Sie Qualifying Test- Ggm Slot # 2

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Sie Qualifying Test- Ggm Slot # 2 - Quiz

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Questions and Answers
  • 1. 

    All of the following must be on the cover page or beginning of the summary prospectus of a mutual fund EXCEPT

    • A.

      The share class or classes offered by the fund

    • B.

      The name of the investment advisor

    • C.

      The fund share class or classes ticker symbols

    • D.

      The website where a full prospectus may be downloaded

    Correct Answer
    B. The name of the investment advisor
    Explanation
    The cover page or beginning of a summary prospectus of a mutual fund should include the share class or classes offered by the fund, the fund share class or classes ticker symbols, and the website where a full prospectus may be downloaded. However, it is not necessary to include the name of the investment advisor on the cover page or beginning of the summary prospectus.

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  • 2. 

    An issuer of bonds can be

    • A.

      Corporate and both the federal and municipal governments

    • B.

      Federal and municipal governments only

    • C.

      Corporates and municipal governments only

    • D.

      Corporate entities only

    Correct Answer
    A. Corporate and both the federal and municipal governments
    Explanation
    An issuer of bonds can be corporate entities, as well as both the federal and municipal governments. This means that corporations, as well as federal and municipal governments, have the authority to issue bonds to raise funds. Bonds are a form of debt securities that are used by these entities to borrow money from investors. By issuing bonds, corporations and governments can raise capital for various purposes, such as funding infrastructure projects or financing business operations. Therefore, the correct answer is that an issuer of bonds can be corporate and both the federal and municipal governments.

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  • 3. 

    Once a corporate liquidation proceeding in court is underway, common shareholders know that

    • A.

      They are not guaranteed to be paid back any amount

    • B.

      They are guaranteed only payment of their initial investment

    • C.

      If preferred shareholders claims are met, their claims are guaranteed to be met

    • D.

      Only if they are paid first, can bondholders have their claims met

    Correct Answer
    A. They are not guaranteed to be paid back any amount
    Explanation
    In a corporate liquidation proceeding, common shareholders are not guaranteed to be paid back any amount. This means that if a company is liquidated and its assets are sold off to pay off debts and obligations, common shareholders are not prioritized and may not receive any payment at all. Unlike preferred shareholders who have a higher priority in receiving payment, common shareholders are at a greater risk of not getting any return on their investment. Similarly, bondholders can only have their claims met if they are paid after preferred shareholders, further highlighting the uncertain position of common shareholders in a liquidation proceeding.

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  • 4. 

    An investor sells short 1 MJS June 55 put at 2. The current market value of LMN is 56. The investor's maximum loss potential is

    • A.

      Unlimited

    • B.

      $5,425

    • C.

      $5,300

    • D.

      $10,600

    Correct Answer
    C. $5,300
    Explanation
    When an investor sells short a put option, they are obligated to buy the underlying asset at the strike price if the option is exercised. In this case, the investor sold short 1 MJS June 55 put at a premium of $2.

    The maximum loss potential for the investor can be calculated by subtracting the premium received from the strike price. In this case, the strike price is $55 and the premium received is $2. Therefore, the maximum loss potential is $55 - $2 = $53.

    Since the investor sold 1 put option, the maximum loss potential is multiplied by the contract size, which is 100 shares. Therefore, the investor's maximum loss potential is $53 * 100 = $5,300.

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  • 5. 

    Transactions where the penny stock rules are applicable would be those that

    • A.

      Neither solicited or unsolicited transactions

    • B.

      Are unsolicited

    • C.

      Are either solicited or unsolicited

    • D.

      Are solicited

    Correct Answer
    D. Are solicited
    Explanation
    The correct answer is "are solicited." The question is asking for the type of transactions where the penny stock rules are applicable. The penny stock rules are regulations that apply to certain low-priced securities. These rules are designed to protect investors by imposing additional requirements on broker-dealers who sell penny stocks. In this context, "solicited" means that the transaction was initiated or recommended by a broker-dealer, while "unsolicited" means that the transaction was not initiated or recommended by a broker-dealer. Therefore, the transactions where the penny stock rules are applicable would be those that are solicited.

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  • 6. 

    Regarding investment products, which of the following is TRUE?

    • A.

      Equity securities represent ownership in an issuing company.

    • B.

      Derivative securities represent ownership in an issuing company.

    • C.

      Both derivatives and debt represent ownership in an issuing company.

    • D.

      Debt securities represent ownership in an issuing company.

