Stock Broker Investment Products & Securities Types 2 — Questions and Answers
Question 1: What is a Real Estate Investment Trust (REIT) and how must it distribute income to maintain its tax-advantaged status?
- A private fund that reinvests all earnings
- A publicly traded company that must distribute at least 90% of taxable income to shareholders (Correct answer)
- A government bond tied to real estate prices
- A savings account backed by mortgage securities
Correct answer: A publicly traded company that must distribute at least 90% of taxable income to shareholders
A REIT is a company that owns income-producing real estate and must distribute at least 90% of its taxable income to shareholders as dividends to maintain its special tax status.
Question 2: Which type of annuity provides a guaranteed fixed payment amount throughout the payout period?
- Variable annuity
- Fixed annuity (Correct answer)
- Indexed annuity
- Immediate variable annuity
Correct answer: Fixed annuity
A fixed annuity guarantees a set, predetermined payment amount during the distribution phase, providing predictable income regardless of market performance.
Question 3: What is a money market instrument, and which of the following is an example?
- A long-term bond; US Treasury 30-year bond
- A short-term debt security; Treasury bills (T-bills) (Correct answer)
- A stock derivative; put option
- A real estate fund; REIT
Correct answer: A short-term debt security; Treasury bills (T-bills)
Money market instruments are short-term debt securities with maturities under one year, and Treasury bills are the classic example, issued by the US government with maturities up to 52 weeks.
Question 4: An American Depositary Receipt (ADR) allows US investors to do which of the following?
- Invest in US companies on foreign exchanges
- Invest in foreign company shares traded on US exchanges in US dollars (Correct answer)
- Avoid paying taxes on foreign dividends
- Trade futures contracts on foreign currencies
Correct answer: Invest in foreign company shares traded on US exchanges in US dollars
ADRs are certificates issued by US banks representing shares in foreign companies, allowing US investors to buy foreign equities on US exchanges and in US dollars without dealing with foreign markets directly.
Question 5: Which type of option gives the holder the right, but not the obligation, to SELL shares at a specified strike price?
- Call option
- Put option (Correct answer)
- Covered option
- Naked option
Correct answer: Put option
A put option gives the holder the right (not obligation) to sell the underlying security at the strike price before or at expiration, profiting when the underlying price falls.
Question 6: What is a municipal bond, and what is its primary tax advantage for investors?
- A corporate bond; deductible interest
- A bond issued by state/local governments; interest is generally exempt from federal income tax (Correct answer)
- A US Treasury bond; exempt from state taxes only
- A foreign government bond; no US taxes
Correct answer: A bond issued by state/local governments; interest is generally exempt from federal income tax
Municipal bonds are debt securities issued by state and local governments, and the interest income is generally exempt from federal income tax (and often state/local taxes if the investor resides in the issuing state).
Stock Broker Investment Products & Securities Types 2
What is a Real Estate Investment Trust (REIT) and how must it distribute income to maintain its tax-advantaged status?