Series 6: Unit 2 Checkpoint

Your customer, Ben, purchased 100 shares of SuperNuTech, Inc., (SNTI) on May 1 at a price of $23 a share. The following April, Ben had a larger-than-expected tax bill and sold the shares of SNTI at $30 a share to raise cash to pay taxes. What are the tax implications of the sale of SNTI? A) $700 short-term capital gain B) $700 long-term capital loss C) $700 short-term capital loss D) $700 long-term capital gain

A) $700 short-term capital gain Ben purchased the 100 shares of SNTI at $23 a share and sold them for $30 a share, realizing a $7 per share gain (30 - 23 = 7). He held the shares for less than a year, so the gain is treated as short term.

After a variable life policy has been in force for three years, the insurance company must make policy loans available to policy owner. What is the minimum amount of the cash value that must be made l available for a loan? A) 75% B) 80% C) 70% D) 90%

A) 75% The minimum is 75%. The practical maximum is 90%, but this number does not seem to be tested; the 75% minimum is

Under the conduit theory of taxation, which of the following statements are true? I. A fund is not taxed on earnings distributed to shareholders if it distributes at least 90% of its net investment income. II. Investors are not taxed on earnings they reinvest. III. A fund is only taxed on interest income. IV. Investors are taxed on earnings they receive in cash.

A) I and IV By qualifying as a regulated investment company and being taxed under the conduit (pipeline) tax theory, the fund is liable only for taxes on retained income if it distributes at least 90% of its net investment income to shareholders. Investors will pay taxes on distributed income whether received in cash or reinvested.

Which of the following is not a suitability consideration when recommending a variable annuity to a customer? A) The source of the money used to fund the purchase of the variable annuity B) The payout to the representative for the sale C) The customer's funding of other retirement options, like employer plans and IRAs D) The customer's tolerance for risk

A) The source of the money used to fund the purchase of the variable annuity How much the representative makes on the sale should be set aside. The focus should be on the investment meeting the customer's objectives and circumstances.

The maximum sales charge imposed on the sale of a variable annuity A) must be fair and reasonable B) is 9%. C) is zero. There is no sales charge allowed. D) is 8½%.

A) must be fair and reasonable There is no specific maximum sales charge on the sale of a variable annuity. FINRA requires that such charges be fair and reasonable. Most variable annuities do not have a front-end sales charge, but instead, impose a CDSC (which may be substantial).

When soliciting the sale of a variable life insurance policy, when must a prospectus be provided to the customer? A) At least three days before the solicitation B) At or before the time of the solicitation C) There is no requirement for a prospectus in the sale of this type of product. D) Within three days of the solicitation

B) At or before the time of the solicitation Though three days before would meet the requirement, the rule is at or prior.

Which of the following statements regarding dollar cost averaging (DCA) is correct? A) DCA will result in the customer paying a higher cost per share than the average price over a given period. B) DCA will result in the customer having a lower cost per share than the average price over a given period. C) DCA can guarantee a profit. D) DCA is a type of mutual fund withdrawal plan

B) DCA will result in the customer having a lower cost per share than the average price over a given period. CA allows the individual to purchase more shares when prices are low and fewer shares when prices are high. In a fluctuating market and over a period, the average cost per share is lower than the average price of the shares. However, DCA does not guarantee profits in a declining market because prices may continue to decline for some time.

Jpon annuitization, an insurance company will determine the payout amount from an annuity. Which of the following is not a factor in that determination? A) Gender B) Marital status C) Assumed interest rate (AIR) D) Age

B) Marital status Marital status is not one of the factors. The payout option is a factor, and many companies offer joint life payout only to married couples, but the annuitant's marital status itself is not a factor. To recall the factors, remember GAAPI: gender, age, amount in the account, payout option, and interest rate (AIR).

A unit investment trust has 90% of its portfolio invested in high-grade bonds with an average maturity of almost 25 years. If the industry consensus were that long-term interest rates were about to increase sharply, which of the following actions would most likely be taken by the UlT? A) Ladder the maturities B) No action taken C) Liquidate and begin to move into cash or cash equivalents D) Switch to short-term bonds

B) No action taken One of the key distinctions of a UIT is its lack of management. Once the portfolio has been created, it is fixed until maturity, in the case of debt securities, or until some predetermined liquidation point, in the case of an equity trust.

Which of the following regarding an open-end management company is not true? A) They may own preferred stock. B) They may issue bonds. C) They may own bonds. D) They may issue common shares.

B) They may issue bonds An open-end management company may hold many different investments in its portfolio (like stocks and bonds). However, the open-end company may not issue bonds or preferred stock; they only issue common shares.

If a variable life insurance policy features a minimum death benefit, the premiums for the policy will be deposited into A) the general account. B) both the separate and the general account, with the split determined by the policy. C) the separate account. D) the escrow account.

B) both the separate and the general account, with the split determined by the policy. In a variable life policy, a portion of the premium goes to the general account and covers the minimum death benefit. The remainder is deposited into the separate account and covers the variable portion of the policy. There is no escrow account in this situation.

e Windmill Growth and Income Fund, Class A, has an NAV of $48 and a POP of $50. What is the sales charge? A) 2% B) 4⅙% C) 4% D) $2

C) 4% Remember, sales charges are expressed as a percentage of the POP. Using the formula NAV + SC = POP, the current sales charge is $2. To get the percentage, divide 2 by 50 to get 0.04 (4%).

For a mutual fund Class B share, the sales charge is which of the following? A) A 1% redemption fee that remains for one year B) A charge applied upon redemption that never reduces C) A charge applied upon redemption that reduces over the holding period until it reaches zero D) A charge applied at purchase that reduces based on the break point chart

C) A charge applied upon redemption that reduces over the holding period until it reaches zero Class B shares typically charge a contingent deferred sales charge (CDSC) that is applied at redemption. This charge is reduced each year of the holding period until it reaches zero -typically in five to seven years. A charge applied at purchase that reduces based on a breakpoint chart is an A share (front-end load). Many C share (level load) funds impose a 1% CDSC for one year. A redemption fee that never goes away does not exist.

