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Question 1 of 10
1. Question
Which of the following statements is true regarding municipal bonds?
Correct
Municipal bonds
There are three main types of municipal bonds, categorized according to the way that the bond repayments can be financed:
• General obligation (GO) bonds are the first type. These are issued to pay for improvements that benefit a community, but don’t produce income. They are also known as “full faith and credit issues,” because they are repaid from tax revenue raised by the issuing government entity.
• Revenue bonds are issued by governments to finance projects and facilities that are expected to generate enough revenue to pay bondholders back without resorting to tax money.
• Double-barreled bonds are revenue bonds that also have the backing of the taxing authority. They are considered GO bonds, even though they depend primarily on revenue generated from the project for repayment.Incorrect
Municipal bonds
There are three main types of municipal bonds, categorized according to the way that the bond repayments can be financed:
• General obligation (GO) bonds are the first type. These are issued to pay for improvements that benefit a community, but don’t produce income. They are also known as “full faith and credit issues,” because they are repaid from tax revenue raised by the issuing government entity.
• Revenue bonds are issued by governments to finance projects and facilities that are expected to generate enough revenue to pay bondholders back without resorting to tax money.
• Double-barreled bonds are revenue bonds that also have the backing of the taxing authority. They are considered GO bonds, even though they depend primarily on revenue generated from the project for repayment. -
Question 2 of 10
2. Question
Which of the following statements is true regarding taxation?
Correct
Taxation
Gains from investments on municipal bonds are ordinarily not taxed. Taxable municipal bonds can be issued if the purpose of the bond revenue has no clear public benefit, but most municipal bonds are tax-exempt. This means not only that coupon payments are not taxed, but also that gains from original issue discount (OID) bonds are tax-exempt as well. Accretion on the discount of municipal OID bonds is treated as tax-exempt interest income. Discounts on municipal bonds purchased in the secondary market are not even accreted.
These are the only bonds whose discounts are not accreted.Incorrect
Taxation
Gains from investments on municipal bonds are ordinarily not taxed. Taxable municipal bonds can be issued if the purpose of the bond revenue has no clear public benefit, but most municipal bonds are tax-exempt. This means not only that coupon payments are not taxed, but also that gains from original issue discount (OID) bonds are tax-exempt as well. Accretion on the discount of municipal OID bonds is treated as tax-exempt interest income. Discounts on municipal bonds purchased in the secondary market are not even accreted.
These are the only bonds whose discounts are not accreted. -
Question 3 of 10
3. Question
Which of the following statements is false regarding equity securities?
Correct
Equity securities
Equity securities, most commonly referred to as stocks, are sold as individual shares of a company. Each share represents a certain percentage of ownership in a company. They are issued by the company and sold at an initial offering and on the secondary market thereafter, wherein investors determine the value of the shares in a bid/ask manner. Shares of stocks provide the holders with certain rights regarding the management of the company, such as voting on new board members. Stocks have historically provided the most return to investors. They are highly recommended for growth in an account, but they are also volatile, and loss of capital is possible.Incorrect
Equity securities
Equity securities, most commonly referred to as stocks, are sold as individual shares of a company. Each share represents a certain percentage of ownership in a company. They are issued by the company and sold at an initial offering and on the secondary market thereafter, wherein investors determine the value of the shares in a bid/ask manner. Shares of stocks provide the holders with certain rights regarding the management of the company, such as voting on new board members. Stocks have historically provided the most return to investors. They are highly recommended for growth in an account, but they are also volatile, and loss of capital is possible. -
Question 4 of 10
4. Question
Which of the following statements is true regarding Common stock?
Correct
Common stock
Common stock is an equity security representative of shares of ownership in a company. They are tradable securities that are fairly liquid if there is enough demand for the stock of the company. Common stockholders benefit from ownership by having input on the operation of the company, such as voting rights on membership on the board. Board voting rights are only afforded to common stockholders, not preferred stockholders. Common stock tends to be the most volatile of all securities, with high gains or losses possible intraday.Incorrect
Common stock
Common stock is an equity security representative of shares of ownership in a company. They are tradable securities that are fairly liquid if there is enough demand for the stock of the company. Common stockholders benefit from ownership by having input on the operation of the company, such as voting rights on membership on the board. Board voting rights are only afforded to common stockholders, not preferred stockholders. Common stock tends to be the most volatile of all securities, with high gains or losses possible intraday. -
Question 5 of 10
5. Question
Which of the following statements is true regarding preferred stock?
Correct
Preferred stock
Preferred stock is an equity security representative of shares of ownership in a company. They are tradable securities that are fairly liquid if there is enough demand for the stock of the company. Preferred stocks tend to pay a higher dividend than those received from common stock but do not appreciate as quickly as common stock. Investors seeking current income with exposure to equity growth find this trait appealing. Preferred stockholders also must receive their dividends before common stockholders. These dividends are usually (though not always) guaranteed.Incorrect
Preferred stock
Preferred stock is an equity security representative of shares of ownership in a company. They are tradable securities that are fairly liquid if there is enough demand for the stock of the company. Preferred stocks tend to pay a higher dividend than those received from common stock but do not appreciate as quickly as common stock. Investors seeking current income with exposure to equity growth find this trait appealing. Preferred stockholders also must receive their dividends before common stockholders. These dividends are usually (though not always) guaranteed. -
Question 6 of 10
6. Question
Which of the following statements is false regarding preferred stock?
