Series 6 Top-Off Unit 3
The manager or adviser of an investment company may liquidate portions of the fund's portfolio:
at any time, provided it is within the policies and objectives stated in the fund's prospectus.
Your open-end investment company customer has decided to take automatic reinvestment of dividends and capital gains distributions. This choice will:
not alter the tax due on the distributions.
The Bellner Fund has 60% of its assets invested in bonds rated BB or higher and 40% invested in the common stock of blue-chip companies. Last year, the mix was 65% bonds and 35% stock, but the investment adviser felt that market conditions warranted a change for this year. The Bellner fund is a(n):
balanced fund.
Money market instruments guaranteed by a bank that are used to provide capital for exporters to foreign countries are called:
banker's acceptances.
The XYZ mutual fund company is introducing a new fund with an investment objective of appreciation in share price by means of capital gains. The portfolio will consist of a mix of both value stocks and growth stocks. This is most likely a:
blend/core fund.
Corporate bonds are considered safer than common stock issued by the same company because:
bonds place the issuer under an obligation but stock does not.
A new company starting operations in the highly competitive computer industry subjects an investor to:
business risk.
A no-load fund sells its shares to the public:
by a direct sale from the fund to the investor.
The NAV of a mutual fund Class A share:
can never be higher than the POP. can never be so much lower than the POP that the difference exceeds 8.5% of the POP.
If an investor has received dividends and capital gains distributions on mutual fund shares she has held for four months, the investor will pay
capital gains rates on capital gains distributions and ordinary income rates on dividends.
An individual with a current Series 6 registration would be permitted to sell a:
closed-end investment company on its initial public offering.
If your customer wants a source of retirement income that is both stable and will offer some protection against purchasing-power risk in times of inflation, you should recommend a:
combination annuity.
An investor has purchased convertible bonds issued by ABC. The common stock of ABC has risen dramatically in recent months. The price of the bonds will most likely reflect the current market value of the company's:
common stock.
Some mutual funds that are in a family of funds managed by the same company offer an exchange privilege. This privilege gives a shareholder the right to:
convert shares to a different mutual fund within the family of funds on a dollar-for-dollar basis.
If a client invests the same amount of money into a mutual fund at regular intervals over a long period of time, the result is a lower:
cost per share than the average price per share.`
A joint life with last survivor annuity:
covers more than one person. continues payments as long as one annuitant is alive.
The rate of return on a money market fund would be most similar to the:
current Treasury bill rate.
If you invest in a front-end load mutual fund and choose automatic reinvestment, you should expect that:
dividend distributions will be reinvested at net asset value. capital gains distributions will be reinvested at net asset value.
A formula timing plan that consists of periodic purchases of a fixed dollar amount of stock regardless of price is known as:
dollar cost averaging.
Once a variable annuity has been annuitized:
each annuity unit's value varies with time, but the number of annuity units is fixed.
The AIR (Assumed Interest Rate) for your customer's variable annuity contract is 5%. In February, the separate account earned 7%. In March, the separate account earns 5%. The April annuity payment will be:
equal to the March payment.
Some open-end investment companies offer their investors a conversion privilege, which permits an investor to:
exchange shares of one mutual fund for those of another within the same fund family, at net asset value.
The exchange privilege offered by open-end investment companies allows investors to:
exchange shares of one open-end fund for another in the same fund family at a net asset value basis.
Your new client is interested in purchasing corporate bonds. When speaking about the different risks associated with this investment, you explain that reinvestment risk is the risk that, between now and when the bond matures or is called, interest rates will:
fall.
Moody's bond ratings are based primarily on an issuer's:
financial strength.
A majority vote of the outstanding shares of an open-end investment company is needed in order to approve a change
from a diversified company to a nondiversified company. from an open-end company to a closed-end company.
A majority vote of the outstanding shares of an open-end investment company is needed to approve a change:
from an open-end company to a closed-end company. in the objectives of the fund.
Under the IRC Subchapter M, if WWF fund only distributes 85% of its net investment income to its shareholders, then the:
fund must pay taxes on 100% of the net investment income. shareholder must pay taxes if the income is received in cash or reinvested.
Mutual fund 12b-1 fees are deducted from the:
fund's assets.
An index annuity allows the investor to participate in the
gains of the stock market, but not the losses and would be an appropriate recommendation
Closed-end investment companies:
generally make a one-time public offering of shares. may issue debt securities.
One characteristic of a closed-end fund that differs from an open-end fund is that with closed-end funds the number of shares outstanding:
generally remains constant.
If ZB Invest Fund seeks capital appreciation, has a low dividend yield, and invests chiefly in the stock of large, well-performing companies that have earnings momentum; it is probably a:
growth fund.
A fixed-premium variable life insurance contract offers a:
guaranteed minimum death benefit. cash value that fluctuates according to the contract's performance.
A holder of mutual fund shares:
has the right to vote for a vacancy on the board of directors. receives regular reports on the fund's expenses no less frequently than semi-annually.
When comparing a mutual fund with a growth objective to one that calls itself a value fund, you would explain to your clients that the value fund could be reasonably expected to:
have higher dividend yields.
In a fixed-time withdrawal plan,
he end date of the plan is fixed, but the individual payment amount is uncertain. An unspecified number of shares is liquidated each month based on the number of months left to distribute and the NAV of the investment. ($10,000 /120 months =.$83.33.)
Closed-end investment company shares can be purchased and sold:
in the secondary market.
If the value of securities held in a fund's portfolio increases, and the amount of liabilities stays the same, the fund's net assets:
increase.
During the accumulation period of a periodic payment deferred variable annuity, the number of accumulation units:
increases and the value per unit varies.
One of your clients owns shares in several of the mutual funds offered by the ABC Fund family. Unhappy with their performance, he wishes to liquidate the entire account and move the money to shares of the XYZ Growth Fund and the XYZ International fund. In doing this, the client would:
incur a taxable event. incur the full sales charge appropriate to the purchase of the XYZ shares.
Your customer wishes to increase and diversify his equity holdings as simply as possible. He is not risk averse, and he would like to gain some returns from growth, but he does not want to engage in a large number of transactions. You might suggest that he:
invest in a blend/core fund.
Investors do not receive a return guarantee; in a variable annuity, the investor assumes
investment risk.
The minimum that must be available in a VL contract after three years
is 75% of cash value.
