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Which of the following statements about corporate equity is true?
All corporations issue common stock
All corporations issue two classes of stock; common and preferred
Corporations have the option of issuing stock
Corporations are only required to issue common stock when they are going public
Question 1 Explanation:
All corporations are required to authorize at least one share of stock. While C corporations can issue any class of stock – common or preferred – S corporations can only issue one class.
In the event a corporation goes bankrupt, which of the following statements is true?
Bondholders are considered creditors and they are prioritized over stockholders
Common stockholders are paid proportionately out of the assets that remain after every creditor and preferred stockholders, if any, have been paid
The stock of a publicly-traded corporation may be delisted from their principal stock exchange and stop trading
All of the above
Question 2 Explanation:
When a company goes bankrupt, all their outstanding liabilities/debts/creditors must be paid first. Stockholders get paid out of any money that remains, with preferred stockholders coming first (if there is any preferred stock outstanding) followed by common stockholders.
When a bond is described as ‘convertible,’ this term refers to:
The issuer’s ability to redeem the bond on or after a specific date in the future
The investor’s choice of whether to receive interest income or dividend payments
The investor having the option to redeem the bond in exchange for a pre-determined number of shares of common stock, on or after a specified date
The investor having the option to redeem the bond for common or preferred stock
Question 3 Explanation:
The conversion feature of a bond allows the investor to exchange their bond for the pre-determined number of shares of the issuer’s common or preferred stock, on or after a specified date.
Generally speaking, when control persons of a publicly-traded corporation, such as Officers and Directors, wish to sell shares they own in that corporation, these sales are subject to the oversight of the SEC and are done in accordance with:
SEC Rule 144
SEC Rule 10B-18
Question 4 Explanation:
SEC Rule 144 governs the resale of common shares held by control persons in a publicly-traded company, which include but are not limited to officers, directors, and persons owning 10% or more of the outstanding voting stock of that corporation. The shares held by control persons are considered restricted securities and the SEC has strict rules for those who wish to sell restricted securities in the public marketplace.
A bond issued to fund a new toll road, which will be paid off by users of the toll road through payment of tolls and not by taxes levied on the general population, is known as a:
Municipal revenue bond
General obligation bond
Private activity bond
Question 5 Explanation:
This is a classic example of a municipal revenue bond, which is always backed by a specific revenue source. Included in this type of bond are bridges, turnpikes, tunnels, airports, and similar projects that have a benefit for the public but are not generally paid for through taxes.
The term ‘money market’ is frequently used in financial discussions. Which of the following best defines a money market instrument?
Any short-term debt investment
Debt securities with maturities of 12 months or less
Debt or equity securities with maturities of 12 months or less
Any short-term equity investment
Question 6 Explanation:
Money market instruments are short-term debt investments that mature in 12 months or less.
Bonds initially offered for sale are typically sold at their:
All of the above
Question 7 Explanation:
All three terms refer to the same thing: the nominal value of a bond, which is typically $1,000.
With respect to the relationship between interest rates and bond prices, the general rule of thumb in the bond market is:
As interest rates fall, bond prices rise
As interest rates rise, bond prices rise
Bond market prices and interest rates move independently of each other depending on many economic factors, including supply and demand
None of the above statements is accurate
Question 8 Explanation:
Interest rates and bond prices have an inverse relationship. When interest rates go down, the market prices of existing bonds tend to be driven higher. Conversely, when interest rates rise, bond prices fall.
Which of the following statements regarding options contracts is true?
The contract conveys certain rights and privileges to the holder/owner of the contract
The contract conveys certain obligations upon the seller/writer of the contract
The contract is a security which is tradable on the floor of the Chicago Board Options Exchange, at a price referred to as the premium
All of the above
Question 9 Explanation:
Investors who purchase call or put options contracts are acquiring certain rights, including the right to ‘exercise’ their options contract or to let it expire unexercised when the expiration date arrives. The investor who sells the contract has certain obligations to fulfill if the options holder chooses to exercise their right. If the contract expires, then the seller has no further obligation. For the purposes of the SIE exam, the CBOE is the primary options exchange in the United States, though there are others.
Pooled investments, such as mutual funds, offer shares of ownership in the fund to investors whose investment objectives match those being promoted by that particular fund. In most cases, the fund attempts to achieve its stated investment objectives through which of the following practices?
Question 10 Explanation:
A substantial number of pooled investments, including mutual funds, attempt to achieve their investment purpose or objectives by diversifying the investments in the fund, also referred to as the portfolio.
Representatives who sell mutual fund shares are often compensated through sales charges levied upon purchasers of the shares. However, the fees paid to the professional managers hired by the fund to make the day-to-day investment decisions are referred to as:
Question 11 Explanation:
Portfolio managers are hired by mutual funds to manage the day-to-day investing. They get paid a fee for their work, which is known as a management fee, investment advisory fee, or portfolio manager fee. These folks aren’t sales personnel; rather than market the fund to the public, they invest all the assets.
A business enterprise that offers its shares to the public and invests those dollars in a variety of real estate investments is most commonly referred to as a:
Real estate investment trust (REIT)
Real estate limited partnership (DPP)
Tenants in Common (TIC)
Mutual fund with a real estate concentration
Question 12 Explanation:
Simply put, this is called a REIT. REITS are usually listed for trading on the NYSE and they trade day-to-day in the same manner as regular corporate stocks.
