Understanding Products and their Risks Flashcards
(134 cards)
1
Q
If a bond has a par value of $1,000 and the conversion ratio is 20, what is the conversion price of the bond?
A. $50
B. $100
C. $20
D. $10
A
A
2
Q
Which two are examples of riders on variable-annuity contracts
I. A cost-of-living adjustment.
II. A lump-sum payment of principal.
III. A positive covenant.
IV. A negative covenant
A. I and II
B. III and IV
C. I and III
D. II and IV
A
A
3
Q
Which of the following is the correct sequence when investing in REIT’s?
!. Rental income is paid to the REIT.
II. Investors buy shares.
III. Distributions to investors.
IV. Acquisitions and capital investments.
A. I, III, II, and IV
B. IV, III, I and II
C. II, I, IV, and III
D. II, IV, I, and III
A
D
4
Q
What are convertible preferred shares?
A. Shares that convert to debt.
B. Preferred equity that can be converted to common stock.
C. Common stock that can convert to preferred shares.
D. Debt that can be called by the issuing company.
A
B
5
Q
What’s the spread between a 10-year Treasury bond yielding 4.8% and a Treasury note yielding 4.2%?
A. 4.4%
B. 0.6%
C. 1.14%
D. 1.0%
A
B
6
Q
The ratings provided by the major rating agencies are intended to reflect which of the following?
A. The issuer’s ability to pay the interest and principal.
B. The value of a bond.
C. The price of a bond.
D. The prepayment risk of a bond.
A
A
7
Q
What are American Depositary Receipts (ADRs)?
A. Shares of US companies sold on foreign stock markets.
B. Deposits similar to CDs.
C. Shares of foreign companies purchased in the US without having to go through foreign stock exchanges.
D. Stock receipts allowing for the purchase of additional shares.
A
C
8
Q
An arbitrage short-selling strategy occurs in which of the following situations?
A. When an investor owns shares and wants to protect their return in case the stock declines in value.
B. When the investor does now own shares and short sells a stock because he or she feels it is overvalued.
C. When the investor uses a straddle.
D. When the investor wants to take advantage of pricing differences in different markets.
A
D
9
Q
Which of the following is a lock-up provision as it applies to investing in hedge funds?
A. A period of time that investors cannot withdraw their money.
B. The average duration of the fixed-income investments the hedge fund holds.
C. The period of time the SEC forbids all trades while a hedge fund is under investigation.
D. A period of time that investors may withdraw money before a lock-up expires.
A
A
10
Q
What is a fund that accrues a balance for the future redemption of a callable bond by a corporation?
A. Mutual fund
B. Money market fund
C. Sinking fund
D. Bond fund
A
C
11
Q
In a negotiated municipal bond sale, how is the deal structured?
A. To meet the demands of investors and the issuer.
B. At the lowest rate the issuer can receive.
C. To match the municipality’s tax revenue.
D. To withstand the worst possible economic downturn.
A
A
12
Q
Which of the following is true of a money market fund?
A. Money market funds must be mainly invested in short-term securities with a maturity not exceeding 120 days.
B. Money market funds are not insured by the Federal Deposit Insurance Corporation (FDIC).
C. Money market funds cannot have a maturity of more than 12 months.
D. Money market funds are guaranteed to maintain a net asset value of a dollar.
A
B
13
Q
Which of the following comprises an option’s total value?
I. Intrinsic value
II, Exercise Price
III. Time value
IV. Strike price
A. I and II
B. II and IV
C. II and III
D. I and III
A
D
14
Q
To maintain their tax-free status, closed-end funds must distribute to investors what percent of their income from dividends and interest as well as what percentage of their capital gains?
A. 98% of income and 90% of capital gains.
B. 50% of income and capital gains.
C. 98% of income and capital gains.
D. 90% of income and 98% of capital gains.
A
D
15
Q
Which category below is NOT a common stockholder right?
A. The right to inspect a corporation’s financial records, systems, and bookkeeping.
B. The right to evaluate the assets of a corporation.
C. The right to call and reissue shares at a specified price.
D. The right to receive an equal share of dividends (i.e., pro-rata dividends).
A
C
16
Q
If a mutual fund has a public offering price of $32.56 and a net asset value of $27.18, what is the sales charge?
A. 19.7%
B. 18.3%
C.16.5%
D. 5.4%
A
C
17
Q
What is the current yield of a bond with a par value of $1,000, a coupon rate of 7%, and a market value of $1,150?
A. 70%
B. 7.0%
C. 6.1%
D. 11.5%
A
C
18
Q
How are the deferred sales charges on unit investment trusts paid?