ALFA Securities, a FINRA member firm, wants to buy shares in ATF Mutual Fund from the fund's sponsor at a discount. This arrangement is possible if ATF's sponsor:
is also a FINRA member and there is a sales agreement between ALFA and the sponsor.
One of the ways in which closed-end investment companies differ from open-end investment companies is in their ability to:
issue debt securities.
What investment management style would you recommend to a moderate-risk client seeking long-term capital gains who also values professional stock selection? A/an:
large-cap growth fund manager.
If your clients, spouses both age 50, are interested in long-term growth and are willing to accept a moderate amount of risk, you should recommend a(n):
large-cap stock fund. relatively moderate risk with likely growth potential.
An investor purchases $10,000 of the Class B shares of the KAPCO Growth Fund. Two years later, the client redeems the shares. The redemption charge is a percent of the:
lesser of the NAV or purchase price.
Variable annuity payout options may include:
life only. joint life with last survivor.
Albert, an accredited investor, invested $100,000 into a hedge fund last year. His investment is now valued at $110,000. An unfortunate set of circumstances requires him to sell his shares immediately. Albert's need to turn his investment into cash quickly results in
liquidity risk
DMF Company has convertible bonds (convertible at $50) outstanding. The current market value of DMF's stock is $42. The bond indenture contains an antidilution feature. If DMF declares a 10% stock dividend, the new conversion price will be
lower than $50
If an open-end investment company wishes to change its investment objective, it may only do so with a:
majority vote of the outstanding shares.
An investment company that is not classified as either a unit investment trust or a face-amount certificate company would be classified as a(n):
management investment company.
An investor purchasing a convertible debenture would most likely NOT be seeking to:
maximize current income.
If ABC Fund pays regular dividends, offers a high degree of safety of principal, and appeals especially to investors seeking tax advantages, ABC is a(n):
municipal bond fund.
An investor reviewing the holdings of a tax-exempt bond fund would expect to see most of the portfolio invested in
municipal bonds.
Another name for Section 529 plan is
municipal fund security
An accredited investor, age 39, would like to invest $10,000 and wants an investment that is liquid. You recommend a(an)
mutual fund that invests in both stocks and bonds
A money market mutual fund portfolio might contain:
negotiable, unsecured bank certificates of deposit. T-bills.
Each share's public offering price (POP) is based on the
net asset value (NAV) of the share plus sales charges.
The Investment Company Act of 1940 requires that mutual funds pay dividends from their:
net investment income.
When a registered representative is deciding on the suitability of a particular investment for a customer, that customer's need for liquidity is:
an important element to be considered.
An investor who owns shares of a mutual fund actually owns:
an undivided interest in the fund's portfolio.
According to investment company rules, open-end investment companies may not distribute long-term capital gains to their shareholders more frequently than:
annually.
The death benefit of a variable life policy must be calculated at least:
annually.
Asset-based distribution fees, also known as 12(b)-1 fees:
are based on the fund's annual average daily net assets. must be reviewed at least quarterly by the fund's board of directors.
A couple wishes to start a withdrawal plan from a mutual fund they have owned for 12 years. As a registered representative, you must
never use charts or tables unless the SEC specifically clears their use
According to the Investment Company Act of 1940, an open-end investment company must compute its NAV
no less frequently than once per business day
A customer is considering entering into an accumulation plan with his mutual fund. He is worried about committing to sending in so much per month that he may have trouble meeting the obligation, but he doesn't wish to commit to so little per month that his account does not build rapidly enough to meet his investment objectives. The registered representative explains that accumulation plans:
are binding on the mutual fund. are not binding on the investor.
index mutual funds and ETFs
are designed to track a particular index.
How do closed-end investment companies differ from open-end investment companies?
Closed-end companies, shares are sold with prospectus only in IPOs; open-end shares solicitations must always be accompanied by a prospectus. Closed-end companies issue a fixed number of shares; there is no limit on the number of shares issued by an open-end company
An investor wishes to start a dollar cost averaging program by investing $100 per month. Which of the following would be the least appropriate investment vehicles for this plan?
Closed-end investment company. Exchange-traded fund.
When comparing mutual funds and ETFs, the disadvantages of investing in ETFs include which of the following?
Commissions both when purchasing and liquidating shares. The spread between the NAV and POP can be greater than 8.5%
A mutual fund can hold which of the following securities in its investment portfolio?
Common stock Preferred stock Corporate bonds Municipal bonds
Under rising stock market conditions, which of the following funds would most likely experience the greatest amount of appreciation?
Common stock fund. a common stock fund appreciates the most when the stock market is rising.
When interest rates are declining, which of the following funds is most directly affected?
Corporate bond fund.
an open-end investment company
It must redeem shares in any quantity within seven days of request. It provides for ownership of an undivided interest in the entire portfolio.
Which of the following statements regarding a fixed-time withdrawal plan offered by a mutual fund are TRUE?
The amount received each month by the client may vary. This plan is self-exhausting.
Who assumes the investment risk in a variable annuity contract?
The annuitant.
If an investor has purchased an immediate variable annuity, which of the following statements best describe the investment?
It was a lump-sum purchase. Distributions to the annuitant will fluctuate during the payout period.
If interest rates are increasing and the market prices of bonds are decreasing, what happens to the value of straight preferred stock during this period?
Its value decreases.
Your customer wishes to invest $25,000 using investment company securities as a means of diversification, but she states that she is not comfortable with stock market risk. Which of the following fund types would be the least appropriate recommendation?
Blend/core fund.
Which of the following bond prices would fluctuate the most if the interest rates fell?
20-year mortgage bond with duration of 16.
If a customer is concerned about interest rate risk, which of the following securities is least appropriate?
25-year municipal bonds.
The KPF Growth and Income Fund experienced $10 million in net investment income last year. Of this, it distributed $8.9 million to its shareholders. On how much of its net investment income must the fund itself pay income tax?
$10 million.
In order to make a public offering, an investment company must have a minimum net worth of:
$100,000.00
A customer purchases $50,000 worth of 10% corporate bonds at par. At the end of the day, the bonds close down a half point. The customer has a loss of:
$250.
An investor's portfolio includes ten bonds and 200 shares of common stock. If both positions increase by one point, what is the appreciation?
$300.
If an investor starts to withdraw from a program that has $9,600 worth of funds, the first monthly payment of a ten-year self-liquidating program will be:
$80.00
Corporations issue commercial paper with maturities ranging from as little as one day to as long as how many days?
