Chapter Two: Understanding Products And Their Risks

32 Questions | By Singhp1989 | Updated: Mar 20, 2022 | Attempts: 83

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The test has been designed to track your progress on chapter two.

Questions and Answers

1.

Miguel Reyes purchased $200,000 of ABC Corporation common stock 5 years ago. At one point, the value of his investment doubled. However, as a result of a recent class action law suit, the company has been ordered to pay 50% more than the company's net worth, and ABC filed for bankruptcy. What is the maximum loss that Reyes can lose on his investment?
- A.
  
  $100,000, 50% of his original investment
- B.
  
  No more than his original investment of $200 ,000
- C.
  
  His original investment plus a 50% assessment for a total of $300,000
- D.
  
  $400,000, the amount his investment was once valued at
2.

Rights of common stockholders include all of the following EXCEPT
- A.
  
  Voting for the board of directors (BOD)
- B.
  
  Transferring ownership of the stock at any time
- C.
  
  Receiving audited semiannual reports
- D.
  
  preemptive rights
3.

Zoe Smith wants to invest $100,000 in ABC common stock. Which of the following would be appropriate objectives when placing the order? I. A long-term hedge against inflation II. The limited liability of ABC's common stock Ill. The stock may appreciate in value and pay a consistent cash dividend IV. The need for monthly dividend checks
- A.
  
  I and Ill
- B.
  
  I and IV
- C.
  
  II and Ill
- D.
  
  II and IV
4.

Which two of the following preference items define preferred stock? i. Preferred dividends must be paid before paying common dividends. ii. Preferred dividends are guaranteed; common dividends are not. iii. Preferred stockholders are paid before common stockholders in the event of liquidation. iv. Preferred stockholders voting rights exceed those of common stockholders.
- A.
  
  I and Ill
- B.
  
  I and IV
- C.
  
  II and Ill
- D.
  
  II and IV
5.

Under Rule 144 , how long must a restricted security be held before it can be sold?
- A.
  
  90 days
- B.
  
  3 months
- C.
  
  6 months
- D.
  
  1 year
6.

An investor is long 1 XYZ May 40 call and XYZ stock has a current market value of 44. Which of the following is TRUE?
- A.
  
  The May 40 call is at the money.
- B.
  
  The May 40 call is in the money.
- C.
  
  The May 40 call is out of the money.
- D.
  
  The May 40 call has no intrinsic value
7.

An investor is long 1 August XYZ 30 put and XYZ has a current market value of 25 Which of the following is TRUE?
- A.
  
  The August 30 put is in the money by 5 points.
- B.
  
  The August 30 put is at the money.
- C.
  
  The August 30 put is out of the money by 30 points.
- D.
  
  The August 30 put has no intrinsic value.
8.

An investor writes (sells) a July 25 ABC call. Which of the following is TRUE?
- A.
  
  The investor has the right to purchase ABC stock at 25.
- B.
  
  The investor has the right to sell ABC stock at 25.
- C.
  
  The investor will be obligated to purchase ABC stock at 25 if the call is exercised by the owner (buyer)
- D.
  
  The investor will be obligated to sell the ABC stock at 25 if the call is exercised by the owner (buyer).
9.

An investor writes a September 65 ABC put. Which of the following is TRUE?
- A.
  
  The investor will be obligated to sell ABC stock at 65 if the put is exercised by the owner (buyer).
- B.
  
  The investor will be obligated to purchase ABC stock at 65 if the put is exercised by the owner (buyer).
- C.
  
  The investor has the right to sell ABC stock at 65.
- D.
  
  The investor has the right to purchase ABC stock at 65.
10.

An investor is long 1 January 30 call at 2. The maximum loss would be-
- A.
  
  $32
- B.
  
  Unlimited
- C.
  
  $200
- D.
  
  $2
11.

An investor is long 1 January 15 put at 4. Calculate the break even point :
- A.
  
  $60
- B.
  
  $11
- C.
  
  $1100
- D.
  
  $400
12.

All of the following are true EXCEPT
- A.
  
