SIE Module 8 Test Bank

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1. Which one of the following statements is correct regarding bid and ask prices?

A. Bid-ask spreads are generally smaller for more actively traded stocks.

B. The ask price is the maximum price a buyer is willing to pay for a security.

C. The bid price is usually higher than the ask price.

D. The bid and ask price is only applicable to transactions involving stocks.

2. Which one of the following investments would most likely have the largest bid-ask spread?

A. U.S. Treasury securities.

B. Investment-grade corporate bonds.

C. Foreign currencies.

D. Penny stocks.

3. Which one of the following statements is correct regarding types of securities orders?

A. With limit orders, certainty of execution is a priority over price of execution.

B. A stop-buy order is used with short sales.

C. “Fill or kill” is a term that applies to market orders.

D. Stop orders are the most commonly used type of orders.

4. Which one of the following type of securities orders would be executed regardless of the price of the security?

A. Market order.

B. Limit order.

C. Stop-limit order.

D. Stop-loss order.

5. Which of the following statements is correct regarding types of stock market orders?

A. A stop-loss order is the most common type of stock market order.

B. A stop-buy order is triggered by an increase in the price of the underlying stock.

C. Market orders can be executed immediately or as a good-’til-cancelled order.

D. Limit orders ensure a transaction because they require immediate execution at the best available price.

6. Which of the following statements is correct regarding types of stock market orders?

A. A fill-or-kill order is executable until filled or cancelled.

B. A stop-loss order activates a limit order when the market reaches the stop level.

C. Day orders can only be executed the day after the order has been placed.

D. A stop-loss order might result in a sale of the stock at a price lower than the stop-loss price.

7. WasserCo Industries stock is trading at $50 per share. Sally would like to sell her 1,000 shares of the stock immediately at market price if the share price drops to $45 per share. Which one of the following orders would be most appropriate for Sally to place to satisfy her goals?

A. Stop-loss order.

B. Market order.

C. Good-‘til-Cancelled order.

D. Stop-limit order.

8. Joey wants to sell his 100 shares of URC Company stock if the price rises to $60 or higher. Currently, the stock is trading for $50 per share. Which one of the following orders would be most appropriate for Joey to place?

A. Stop-loss order.

B. Market order.

C. Limit order.

D. Stop-limit order.

9. A client instructed her registered representative to purchase 1,000 shares of Smithco common stock at market price at whatever time the representative deems appropriate. Three weeks later, the registered representative executed a purchase order for 1,000 shares at the market price. Would this trade be considered a discretionary trade?

A. No, because trades executed at market price are never considered discretionary trades.

B. No, because the registered representative did not choose the amount of the trade or the asset.

C. Yes, because the registered representative executed the trade more than 15 days after receiving the instructions.

D. Yes, because the purchase price was not specifically communicated by the client.

10. An investment adviser that wants to exercise discretionary authority over a client’s account must receive written approval from the client within how many business days after the first trade based on oral authority?

A. 3.

B. 7.

C. 10.

D. 14.

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11. Roberto has an individual account with an investment adviser in the United States. Before leaving for a 60-day business trip in Mexico, he reached out to his adviser and instructed her to “sell any of my securities that decline in value by more than 10% while I am gone.” The adviser did not obtain a signed discretionary account agreement before Roberto left for his trip. While he was in Mexico, one of the securities in his account declined by 12%. The investment adviser should:

A. Sell the security and obtain the signed discretionary account agreement immediately after Roberto returns to the United States.

B. Contact Roberto’s wife to obtain approval to sell the security.

C. Purchase a put option in the account to protect Roberto from further downside risk.

D. Inform her direct supervisor of the situation.

12. Which of the following statements is/are correct regarding a limited trading authorization form?

I. It is also referred to as a general power of attorney.
II. It permits the holder to make decisions regarding the purchase of securities in the account.
III. It permits the holder to make decisions regarding the sale of securities in the account.
IV. It permits the withdrawal of funds from the account by the holder.

A. I and IV.

B. II and III.

C. III and IV.

D. I, II, and III.

13. Which of the following statements concerning the measurement of performance of a portfolio with interim cash flows is correct?

D. Contributions to retirement accounts, such as a traditional IRA or Roth IRA, are not considered when determining interim cash flows.

A. The receipt of interest and dividends in a portfolio is considered an interim cash flow, regardless of whether or not the interest and dividends are retained in the portfolio or distributed.

B. When calculating the geometric mean return, the sequence of returns is irrelevant when comparing two portfolios, if the actual returns are the same between the portfolios.

