textbook Reference:Please see textbook section 1.2.1.5

ABC corporation will elect 2 members of the Board of Directors at its annual meeting. A shareholderthat owns 200 shares of stock may:I. Vote 200 shares of stock for each director under statutory votingII. Vote 100 shares of stock for each director under statutory votingIII. Split a total of 200 votes any way between the two directors under cumulative votingIV. Split a total of 400 votes any way between the two directors under cumulative voting

Correct Answer:I and IVExplanation:Under statutory voting, a shareholder has one vote per share for each director that is tobe elected. Under cumulative voting, the shareholder may pool together the total votes(400 in this example, 2 directors x 200 votes) and cast them as preferred.Textbook Reference:Please see textbook section 1.1.1.2

When comparing rights and warrants, which of the following statements are TRUE?I. Rights are longer term than warrantsII. Warrants are longer term than rightsIII. At issue, the exercise price of a right is lower than the market price of the underlying stockIV. At issue, the exercise price of a warrant is lower than the market price of the underlying stock

Correct Answer:II and IIIExplanation:Rights are short term instruments that allow the holder to buy the stock at a price that istypically lower than the current market price of the stock. Warrants are long-terminstruments. The exercise price of the stock is typically higher than the market price ofthe stock at the time the warrants are issued. Warrants have value only if the price of thestock appreciates.Textbook Reference:Please see textbook section 1.1.1.8

When must proxy materials be filed with the SEC?

Correct Answer:In advance of the shareholder solicitationExplanation:The information contained in proxy materials must be filed with the SEC in advance ofthe shareholder solicitation, and it must disclose all important facts upon whichshareholders are asked to vote.Textbook Reference:Please see textbook section 1.1.1.2

Common stock holders have limited liability. This means that

Correct Answer:They cannot lose more than their original investmentExplanation:Limited liability means that an investor cannot lose more than their original investment.Textbook Reference:Please see textbook section 1.1.1.1

Treasury stock is best characterized as

Correct Answer:authorized stock that was previously outstanding but has been repurchased by the issuer.Explanation:Treasury stock are shares that were previously sold to the public but have since beenrepurchased by the issuer. These shares do not carry voting rights nor pay dividends.Textbook Reference:Please see textbook section 1.1

Pre-emptive rights are available to current shareholders of a company as a means of

Correct Answer:avoiding dilution.Explanation:Pre-emptive rights are available to current shareholders. They give shareholders theright to maintain their proportionate interest when a company does a follow-on offering.This, in effect, helps prevent dilution.Textbook Reference:Please see textbook section 1.1.1.6

ABC Corporation common shares tend to increase during stronger economic times and decreaseduring weaker economic times. ABC common shares might best be described as

Correct Answer:cyclicalExplanation:Cyclical stocks tend to track to the economy, gaining value when the economy is growingand declining when the economy is contracting.Textbook Reference:Please see textbook section 1.2.1.3

An investor owns ten warrants of XYZ Co. These warrants are considered

Correct Answer:equity securities, as they may be exercised for shares in XYZ.Explanation:Warrants are considered equity securities of a company, as their exercise will allow theholder to receive shares of the underlying company. Note that warrants do not makeinterest payments to investors.Textbook Reference:Please see textbook section 1.1.1.7

An effective technique for reducing the systematic risk of an equity portfolio is to

Correct Answer:protect the portfolio by using hedging strategies.Explanation:Systematic risk cannot be avoided by diversification or by selecting specific types ofstocks. It can be hedged with derivatives, such as buying put options on a stock marketindex.Textbook Reference:Please see textbook section 1.3.1

At the time of the issuance of a warrant by a corporation, the warrant

Correct Answer:will not have any intrinsic value.Explanation:A warrant is a type of equity instrument issued by a corporation, where at the time ofissuance the exercise price of the warrant will be higher than the current market price ofthe company's common stock. In other words, warrants are not issued with intrinsicvalue.Textbook Reference:Please see textbook section 1.1.1.7

An investor sells 2 put options on a stock currently valued at $72. The strike price of the option is $75, and the premium received is $7. The maximum loss on this position is A) $13,000.00 B) $16,400.00 C) $15,800.00 D) $13,600.00

