Stock Broker Investment Products & Securities Types 1 — Questions and Answers
Question 1: Which type of bond is backed by the full faith and credit of the US government and is considered the safest fixed-income investment?
- Municipal bonds
- Corporate bonds
- US Treasury bonds (Correct answer)
- Agency bonds
Correct answer: US Treasury bonds
US Treasury bonds are backed by the full faith and credit of the US federal government and are considered the benchmark risk-free investment in the US.
Question 2: What is a convertible bond?
- A bond that adjusts its interest rate with inflation
- A bond that can be exchanged for a set number of the issuer's common shares (Correct answer)
- A bond issued in foreign currency
- A bond with no fixed maturity date
Correct answer: A bond that can be exchanged for a set number of the issuer's common shares
A convertible bond is a debt instrument that gives the holder the option to convert it into a predetermined number of the issuer's common shares at a specified price.
Question 3: Which type of preferred stock allows unpaid dividends to accumulate and must be paid before common stock dividends?
- Participating preferred
- Cumulative preferred (Correct answer)
- Callable preferred
- Convertible preferred
Correct answer: Cumulative preferred
Cumulative preferred stock requires that any missed dividend payments accumulate and must be paid in full to preferred shareholders before common shareholders receive any dividends.
Question 4: What is the primary characteristic of a zero-coupon bond?
- It pays interest monthly
- It is issued at a discount and pays no periodic interest, returning face value at maturity (Correct answer)
- It adjusts interest payments based on the prime rate
- It can be called before maturity at par
Correct answer: It is issued at a discount and pays no periodic interest, returning face value at maturity
Zero-coupon bonds are issued at a significant discount to their face value and pay no periodic interest; the investor's return comes entirely from the appreciation to face value at maturity.
Question 5: An ETF (Exchange-Traded Fund) differs from a mutual fund primarily because ETFs:
- Can only hold bonds
- Trade on exchanges throughout the day like stocks (Correct answer)
- Are exempt from SEC registration
- Have no expense ratios
Correct answer: Trade on exchanges throughout the day like stocks
Unlike mutual funds that price once daily after market close, ETFs trade continuously on stock exchanges throughout the trading day at market-determined prices.
Question 6: Which of the following is a characteristic of a 'callable' bond?
- The holder can demand early repayment
- The issuer can redeem the bond before maturity at a specified price (Correct answer)
- The bond adjusts its coupon based on market rates
- The bond converts to stock automatically
Correct answer: The issuer can redeem the bond before maturity at a specified price
A callable bond gives the issuer (not the investor) the right to redeem the bond before its maturity date, typically at a premium to par value, usually when interest rates fall.
Stock Broker Investment Products & Securities Types 1
Which type of bond is backed by the full faith and credit of the US government and is considered the safest fixed-income investment?