IAR Investment Vehicles 2

Question 1

Which characteristic distinguishes a closed-end fund from an open-end mutual fund?

Accepted Answer

Closed-end funds issue a fixed number of shares traded on exchanges

Answer

Closed-end funds issue a fixed number of shares at IPO and trade on exchanges at market prices that may differ from NAV.

Question 2

A real estate investment trust (REIT) must distribute at least what percentage of its taxable income to shareholders to maintain its tax status?

Accepted Answer

90%

Answer

REITs must distribute at least 90% of their taxable income annually to shareholders to qualify for pass-through tax treatment.

Question 3

An investor holds a zero-coupon bond purchased at $600 that matures in 5 years at $1,000. How is the annual accreted interest treated for federal tax purposes?

Accepted Answer

Taxed as ordinary income each year even though no cash is received

Answer

Zero-coupon bond holders must recognize phantom income (OID) as ordinary income each year even though no cash coupon is paid.

Question 4

Which type of preferred stock allows unpaid dividends to accumulate and be paid before common stock dividends?

Accepted Answer

Cumulative preferred

Answer

Cumulative preferred stock requires that any missed dividends accumulate and must be paid in full before common shareholders receive any dividends.

Question 5

A structured note whose return is linked to the S&P 500 index with principal protection at maturity is best described as a:

Accepted Answer

Principal-protected note

Answer

A principal-protected note guarantees return of the invested principal at maturity while linking upside potential to an underlying index.

IAR Practice Test

IAR Practice Test

IAR Investment Vehicles 2