Ch. 7 Investment Vehicle Characteristics
c
A 62 year old client calls you to report that they have received news that they have earned $5,000 on a $30,000 fixed annuity. Your client is wondering what the tax ramification will be on the $5,000. Your client is in the 28% tax bracket. Which of the following is correct with regard to this situation? [A] They will pay $750 on the long-term gain. [B] They will pay $1,400 on the earnings. [C] They will pay no tax unless the clients withdraw the earning from the annuity. [D] They will pay $2,500 on the earnings.
c
A Capital Needs Analysis should be based on all of the following EXCEPT? [A] Inflation [B] Life Expectancy [C] Market volatility [D] Future Earning of the Client
tracking errors
ETNs do not have ___________________ that are common with ETFs
counter party risk
ETNs will have _____________________________ because the liability of the ETN rests with the issuing bank and there are no actual products backing the ETN (unsecured). If the bank defaults the ETN holder will become a creditor
b
All of the following are characteristics of a call option EXCEPT: [A] It gives the buyer or holder the right, but not the obligation, to buy an underlying asset at a fixed price for a limited period of time. [B] The underlying asset may only be a security. [C] It may be traded on an options exchange. [D] It obligates the seller or writer to sell the underlying asset if the holder exercises his option. The underlying asset does not have to be a security as in equity options ((e.g. stock). The underlying assets for options on futures contracts are often commodities such as wheat or pork bellies.
profitability ratios
When assessing the safety of bonds an analyst would use cash flows, revenue to assets, and leverage ratios, but would not use ________________________
Premiums, call date, price paid
Yield to call is affected by:
c
All of the following are characteristics of a traditional equity indexed annuities EXCEPT: [A] Annuity payments are linked to the performance of a specific stock index. [B] If the index rises, there may be a "cap" on how much of the gain is credited to the contract. [C] Supervision of sales of this product is not required since it is not treated like a security. [D] If the index declines, there may be a "floor" on how much of the loss is charged against the contract.
b
All of the following are characteristics of term life insurance, except: [A] It provides death benefits only with no cash values. [B] It is normally renewed for an additional term at the same premium level. [C] It provides the most death benefits for the premium amount paid. [D] It is frequently part of a "buy term and invest the difference" strategy.
c
An Investment Advisor Representative advertises their services as "fee only". This IAR discusses a mutual fund as a prospective investment for a client. After this fund is purchased by the client, the IAR receives a portion of 12b-1 fees and if the IAR sells enough fund shares from this investment company, the IAR will be rewarded with a free tropical vacation. Which of the following is TRUE under the Uniform Securities Act? [A] Since the IAR only directly charges the client for the investment advice, the advertisement as "fee only" is acceptable [B] Since the IAR only receives a portion of the 12b-1 fees and is only eligible for the vacation if a specific target volume of shares is achieved, the IAR has not violated industry regulations [C] Since the IAR receives some form of compensation that exceeds the fee charged for the investment advice, it is deceptive for the IAR to advertise as "fee only". [D] Under no circumstances is an IAR permitted to receive a portion of the 12b-1 fees or free vacations from an investment company. An IAR who advertises as "fee only" must ensure that the fees charged to clients are the only form of compensation received for their services. Failure to disclose receipt of a portion of 12b-1 fees as well as failure to disclose the potential tropical vacation as compensation would violate industry regulations.
c
In order to bring in new business, an investment adviser decides to run an advertisement directed solely to accredited investors. The IA includes the following phrase in the advertisement: "We are a fee-only adviser, so come in and we'll see what we can do for you." Which of the charges listed below would conflict with the IA's advertisement? [A] The IA charges clients fees based only on assets under management. [B] The IA charges clients a fee based on performance. [C] The IA charges clients a 12b-1 fee on a mutual fund. [D] The IA charges clients on a per hour basis when developing their financial plan.
b
Jerry has purchased an equity indexed annuity. His participation in increases in the index is capped at 4% . If the index goes up by 25%, how much will Jerry get? [A] Jerry will see 4% of 25%, or an increase of 1%. [B] Jerry will see a total of 4% of increase. [C] Jerry will see an increase of 21% in the value of the equity indexed annuity. [D] Jerry will see an increase of 25%, since this exceeds 4%.