A. Upon trust liquidation
B. Annually
C. Monthly
D. Up front
A
C
19
Q
What is the primary difference between closed-end mutual funds and open-ended ones?
A. Closed-end funds are limited to 10 investors.
B. Closed-end funds do not raise or accept new capital contributions after their IPO.
C. Closed-end funds invest in fixed-income securities while open-ended mutual funds only invest in stocks and ETFs.
D. Closed-end funds have a different tax treatment of their dividends and returns of capital.
A
B
20
Q
If an asset is not sold quickly and requires a significant reduction in price to be sold, which of the following types of risk occurs?
A. Credit risk
B. Liquidity risk
C. Prepayment risk
D. Price risk
A
B
21
Q
What type of security is typically assumed to have no credit risk (i.e., the probability that the full principal will not be repaid in 0%)?
A. Municipal bonds
B. Asset backed securities
C. Corporate bonds
D. Treasury bonds
A
D
22
Q
A rights offering allows which of the following?
A. A stock issuer to call the stock back for reissuance.
B. An investor to retire shares when they want .
C. An existing shareholder to purchase shares at a discount.
D. A bondholder the right to receive stock dividends.
A
C
23
Q
Which best describes how a puttable bond works?
A. It grants the issuer the obligation to “put” bonds back to the investor at a lower rate.
B. It grants the issuer the right to change the rate on the bonds they have issued.
C. It grants the investor the right to “put” the bonds back to the issuer.
D. It ensures that the corporation can no longer issue new debt.
A
C
24
Q
When do LEAPS expire?
A. On the first Tuesday in November
B. Every two years
C. The last day of the year
D. The third Friday of every January
A
D
25
Under the Investment Company Act of 1940 Rule 3c1, which of the following would violate the tax-exemption status of a hedge funds?
A. Retaining more than 10% of its income.
B. Having more than one hundred beneficial shareholders.
C. Distributing more than 98% of capital gains.
D. Having more than 100 pension funds investing in their shares.
B
26
Which of the following are examples of political risk?
I. New laws forcing a company to change strategies.
II. A currency fluctuates in value.
III. A regulator requires banks to change the way they market loans to customers.
IV. A CEO launders money from the company.
A. I, II, and III
B. III and IV
C. I and III
D. II and IV
C
27
In reference to REITs, what does DRIP stand for?
A. Dividend repurchase insurance program.
B. Divisible retained income purchase
C. Division real estate income plan
D. Dividend reinvestment program
D
28
What do direct participation programs (DPPs) typically invest in?
A. Real estate, futures, and mutual funds
B. Other private equity funds
C. Real estate, energy, futures/options, and equipment leases
D. Commercial paper, short-term treasury bonds, and other short-term debt.
C
29
By holding cash, an investor increases and decreases their exposure, respectively, to which of the following risks?
A. Reinvestment risk and currency risk
B. Currency risk and default risk
C. Credit risk and capital risk
D. Inflation risk and capital risk
D
30
What is the main distinction between a LGIP and a traditional mutual fund?
A. LGIPs must be managed by corporate stockbrokers.
B. LGIPs only invest in long-term securities.
C. LGIPs tend to be subject to higher tax liabilities.
D. LGIPs are only available to government groups.
D
31
Which of the following statements is true of municipal fund securities?
A. They guarantee a minimum fixed return to investors,
B. They are only available to large institutions.
C. They can be exempt from federal income tax.
D. They carry more risk than corporate bonds.
C
32
Who usually has the final say on decisions regarding an asset or investment?
A. Brokers
B. Owners
C. Beneficiaries
D. Traders
B
33
An advantage that directly reduces the amount of total tax you owe is called what?
A. Tax credit
B. Tax deferral
C. Tax deduction
D. Tax exemption
A
34
Which statement about the process of exercising an option is correct?
A. The exchange notifies the holder of the expiration date.
B. The holder's broker-dealer identifies a counterparty who will fulfill the option.
C. It begins with the holder informing the holder's broker-dealer of their intention to exercise the contract.
D. The broker-dealer that received the exercise notice fulfills the option without notifying the writer.
C
35
What is a typical characteristic of equity-indexed contracts (EICs) but NOT a typical characteristic of variable contracts?
A, "Bonus" additions in excess of the cash amount invested, as the basis for calculating death benefits and annuitization.
B. Income tax deferral
C. Payments for the life of the annuitant, who is usually the owner.
D. Death benefits for one or more beneficiaries
A
36
Which statement about the expiration of options is correct?