    Correct Answer
    A. Equity securities represent ownership in an issuing company.
    Explanation
    Equity securities represent ownership in an issuing company. This means that when an individual purchases equity securities, they are essentially buying a portion of the company and becoming a partial owner. This ownership comes with certain rights, such as voting rights and the potential to receive dividends. On the other hand, derivative securities do not represent ownership in a company, but rather derive their value from an underlying asset, such as stocks, bonds, or commodities. Debt securities, such as bonds, represent a loan made by an investor to a company or government entity, but do not represent ownership. Therefore, the correct statement is that equity securities represent ownership in an issuing company.

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  • 7. 

    With interest rates in the marketplace at 7%, it could be expected that in the secondary market, a bond carrying a 5% coupon would trade

    • A.

      Only in accordance to supply and demand

    • B.

      Upward in price

    • C.

      Unaffected by the changing interest rates

    • D.

      Downward in price

    Correct Answer
    D. Downward in price
    Explanation
    When interest rates in the marketplace are higher than the coupon rate of a bond, the bond becomes less attractive to investors because they can earn a higher return elsewhere. As a result, the demand for the bond decreases, causing its price to decrease. Therefore, a bond carrying a 5% coupon in a market with 7% interest rates would be expected to trade downward in price.

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  • 8. 

    The market price of a company's common stock could be affected by
    1. the company's earnings
    2. changes in the business cycle
    3. FRB policies
    4. International conflicts

    • A.

      2 & 3

    • B.

      1 & 2

    • C.

      1 & 3

    • D.

      1,2,3 & 4

    Correct Answer
    D. 1,2,3 & 4
    Explanation
    The market price of a company's common stock could be affected by several factors. Firstly, the company's earnings play a significant role in determining the stock price. If the company's earnings are high, investors may perceive it as a good investment and the stock price may increase. Secondly, changes in the business cycle can impact the stock price. During economic booms, stock prices tend to rise, while during recessions, stock prices may decline. Thirdly, FRB (Federal Reserve Board) policies can also influence stock prices. Changes in interest rates set by the FRB can affect investor sentiment and impact stock prices. Lastly, international conflicts can create uncertainty in the market, leading to fluctuations in stock prices.

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  • 9. 

    Commercial paper is

    • A.

      Unsecured debt with a maximum maturity of 1 year

    • B.

      Unsecured debt with a maximum maturity of 9 months

    • C.

      Secured debt with a maximum maturity of 9 months

    • D.

      Secured debt with a maximum maturity of 1 year

    Correct Answer
    B. Unsecured debt with a maximum maturity of 9 months
    Explanation
    Commercial paper is a type of short-term borrowing instrument issued by corporations to meet their immediate funding needs. It is considered unsecured debt because it is not backed by any collateral. The maximum maturity of commercial paper is typically 270 days or 9 months, making it a short-term financing option for companies. This allows them to raise funds quickly and efficiently without having to commit to long-term debt obligations. Therefore, the correct answer is "unsecured debt with a maximum maturity of 9 months."

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  • 10. 

    Which of the following securities are nonexempt from registration under the Securities Act of 1933?

    • A.

      Municipal securities and U.S. government agency issues

    • B.

      Corporate debt issues and U.S. government agency issues

    • C.

      Real estate investment trusts and corporate equity issues

    • D.

      U.S. government Treasury issues and real estate investment trusts

    Correct Answer
    C. Real estate investment trusts and corporate equity issues
    Explanation
    Real estate investment trusts and corporate equity issues are nonexempt from registration under the Securities Act of 1933. This means that these securities do not need to go through the registration process with the Securities and Exchange Commission (SEC) before they can be sold to the public. Municipal securities, U.S. government agency issues, corporate debt issues, and U.S. government Treasury issues are exempt from registration under different provisions of the Securities Act.

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  • 11. 

    Options contracts

    • A.

      Give both parties the right to buy or sell the underlying security

    • B.

      Obligate both parties to purchase the underlying security

    • C.

      Give one party the right to buy or sell the underlying security

    • D.

      Obligate both parties to sell the underlying security

    Correct Answer
    C. Give one party the right to buy or sell the underlying security
    Explanation
    Options contracts give one party the right to buy or sell the underlying security. This means that the holder of the option has the choice to exercise the contract and buy or sell the underlying asset at a predetermined price, known as the strike price. The other party, known as the writer of the option, is obligated to fulfill the terms of the contract if the holder decides to exercise it. Therefore, options contracts do not obligate both parties to purchase or sell the underlying security, but rather give the holder the right to do so.

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  • 12. 

    A stock currently has a market value of $75 per share. If a put option on the stock has an exercise price of $60, the put option is

    • A.

