Series 65: Investment Vehicle Characteristics
UPDATED ACTUAL Exam Questions and
CORRECT Answers
Define restricted stock, and discuss the limitations placed thereon. - CORRECT ANSWER -
Restricted stock is stock that is held in a company that was not offered as part of an initial public
offering. It is considered restricted because the company and equity issue has not gone through
the vetting process as required by the Securities Exchange Commission. It is illegal to sell it to
another investor without taking the proper steps to inform the SEC of the sell and complying
with the regulations.
Define warrant as related to the securities industry, and describe its usefulness to investors. -
CORRECT ANSWER - 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. Investors
benefit from warrants in several ways. they can sell them to other investors and collect the
premium for a security in which they had no investment, or they can exercise them and buy a
well-performing security for less than market value.
Discuss the preferred stock, including its risk characteristics and place in the order of liquidation
priority. - CORRECT ANSWER - 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. They tend to pay a higher dividend than those
received from common stock but do not appreciate as quickly as common stock. Preferred
stockholders do not have voting rights in a company's decision making process. If a company
were to be liquidated, they would be second from the bottom on the list.
Discuss the characteristics of pooled investments. - CORRECT ANSWER - Pooled
investments create economies of scale which lower an individual's administrative costs and allow
for greater diversification and benefit from professional money managers. Pooled investments
spread the risk over the pool of investors. The capital gains earned on pooled funds are spread
evenly over the pool, regardless of the tenure of the participant.
Describe employee stock options, and discuss the difference in incentive plans and non qualified
plans concerning employee stock options. - CORRECT ANSWER - Employee stock options
are options to buy a security of a certain company that are given to employees of that company.
, Companies may issue employee stock options as a part of their retirement savings or as taxable
bonus compensation. These retirement incentive plans are tax deferred until redemption.
Nonqualified plans are taxable upon receipt instead of redemption.
Discuss fundamental analysis and how it is used to determine the value of equity securities. -
CORRECT ANSWER - Fundamental analysis is the method by which investors determine the
value of equity securities using data gathered from the company's financial statements. These
fundamental numbers are assessed and if they are found to be favorable, an investor will place a
high valuation on the security, perhaps higher than the current market value. This indicates to
investor that it is a good time to buy the stock.
Discuss the methods used to determine the value of pooled investments, including net asset value
and discounts versus premiums. - CORRECT ANSWER - Net asset value (NAV) refers to the
value of all underlying assets minus liabilities divided by outstanding shares. this is the most
common valuation of mutaul fund shares and usually the price point at which they trade. ETFs
have a NA because they are pooled investments based on a group of holdings, but they do not
trade at that NAV.
Describe unit investments trusts, discuss their characteristics, and describe their role in portfolio
allocation. - CORRECT ANSWER - UITs are created when investment companies that are
registered with the SEC buy a portfolio of income-producing securities and sell participation in
the portfolio to investors in the forms of shares of the trust. UITs are characterized by their lack
of management and lower fees than other similar investments. UITs are considered low-risk
investments and suitable for investors seeking current income and capital preservation.
Describe real estate investment trusts (REITs) and discuss their effect on investment portfolios. -
CORRECT ANSWER - REITs are a type of pooled investment that invests the investors'
funds in income property, or equity REITs, and mortgage loans or mortgage REITs. REITs
provide investors with access to the real estate markets while remaining liquid. Investors also
have access to investing in commercial property through REITs as well. REITs also provide
income in the form of dividends while making capital appreciation possible through the real
estate market.
Define derivative securities, review their characteristics, and discuss their role in portfolio
allocation. - CORRECT ANSWER - Derivative securities are those securities that derive their
existence based on other securities. Without the existence of the underlying security, derivatives
would not exist. Derivatives range from the ultra-risky and speculative to the ultra safe, income-
UPDATED ACTUAL Exam Questions and
CORRECT Answers
Define restricted stock, and discuss the limitations placed thereon. - CORRECT ANSWER -
Restricted stock is stock that is held in a company that was not offered as part of an initial public
offering. It is considered restricted because the company and equity issue has not gone through
the vetting process as required by the Securities Exchange Commission. It is illegal to sell it to
another investor without taking the proper steps to inform the SEC of the sell and complying
with the regulations.
Define warrant as related to the securities industry, and describe its usefulness to investors. -
CORRECT ANSWER - 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. Investors
benefit from warrants in several ways. they can sell them to other investors and collect the
premium for a security in which they had no investment, or they can exercise them and buy a
well-performing security for less than market value.
Discuss the preferred stock, including its risk characteristics and place in the order of liquidation
priority. - CORRECT ANSWER - 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. They tend to pay a higher dividend than those
received from common stock but do not appreciate as quickly as common stock. Preferred
stockholders do not have voting rights in a company's decision making process. If a company
were to be liquidated, they would be second from the bottom on the list.
Discuss the characteristics of pooled investments. - CORRECT ANSWER - Pooled
investments create economies of scale which lower an individual's administrative costs and allow
for greater diversification and benefit from professional money managers. Pooled investments
spread the risk over the pool of investors. The capital gains earned on pooled funds are spread
evenly over the pool, regardless of the tenure of the participant.
Describe employee stock options, and discuss the difference in incentive plans and non qualified
plans concerning employee stock options. - CORRECT ANSWER - Employee stock options
are options to buy a security of a certain company that are given to employees of that company.
, Companies may issue employee stock options as a part of their retirement savings or as taxable
bonus compensation. These retirement incentive plans are tax deferred until redemption.
Nonqualified plans are taxable upon receipt instead of redemption.
Discuss fundamental analysis and how it is used to determine the value of equity securities. -
CORRECT ANSWER - Fundamental analysis is the method by which investors determine the
value of equity securities using data gathered from the company's financial statements. These
fundamental numbers are assessed and if they are found to be favorable, an investor will place a
high valuation on the security, perhaps higher than the current market value. This indicates to
investor that it is a good time to buy the stock.
Discuss the methods used to determine the value of pooled investments, including net asset value
and discounts versus premiums. - CORRECT ANSWER - Net asset value (NAV) refers to the
value of all underlying assets minus liabilities divided by outstanding shares. this is the most
common valuation of mutaul fund shares and usually the price point at which they trade. ETFs
have a NA because they are pooled investments based on a group of holdings, but they do not
trade at that NAV.
Describe unit investments trusts, discuss their characteristics, and describe their role in portfolio
allocation. - CORRECT ANSWER - UITs are created when investment companies that are
registered with the SEC buy a portfolio of income-producing securities and sell participation in
the portfolio to investors in the forms of shares of the trust. UITs are characterized by their lack
of management and lower fees than other similar investments. UITs are considered low-risk
investments and suitable for investors seeking current income and capital preservation.
Describe real estate investment trusts (REITs) and discuss their effect on investment portfolios. -
CORRECT ANSWER - REITs are a type of pooled investment that invests the investors'
funds in income property, or equity REITs, and mortgage loans or mortgage REITs. REITs
provide investors with access to the real estate markets while remaining liquid. Investors also
have access to investing in commercial property through REITs as well. REITs also provide
income in the form of dividends while making capital appreciation possible through the real
estate market.
Define derivative securities, review their characteristics, and discuss their role in portfolio
allocation. - CORRECT ANSWER - Derivative securities are those securities that derive their
existence based on other securities. Without the existence of the underlying security, derivatives
would not exist. Derivatives range from the ultra-risky and speculative to the ultra safe, income-
