Knowledge Flashcards

Which of the following correctly defines 'liquidity' in the context of securities?

Answer: The ease with which a security can be converted to cash without significant price impact

Liquidity refers to how quickly and easily a security can be bought or sold in the market without causing a significant change in its price.

A callable bond gives the issuer the right to:

Answer: Redeem the bond before its maturity date

A callable bond allows the issuer to repurchase and retire the bond before its stated maturity, typically when interest rates decline.

Which of the following entities protects customers of FINRA member broker-dealers if the firm fails?

Answer: SIPC

SIPC (Securities Investor Protection Corporation) protects customers of failed broker-dealers by covering up to $500,000 in securities and cash.

An investor buys a stock for $40 and sells it after 8 months for $55. This gain is taxed as a:

Answer: Short-term capital gain

Short-term capital gains apply to assets held for one year or less (here 8 months) and are taxed at ordinary income rates.

Which term describes the difference between the bid and ask prices of a security?

Answer: Spread

The bid-ask spread is the difference between the price a buyer will pay (bid) and the price a seller will accept (ask).

Which of the following is considered an equity security?

Answer: Common stock

Common stock represents ownership (equity) in a corporation, making it an equity security as opposed to a debt security.

A customer's account statement shows a 'long' position in 100 shares of XYZ. This means the customer:

Answer: Owns 100 shares of XYZ

A long position means the investor owns the security outright and benefits if the price increases.