Progress Exam 7A & 7B

Which TWO of the following statements are TRUE concerning hedge funds? They might be suitable for investors seeking exposure to distressed or bankrupt companies They are permitted only to sell short securities with prior regulatory approval They may charge both an annual fee and a fee based on the funds' profits They are subject to the same rules as mutual funds I and III I and IV II and III II and IV

A A hedge fund is an investment fund that pools investors' money. Hedge funds might be suitable for investors seeking exposure to distressed or bankrupt companies since many of the restrictions placed on mutual funds are not applicable to hedge funds. They are permitted to sell short, invest in privately issued securities, and invest in other types of risky strategies without regulatory approval. Hedge funds often have higher fees than mutual funds, and their fees may include a percentage of assets under management and a percentage of the gains (for example, a 2% management fee plus 20% of the gains).

A sales breakpoint of a mutual fund is: The minimum dollar amount of a purchase of a mutual fund where a volume discount is given The minimum share amount of a purchase of a mutual fund where a volume discount is given The point at which a letter of intent can be obtained The point at which a letter of intent can be backdated

A A sales breakpoint of a mutual fund is the minimum dollar amount (not the share amount) of a purchase of a mutual fund where a volume discount is given. The sales charge percentage declines when certain minimum dollar amounts are reached.

A 65-year-old individual has retired and started receiving money from a qualified variable annuity. Which TWO of the following statements are TRUE concerning the distributions from the annuity? It is treated as ordinary income for tax purposes It is fully taxable at the investor's tax bracket It is treated as a capital gain for tax purposes It is partially taxable at the investor's tax bracket I and II II and III III and IV I and IV

A A tax-qualified variable annuity is one used as part of a qualified retirement plan. The monies contributed are a tax deduction (pretax monies), grow tax-deferred, and all monies withdrawn are taxed as ordinary income. There is no exclusion allowance since the distribution has never been taxed.

Which of the following statements is TRUE concerning exchange-traded funds (ETFs)? The securities may be used by individuals to pursue a market timing strategy The purchase price is based on a net asset value, plus any applicable sales charges The securities are priced once a day based on the close of trading Transactions in these securities must be executed in a cash account

A Exchange-traded funds (ETFs) represent a basket of securities. ETFs are structured to track an index of securities such as the Nasdaq 100, Standard and Poor's 500, or the Dow Jones Industrial Average. Shares are issued and then trade in the secondary market, much like closed-end investment company shares. Shares are purchased and sold on an exchange and may be purchased on margin and sold short. The price of an ETF is based on market sentiment (supply and demand) are changes throughout the trading session. An index fund (a type of mutual fund that also mirrors an index of securities) is priced only once a day, typically at 4:00 p.m. Individuals that pursue a market timing strategy are frequent users of ETFs. Market timers are active investors who trade frequently based up economic trends, technical factors, and corporate information.

Which of the following statements is NOT TRUE regarding the classification of a diversified investment company? It must distribute a minimum percentage of its net investment income to its shareholders A minimum percentage of the portfolio must be invested in securities It must invest 75% of its portfolio in such a way that it contains no more than 10% of the voting stock of another corporation In 75% of its portfolio, there is a limitation on the percentage of assets that can be committed to a single issue

A For an investment company to be considered diversified, its portfolio must be invested in a prescribed manner. Choice (a) applies to a regulated investment company. For a regulated investment company to avoid paying taxes on distributions to shareholders, it must distribute a minimum percentage of its net investment income.

The following closed-end funds are listed in The Wall Street Journal. Net Asset Value Market Price American Fund 23.75 24.25 Bunker Hill Fund 21.85 21.50 American Fund is selling at: A premium A discount Net asset value Parity

A The American Fund is a closed-end fund that is selling at 24.25. This is above its net asset value of 23.75. It is, therefore, selling at a premium.