C. The internal rate of return on an investment is the rate of return that equates the cash flows from the investment to the net cash flows that would be received if the investor had purchased a fixed income security with similar risk.

14. Which of the following statements is correct regarding measures of return?

A. If no cash is added to or removed from a portfolio, the time-weighted and dollar-weighted rates of return will be equal.

B. If the arithmetic average of a portfolio’s rates of return is zero, the time-weighted rate of return could be positive or negative, depending on the interim cash flows.

C. The geometric mean return will always be more than the arithmetic mean return, unless each per-period return is identical.

D. When individual returns are dissimilar, the arithmetic average will understate the return.

15. Two years ago, Dave purchased an investment. The investment has provided annual rates of return of 8% and -8% respectively. What is Dave's arithmetic mean return?

A. -0.3%.

B. 0%.

C. 1.28%.

D. 11.31%.

16. Joe is about to make a business investment. He anticipates that cash flows will be uncertain for the first five years. Which technique would be the most appropriate to use to help Joe determine if he should purchase this investment?

A. Net Present Value, because when uneven cash flows are present, the net present value is the best indicator of the investment prospect.

B. Arithmetic Mean, because it represents the average return and would be the best measure in this situation.

C. Internal Rate of return, because given the fluctuating cash flows, it will give the most accurate measure of this investment.

D. Geometric Mean, because it takes compounding into consideration and would be the best measure, given the number of years of the project.

17. Tammy had an investment portfolio balance at age 60 of $2,000,000 in small cap equity securities. She retired at age 60 after working for 35 years. A retirement plan that was generated for her made the following assumptions:
• Rate of return on her investments – 7%
• Inflation – 3.3%
Based on these assumptions, she withdrew 4% annually from her portfolio during retirement. Even though small cap equity securities (as a whole) did provide a rate of return of 7%, she ran out of money at age 82. The probable reason she ran out of money is because she:

A. Underestimated inflation.

B. Used the net of tax rate of return rather than the arithmetic return.

C. Experienced higher-than-expected variability in her actual rate of return.

D. Was not eligible for Social Security benefits.

18. The yield to maturity for a bond represents:

A. The coupon payments of the bond divided by the bond’s face value.

B. An index for a bond’s price volatility and a measure that can be used for an immunization strategy.

C. The probability that the bond issue will be called by the issuer.

D. The interest rate that equates a bond’s coupon payments and face value to the current price of the bond.

19. The total rate of return a bondholder will receive on a bond if the bond is held to maturity is referred to as the:

A. Current yield.

B. Coupon rate.

C. Yield to maturity.

D. Liquidity premium.

20. Which one of the following statements is correct regarding bond investments?

A. The yield to maturity for a corporate bond is determined by the various bond rating agencies, such as Standard and Poor’s.

B. U.S. Treasury bonds have relatively low yields to maturity compared to corporate bonds because Treasury bonds have higher coupon rates.

C. Asset-backed securities may be preferable to an investor over mortgage-backed securities because asset-backed securities have shorter maturities.

D. The market price of a company’s outstanding bonds would be likely to increase if the average rate of inflation in the economy decreases.

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21. A security is purchased for $500, and later sold for $650 after paying dividends of $50. What is the holding period return?

A. 20%.

B. 30%.

C. 40%.

D. 50%.

22. Stacy purchased a bond for $900. After receiving $150 of interest over a three-year period, she sold the bond for $800. Stacy’s holding period return is:

A. -11.1%.

B. 5.56%.

C. 0.889.

D. 1.056.

23. Last year, Tommy purchased a bond for $880. The coupon rate of the bond was 9%. One year later, he sold the bond for $900. What was Tommy’s holding period return?

A. 10%.

B. 10.22%.

C. 12.23%.

D. 12.5%.

24. An individual has been investing $2,000 every quarter for the past 12 quarters into a mutual fund. He asks an investment adviser to compare his fund’s performance against the S&P 500 index. Which of the following performance measures is most appropriate?

A. Time weighted return.

B. Dollar weighted return.

C. Weighted average return.

D. Holding period return.

25. Renee is considering the purchase of an investment that has a 40% probability of returning a 30% gain, and a 60% probability of experiencing a 10% loss. What is the expected return of the investment?

A. 6%.

B. 9%.

C. 14%.

D. 20%.

26. When filling out an order to purchase or sell securities (order ticket), full disclosure must occur. Each order ticket must disclose all of the following items, EXCEPT:

A. Execution price.

B. Identity of the agent who accepted the order or is responsible for the account.

C. Description of the security.

D. Client’s name.

27. BigCompany stock is trading at $50 per share. Dolly would like to sell her 1,000 shares of the stock immediately at market price if the share price rises to $55 per share. Which one of the following orders would be most appropriate for Dolly to place to satisfy her goals?