D) $13,600Answer ExplanationWhen an investor sells a put option, maximum loss will occur if the stock falls to zero as the investor will be obligated to buy the stock at the strike price, even though the shares are worthless. For taking on this obligation, the investor does receive the premium. To calculate maximum loss subtract the premium from the strike price and then multiply by both the number of contracts and shares per contract. $75 ‚Äì $7 = $68. 100 shares x 2 contracts x $68 = $13,600. For any question on put option maximum gain, loss or breakeven, ignore the market value of the underlying.Textbook ReferencePlease see textbook section 6.3.3

An investor buys put options which have a maximum gain of $3,600 and a maximum loss of $550. What is the maximum gain and loss for the investor who sells this same trade? A) $550 gain and unlimited loss. B) It can't be determined from the information given. C) $3,050 gain and $4,150 loss. D) $550 gain and $3,600 loss.

D) $550 gain and $3,600 lossAnswer ExplanationThe maximum gain and maximum loss are exactly opposite for long and short puts since they are opposite sides of the same trade.Textbook ReferencePlease see textbook section 6.3.3

To execute a covered call strategy, Jordan sells 28 call options. What is the minimum number of shares of stock she must own for the calls to be fully covered? A) 5,600 B) 280 C) 560 D) 2,800

D) 2,800Answer ExplanationEach listed option contract is for 100 shares. For a position to be fully covered, the underlying stock must fully collateralize the short call. For each option written, the investor must own 100 shares of stock. If any of this stock is sold, the position is no longer fully covered. Textbook ReferencePlease see textbook section 6.2.2.2

To execute a covered call strategy, Jordan sells 28 call options. What is the minimum number of shares of stock she must own for the calls to be fully covered? A) 560 B) 5,600 C) 280 D) 2,800

An investor purchases 100 shares of XYZ stock at 56 and later buys 1 XYZ 54 put for 2.10 when the market price of ABC is 55. What is the investor's breakeven on the combined purchase? A) 56.1 B) 51.9 C) 53.9 D) 58.1

D) 58.1Answer ExplanationWhen an investor buys a put to protect a stock purchase, the investor will breakeven when the stock price is equal to the cost of the stock plus the put premium. 56 + 2.10 = $58.10.Textbook ReferencePlease see textbook section 6.3.4

At which of the following levels is the interest paid on U.S. Treasury obligations taxable? A) At both the federal and state/local income tax levels B) At the State/local income tax level, but not the federal level C) At neither the federal nor state level D) At the Federal income tax level, but not the state/local level

D) At the Federal income tax level, but not the state/local levelAnswer ExplanationInterest paid on U.S. Treasury bonds and other direct obligations of the U.S. Government is taxable at the federal income tax level, but is excluded from taxable income for state and local income tax purposes.Textbook ReferencePlease see textbook section 3.5

An investment which is a multi ‚Äìclass debt instrument backed by a pool of mortgage pass-through securities is a(n) A) REIT. B) ELN. C) ETF. D) CMO.

D) CMO.Answer ExplanationThese types of structures are commonly known as collateralized mortgage obligations (CMOs). The structure is sold to investors in the form of "tranches", each having their own individual characteristics and risks.Textbook ReferencePlease see textbook section 3.3.2

Puts or calls of the same issuer share the same A) Sub group B) Series C) type D) Class

D) ClassAnswer ExplanationPuts or calls of the same issuer are part of the same class.Textbook ReferencePlease see textbook section 6.1.1

A security that typically has up to 270 days until its maturity date is a(n) A) Treasury note B) Open- end investment company C) American Depository receipt D) Commercial paper

D) Commercial PaperAnswer ExplanationCommercial paper is a short- term debt issuance of a corporation, proceeds normally used for the capital purposes of the business. CP usually has a maximum of 270 days until maturity. Textbook ReferencePlease see textbook section 3.6.1

An investor would like to purchase a basket of equity securities with performance linked to a broad market index. The investor also prefers the option of intra-day marketability. Which of the following securities is most appropriate for this investor? A) ELK B) ETN C) Mutual fund D) ETF

D) ETFAnswer ExplanationExchange Traded Funds (ETF) are funds that trade like a stock. ETFs combine popular features of stock/bonds and mutual funds. Like a mutual fund, an ETF is a collection of stocks or bonds. And like a stock, ETFs can be purchased or sold throughout the day as long as the market is open. Certain ETFs track the performance of an index and keep costs to owners relatively low because of minimal trading of the securities that comprise the fund.Textbook ReferencePlease see textbook section 5.5.1

