AD BANKER SIE CHAPTER 5

Which of the following education accounts allows plan owners to lock-in current tuition prices for the future?

529 prepaid tuition plans 529 prepaid tuition plans promise to keep pace with the tuition of in-state public colleges. They allow plan owners to lock-in today's tuition prices for the future. There is no risk to the principal amount invested. With 529 savings plans, the investor places any chosen amount(s) into the plan and the account value will fluctuate based on the performance of the investments. While this is a tax efficient way to save for college, the 529 savings plan does not lock in future tuition prices. The Coverdell education savings account is another way to save for education purposes in a tax-efficient manner, and investors can contribute up to $2,000 per year into this type of account. 501(c)3 are tax-exempt organizations, not education savings plans.

Which of the following statements is true when describing variable annuity charges and expenses?

A contingent deferred sales charge may be imposed when an investor withdraws money during the accumulation period Most annuities impose a contingent deferred sales charge (CDSC) when an investor withdraws money during the accumulations period. A CDSC normally declines, and will eventually be eliminated, the longer the contract is held. Variable annuity sales charges, if applicable, are deducted before the premium is invested into the separate account. There is no specific maximum allowable sales charge set by FINRA. Mortality and expense risk are fixed fees the insurance company charges to cover lifetime income and other operating expenses. Management fees are separately charged in each of the subaccounts and are the same as an investment adviser's fee in a mutual fund. These fees will vary depending on the various subaccount options within the annuity.

A parent has invested $100,000 into a 529 plan for their child. If the money is withdrawn and not used for higher education, what are the tax consequences?

All earnings are taxed as ordinary income plus a 10% penalty on the taxable portion Withdrawals from a 529 plan that are not used for qualified education expenses are subject to ordinary income tax on the earnings, as well as a 10% penalty on those earnings. The child receiving a scholarship would be an exception to the 10% penalty, but earnings are still subject to ordinary income taxes.

Which of the following is not a factor when determining the initial payment upon annuitization of an annuity contract?

Annuitant's health The calculation of the initial payment on a variable annuity that has been annuitized will be based on the principal balance of the contract, annuitant's age, payout option selected, and assumed interest rate used in the calculation. The annuitant's health is not a factor in this calculation.

All the following statements regarding the taxation of contributions to 529 plans are true, except:

Contributions are federally tax deductible to the donor Contributions to 529 plans are not federally tax deductible. Although not required, many investors select their home state plan to capture additional state tax advantages as many states offer state income tax deductions or credits for contributions. A tax benefit is offered by 529 plans that allows an individual to give a lump sum into a Section 529 plan that is equal to 5 years' worth of contributions, or $80,000, per donor ($160,000 for those filing jointly) without incurring a gift tax. The donor would not be able to give to the same beneficiary for 5 years without gift tax ramifications.

All the following are potential drawbacks of investing in a hedge fund versus a mutual fund, except?

Hedge fund managers use advanced investment strategies and tactics to protect against downside market risk Hedge funds are investments that resemble mutual funds but are typically only offered to sophisticated investors. These funds may engage in aggressive financial strategies, such as short selling (selling something you don't own), the use of leverage (borrowed money), arbitrage (simultaneously buying and selling two related securities), or extreme concentration of the portfolios assets in one sector or asset class. Hedge funds are not registered with the SEC. Hedge funds are not suitable for the novice investor. These investments often carry higher fees and lack liquidity when compared with traditional mutual funds.

LGIPs that are offered by broker-dealers are:

Investment pools available to local government entities that permit investment of public funds Local government investment pools (LGIPs) are investment pools that are established by state or local government entities to allow for the investment of public funds. The objectives of an LGIP are to provide a safe investment return and daily liquidity, like money market funds.

What type of ETF uses borrowing techniques and attempts to magnify the returns of an underlying index?

Leveraged ETFs Leveraged ETFs use borrowing techniques and attempt to magnify the returns of an underlying index. Leveraged funds can be used as an alternative to margin, which also takes advantage of borrowed money to increase returns. These funds have higher costs and risks that must be disclosed to investors. Leveraged funds are used for short-term investing.

A hedge fund is often structured as a:

Limited partnership A hedge fund is a security often structured as a limited partnership and is mainly available to accredited investors. They are high-risk investments for sophisticated investors who seek aggressive yield, and they use advanced investment strategies and tactics to protect against downside market risk.

A retiree who receives variable annuity payments is subject to what type of risk?

