Series 65 – Uniform Investment Adviser Law Exam Investment Vehicle Characteristics 1 — Questions and Answers
Question 1: What is a characteristic unique to preferred stock compared to common stock?
- Preferred stockholders have voting rights
- Preferred stockholders receive dividends before common stockholders (Correct answer)
- Preferred stockholders benefit more from capital appreciation
- Preferred stockholders can convert shares to bonds
Correct answer: Preferred stockholders receive dividends before common stockholders
Preferred stockholders have priority over common stockholders in receiving dividends and in asset distribution during liquidation.
Question 2: Which type of bond is backed by the full faith and credit of the U.S. government?
- Municipal bonds
- Corporate bonds
- U.S. Treasury bonds (Correct answer)
- Agency bonds
Correct answer: U.S. Treasury bonds
U.S. Treasury bonds are direct obligations of the federal government and are backed by the full faith and credit of the United States.
Question 3: What is the primary tax advantage of municipal bonds for U.S. investors?
- Capital gains are exempt from all taxes
- Interest income is generally exempt from federal income tax (Correct answer)
- Dividends are tax-deferred
- All income is exempt from state and local taxes
Correct answer: Interest income is generally exempt from federal income tax
Interest earned on most municipal bonds is exempt from federal income tax, and often exempt from state and local taxes in the issuing state.
Question 4: Which of the following describes a zero-coupon bond?
- A bond that pays variable interest semiannually
- A bond issued at a discount that pays no periodic interest but pays face value at maturity (Correct answer)
- A bond whose interest rate adjusts with inflation
- A bond convertible into common stock
Correct answer: A bond issued at a discount that pays no periodic interest but pays face value at maturity
Zero-coupon bonds are sold at a deep discount, pay no periodic interest, and return the full face value at maturity.
Question 5: What is a real estate investment trust (REIT)?
- A private equity fund that buys and sells real estate
- A company that owns income-producing real estate and passes at least 90% of taxable income to shareholders (Correct answer)
- A government program to subsidize real estate development
- A mutual fund that invests only in real estate stocks
Correct answer: A company that owns income-producing real estate and passes at least 90% of taxable income to shareholders
REITs must distribute at least 90% of their taxable income to shareholders as dividends, providing investors with real estate exposure and regular income.
Question 6: What distinguishes an exchange-traded fund (ETF) from a traditional mutual fund?
- ETFs are actively managed; mutual funds are passive
- ETFs trade on exchanges throughout the day like stocks; mutual funds price only at end of day (Correct answer)
- ETFs have no management fees; mutual funds do
- ETFs can only hold stocks; mutual funds can hold bonds
Correct answer: ETFs trade on exchanges throughout the day like stocks; mutual funds price only at end of day
ETFs trade continuously on stock exchanges during market hours, while mutual fund shares are priced and transacted only at the end-of-day net asset value.