270 days.
The maximum fee that can be charged for distribution and promotion under a 12b-1 plan is
0.75% of average net assets.
How long is the free-look period for a variable life insurance policy?
10 days after delivery. 45 days after application.
Your customer would like to do a 1035 exchange of his variable annuity for a life insurance policy and wants to be sure there will be no adverse tax consequences. You tell him:
1035 exchanges are not allowed from annuities to life insurance.
Which investment is exposed to the greatest price sensitivity when interest rates increase?
20 year bond with a 4% coupon
Your customer owns a variable annuity contract, and the AIR stated in the contract is 5%. In January, the realized rate of return in the separate account was 7%, and he received a check based on this return for $200. In February, the rate of return was 10%, and he received a check for $210. To maintain the same payment he received in February, what rate of return would the separate account have to earn in March?
5%.
Which of the following plans does NOT allow a catch-up contribution for individuals who are at least 50 years old?
529
To be in compliance with the Investment Company Act of 1940, every registered investment company must report to shareholders no less frequently than every:
6 months.
A mutual fund must send a check for its tendered shares within how many days after receiving a written request for their redemption?
7 days
A moderate risk customer who has been funding a self-directed IRA since her late twenties is now in her early sixties. The investment vehicle currently weighted heavily toward equities for growth has allowed her to accumulate a robust nest egg to be used during retirement. Hoping to keep the IRA investments limited to mutual funds she asks for a more conservative allocation given her age. Which of the following is suitable and conservative allocation?
70% balanced fund, 30% US government bond funds
FINRA allows sales charges up to a maximum of:
8.5% on mutual funds.
A thirty-five year-old client purchases a variable life insurance policy. Under current regulations, the maximum sales charge permitted over the life of the policy is:
9%.
You have 4 clients each expressing interest in a variable annuity contract. Which 2 of the 4 client profiles would a VA be least suitable for?
A 45-year-old employed individual with no other retirement accounts in place A 32-year-old with a company-sponsored 401k plan and will need a lump sum soon to finance graduate school tuition
A prospect is 50 years old and has just inherited $50,000. He wants to invest the money but is very risk averse and fears losing principal. Which of the following recommendations would be most suitable?
A bond fund with low duration
Which of the following activities by a mutual fund require approval by a majority vote of outstanding shares?
A change in sales load policy. A change in investment policy.
Which of the following statements regarding the suitability of investment recommendations are TRUE?
A client's investment objectives, prior investment experience, financial profile, and risk tolerance aid in determining suitability. Suitability will vary with each investor.
These customers are preparing for retirement, and they want to maintain a comfortable standard of living, which means staying ahead of inflation
A combined fund that offers both current income and growth potential is the best choice for this couple.
Your customer has redeemed some of his mutual fund shares, but finds that the price he received is somewhat less than was reported as the NAV of his fund in the newspaper the next day. The most likely reason for this is which of the following?
A contingent deferred sales charge.
During the accumulation period of a variable annuity contract, an investor will receive?
A deferral of tax liability on investment income and capital gains earned in the separate account.
Which of the following situations are potential Conduct Rule violations?
A registered representative recommends a municipal bond to a risk-averse customer in a low tax bracket. A registered representative recommends investment products without regard to commissions or sales charges.
Which of the following best defines credit risk?
A risk associated with default of a debt security.
Which of the following mutual funds is likely to carry the greatest credit risk in its portfolio?
The Keppel High-Yield Bond fund.the riskiest of the debt securities given and carry the most credit risk.
For an insurance company, mortality risk turns out unfavorably if:
an annuitant lives longer than expected. a life insurance holder dies sooner than expected.
Loss of purchasing power has the greatest impact on which of the following investor profiles?
An elderly person living on a fixed retirement income with little savings.
Which of the following is the safest from default risk?
AAA unsecured bond
An investor would like to make a long-term investment in a debt security whose duration is shorter than its maturity. Which of the following AAA rated bonds should his registered representative recommend?
ABC 8% ten-year bond maturing in five years.
Which of the following funds would be required to invest at least 80% of its assets in a particular type of security?
ABC High-Yield Bond Fund
Which of the mutual funds listed below would be likely to have the lowest volatility?
ABC Money Market fund.
If a registered representative works for ABC Brokerage Firm and sells a customer shares of XYZ Mutual Fund, to whom may the customer make the check payable?
ABC. XYZ Mutual Fund Company.
Which of the following funds may issue more than one type of security?
ACE Closed-End Fund.
ACE Fund's offering price is $9.00, and its net asset value is $9.40. GEM Fund's offering price is $24.00, and its net asset value is $20.00. From these quotes you know that:
ACE is a closed-end fund. GEM is a closed-end fund.
Your customer, age 29, is seeking a long-term growth investment, is concerned about the loss of purchasing power as a result of inflation, and often complains about high commissions that reduce his investment returns. When he was in college, he took a few economics courses and firmly believes that securities analysts cannot consistently outperform the overall market. Which of the following mutual funds is the most suitable for the customer?
ARG Stock Index Fund.
A company has negative operating revenues for the year. It would NOT be required to make interest payments on which of its following issues?
Adjustment bonds.
The value of which of the following is used to determine an annuitant's payment amount during the payout period of a variable annuity contract?
Annuity unit.
A mutual fund shareholder purchases no-load shares at the beginning of an investment period and, at the end of the investment period, sells the shares for a gain.
The NAV per share was lower at the beginning.
How much of an investment company's assets must be invested in securities before it must register with the SEC as an investment company?
At least 40%.
On February 14, an investor purchases 1,000 shares of ACE Bond Fund, with an objective of providing the highest possible level of income on a monthly basis. On August 15, the investor informs his agent that he has changed his mind and wishes to exchange his bond fund shares for shares of a common stock growth fund with an objective of capital appreciation within the same family of funds. If the investor's bond fund shares increase in value before the exchange, how will they be taxed?
As a short-term gain because the bond fund was held for less than 12 months.
A straight life annuity will give the annuitant monthly payments for which of the following?
As long as the annuitant lives.
When a customer wants income from an annuity and chooses the option of life with 20-year period certain, how will distributions be taxed?
As ordinary income based on an exclusion ratio
Which of the following mutual fund share classes are specially suited to investors that have long-term objectives?
