SIE Exam: Understanding Products & Their Risks Solved 100% Correct

What are statutory voting rights? - ANSWER-Allows the shareholder to vote one time per share for each seat on the board. If the investor owns 10 shares, she can use 10 shares to vote for position #1 and 10 shares to vote for position #2. What are cumulative voting rights? - ANSWER-Allows the shareholder to pool votes together and then allocate as desired. If the investor owns 10 shares and there are 2 open seats, she can use all 20 shares to vote for a single candidate. When are common stockholders paid in a liquidation? - ANSWER-Last What are pre-emptive rights? - ANSWER-Give investors the right to acquire additional shares to maintain a proportionate interest in a company's stock (not increase their position) when new shares are issued. This prevents dilution. Are rights and warrants traded as independent securities in the secondary market? - ANSWER-Yes Do warrants or rights remain outstanding longer? - ANSWER-Warrants Are warrants issued with intrinsic value? - ANSWER-No, they are not valuable until the stock's price increases. What is the market value of a warrant connected to? - ANSWER-The value of the underlying stock What is the exercise price of rights? - ANSWER-Below current market value What is the exercise price of warrants? - ANSWER-Above the current market value Are warrants typically issued in connection with another security in order to make that security more attractive? - ANSWER-Yes What are characteristics of penny stocks? - ANSWER-Unlisted Low-priced Risky Volatile Less liquid than blue chip stocks What happens when a dividend is issued to an ADR holder? - ANSWER-The ADR holder can receive a lower dividend than was actually declared by the foreign company. The foreign government might have withheld a % of the dividend for tax purposes. Do ADRs have call risk? - ANSWER-No, because they are common stock. What types of risk do ADRs have? - ANSWER-Currency risk and political risk Do holders of preferred stock have voting rights? - ANSWER-No, only common stock holders. What is a preferred stock dividend quoted as a percentage of? - ANSWER-As a % of par NOT as a % of the price at which the stock is currently trading What is cumulative preferred stock? - ANSWER-Entitles investors to receive dividends in arrears (i.e. entitles them to receive missed dividend payments). What types of preferred shares provide an advantage to the investor? - ANSWER-Cumulative Convertible Participating preferred What types of preferred shares provide an advantage to the issuer? - ANSWER-Callable preferred Do preferred shares that benefit the investor or issuer pay higher dividends? - ANSWER-Preferred shares that benefit the issuer Do preferred or common stock have a higher potential for appreciation/capital gains? - ANSWER-Common stock What does a transfer agent do? - ANSWER-Responsible for ensuring that investors receive the appropriate shares in a corporate event (i.e. stock split or stock dividend). What is regular way trade? - ANSWER-Settles T+2 days What is the ex-date for regular way trade? - ANSWER-The business day before the record date. What is the order of 4 dates that occur in the payment of a cash dividend? - ANSWER-DERP: 1. Declaration date 2. Ex-dividend date 3. Record date 4. Payable date In a stock split, how does the overall value of the investors' position change? - ANSWER-It does not change How do you calculate the new number of shares after a split? - ANSWER-Shares * first number / second number How do you calculate the new price after a split? - ANSWER-Price / first number * second number What risk do short-sellers have? - ANSWER-Unlimited What is the par value of a bond? - ANSWER-$1,000 What is a bond quoted at 97 worth? - ANSWER-$970 When a bond matures, what do investors receive? - ANSWER-Principal ($1000) + Semiannual Coupon Payment Is interest calculated based on bond's par value or market price? - ANSWER-Bond's par value What is the relationship between interest rates and bond prices? - ANSWER-As interest rates increase, bond prices decrease When is a bond trading at a premium? - ANSWER-Market value > par value When is a bond trading at a discount? - ANSWER-Market value < par value As a bond reaches maturity, what does the price move towards? - ANSWER-Towards the par value When will an issuer call a bond? - ANSWER-When interest rates are declining What happens if an issuer calls a bond? - ANSWER-The bondholder receives final semiannual coupon payment + call premium Does a call feature benefit the issuer or investor? - ANSWER-Issuer When would investors exercise a put feature? - ANSWER-When interest rates increase When is a bond's yield to call calculated? - ANSWER-Using the first date on which the issuer could call the bond In terms of yields, what happens when a bond is trading at a premium? - ANSWER-YTC < YTM < CY < NY In terms