A. Listed American stock index options may be exercised on any day on or before the expiration date.
B. Listed foreign currency options may be exercised on the day on or before the expiration date.
C. Listed American stock options may be exercised on any day on or before the expiration date.
D. Unlisted American stock options expire on the second Friday of the expiration month.
C
37
Which statement about municipal bond credit ratings or rating firms is correct?
A. The credit rating of a special tax bond is not affected by what is being taxed.
B. A municipality's degree of dependence on a public transit system may impact it's credit rating.
C. Rating firms do not scrutinize a municipality's hospital bonds as they are rarely in default.
D. Rating firms and investors do not account for how essential a project is regarding revenue bonds.
B
38
What is an advantage that a company gains by using rights to sell stock?
A. It provides an opportunity to invest excess cash to get a better return than through expansion.
B. It enlarges the number of investors holding stock and it fosters goodwill among the investing public.
C. It provides a secret way to issue additional shares by communicating only with current shareholders.
D. It eliminates the cost of living an investment banker or syndicate to prepare paperwork for the SEC.
D
39
Which act established packaged products that could provide investors with diversification without personally researching each investment?
A. Investment Company Act of 1940
B. Trust Indenture Act of 1939
C. Securities Exchange Act of 1934
D. Securities Act of 1933
A
40
Which of the following is a bank draft?
A. Short-term debt instruments
B. Commercial paper
C. Banker's acceptance
D. Money market instruments
C
41
Which share class is most appropriate for an investor just starting to get acquainted with mutual funds and unsure of their time horizon?
A. Class A
B. Class B
C. Class C
D. Class T
C
42
What is the characteristic of municipal bond insurance?
A. In case of inadequate revenue for a revenue bond, the insurance company offers to purchase all of their bond issue from the investors.
B. GO bonds with insurance typically have lower credit ratings than uninsured GO bonds.
C. Insured bonds typically sell at a lower price than uninsured bonds.
D. More bonds may be sold if the issue is insured.
D
43
Which act is also known as the Trust in Securities Act?
A. 1933 Securities Act
B. 1934 Securities Exchange Act
C. 1940 Investment Company Act
D. 2002 Sarbanes Oxley (SOX) Act
A
44
Which of the following is NOT true of a unit investment trust (UIT)?
A. The invested assets are eventually sold, with the proceeds going to the investors.
B. A UIT has no stated termination date.
C. A UIT has no investment manager after the investments are initially chosen.
D. UITs issue shares of beneficial interest (SBIs).
B
45
Which of the following is calculated based upon the proportion of shares held by a stockholder, compared to all outstanding shares?
A. Preemptive rights clause
B. Anti-dilution provision
C. Rights issue ratio
D. Right of first refusal
C
46
A mortgage-backed pass-through certificate entitles its owner to which of the following?
A. Monthly cash flow principal and interest payments, less administrative costs.
B. Upon maturity, face value plus accrued interest, less administrative costs.
C. Monthly cash flow of interest payments, less administrative costs, and the face value of maturity.
D. Discounted present value of total interest payments and face value that would be paid at maturity.
A
47
What is the limited liability advantage of common equity securities?
A. Even if liabilities exceed assets, the stockholder has no liability prior to/at liquidation.
B. The stockholder is liable if the board of directors makes an assessment prior to liquidation.
C. The stockholder is liable for the firm's liabilities, limited to the par value of stock owned, if the firm defaults on loan covenants.
D. The stockholder is liable for the firm's liabilities if the board of directors commits illegal acts.
A
48
Which share class may serve as a short-term investment, even though it is included in a variable annuity?
A. Class B
B. Class C
C. Class L
D. Class T
C
49
Which statement about interest on federal income tax on municipal bonds is correct?
A. Interest payments are exempt from federal income tax on bond for building private facilities.
B. Interest payments on hospital bonds are typically exempt from federal income tax.
C. Taxable social security benefits are not affected by nontaxable interest payments on municipal bonds.
D. Interest payments on bonds to help replenish retirement pension plans are tax exempt.
B
50
Which statement about options is correct?
A. They are debt securities that are only issued by corporations.
B. They are equity securities that are only developed by hedge funds.
C. They are derivative instruments that may be developed by traders.
D. They trade with less volume than stock warrants.
C
51
Which statement about a prospectus is correct?
A. The primary disclosure document may be either a statutory or summary prospectus.
B. The representative may mark the prospectus to emphasize items of particular importance.
C. The prospectus is not to be relied upon by the investor to make an informed choice.
D. The representative's opinion which share to purchase is the only basis for the investor's decision.
A
52
Which organization guarantees all listed options?