Class A shares for investors that have a large amount to invest. Class B shares for investors that have a small amount to invest.
Which of the following mutual fund share classes has no back-end load, lower operating expenses, and low or no 12b-1 fees?
Class A.
Money market instruments would include which of the following?
Banker's acceptances. Commercial paper.
Which of the following securities trade in the money market?
Bankers' acceptances. Treasury bills.
Your customer wishes to invest $25,000 using investment company securities as a means of diversification, but she is not comfortable with stock market risk. Which of the following fund types would be the LEAST appropriate recommendation?
Blend/core fund.
Which of the following share classes typically have a higher expense ratio than Class A shares?
Class B shares. Class C shares.
Your client is interested in a variable annuity that offers to add a small percentage of each of his premium payments to the account. You explain that, in return for this enhancement, the annuity has a longer surrender period than the insurance company's standard variable annuity products, meaning that surrender charges are applicable for a longer period of time. What type of annuity is this?
Bonus annuity.
When comparing bonus or enhancement annuities to other annuities, which of the following statements are TRUE?
Bonus variable annuities tend to have higher annual fees. Bonus variable annuities generally have longer surrender charge periods.
When comparing bonus or enhancement annuities to other annuities, which of the following statements are TRUE?
Bonus variable annuities tend to have higher annual fees. Bonus variable annuities generally have longer surrender charge periods.
Which of the following is a characteristic shared by debentures and equipment trust bonds?
Both pay principal as it comes due.
A young, recently married couple, would like to purchase a home within five years. They have $2,000 in savings and $400 a month to invest. In addition, they owe $35,000 on student loans to be repaid over the next ten years. What type of mutual fund investment would likely be the BEST recommendation?
Build up cash reserves and then save for a down payment on the new home. Investing must wait.
Under which of the following circumstances is an investor in a position to acquire stock?
Buy a call. Sell a put.
A customer believes that ABC's price will go up but does not have the money to buy 100 shares right now. How could the customer use options to profit from an increase in the stock's price?
Buy calls. Write puts.
In a fiduciary account with stated investment objectives of preserving capital and generating income, which of the following investment trading strategies is the most suitable?
Buying Treasury bonds.
Shares of which of the following classes may eventually convert to another share class?
Class B.
Which of the following share classes have a back-end load?
Class B. Class C.
Investors with a short time horizon most likely will invest in which class of mutual fund shares?
Class C shares
Mutual fund shares that carry a level load are:
Class C shares.
Which of the following are among the objectives of a balanced fund?
Capital appreciation. Income.
A 45-year-old woman wants the greatest possible monthly income with the preservation and stability of capital as secondary objectives. Which of the following investments would you recommend?
High-grade bond fund.the greatest possible monthly income with preservation of capital and stability.`\
Which of the following activities are a registered representative's responsibilities?
Determining the suitability of various investments for individual customers. Describing the characteristics and benefits of various securities products.
When may a variable annuity account be surrendered?
During the accumulation period.
A customer wants to know how he can be sure that he will get the most current price for his mutual fund shares upon redemption. You could tell him:
Every mutual fund has to calculate its NAV at least once per business day. The price you get is the price next calculated after the fund receives your redemption request.
A shareholder has redeemed some mutual fund shares that were purchased over a period of ten years. If the shareholder has not indicated the specific dates of purchase and cost of the shares that were redeemed on his tax return, the IRS will follow which of the following methods in determining the cost basis of shares redeemed?
FIFO.
Your client has $50,000 to invest. His objective is monthly income that he can receive after he retires. Part of his customer profile stresses that he has had uncomfortable experiences in the past with the stock market and is not inclined to invest in anything that is based on stock market performance and would opt for principal protection instead. Based on the clients profile which of the following would be the best recommendation?
Fixed Annuity
From which of the following might you be able to purchase shares of a closed-end investment company after its initial offering?
From other stockholders in the OTC market. From other stockholders on the NYSE.
To help manage quantitative risk you can use quantitative measures to compare mutual funds regarding which of the following?
Fund performance.
An investor will pay a sales charge in all of the following marketing methods EXCEPT:
Fund to investor.
Given the following choices, the most suitable investment recommendation for a customer that wants monthly income is
GNMAs
Which of the following would be valid when recommending investments for a client that does not believe in professional money management and is interested in long-term capital appreciation?
Gather financial information from the client. Consider index funds for a portfolio mix that is appropriate for the client based upon risk tolerance, time horizon, and investment expectations.
An investor who desires minimal credit risk and monthly interest income should consider an investment in which of the following?
Ginnie Maes.
A customer has been investing $150 into an equity growth mutual fund for three years. The customer's daughter is in college and needs money for expenses. What would you recommend she do to provide her daughter with expense money?
Give the daughter $100 per month and invest $50 per month instead of $150 per month into the mutual fund
Assuming that expense ratios for the funds listed are identical, rank the funds below in order, from lowest to highest expected income yield.
Growth stock fund Municipal bond fund Government bond fund Corporate bond fund
An investor has decided to pursue a speculative investment program. Which of the following securities most closely reflect this investment objective?
Growth stocks. High-yield corporate bonds.
The Investment Company Act of 1940 requires that a mutual fund do which of the following?
Have $100,000 minimum capitalization. Provide semiannual reports to shareholders.
If a retired individual seeking income has $200,000 to invest, which of the following mutual funds would be the most suitable?
High-grade bond fund.
unrealized gain in a mutual fund portfolio
It affects the mutual fund's shares' value. It is realized by shareholders when they redeem their shares.
Your 45-year-old client is interested in obtaining the highest current income possible from his investment. If he is willing to accept fluctuations in investment principal, which of the following would best suit this client's investment objective?
High-yield bond fund.
John owns a nonqualified, tax-deferred annuity. When he retires, what will be the tax consequences of his annuity payments?
His annuity payments are partly taxable and partly tax-free return of capital.
An investor is considering purchasing a bond. He has settled on either a 6% municipal bond offered by the state in which he lives or an 8% corporate bond offered by a company with headquarters in his state. He would like you to help him decide which bond will get him the greatest return for his investment. Which of the following items of information must you obtain before you can make a specific recommendation?
His tax bracket.
Under what circumstances may an open-end investment company act as its own distributor?
If the fund is established under Section 12b-1.
An investor has $250,000 to invest in mutual funds. Which of the following would be appropriate statements to make to him?
