Series 65 Investment Vehicles: what to know
Short answer: “Investment Vehicle Characteristics” is 32 of the 130 scored Series 65 questions (about 25%) under NASAA's June 2023 outline. A quarter of the exam. You must know how every major product works, what it pays, how it is taxed, and which risks it carries — because suitability questions later assume this knowledge.
Independent practice questions. Not affiliated with or endorsed by NASAA or FINRA.
Core concepts
Equity securities
Common stock carries voting rights and residual claims; preferred stock pays a fixed dividend and sits ahead of common in liquidation but usually has no vote. Know cumulative vs. non-cumulative preferred, convertible preferred, ADRs (foreign shares trading in U.S. dollars, subject to currency risk), rights and warrants, and how stock splits and dividends change share price.
Debt securities
Bond prices move inversely to interest rates — this single idea drives many questions. Know coupon vs. current yield vs. yield to maturity, duration as rate sensitivity, credit ratings (investment grade is BBB-/Baa3 and above), and the product spectrum: Treasuries (state-tax-free, backed by full faith and credit), agency debt, municipal bonds (general obligation backed by taxing power vs. revenue bonds backed by project income; interest usually federally tax-free), corporate bonds, high-yield, zero-coupon (issued at discount, no reinvestment risk, but phantom income is taxed annually), and mortgage-backed securities with prepayment risk.
Pooled investments
Mutual funds: open-end, priced once daily at NAV, redeemable with the fund; classes A (front-end load, breakpoints), B (contingent deferred sales charge), and C (level load). ETFs: trade intraday like stocks, generally more tax-efficient due to in-kind redemptions. Know UITs, closed-end funds (can trade at premiums/discounts to NAV), REITs (must distribute most income; dividends mostly non-qualified), hedge funds and private placements for accredited investors, and annuities — fixed vs. variable, accumulation vs. annuitization, mortality and expense charges, and the fact that variable annuities are securities requiring registration.
Options and derivatives
Calls give the right to buy; puts the right to sell. Buying options limits loss to the premium; writing uncovered calls carries unlimited risk. Covered calls generate income in flat markets. Know intrinsic value, time value, and how investors use protective puts to hedge. Futures and commodities appear only lightly, but know they are high-risk and generally unsuitable for conservative clients.
Insurance-based and alternative products
Life insurance types (term vs. whole vs. universal vs. variable), and where each fits. Alternatives like limited partnerships and direct participation programs: illiquid, with pass-through tax treatment. The exam tests liquidity, risk, tax character, and appropriate investor for each vehicle.
Subtopics we cover
- Equity securities
- Fixed income
- Cash & money-market instruments
- Pooled investments
- Options & derivatives
- Alternative investments
- Insurance products
- Investment company rules
12 free investment vehicles practice questions
Each includes the answer and an explanation of why it is right and why the tempting alternative is wrong. Prefer to answer interactively? Take the free sets.
1.Which of the following is a characteristic of a direct participation program (DPP)?
- A. Income and losses flow through to the individual investors
- B. It is taxed as a C corporation
- C. Units are highly liquid and exchange-traded
- D. Limited partners manage day-to-day operations
Show answer and explanation
Answer: Income and losses flow through to the individual investors
A partnership-taxed direct participation program allocates income, gains, losses and deductions to partners, subject to basis, at-risk and passive-activity limits. C-corporation double taxation is a different structure; allocated drilling or depletion deductions are not automatically fully deductible by every investor.
2.Which characteristic distinguishes a closed-end investment company from an open-end fund?
- A. Shares are redeemed by the fund at NAV upon request
- B. Shares trade in the secondary market at a price set by supply and demand
- C. It may only issue common stock
- D. It must be registered under the Securities Act of 1933 while open-end funds need not be
Show answer and explanation
Answer: Shares trade in the secondary market at a price set by supply and demand
A listed closed-end fund generally trades in the secondary market at a supply-and-demand price that may differ from NAV and does not continuously redeem shares on demand. Open-end mutual fund investors instead transact with the fund at the next computed NAV, subject to applicable charges; a closed-end fund can issue additional shares, so its share count is not permanently fixed.
3.A variable annuity's separate account performance directly affects which of the following during the accumulation phase?
- A. The guaranteed minimum interest rate
- B. The value of the accumulation units
- C. The insurance company's general account reserves
- D. The mortality and expense risk fee percentage
Show answer and explanation
Answer: The value of the accumulation units
During variable-annuity accumulation, separate-account investment results affect the value of accumulation units. A fixed credited interest guarantee belongs to a different contract feature, not to the market performance of the variable subaccounts, and optional riders do not eliminate underlying investment risk.
