Investment Investment Vehicles and Instruments 2 — Questions and Answers
Question 1: What is a preferred stock?
- A stock that always increases in value
- A class of stock that pays fixed dividends and has priority over common stock in liquidation (Correct answer)
- A stock purchased by company executives only
- A government-guaranteed equity investment
Correct answer: A class of stock that pays fixed dividends and has priority over common stock in liquidation
Preferred stock pays fixed dividends and has priority over common stockholders in the event of a company liquidation, but typically lacks voting rights.
Question 2: What is a call option?
- The right to sell a stock at a specified price before expiration
- The right to buy a stock at a specified price before expiration (Correct answer)
- A guaranteed purchase agreement for a commodity
- A type of margin call from a broker
Correct answer: The right to buy a stock at a specified price before expiration
A call option gives the holder the right, but not the obligation, to buy a specified asset at a predetermined strike price before or on the expiration date.
Question 3: What is a Treasury Inflation-Protected Security (TIPS)?
- A bond whose principal adjusts with inflation to protect purchasing power (Correct answer)
- A stock guaranteed not to lose value
- A savings account with a fixed rate above inflation
- A government subsidy for investors
Correct answer: A bond whose principal adjusts with inflation to protect purchasing power
TIPS are U.S. Treasury securities whose principal value adjusts based on changes in the Consumer Price Index, protecting investors from inflation erosion.
Question 4: Which investment vehicle allows you to invest in commodities like gold without physically owning the metal?
- Corporate bonds
- Commodity ETFs (Correct answer)
- Municipal bonds
- Certificates of deposit
Correct answer: Commodity ETFs
Commodity ETFs track the price of commodities such as gold, silver, or oil, allowing investors to gain exposure without storing the physical commodity.
Question 5: What is a closed-end fund?
- A mutual fund that stops accepting new investors after a set date
- A fund that issues a fixed number of shares through an IPO and trades on an exchange (Correct answer)
- A fund restricted to retirement accounts only
- A bond fund that matures on a specific date
Correct answer: A fund that issues a fixed number of shares through an IPO and trades on an exchange
A closed-end fund raises capital through an IPO, issuing a fixed number of shares that then trade on a stock exchange at market-determined prices.
Question 6: What does 'shorting a stock' mean?
- Buying a stock and holding it for less than one year
- Borrowing shares to sell them now, hoping to buy them back at a lower price later (Correct answer)
- Purchasing fractional shares of a company
- Selling shares immediately after buying them at a higher price
Correct answer: Borrowing shares to sell them now, hoping to buy them back at a lower price later
Shorting a stock involves borrowing shares from a broker, selling them at the current price, and hoping to repurchase them at a lower price to return to the lender and pocket the difference.
Investment Investment Vehicles and Instruments 2
What is a preferred stock?