Understanding Products and their Risks (Blue Cards)

Question 1

Which are examples of riders on variable-annuity contracts?

l. A cost-of-living adjustment
ll. A lump-sum payment of principal
III. A positive covenant
IV. A negative covenant

A) I and II
B) III and IV
C) I and III
D) II and IV

Answer 1

A:

Cost-of-living adjustments adjust the payments to assure the investor is receiving payments to cover their cost of living, usually
adjusted by an inflationary index. Lump-sum payments assure the principal will be returned in its entirety. Disability riders assure payment should the owner of the annuity become ill, positive and negative covenants apply to bonds, not annuities.

Question 2

What’s the spread between a 10-year Treasury bond yielding 4.8% and a Treasury note yielding 4.2%?

A) 4.4%

B) 0.6%

C) 1.14%

D) 1.0%

Answer 2

B:

The spread between two bonds is the difference between their yields: 4.8% - 4.2% = 0.6%

Question 3

The ratings provided by the major rating agencies are intended to reflect which of the following?

A) The issuer’s ability to pay the interest and principal

B) The value of a bond

C) The price of a bond

D) The prepayment risk of a bond

Answer 3

A:

A bond rating reflects the issuer’s ability to pay interest and principal on its outstanding debt. The rating has nothing to do with a bond’s value, price, or prepayment risk.

Question 4

What are American Depositary Receipts (ADRs)?

A) Shares of US companies sold on foreign stock markets

B) Deposits similar to CDs

C) Shares of foreign companies purchased in the US without having to go through foreign stock exchanges

D) Stock receipts allowing for the purchase of additional shares

Answer 4

C:

American Depositary Receipts (ADRs) are shares of foreign companies purchased in the US without having to go through a foreign stock exchange.

Question 5

Which of the following is true of a money market fund?

A) Money market funds must be mainly invested in short-term securities with a maturity not exceeding 120 days.

B) Money market funds are not insured by the Federal Deposit Insurance (FDIC).

C) Money market funds cannot have a maturity of more than 12 months.

D) Money funds are guaranteed to maintain a net asset of a dollar.

Answer 5

B:

Money market funds are not insured by the FDIC. Also, there is no guarantee that they will maintain a net asset value of a dollar;
therefore, choice D is incorrect. They must be mainly invested in short-term securities with an average maturity of no greater than 90 days, rather than 120 days. The maturity cannot be more than 13 months, instead of 12 months; thus, choice C is incorrect.

Question 6

Which category below is NOT a common stockholder right?

A) The right to inspect a corporation’s financial records, systems, and bookkeeping

B) The right to evaluate the assets of a corporation

C) The right to call and reissue shares at a specified price

D) The right to receive an equal share of dividends (i.e., pro rata dividends)

Answer 6

C:

The right to call and reissue shares at a specified price is a company’s right when issuing a callable bond. It is not a common stockholder
right.

Question 7

What is the primary difference between closed-end mutual funds and open-ended ones?

A) Closed-end funds are limited to 10 investors.

B) Closed-end funds do not raise or accept new capital contributions after their IPO.

C) Closed-end funds invest in fixed-income securities, while open-ended mutual funds only invest in stocks and ETFs.

D) Closed-end funds have a different tax treatment of their dividends and returns of capital.

Answer 7

B:

A closed-end fund is closed because no more capital can be contributed to the fund after its initial public offering. The investments inside the fund are not rolled over and the
profits, losses, and capital will be returned to investors after expiration. This lack of liquidity allows for it to be traded below NAV if demand wanes. Closed-end funds are not restricted in their number of investors or whether they must only buy fixed-income securities.

Question 8

If an asset is not sold quickly and requires a significant
reduction in price to be sold, which of the following types of risk occurs?

A) Credit risk

B) Liquidity risk

C) Prepayment risk

D) Price risk

Answer 8

B:

This situation poses a liquidity risk. If an asset requires a significant reduction in price to be sold, the asset or security is said
to be illiquid. Credit risk refers to the risk that a borrower cannot pay the interest or principal on debt. Prepayment risk is the risk that a loan will be paid back before its scheduled maturity. Price risk is the risk incurred when a security is purchased that fluctuates in value.

Question 9

What type of security is typically assumed to have no credit
risk (i.e., the probability that the full principal will not be repaid is 0%)?