A. Financial Industry Regulatory Authority (FINRA)
B. Securities Exchange Commission (SEC)
C. Options Clearing Corporation (OCC)
D. Chicago Board of Exchange (CBOE).
C
53
An equity-indexed contract holder has chosen a minimum guaranteed rate of 4%, along with a limited upside potential of 80% of the increase in the S&P Index, up to a maximum of 8%. If the S&P Index increases by 12%, what would the contract be credited with?
A. 4%
B. 8%
C. 9.6%
D. 12%
B
54
Which statement about short-term debt instruments is correct?
A. Short-term debt instruments are defined as having a term of less than two years.
B. A variety of short-term debt instruments are typically used by a firm with a long-term cash need.
C. The primary goal of a purchase of short-term debt is a high tax-effective interest rate.
D. A purchaser of short-term debt is typically most concerned with stability of value and certainty of repayment.
D
55
Which statement about the Municipal Securities Rulemaking Board (MSRB) is correct?
A. It does not regulate the initial issuance of municipal securities, which are regulated by the SEC.
B. It requires a municipal securities dealer to offer prices that are lower than the general market.
C. It promotes municipal securities as generally having higher nominal interest rates than corporate bonds.
D. It seeks to issue rules to promote a fair and organized market, with protections for those involved.
D
56
What is one reason that a firm would likely include a provision to call a bond issue?
A. Under certain conditions and at certain times, the bondholders would be able to convert the bonds to common stock.
B. In case interest rates decline, the issue could be replaced by one with a lower interest rate.
C. This provision could increase the demand for the bonds.
D. The SEC requires a certain percentage of each corporation's bonds to have a call provision.
B
57
Which statement about prepaid tuition plans (PTPs) is correct?
A. PTPs are not considered to be municipal fund securities.
B. PTPs invest in conservative equity and debt securities.
C. PTPs cover no more than two years of qualifies education expenses.
D. PTPs offer the donor a choice of investment vehicles.
A
58
Which statement about put warrants is true?
A. Expired put warrants provide voting rights.
B. Expired put warrants receive dividends when declared and paid.
C. Expired put warrants receive monetary value upon liquidation of the company.
D. Until put warrants are exercised, the seller received all dividends declared and paid.
D
59
Which statement about variable contracts is correct?
A. As the investment account balance grows, it enjoys tax deferral if the contract is not part of a qualified retirement account.
B. The purchase of a variable contract typically receives no investment advice.
C. Investments are always limited to the IRS retirements fund contribution limits.
D. The investment options of variable contracts are all fixed-income investments.
A
60
Which compliance statement regarding American Depositary Receipts (ADRs) is correct?
A. No matter what level of compliance, unsponsored ADRs may not trade in the OTC market.
B. Level II compliance does not allow ADRs to trade on the New York Stock Exchange (NYSE).
C. No sponsored ADRs may issue shares in the US.
D. ADRs are considered to have risks that stocks in American companies do not.
D
61
If the Board of Directors of a company declare and pays dividends to common shareholders, what else must it also do?
A. Redeem subordinated debentures.
B. Declare and pay dividends on preferred stock.
C. Reduce the market value of the common stock.
D. Hold a special stockholders meeting.
B
62
Which of the following is true regarding the term of Treasury securities?
A. All Treasury securities have maturities of one year or more.
B. Treasury bills (T-bills) have maturities of one year.
C. Treasury notes (T-notes) have maturities of two, four, six, eight or ten years.
D. Treasury bonds (T-bonds) have maturities of more than ten years.
D
63
Which statement about municipal securities is correct?
A. Municipal bonds may be issued only by the federal government.
B. Municipal bonds may not be issued by Puerto Rico.
C. Private activity bonds are one category of municipal bonds that is subject to the alternative minimum tax, whereas most municipal bond interest is exempt from federal income tax.
D. Municipal bond interest is always exempt from state or local income tax.
C
64
Which of the following is an advantage of Real Estate Investment Trust as opposed to traditional real estate ownership?
A. More immediate capital gain
B. Greater control over property
C. Assets have easier liquidity
D. Exemption from property tax
C
65
What type of company is most likely to be targeted by private equity investment?
A. Multinational corporation with diverse portfolios of products
B. Mid-size companies with a stable level of earnings
C. Failing or otherwise economically distressed companies
D. Government owned groups looking to be privatized
C
66
Investing in gold, oil, and natural gas is indicative of which form or alternative investment?
