NASAA Series 66 Uniform Combined State Law ExaminationInvestment Vehicle CharacteristicsEasy
A client is looking to invest in a security that provides a fixed income stream and a return of principal at maturity. They are particularly interested in a security issued by a corporation to finance its operations. Which of the following best describes this investment?
- APreferred Stock
- BMunicipal Bond
- CCommon Stock
- DCorporate Bond
Show answer & explanationAnswer & explanation
Correct answer: D. Corporate Bond
A corporate bond is a debt security issued by a corporation to raise capital, promising to pay a fixed interest rate (income stream) and return the principal at a specified maturity date.
Why the other options are wrong
- A. Preferred stock pays a fixed dividend but represents equity, not debt, and typically has no maturity date.
- B. A municipal bond is issued by state or local governments, not corporations.
- C. Common stock represents ownership, pays variable dividends (if any), and has no maturity date or return of principal guarantee.
Corporate Bond
A debt security issued by a corporation to raise capital, promising to pay interest periodically and return the principal amount at a future date.
- Represents a loan to the corporation.
- Pays fixed or variable interest (coupon payments).
- Has a specific maturity date.
- Holders are creditors, not owners.
Memory trick: Debt is due, equity is ownership too.