XYZ stock is trading at 21.75. The XYZ April 20 put option has time value A) Equal to zero B) Which cannot be determined C) Equal to the intrinsic value of this option D) Equal to the premium of this option

D) Equal to the premium of this optionAnswer ExplanationAn option premium is equal to its intrinsic value and its time value. If the option has no intrinsic value (as in this case), the premium is represented by time value only. A put option is said to be "in-the-money" (or have intrinsic value) when the market price of the underlying stock is below the strike price of the put. As this is not the case in this question, the put option is said to be "out-of-the -money", and its premium is time value only. Textbook ReferencePlease see textbook section 6.5.2

Which of the following terms is most interchangeable with "listed option"? A) Standardized option B) Customized option C) OTC option D) Exchange traded option

D) Exchange Traded OptionAnswer ExplanationListed options are puts and calls that are exchange traded. They have standardized strike prices and expiration dates which make them marketable and liquid for buyers and sellers.Textbook ReferencePlease see textbook section 6.6

Ad valorem taxes would most likely back which of the following bond issues? A) GO issued by the state of Washington B) Special tax bonds C) Industrial development revenue bonds D) GO bond issues by the city of Seattle

D) GO bond issues by the city of SeattleAnswer ExplanationAd valorem, or property, taxes back GO obligation issues. Property taxes back issues of local governments. IDRs are revenue bonds, so are not backed by taxes. Special tax bonds are backed by taxes like fuel taxes, hotel taxes, or license taxes (user taxes). State issues are generally backed by income or sales taxes. Textbook ReferencePlease see textbook section 3.4.1

LGIPs and firms which distribute them are exempt from which of the following regulations?I. Registration and prospectus requirements under the Securities Act of 1933II. Anti-fraud Rules of the Securities Exchange Act of 1934III. MSRB RulesIV. Investment Company Act of 1940 A) II and IV B) II and III C) I and II D) I and IV

D) I and IVAnswer ExplanationAlthough Local Investment Government Pool Securities function very much like mutual funds, they are not subject to registration and prospectus requirements under the Securities Act of 1933 or the rules that define open end and closed end investment companies under the Investment Company Act of 1940. These securities and firms that sell them are subject to all rules of the MSRB and also to the anti-fraud requirements under the Securities Exchange Act of 1934.Textbook ReferencePlease see textbook section 5.6.1.2

An investor is long 2 ABC June 70 puts at 4. If just prior to expiration ABC is trading for 62, which two of the following are TRUE?I. The puts will be exercisedII. The puts will expireIII. The investor will purchase stockIV. The investor will sell stock A) I and III B) II and III C) II and IV D) I and IV

D) I and IVAnswer ExplanationThis put is in the money just prior to expiration because the market price of 62 is below the exercise price of 70. The investor will exercise the right to sell the stock for the exercise price of 70.Textbook ReferencePlease see textbook section 6.3.1.1

Passive income is earned from which of the following?I. Partnership interests in which no active management role is assumedII. Portfolio incomeIII. A part-time business performed outside of business hours which an individual manages A) I and II only B) I, II, and III C) II and III only D) I only

D) I onlyAnswer ExplanationThe IRS defines three main categories of income: active income, passive income and portfolio income. Passive income does not include earnings from wages or active business participation, nor does it include income from dividends, interest or capital gains. Textbook ReferencePlease see textbook section 5.1

When compared to a bond with a high credit rating, a bond with a low credit rating usually I. is more marketableII. is less marketableIII. offers a higher yieldIV. offers a lower yield A) I and IV B) I and III C) II and IV D) II and III

D) II and IIIAnswer ExplanationMost investors are concerned with safety of principal, so bonds with lower credit ratings are less marketable than highly rated bonds. Bonds with low credit ratings must offer a higher yield to offset their reduced degree of safety. Textbook ReferencePlease see textbook section 2.3.5.1

An investor writes an S&P 500 2020 call for 8.50. Just prior to expiration the S&P is 2004. Which two of the following statements are TRUE?I. The contract will be exercisedII. The contract will expireIII. The investor profits in this transactionIV. The investor has a loss in this transaction A) I and III B) I and IV C) II and IV D) II and III