  Break even (BE) is always the same number for both buyer and seller of an option contract
- B.
  
  The maximum loss for options buyers is the premium paid
- C.
  
  The maximum gain for options buyers is always unlimited
- D.
  
  BE is calculated using the same formula for both buyer and seller
13.

Listed options transactions settle regular way
- A.
  
  On the third Friday of the expiration month
- B.
  
  On the next business day after trade date (T + 1)
- C.
  
  On the third business day after trade date (T + 3)
- D.
  
  When the option finally expires
14.

Regarding assignment of exercises notices, which of the following are TRUE? I. The Options Clearing Corporation (OCC) assigns short BDs randomly. II. The OCC assigns short BDs using the first-in, first-out (FIFO) accounting method. Ill. Short BDs can assign their short customers randomly only. IV. Short BDs can assign their short customers randomly, using the FIFO accounting method or by any other fair method.
- A.
  
  I and Ill
- B.
  
  I and IV
- C.
  
  II and 111
- D.
  
  II and IV
15.

A customer of a BD is opening a new options account. The customer must return the options agreement
- A.
  
  Signed before the account can be approved
- B.
  
  Before the first transaction can occur
- C.
  
  Signed and not later than 15 days after the account approval
- D.
  
  Before he will be allowed to view the options disclosure document
16.

An investor purchases 100 shares of XYZ stock at 67 and writes 1 covered call for a premium of $2.25 each. What is the investor's break even point?
- A.
  
  $2.25
- B.
  
  $64.75
- C.
  
  $67.00
- D.
  
  $69 .25
17.

All the following could be found in the money market EXCEPT
- A.
  
  T-bonds maturing in 12 months
- B.
  
  T-bills
- C.
  
  Commercial paper
- D.
  
  Equities such as common and preferred shares
18.

The most common type of direct participation program (DPP) in the securities industry is
- A.
  
  A limited partnership (LP)
- B.
  
  A real estate investment trust (REIT)
- C.
  
  A collateralized mortgage obligation (CMO)
- D.
  
  An investment company
19.

All of the following are benefits for the limited partners in a direct participation program (DPP) EXCEPT
- A.
  
  Passive losses
- B.
  
  Flow-through of income
- C.
  
  Unlimited liability
- D.
  
  An investment managed by the general partner (GP)
20.

A pooled investment which is organized as a trust in which investors buy shares or certificates of beneficial interest, either on stock exchanges or in the over-the counter market, is
- A.
  
  An investment company
- B.
  
  A real estate investment trust (REIT)
- C.
  
  A collateralized mortgage obligation (CMO)
- D.
  
  A direct participation program (DPP)
21.

An open-end management company may charge what amount annually and still advertise itself as a no-load fund?
- A.
  
  8.5%
- B.
  
  2.5%
- C.
  
  1.25%
- D.
  
  0.25%
22.

All of the following are true for exchange-traded funds (ETFs) EXCEPT
- A.
  
  ETFs can be bought or sold throughout the trading day
- B.
  
  ETFs are not marginable securities
- C.
  
  ETF share prices are subject to market forces like supply and demand
- D.
  
  ETF transactions are commissionable trades
23.

An investment established by states to provide other government entities such as cities or counties a place to invest funds short term is
- A.
  
  An FDIC
- B.
  
  An ABLE
- C.
  
  An LGIP
- D.
  
  A REPO
24.

Regarding annuity products offered by insurance companies, which of the following is TRUE?
- A.
  
  Variable annuities are securities; fixed annuities are not.
- B.
  
  Fixed annuities are securities; variable annuities are not.
- C.
  
  Neither variable nor fixed annuities are securities.
- D.
  
  Both variable and fixed annuities are securities.
25.

A private, unregulated investment company organized in such a way so as to invest and achieve high returns utilizing debt leverage and derivative products such as options and margin is best described as
- A.
  
  A mutual fund
- B.
  
  A direct participation program (DPP)
- C.
  
  A real estate investment trust (REIT)
- D.
  
  A hedge fund