Market risk A variable annuity is subject to fluctuations in the market. Policyowners are given a choice of investment options, and the rate of cash value build-up is dependent upon the performance of the separate account. With all variable contracts, the investor bears the investment risk.

To be considered a qualified REIT, at least 75% of its assets must be invested in any or all of the following, except:

Municipal debt To be considered qualified, the REIT must have at least 75% of its assets invested in real estate, cash, or Treasurys.

Which of the following is not a characteristic of hedge funds?

Not subject to antifraud provisions Hedge funds are high-risk investments for sophisticated investors seeking an aggressive yield. They are not offered to the general public and do not have to register with the SEC. They are still subject to the antifraud provisions of the SEC Rule 10b-5, the catch-all fraud rule.

All the following are types of annuities, except:

Periodic payment immediate contract A periodic payment immediate contract is not allowed.

A registered representative is meeting with a client who has expressed a desire to save for college education for their children. Which of the following statements can the registered representative make in describing a 529 prepaid tuition plan?

Prepaid tuition plans will allow you to lock-in today's tuition prices for the future and are based on in-state public tuition averages 529 prepaid tuition plans promise to keep pace with the tuition of in-state public colleges. They allow plan owners to lock-in today's tuition prices for the future. There is no risk to the principal amount invested. The plan returns, however, are based on in-state public tuition averages. To take advantage of the full benefits of these plans, students need to attend an in-state public college. If the student attends an out-of-state college or a private institution, they only receive the average of the in-state colleges' annual tuition.

An equity REIT could invest in all the following, except:

Private equity funds Equity REITs own specific pieces of real estate, like apartments, shopping malls, and office buildings, and are not leveraged. These are considered real estate equity, as opposed to the debt of mortgage REITs, since the REIT owns the properties found in the pool of assets. They are purchased for their dividend payouts. Income to the REIT is usually in the form of rental income from the tenants of the properties held, which is passed on to investors in the form of dividends.

Which of the following would not cause a decrease in the separate account value during the accumulation phase?

Sales charges Management fees are separately charged in each of the subaccounts. Mortality and expense risk fees are insurance company charges to cover lifetime income and other operating expenses. Administrative expenses may be charged as a flat account maintenance fee on a monthly or annual basis. These may also be referred to as policy fees. Variable annuity sales charges, if applicable, are traditionally in the form of contingent deferred sales charges and are deducted from amounts withdrawn during the early years of the contract.

Direct participation programs are:

Structured as partnerships DPPs are structured as partnerships, usually limited partnerships. The partners participate in the gains and losses as they are passed down directly to the partners. The partnership itself is not taxed. DPPs are unlisted and very illiquid, having specified end dates for redemption.

If an LGIP retains a broker-dealer to market their offerings in a state, which of the following statements is true?

The MSRB will regulate sales of LGIP issues sold by broker-dealers because LGIPs are municipal fund securities subject to MSRB rules The MSRB regulates sales of LGIP issues when they are sold by broker-dealers. On the other hand, if the LGIP uses its own employees to market itself to local and state governmental entities, it is not subject to MSRB rules. LGIPs are modeled after mutual funds or UITs, but the pools are not subject to the Investment Company Act of 1940 registration requirement. LGIPs may only be offered to local municipal government entities in that state. Individual investors are not permitted to purchase LGIPs.

All the following are true regarding variable annuities except:

They are exempt securities Variable annuities are non-exempt securities that must be sold by prospectus and registered under the Investment Company Act of 1940. They contain a separate account that holds the investment choices of the purchaser. The purchaser bears the investment risk not the insurance company. If the holder chooses to annuitize, a variable annuity can provide a stream of income for the rest of the annuitant's life.

All the following are characteristics of funds of hedge funds, except:

They are considered an inexpensive, liquid, aggressive type of an investment Broker-dealers created funds of hedge funds so smaller investors could participate in these types of investments. These funds must be registered under the Investment Company Act of 1940 and usually have a minimum investment amount of $25,000. They are still considered very aggressive investments since the underlying investments are hedge funds. They are also more expensive than traditional investment company securities since they have two sets of fees.: one for the hedge fund managers and one for the investment manager of the fund. The composition of hedge funds also makes them more illiquid than traditional funds, and they cannot be redeemed any time. They usually have specific time frames where investors can liquidate all or a portion of their holdings.

A variable annuity guarantees which of the following?