The variable portion of the death benefit in a variable life insurance policy is adjusted dependent on the separate account's performance versus an assumed interest rate. How often is the variable death benefit adjusted? A) Quarterly B) Monthly C) Annually D) Biannually

C) Annually This adjustment is made on an annual basis. The payout on a variable annuity is adjusted monthly. Do not get the two mixed up.

Which of the following must be registered as investment companies under the Investment Company Act of 1940? I. Closed-end investment companies II. Separate accounts of insurance companies offering variable products III. Variable annuity contracts IV. Variable life insurance policies A) I and IV B) II and III C) I and II D) III and IV

C) I and II Under the Investment Company Act of 1940, face-amount certificate companies, unit investment trusts, open- and closed-end management companies, and separate accounts of insurance companies used to fund variable annuity and variable life contracts must register with the SEC as investment companies. Note that the separate account is registered as an investment company, not the variable contract.

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? I. The capital gain distribution is treated as long term. II. The capital gain from redemption is treated as long term. III. The capital gain from redemption is treated as short term. IV. The capital gain distribution is treated as short term.

C) I and III When long-term capital gains are distributed, the length of time an investor has owned the fund is not relevant; it's still a long-term distribution. However, redemption of shares follows the normal holding period rules. Therefore, when this customer sold shares 10 months (July to May) after the purchase, the gain -like any other gain from a holding period that does not exceed 12 months -is short term.

For a mutual fund Class A share, the public offering price is determined by which of the following? A) NAV - SC B) NAV x SC C) NAV + SC D) NAV •/• SC

C) NAV + SC For a front-end load (A share), the public offering price is the net asset value (NAV) plus the sales charge (SC).

Your client wishes to invest $50,000 into shares of the ACE mutual fund. This morning's financial news indicated that the POP for ACE was $10.86, while the NAV was $10 per share. The client's order is placed at 2:00 pm ET. On the basis of this information, you could confirm to the client a purchase of A) more than 4,604.052 shares, but fewer than 5,000 shares. B) 4,604.052 shares. C) nothing yet, as you must wait for the POP to be computed based on the day's close. D) 5,000 shares.

C) nothing yet, as you must wait for the POP to be computed based on the day's close. Mutual funds use forward pricing, so we never know what we'll be paying per share (if purchasing) or receiving per share (if redeeming) until the next calculated price.

All purchases and redemptions of mutual funds are based on A) the last NAV calculation before the order was received. B) the NAV calculation at settlement on the second business day (T+2). C) the next NAV calculation after the order is received. D) the average of the NAV calculations for the day before the order is received.

C) the next NAV calculation after the order is received. Purchases and redemptions of mutual fund shares are based on the next NAV calculation after the order is received. is called forward pricing.

The tax rule that allows a mutual fund to avoid taxation on the money paid out as dividends is called A) the pass-through theory. B) the dividend tax break. C) the pipeline theory. D) the investment company dividend incentive.

C) the pipeline theory This rule is the pipeline (or conduit) tax theory. If an investment company pays out a minimum of 90% of its net investment income to shareholders as a dividend, the fund avoids taxes on the amount distributes.

An investor who has purchased a variable annuity has the right to I. vote on proposed changes in investment policy. II. approve changes in the plan portfolio. III. vote for the investment adviser. IV. withdraw principal without any tax consequences. A) II and IV B) II and Ill C) I and IV D) I and III

D) I and III Owners of variable annuities, like owners of mutual fund shares, may vote on changes in investment policy and for an investment adviser. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are taken out before principal.

To receive long-term capital gains treatment, a position must be held for how long? A) One year or more B) More than two years C) No less than one year D) More than one year

D) More than one year To be treated as long-term gains, a position must be held for more than one year. One year or more and no less than one year both include one year and are incorrect. Though a holding period of more than two years is technically correct, it excludes some time that would qualify. More than one year is the best answer.

Which of the following regarding a closed-end management company is true? A) They may not issue bonds. B) The sale price is set by the NAV plus a sales charge. C) The shares are purchased from and redeemed by the issuer. D) The shares are purchased and sold in the secondary market.

D) The shares are purchased and sold in the secondary market. After the IPO, shares on a closed-end management company trade in the secondary market where the price is determined by supply and demand (not NAV + sales charge). Closed ends may issue preferred shares and bonds.

September 1, Natalie purchased 300 shares of Sierra Verde Coffee stock at $33 a share. On October 1 of the same year, she purchased another 300 shares at $31 a share. The stock continued to decline, and Natalie sold 300 shares at $28 a share on October 25. For tax purposes, Natalie realizes A) a loss of $3 a share. B) a loss of $6 a share. C) a loss of $5 a share. D) no gain or loss.

D) no gain or loss Unfortunately, Natalie created a wash sale. Though she experienced a loss on October 25, she had re-established the position within 30 days of the loss (on October 1). She may not claim this loss for tax purposes.

ach of the following is a characteristic of money market funds except A) a beta of 1.00. B) a NAV of $1.00 per share. C) offered without a sales load. D) portfolio of short-term debt instruments.

D) portfolio of short-term debt instruments. A beta of 1.00 means that a security (or portfolio) has the same price volatility as the overall market. That is certainly not the case with money market fund shares. Money market mutual funds invest in a portfolio of short-term debt instruments such as T-bills, commercial paper, and banker's acceptances. They are offered without a sales load or charge. The principal objective of the fund is to maintain a stable NAV ($1 per share).