of yields, what happens when a bond is training at a discount? - ANSWER-YTC > YTM > CY > NY If an investor buys a bond with a YTM > coupon, was the bond purchased at a discount or premium? - ANSWER-Discount Are long-term bonds more or less volatile than short-term bonds? - ANSWER-More volatile Are low-coupon bonds more or less volatile than high-coupon bonds? - ANSWER-More volatile Do zero-coupon bonds have reinvestment rate risk? - ANSWER-No because they don't pay a coupon, so there is no interest to reinvest What risks are US government securities susceptible to? - ANSWER-Interest rate and inflationary risk NOT default risk What does trading flat mean? - ANSWER-A bond is not trading with accrued interest. What are examples of when a bond would trade flat? - ANSWER-1. Settlement date = interest payment date 2. Settlement date = dated date 3. Bond was in default 4. Zero-coupon bond What is the term debenture bond synonymous with? - ANSWER-Unsecured corporate debt Do convertible bonds or nonconvertible bonds pay a higher coupon rate? - ANSWER-Nonconvertible bonds What are convertible bonds? - ANSWER-Bonds that can be exchanged for a fixed number of shares of the issuer's common stock. Do convertible bonds trade more like equities or bonds? - ANSWER-More like equities When is the price of a convertible bond most volatile? - ANSWER-During STABLE interest rates What are non-marketable debt securities? - ANSWER-US Savings Bonds Cannot be resold by investors (i.e. no secondary market) Which are more affected by interest rates: treasury bonds, T-notes, or T-bills? - ANSWER-Treasury bonds because of their longer maturity Do STRIPS have reinvestment rate risk? - ANSWER-No, because they do not pay a coupon Do any of the following pay coupons: T-notes, T-bonds, T-bills, T-receipts? - ANSWER-Notes & Bonds: Pay coupons Bills & Receipts: No coupons How are T-bills quoted? - ANSWER-On a discount yield basis What are agency securities, also known as mortgage-backed securities (MBS)? - ANSWER-Ginnie Mae, Fannie Mae, Freddie Mac How do MBS pay interest? - ANSWER-Monthly -- this differs from other US securities which pay semiannually Which type of MBS is backed by the full faith and credit of the US government? - ANSWER-Ginnie Mae (GNMA) What do collateralized mortgage obligations (CMOs) consist of? - ANSWER-Tranches What are asset-backed securities? - ANSWER-Permit securitization of financial assets (i.e. student loans, auto loans, equipment leases), not hard assets (i.e. equipment) What are general obligation bonds (GO bonds) backed by? - ANSWER-The full taxing power of the issuing municipality Are revenue bonds municipal bonds or corporate debt? - ANSWER-Municipal bonds Would a revenue bond be issued to build a public high school? - ANSWER-No, only private-sector projects Do municipal bonds pay tax-exempt interest? - ANSWER-Yes What is the taxation of municipal bonds? - ANSWER-Interest paid is exempt from taxes, but capital gains isn't Who are tax-free municipal bonds most suitable for? - ANSWER-Higher tax bracket individuals (since interest is tax-free) Not beneficial for retirement accounts or pension funds, that have income-tax sheltering What are industrial development revenue bonds backed by? - ANSWER-Lease payments made by the corporation to the municipality Does the debt generated by the industrial development revenue bonds affect the credit quality of a corporation? - ANSWER-Yes What should investors subject to the alternative minimum tax (AMT) avoid? - ANSWER-Private activity bonds What types of US securities can trade in money market? - ANSWER-Treasury bills T-notes and T-bonds with 1 year or less to maturity What is a money market instrument that is used to finance and facilitate international trade? - ANSWER-Banker's acceptance How often must financial reports be sent to mutual fund holders? - ANSWER-Semiannually What is the greatest expense of any mutual fund management company? - ANSWER-Management fee In a mutual fund, what do investors pay tax on? - ANSWER-Net investment income (dividends + interest income + net capital gains) What NAV do money markets aim to maintain? - ANSWER-A stable NAV of $1.00 per share What is the taxation for municipal bond funds? - ANSWER-Dividend distributions = tax-free Capital gains distributions = taxable Who are index funds most appropriate for? - ANSWER-Investors seeking to invest in mutual funds that charge lower fees When a mutual fund pays a distribution, what happens? - ANSWER-The NAV decreases by the amount of the distribution What is forward pricing in relation to mutual funds? - ANSWER-The price investors pay for mutual funds is based on the next day's closing price NAV Are mutual fund shares redeemable? - ANSWER-Yes, they are sold back to the fund. There is no secondary market for them. How is a mutual fund sales load expressed? - ANSWER-% of Public Offering Price NOT a % of NAV