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NEW QUESTION # 308
An increase in interest rates has which of the following effects on a municipal bond?
Answer: D
Explanation:
When interest rates rise, existing bond prices generally fall, and this relationship applies to municipal bonds just as it does to Treasuries and corporate bonds. The reason is competitive pricing in the market: newly issued bonds come to market offering higher yields (because prevailing rates are higher). To remain attractive, older bonds with lower coupon rates must trade at discounted prices so that their yield to an investor purchasing them today rises to a competitive level. Therefore, an increase in interest rates typically causes a decrease in the market price of an existing municipal bond, making choice A correct.
Choice B is the opposite of the correct interest-rate/price relationship. Choice C and D are incorrect because the question asks about the effect on a municipal bond already issued. The bond's coupon rate (the stated interest rate on the bond) is fixed at issuance for most standard municipal bonds; market interest rates changing does not retroactively change the bond's coupon. What changes is the bond's market price and therefore its yield in the secondary market.
This concept is core SIE bond math/relationships: price and yield move inversely, and bond sensitivity to rate changes increases with longer maturities and lower coupons (i.e., more duration). Municipal bonds also carry other risks (credit, call/prepayment features, liquidity), but the direct effect of a general rise in interest rates is a market-price decline due to the need to adjust yields to current levels. The SIE outline specifically expects understanding of debt instruments and the relationship between price and interest rates.
NEW QUESTION # 309
Which of the following responses describes a common feature of a hedge fund?
Answer: A
Explanation:
Step by Step Explanation:
* Low Liquidity: Hedge funds often impose lock-up periods and restrict redemptions, leading to low liquidity for investors.
* Incorrect Options:
* B: Hedge funds typically have high minimum investment requirements, often $1 million or more.
* C: Hedge funds employ diverse strategies, not just fixed income.
* D: Hedge funds are generally opaque about their strategies and holdings to protect their competitive advantage.
References:
* SEC Investor Bulletin on Hedge Funds: SEC Hedge Funds.
NEW QUESTION # 310
When is it permissible to exercise European-style options contracts?
Answer: C
Explanation:
Step by Step Explanation:
* European-Style Options: Can only be exercised on their expiration date, unlike American-style options, which can be exercised any time before expiration.
* Incorrect Options:
* A: Not accurate; the exercise must occur specifically on the expiration date.
* C: Options cannot be exercised after expiration.
* D: The expiration date depends on the option contract, not a specific weekday.
Options Clearing Corporation (OCC) Guidelines: OCC European Options.
NEW QUESTION # 311
Which of the following responses describes treasury stock?
Answer: B
Explanation:
Treasury stock refers to shares that were issued by a company and subsequently repurchased by the company.
These shares are held in the company's treasury and are not considered outstanding.
* C is correct because treasury stock is stock reacquired by the issuer.
* A is incorrect because authorized but unissued stock has never been issued.
* B is incorrect because restricted stock refers to shares issued with restrictions on transferability, not reacquired stock.
* D is incorrect because it incorrectly refers to government securities, not corporate stock.
Reference: SIE Study Guide, Chapter 5: Corporate Securities
NEW QUESTION # 312
Which of the following statements is true of a rights offering?
Answer: D
Explanation:
A rights offering gives existing shareholders the opportunity to buy additional shares, usually at a subscription price and within a limited period. The purpose is to permit shareholders to maintain their proportionate ownership interest when the company issues additional common stock. Without rights, a new stock issuance could dilute existing shareholders' percentage ownership and voting influence. Choice C is therefore correct.
Choice A is incorrect because rights offerings relate to equity ownership, not the marketability of fixed income securities. Choice B is incorrect because rights do not transfer voting rights; they provide a purchase privilege. Choice D describes a participating preferred stock feature, not a rights offering. In the SIE framework, rights are included under equity securities, and rights offerings are also listed under corporate actions. This question tests how an equity corporate action affects existing shareholders. Rights are fundamentally anti-dilution instruments, preserving the investor's ability to keep the same ownership percentage if the investor chooses to subscribe. Reference: Section 2.1.1 Equity Securities; Section 3.1.4 Corporate Actions, rights offerings.
NEW QUESTION # 313
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