      In the money

    • B.

      Out of the money

    • C.

      At breakeven

    • D.

      At the money

    Correct Answer
    B. Out of the money
    Explanation
    A put option is considered "out of the money" when the market price of the underlying stock is higher than the exercise price of the option. In this case, the market value of the stock is $75 per share, which is higher than the exercise price of $60. Therefore, the put option is out of the money.

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  • 13. 

    An investor who is long MES equity put options is

    • A.

      Is bearish on the put price but bullish on MES stock

    • B.

      Bullish on MES stock

    • C.

      Wants MES stock to remain fixed at the current price

    • D.

      Bearish on MES stock

    Correct Answer
    D. Bearish on MES stock
    Explanation
    If an investor is long MES equity put options, it means that they have bought put options on MES stock. This indicates that the investor expects the price of MES stock to decrease in the future. Therefore, the investor is bearish on MES stock.

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  • 14. 

    The time to maturity for debt instruments

    • A.

      Can never be shorter than 5 years

    • B.

      Can be any length of time

    • C.

      Can never be longer than 30 years

    • D.

      Must always be between 5 and 30 years

    Correct Answer
    B. Can be any length of time
    Explanation
    The correct answer is "can be any length of time" because debt instruments, such as bonds or loans, can have varying maturities. They can range from short-term debt with a maturity of less than a year to long-term debt with maturities of 10, 20, or even 30 years or more. The time to maturity is determined by the terms of the debt agreement and can be tailored to meet the needs of both the borrower and the lender. Therefore, there is no restriction on the length of time for debt instruments.

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  • 15. 

    Which position has the greatest potential risk if the price of the underlying stock goes up?

    • A.

      Short put

    • B.

      Long put

    • C.

      Short call

    • D.

      Long call

    Correct Answer
    C. Short call
    Explanation
    The short call position has the greatest potential risk if the price of the underlying stock goes up. In a short call position, the investor sells a call option without owning the underlying stock. If the price of the stock increases, the call option may be exercised by the buyer, forcing the seller to sell the stock at a lower price than the current market value. This could result in significant losses for the seller.

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  • 16. 

    Which of the following investors are bearish?

    • A.

      Put buyers and put writers

    • B.

      Call buyers and put writers

    • C.

      Call writers and put buyers

    • D.

      Call buyers and call writers

    Correct Answer
    C. Call writers and put buyers
    Explanation
    Call writers and put buyers are bearish investors because call writers sell call options, which give the buyer the right to buy the underlying asset at a specified price, indicating a belief that the price will not rise significantly. Put buyers, on the other hand, purchase put options, which give them the right to sell the underlying asset at a specified price, indicating a belief that the price will fall. Both actions suggest a bearish outlook on the market.

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  • 17. 

    Your customer has purchased an MJS October 35 call at 4. Their proof of ownership will be

    • A.

      The trade confirmation

    • B.

      The certificate issued by the underlying company (MJS)

    • C.

      The executing broker-dealer's account records

    • D.

      The OCC issued certificate

    Correct Answer
    A. The trade confirmation
    Explanation
    The trade confirmation is the proof of ownership for the customer who purchased the MJS October 35 call at 4. This document serves as evidence of the transaction and includes important details such as the trade date, the number of contracts bought, the strike price, and the premium paid. It is typically provided by the broker-dealer to the customer after the trade has been executed. The trade confirmation is an important record that the customer can use to verify their ownership of the option.

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  • 18. 

    At a shareholders' meeting, a mutual fund investor might be called upon to vote on any of the following EXCEPT
    1. changes in membership in the board of directors
    2. whether to sell a certain company's stock out of the portfolio
    3. approval of the investment adviser's contract
    4. changing to a new landscaper for the fund's headquarters

    • A.

      1 & 4

    • B.

      2 & 4

    • C.

      2 & 3

    • D.

      1 & 3

    Correct Answer
    B. 2 & 4
  • 19. 

    All of the following describe mutual funds EXCEPT

    • A.

      Funds simplify tax calculations for investors by supplying Form 1099

    • B.

      Various withdrawal plans may be offered for redemption of shares

    • C.

      The portfolio is professionally managed

    • D.

      Shares may be sold either on an exchange or over the counter

    Correct Answer
    D. Shares may be sold either on an exchange or over the counter
    Explanation
    Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of securities. They are professionally managed and offer various withdrawal plans for redemption of shares. Additionally, mutual funds simplify tax calculations for investors by supplying Form 1099. The only statement that does not describe mutual funds is that shares may be sold either on an exchange or over the counter.