An investor owns 1,000 shares of a mutual fund. The offering price is $12 per share. The fund charges a 6% sales charge and has a 1% redemption fee. If the investor redeems his shares, he will receive approximately: $11,167 $11,280 $11,880 $12,000

A The investor owns 1,000 shares of the fund. The offering price is $12 per share. The sales charge is 6% or $0.72 ($12.00 offering price x 6% sales charge = $0.72). The net asset value is equal to $11.28 ($12.00 offering price minus the sales charge of $0.72 = $11.28 net asset value). The investor is selling 1,000 shares of the fund at the net asset value of $11.28. This equals $11,280. Deducting the redemption fee of $112.80 (1% of $11,280) from the net asset value of $11,280 equals approximately $11,167 that the customer receives from the fund.

The practice of selling dividends is prohibited because: The amount of the dividend is already included in the price the customer pays for the fund The investor must pay a capital gains tax on any fund distribution The dividend is tax-free This would constitute making a recommendation on nonpublic information

A The phrase selling dividends is applied to the practice of inducing an investor to purchase a mutual fund on the basis of an impending dividend. For example, a mutual fund has announced that it will pay a dividend of $1 a share to holders of record as of December 30. A registered representative tells a customer to purchase the fund on December 20 at $10 a share. In this case, the investor will be listed as a holder of record on the record date and will be entitled to the distribution. The investor might be under the impression that there will be a 10% return on investment almost immediately and will, therefore, be inclined to purchase the fund. However, the fund will trade ex-dividend by the amount of the distribution. Assuming that the fund is still selling at $10 on the record date, the price will be reduced to $9 ($10 less the $1 distribution) on the ex-dividend date. The $1 dividend that the fund distributed is, therefore, already included in the price of the fund. An investor who waited until the ex-date would have been able to purchase the fund at $9 a share. Dividends are taxed as ordinary income.

The BG mutual fund has a NAV of $11.72 and an offering price of $12.67. What is the sales charge for this fund? 7.5% 8.10% 8.50% 9%

A The sales charge for the fund is calculated by dividing the difference between the offering price and the NAV ($12.67 - $11.72 = $0.95) by the offering price ($0.95 divided by $12.67 equals 7 1/2 %).

Over the last 20 years, Grant Rock, age 66, has invested $200,000 in a tax-qualified annuity sponsored by his employer, Tombstone Enterprises. The account is currently worth $800,000. He decides to annuitize the contract and begin drawing down the contract balance. In the first year he has received $50,000. How will these distributions be taxed? 100% is taxable as ordinary income 100% is tax-free since Grant is above age 59 1/2 Part of the distribution will be taxable at long-term capital gains rates and the balance will be viewed as a return of capital Part of the distribution will be taxable at ordinary income rates and the balance will be viewed as a return of capital

A This question discusses a qualified annuity, also known as a tax-sheltered or tax-qualified annuity. A qualified annuity is funded with pretax contributions from the employee's paycheck. This means the money that goes into the contract has never been taxed. Earnings grow tax-deferred. Upon distribution, both the earnings and the original contribution are taxed at ordinary income rates. A different way of saying this is the annuity has a zero cost basis, therefore, 100% of distributed funds are taxable as income. Annuity distributions never generate long-term capital gains.

A variable annuity with an assumed interest rate of 5% has been experiencing subpar performance. The annuitant will find the annuity payments: Decreasing Increasing Remaining the same Not being paid

A When a variable annuity enters the annuity (payout) period, payments are determined by the life expectancy of the annuitant, the settlement option, and the assumed interest rate (AIR). If the actual rate of performance falls below the AIR, payments will begin to decrease. If the actual rate of performance exceeds the AIR, payments will begin to increase.

Which of the following statements is TRUE concerning the death benefit on a variable annuity if the annuitant dies during the accumulation period? The death benefit will not be less than the cost basis in the annuity The death benefit will equal the accumulated value of the variable annuity The death benefit is always greater than the cost basis in the variable annuity There is no death benefit during the accumulation period in a variable annuity

A When an annuitant dies during the accumulation period in a variable annuity, the death benefit will be no less than the cost basis in the account. Should the accumulated value be greater than the cost basis, the death benefit is normally increased above the cost basis.

