Section 2 Quiz

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.

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.

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.

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.

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.

Money market instruments are short-term debt investments that mature in 12 months or less.

All three terms refer to the same thing: the nominal value of a bond, which is typically $1,000.

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.

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.

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.

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.

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.

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 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.

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.

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.

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.

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).

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.

The first two answers both describe what happens when an issuer decides to redeem a callable bond.

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.

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.

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.

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%.

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.