S-12 Securities Products and Markets 2 — Questions and Answers
Question 1: A preferred stock that allows unpaid dividends to accumulate before common stockholders receive any dividends is called:
- Participating preferred
- Cumulative preferred (Correct answer)
- Callable preferred
- Convertible preferred
Correct answer: Cumulative preferred
Cumulative preferred stock requires that all unpaid past dividends (arrears) be paid to preferred shareholders before common shareholders can receive any dividends.
Question 2: The spread between the bid price and ask price of a security is known as the:
- Margin
- Premium
- Bid-ask spread (Correct answer)
- Yield spread
Correct answer: Bid-ask spread
The bid-ask spread is the difference between the highest price a buyer will pay (bid) and the lowest price a seller will accept (ask), representing the market maker's compensation.
Question 3: Under the Securities Act of 1933, which type of offering is exempt from full SEC registration requirements?
- Initial public offerings
- Secondary market transactions
- Regulation D private placements (Correct answer)
- NYSE-listed securities
Correct answer: Regulation D private placements
Regulation D provides exemptions from SEC registration for private placements, which are sales to accredited investors and a limited number of sophisticated buyers without a public offering.
Question 4: A bond trading at a price below its par value is said to be trading at a:
- Premium
- Discount (Correct answer)
- Parity
- Margin
Correct answer: Discount
When a bond's market price is below its face (par) value—typically $1,000—it is trading at a discount, usually because prevailing interest rates have risen above the bond's coupon rate.
Question 5: Which index measures the performance of 500 large-cap U.S. companies and is widely used as a benchmark for the U.S. equity market?
- Dow Jones Industrial Average
- NASDAQ Composite
- S&P 500 (Correct answer)
- Russell 2000
Correct answer: S&P 500
The S&P 500 tracks 500 large-capitalization U.S. stocks selected by a committee and is considered one of the most representative benchmarks of U.S. equity market performance.
Question 6: Which of the following best describes an exchange-traded fund (ETF)?
- A fund that can only be redeemed at end-of-day NAV
- A basket of securities that trades on an exchange like a stock (Correct answer)
- A closed-end fund with a fixed number of shares priced daily
- A money market fund with daily liquidity
Correct answer: A basket of securities that trades on an exchange like a stock
ETFs are investment funds holding a basket of securities (stocks, bonds, etc.) whose shares trade intraday on a stock exchange at market prices, combining features of mutual funds and stocks.
Question 7: When an investor sells a security they do not own, borrowing it from a broker, this strategy is called:
- Buying on margin
- Short selling (Correct answer)
- Writing a covered call
- Dollar-cost averaging
Correct answer: Short selling
Short selling involves borrowing a security and selling it in the open market, with the obligation to repurchase and return it later, profiting if the price declines.
S-12 Securities Products and Markets 2
A preferred stock that allows unpaid dividends to accumulate before common stockholders receive any dividends is called: