Uniform Securities Agent State Law (Series 63) Practice Exam

What is a characteristic of a guaranteed security?

1. A security guaranteed for the payment of interest only

2. A security guaranteed for the payment of principal only

3. A security guaranteed for the payment of principal, interest, or dividends

4. A security guaranteed by a third-party issuer

The correct answer is: A security guaranteed for the payment of principal, interest, or dividends

A guaranteed security is characterized by the provision of a guarantee for the payment of principal, interest, or dividends. This means that if the issuer of the security is unable to make these payments due to financial difficulties or other reasons, a third-party guarantor commits to fulfilling these obligations. This assurance of payment can provide added security for investors, as it reduces the risk associated with potential default by the issuer. The other options do not accurately capture the comprehensive nature of the guarantee associated with such securities. The first two options limit the guarantee to either interest or principal only, which does not reflect the broader scope of what a guaranteed security entails. The final option suggests that a security is guaranteed by a third-party issuer, which may imply that the guarantee only rests on the involvement of a third party, rather than clearly stating that it covers payments of principal, interest, or dividends, making option C the most accurate representation of a guaranteed security.