Correct
Preferred stock
Preferred stockholders also must receive their dividends before common stockholders. These dividends are usually (though not always) guaranteed. Preferred stock tends to be less volatile than common stock, and while this results in slower growth, it also lends to less loss in a down market. Preferred stockholders do not have voting rights in a company’s decision-making process. If a company were to be liquidated, preferred stockholders receive assets before common stockholders but after unsecured debt holders, making them second from the bottom on the list.Incorrect
Preferred stock
Preferred stockholders also must receive their dividends before common stockholders. These dividends are usually (though not always) guaranteed. Preferred stock tends to be less volatile than common stock, and while this results in slower growth, it also lends to less loss in a down market. Preferred stockholders do not have voting rights in a company’s decision-making process. If a company were to be liquidated, preferred stockholders receive assets before common stockholders but after unsecured debt holders, making them second from the bottom on the list. -
Question 7 of 10
7. Question
Which of the following statements is true regarding convertible preferred stock?
Correct
Convertible preferred stock
Convertible preferred stock is similar to preferred stock, but it differs in that it may be converted to common stock after a certain time given to the investor at purchase. As the price of preferred stock is usually higher than common stock, a single preferred share will usually convert to multiple common shares. If not all of the value of the preferred share is converted to common stock, the remaining value is referred to as the conversion premium. Special risks to consider are the ability of some companies to force conversion when the investor does not desire conversion.Incorrect
Convertible preferred stock
Convertible preferred stock is similar to preferred stock, but it differs in that it may be converted to common stock after a certain time given to the investor at purchase. As the price of preferred stock is usually higher than common stock, a single preferred share will usually convert to multiple common shares. If not all of the value of the preferred share is converted to common stock, the remaining value is referred to as the conversion premium. Special risks to consider are the ability of some companies to force conversion when the investor does not desire conversion. -
Question 8 of 10
8. Question
Which of the following statements is true regarding resale restrictions on equity securities?
Correct
Resale restrictions on equity securities
Equity securities can have different restrictions on their resale or transference which then classify the securities as restricted stock (also called Section 1244 stock or letter stock). These restrictions especially apply to executives or other insider employees of a company who would receive stock as compensation but who would not be able to sell the stock given the harms such early selling could bring to the company’s stock value. Accordingly, restricted stock can often be on a vesting schedule, such that an employee would fail to retain the stock if he departed from the company before it was fully vested. Resale restrictions on stocks are regulated by the SEC and not merely by private agreements between publicly-traded companies and their insider employees.Incorrect
Resale restrictions on equity securities
Equity securities can have different restrictions on their resale or transference which then classify the securities as restricted stock (also called Section 1244 stock or letter stock). These restrictions especially apply to executives or other insider employees of a company who would receive stock as compensation but who would not be able to sell the stock given the harms such early selling could bring to the company’s stock value. Accordingly, restricted stock can often be on a vesting schedule, such that an employee would fail to retain the stock if he departed from the company before it was fully vested. Resale restrictions on stocks are regulated by the SEC and not merely by private agreements between publicly-traded companies and their insider employees. -
Question 9 of 10
9. Question
Which of the following statements is true regarding Warrants?
Correct
Warrants
Warrants are derivative securities that allow the investor to buy securities directly from the issuer at a given price within a defined period of time. Warrants are usually included at no additional charge with a new issue of debt instruments to entice investors to buy the investment. In this case, warrants are referred to as sweeteners. Warrants differ from call options in that they originate from the issuing company, and calls are sold by other investors. Warrants also tend to have longer periods until expiration than options, usually measured in years instead of the months common to options. Investors benefit from warrants in several ways.Incorrect
Warrants
Warrants are derivative securities that allow the investor to buy securities directly from the issuer at a given price within a defined period of time. Warrants are usually included at no additional charge with a new issue of debt instruments to entice investors to buy the investment. In this case, warrants are referred to as sweeteners. Warrants differ from call options in that they originate from the issuing company, and calls are sold by other investors. Warrants also tend to have longer periods until expiration than options, usually measured in years instead of the months common to options. Investors benefit from warrants in several ways. -
Question 10 of 10
10. Question
Which of the following statements is true regarding American depositary receipts?
Correct
American depositary receipts
American depositary receipts, or ADRs, are tradable certificates representing shares of stock traded on foreign exchanges. For ADRs to be traded on stock exchanges in the United States, they must be sponsored by a United State bank. To facilitate trade on American exchanges, ADRs use United State dollars as their native denomination. ADRs have several intrinsic benefits of which investors may take advantage. ADRs effectively bypass duties imposed on such transactions and the administrative costs related thereto if the same security had been purchased on a foreign exchange. Additionally, investors benefit by taking part in investing in foreign ventures while receiving gains and dividends in United States currency.Incorrect
American depositary receipts
American depositary receipts, or ADRs, are tradable certificates representing shares of stock traded on foreign exchanges. For ADRs to be traded on stock exchanges in the United States, they must be sponsored by a United State bank. To facilitate trade on American exchanges, ADRs use United State dollars as their native denomination. ADRs have several intrinsic benefits of which investors may take advantage. ADRs effectively bypass duties imposed on such transactions and the administrative costs related thereto if the same security had been purchased on a foreign exchange. Additionally, investors benefit by taking part in investing in foreign ventures while receiving gains and dividends in United States currency.