If you purchase Class B shares, you will have no load now, but you will probably incur higher operating costs. A purchase of Class A shares in this quantity will probably lead to a reduction in sales charge.
If an annuity's separate account has a portfolio that contains mostly common stocks, what does this mean?
In a rising market, the value of the account may rise. In a rising market, the value of an accumulation unit may rise.
Bob Smith, who is in his 40s, has just been placed into an extremely generous defined benefit plan at his company. He has decided he no longer needs his variable annuity for retirement purposes and wants to use the money for a trip to Africa. Over the years, he has invested $60,000 in the annuity, and its total value is now $80,000. How much will Bob owe in taxes and penalties if he cashes it in?
Income tax on $20,000 and a $2,000 penalty
Which of the following characteristics describe the net asset value per share?
Increases if the fund's assets appreciate in value. Decreases if the fund distributes a dividend to shareholders.
Your customer seeks capital growth but is concerned about execution costs. Which of the following funds would be most suitable for him?
Index fund.
Your customer is interested in a fund that follows a buy-and-hold style of investing. He also insists on the lowest fees and expenses possible. Which of these funds might you recommend?
Index.
A single premium immediate annuity will pay $2,000 a month for life. What is the annuitant's greatest risk?
Inflation risk
Which of the following is allowed in a mutual fund sales presentation?
Informing the customer of the tax status of dividend distributions
According to the Investment Company Act of 1940, which of the following are required of investment companies?
Investment company registration statement filed with the SEC. Statement of investment policies and diversification status.
Which of the following would cause an increase in NAV?
Investment income is received by the fund. The securities in the portfolio appreciate.
An open-end investment company cannot
Issue Bonds
Which of the following are characteristics of negotiable jumbo CDs?
Issued in amounts of $100,000 to $1 million or more. Trade in the secondary market.
A couple in their early 30s has been married for four years, their disposable income is relatively high, and they are planning to buy a condominium. If they need a safe place to invest their down payment for about six months, which of the following mutual funds is the most suitable for these customers?
LMN Cash Reserves Money Market Fund.
Which of the following statements regarding interest rates and price fluctuations of debt securities are TRUE?
Long-term prices fluctuate more than short-term prices. Short-term interest rates fluctuate more than long-term rates.
Which of the following would be characteristic of money market mutual funds?
Low volatility. A portfolio consisting of short-term securities.
Your customer, age 37, makes $60,000 per year and wants to invest $10,000. He wants a conservative investment with annual returns in the 10-20% range. Which of the following should you suggest?
Managing and lowering your customer's expectations.
Which of the following are characteristics of commercial paper?
Maximum maturity is 270 days Exempt from registration
An investor is in a low tax bracket and wishes to invest a moderate sum in an investment that will provide some protection from inflation. Which of the following should you recommend?
Mid-cap common stock mutual fund.
A married couple in their early 50's saving for retirement would most likely have which of the following objectives?
Moderate risk, moderate safety, low liquidity.
Which of the following mutual funds would be most likely to have the least correlation with the overall market?
Money market fund.
If an investor has $20,000 to invest, but requires $500 per month to pay for her mother's nursing home care, which of the following funds should you recommend?
Money market.
GNMA's pay interest on a
Monthly basis
If a customer's chief concern is to shelter as much of his portfolio earnings from tax as possible, which of the following securities would be most suitable?
Municipal GOs
Assuming that expense ratios for the funds listed are identical, rank the funds below in order, from lowest to potentially highest yield.
Municipal bond fund. Government bond fund. Investment-grade corporate bond fund. Speculative income fund.
Your customer would like to know what advantages mutual funds enjoy over other types of investments. In addressing the customer's question, you might make which of the following statements?
Mutual funds offer the advantages of diversification and professional management of your investment money.
Which of the following occurrences will change the net asset value per share of a mutual fund?
Net appreciation of the assets held in the portfolio of the fund. Net depreciation of assets held in the portfolio of the fund.
Which of the following would not trade in the money market?
Newly issued debentures rated Aaa. Treasury notes.
When a mutual fund does not assess a distribution charge, it is called a:
No-load fund.
Which of the following companies would generally sell shares directly to the public?
No-load mutual fund.
There are a number of risks inherent in investing in equity securities. Which of the following stocks would be most affected by changes in interest rates?
Noncumulative preferred stock.
Diversification helps protect against which of the following types of risk?
Nonsystematic Business
When a customer receives payment during the annuity period of a variable annuity, which of the following is TRUE?
Only the amount that represents investment income is subject to tax.
An investor owning which of the following variable annuity contracts would hold accumulation units?
Periodic payment deferred annuity. Single payment deferred annuity.
What is the greatest risk to an investor in an asset allocation portfolio?
Poor portfolio management.
Which of the following is a possible advantage of variable life insurance over whole life insurance?
Possible inflation protection for the death benefit.
Which of these is TRUE regarding a life settlement contract?
Premiums will be paid by the contract owner. Proceeds will be paid upon the death of the insured.
What happens to outstanding fixed-income securities when market interest rates drop?
Prices increase.
Which of the following is the best recommendation for someone extremely averse to risk?
Principal protected fund
12b-1 fees may be allocated for payment of which of the following?
Printing the annual prospectus. Television advertisement about a mutual fund.
For individual investors, which of the following is an advantage of investing in mutual funds rather than individual securities?
Professional investment management.
The primary objective of a particular mutual fund is the payment of dividends, regardless of the market's current state. Capital growth is a secondary objective. Which of the following industry groups would be appropriate for the fund's portfolio?
Public utilities.
Your customer, 62 years old, has unexpectedly received a large inheritance. He would like to generate income from it now, with as little bother on his part as possible. Which of the following might you recommend to him?
Purchase a lump-sum immediate annuity.
Which of the following statements about deferred variable annuities are TRUE?
Purchase payments can be either lump sum or periodic. Earnings accumulate tax-deferred during the accumulation period.
Which of the following concerning hedge funds are TRUE?
Purchasers of hedge funds are generally required to be accredited investors. Ordinary investors may invest in hedge funds indirectly through funds of hedge funds.
Which of the following would be obligated to purchase stock should the option be exercised?
Put writer.
Which of the following concerning Section 529 plans are TRUE?
Qualified withdrawals are exempt from federal income tax. Contribution limits are set at the state level.
Which of the following concerning Section 529 plans are TRUE?