D) II and IIIAnswer ExplanationThe investor received $850 to write the index call. The call is not exercised because the index value is below the exercise price. The writer profits from the premium received at expiration as the contrast will expire unexercised.Textbook ReferencePlease see textbook section 6.4

Arrange the steps that are followed in the liquidation of a limited partnership from first to last. I. General creditors are paidII. Secured claims are paidIII. General partners receive their share of profits and contributed capitalIV. Limited partners receive their share of profits and contributed capital A) II, I, III, IV B) IV, III, II, I C) I, II, III, IV D) II, I, IV, III

D) II, I, IV, IIIAnswer ExplanationThe order of liquidation of a limited partnership is as follows:I. Secured lendersII. General creditorsIII. Limited partners profitsIV. Limited partners return of contributionV. General partner feesVI. General partner share of profitsVII. General partner return of contributed capitalTextbook ReferencePlease see textbook section 5.2.4

Which of the following offers a leveraged alternative to a long position in stock? A) Long put B) Short put C) Short call D) Long call

D) Long callAnswer ExplanationA long call gives the investor the right to buy the underlying stock and allows an investor to benefit on its gains without having paid in full for the shares. The investor benefits from leverage, receiving a higher return for a dollar invested.Textbook ReferencePlease see textbook section 6.2.1

The most profitable options strategy for an investor who believes that a stock will increase in value is a A) short call B) long put C) covered call D) long call

D) Long callAnswer ExplanationA long call is the most profitable options strategy for an investor to undertake if they believe that a stock will increase in value. There is unlimited potential profit available with a long call. Textbook ReferencePlease see textbook section 6.2.1

Which of the following corporate securities has the highest priority in a bankruptcy proceeding? A) Senior unsecured debt B) Common stock C) Mezzanine debt D) Secured debt

D) Secured debtAnswer ExplanationSecured debt has the highest priority of corporate securities for repayment in a bankruptcy proceeding, followed by senior unsecured debt, mezzanine debt, and common stock. Textbook ReferencePlease see textbook section 3.1.2.3

Which of the following receive the least amount of their revenue from property taxes? A) County governments B) City governments C) School districts D) State governments

D) State governmentsAnswer ExplanationState governments receive the bulk of their revenue from income and sales taxes. Property taxes are the main revenue source for local governments.Textbook ReferencePlease see textbook section 3.4.1

A pre-packaged security that was created to meet specific investor needs that cannot be met from standardized financial instruments available in the market describes a(n) A) Investment Program B) Asset Allocation Ladder C) Derivative D) Structured Product

D) Structured ProductAnswer ExplanationThere is no single uniform definition of structured products. They are simply a pre-packaged, often customized investment strategy. Structured products are based on derivatives, and can be linked to the performance of baskets of securities, options, indices, commodities, loans, debt issuances and/or foreign currencies, and swaps. Textbook ReferencePlease see textbook section 5.5

An investor writes a December 50 call at 7 when the current market price of the stock is 46. Which of the following statements is true? A) The contract has time value of $300 B) The contract has intrinsic value of $400 C) The contract has intrinsic value of $300 D) The contract has no intrinsic value

D) The contract has no intrinsic valueAnswer ExplanationAn option's premium is comprised of time value and intrinsic value (the in-the-money amount of the contract). Calls have intrinsic value when the price of the stock is above the strike price. In this example, the premium is $700. The intrinsic value is $0 (the stock price is below the strike price), so the time value of the contract is $700, or the full amount of the premium.Textbook ReferencePlease see textbook section 6.5.1

An investor decides to purchase an XYZ 2-year 90 LEAPS call for a quoted price of $13. Which of the following statements is TRUE? A) The contract controls 1000 shares of XYZ stock B) The contract can only be exercised during a specified period just prior to its expiration C) The holder is obligated to sell XYZ stock if the contract is exercised D) The cost of the contract is $1,300

D) The cost of the contract is $1,300Answer ExplanationA LEAPS call controls 100 shares of stock, and its premium must be multiplied by 100 to calculate the cost of the contract. The holder of an options contract has rights, not obligations. Equity LEAPS are American-style contracts, which means they can be exercised any time between the date of purchase and the expiration date.Textbook ReferencePlease see textbook section 6.1.1

What is the main credit risk in a BA? A) There is none because BAs are FDIC-insured B) The bank guarantor fails C) Rapidly rising interest rates D) The issuer declares bankruptcy