A specialized or specialty fund invests in stocks that are primarily: In many industries In a particular industry or geographical area Traded in the OTC market Special situations

B A specialized or specialty fund is a type of a fund that invests primarily in a particular industry or geographical area.

An individual has invested in a nonqualified variable annuity. If she withdraws the entire value of the annuity, the tax treatment will be: Ordinary income on the entire amount Ordinary income on the amount in excess of the original investment Ordinary income on the amount in excess of the original investment and a capital gain on the original investment A capital gain on the entire amount

B A total withdrawal from a nonqualified annuity results in two separate tax treatments. The original amount invested is treated as a return of capital and the earnings in the account (amount above the original investment) is treated as ordinary income.

Dividends and capital gain distributions in a variable annuity are: Taxable to the investor in the year declared Allowed to accumulate on a tax-deferred basis Used to reduce the cost basis of the investment Tax-deferred only if the IRA contribution funding the account is tax-deductible

B All growth, dividends, and capital gain distributions paid during the accumulation period in a variable annuity are automatically reinvested and grow tax-deferred. Any tax implications commence when distributions begin.

The major provisions of ERISA provide protection for: Investors in mutual funds Participants in private pension plans Participants in government-sponsored pension plans Loss of funds in the case of bankruptcy of a broker-dealer

B ERISA gave the government jurisdiction over private pension plans and protects employees from improper investments by their employers. It does not apply to government employer plans.

Which TWO of the following choices are advantages of trading exchange-traded funds (ETFs)? They may be purchased on margin Investors can receive breakpoints There is no fee to liquidate shares They may be sold short I and III I and IV II and III III and IV

B Exchange-traded funds (ETFs) represent a basket of securities. They are structured to represent an index of securities such as the Nasdaq 100 or the Dow Jones Industrial Average. Their shares are purchased and sold on an exchange, therefore, they may be purchased on margin and sold short. Mutual funds may not be purchased on margin or sold short since they are sold under prospectus and not on an exchange. Investors pay a commission whenever they buy or sell shares of ETFs. Investors receive breakpoints on sales if they purchase a specified amount of a mutual fund, not an ETF.

A client redeems shares of a mutual fund. According to current regulations, a check must be sent within how many days of submitting a redemption notice? 5 days 7 days 10 days 15 days

B Federal regulation requires that an individual receive payment for the redemption of a mutual fund within seven days.

Which TWO of the following statements are TRUE about real estate investment trusts (REITs)? They must distribute 90% of their earnings to shareholders They may invest only in short-term construction loans They must invest in mortgages and securities Their profits are derived from the difference between the payments made on outstanding mortgages and the amount received in rental income I and II I and IV II and III II and IV

B Real estate investment trusts (REITs) raise capital and invest the proceeds in real estate and mortgages. Their profit is derived from the rental income they receive as well as the difference between the interest they pay and the greater amount of interest they receive. In order to qualify for favorable tax treatment, REITs must pay 90% of their income to shareholders.

An increase in which of the following choices would cause an increase in the expense ratio for an investment company? Redemptions Management fees NAV Shareholders

B The expense ratio depends on the fees charged against the net assets of the fund. The only fee listed in this question is the management fee.

If a REIT generates at least 75% of its income from rents or mortgage interest, and pays out at least 90% of its income to the shareholders, for tax purposes the income distributed by the REIT will be taxable to: The REIT and not the shareholders The shareholders and not the REIT Both the shareholders and the REIT Neither the shareholders nor the REIT

B To qualify as a REIT, it must receive no more than 25% of its revenue from subsidiary (non-real estate) activities and must be structured and established as a trust. Also, the REIT must distribute a minimum of 90% of its income. Shareholders are responsible for paying taxes on the income distributed by the REIT. This income is treated as a nonqualifying dividend for tax purposes.

Which of the following choices is a type of retirement plan associated with individuals who work for a publicly traded company? A 457 plan A 403(b) plan A 401(k) plan A 529 plan

C A 401(k) plan is a tax-advantaged retirement account established by corporations, both private and publicly traded. A 457 plan is a tax-advantaged retirement plan that may be established by a governmental body (a municipality) or nongovernmental (nonprofit) employers. 403(b) plans are established by certain nonprofit organizations, such as religious organizations or public schools. A 529 plan is a tax-advantaged savings plan used by individuals to fund higher education needs.