A. Hedge fund investing
B. Private equity investing
C. Venture capital investing
D. Commodity investing
D
67
Which statement about college savings plans is correct?
A. Contributions to college savings plans are tax-deductible.
B. Investments grow tax-deferred.
C. College savings plans always have a large selection of investments.
D. Income from investments is typically tax exempt at the state level and taxable at the federal level.
B
68
Section 1-b-1B of which of the following acts attempts to aid the investing public by limiting a company's purchases of its own stock?
A. 1933 Securities Act
B. 1934 Securities Exchange Act
C. 1986 Consumer Protection Act
D. 2002 Sarbanes-Oxley (SOX) Act
B
69
Which statement about money market instruments is correct?
A. Certificate of Deposit (CDs) are money market instruments.
B. Mutual funds typically do not invest in money market instruments.
C. State governments issue most money market instruments.
D. Money market instruments are used to obtain a stable value and not for a high interest rate.
D
70
Which statement about municipal bonds is correct?
A. Revenue bonds typically benefit the general public.
B. Rating agencies typically rate revenue bonds higher than general obligation (GO) bonds.
C. A general obligation (GO) bond must have voter approval.
D. A revenue bond must have voter approval.
C
71
Which statement about an investor's consideration of a municipal bond purchase is correct?
A. Lower-rated bonds usually pay higher interest rates.
B. All lease rental bonds have a permanent legislative commitment for debt service.
C. Revenue bonds typically pay a lower interest rate than general obligation (GO) bonds.
D. GO bonds usually involve a feasibility study to justify the issue.
A
72
Which statement about the purpose of corporate bonds is correct?
A. A firm typically sells bonds at a discount and pays the face amount at maturity.
B. A firm typically does not provide monetary value to bondholders at liquidation.
C. A firm may receive proceeds for investing in the firm's growth by selling bonds.
D. A firm diversifies its ownership by selling bonds.
C
73
Which statement about American Depositary Receipts (ADRs) is correct?
A. Non-Americans can purchase American stock on foreign markets using ADRs.
B. American investors receive dividends on ADRs in American dollars.
C. A foreign company issues unsponsored ADR shares by paying an American bank to issue its ADRs.
D. Sponsored ADRs may not trade in the over-the-counter (OTC) market.
B
74
Which of the following is true regarding debt certificates issued by a face-amount certificate company?
A. They pay a set interest rate.
B. Investments occur only in a lump sum.
C. They receive no interest until maturity.
D. Redemptions prior to maturity receive face value with no interest
A
75
Which statement about commercial paper is correct?
A. It is secured by equipment.
B. It is issued by a bank.
C. It is sold at face value.
D. It typically has a term of less than one year.
D
76
Which share class is associated with a letter of intent and rights of accumulation?
A. Class A
B. Class B
C. Class C
D. Class T
A
77
Which statement about agencies of the federal government and government-sponsored enterprises (GSEs) is correct?
A. Agencies and GSEs borrow money by issuing bond securities.
B. The US Treasury issues agency bond securities.
C. Agency bond securities pay a lower interest rate than Treasury bonds.
D. GSE bond securities are formally backed by the "full faith and credit" of the United States.
A
78
Which of the following relates to a rights offering in which the issuer may NOT receive the full issue proceeds?
A. Direct rights offering
B. Standby rights offering
C. Insured rights offering
D. Backstop purchaser
A
79
Which is the correct statement about options that are not guaranteed?
A. They all exclusively have standardized terms, which cannot be negotiated.
B. They have no risk of non-performance by either the buyer or seller.
C. They have a greater quantity of trades, making a counterparty easier to find.
D. They trade in the over-the-counter (OTC) market.
D
80
Which of the following is true of stock rights?
A. Expired stock rights provide voting rights.
B. Expired stock rights receive dividends when declared and paid.
C. Expired stock rights receive monetary value upon liquidation of the company.
D. Sock received after rights are exercised receive dividends when declared and paid.
D
81
In the event that a company is liquidated, which individuals would be last in line to receive financial value?
A. Senior bondholders
B. Holders of subordinated debentures
C. Preferred stockholders
D. Common shareholders
D
82
What does cumulative voting allow?
A. A creditor may vote to increase the interest rate on all mortgages outstanding.
B. A bondholder may vote for a reduction in the interest rate on all bonds outstanding.
C. A preferred shareholder may cast votes multiplied by the number of past years when they did not vote for a single candidate for the board of directors.
D. A common shareholder may vote for a candidate for directors using all their votes.
D
83
Which of the following would be considered a secured bond?
