1.1 Securities Market and Money Market Instruments

Question 1

Intermediary - Banks, Credit Unions

What type of investments and who is the ultimate users?

Answer 1

Investments: CD’s Savings Accounts, Checking Accounts.

Ultimate users: Business borrowers, car purchasers, homeowners

Question 2

Intermediary - Brokers, dealers, investment bankers, mutual funds
What type of investments and who is the ultimate users?

Answer 2

Investments: Bonds, stocks, commodities, mutual funds

Ultimate users: Businesses, entrepreneurs, investment managers, farmers

Question 3

Intermediary - Insurance Companies

What type of investments and who is the ultimate users?

Answer 3

Investments: Bonds, stocks, real estate

Ultimate users: Businesses

Question 4

Equity investments made for the launch, early development, or expansion of a business are known as

Answer 4

The answer is venture capital. Equity financing associated with the early development of a business is called venture capital. Distressed debt is distressed debt investing in the debt of companies that are in trouble or failing.

Question 5

Mezzanine financing

Answer 5

Mezzanine financing is provided for expansion and new products

Question 6

Leveraged buyout financing

Answer 6

is provided to allow management to buy all or part of a business; often used when a public company divests a division that it feels is no longer part of its long-term plans.

Question 7

Distressed debt

Answer 7

Distressed debt is distressed debt investing in the debt of companies that are in trouble or failing.

Question 8

money market deposit accounts (MMDAs)

Answer 8

MMDAs provide limited check writing privileges and are offered by banks and savings and loans. MMDAs require a minimum balance. Unlike money market mutual funds, MMDAs are FDIC insured.

Question 9

Wash Sales

Answer 9

A wash sale occurs if the taxpayer sells or exchanges stock or securities for a loss and, within 30 days before or after the date of the sale or exchange, acquires similar securities.
The wash sale rules are easily avoided in the case of fixed-income securities by substituting a bond with the same or similar characteristics as long as it is issued by a different company

Question 10

accredited investor under Rule 501 of Regulation D

Answer 10

A charitable organization, corporation, or partnership with assets exceeding $5 million
B)
A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year
C)
A director, executive officer, or general partner of the company selling the securities

Question 11

Limited partnerships

Answer 11

The general partner controls the business activities of the partnership.
The limited partners participate in the business venture with limited liability.
The general partner determines when distributions are made to the limited partners.
The limited partners may have difficulty selling their interests.

Question 12

stop limit order

Answer 12

The stop limit order turns into a limit order when triggered (both the stop order price and the limit order price are specified). However, this type of order will not guarantee execution if the stock leapfrogs past the $19.75 mark

Question 13

cash distributions of ordinary and capital gains dividend distributions to mutual fund investors is

Answer 13

The answer is they are fully taxable to the investor. Ordinary and capital gain dividend distributions are taxable. If these distributions are reinvested, the individual receives an increased tax basis. If the distributions are made in cash, there is no increase in the tax basis of the underlying securities.

Question 14

When considering the purchase of a limited partnership interest, an investor should be most concerned with

Answer 14

The answer is economic viability. Economic viability is the number one reason for the purchase of an interest in a limited partnership. Tax sheltering and loss pass-through are also considerations but should not be the primary motive to invest. Short-term trading opportunities do not exist. The investor should expect to hold the interest until the partnership is dissolved or liquidated.

Question 15

Describes the certificate of deposit investment strategy known as laddering

Answer 15

Purchasing multiple certificates of deposit (CDs), rather than just one, with equally spaced terms of maturity

Question 16

Negotiable CDs

Answer 16

deposits of $100,000 or more placed with commercial banks at a specified interest rate for a term of up to one year.

traded in the open market

Question 17

banker’s acceptances

Answer 17

short-term drafts drawn on major banks to finance imports and exports

Question 18

commercial paper

Answer 18

is a short-term, unsecured promissory note issued by large firms and offers a nominally higher yield than T-bills

Question 19

Eurodollar CD’s

Answer 19

Eurodollar-denominated deposits marinated at banks within the United States. Eurodollars are U.S. dollar-denominated deposits in banks outside the United States. The average deposit is in the millions and has a maturity of less than six months

Question 20

disadvantages of cash and cash equivalents

Answer 20

investments in money market mutual funds are not insured or guaranteed by the U.S. government.
C)
investors choosing to redeem their certificates of deposit (CDs) prior to maturity may be subject to a substantial penalty.
D)
the rate of return on passbook savings accounts is relatively low when compared to higher risk alternatives such as government bonds

Question 21

A risk-averse client, living in Iowa, holds a high proportion of his investment portfolio in cash and cash equivalents in U.S. financial institutions in dollars. The advisor should point out to the client that the portfolio is most subject to which of the following risks?

Answer 21

The answer is purchasing power risk. Although these vehicles may assist in managing liquidity risk, they do have purchasing power risk because they have limited opportunity for capital appreciation

Question 22

To be eligible for preferential dividend tax rates

Answer 22

the stock must be held for more than 60 days during the 121-day period beginning 60 days BEFORE the ex-dividend date