Series 66 Investment Vehicle Characteristics Practice Questions

Correct answer: C. An equity REIT primarily owns and operates income-producing real property, earning rental income, while a mortgage REIT primarily originates or purchases mortgages or mortgage-backed securities, earning interest income

Equity REITs generate revenue by owning and operating physical properties (rental and lease income plus property appreciation), whereas mortgage REITs generate revenue from interest on mortgage loans and mortgage-backed securities they originate or hold, making them more directly sensitive to interest rate movements. Both REIT types are subject to the same 90% distribution requirement.

• A. Mortgage REITs are, if anything, especially sensitive to interest rate risk since their income and funding costs depend on rates and spreads — they are not immune to it.
• B. This mischaracterizes both — equity REITs primarily own and operate real property, and mortgage REITs hold mortgages and mortgage-backed securities, not just Treasury and agency debt.
• C. Correct: equity REITs own and operate income-producing property, earning rental income, while mortgage REITs primarily hold or originate mortgages/MBS, earning interest income.
• D. The 90% distribution requirement applies to REITs generally (to maintain pass-through tax status), so equity REITs aren't exempt from it, and REIT income isn't taxed at the entity level when distributed.

Correct answer: D. Closed-end fund shares trade on the secondary market at prices that may differ from net asset value

A closed-end fund issues a fixed number of shares in an initial offering and then trades on an exchange or over-the-counter, where its market price is set by supply and demand and can trade at a premium or discount to NAV. Open-end funds, by contrast, continuously issue and redeem shares directly with the fund at NAV, which is the opposite of what choices A and B describe.

• A. Closed-end funds are actually permitted to use leverage (e.g., through borrowing or preferred shares) more readily than open-end funds.
• B. This describes open-end fund pricing; closed-end fund shares trade at market-determined prices that can deviate from NAV.
• C. Continuous share issuance describes open-end funds; closed-end funds issue a fixed number of shares in their initial offering.
• D. Correct. Closed-end fund shares trade on the secondary market at prices set by supply and demand, which may be above or below NAV.

Correct answer: C. Exempt from federal income tax, and potentially exempt from that state's income tax for residents of the issuing state

Interest on most municipal bonds is exempt from federal income tax. If the investor resides in the state (or in some cases locality) that issued the bond, the interest is often also exempt from that state's income tax, making it 'double tax-exempt' for in-state residents.

• A. Incorrect - the federal exemption is available to individual investors generally, not limited to institutions.
• B. Incorrect - this describes taxable bonds (e.g., corporate bonds), not municipal bonds.
• C. Correct - this reflects the standard federal (and often state, for residents) tax-exempt treatment of municipal bond interest.
• D. Incorrect - this reverses the treatment; municipal interest is generally federally exempt, not state-only exempt.

Correct answer: C. $3,800

The put writer's loss is greatest if the stock falls to zero, when the writer must buy at $40 a share worth nothing. The loss is $40 less the $2 premium collected, or $38 x 100 shares = $3,800.

• A. Wrong: this is the maximum gain, the premium received.
• B. Wrong: this ignores the premium that offsets part of the loss.
• C. Correct: ($40 - $2) x 100 = $3,800.
• D. Wrong: this adds the premium instead of subtracting it.