d
Lapsed life insurance policies may be reinstated [A] on a guaranteed basis. [B] with evidence of insurability only. [C] with payment of unpaid premiums only. [D] with both evidence of insurability and the payment of unpaid premiums.
d
The characteristics of a futures contract include all of the following EXCEPT: [A] The terms of the contract are standardized and established by the futures exchanges. [B] The price is established by supply and demand on the floor of a futures exchange. [C] The contract may be traded. [D] Delivery and settlement of the contract occurs presently. Delivery and settlement of the contract will occur on a future date unless the contract is "liquidated" or closed by an equal and opposite trade before the delivery/settlement date.
a
The face amount of a life insurance policy is usually paid to the beneficiary at the death of the insured as a lump sum. In the alternative, all of the following settlement options are available EXCEPT: [A] A variable annuity [B] Interest only paid annually with the principal left on deposit [C] Fixed annual installments until the funds (principal and interest) are exhausted [D] Fixed period equal installment payments until the period ends
Brady Bonds
U.S. dollar denominated bonds issued by Latin American countries that are collateralized (backed) by U.S. Treasury zero-coupon bonds. 1) they are coupon bearing bonds w/ fixed or variable interest rates that mature in 10 to 30 years 2) They are backed by U.S. Treasury zero-coupon bonds
Yankee Bonds
U.S. dollar denominated bonds issued in the U.S.A by foreign companies or governments
d
Variable life and variable universal life share all of the following characteristics, except: [A] They have variable death benefits. [B] They have variable cash values. [C] The policyholder bears the investment risk. [D] The premiums are fixed and level The premiums for variable life are fixed and level, whereas the premiums for variable universal are flexible. The other characteristics are shared by both types of policies.
a
What is Annual Reset? [A] It is a valuation method used for Equity Index Annuities, in which the annuitant locks in gains from the beginning of the year to the end of the year [B] It measures the movements from a high point of an index and compares it to the index value at the beginning of the period [C] It is a valuation method used for managers, to determine if they are managers which produce profits for a Hedge Fund [D] It is when securities in an account are rebalanced to keep the original asset allocation
b
When an investor or an investment advisor is doing a "capital needs analysis" they are determining which of the following? [A] analysis of when the investor will have the funds to purchase additional life insurance in the future [B] analysis to determine if the investor has sufficient life insurance to cover all of their financial goals should the investor pass away [C] analysis of the cash value of existing life insurance policies of the investor [D] analysis of the capital that the investor will need to cover tax liabilities for beneficiaries Capital Needs Analysis is used to determine if the investor has enough life insurance to cover all of their financial goals should the investor pass away unexpectedly.
c
Which of the following are benefits of a Health Savings Account (HSA)? I.Tax-free withdrawals are permitted for any medically-related expense. II.Earnings within the account are tax-deferred. III.Contributions to the HSA are tax-deductible up to limitations. IV.HSAs can be established as investment accounts. [A] I and III only [B] I, II, and III only [C] II, III, and IV only [D] I, II, III, and IV
d
Which of the following is TRUE regarding the variable universal life policy? [A] Premiums and death benefits are fixed. [B] Premiums are fixed but death benefits may fluctuate. [C] Premiums fluctuate but death benefits are fixed. [D] Premiums and death benefits may fluctuate. On a Variable Universal Life Policy cash values and death benefits may vary or fluctuate based on the performance of the Separate Account. The premiums are flexible or adjustable by the policyholder within a range.
b
Which of the following types of life insurance offers a fixed death benefit, fixed cash value and fixed premium payment? [A] Term life insurance [B] Whole life insurance [C] Universal life insurance [D] Variable life insurance
a
Which of the following would be the most common issuer of Agencies CMOs? [A] Government Agencies which would include; Fannie Mae, Freddie Mac, Ginnie Mae [B] Private institutions such as banks, investment banks, and home builders [C] Real Estate Investment Trusts [D] Direct Participation Programs
a
Which of the following would not have an affect on fixed-income securities? [A] The age of the investor looking to buy the fixed-income securities [B] The prevailing interest rates of the Federal Reserve [C] The current and anticipated future rates of inflation [D] The balance sheet of the entity issuing the security
coupon bond
_______________________ has a lower duration than a zero-coupon bond
annual Interest x (100% - Investor's Tax Rate)
after tax yield =