4.Which option position produces unlimited maximum loss?
- A. Long call
- B. Long put
- C. Uncovered (naked) short call
- D. Covered call
Show answer and explanation
Answer: Uncovered (naked) short call
An uncovered call writer must deliver shares at the strike if assigned and may have to acquire them at an arbitrarily high market price. The premium limits neither that purchase cost nor the resulting loss, whereas a call buyer can lose only the premium paid.
5.Which instrument is unsecured short-term corporate debt commonly issued at a discount to finance current transactions, with maturities of 270 days or less when relying on Securities Act Section 3(a)(3), subject to its other conditions?
- A. Banker's acceptance
- B. Commercial paper
- C. Negotiable CD
- D. Repurchase agreement
Show answer and explanation
Answer: Commercial paper
Commercial paper is unsecured short-term corporate borrowing often issued at a discount to fund current operations. Securities Act section 3(a)(3) requires more than a maturity of no more than nine months, including current-transaction conditions; a banker’s acceptance instead involves a bank-accepted time draft.
6.A 12b-1 fee is BEST described as:
- A. A one-time front-end commission
- B. An annual asset-based charge for distribution and shareholder servicing expenses
- C. A redemption fee paid directly to the selling shareholder
- D. A management fee paid to the fund's custodian
Show answer and explanation
Answer: An annual asset-based charge for distribution and shareholder servicing expenses
Rule 12b-1 permits fund assets to pay distribution expenses under an approved plan, and fund fee tables may include shareholder-service fees in that category. These ongoing asset-based expenses are not a one-time front-end sales commission paid when shares are purchased.
7.A bond with a 6% coupon is purchased at a price of 80. What is the current yield?
- A. 6.00%
- B. 7.50%
- C. 4.80%
- D. 8.25%
Show answer and explanation
Answer: 7.50%
Current yield is annual coupon income divided by current market price, not par value. The 6% coupon on a bond priced at 80 therefore produces 7.5%; using 6% confuses the coupon rate with the return on the price actually paid.
8.A mutual fund has a net asset value of $9.40 and a public offering price of $10.00. The sales charge percentage is:
- A. 6.0%
- B. 6.4%
- C. 5.7%
- D. 0.6%
Show answer and explanation
Answer: 6.0%
A front-end sales charge is measured against the public offering price: ($10.00 − $9.40) / $10.00 = 6%. Dividing the charge by NAV instead produces about 6.4%, which uses the wrong denominator for the quoted sales-charge percentage.
9.In a variable annuity, the assumed interest rate (AIR) is used to:
- A. Guarantee a minimum payout for life
- B. Benchmark separate account performance in determining the value of annuity units during payout
- C. Establish the surrender charge schedule
- D. Set the maximum sales charge
Show answer and explanation
Answer: Benchmark separate account performance in determining the value of annuity units during payout
The assumed interest rate is a benchmark used to determine variable-annuity payout changes, not a promised investment return. Investment performance above the benchmark generally increases subsequent payments and performance below it decreases them; any lifetime-payment guarantee arises from the contract, not the AIR itself.
10.Preferred stock generally offers which of the following relative to common stock of the same issuer?
- A. Greater voting power and growth potential
- B. Priority in dividends and liquidation but limited appreciation potential
- C. Guaranteed dividends payable regardless of board action
- D. First claim on assets ahead of secured creditors
Show answer and explanation
Answer: Priority in dividends and liquidation but limited appreciation potential
Preferred shares generally have a stated dividend preference and rank ahead of common shares for dividends and liquidation distributions. That preference does not put them ahead of creditors or make dividends unconditional debt obligations; common shares generally offer more voting power and residual growth potential.
11.Which of the following bonds would have the GREATEST price volatility for a given change in interest rates?
- A. 5-year, 8% coupon
- B. 20-year, 3% coupon
- C. 20-year, 9% coupon
- D. 2-year zero coupon
Show answer and explanation
Answer: 20-year, 3% coupon
For otherwise comparable option-free bonds, longer maturity and lower coupon generally increase duration and interest-rate sensitivity. A shorter-maturity bond is less sensitive, while a lower coupon at the same maturity increases rather than reduces price volatility.
12.Under a legacy mutual fund share-class schedule, which class has no front-end load, a declining contingent deferred sales charge, and eventual conversion to Class A?
- A. Class A
- B. Class B
- C. Class C
- D. Institutional
Show answer and explanation
Answer: Class B
Under the legacy Class B structure, the contingent deferred sales charge generally declines with the holding period and the shares later convert under the prospectus terms. Class A generally uses a front-end load instead; this historical fee description does not establish current availability or suitability.