Which of the following statements is NOT TRUE about a Keogh plan? It may only be opened by those with self-employed income It is a retirement plan where earnings in the account are tax-deferred It is a nonqualified plan that is exempt from ERISA standards Contributions made to the plan are tax-deductible

C A Keogh plan is a qualified retirement plan for a self-employed individual and some of his employees. It is set up according to the standards established by ERISA. Contributions to the plan and earnings in the plan are not subject to tax until they are withdrawn. Keoghs are not tax-free. The tax is deferred.

The purchase price of a no-load fund is determined by: The net asset value plus a sales charge The net asset value plus a commission The net asset value as computed at the end of the business day The supply and demand for the fund

C A no-load fund has no sales charge. The purchase price is determined by the net asset value as computed at the end of each business day.

A mutual fund charges a maximum front-end load of 5.50% for purchases of less than $100,000 and 3.50% for purchases of $100,000 but less than $250,000. An individual invests $75,000 in the fund and signs a letter of intent. Prior to the expiration date of the letter, the individual invests another $75,000. What is the total sales charge the individual should pay? $7,250 $6,750 $5,250 $8,250

C If a client signs a letter of intent and contributes enough money to receive the discount, she will pay the lower sales charge on the entire amount invested. The total amount invested is $150,000 which is equal to or greater than $100,000. Therefore, the investor will pay a 3.50% sales charge. 3.50% of $150,000 is equal to $5,250.

The separate account of the variable life policy that Tom Jones bought is performing poorly. Does this have any influence on his death benefit? No, the death benefit is fixed over the life of the contract Yes, but it could never drop below the highest death benefit attained during the time that the contract began building cash value Yes, but it could never drop below the fixed minimum No, the cash value can only increase over the life of the contract

C If the performance of the separate account of a variable life insurance policy is less than the assumed interest rate (AIR), the death benefit will decline. However, the death benefit may never drop below the face value of the policy.

An investor might take advantage of a Section 1035 exchange if: The new contract carries a new or longer surrender period The enhanced features do not apply to her Her investment objectives have changed and she is unable to obtain new benefits by switching to another subaccount in the same contract The total cost of the exchange outweighs the benefits of the exchange

C In order for the 1035 exchange to avoid scrutiny, the customer must be able to benefit from at least some of the features received on the new contract. Should the customer lose benefits, incur additional charges, or be subject to a longer surrender period, the 1035 exchange is likely to be viewed as unsuitable.

Normally, the largest expense incurred by an open-end investment company is the: Sales charge reallowed to the broker-dealers Custodial fee Investment advisory fee Accountant's fee

C Management (investment advisory) fees are normally the largest expense incurred by an open-end investment company (mutual fund).

The following is a listing of breakpoints on a mutual fund. Amount Sales Charge 0 - $ 9,999 8% $10,000 - $24,999 6% $25,000 - $39,999 5% $40,000 and above 4% The current net asset value is $9.20. The current offering price is $10.00. If a customer invests $50,000, how many shares will he be able to purchase? 4,227 5,000 5,219 6,000

C Since the customer has $50,000 to invest, he will pay a 4% sales charge. First, calculate the offering price by dividing the net asset value ($9.20) by the complement of the sales charge percent (96%) which equals approximately $9.58. Next, divide the amount to be invested ($50,000) by the offering price ($9.58), which equals the number of shares that can be purchased (5,219).

Mr. and Mrs. Blue both have full-time jobs and are covered by their employers' pension plans. Mr. Blue's salary is $65,000. Mrs. Blue's salary is $75,000. If they file a joint tax return and each wants to open an IRA: They will be prohibited from doing so since they are covered by their company's pension plans They may open a joint IRA to consolidate their savings Each may do so in separate accounts and may contribute up to $5,500 in each account Each may do so in separate accounts with the maximum contribution for both accounts combined being $5,500

C Since they both have earned income, they may each establish an IRA and contribute $5,500 to each account. Joint accounts are not permitted for IRAs.