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  • 20. 

    Preferred shareholders who expect missed dividend payments to be eventually paid are most likely to own

    • A.

      Straight preferred stock

    • B.

      Convertible preferred stock

    • C.

      Callable preferred stock

    • D.

      Cumulative preferred stock

    Correct Answer
    D. Cumulative preferred stock
    Explanation
    Cumulative preferred stock is the most likely choice for preferred shareholders who expect missed dividend payments to be eventually paid. This type of stock guarantees that any missed dividend payments will accumulate and be paid out in the future. This is beneficial for shareholders who prioritize receiving their dividends, as it ensures that they will eventually receive the full amount owed to them.

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  • 21. 

    An investor owns one NMS June 40 call trading at 5. If the underlying value of NMS stock is 45, the contract is trading

    • A.

      With no intrinsic value

    • B.

      At parity

    • C.

      Out of the money

    • D.

      At the money

    Correct Answer
    B. At parity
    Explanation
    If the underlying value of the NMS stock is 45 and the investor owns a June 40 call trading at 5, then the call option is at parity. This means that the option's strike price is equal to the current price of the underlying asset. In this case, the strike price of the call option is 40, which is equal to the underlying value of the NMS stock. Therefore, the call option is trading at parity.

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  • 22. 

    Which of the following are TRUE of municipal revenue bonds?
    1. They are secured by a specific pledge of property.
    2. They are a type of general obligation bond.
    3. They are not subject to statutory debt limits.
    4. They are backed by a facilities ability to generate revenue.

    • A.

      1 & 2

    • B.

      1 & 4

    • C.

      3 & 4

    • D.

      2 & 3

    Correct Answer
    C. 3 & 4
    Explanation
    Municipal revenue bonds are backed by the facilities' ability to generate revenue, making statement 4 true. They are not subject to statutory debt limits, making statement 3 true. However, they are not secured by a specific pledge of property (statement 1) and they are not a type of general obligation bond (statement 2). Therefore, the correct answer is 3 & 4.

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  • 23. 

    An investor makes several statements regarding what they know about exchange-traded funds. All of them are correct EXCEPT

    • A.

      I can't buy them on margin because they represent an entire basket of stocks like mutual funds do

    • B.

      I can expect them to have lower expense and operating costs than mutual funds

    • C.

      I won't have to pay any sales charges as I do with mutual funds, but I will have to pay commissions

    • D.

      I'll be able to buy or sell them throughout the trading day like stocks trading on an exchange

    Correct Answer
    A. I can't buy them on margin because they represent an entire basket of stocks like mutual funds do
    Explanation
    The investor states that they cannot buy exchange-traded funds (ETFs) on margin because they represent an entire basket of stocks like mutual funds do. However, this statement is incorrect. Unlike mutual funds, ETFs can be bought on margin, allowing investors to borrow money to purchase them. Therefore, this statement is the only one that is not correct.

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  • 24. 

    For Treasury bills, which of the following are TRUE?
    1. T-bills are issued at a discount to par.
    2. T-bills have maturities of 1 to 10 years
    3. Most T-bill issues are callable and convertible.
    4. T-bills are a direct obligation of the U.S. government.

    • A.

      2 & 4

    • B.

      2 & 3

    • C.

      1 & 4

    • D.

      1 & 3

    Correct Answer
    C. 1 & 4
    Explanation
    Treasury bills (T-bills) are issued at a discount to par, meaning that investors purchase them for less than their face value and receive the full face value at maturity. T-bills typically have short-term maturities, ranging from a few days to one year, rather than 1 to 10 years as mentioned in option 2. T-bills are not callable or convertible, making option 3 false. T-bills are considered a direct obligation of the U.S. government, meaning that they are backed by the full faith and credit of the U.S. government, making option 4 true. Therefore, the correct answer is 1 & 4.

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  • 25. 

    A company's business operations are overseen by

    • A.

      Stockholders placed in position by the board of directors

    • B.

      A board of directors elected by bondholders

    • C.

      Bondholders placed in position by the board of directors

    • D.

      A board of directors elected by shareholders

    Correct Answer
    D. A board of directors elected by shareholders
    Explanation
    The correct answer is a board of directors elected by shareholders. The board of directors is responsible for overseeing the company's business operations. Shareholders, who are the owners of the company, elect the board of directors to represent their interests and make important decisions on their behalf. The board of directors is accountable to the shareholders and is responsible for making strategic decisions, appointing executives, and ensuring the company's overall success.

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  • 26. 

