1. Which of the following responses best describes the primary strategy that an investor uses when selling a covered call?
A. Growth
B. Speculation
C. Profit guarantee
D. Income generation Correct
Explanation
An investor who owns shares and sells a call against them receives the premium immediately. That premium is pure income and is the main reason most people sell covered calls. Growth is limited because the shares can be called away. Speculation involves taking large risk for large reward — covered calls are conservative. Nothing in the markets is ever guaranteed.
2. Which of the following data points is necessary to calculate a dividend yield?
A. Net income
B. Current stock price Correct
C. Dividend payout ratio
D. Return on equity (ROE)
Explanation
Dividend yield is calculated by taking the annual dividend per share and dividing it by the current market price of the stock. Without the current price you cannot compute the yield. Net income is used for earnings yield. Payout ratio tells what percentage of earnings is paid out but not the yield. ROE measures profitability, not dividends.
3. Which of the following bonds are redeemable prior to the maturity date by the issuer at a specified price at or above par?
A. Callable Correct
B. Treasury
C. Escrowed
D. Convertible
Explanation
Callable bonds give the issuer the right to redeem them early, usually at par or a small premium, when interest rates fall. Regular Treasury bonds are non-callable. Escrowed (pre-refunded) bonds are effectively retired. Convertible bonds are converted by the holder into stock, not called by the issuer.
4. After years of contributing to his minor children's UTMA accounts, a customer becomes concerned that one of the children is irresponsible. The customer instructs his registered representative (RR) to transfer all the assets from this child's account to one of his other children's accounts. Which of the following actions should the RR take?
A. Explain to the customer that consolidating the accounts is not permissible Correct
B. Request that the customer sign a letter of authorization to move the account
C. Request approval from the branch office manager to complete the transaction
D. Offer to place a buy order for the securities in one account and sell in the other
Explanation
Once money is placed in an UTMA account it becomes an irrevocable gift to that specific child. The custodian cannot take it back or move it to another child. Doing so would violate the Uniform Transfers to Minors Act. All other choices attempt to move the money and are therefore illegal.
5. Which of the following Treasury instruments constitute interest-bearing obligations of the Treasury with maturities ranging from 2 to 10 years?
A. Treasury bills
B. Treasury notes Correct
C. Treasury bonds
D. Treasury Separate Trading of Registered Interest and Principal of Securities (STRIPS)
Explanation
Treasury notes are issued in 2-, 3-, 5-, 7-, and 10-year maturities and pay interest semiannually. Treasury bills are discount instruments with maturities of one year or less. Treasury bonds are 20- and 30-year issues. STRIPS are zero-coupon instruments created from notes and bonds.