A) Municipal bonds

B) Asset-backed securities

C) Corporate bonds

D) Treasury bonds

Answer 9

D:

Municipal bonds may not have principal paid in full if there isn’t a significant tax base in that municipality. Asset-backed securities have credit risk because borrowers may stop
paying their loans. Corporate bonds have credit risk because companies can go bankrupt and not have enough assets to pay back all of their creditors if liquidated. Treasury bonds are usually assumed to have zero credit risk since they’re
backed by the full faith of the US government.

Question 10

Which of the following are examples of political risk?

l. New laws forcing a company to change strategies.
ll. A currency fluctuates in value.
III. A regulator requires banks to change the way they market loans to customers.
IV. A CEO launders money from the company.

A) I, II, and III

B) III and IV

C) I and III

D) II and IV

Answer 10

C:

The introduction of laws and regulations poses a political risk outside of the course of normal business. Currency fluctuations are simply currency risks that investors incur when they invest internationally. The risk of a CEO
laundering money is a business risk.

Question 11

By holding cash, an investor increases and decreases
their exposure, respectively, to which of the following risks?

A) Reinvestment risk and currency risk

B) Currency risk and default risk

C) Credit risk and capital risk

D) Inflation risk and capital risk

Answer 11

D:

By holding cash, investors expose themselves to the risk that inflation will erode the purchasing power of their cash. They have no exposure to capital risk because cash carries no risk of losing its principal value.

Question 12

Who usually has the final say on decisions regarding an asset or investment?

A) Brokers

B) Owners

C) Beneficiaries

D) Traders

Answer 12

B:

Choice B is correct because the legal owner of an asset or investment has the final say on decisions regarding their property. Brokers (Choice A) only act as intermediaries between owners and beneficiaries. Beneficiaries (Choice
C) can be owners and beneficiaries from an asset or
investment, but beneficiary status does not grant rights regarding decision-making Traders (Choice D) may end up becoming owners as they trade assets, but trader status does not grant rights regarding decision-making.

Question 13

Which organization guarantees all listed options?

A) Financial Industry Regulatory Authority (FINRA)

B) Securities Exchange Commission (SEC)

C) Options Clearing Corporation (OCC)

D) Chicago Board Options Exchange (CBOE)

Answer 13

C:

The OCC guarantees all options traded on registered American exchanges, known as listed options. Choice A is incorrect because FINRA does not guarantee listed options, though it does regulate options. Choice B is incorrect
because the SEC does not guarantee listed options, though it has overall responsibility for oversight of domestic exchange activity. Choice D is incorrect because the CBOE does not guarantee listed options.

Question 14

Which of the following is an advantage of Real Estate Investment Trust as opposed to traditional real estate ownership?

A) More immediate capital gain

B) Greater control over property

C) Assets have easier liquidity

D) Exemption from property tax

Answer 14

C:

Investing in a REIT is easier for buying/selling shares on the market than owning property. Choice A is incorrect because the immediacy of capital gains is determined by market conditions and property location. Choice B is incorrect because REIT investors do not manage their investment property. Choice D is incorrect because REIT investors pay property tax; a REIT must distribute a majority of its
taxable income to shareholders.

Question 15

Investing in gold, oil, and natural gas is indicative of which
form of alternative investment?

A) Hedge fund investing

B) Private equity investing

C) Venture capital investing

D) Commodity investing

Answer 15

D:

Commodity investing is making investments in concrete, physical assets such as gold, oil, and natural gas. Choice A is
incorrect because hedge funds can invest in physical assets, but they are defined by their wide variety of investment strategies, so they are not the focus of hedge funds. Choices B and C, private equity investing and commodity investing, focus more on investing in businesses and companies than physical assets.

Question 16

Which statement about college savings plans is correct?

A) Contributions to college savings plans are tax-deductible.

B) Investments grow tax-deferred.

C) College savings plans always have a large selection of investments.

D) Income from investments is typically tax-exempt at the State level and taxable at the federal level.

Answer 16

B:

Choice B is correct because college savings plans grow tax-deferred. Choice A is incorrect because contributions to college savings plans are made with after-tax dollars.
Choice C is incorrect because some college savings plans offer a choice from a limited number of investments. Choice D is incorrect because college savings plans are tax-exempt at the federal level. At the state level, they may or may not be tax-exempt.

Question 17

In the event that a company is liquidated, which individuals would be last in line to receive financial value?

A) Senior bondholders

B) Holders of subordinated debentures

C) Preferred stockholders

D) Common shareholders

Answer 17

D:

In the event of liquidation, common shareholders would receive financial value after all other stakeholders. Choice A would be in line after debtors with collateral loans and before holders of subordinated debentures (also known
as junior securities). Choice B, also known as holders of junior securities, would be after senior bondholders and before stockholders. Choice C would be after all debtors but before common shareholders.