Qualified withdrawals are exempt from federal income tax.Some states will tax the withdrawals as income.
Customer A and Customer B each have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments?
Receiving cash distributions may reduce Customer A's proportional interest in the fund. Customer B's reinvestments purchase additional shares at NAV rather than at the offering price.
typically found with Class B and Class C shares, are not an operating expense of the fund.
Redemption fees,They are a cost incurred by the investor.
A 55-year-old customer in the 18% tax bracket wants to maximize current return with a moderate degree of risk. He has just inherited $25,000 and seeks a bond investment. A suitable bond would have which of the following features?
Relatively high rating.
Your customer, who is in his 30s, is single, and has a steady, well-paying job, has just received a large inheritance. He wishes to generate as much extra income with it as possible and does not mind financial risk. Which of the following investments would you recommend?
STG Corporate Bond Fund, which specializes in speculative bond offerings.
Your client has a solid financial foundation, has additional discretionary income to invest, is bullish, and is willing to accept the higher risks that come with the potential for higher rewards. Which of the following might you recommend?
Sector funds
Which of the following funds would provide high appreciation potential together with high risk?
Sector.or specialized, fund offers a higher appreciation potential, coupled with higher risk than an income-oriented fund or a diversified growth fund.
Mutual funds are subject to which of the following federal securities regulations?
Securities Act of 1933. Investment Company Act of 1940.
Capital appreciation funds
Seek growth
Where would an investor find a complete list of holdings for a particular mutual fund?
Semi-annual or annual report
A customer purchases 1,000 ABC mutual fund Class A shares and wishes to redeem the shares 30 days later. Which of the following will occur?
Shares will be redeemed at a price equal to the next calculated net asset value.
A customer would like to know which of the following mutual funds has the highest potential for capital growth. Which would you choose?
Small-cap technology stock fund.
Which of the following types of mutual funds would be most likely to have capital appreciation as its stated objective?
Specialized.
Which of the following entities are issuers of municipal bonds?
States. Cities.
Which of the following regarding T-bills are TRUE?
T-bills trade at a discount to par. T-bills are a direct obligation of the U.S. government.
Your customer is a 66-year-old retired widower. He is seeking an investment of $50,000 that will keep pace with inflation. He currently survives on Social security and a pension and is very risk averse. Which of the following do you recommend?
TIPS. TIPS is the only choice that keeps pace with inflation and also has the lowest default risk of the choices given.
Which of the following is a key advantage of purchasing a variable annuity?
Tax deferral.
Which of the following is a major advantage of a nonqualified variable annuity compared to a mutual fund?
Tax deferral.
Which of the following funds might have income as their primary investment objective?
The Bellner Preferred Equity Fund. The LMN Long-Term Corporate Bond Fund.
Your customer is interested in income that is as free of default risk as possible. Which of the following funds would you consider suitable to recommend to him?
The Ellis Government Bond Fund.
Which of the following funds would you expect to have only debt instruments in their portfolios?
The Excelsior High-Yield Fund. The KPL Money Market Fund.
A customer establishes a nonqualified periodic payment deferred annuity and makes payments for three years. If the customer suddenly dies, which of the following statements correctly identifies the tax consequences to the beneficiary?
The beneficiary must pay ordinary income tax on proceeds exceeding the cost basis.
Mutual funds are like other types of corporations in which of the following ways?
The board of directors makes policy decisions. Shareholders have ownership rights.
Which of the following statements regarding a corporate bond quoted as QRS Zr 20 is TRUE?
The bond pays no interest until maturity.
A customer buys a long-term, 10% Treasury bond with a current yield of 12% and holds the bond until one year before maturity. She sells the bond when the short-term T-bill rate is 8%. Which of the following statements are CORRECT?
The bond was purchased at a discount. The bond was sold at a premium.
In July, a customer invested $10,000 in the ABC Mutual Fund. In December of the same year, ABC announced a long-term capital gains distribution. In May of the next year, the customer decided to redeem his shares for a capital gain. How are both of the capital gains treated for tax purposes:
The capital gain distribution is treated as long term. The capital gain from redemption is treated as short term.
describe an open-end investment company?
The company may sell new shares in any quantity at any time. The company must redeem shares in any quantity at any time except that it may suspend the redemption of shares with SEC approval.
A customer purchases a 4% corporate bond yielding 5%. A year before the bond matures, new corporate bonds are issued at 3%, and the customer sells the 4% bond. Which of the following statements regarding the bond are TRUE?
The customer bought it at a discount. The customer sold it at a premium.
With regard to duration in bonds
The duration of a zero-coupon bond is the same as its time to maturity. The duration of an interest-bearing bond is shorter than its time to maturity.
Your customer uses the FIFO method to determine his capital gains. What does this mean?
The first shares purchased are the first shares redeemed.
For a mutual fund that collects a 12b-1 fee, which of the following statements are TRUE?
The fund may use the money to pay for mailing sales literature. The fund's prospectus must disclose the fee.
Which of the following would affect the net asset value per share of a mutual fund?
The fund pays a dividend. The portfolio changes in value.
Which of the following might bring about a change in the NAV of a mutual fund?
The fund pays a dividend. The portfolio increases in market value.
Typically, no-load mutual funds are sold to the public in which of the following ways?
The fund sells directly to the investor.
Who sets a mutual fund's ex-date?
The fund's board of directors
When comparing a short-term bond fund to a long-term bond fund, which of the following is generally true?
The long-term fund has a higher yield. The short-term fund is less volatile.
Your client is interested in an investment program that is sensitive and responsive to anticipated market moves. You might recommend:
an asset allocation fund.
Under the Investment Company Act of 1940, which of the following statements regarding the investment objective of a mutual fund are TRUE?
The majority of outstanding shares must vote to approve changes in the investment objective. The investment adviser does not set, but tries to meet, the investment objective.
When securities are inherited, what will be the recipient's cost basis?
The market value of the securities at the time of death.
If an investment company has a fixed portfolio of municipal bonds with high duration, how will substantial changes in general interest rates affect the company's portfolio?
The market value will fluctuate significantly, but the investment income will remain stable.
You are preparing a sales presentation for a customer whose portfolio you think would best be served by variable life insurance. You are considering several statements you might wish to make. Which of the following would be permitted?
The minimum death benefit is guaranteed.
Which of the following statements characterize the accumulation phase of a variable annuity?