The number of annuity units upon annuitization No rate of return is guaranteed with a variable annuity. The annuitant assumes the investment risk. The number of annuity units is guaranteed once annuitization occurs, but the value of the units is not guaranteed. Meaning that even if the investor "runs out" of annuity units during their lifetime, the insurance company is still responsible for paying out a value based on the original number of annuity units redeemed each month starting from the point of annuitization.

An investor places an order sell their shares of the STU ETF on Monday, at 4:23 p.m., Eastern time. What price will the investor most likely receive?

The opening bid price on Tuesday ETFs trade on exchanges at the current bid or ask price. When selling shares, investors receive the current bid price. If the order is placed after the market closes (e.g., 4:23 p.m.), the investor should expect to receive the opening bid price on the next trading day.

Which of the following statements is true regarding 529A plans?

These are used to save funds for the ongoing care of disabled individuals The ABLE (Achieving a Better Life Experience) Act established 529A plans, or ABLE accounts, and are intended to help individuals and their families living with disabilities. Like 529 plans, non-deductible contributions can be made by anyone on an after-tax basis, and qualified withdrawals are federally income tax-free. Qualified withdrawals must relate to the expenses of living with a disability, including education, housing, transportation, health care expenses, and any services needed to improve quality of life.

How are hedge funds structured?

They are structured as limited partnerships A hedge fund is a security structured as a limited partnership and typically only available to sophisticated investors. They are high-risk investments for investors who seek aggressive yield. They use sophisticated investment strategies and tactics to protect against downside market risk. They are private placement offerings only available to 35 non-accredited investors, and they do not trade.

Which of the following statements about hedge funds is false?

They are structured like mutual funds and are regulated by the Investment Company Act of 1940 A hedge fund lacks transparency. Hedge funds are not registered investment companies and are not regulated by the Investment Company Act of 1940. They are private placement offerings, and they do not trade. The maximum number of investors is limited to 99, with a maximum of 35 investors being non-accredited or all investors being qualified purchasers. Hedge funds are structured like mutual funds because they pool investments to purchase a portfolio of securities, but they can only be liquidated on specific dates.

Which of the following statements regarding hedge funds is true?

They are subject to lock-up provisions during the first 6 months Hedge funds are purchased by sophisticated, wealthy investors and are more aggressive than other packaged instruments. Therefore, hedge funds carry more risk. Hedge funds are NOT investment companies as defined by the Investment Company Act of 1940 and are, consequently, not regulated by the Act. Series 6-licensed representatives may NEVER sell hedge funds. Hedge funds are private placement offerings under Regulation D. The maximum number of investors is limited to 99, with a maximum of 35 investors being non-accredited. Regulation D offerings are subject to lock-up provisions during the first 6 months, making them very illiquid in the early phases.

How does the insurance company get compensated for the life expectancy risks it assumes under the annuity contract?

They assess a mortality expense charge The insurance company risks the possibility that the annuitant will outlive their life expectancy. This would put the insurance company at a disadvantage, because it provides the annuitant with lifetime payout options. The insurance company prices these risks as accurately as possible during accumulation and assesses a charge against the contract value, which is called a mortality expense charge. The amount of this charge is guaranteed as a percentage of the contract value. This charge compensates the insurance company for the life expectancy risks it assumes under the annuity contract.

Why would an investor want to invest in a REIT?

To add another asset class to their portfolio for diversification purposes A real estate investment trust (REIT) invests in real estate (property), mortgages on real property, and/or shares of other REITs. With mortgage REITs, investors are paid out of the spread between the borrowing rates and income rates. Income REITs are purchased for their dividend payouts. Income to the REIT is usually in the form of rental income from the tenants of the properties held, which is passed on to investors in the form of dividends. REITs can provide diversification benefits to an investor's portfolio.

Which type of security offers the best protection of purchasing power?

Variable annuities Of the given choices, variable annuities have the greatest appreciation potential. They provide the greatest protection of purchasing power.

A registered representative is meeting with a client who had questions regarding variable products. Which of the following statements is appropriate for the registered representative to make?

Variable life insurance policies are permanent life insurance products that accumulate a cash value and pay a death benefit to the named beneficiary upon death of the insured; variable annuities are intended to generate an income stream Variable life insurance policies are permanent life insurance products that accumulate cash value and pay a death benefit to the named beneficiary upon the death of the insured. On the other hand, variable annuities are intended to generate an income stream, typically to supplement retirement income. They are both considered securities that require a FINRA Series 6 or 7 license in addition to a state insurance license to sell.