A. Stop-loss order.

B. Market order.

C. Good ‘til Cancelled order.

D. Sell limit order.

28. A buy limit order is an order to:

A. Sell an asset at or below a specified price.

B. Purchase an asset at or below a specified price.

C. Purchase an asset at or above a specified price.

D. Sell an asset at or above a specified price.

29. A sell limit order is an order to:

A. Sell an asset at or below a specified price.

B. Purchase an asset at or below a specified price.

C. Purchase an asset at or above a specified price.

D. Sell an asset at or above a specified price.

30. Which one of the following represents an order to purchase a security at or below a specified price?

A. Market order.

B. Short sale.

C. Stop buy order.

D. Limit buy order.

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31. Mena has an investment with a net present value of zero, calculated using a required rate of return of 7.5%. As a result, the investment’s actual rate of return is:

A. Negative.

B. Greater than 7.5%.

C. Equal to 7.5%.

D. Between 0%-7.5%.

32. The information below summarizes the projected net present value (NPV) and internal rate of return (IRR) for four investment options being considered by an investor:
• Investment 1 – IRR = 5%; NPV = -$9,003
• Investment 2 – IRR = 6%; NPV = -$4,586
• Investment 3 – IRR = 7%; NPV = $0
• Investment 4 – IRR = 8%; NPV = $4,760
Based on the information above, the investor’s required rate of return is:

A. 5%.

B. 6%.

C. 7%.

D. 8%.

33. Which one of the following statements is correct regarding dividend reinvestment plans (DRIPs)?

A. They are generally available to large institutions that own at least 10,000 shares of the company’s stock.

B. Any dividends that cannot buy whole shares are paid in cash to investors.

C. Dividends used to purchase additional shares are not taxed to the investor.

D. Shares purchased with reinvested dividends are often purchased without fees or commissions being charged.

34. Which one of the following represents the correct sequence of dates related to the payment of a dividend on a publicly traded stock?

A. Date of record, payment date, declaration date, ex-dividend date.

B. Declaration date, ex-dividend date, date of record, payment date.

C. Declaration date, date of record, ex-dividend date, payment date.

D. Payment date, date of record, ex-dividend date, declaration date.

35. Tom owns an investment yielding an after-tax return of 8%. Assuming Tom is in the 35% tax bracket, the equivalent pre-tax yield would be:

A. 5.2%.

B. 12.31%.

C. 15.67%.

D. 22.86%.

36. Barry purchased stock for $20,000 last year. After receiving a dividend of $2,000, he sold the stock this year for $19,000. What is Barry’s return on this investment?

A. -15%.

B. 5%.

C. 15%.

D. 31.25%.

37. Which one of the following represents a measure of return that eliminates the distorting effects on growth rates created by inflows and outflows of cash?

A. Yield to maturity.

B. Dollar-weighted rate of return.

C. Time-weighted rate of return.

D. Internal rate of return.

38. A one-year Treasury bill is priced at 94. Assuming the Treasury bill pays 100 at maturity, what is the holding period return on the investment?

A. 6%

B. 6.2%

C. 6.38%

D. 6.76%.

39. Several years ago, Big Company issued shares of common stock with a par value of $10 per share. Yesterday, the company had a four-for-one stock split. After the stock split, the par value of the stock is:

A. $2.50.

B. $5.00.

C. $10.00.

D. $40.00.

40. Which of the following statements regarding the mechanics of paying a dividend is correct?

A. The ex-dividend date is set directly by the company’s board of directors.

B. The ex-dividend date is the last day an investor can purchase the company’s stock and still receive the next dividend.

C. A stockholder selling their stock the day after the record date and before the payment date will still receive the next dividend.

D. Firms typically increase their dividend in the last quarter of each year.

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41. Tom owns 10,000 shares of ABC Company stock. During the year, ABC Company had a capital distribution of $1 per share. Tom had a total cost basis in the stock of $7,000 before the capital distribution. Which of the following statements is correct regarding the income tax treatment to Tom of this capital distribution?