The number of accumulation units increases as investment continues. The value of an individual accumulation unit depends only on the performance of the separate account, regardless of AIR.
Which of the following statements about a straight-life variable annuity is TRUE?
The number of annuity units a client owns never changes.
Which of the following statements is TRUE regarding the annuity units during the annuitization period of a variable annuity contract?
The number of units remains the same, but the value of each unit changes.
In which of the following markets would an investor expect to find closed-end investment company shares traded?
The over-the-counter market. The exchanges.
John is the annuitant in a variable plan, and Sue is the beneficiary. Upon John's death during the accumulation period, Sue takes a lump-sum payment. What is her total tax liability?
The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate.
When an agent explains mutual funds to a prospective investor, which of the following statements may be made?
The redemption value of mutual fund shares fluctuates according to the fund's portfolio value.
The payout of an annuitized variable annuity account changes from month to month in a manner determined by which of the following?
The separate account performance compared to an assumed interest rate. This month's payout compared to last month's payout.
Your client has asked about the automatic dividend reinvestment plan offered by the ABC Growth and Income Fund. In describing the differences between dividend reinvestment and receiving distributions in cash, which of the following statements are CORRECT?
The taxation of the dividend distribution is not affected by your choice to reinvest or receive the dividend in cash. Reinvestment of dividends tends to have a compounding effect, while taking the distributions in cash inhibits the opportunity for growth of capital.
Which of the following statements regarding 12b-1 charges are CORRECT:
There is a maximum allowable charge of .75% for marketing and promotion An additional .25% may be charged as a shareholder servicing fee.
Your client invests in an open-end investment company whose portfolio consists of insured municipal bonds issued within his state. Which of the following statements is CORRECT regarding the taxation of distributions from this fund?
There is no federal income tax due on any dividend distributions, but the capital gains distribution would be subject to tax.
Which of the following are characteristics of exchange-traded funds (ETFs)?
They are priced by supply and demand. They are designed to track an index.
Which of the following statements regarding Treasury bills are TRUE?
They are sold at a discount. They mature in less than one year.
Which of the following statements regarding qualified pension plans are TRUE?
They must not discriminate. They must have a vesting schedule.
In promoting a variable life insurance contract to a customer, which of the following statements would be permissible?
This product gives you the possibility of a greater death benefit in exchange for accepting investment risk.
An individual purchasing a flexible premium variable life contract should know which of the following?
Timing and amount of premiums generally are discretionary. The performance of the separate account directly affects the policy's cash value.
If your customer wants to set aside $40,000 for when his child starts college, but does not want to endanger the principal, you should recommend:
Treasury STRIPS.
Which of the following income investments would be most suitable if interest rates were expected to increase sharply within the next two years?
Treasury bills.
You are considering investments for a new client who informs you that she hopes to purchase a new home in the upcoming year. Which of the following would be most suitable?
Treasury bills. Money market fund.
Which type of marketable security pays semiannual interest?
Treasury bond.
Which of the following securities is issued at par?
Treasury notes
The interest from which of the following bonds is subject to federal income tax?
Treasury notes. FNMA.
Which of the following are features of Class C mutual fund shares?
Typically charge no front-end load. Typically impose lower CDSCs than Class B shares for a shorter period.
A contractual plan company is what type of investment company?
Unit investment trust.
Which of the following investment company portfolios is supervised rather than managed?
Unit investment trust.
Which of the following would be appropriate recommendations for a customer looking for income?
Utility fund
Types of annuity plans
Variable Combination Fixed
Money market mutual fund shares are always purchased at NAV—there are none with a sales load.
While their portfolio consists of high-quality short-term debt instruments, they do not issue debt instruments themselves. Check writing privileges are a primary feature adding to the liquidity of these shares.
An investor would like to make a long-term investment in a debt security whose duration is equal to its maturity. Which of the following AAA rated bonds should his registered representative recommend?
XYZ zero coupon bond maturing in 15 years.
You are recommending to your client a fund whose portfolio manager purchases stocks with a high price-to-earnings ratio. Which of the following best describes your customer?
Young couple with reasonable income needing long-term growth.
Your customer, age 32, makes $48,000 annually and has $15,000 to invest. Although he has never invested before, he wants to invest in something exciting, with investment returns in the 20%+ range. Which of the following should you suggest?
Your customer should provide more information before you can make a suitable recommendation.
A railroad company pledges its railroad cars as collateral for a bond offering. This bond would be issued as
an equipment trust certificate
A contingent deferred sales charge is best described as:
a back-end sales charge that decreases the longer the investor holds the shares.
Sector funds invest in stocks of companies operating in specific industries or specific geographic sectors;
a biotechnology fund is one example of sector funds.
In reviewing investment companies, you notice one that has a net asset value (NAV) greater than its asking price. The investment company must be:
a closed-end management company.
An investor who purchases a fixed premium variable life contract on July 1 and cancels the policy four days after receiving notification of his free-look right would receive:
a full refund of all money paid to date.
In a variable life insurance policy:
a minimum death benefit is guaranteed. all sales charges must be addressed in the prospectus.
In a variable life annuity with ten-year period certain, a contract holder receives:
a minimum of ten years of variable payments, followed by additional variable payments for life.
A 12b-1 fee is charged quarterly as
a percentage of the average annual assets.
A balanced fund invests:
a portion of its portfolio in both debt and equity instruments.
In order for an investor to realize a capital gain or loss:
a sale must take place.
If your customer, age 36, invested $1.2 million dollars with an insurance company to purchase an annuity that would begin payouts to him when he reached the age of 65, he would be purchasing:
a single payment, deferred annuity.
The prospectus of the ABC Fund contains the phrase "will have at least one-quarter of common stock investments in the field of business machines." The ABC Fund is:
a specialized fund.
Your 75-year-old customer has read many articles about variable annuities and would like you to choose one that would be appropriate for his $100,000 investment. Your customer has a well-diversified investment portfolio and is not currently in need of additional income. The most appropriate response to your customer's request in this situation is:
a variable annuity is probably not a suitable investment choice because of your investor's age and the contingent deferred sales charges that apply on withdrawals.
To determine the payment amount,
accumulation units are converted to annuity units. In a variable annuity, neither the annuity unit's value nor the monthly payment amount can be fixed.
A regulated investment company:
acts as a conduit for dividend distributions.