A. Debenture
B. Convertible unsecured bond
C. Mortgage bond
D. Convertible preferred stock
C
84
Which statement about derivatives is correct?
A. Common stock is a derivative.
B. Stock index options are not derivatives.
C. A derivative's market value is equal to its intrinsic value.
D. Their value is based on an underlying security.
D
85
Which of the following is true of unit investment trusts (UITs), closed-end investment management companies, and open-end investment management companies?
A. They are governed by a board of directors.
B. They have ongoing management fees.
C. They are actively managed portfolios.
D. They are governed by the Investment Company Act of 1940.
D
86
What is an advantage of writing a covered stock call option?
A. The writer can choose to not sell the stock when the stock call option is exercised.
B. Any time before exercise, the writer can choose the number of shares of stock to sell.
C. The writer has a limited maximum possible loss.
D. The writer may change the expiration date any time before the stock call option is exercised.
C
86
Which statement is true regarding interest paid on Treasury securities and bonds created by brokerage firms that are backed by government securities?
A. T-bills pay interest in semiannual payments.
B. Treasury receipts make no interest payments before maturity.
C. Similar to corporate bonds, T-notes pay a fixed interest rate in quarterly payments.
D. T-bonds make no interest payments before maturity.
B
87
Which statement about general obligation (GO) bonds is correct?
A. GO bonds account for less than half of all municipal bonds sold.
B. The most popular use for GO bonds is transportation.
C. Private activity GO bonds lower interest rates for companies.
D. Moral obligation GO bonds make the state legislature morally, but not legally, obligated to cover shortfalls in revenue,
A
88
Which of the following is NOT a form of municipal fund securities?
A. 529A plans
B. Local government investment pools (LGIPs)
C. Municipal bond
D. 529 college savings plan
C
89
Which of the following revenue bonds typically benefit a private company's facility?
A. Utility revenue bonds
B. Education revenue bonds
C. Housing revenue bonds.
D. Industrial revenue bonds (IDR bonds)
D
90
Which statement about 12b-1 fees is correct?
A. No-load funds may have a 12b-1 fee.
B. Load funds may have a 12b-1 fee up to 0.75% of the fund's net asset per year for shareholder service.
C. 12b-1 fees may be deducted from the NAV only one time each year.
D. Management companies selling no-load funds compensate representatives who solicit investors at the time of purchase.
A
91
How can someone mitigate purchasing power risk in their investment strategies?
A. Investing in high-risk stocks with high potential returns
B. Diversifying their portfolio with assets that hedge against inflation.
C, Getting extended warrants for products that they purchase
D. Avoiding any form of investment altogether.
B
92
Which type of risk shares from fluctuations in the exchange rates of foreign markets?
A. Market risk
B. Political risk
C. Inflationary risk
D. Currency risk
D
93
What is the primary purpose of FINRA rule 2262: Disclosure of Control Relationship with User?
A. To protect investors against conflicts of interest.
B. To limit the investment activities on non-FINRA members.
C. To require companies to disclose their internal operations.
D. To ensure fair compensation among securities issuers.
A
94
Why must dealers consider prevailing market prices as outlined in MSRB Rule G-30?
A. It allows dealers to use their personal judgment when setting prices.
B. It ensures that customers get the best price on the market.
C. It eliminates the need to assess the individual value of an investment.
D. It establishes an agreed-upon standard of reasonable pricing.
D
95
Which of the following states the purpose of an ABLE account?
A. To assist individuals with disabilities who have limited additional resources.
B. To purchase shares of foreign companies in the US market.
C. To fund a business venture's cash flow and taxation benefits.
D. To spread out ownership of an individual investment to multiple investments.
A
96
Which of the following risks is most relevant for a bond investor with a long-term investment horizon?
A. Liquidity risk
B. Inflation risk
C. Prepayment risk
D. Credit risk
B
97
An investor is considering investing in common stock, but is unsure of the risks involved. Which of the following represents the primary risk associated with investing in common stock?
A. Inability to inspect the financial records.
B. No voting rights on corporate issues.
C. Residual claim on the company's value after paying off obligations.
D. Lack of ownership control.
C
98
Which of the following is an Exchange-Traded Note (ETN)?
A. Notes of indebtedness that are traded on a securities exchange like stocks and exchange-traded funds (ETFs).
B. Debt securities issued by a corporation.
C. Securities that allow US citizens to purchase shares of foreign companies in the US market without having to make the purchase on a foreign stock exchange.
D. Negotiable piece of paper that functions like a post-dated check.
A
99
Which risk is associated with an investment declining in value due to fluctuations in the value of the currency?
