Understanding Products and Their Risks 2
Under the rules, a penny stock is defined as an unlisted, security trading at less than
$5 per share
Under the de minimis exemption, an initial public offering of common stock may be sold to an account where restricted persons have a beneficial interest as long as their interest in the account does NOT exceed
10%
A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year and was missed in the 2 previous years. If the company wants to pay a dividend to common shareholders, how much must the company pay this customer per share first?
24 If the company is going to pay a common stock dividend, it must pay the preferred dividends first, including all dividends in arrears (missed). There are $16 due in back dividends for the 2 years missed, in addition to $8 this year, for a total of $24.
Corporate shareholder structure regarding liability is different from that of a partnership. In recognizing that, which of the following is TRUE?
A corporate shareholder cannot be forced to liquidate personal assets during a corporate bankruptcy.
Which of the following investment companies has an actively managed portfolio?
Closed-end company
Which of the following corporate bonds is backed by the securities of other corporations or those of a subsidiary?
Collateral trust bond
Which of the following preferred issues is most likely to fluctuate in line with the issuer's common shares?
Convertible
Advantages to the investor offered by investment companies include ability to invest small amounts in many different securities special securities prices available only to investment companies elimination of market risk through pooling of investments increased purchasing power in the marketplace
I and IV
By purchasing shares of stock in a company, investors can benefit from which of the following? An increase in the price of the shares An increase in price of the company's debt securities An increase in the yield of the company's outstanding debt securities The receipt of profits to be distributed
I and IV
Options investors who are bullish on a stock should buy calls bullish on a stock should buy puts bearish on a stock should buy calls bearish on a stock should buy puts
I and IV
The market price of a company's common stock could be affected by the company's earnings changes in the business cycle FRB policies International conflicts
I, II, III, and IV
Rank the following in order of payment at the time of a corporate liquidation, from first to last. Employee wages and taxes owed Preferred stock Subordinated debentures Secured debtholders
I, IV, III, II
A bond having an 8% coupon is selling with an 8.25% yield to maturity. Which of the following statements are TRUE? Nominal yield is higher than YTM. Current yield is higher than nominal yield. Nominal yield is lower than YTM. Current yield is lower than nominal yield.
II and III
A call option reaches its expiration date and goes unexercised. This means the buyer gains the premium paid the buyer loses the premium paid the writer gains the premium received the writer loses the premium received
II and III
A customer buys a 10% bond with a current yield of 12% and holds the bond until 1 year before maturity. The bond is sold when current interest rates are 8%. Which of the following statements are CORRECT? The bond was purchased at a premium. The bond was purchased at a discount. The bond was sold at a premium. The bond was sold at a discount.
II and III
A bond backed by a corporation's full faith and credit is secured unsecured backed by a specific asset not backed by any assets
II and IV
Identify 2 trading strategies that a hedge fund could employ in its portfolio but a mutual fund cannot. Limiting investments to a narrow group of securities within one industry Trading on margin to purchase portfolio securities Purchasing speculative or low rated securities Selling short stocks
II and IV
Which of the following statements regarding real estate investment trusts are TRUE? Hybrid REITs invest in both commercial property and residential property. Some REITs hold no real property but hold mortgages on commercial property instead. Hybrid REITs can hold only residential property and mortgages on residential property. REITS can pay dividends to shareholders and make capital gains distributions.
II and IV
If a preferred shareholder received a $3.50 annual dividend each year, it could be assumed that
this is a 3.5% preferred class An annual dividend of $3.50 simply tells you that this is a 3.5% preferred class of stock (3.5% × par ($100) = $3.50) or ($3.50 / par ($100) = 0.035). The current market value is not used to calculate the fixed dividend, nor does this dividend amount tell us what common shareholders received.