D) The issuer declares bankruptcyAnswer ExplanationAlthough the underlying deposits that serve as the borrower's collateral in BAs may be FDIC-insured, BAs themselves are not covered by FDIC insurance. They are not bank deposits and the main credit risk is that the bank guarantor fails.Textbook ReferencePlease see textbook section 3.6.3

Just prior to expiration the market price of XYZ is stock is $63.27. If an investor holds an XYZ $63.25 put, which of the following statements is TRUE? A) The put is subject to exercise but only if the investor gives written notice to the broker-dealer on the business day prior to expiration B) Although the put is in the money, it does not meet the OCC rules of automatic exercise C) The put will be exercised automatically and no notice is required D) The put will expire

D) The put will expireAnswer ExplanationThe Options Clearing Corporation will automatically exercise any expiring equity call or put in a customer account that is $0.01 or more in-the-money. No notice is required. Calls are in the money when the market price is higher than the exercise price; puts are in the money when the market price is lower than the exercise price. This put is not in the money and will expire.Textbook ReferencePlease see textbook section 6.6.1

With regard to municipal taxing authority, which of the following statements is TRUE? A) States usually rely on property taxes to back GO bond issues. B) A high debt limit is viewed as a greater sign of safety than a low debt limit. C) Most cities and counties may issue GO bonds without voter referendums. D) The taxing authority of municipalities varies widely depending on applicable state or local laws.

D) The taxing authority of municipalities varies widely depending on applicable state or local laws.Answer ExplanationMunicipal taxing authority and statutes that address types and amounts of taxes vary considerably. Most local government bond issues require voter approval or referendums before they can be issued. States typically rely on sales or income taxes for backing of bond issues. A low debt limit is typically viewed more favorably because the municipality potentially has less outstanding debt to service.Textbook ReferencePlease see textbook section 3.4.1

All of the following statements about municipal revenue bonds are true EXCEPT: A) The maturity of the revenue bond is usually shorter than the useful life of the facility being built B) They are considered slightly less safe than GO bonds C) The interest and principal is paid from user fees D) They are subject to the debt limits of the issuer

D) They are subject to the debt limits of the issuerAnswer ExplanationMunicipal revenue bonds are issued to support long-term infrastructure projects. They offer municipalities financing flexibility because they are not subject to the debt limits or taxing authority of the issuer. Revenue bonds usually mature before the facility they fund is no longer of use. Textbook ReferencePlease see textbook section 3.4.2

Which of the following statements is true of Treasury Notes? A) They are issued at a discount and mature to face value B) They cannot be traded in the secondary market C) They are the shortest maturity of U.S. government securities D) They have a minimum purchase amount of $100

D) They have a minimum purchase amount of $100Answer Explanation$100 is the minimum purchase amount for U.S. Treasury Notes, which are medium term Treasury securities. They mature in the range of two to ten years, and yield a steady stream of interest payments, payable every 6 months. They are generally issued at par and trade actively in the over-the-counter market. Textbook ReferencePlease see textbook section 3.2.1.2

A discount bond issued by a broker-dealer, secured by interest and principal payments from Treasury securities, is known as a(n) A) Income bond B) Treasury Strip C) Treasury bond D) Treasury Receipt

D) Treasury ReceiptAnswer ExplanationA Treasury Receipt is essentially a zero-coupon bond structured by a broker-dealer and backed by the cash flows from Treasury securities. Textbook ReferencePlease see textbook section 3.2.1.6

Which of the following legislative acts exclusively regulates debt securities? A) Securities Exchange Act of 1934 B) Securities Act of 1933 C) Investment Advisers Act of 1940 D) Trust Indenture Act of 1939

D) Trust Indenture Act of 1939Answer ExplanationThe Trust Indenture Act of 1939 exclusively regulates corporate debt securities and requires that a trust indenture be established between the issuer and the trustee on behalf of the bondholders to protect the bondholders' rights.Textbook ReferencePlease see textbook section 3.1.1

When a UIT reaches the termination date specified at its creation, the trust A) Has a new offering of units B) Is sold and proceeds are distributed to unit holders C) Can refile with the SEC for a subsequent primary offering D) Is dissolved and no longer active

D)Answer ExplanationA UIT is created for a specified period of time. Its termination date is established at the time the trust is created, and the trust is dissolved when that date is reached.Textbook ReferencePlease see textbook section 4.4.1.2