When FINRA refers to ETPs in their rulebook, they are referring to each of the following except:
Exchange-traded preferred stock
Question 13 Explanation:
The term ETP is used by FINRA to refer to an exchange-traded product, a packaged portfolio with a finite or limited number of available shares, which does not include preferred stock.
The value of the dollar declines due to inflation. This exposes fixed income investments, whose annual income does not rise to keep pace with the rate of inflation, to a risk commonly referred to by investment professionals as:
Purchasing power risk
Fixed-income investment risk
Question 14 Explanation:
The purchasing ‘power’ of the dollar is eroded due to inflation. If inflation is at the Fed’s target of 2% per year, then $1.00 of income this year will buy only 98 cents’ worth of goods next year and so on. This is known as ‘inflation risk’ or purchasing power risk.
Systematic risk, the risk that the broad stock market will suffer a substantial decline in value, is also commonly called:
Question 15 Explanation:
Investing in the stock market involves the risk that if the market experiences a significant or extended decline – some might call it a crash – then an investor will suffer a loss, even if they carefully chose their investments.
You’ve no doubt heard the expression ‘don’t put all your eggs in one basket.’ With investing, the dangers of having all your money in one investment or in one sector of the economy is referred to as:
Question 16 Explanation:
Putting all your money into one stock, or into one sector of the economy such as transportation, energy, healthcare, etc. means risking a loss if that business suffers a downturn. This is called business risk, also known as non-systematic risk.
Following Question #16, one of the most well-established ways of mitigating the ‘all in one basket’ risk is:
Investing in bank certificates of deposit
Investing in fixed annuities
Question 17 Explanation:
Diversification means to spread your investment assets across different businesses and sectors, so that even if one area suffers a downturn, the rest of your portfolio is protected.
Moody’s and Standard & Poor’s are two of the most well-known statistical rating organizations that, among other things, rate the investment quality of bond issues. Ratings in the AAA, AA and A categories are referred to as:
Junk bond ratings
Question 18 Explanation:
The highest bond quality ratings are AAA, AA and A and are referred to as investment-grade. Ratings don’t become speculative or ‘junk’ until they drop below BBB (S&P) or Baa (Moody’s).
The ability of an investor to readily sell their investment at a fair market price is called:
Question 19 Explanation:
Some investments, such as stocks and marketable securities, are considered more liquid than others. When an investor seeks liquidity in their portfolio, they are likely to stay away from assets like art or real estate since these cannot be quickly converted to cash.
When interest rates are higher than average, bond issuers will often add a callable feature to those high-interest bonds. This benefits the issuer in that if and when rates come down in the future, they can sell brand new bonds at the lower interest rate and use the infusion of cash to do what?
Buy back all the existing high-interest callable bonds at the predetermined call price, usually par value or a slight premium
Force the existing high-interest callable bondholders to turn in their bonds in exchange for cash, by a specified deadline
Both (A) and (B) are accurate
Give each existing callable bondholder one of the new low-interest bonds in exchange for their high-interest callable bond
Question 20 Explanation:
The first two answers both describe what happens when an issuer decides to redeem a callable bond.
Used to save up for certain postsecondary educational expenses, 529 college savings plans enjoy all the following tax benefits except:
Accounts earnings grow federally tax-free
Federal taxes don’t have to be paid on the investment income or capital gains
Withdrawals can be made from the account tax-free, so long as they are used for qualified postsecondary educational expenses.
State taxes don’t have to be paid on the investment income or capital gains
Question 21 Explanation:
529 college savings plans are popular for their tax benefits. However, while over 30 states currently offer full or partial tax deductions or credits for 529 plan contributions. 529 plans are not exempt from state taxes.
In a direct participation program (DPP), the investors who buy into the program are referred to as:
Question 22 Explanation:
The majority of DPPs are legally organized as limited liability corporations (LLCs), real estate investment trusts (REITs), or limited partnerships, though they all act as limited partnerships in reality. Investors become limited partners by buying into the program and then the general partner invests their pooled money.
Hedge funds and private equity funds share some similarities and often get confused with one another. The primary difference between the two is that private equity funds:
Focus more on long-term returns than short-term returns
Invest directly into companies by purchasing private companies or acquiring controlling interests in publicly traded companies
Are considered less risky than hedge funds
All of the above
Question 23 Explanation:
While hedge funds and private equity funds share a similar compensation structure, legal structure, and even types of investors, there are significant differences between the two. Private equity funds invest directly into companies by purchasing private companies or acquiring controlling interests in publicly traded companies, in order to generate long-term returns, and are considered less risky than hedge funds.
An investor purchases a 5% coupon rate bond for a discount at $850 (par value is $1,000). What is this bond’s current yield?
Question 24 Explanation:
Current yield, the expected annual rate of return of a bond, is calculated by dividing the bond’s annual interest by its current market price. In this example, the annual interest of $50 ($1,000 par value * 0.05 coupon rate) divided by the current market price of $850 gives a current yield of 5.88%.
An investor owns a call option which gives them the right to buy 150 shares of Company XYZ stock at a strike price of $115. If Company XYZ is currently trading at $140, then the option is considered to be:
In the money
At the money
At a premium
Out of the money
Question 25 Explanation:
A call option is considered ‘in the money’ if the current price of the underlying stock is trading at a higher price than the strike price. If the holder were to exercise their right to purchase the underlying stock, then they would get to pay less than its current value.
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