An investor who purchases stock in two technology companies with high projected earnings and growth potential but little performance history is considered a(n):
aggressive investor.
Your open-end investment company customer has decided to make automatic reinvestment of dividend and capital gains distributions. This choice will:
not change the tax status of these distributions. allow your customer to reinvest the distribution without paying a sales charge.
The result of dollar cost averaging is to:
obtain a lower average cost per share than average price per share.
A convertible bond of the KLP Corporation has a conversion ratio of 20. This means that:
one bond can be exchanged for 20 shares of KLP common stock. the conversion price of the bond is $50 per share.
Your client is interested in some of the tax ramifications of investing in variable annuities. You could tell her:
partial withdrawals from nonqualified plans are taxed on a LIFO basis. if she is dissatisfied with one company, Section 1035 of the Internal Revenue Code will permit her to liquidate one variable annuity and place the funds into a different one without being taxed.
A mutual fund that takes special steps to shield its investors from loss of capital is a(n):
principal-protected fund.
An investment adviser of a mutual fund may liquidate shares held in the fund's portfolio:
provided the liquidation is within the guidelines set forth by the fund's objective.
When comparing stock market and mutual fund definitions, the bid price is analogous to the NAV, and the ask price is analogous to the:
public offering price.
A defensive investment strategy would be best described as one where the investor builds a portfolio consisting largely of:
public utilities, food manufacturers and tobacco companies.
Your customer has invested in a mutual fund with a 12b-1 fee. You explain to him that a charge will be deducted from his account:
quarterly.
UITs are
redeemable by the issuer
If interest rates increase, the interest payable on outstanding corporate bonds will:
remain unchanged.
One characteristic of a closed-end fund that differs from an open-end fund is that with closed-end funds, the number of shares outstanding:
remains constant.
ACE Fund experienced an unrealized loss last month. This will:
result in a lower NAV per share. reduce the proceeds payable to shareholders who liquidate their shares.
U.S. government bond fund offers the best combination of
safety and a higher yield of the choices offered.
12b-1 fees may be used to cover all of the following charges
sales literature. cost of prospectus mailings to prospective shareholders . advertising.
Open-End investment companies do not issue
senior securities
Dollar cost averaging results in a lower average cost per share than the average price per share paid, only if the share price during the investment period:
shows any fluctuation.
The NAV of a mutual fund is $14.17 per share. The POP is $15.32 per share. To determine the sales charge of the fund:
subtract the NAV from the POP.
The price of closed-end investment company shares trading in the secondary market is determined by
supply and demand
To register new securities, an investment company must
supply detailed information about itself to the SEC. supply detailed information about the new securities to the SEC.
In a variable annuity, the risk of a fluctuating market is borne by:
the annuitant.
Under Internal Revenue Code Section 1035, to accomplish a tax-free exchange
the approved policies do not have to be issued by the same company.
A customer of yours owns a corporate bond fund with a long duration. Mortgage rates are going up. What impact will this have on the investment?
the current yield will increase since the price of the shares can be expected to fall.
An investor purchased a variable annuity some years ago and has been making regular payments into it. He has encountered financial difficulties and asks his registered representative if he can arrange to delay his next few payments. The registered representative explains that:
the customer may pay in as much or as little, as frequently or as infrequently, as he pleases, with no penalty.
Open-end investment company shares normally go ex-dividend:
the day after the record date.
You would like to introduce a new client to investment company securities as a method of diversifying his portfolio. Important factors to consider when comparing mutual funds would be:
the fund's investment objective. fees and expenses.
All mutual fund prospectuses are required to show
the method of computing the offering price.
During the accumulation phase of a variable annuity, the value of the contract owner's portion of the separate account is equal to:
the number of accumulation units times the value per unit.
The management fees paid by an investment company are part of:
the operating expense of the fund.
The investment policy of a mutual fund can be changed by a majority vote of:
the outstanding shares.
The main benefit that variable life insurance has over whole life insurance is:
the potential for a higher cash value and death benefit.
Before your customer buys shares of XYZ Invest Mutual Fund, shortly before the ex-dividend date, he should understand that:
the price of the shares will decline on the ex-dividend date by the amount of the distribution.
One of your clients is interested in purchasing an index annuity. When discussing this product, you should mention
the rate cap the participation rate
An insurance company offering a variable annuity makes payments to annuitants on the 1st of each month. The contract has an assumed interest rate of 3%. In July of this year the contract earned 4%. In August the account earned 6%. If the contract earns 3% in September, the payments to annuitants in October will be:
the same as the payments in September.
The cost basis of mutual fund shares includes
the total cost, including sales charges, plus dividends or capital gains reinvested in the fund
When evaluating the purchase of an immediate variable annuity for a retiree, the most important factor in determining suitability is:
the uncertainty of the amount of the monthly check.
T-bills are direct obligation of the US government and
trade in the secondary market. are issued at a discount
A customer requests information on a variable life insurance policy and asks her registered representative to circle the important information in the prospectus and information he thinks will be of special interest to her. This is permitted:
under no circumstances.
Capital gains distributions may be combined with income distributions to calculate annual yield on mutual fund shares:
under no circumstances.
Investors should consider all of the following when investing in a mutual fund EXCEPT the:
underwriter
A client wishing to invest $10,000 in a tax-exempt unit investment trust would be acquiring:
units.
Mutual fund shareholders are not taxed on:
unrealized capital gains.
A customer purchased a variable annuity from an agent five years ago with an initial investment of $200,000. The annuity's surrender fee will expire in year seven, which coincides with the customer's anticipated need for the funds. In the fifth year of the contract, the value of the annuity increased from $300,000 to $375,000. The agent notices that the general market is on the decline and recommends she enter a 1035 exchange of the variable contract for another, thus increasing her death benefit and locking it in at a higher minimum. This recommendation is:
unsuitable because of surrender fees.
If the newspaper indicates that T-bill yields have gone down, this means that T-bill prices are:
up.
The net asset value per share of a mutual fund will fluctuate in value relative to the:
value of the fund's portfolio.
A type of life insurance where the death benefit varies based upon the investments selected by the policyowner is known as
variable life.
For a variable annuity, the payments will
vary with the value of the portfolio in the separate account
The best time to purchase shares in a long-term bond fund is:
when long-term interest rates are falling after a period of high interest rates.
Dividend distributions from a bond fund would be taxable:
whether the dividends are received in cash or reinvested.