Which of the following statements is TRUE regarding the straight life payout option available in a variable annuity? It is the most conservative method for receiving payments It allows for a beneficiary for the entire payout period It provides the maximum cash flow of all payout options It provides an equal amount each month for the investor's lifetime

C The annuitant will receive the greatest cash flow from the straight life annuity payout option. This option allows the annuitant to receive payments as long as the annuitant is alive. At death, the payments stop. No beneficiary is designated and the insurance company is relieved of its liability to pay the balance of the plan. The annuitant has the greatest degree of risk with this type of payout and is entitled to the greatest cash flow. There are other payout options with less risk. The joint and last survivor life annuity allows payments to be made to two individuals as long as either annuitant is alive. Upon the death of one party, payments are made to the survivor. Upon the death of the survivor, payments cease. The life annuity with period certain entitles the annuitant to have a beneficiary for a specified number of years. If death occurs before the end of the specified period, the remaining payments are made to the beneficiary. If death occurs after the specified period, no further payments are paid to the beneficiary.

An advantage of a Coverdell account over a 529 plan is: Higher annual contributions Stronger tax incentives More educational options No income limit on contributors

C The maximum annual contribution to a Coverdell IRA is $2,000. Contributions to a 529 plan are substantially higher. Although there is no annual limit on a 529 plan, contributions exceeding the annual gift limits of $14,000 per year may be subject to the payment of gift taxes. Lump-sum contributions of up to $70,000 over a five-year period are permitted by single individuals and up to $140,000 if the contribution is made from joint property. Qualified distributions from the account are tax-free in both cases. Funds in the Coverdell may be used for elementary school as well as for higher education, whereas distributions from a 529 plan may be used only for higher education. Income limits apply to Coverdell contributors, but do not apply to 529 plans.

Which of the following statements about a closed-end investment company is TRUE? It is continuously issuing new shares It may be redeemed by the issuing investment company It is traded in the open market at its current market price It may only issue common stock

C The only true statement regarding a closed-end investment company is that it is traded in the open market at its current market price. All of the other statements apply to an open-end investment company.

An uncle would like to invest for his nephew's college education. Which of the following factors is a benefit of a 529 plan? Uniformity of state taxation Pretax contributions Change of beneficiaries allowed No limits on contributions

C The owner of a 529 plan may change beneficiaries. Contributions are made on an after-tax basis, and are based on state rules, which vary from state to state. Contributions are limited, and vary by state.

An investor purchases $25,000 of a mutual fund when the price of the fund is $13.20. In the same year, the investor receives a $400 dividend distribution and a capital gain distribution of $700. Both distributions are reinvested in additional shares at a price of $12.80. If the fund has a current value of is $14.50 and the investor sells $5,000 worth of the fund, what is the investor's capital gain using the average cost method? No gain or loss is reported $344 $456 $845

C Using the average cost method, the gain is found by subtracting the cost basis from the sales proceeds. To calculate the cost basis using the average cost method, divide the sum of all investments by the shares owned by the investor. The investor purchased $25,000 of the fund at a price of $13.20. The total number of shares purchased was 1,893.94. The investor also received a total of $1,100 in distributions, all reinvested in additional shares when the price was $12.80. The total number of shares purchased is 85.94. The total amount invested is $26,100. The total number of shares owned is 1,979.88. Therefore, the average cost is $13.18. The number of shares being sold is 344.83 ($5,000 / $14.50). If we subtract the cost basis of $4,544 (344.83 x $13.18) from $5,000, this equals a capital gain of $456.

Which TWO of the following statements are TRUE regarding the contract holder of a variable annuity? The investor buys into the variable annuity at current market value plus commission The investor buys into the variable annuity at net asset value plus a sales charge The investor bears all the associated investment risk The investor is provided with the same dollar payments at regular intervals for the contract term I and III I and IV II and III II and IV

C Variable annuities are purchased by investors at the net asset value plus a sales charges and, during the payout period, provide the annuitant with variable dollar payments at regular intervals for the contract term. Since the dollar amount of the payout varies according to the fluctuating value of the separate account, the investor bears the investment risk of a variable annuity. Closed-end investment company shares are purchased by the investor at current market value plus a commission.