Question 18

Which statement about derivatives is correct?

A) Common stock is a derivative.

B) Stock index options are not derivatives.

C) A derivative’s market value is equal to its intrinsic value.

D) Their value is based on an underlying security.

Answer 18

D:

A derivative gets its market value from the market value of its underlying security. Choice A is incorrect because common stock receives its market value from the perceived value of the issuing company. Choice B is incorrect because a stock index option is a derivative. It receives its value from the current value of an index. Choice C is incorrect because a derivative’s value is intrinsic value plus time value.

Question 19

How can someone mitigate purchasing power risk in their investment strategies?

A) Investing in high-risk stocks with high potential returns

B) Diversifying their portfolio with assets that hedge against inflation

C) Getting extended warranties for products that they purchase

D) Avoiding any form of investment altogether

Answer 19

B:

Purchasing power risk is another term for inflation risk, which refers to the risk of one’s money decreasing in value over time due to inflation. Hedging against inflation is the
best way to mitigate risk. Choice A is a risky way to invest. Choice C is incorrect because purchasing warranties on products has no bearing on inflation risk. Choice D is incorrect because choosing not to invest is not an investment strategy.

Question 20

Which type of risk arises from fluctuations in the exchange
rates of foreign markets?

A) Market risk

B) Political risk

C) Inflationary risk

D) Currency risk

Answer 20

D:

Currency risk is the risk of financial loss from changing exchange rates between currencies. Choice A is incorrect because it refers to the risk Of investing in financial markets.
Choice B is incorrect because it refers to risk related ta changes in government/political situations in foreign countries. Choice C is incorrect because it refers to money’s declining purchasing power from rising prices within a
domestic economy.

Question 21

Which of the following risks is most relevant for a bond investor with a long-term investment horizon?

A) Liquidity risk

B) Inflation risk

C) Prepayment risk

D) Credit risk

Answer 21

B:

Inflation risk is the risk that inflation will erode the purchasing power of the income from a bond investment. Choice A is for investors who may need to sell their bonds before maturity and may have difficulty finding buyers; Choice C is for investors in mortgage-backed securities,
where the borrower may prepay the principal before maturity; and Choice D is for investors in lower-rated bonds where the risk of default is higher.

Question 22

Which risk is associated with an investment declining in value due to fluctuations in the value of a currency?

A) Call risk

B) Capital risk

C) Credit risk

D) Currency risk

Answer 22

D:

Currency risk is the risk that an investment’s value will decline from fluctuations in the exchange rate between the
Investor’s currency and the currency in which the investment is denominated. Choice A refers to the risk that a bond will be called before its maturity date; Choice B refers to the risk of losing money on an investment; and Choice C is the risk that the borrower will default on a loan or other obligation.

Question 23

Which of the following is the Federal Open Market
Committee (FOMC) responsible for?

A) Issuing various debt securities across the Yield Curve for its ongoing needs

B) Investing in common stock

C) Guaranteeing bonds with the full faith and credit of the US government

D) Conducting open market operations - buying and selling securities in the open market by a central bank

Answer 23

D:

The Federal Open Market Committee (FOMC) is a committee within the Federal Reserve System responsible for setting and implementing monetary policy in the United States, primarily through the open market operations of the Federal Reserve Bank of New York, including the buying and selling of securities.

Question 24

How do American Depositary Receipts (ADRs) help citizens invest in foreign companies?

A) By enabling the purchase of shares of foreign companies in the US market

B) By eliminating currency risk associated with investments in foreign companies.

C) By offering higher dividend rates than domestic stocks

D) By providing tax advantages for international investors

Answer 24

A:

American Depositary Receipts (ADRs) are a type of security issued by LIS banks and traded on US stock exchanges that represent ownership in shares of a foreign company.
Additionally, ADRs are subject to the same regulations and disclosure requirements as US securities, which can provide greater transparency and protection for investors.

Question 25

An investor wants to reduce risk in their investment strategy. Which of the following is the most effective
method for them to achieve this goal?

A) Market timing

B) Investing in only one industry

C) Diversification

D) Focusing on high-yield investments

Answer 25

C:

Diversification involves spreading investments across a wide range of assets, sectors, and geographical locations, this
mitigates the impact of any single investment
underperforming. Market timing is risky and involves trying to predict when to enter/exit the market based on current or predicted market conditions. Concentrating investments in a single industry and high-yield investments exposes the
investor to significant risks.