A member firm is assigned an exercise notice by the Options Clearing Corporation. The member firm may assign the exercise notice to one of its short customers by any of the following methods EXCEPT
to the customer having the largest short position
A penny stock is best described as an
unlisted stock valued at less than $5 per share
Interest-rate sensitivity for preferred shareholders should be understood to mean that
when interest rates rise, the prices for preferred shares can fall
A company's business operations are overseen by
a board of directors elected by shareholders
All of the following statements are true EXCEPT
a bond mutual fund may issue bonds
A company has just conducted a stock offering, by prospectus, through an investment banker. The proceeds of the offering are used to purchase a portfolio of securities. The stock, now in the hands of the public, is freely traded in the secondary market, and the portfolio is managed to generate maximum profit according to a specific investment objective. The company must be
a closed-end company
A written promise made by a corporation to pay the principal at its due date and interest on a regular basis on one of its debt issues but backed by no physical assets or titles to assets could only be
a debenture
Hedge funds are considered
a form of private investment company and, therefore, unregulated
An investor has purchased bonds having a put feature attached. With this put feature, it is likely that these bonds were issued with
a lower coupon than similar bonds without the feature
Which of the following would have no effect on the NAV per share of a mutual fund share?
Portfolio securities had to be sold for a big capital loss.
At expiration, for those who trade put options, which of the following is TRUE?
Put buyers want the contract to be in the money.
The ability to take the proceeds from the redemption of one security or investment and allocate those proceeds in such a way so as to maintain the same level of return is expressed in which of the following concepts?
Reinvestment risk
For municipal debt issues, which of the following is TRUE?
Revenue bonds are self-supporting, while GO bonds are backed by the municipality's good faith and credit.
Regarding investment risks, which of the following is TRUE?
Safer investments tend to offer lower yields.
In safety of principal, municipal bonds are considered second only to
U.S. government and agency bonds
Under which of the following conditions will an investor be able to purchase mutual fund shares and pay no sales charge?
Under the automatic reinvestment privilege
In explaining hedge funds to an investor, a registered representative might correctly characterize them as utilizing
advanced and complicated strategies entailing high risk
A call feature attached to a bond allows
an issuer to call in a bond before maturity at times that will benefit the issuer
An investor bought a put option and, in time, the underlying security declined below the strike price of the put. The put would probably
be exercised
An investor is long a call option. Over time, the underlying security rises in value above the strike price of the call. It is likely that the call would
be exercised
An investor sells one equity call option on DGF stock. This investor is
bearish on DGF the stock
An investor who is long MES equity put options is
bearish on MES stock
A company is about to introduce a new product. While confident in the product's appeal and market, it is still an unknown factor until sales results are viewed later. Investors holding stock in the company are at this time specifically exposed to
business risk
Of the following, reinvestment risk is most closely associated with
call risk
An investor holding a 4.5% callable bond has it called away by the issuer when interest rates fall to 3.5%. This is an example of
call risk, which can lead to reinvestment risk
A bond having a call feature
can be redeemed before maturity at the issuer's option
The risk when investing, where one has the potential to lose all or part of the investment due to circumstances that are unrelated to the issuer's financial strength or well-being, is known as
capital risk
Once a dividend is initially declared by the board of directors, any future dividend payments
carry no guarantee of payment in any amount
Index and foreign currency options must be settled in
cash
Your customer is a limited partner in a real estate partnership. This partner has the right to do all of the following EXCEPT
choose which properties the partnership should buy or sell
Rule 144 stipulates that after holding restricted stock fully paid for 6 months, an affiliate may begin selling shares
completely unrestricted
Preferred shareholders who expect missed dividend payments to be eventually paid are most likely to own
cumulative preferred stock
An LP is a type of
direct participation program
Political risk is more associated with
emerging economies, but could occur even in highly developed ones
Par value for a bond is also known as
face value or the amount a bond will be redeemed for at maturity
Direct participation programs (DPPs) are set up
having the owners of the business liable for any taxes due
An investor is able to purchase a bond at $725, well below par value. Buying the bond so cheaply tells us that the investors return at maturity
increases
An investor who relies heavily on fixed interest payments from long-term (25-30 years) bonds should be most concerned with
inflation risk
All of the following are true of negotiable commercial paper EXCEPT
it is typically issued by banks
A change to tax rates on dividends would be an example of
legislative risk