    The coupon for a bond is calculated as a percentage of

    • A.

      Par value, usually $100 for a bond

    • B.

      Par value, usually $1,000 for a bond

    • C.

      Par value, usually $10 for a bond

    • D.

      Current market value for a bond

    Correct Answer
    B. Par value, usually $1,000 for a bond
    Explanation
    The coupon for a bond is calculated as a percentage of the par value, which is the face value or the original value of the bond. This par value is typically set at $1,000 for a bond. The coupon rate is expressed as a percentage of this par value and represents the annual interest payment that the bondholder will receive. Therefore, the correct answer is "par value, usually $1,000 for a bond."

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  • 27. 

    A mutual fund can offer all of the following to investors EXCEPT

    • A.

      Physical custody of the fund's portfolio cash and securities

    • B.

      Acting as custodian for retirement accounts

    • C.

      Check-writing privileges for redemptions

    • D.

      The ability to do transfers by telephone or online

    Correct Answer
    A. Physical custody of the fund's portfolio cash and securities
    Explanation
    A mutual fund can offer acting as custodian for retirement accounts, check-writing privileges for redemptions, and the ability to do transfers by telephone or online. However, it does not offer physical custody of the fund's portfolio cash and securities. This means that investors do not have direct control or possession of the actual assets held by the mutual fund. Instead, the fund manager or a custodian appointed by the fund is responsible for the safekeeping and management of the fund's assets.

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  • 28. 

    A court has ordered a corporation to liquidate all assets under a federal bankruptcy proceeding. Which of the following is TRUE?

    • A.

      Preferred stockholders are paid before debtholders.

    • B.

      Common stockholders are paid before preferred stockholders.

    • C.

      There is no priority for the payment of wages to employees.

    • D.

      Debtholders are paid before stockholders.

    Correct Answer
    D. Debtholders are paid before stockholders.
    Explanation
    In a federal bankruptcy proceeding, debtholders have priority over stockholders when it comes to payment. This means that any money or assets that are available for distribution will first be used to pay off the debts owed by the corporation. Only after the debtholders have been paid in full or to the extent possible, will any remaining funds be distributed to the stockholders. Therefore, it is true that debtholders are paid before stockholders in a bankruptcy proceeding.

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  • 29. 

    For a real estate DPP, which of the following is TRUE?

    • A.

      Income can be derived from rents received for the properties.

    • B.

      Capital growth can be derived from rents received.

    • C.

      Income will come from appreciation of the portfolio properties

    • D.

      Neither income nor capital growth would come from rents received.

    Correct Answer
    A. Income can be derived from rents received for the properties.
    Explanation
    In a real estate DPP (Direct Participation Program), income can be derived from rents received for the properties. This means that investors who participate in the DPP can earn income by renting out the properties they own within the program. This income is generated from the rental payments made by tenants. Therefore, the correct answer is that income can be derived from rents received for the properties.

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  • 30. 

    What limit is placed on the number of outstanding shares a mutual fund may have in the hands of investors?

    • A.

      The number is specified in the fund's corporate charter.

    • B.

      There is no limit.

    • C.

      Federal law specifies how many shares a mutual fund may sell.

    • D.

      The limit varies from state to state.

    Correct Answer
    B. There is no limit.
    Explanation
    Mutual funds do not have a limit on the number of outstanding shares that can be held by investors. Unlike corporations, which may have restrictions on the number of shares they can issue, mutual funds are not subject to such limitations. Investors can buy and sell shares of a mutual fund freely, and the fund can continue to issue new shares as long as there is demand from investors. Therefore, there is no limit on the number of outstanding shares a mutual fund may have in the hands of investors.

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  • 31. 

    An income bond is

    • A.

      Also known as a debenture and is unsecured

    • B.

      Also known as a debenture and is secured

    • C.

      Also known as an adjustment bond and is unsecured

    • D.

      Also known as an adjustment bond and is secured

    Correct Answer
    C. Also known as an adjustment bond and is unsecured
    Explanation
    An income bond is also known as an adjustment bond because it is a type of bond that pays interest only if the issuer has sufficient earnings. This means that the bondholders' income is directly tied to the issuer's financial performance. Unlike secured bonds, income bonds are unsecured, meaning they do not have any specific assets pledged as collateral. Therefore, in case of issuer default, income bondholders do not have a claim on specific assets but instead rely on the issuer's general creditworthiness.

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  • 32. 

    Limited partnerships

    • A.

      Must end on a predetermined date or can be dissolved earlier by vote

    • B.

      Must end on a predetermined vote with no exceptions

    • C.

