Compare instead of collecting facts
Use five lenses for every product.
Claim
Equity represents ownership; debt represents a creditor claim; an option gives a contractual right or creates an obligation.
Return
Ask whether return comes from interest, dividends, market appreciation, option premium, or a combination—and whether it is fixed or variable.
Priority
In liquidation, creditors generally stand ahead of preferred and common owners. Higher priority does not mean no risk.
Market behavior
Longer fixed-rate bonds are generally more sensitive to rate changes. Options add time, volatility, and asymmetric payoff considerations.
Tax and liquidity
Tax treatment varies by instrument and investor. A quoted return is incomplete unless you also notice access, marketability, fees, and risk.
Five original questions
Make the tradeoff visible.
1. An investor expects interest rates to rise sharply. Which holding has the greatest interest-rate risk?
- A 30-year zero-coupon bond
- A 90-day Treasury bill
- A floating-rate note
- A money market fund
Answer: A. Long maturity and no interim coupon payments create high duration, making the zero-coupon bond most price-sensitive.
2. A call option buyer’s maximum possible loss is:
- Unlimited
- The strike price
- The premium paid
- The market price of the stock
Answer: C — The premium paid. The buyer may let the option expire and has a right rather than an obligation to exercise.
3. Which product is generally most appropriate for an investor seeking tax-free current income?
- Corporate debenture
- Municipal bond
- Preferred stock
- Treasury note
Answer: B — Municipal bond. Interest on most municipal bonds is exempt from federal income tax, though exceptions and state or local treatment vary.
4. Which security gives its holder a residual ownership interest and voting rights?
- Common stock
- Corporate bond
- Preferred stock in every case
- Equipment trust certificate
Answer: A — Common stock. Common stock represents residual ownership and typically includes voting rights.
5. Which statement about cumulative preferred stock is accurate?
- Missed dividends accumulate
- Its dividend must increase each year
- It always has voting rights
- It has no interest-rate sensitivity
Answer: A. Unpaid cumulative preferred dividends generally must be paid before common dividends resume.
Common confusion
Do not let one attractive feature erase the risk.
- Tax-exempt does not mean risk-free.
- A bond’s stated coupon is not its current yield or total return.
- An option buyer’s limited loss is different from an uncovered writer’s exposure.
- Preferred stock is equity even though its income can resemble fixed income.
- Diversification can reduce issuer-specific risk; it cannot eliminate broad market risk.
Sources and limits
Mapped to Section 2.
- FINRA SIE Content Outline — Sections 2.1 and 2.2.
- Investor.gov: Stocks.
- Investor.gov: Bonds.
Educational content is not a product recommendation or investment advice. Verify current exam details with FINRA.