Under what circumstances will the payout from a variable annuity increase? The rate of inflation exceeds the AIR The performance of the separate account exceeds the rate of inflation The performance of the separate account exceeds the AIR The performance of the separate account for the current period exceeds the performance of the separate account for the previous period

C Whether the payment from a variable annuity changes depends on the relationship between the performance of the separate account and the assumed interest rate (AIR) in the contract. If the account performance exceeds the AIR, the payment will be greater than the last payment. If the account performance equals the AIR, the payment will be unchanged from the last payment. If the account performance is less than the AIR, the payment will decline from the last payment.

Which of the following statements is TRUE about a Keogh plan? It may be opened by both self-employed individuals and individuals employed by a corporation It is a retirement plan where earnings in the account are tax-free It is a nonqualified plan that is exempt from ERISA standards Contributions made to the plan are tax-deductible

D A Keogh plan is a qualified retirement plan only for self-employed individuals and full-time employees. Contributions made are tax-deductible (pretax dollars). It is set up according to the standards established by the Employee Retirement Income and Security Act of 1974 (ERISA). Contributions to the plan and earnings in the plan are not subject to tax until they are withdrawn. Keoghs are not tax-free. The tax is deferred.

Which TWO of the following statements are TRUE concerning hedge funds? They do not have fees that include a percentage of assets under management and only charge a fee based on a percentage of the gains They may employ a wide range of investment strategies that include selling short, arbitrage, derivatives, and the use of leverage They are suitable for investors seeking liquidity They may place restrictions on withdrawals I and III I and IV II and III II and IV

D A hedge fund is an investment fund that pools investors' money. Hedge funds may employ a wide range of investment strategies that include selling short, arbitrage, derivatives, and the use of leverage. Hedge funds often have higher fees than mutual funds, and their fees may include a percentage of assets under management and a percentage of the gains (for example, a 2% management fee plus 20% of the gains). Hedge funds are not required to publish the net asset value on a daily basis and might have restrictions on withdrawals, which can make their assets less liquid than those in mutual funds.

Ms. Taylor purchased $25,000 of mutual fund shares. To date, the fund has paid her $1,000 of net investment income and $500 of capital gain distributions. If Ms. Taylor reinvested all of these monies back in the fund, the cost basis of her total investment is: $25,000 $25,500 $26,000 $26,500

D All dividends, interest, and capital gains reinvested into a mutual fund are added to the investor's total cost basis. The $1,000 Ms. Taylor received in net investment income and the $500 she received in capital gains are added to her original purchase of $25,000 when reinvested in the fund.

A husband and wife are both currently employed and jointly file their tax return. The husband earns $115,000 per year and the wife earns $120,000 per year. Which TWO of the following statements are TRUE concerning contributions to a Roth IRA? The husband may contribute $5,500 per year The husband may not contribute The wife may contribute $5,500 per year The wife may not contribute I and III I and IV II and III II and IV

D Contributions may not be made to a Roth IRA by either spouse since their combined income is in excess of $194,000 per year.

Dorothy Hill is 53 and her annual income is $63,000. What is the maximum annual amount Dorothy is permitted to contribute to her IRA? $2,000 $3,500 $5,500 $6,500

D Dorothy is allowed to contribute $6,500 to her IRA. The annual contribution limit to an IRA is $5,500. Also, there is a catch-up provision for people who are age 50 and older, which allows for an additional $1,000 increase in contributions.

Which of the following securities is LEAST appropriate for an IRA account? Covered call writing Convertible bonds Exchange-traded funds (ETFs) Municipal bonds

D IRA's are tax-advantaged retirement accounts. Municipal bonds are the least appropriate because, when placed in an IRA, the interest becomes taxable at retirement. The main reason that investors buy municipal bonds is to take advantage of tax-exempt interest. If that characteristic is removed, municipal bonds are not as attractive.