A. Call risk
B. Capital risk
C. Credit risk
D. Currency risk
D
100
Which type of risk is most often associated with mortgage-backed securities?
A. Prepayment risk
B. Credit risk
C. Interest rate risk
D. Liquidity risk
A
101
Which of the following is a Dutch auction?
A. An auction where the price of the item is decreased until it matches the bid price.
B. An ongoing annual fee that is capped by the SEC at 1% of the assets value.
C. A tax on specific goods such as gasoline, tobacco, and alcohol.
D. A formal agreement between the bond issuer and the investor,
A
102
Which of the following is the Federal Open Market Committee (FOMC) responsible for?
A. Issuing various debt securities across the yield curve for its ongoing needs.
B. Investing in common stock.
C. Guaranteeing agency bonds with the full faith and credit of the US government.
D. Conducting open market operations - buying and selling securities in the open market by a central bank.
D
103
Which is correct regarding the maturity of Treasury bills, notes, and bonds?
A. Bills mature in 1 year or less, notes mature in 1-10 years, and bonds mature 10-30 years from issuance.
B. Bills mature in 1-5 years, notes mature in 5-15 years, and bonds mature 15-30 years from issuance.
C. Bills mature in 1-10 years, notes mature 10-20 years and bonds mature 20-30 years from issuance.
D. Bills mature in 1-3 years, notes mature in 3-10 years, and bonds mature 10-20-years from issuance.
A
104
Which of the following is true about zero-coupon bonds?
A. They pay periodic interest throughout the bond's life.
B. They are sold at a discount to par value and redeemed at full par value at maturity.
C. They offer higher yields than traditional bonds.
D. The provide tax advantages due to periodic interest payments.
B
105
How do American Depositary Receipts (ADRs) help US citizens invest in foreign companies?
A. By enabling the purchase of shares of foreign companies in the US market.
B. By eliminating currency risk associated with investments in foreign companies.
C. By offering higher dividend rates than domestic stocks.
D. By providing tax advantages for international investors.
A
106
An investor wants to reduce risk in their investment strategy. Which of the following is the most effective method for them to achieve this goal?
A. Market timing
B. Investing in only one industry
C. Diversification
D. Focusing on high-yield investments
C
107
What does portfolio rebalancing involve?
A. Adjusting an investor's asset allocation to match their initial target allocations.
B. Buying more of a particular security to increase its weight in the portfolio.
C. Moving all investments into cash.
D. Focusing exclusively on high-risk investments.
A
108
Which risk is measured by a security's Beta?
A. non-systematic risk
B. Market risk
C. Credit risk
D. Liquidity risk
B
109
Which of the following is the primary objective of an income fund?
A. To provide long-term capital appreciation.
B. To generate consistent income streams for investors.
C. To invest in speculative, high-growth stocks.\
D. To minimize risk by investing in a diversified portfolio.
B
110
An investor who primarily focuses on capital preservation is likely to invest in which of the following asset classes?
A. High-yield corporate bonds
B. Growth stocks
C. Government bonds
D. Commodities
C
111
When an investor purchases a call option, what right do they acquire?
A. The right to sell the underlying asset at the strike price within a specified period.
B. The right to buy the underlying asset at the market price within a specified period.
C. The right to sell the underlying asset at the market price within a specified period.
D. The right to buy the underlying asset at the strike price within a specified period.
D
112
During a company's liquidation process, which type of equity security holder is considered last when it comes to claims on the company's assets?
A. Bondholders
B. Preferred stockholders
C. Common stockholders
D. Convertible bondholders
C
113
Which type of equity security provides investors with a fixed dividend and higher priority claim on a company's assets during liquidation, and usually no voting rights in company decisions?
A. Common stock
B. Municipal bonds
C. Corporate bonds
D. Preferred stock
D
114
In the context of investment management, which of the following best exemplifies the concept of diversification?
A. Allocating all of one's savings to one high-performing stock.
B. Distributing funds across different sectors in the stock market.
C. Purchasing shares of a single company with operations in multiple industries.
D. Investing exclusively in government bonds.
B
115
Which of the following financial instruments is issued by a bank, trades on a securities exchange similarly to stocks and ETFs, and tracks an underlying index without directly owning the asset.
A. Mutual funds
B. Exchange-traded Funds (ETFs)
C. Exchange-traded Notes (ETNs)
D. Closed-end funds
C
116
Which of the following financial regulation primarily aims to restrict banks from making speculative investments?
A. Dodd-Frank Act
B. Glass-Steagall Act
C. Investment Company Act of 1940
D. Volcker Rule
D
117
Municipal Fund Securities can be distinguished by which of the following characteristics?
