Financial Terms

Series 65 Section 2: Investment Vehicles

Investment Vehicle Characteristics - 25% of the exam, 32 of 130 questions.

Cash equivalents, bonds and their valuation, equities, pooled funds, derivatives, alternatives, annuities and life insurance, commodities, and digital assets.

The Series 65 has 130 scored questions (plus 10 unscored), runs 180 minutes, and requires 92 correct answers to pass (70.8%). This section covers 74 of the terms in our glossary.

Sample questions

Answers and explanations are shown below each question. The study app has 32 questions for this section, with timed full-length exams.

A client holds $400,000 in CDs at a single FDIC-insured bank, all in an individual account in the client's name. How much is FDIC insured?

  1. $400,000
  2. $500,000
  3. $250,000
  4. $100,000

Answer: $250,000 — FDIC coverage is $250,000 per depositor, per insured bank, per ownership category. The other $150,000 is uninsured. $500,000 is the SIPC limit for a brokerage failure.

Commercial paper is exempt from registration under the Securities Act of 1933 when its maturity is no longer than:

  1. 90 days
  2. 270 days
  3. 1 year
  4. 2 years

Answer: 270 days — Commercial paper maturing in 270 days or less is exempt from '33 Act registration, which is why issuers keep maturities within that limit.

An investor holds TIPS in a taxable brokerage account. The inflation adjustment to principal each year is:

  1. tax-free until the bond matures
  2. taxed only at maturity as a capital gain
  3. exempt from federal tax but subject to state tax
  4. taxable as income in the year it occurs, even though it is not paid until maturity

Answer: taxable as income in the year it occurs, even though it is not paid until maturity — The annual principal increase is taxable in the year it accrues - phantom income. That is why TIPS are often held in tax-deferred accounts. Treasury interest, including TIPS, is exempt from state and local tax, not federal.

Which of the following bonds would experience the largest price change for a given change in interest rates?

  1. A 20-year zero-coupon bond
  2. A 20-year bond with a 6% coupon
  3. A 5-year zero-coupon bond
  4. A 10-year bond with an 8% coupon

Answer: A 20-year zero-coupon bond — Longer maturity and lower coupons both increase duration. A zero's duration equals its maturity, so the 20-year zero has the highest duration and the greatest price sensitivity.

Practice this section Study its terms

Terms in this section

Common Stock An ownership share in a company, with voting rights and last claim on assets. Preferred Stock Equity with a fixed dividend and priority over common, usually without votes. Bond A loan to an issuer that pays interest and returns principal at maturity. Coupon Rate The bond's stated annual interest as a percentage of par. Yield to Maturity (YTM) The total annualized return if you buy today and hold to maturity. Par Value (Face Value) The principal repaid at maturity, conventionally $1,000 per bond. Duration A bond's price sensitivity to a 1% change in interest rates. Credit Rating An agency's assessment of an issuer's likelihood of default. High-Yield (Junk) Bond A below-investment-grade bond paying more to compensate for default risk. Treasury Securities US government debt: bills, notes, and bonds. Municipal Bond State or local government debt, usually federally tax-exempt. Mutual Fund A pooled fund priced once daily at net asset value. Exchange-Traded Fund (ETF) A pooled fund that trades intraday on an exchange like a stock. Index Fund A fund that tracks a benchmark instead of trying to beat it. Expense Ratio The annual percentage of assets a fund charges to operate. Net Asset Value (NAV) A fund's per-share value: assets minus liabilities, divided by shares. Call Option The right to buy 100 shares at a set strike price before expiration. Put Option The right to sell 100 shares at a set strike price before expiration. Strike Price (Exercise Price) The fixed price at which an option can be exercised. Option Premium The price of the option contract: intrinsic value plus time value. Covered Call Selling a call against shares you already own to generate income. Futures Contract A standardized obligation to buy or sell an asset on a future date. REIT A company owning income real estate that must distribute 90% of taxable income. Annuity An insurance contract converting a premium into future income.

See all 74 terms in the glossary

Memorizing figures? The Series 65 numbers cheat sheet lists every threshold, deadline and limit in one place, and the formulas page has calculators for the math questions.

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