For investors, changes made to the tax code by the IRS are known as a form of
legislative risk
The 4 basic options transactions are
long calls, short calls, long puts, short puts
A March 30 call purchased at 3 has expired without being exercised. The owner of the call
loses the $300 premium paid
If the stock market were to fall substantially in a single day, a portfolio consisting primarily of common and preferred stock would be most subject to
market risk
Short-term purchases and sales of a mutual fund to take advantage of price fluctuation is known as
market timing
A company an individual has invested in by purchasing 1000 shares of common stock has unfortunately gone bankrupt. This investor
may lose all that was invested but is not liable for any corporate debts that cannot be satisfied during the dissolution process
Secured corporate debt includes
mortgage debt
All of the following are identified as types of investment companies in the Investment Company Act of 1940 EXCEPT
municipal bond pool
A state government has outstanding debt that it issued to finance toll roads, sports facilities, and public housing projects. All of these issues are examples of
municipal revenue bonds
Mutual funds that market directly to the public, using no underwriter and charging no sales charge, are called
no-load funds
A member firm receives an order to purchase shares in a common stock IPO from another broker-dealer for a customer. Regarding restricted persons, the member must
obtain a written representation that the buyer is not a restricted person
Typically, a corporation would NOT issue
option contracts
For investors, instability within an emerging economy is generally recognized as
political risk
Callable preferred stock is advantageous to the issuing company because it allows the company to
replace a higher, fixed-rate issue with a lower issue after the call date
All of the following describe mutual funds EXCEPT
shares may be sold either on an exchange or over the counter
Treasury bills (T-bills) are
short-term debt obligations issued weekly
When a corporation issues a mortgage bond, the issue's total value
should be less than that of the real estate it is backed by
In order to meet federal budget needs, the types and quantity of government securities to be issued are determined by
the U.S. Treasury Department
Listed options can be exercised by
the holder from the time of purchase until they expire
It would be expected that a repurchase (repo) agreement contract would include
the repurchase price and the maturity date
Your customer has purchased an MJS October 35 call at 4. Their proof of ownership will be A)
the trade confirmation
An investor in a direct participation program wishes to divest of a partnership interest purchased some time ago. You would correctly advise that
there is no secondary market making them highly illiquid
A hedge fund portfolio has been characterized as being highly leveraged. This means that
there is substantial borrowing or purchasing on margin
Which of the following statements is correct concerning the pricing of ADRs?
ADR pricing is dollar-based and fluctuates throughout the day.
A call or put that can be exercised before expiration is a(n)
American-style option
Which of the following issues only common stock?
An open-end management investment company
For investors engaging in the trading of option contracts, which of the following is TRUE?
Buyers pay the premium for the right to exercise the contract.
A customer believes the price of MJS stock will rise but is not currently in a position to purchase the stock outright. How could the customer use options to profit from a rise in the stock's price? Buy calls Write calls Buy puts Write puts
I and IV
What is the primary benefit for an American investor when purchasing an ADR?
Diversification
Which of the following statements regarding systematic risk as it relates to an investment portfolio is TRUE?
Diversification will not eliminate it.
The United States Congress has authorized all of the following enterprises to issue securities EXCEPT
FDIC
Which of the following are considered systematic risks—those that would impact all businesses? Market risk Inflation risk Regulatory risk Business risk
I and II
A registered representative speaks to a customer about a particular 6% municipal bond quoted on a 6.5% basis. Which of the following is CORRECT? 6% is the bond's coupon. 6% is the bond's current yield. 6.5% is the bond's yield to maturity. 6.5% is the bond's current yield.
I and III
Characteristics common to penny stocks would include which of the following?
Market price less than $5 per share and unlisted
A customer has a short-term investment time horizon and a fairly certain need for funds she wishes to invest. Which of the following might meet those 2 investment objectives?
Money market instruments
Your customer wants to be in a position to buy CDS stock while taking in premium. Which of the following options positions might accomplish this?
Short puts
A new customer tells you that her objective is to incur little risk because she is anticipating a new home within the next 12 months. Which of the following would be a suitable recommendation?
T-bills
A diversified growth fund charging 0.4% of net assets per year as a 12b-1 fee may NOT make which of the following statements?
The fund is a no-load fund.
A customer buys an October 75 MMS put. MMS stock closes at 70. Which of the following is TRUE?
The put has intrinsic value.
Which of the following regarding Treasury STRIPS, receipts, bills, notes and bonds is TRUE?
They all mature at par value.
Which of the following is TRUE regarding no-load shares?
They have fees associated with sales and redemptions.