A. Issued by private corporations and considered as investment companies.
B. Issued by government entities and considered as investment companies.
C. Issued by government entities and not considered as investment companies.
D. Issued by private corporation and not considered as investment companies.
C
118
Which choice best explains the relationship between the strike price, intrinsic value, and option premium?
A. Intrinsic value affects the option premium and is the difference between the asset and strike price.
B. The strike price is determined by the intrinsic value, which then influences the option premium.
C. The option premium is determined by the strike price, which then influences the intrinsic value.
D. There is no relationship among the strike price, intrinsic value, and option premium.
A
119
Which of the following is NOT a characteristic of mortgage-based securities (MBSs)?
A. They consist of pooled mortgages.
B. Their rate of return is influenced by the interest rates of the underlying mortgages.
C. They belong to the category of asset-backed securities.
D. Their performance is directly linked to a single company's stocks.
D
120
What is the primary function of the Federal Open Market Commission (FOMC)?
A. Managing the sale and purchase of government securities.
B. Controlling the money supply through open market operations.
C. Determining mortgage interest rates.
D. Supervising the issuance of new stocks and bonds.
B
121
A company has total assets of $1,000,000 and liabilities of $600,000, with 20,000 outstanding shares. What is the net asset value (NAV) per share?
A. $20
B. $25
C. $30
D. $40
B - To calculated the NAV per share. First find the difference between the total assets and liabilities which gives you the total equity value. Next divide the total equity value by the number of outstading shares.
122
An investor seeks to profit from a falling market. Which type of ETF is best suited for this investment strategy?
A. Leveraged ETFs
B. Sector ETFs
C. Inverse ETFs
D. Commodity ETFs
C
123
An investor wants to participate in a company's growth through dividends and capital appreciation while retaining voting rights in company decisions. Which type of equity security should they consider purchasing?
A. Non-voting preferred stock
B. Callable preferred stock
C. Common stock
D. Convertible bonds
C
124
Which investment strategy seeks to minimize the effects of market fluctuations by regularly investing a predetermined dollar amount in a specific investment?
A. Value investing
B. Dividend reinvestment
C. Dollar-cost averaging
D. Momentum investing
C
125
Which of the following statements about 529 Savings Plans in INCORRECT?
A. They provide tax advantages for funding education expenses.
B. They can be categorized as either prepaid tuition plans or education saving plans.
C. They permit unlimited, tax-free withdrawals for any purpose.
D. They offer flexibility in asset allocation and withdrawals for qualified education expenses.
C
126
Which of the following investment vehicles is known for providing trading flexibility, low expense ratios, diversification, and tax efficiency?
A. Actively managed mutual funds
B. Exchange-traded funds (ETFs)
C. Closed-end funds
D. Real estate investment trusts (REITs)
B
127
Which business entity offers the benefits of pass-through taxation, similar to a partnership, and the limited liability protection of a corporation?
A. Sole Proprietorship
B. S Corporation
C. C Corporation
D. Limited Liability Company (LLC)
D
128
Which of the following Treasury Securities typically has the shortest maturity period?
A. Treasury bonds
B. Treasury notes
C. Treasury bills
D. Separate Trading of Registered Interest and Principal of Securities (STRIPS)
C
129
A put option exhibits intrinsic value when?
A. The underlying asset's market price is lower than the option's strike price.
B. The underlying asset's market value price is higher than the option's strike price.
C. The option's strike price is exactly equal to the underlying asset's market price.
D. The option's strike price is lower than the underlying asset's market price.
A
130
An investor is planning to redeem their shares from a mutual fund. Which fee is typically associated with this action?
A. Management fee
B. Front-end load
C. Back-end load
D. Expense ratio
C
131
When constructing a diversified investment portfolio, which of the following is NOT typically considered an asset class?
A. Stocks
B. Bonds
C. Real estate
D. Life insurance policies
D
132
A broker-dealer firm is reviewing its policies and procedures to ensure compliance with privacy regulations. Which regulation should be the primary focus for the firm to process customers from identity theft and unauthorized access to privileged information?
A, Regulation S - K
B. Regulation S - P
C. Regulation D
D. Regulation A
B
133
When evaluating a corporate bond's credit risk, what is the main factor an investor should consider?
A. The probability of the issuing company defaulting on its debt payments.
B. The effect of interest rate changes on the bond's market value.
C. The risk that the issuing company will be taken oven by a competitor.
D. The potential impact of inflation on the bond's purchasing power.
A