      Can either exist in perpetuity or be designated to end on a specific date

    • D.

      Must exist in perpetuity

    Correct Answer
    A. Must end on a predetermined date or can be dissolved earlier by vote
    Explanation
    Limited partnerships must end on a predetermined date or can be dissolved earlier by vote. This means that the partnership has a specific duration, which is predetermined and agreed upon by the partners. Alternatively, the partners may choose to dissolve the partnership before the predetermined date through a vote. This flexibility allows for the partnership to have a defined lifespan, providing clarity and certainty for the partners involved.

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  • 33. 

    Regarding sales loads, management fees, and operating expenses for mutual funds, which of the following is TRUE?

    • A.

      All increase investor returns because each is received by the fund increasing the amount they have to invest

    • B.

      All reduce investor returns because they reduce the amount of money available for the fund to invest.

    • C.

      Only management fees and operating expenses reduce investor returns by reducing the amount of money available for the fund to invest

    • D.

      Sales loads increase investor returns because they are received by the fund increasing the amount they have to invest

    Correct Answer
    B. All reduce investor returns because they reduce the amount of money available for the fund to invest.
  • 34. 

    Treasury bond (T-bond) interest is stated as

    • A.

      A discount to the face value

    • B.

      A percentage of par value

    • C.

      A premium over the price paid

    • D.

      A percentage of the purchase price

    Correct Answer
    B. A percentage of par value
    Explanation
    The correct answer is "a percentage of par value." This means that the interest on Treasury bonds is calculated based on a percentage of the bond's par value, which is the face value of the bond. The interest payment is not based on the price paid for the bond or any discount or premium over the price. Instead, it is a fixed percentage of the par value that the bondholder will receive as interest payments.

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  • 35. 

    If a call contract has no intrinsic value, it must be

    • A.

      At, or out of the money

    • B.

      At, or in the money

    • C.

      Only in the money

    • D.

      Out of, or in the money

    Correct Answer
    A. At, or out of the money
    Explanation
    If a call contract has no intrinsic value, it means that the current price of the underlying asset is either equal to or lower than the strike price of the call option. In this case, the call option is considered to be "at the money" or "out of the money." "At the money" means that the strike price is equal to the current price of the underlying asset, while "out of the money" means that the strike price is higher than the current price of the underlying asset. Therefore, the correct answer is "at, or out of the money."

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  • 36. 

    Unique tax advantages associated with oil and gas direct participation programs are

    • A.

      Tax credits and depreciation allowances

    • B.

      Intangible costs and depletion allowances

    • C.

      Tax credits and cash flow allowances

    • D.

      Intangible costs and cash flow allowances

    Correct Answer
    B. Intangible costs and depletion allowances
    Explanation
    Oil and gas direct participation programs offer unique tax advantages such as intangible costs and depletion allowances. Intangible costs refer to expenses that cannot be physically seen or touched, such as drilling and labor costs. These costs can be deducted from taxable income, reducing the overall tax liability. Depletion allowances, on the other hand, allow investors to deduct a portion of the value of the oil or gas reserves that are extracted and sold. This reduces the taxable income further. Therefore, the correct answer is intangible costs and depletion allowances.

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  • 37. 

    Common shareholders have the right to receive an audited set of financial statements of the company's performance

    • A.

      Biannually

    • B.

      Each quarter

    • C.

      Annually

    • D.

      Monthly

    Correct Answer
    C. Annually
    Explanation
    Common shareholders have the right to receive an audited set of financial statements of the company's performance annually. This means that once a year, the company is required to provide its shareholders with a comprehensive report on its financial performance, including details such as revenue, expenses, profits, and losses. This allows shareholders to assess the company's financial health and make informed decisions about their investments. Providing audited financial statements ensures transparency and accountability, as they have been independently reviewed by a certified public accountant to ensure accuracy and compliance with accounting standards.

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  • 38. 

    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?
    1. The bond was purchased at a premium.
    2. The bond was purchased at a discount.
    3. The bond was sold at a premium.
    4. The bond was sold at a discount.

    • A.

      1 & 4

    • B.

      2 & 4

    • C.

      2 & 3

    • D.

      1 & 3

    Correct Answer
    C. 2 & 3
    Explanation
    The correct answer is 2 & 3. This is because when the current yield is higher than the interest rate, the bond is purchased at a discount. In this case, the current yield is 12% and the interest rate is 8%, indicating that the bond was purchased at a discount. When the bond is sold at a lower interest rate than the current yield, it is sold at a premium. In this case, the current interest rate is 8% and the bond was purchased with a current yield of 12%, indicating that the bond was sold at a premium.