Joan has set up 529 plans for each of her grandchildren. What is the most that she may contribute to each child's plan without incurring gift taxes? $2,000 annually $5,500 annually $2,000 annually or $10,000 at one time $14,000 annually or $70,000 at one time

D Joan may take advantage of the annual gift tax exclusion to contribute $14,000 per year to each of her grandchildren's 529 plans. She may also aggregate 5 years' worth of contributions in one large $70,000 contribution per child (5 x $14,000). If Joan opts to contribute $70,000 at one time, she may not make further contributions for five years without incurring gift taxes.

Who is permitted to participate in a tax-sheltered annuity established under Internal Revenue Code Section 403(b)? A student of a school district that has an established plan Only self-employed individuals Any employee of a corporation who meets the eligibility standards An employee of a nonprofit organization that has an established plan

D Tax-sheltered annuities are funded with pretax dollars and represent an immediate deduction to the investor. They are made available to employees of public school systems (not students) and to employees of certain nonprofit organizations under IRS Code 501(c)(3).

In reviewing prices for a mutual fund, an investor notices that the Beacon Fund has two listings, one for Class A shares and the other for Class B shares. The distinction between the two classes of shares is most likely that: Class A shares are oriented toward short-term trading, while Class B shares have a long-term perspective Class A shares should be purchased by income-oriented investors, while Class B shares are for those seeking capital appreciation Class A shares can be purchased directly from the fund, while Class B shares are offered through broker-dealers Class A shares have a front-end sales charge, while Class B shares have a contingent deferred sales charge

D The difference between Class A and Class B shares is normally that the A shares have a front-end sales charge while the B shares have a contingent deferred sales charge (CDSC). A CDSC is deducted only when the investor redeems shares. Generally, if the investor holds the B shares for a sufficient period, there is no sales charge deducted upon redemption.

As far as variable annuities are concerned, which of the following statements is TRUE? The investment risk is borne by the insurance company as in a fixed annuity Payments of a variable annuity can be decreased because of an increase in the expenses of the insurance company RRs selling variable annuities are not required to register with the SEC or FINRA Variable annuity nonqualified separate accounts are registered under the Investment Company Act of 1940

D The only true statement listed concerning variable annuities is variable annuity nonqualified separate accounts (the mutual fund portion) are registered under the Investment Company Act of 1940. The investment risk (fluctuation in the market value of the separate account) is borne by the annuity owner, not by the insurance company as in the case of a fixed annuity. Payments of a variable annuity cannot be decreased because of an increase in the expenses of the insurance company. RRs selling variable annuities are required to register with the SEC and FINRA.

A registered representative sells shares of a mutual fund to a customer at a dollar amount of $49,500. The RR does not disclose that a reduced sales charge is available at amounts of $50,000 and above. This practice is a(n): Acceptable practice known as a breakpoint sale Acceptable practice known as front-running Prohibited practice known as front-running Prohibited practice known as a breakpoint sale

D The practice described in this situation is a breakpoint sale and is a prohibited business practice under FINRA rules. It is defined as selling shares of an investment company just below the quantity where a customer would receive a quantity discount (breakpoint). For example, suppose the sales charge is 5% on dollar amounts invested below $50,000 and 3% on amounts at or above $50,000. If the customer in the question had invested an additional $500, he would have paid a lower sales charge.

When a beneficiary receives the death benefit from a variable annuity, the amount received is: Tax-free to the beneficiary Fully taxable to the beneficiary Taxable above the cost basis to the annuitant Taxable above the cost basis to the beneficiary

D When a beneficiary receives the death benefit from a variable annuity, the amount above the cost basis is taxable as ordinary income to the beneficiary.

Withdrawals from an IRA must commence: At age 70 By April 1 of the year in which the individual reaches age 70 At age 70 1/2 By April 1 following the year in which the individual turns 70 1/2

D Withdrawals from an IRA must begin no later than April 1 following the calendar year in which the individual reaches age 70 1/2. For example, if the owner of an IRA account turns 70 1/2 on December 10, payments must begin the following April 1. NOTE: Roth IRAs do not have RMD (required minimum distribution) provisions.