Question 26

An investor who primarily focuses on capital preservation is likely to invest in which of the following asset classes?

A) High-yield corporate bonds

B) Growth stocks

C) Government bonds

D) Commodities

Answer 26

C:

An investor who primarily focuses on capital preservation is generally risk-averse and seeks to preserve their initial investment. Therefore, they are likely to invest in asset
classes that are less volatile and have lower risk, such as government bonds. Choices A, B, and D are incorrect because they are all more risky and volatile than government bonds.

Question 27

What is the primary function of the Federal Open Market Committee (FOMC)?

A) Managing the sale and purchase of government securities

B) Controlling the money supply through open market
operations

C) Determining mortgage interest rates

D) Supervising the issuance of new stocks and bonds

Answer 27

B:

The Federal Open Market Committee (FOMC) sets monetary policy in the United States by controlling the money supply through open market operations. This involves influencing
the availability and cost of money and credit to promote economic growth and stability. The FOMC does not directly manage the sale and purchase of government securities, determine mortgage interest rates, or supervise the issuance of new stocks and bonds.

Question 28

Which of the following financial instruments is issued by a bank, trades on a securities exchange similarly to stocks and ETFs, and tracks an underlying index without directly owning the assets?

A) Mutual Funds

B) Exchange-traded Funds (ETFs)

C) Exchange-traded Notes (ETNs)

D) Closed-end Funds

Answer 28

C:

Exchange-traded Notes (ETNs) are financial instruments issued by a bank that tracks an underlying index but does not directly own the assets. They trade on securities exchanges similarly to stocks and ETFs. Choice A and Choice D are investment vehicles that hold a portfolio of assets, making them different from ETNs. Choice B does track an underlying index, but they directly own the assets in the fund.

Question 29

A company has total assets of $1,000,000 and liabilities of
$600,000, with 20,000 outstanding shares. What is the net asset value (NAV) per share?

A) $20

B) $25

C) $30

D) $40

Answer 29

A:

To calculate the net asset value (NAV) per share, first find the difference between the total assets and liabilities. The company has $1,000,000 in assets and $600,000 in liabilities,
which gives us a total equity value of $400,000 ($1,000,000 - $600,000). Next, divide the total equity value by the number of outstanding shares. There are 20,000 outstanding shares, so the NAV per share is $400,000 / 20,000 ($20 per share).

Question 30

Which investment strategy seeks to minimize the effects
of market fluctuations by regularly investing a predetermined dollar amount in a specific investment?

A) Value investing

B) Dividend reinvestment

C) Dollar-cost averaging

D) Momentum investing

Answer 30

C:

Dollar-cost averaging involves consistently investing a predetermined dollar amount in a specific investment, regardless of market fluctuations, minimizing the impact
of market volatility by spreading out the investments over time. Choice A focuses on buying undervalued stocks. Choice B involves reinvesting dividends co purchase more shares. Choice D relies on following market trends and
buying stocks with a strong performance.

Question 31

Which of the following investment vehicles is known for providing trading flexibility, low expense ratios,
diversification, and tax efficiency?

A) Actively managed mutual funds

B) Exchange-traded funds (ETFs)

C) Closed-end funds

D) Real estate investment trusts (REITs)

Answer 31

B:

Exchange-traded funds (ETFs) provide trading flexibility as they can be bought and sold throughout the trading day, unlike mutual funds, as mutual funds are priced once
a day. They generally have lower expense ratios compared to Choice A due to their passive management style. ETFs offer diversification as they can be comprised of a broad range of assets and are tax-efficient due to their unique creation and redemption process.

Question 32

Which business entity offers the benefits of pass-through taxation, similar to a partnership, and the limited
liability protection of a corporation?

A) Sole Proprietorship

B) S Corporation

C) C Corporation

D) Limited Liability Company (LLC)

Answer 32

D:

A limited Liability Company (LLC) offers the benefits of pass-through taxation and the limited liability protection of a corporation. Choice A, a sole proprietorship, does not
provide limited liability protection; Choice B, an S Corporation, has pass-through taxation but with specific restrictions and requirements; and Choice C, a C Corporation, does not have pass-through taxation as it is taxed as a separate legal entity.

Question 33

When constructing a diversified investment portfolio, which
of the following is NOT typically considered an asset class?

A) Stocks

B) Bonds

C) Real estate

D) Life insurance policies

Answer 33

D:

A diversified investment portfolio typically consists of various asset classes, such as stocks, bonds, and real estate, which help spread out the risk and potentially increase returns by investing in different types of investments.