Revenue bonds may be issued by all of the following EXCEPT A) A city that wants to build a new event venue to host concerts and athletic events B) A public housing program supplying government sponsored housing for elderly citizens C) A public transportation provider in an urban area D) An agency that provides a free service to the municipality

D)Answer ExplanationRevenue bonds may be issued by political entities or government agencies that generate operating expenses or revenues. They cannot be issued by agencies that supply free services, because general tax dollars are not available to pay debt service.Textbook ReferencePlease see textbook section 3.4.2

Today, Vladimir sold 15 Landmark Inc. May 65 puts for 2.15. On settlement date, Vladimir A) must pay a total of $3,225 B) will receive $2.15 per share when he delivers his Landmark shares to his broker-dealer C) must pay $65 per share D) will receive a total of $3,225

D)Answer ExplanationSince Vladimir sold 15 put options for 2.15 each, he will receive a total of $3,225 in his account when this trade settles.Textbook ReferencePlease see textbook section 6.1.1

When a stock index option is exercised, A) all margin calls must be satisfied within 24 hours. B) a specific securities transaction is effected to complete the exercise process. C) the exercise settlement process always occurs within two business days. D) the settlement of the process occurs in cash.

D)Answer ExplanationThe exercise of a stock index option is always handled in cash, never through a securities transaction. In contrast, the exercise of an equity option is handled through a separate securities transaction. Textbook ReferencePlease see textbook section 6.4

The goal of portfolio rebalancing is to ensure that A) The registered representative handling the portfolio always has an opportunity to make changes in the investor's portfolio. B) All investment categories are equally weighted. C) The allocation of stocks, bonds, and cash is reviewed at least once each year to ensure that the best performing assets over the past year are given additional weighting in the portfolio. D) No asset class becomes over-weighted in a portfolio

D)Answer ExplanationThe goal of portfolio rebalancing is to ensure that the portfolio is returned to its original proportionate investment mix. This may involve selling an asset that has become over-weighted due to recent strength in that sector. Textbook ReferencePlease see textbook section 7.5.1`

A type of investment that offers freely tradeable shares and limited liability, along with certain tax benefits, is a(n) A) Preferred shares in a blue-chip company B) Convertible debenture C) Hedge fund D) Master limited partnership

DAnswer ExplanationA master limited partnership combines the tax benefits of a limited partnership with the liquidity of a publicly traded security. Textbook ReferencePlease see textbook section 5.2.6

All of the following would likely cause a share of a REIT to trade at a discount EXCEPT A) A decline in property values B) A decrease in the demand for the shares of the REIT C) A decrease in demand for new space D) A reduction in vacancy rates

DAnswer ExplanationA reduction in vacancy rates means that there is a lower supply of available buildings. When the supply is reduced, there is greater demand, which drives the price up. A reduction in vacancy rates would be likely to cause the share of a REIT to trade at a premium. Declining demand for space, declining property values, and decreasing demand for REIT shares would all be likely to cause REIT shares to trade at a discount.Textbook ReferencePlease see textbook section 5.1.2

Cash dividends paid on common shares held for fewer than 60 days are A) taxable to individuals but not to other corporations B) taxable as a capital gain C) exempt from state tax but subject to federal income tax D) taxable as ordinary income

DAnswer ExplanationCash dividends on stock are taxable as ordinary income if the stock is held for fewer than 60 days. If held for greater than 60 days, it is taxed at a preferential rate.Textbook ReferencePlease see textbook section 5.1.6

Why are most direct participation programs (DPPs) structured as limited partnerships or limited liability companies? A) To enable large amounts of investors to participate B) To give limited partners the same voting rights as equity shareholders C) To increase share liquidity for investors D) To offer pass-through tax benefits to investors

DAnswer ExplanationDPPs usually are structured as a limited partnership or limited liability companies to offer tax pass-through benefits to investors. This avoids double taxation on distributions to investors. Textbook ReferencePlease see textbook section 5.2.5

Investment advantages that can be provided by equity REITs include all of the following EXCEPT A) Asset class diversification B) The potential to reduce portfolio volatility C) A low performance correlation to other assets like stock and bonds D) A pass through of losses that can shelter other investment income

