Series 65 – Uniform Investment Adviser Law Exam Investment Vehicle Characteristics 3 — Questions and Answers
Question 1: What is a convertible bond?
- A bond that can be exchanged for a fixed number of shares of the issuer's common stock (Correct answer)
- A bond whose interest rate converts from fixed to floating
- A bond that can be exchanged for a different bond
- A bond that converts to cash at a premium at maturity
Correct answer: A bond that can be exchanged for a fixed number of shares of the issuer's common stock
Convertible bonds give the bondholder the right to convert the bond into a predetermined number of common shares, offering upside participation if the stock rises.
Question 2: What is duration in the context of fixed income securities?
- The number of years until a bond matures
- A measure of a bond's price sensitivity to interest rate changes (Correct answer)
- The length of time a bond pays interest
- The average time between coupon payments
Correct answer: A measure of a bond's price sensitivity to interest rate changes
Duration measures the weighted average time to receive a bond's cash flows and is used to estimate how much a bond's price will change when interest rates move.
Question 3: Which type of mutual fund charges a fee when shares are purchased?
- No-load fund
- Front-end load fund (Correct answer)
- Back-end load fund
- 12b-1 fund
Correct answer: Front-end load fund
A front-end load fund charges a sales commission at the time of purchase, reducing the amount of money actually invested.
Question 4: What is a closed-end fund?
- A mutual fund that stops accepting new investors after a set date
- An investment company that issues a fixed number of shares that trade on an exchange at market prices (Correct answer)
- A fund that only invests in closed companies
- A fund with a fixed investment term and guaranteed return
Correct answer: An investment company that issues a fixed number of shares that trade on an exchange at market prices
Closed-end funds issue a fixed number of shares through an IPO and trade on exchanges like stocks, with prices determined by market supply and demand rather than NAV.
Question 5: What distinguishes an accredited investor under U.S. securities laws?
- An investor who has passed the Series 65 exam
- An individual with income exceeding $200,000 annually or net worth over $1 million excluding primary residence (Correct answer)
- An investor who has traded securities for more than five years
- An investor with a brokerage account valued over $500,000
Correct answer: An individual with income exceeding $200,000 annually or net worth over $1 million excluding primary residence
Under SEC rules, an accredited investor must meet income ($200,000 individual or $300,000 joint) or net worth thresholds ($1 million excluding primary residence), allowing access to certain private offerings.
Question 6: What is a put option?
- The right to buy a security at a specified price before expiration
- The right to sell a security at a specified price before expiration (Correct answer)
- An obligation to buy a security at the current market price
- A bond that gives the issuer the right to repay early
Correct answer: The right to sell a security at a specified price before expiration
A put option gives the holder the right, but not the obligation, to sell an underlying security at the strike price before or at expiration.
Series 65 – Uniform Investment Adviser Law Exam Investment Vehicle Characteristics 3
What is a convertible bond?