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  • 39. 

    When an investor purchases a corporate bond, the investor is

    • A.

      Lending money to and becoming a creditor of the corporation

    • B.

      Lending money to and becoming an owner of the corporation

    • C.

      Borrowing money from and becoming an owner of the corporation

    • D.

      Borrowing money from and becoming a creditor of the corporation

    Correct Answer
    A. Lending money to and becoming a creditor of the corporation
    Explanation
    When an investor purchases a corporate bond, they are essentially lending money to the corporation. In return, the corporation promises to pay back the principal amount of the bond at maturity, along with periodic interest payments. By becoming a creditor, the investor has a legal claim on the assets and earnings of the corporation. This means that in the event of bankruptcy or liquidation, the bondholders have priority over shareholders in receiving their investment back. Therefore, the correct answer is "lending money to and becoming a creditor of the corporation."

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  • 40. 

    With money market securities held in one's portfolio, relative to other, longer-term debt securities, an investor should expect

    • A.

      A lower degree of safety with lower returns

    • B.

      A higher degree of safety with higher returns

    • C.

      A lower degree of safety with higher returns

    • D.

      A higher degree of safety with lower returns

    Correct Answer
    D. A higher degree of safety with lower returns
    Explanation
    With money market securities, investors should expect a higher degree of safety but lower returns compared to other longer-term debt securities. Money market securities are short-term, highly liquid, and have low risk of default. They are typically issued by governments, financial institutions, and corporations with strong credit ratings. Due to their low risk nature, they offer lower returns compared to longer-term debt securities that carry higher risk and potential for higher returns. Therefore, investors prioritize safety over returns when investing in money market securities.

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  • 41. 

    All of the following regarding a trust set up for the purpose of holding commercial property, or mortgages on commercial property, are true EXCEPT

    • A.

      Gains can pass through to the owners of these shares

    • B.

      These investments could not be considered open- or closed-end funds

    • C.

      Investors may never purchase shares in these trusts on an exchange or OTC

    • D.

      Ownership of these shares may provide for the receipt of dividends

    Correct Answer
    C. Investors may never purchase shares in these trusts on an exchange or OTC
    Explanation
    A trust set up for the purpose of holding commercial property or mortgages on commercial property can be purchased by investors on an exchange or over-the-counter (OTC). Therefore, the statement "investors may never purchase shares in these trusts on an exchange or OTC" is not true.

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  • 42. 

    Which of the following regarding established customers of a broker-dealer and the purchase of penny stocks are TRUE?
    1. They are exempt from the suitability statement requirement.
    2. They are not exempt from suitability statement requirement.
    3. They are exempt from the disclosure rules.
    4. They are not exempt from the disclosure rules

    • A.

      1 & 4

    • B.

      1 & 3

    • C.

      2 & 4

    • D.

      2 & 3

    Correct Answer
    A. 1 & 4
    Explanation
    Established customers of a broker-dealer are exempt from the suitability statement requirement and are exempt from the disclosure rules.

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  • 43. 

    A shareholder owns preferred shares that allow for the possibility of receiving more than the stated dividend. This type of preferred share would be known as

    • A.

      Participating

    • B.

      Callable

    • C.

      Convertible

    • D.

      Adjustable

    Correct Answer
    A. Participating
    Explanation
    A shareholder who owns participating preferred shares has the opportunity to receive additional dividends beyond the stated dividend. This means that if the company performs well and generates higher profits, the shareholder will receive a share of those additional profits. This type of preferred share is known as participating because it allows the shareholder to participate in the company's success and potentially earn more than the stated dividend.

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  • 44. 

    A preemptive right for existing shareholders is best described as

    • A.

      The right to purchase shares in an amount that would keep a shareholder's proportionate ownership in the corporation unchanged when a company issues additional shares

    • B.

      The right for the board of directors to preempt existing shareholders from purchasing additional shares so that they may be used for paying stock dividends by the corporation

    • C.

      The right for the board of directors to preempt existing shareholders and only allow them to purchase the newly issued additional shares after the board has purchased the shares they want

    • D.

      the right that allows new investors to purchase shares before existing shareholders when a company issues additional shares    

    Correct Answer
    A. The right to purchase shares in an amount that would keep a shareholder's proportionate ownership in the corporation unchanged when a company issues additional shares
    Explanation
    A preemptive right for existing shareholders means that they have the right to purchase additional shares in order to maintain their proportionate ownership in the corporation. This means that when a company issues additional shares, existing shareholders have the opportunity to purchase enough shares to keep their ownership percentage the same. This ensures that existing shareholders are not diluted by the issuance of new shares and helps protect their investment in the company.

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  • 45. 

    The risk that all or a significant portion of the sum invested might be lost is known as

    • A.

      Market risk

    • B.

      Call risk

    • C.

      Purchasing power risk

    • D.

      Capital risk

    Correct Answer
    D. Capital risk
    Explanation
    Capital risk refers to the risk of losing all or a significant portion of the sum invested. This risk arises from the possibility of the investment losing value or becoming worthless. It is different from other risks such as market risk, which refers to the risk of fluctuations in the overall market, or call risk, which refers to the risk of a bond being called back by the issuer. Purchasing power risk, on the other hand, refers to the risk of inflation eroding the value of money. Therefore, the correct answer for the given question is capital risk.

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  • 46. 

    A luxury tax that consumers must pay that is levied on nonessential items of a certain value or more is an example of

    • A.

      Political risk

    • B.

      Legislative risk

    • C.

      Consumer risk

    • D.

      Regulatory risk

    Correct Answer
    B. Legislative risk
    Explanation
    A luxury tax that consumers must pay that is levied on nonessential items of a certain value or more is an example of legislative risk. This is because the imposition of such a tax is dependent on the passing of legislation by the government. The risk arises from the uncertainty of whether the legislation will be passed and how it may impact consumers and businesses.

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  • 47. 

    The risk that changes in the overall economy will have an adverse effect on individual securities regardless of the company's circumstances is known as

    • A.

      Investment risk

    • B.

      Securities risk

    • C.

      Nonsystematic risk

    • D.

      Systematic risk

    Correct Answer
    D. Systematic risk
    Explanation
    Systematic risk refers to the risk that is inherent in the overall economy and affects all securities in the market, regardless of the specific circumstances of individual companies. This type of risk cannot be diversified away and is caused by factors such as interest rate changes, inflation, political instability, or economic recessions. It is important for investors to consider systematic risk when making investment decisions as it can have a significant impact on the performance of their portfolios.

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  • 48. 

    All of the following are examples of legislative risk EXCEPT

    • A.

      Changes made to the tax code regarding income tax

    • B.

      A luxury tax imposed on high-priced amenities such as automobiles or yachts

    • C.

      A law that would either allow or eliminate a tax deduction

    • D.

      An environmental regulation enacted to require certain precautions be taken

    Correct Answer
    D. An environmental regulation enacted to require certain precautions be taken
    Explanation
    Legislative risk refers to the potential negative impact on an organization's operations or profitability due to changes in legislation or regulations. The examples given in the question are all related to legislative risk, except for "an environmental regulation enacted to require certain precautions be taken." This option does not involve changes in taxation or laws that directly affect business operations or profitability. Instead, it focuses on environmental regulations that aim to protect the environment and ensure safety measures are taken. Therefore, it does not fall under the category of legislative risk.

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  • 49. 

    There are several types of investment risks that will generally fall into 2 categories. These categories are known as

    • A.

      High return and low return

    • B.

      Averse and nonaverse

    • C.

      Systematic and nonsystematic

    • D.

      Investment and investor

    Correct Answer
    A. High return and low return
    Explanation
    The correct answer is "systematic and nonsystematic." These are the two categories of investment risks. Systematic risk refers to risks that affect the entire market or a specific sector, such as economic downturns or political instability. Nonsystematic risk, on the other hand, is specific to an individual investment and can be mitigated through diversification. High return and low return, aversive and nonaversive, and investment and investor are not accurate categories of investment risks.

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  • 50. 

    Which of the following statements regarding systematic risk as it relates to an investment portfolio is TRUE?

    • A.

      Diversification can be used to eliminate it completely

    • B.

      Diversification cannot mitigate it to any extent

    • C.

      Diversification will not eliminate it.

    • D.

      Diversification ensures that portfolios are not subject to it.

    Correct Answer
    C. Diversification will not eliminate it.
    Explanation
    Diversification is a risk management strategy that involves spreading investments across different assets to reduce the impact of any one investment's performance on the overall portfolio. However, systematic risk, also known as market risk, cannot be eliminated through diversification. Systematic risk refers to risks that affect the entire market or a specific sector, such as economic downturns, political events, or natural disasters. These factors are beyond the control of individual investors and cannot be diversified away. Therefore, the statement that diversification will not eliminate systematic risk is true.

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Quiz Review Timeline +

Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Sep 06, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Jun 03, 2019
    Quiz Created by
    SIE Qualifying
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