DAnswer ExplanationEquity REITS do not pass through losses to investors, so do not function as tax shelters. They offer investors a unique asset class that has a low correlation to others like stock and bonds. Real estate investments respond to market conditions differently than other types of investments so help reduce portfolio volatility.Textbook ReferencePlease see textbook section 5.1.1

An unregulated investment fund that can engage in a variety of investment strategies is known as a(n) A) endowment B) mutual fund C) money market fund D) hedge fund

DAnswer ExplanationHedge funds are unregulated investment vehicles that use one or more investment strategies with the aim of generating substantial returns to investors. Investors in hedge funds are generally accredited investors. Textbook ReferencePlease see textbook section 5.3.1

Which of the following is a key difference between a limited partnership (LP) and a master limited partnership (MLP)? A) An MLP hires professional managers to act as general partners B) An LP has more favorable tax treatment C) An LP has more liquidity D) An MLP is exchange-traded and has more easily transferable interests

DAnswer ExplanationMLPs are publicly offered limited partnership, and they usually are traded on exchanges, with large numbers of limited partners and freely transferable interests. Textbook ReferencePlease see textbook section 5.2.6

A structured product is best defined as which of the following? A) A trust that owns and operates real estate related assets B) A funding pool raised from retail and institutional investors for investment in equity positions in high potential companies C) A professionally managed investment company that offers exchange traded interests in a pool of securities D) An investment product that produces a return based on the performance of one or more underlying securities

DAnswer ExplanationStructured products produce a return based on the performance of one or more underlying securities. Market linked CDs and structured notes are common examples of structured products.Textbook ReferencePlease see textbook section 5.5

With the market price at $67.25 at expiration, a long XYZ 65 call will A) Be exercised only if the counterparty to the contract has met the initial margin requirement for purchase of the stock B) Be exercised only if the holder gives exercise instruction C) expire D) Be automatically exercised according to OCC provisions

DAnswer ExplanationThe Options Clearing Corporation has provisions for the automatic exercise of certain in-the-money options at expiration. This procedure is also referred to as "exercise by exception." Generally, the OCC will automatically exercise any expiring equity call or put in a customer account that is $0.01 or more in-the-money, and an index option that is $.01 or more in-the-money. However, the customer's broker-dealer may have a different threshold for automatic exercise which may or may not be the same as the OCC's.Textbook ReferencePlease see textbook section 6.6.1

An investor with no other positions buys an ABC May 63 put at 6.25. The investor buys the stock in the market and exercises the put when the stock is trading for 52. What is the investor's profit or loss? A) Profit of $475 B) Profit of $1,725 C) Loss of $1,725 D) Loss of $475

a) Profit of $475Answer ExplanationThe investor paid $625 to purchase the put. The stock is purchased at the market price for $5,200. The exercise of the put permits the investor to sell the stock at the strike price, so the customer makes $6,300. The investor has a profit of $475 (Paid $5,825, received $6,300). Textbook ReferencePlease see textbook section 6.3.1.1

To establish a short position in one XYZ two-year 90 LEAP puts at $13, an investor will A) Receive $1,170 B) Receive $1,300 C) Pay $1,170 D) Pay $1,300

b) Receive $1,300Answer ExplanationWhen establishing a short options position, an investor receives premium income. Like equity options, LEAP options are quoted in points. Each contract includes a $100 multiplier, so the premium is multiplied by $100 for each contract. In this example, the investor receives $1,300 to open the position ($13 x 100 x 1 contract).Textbook ReferencePlease see textbook section 6.1.1.2

Which of the following business structures allows for pass through of losses to investors?I. Limited partnershipsII. Subchapter S corporationsIII. Limited liability corporations A) II and III only B) I and III only C) I only D) I, II, and III

d) I, II, and IIIAnswer ExplanationLimited partnerships, Subchapter S corporations, and limited liability corporations are all structures that allow for pass through of both gains and losses to investors. These structures allow "direct participation" by investorsTextbook ReferencePlease see textbook section 5.2

Another name for a repo is A) Sale/leaseback agreement B) Counterparty swap C) Collateralized loan facility D) Sale-and-repurchase agreement

d) Sale-and-repurchase agreementAnswer ExplanationRepos are also called sale-and-repurchase agreements. Technically, they are not instruments or securities but rather transactions in which one party sells a high-quality instrument for cash and agrees to buy it back at a different price.Textbook ReferencePlease see textbook section 3.6.4

SIE Chapters 1-7 (Part 1)

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