A. Tom will have a basis of $6,000 on his stock after the capital distribution.

B. Tom will be required to report a capital gain of $3,000 on his tax return.

C. Tom will receive the entire capital distribution tax free.

D. Tom will be required to report dividend income of $10,000 on his tax return.

42. All of the following statements concerning tax issues for stock investors are correct EXCEPT:

A. A stock split will not result in taxable income.

B. Upon exercise, the basis of a warrant is added to the basis of the acquired stock.

C. The holding period of a short sale will always be considered short-term.

D. The distribution of stock rights is generally non-taxable.

43. Which one of the following securities would settle on the trade date (T)?

A. Corporate stock.

B. Corporate bonds.

C. Treasury bonds.

D. Commercial paper.

44. Which one of the following securities would settle one business day after the trade date (T + 1)?

A. Corporate stock.

B. Mutual funds.

C. Bank CDs.

D. Commercial paper.

45. To be delivered in good form, stock certificates must be denominated in multiples of:

A. 50 shares.

B. 100 shares.

C. 150 shares.

D. $1,000.

46. Which one of the following represents a method of transferring stocks without a physical, printed certificate?

A. Book entry.

B. Good delivery.

C. Street entry.

D. Tender offer.

47. Which one of the following statements is correct regarding changes in ownership and control?

A. A tender offer represents the sale of part of a company in which the seller gives up all ownership in the sold portion.

B. A consolidation is the combination of two entities, after which both the buying and target entities will cease to exist.

C. A proxy contest represents an acquisition of a target corporation.

D. A spin-off involves the transfer of a portion of a business’s assets and liabilities to a newly created subsidiary of the business.

48. Which one of the following changes of ownership and control may result in the target company continuing to exist as a subsidiary of the purchasing company?

A. Consolidation.

B. Merger.

C. Spin-off.

D. Acquisition.

49. Company 1 is in the process of taking over ownership of Company 2. To facilitate the takeover, Company 1 offers to purchase the stock of Company 2 directly from the shareholders of Company 2 at a price in excess of the market value. This strategy for achieving a takeover is known as:

A. A merger.

B. A consolidation.

C. A proxy contest.

D. A tender offer.

50. Company A and Company B decided to combine their assets to take advantage of synergies between the two companies. They formed a new company, Company C.C. The assets and liabilities of both Company A and Company B were then transferred to Company C, at which time Company A and Company B ceased to exist. This strategy for achieving synergies is known as:

A. A consolidation.

B. A tender offer.

C. A merger.

D. An acquisition.

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51. Timmy purchased 100 shares of ABC Company Common stock for $10 per share three years ago. He paid a total commission of $20 at the time of purchase. The stock had a 2-for-1 stock split. Timmy then sold 50 shares for $12 per share the following day. He paid no commission on the sale. The net capital gain or loss is:

A. $80 short-term capital gain.

B. $80 long-term capital gain.

C. $345 short-term capital gain.

D. $345 long-term capital gain.

52. Agnes owns 100 shares of ABC Company common stock, which she purchased three years ago for $20 per share. The company declared a 1:2 reverse stock split. After the reverse stock split, Agnes will own:

A. 50 shares of ABC Company common stock with a cost basis of $20 per share.

B. 50 shares of ABC Company common stock with a cost basis of $40 per share.

C. 200 shares of ABC Company common stock with a cost basis of $20 per share.

D. 200 shares of ABC Company common stock with a cost basis of $40 per share.

53. Which one of the following statements is correct regarding proxy voting?

A. Proxy voting is only permitted for companies with stock trading on the New York Stock Exchange.

B. For a shareholder’s proxy vote to count, the shareholder must physically attend the company’s annual shareholder meeting.

C. Registered investment management companies may cast proxy votes on behalf of mutual fund shareholders.

D. There are two categories of votes in a proxy vote ballot: For and Against.

54. A corporate bond with a par value of $1,000 is quoted as follows:
• Bid - $97.25
• Ask - $97.50
Which one of the following statements is correct regarding the bond?

A. The bid-ask spread is $2.50.

B. The bond is a zero-coupon bond.

C. An investor could purchase the bond from a dealer for $972.50.

D. The bond is currently trading at a discount.

55. Which one of the following represents the discount rate that equates the present value of a bond’s interest and principal payments to the bond’s current market price?

A. 2.60%

B. 4.00%

C. 6.15%

D. 14.00%

56. John’s federal marginal tax rate is 35%. He is considering investing in a tax-free bond issued in his state of residence, which yields 4%. What is the taxable equivalent yield of this bond?

A. 2.60%

B. 4.00%

C. 6.15%

D. 14.00%

57. Which of the following statements is correct regarding bond yields?

A. The yield to maturity of a bond is equal to the coupon rate plus the liquidity premium.

B. The contractually stated interest rate on a corporate bond is referred to as the current yield.

C. For discount bonds, the current yield will be greater than the coupon rate of the bond.

D. For premium bonds, the yield to maturity will be greater than the current yield of the bond.

SIE Module 8 Test Bank

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