Series 66

The current yield of a callable bond selling at a premium is calculated

% of its current MKT price

Many fixed-income investors are looking to avoid loss of principal. Which of the following would likely have the lowest degree of exposure to credit risk? A) Ba-rated corporate mortgage bond B) A-rated general obligation municipal bond C) Aa-rated corporate debenture D) Baa-rated municipal revenue bond

Aa rated corporate debenture a bond's rating takes into consideration all factors, including collateral and tax base. the higher the rating, the lower the credit risk

To a technical analyst, the resistance level signifies the price at which a stock's supply would be expected to

Increase substantially This is about comparing support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down. The lower limit to these fluctuations is called a support level - the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level - the price range where a stock appears expensive and initiates increased selling. This selling represents an oversupply of the stock which results in downward pressure on the stock.

What affects NAV of a Mutual fund?

Market appreciation and decline in the value of the securities

A client has purchased a nonqualified variable annuity from a commercial insurance company. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. What is the taxable consequence of this withdrawal to your client?

Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis

When does it make sense to purchase a fixed-income security when its NPV is

When the NPV is positive, meaning the security is available for a price below its present value Negative NPV means it is too high, zero NPV means it is accurately priced

One of the likely consequences of a rating downgrade on a bond is

a reduction in the market price of the bond

Compound Interest

Interest earned on interest that has been added to the original principal

Mark's company, which is located in Oregon, makes unfinished wood furniture. His company sells this furniture directly to the public from a large warehouse. Theresa's company, which is located in southern Georgia, grows cotton for t-shirts manufacturers. Which of the following statements correctly identifies hedging strategies for Mark and Theresa? Mark should buy lumber futures. Theresa should sell cotton futures. Mark should sell lumber futures. Theresa should buy cotton futures.

Mark should buy lumber features, he is short lumber, since he needs lumber to produce. So he must go long on lumber Theresa is long cotton since she produced it. She should short cotton by selling futures to hedge.

Which of the following is the risk that diminishes through portfolio diversification? A) Unsystematic risk B) Interest rate risk C) Systematic risk D) Purchasing power risk

Unsystematic Risk Unsystematic risk (diversifiable risk) is the risk that is eliminated when the investor builds a well-diversified portfolio. Interest rate risk and purchasing power risk are examples of systematic (nondiversifiable risk).

Current market interest rates are 6%. A bond with an 8% coupon would be most likely to have a net present value of zero when the bond's internal rate of return is

6% The internal rate of return of a bond is the interest rate that makes the NPV of the investment equal to zero. When a bond is selling at its present value, the NPV is zero. A bond's present value should be equal to a market price giving a yield to maturity equal to the current market interest rates. Therefore, when current market interest rates are 6%, a bond with an 8% coupon should be selling at a price producing a YTM, or IRR of approximately 6%.

Which of the following rates of return is used by investment professionals as the risk-free rate? A) Federal funds rate B) 91-day Treasury bill rate C) Discount rate D) Prime rate

B- 91- day Treasury Bill Rate The interest rate used as the basis for a risk-free rate of return is the 91-day Treasury bill rate. T-bills are U.S.-government guaranteed, the rate is short-term, and the market risk is minimal.

An investor has been comparing several different mutual funds with the same objectives. When making the decision as to which fund to purchase, which of the following factors would be the most important? A) The fund manager's tenure B) The exchange on which the fund is listed C) The net asset value per share D) The date of the annual shareholders meeting

The fund manager's tenure The fund manager's tenure (the number of years that manager has been managing that fund's portfolio) is important because, although past performance is no guarantee of the future, in general, investors prefer someone who has performed well over the years instead of a manager with only a year or two at the helm. Because investors in mutual funds invariably purchase in a dollar amount rather than by the number of shares, the NAV per share is not a factor. That is, if you invest $10,000, what difference does it really make if the NAV per share is $10 or $100? No mutual funds are traded on the listed exchanges and why would someone buy a fund based on the date of the annual meeting?

All of the following are characteristics typical of a money market fund EXCEPT A) its net asset value normally remains unchanged B) the underlying portfolio consists of short-term debt instruments C) it is offered as a no-load investment D) it has a high beta and is safest in periods of low market volatility

it has a high beta and is safest in periods of low market volatility A money market fund has almost no price volatility, because the underlying portfolio consists of low-beta instruments, and the fund is deliberately managed for low beta (see the Glossary of Terms if you are not familiar with beta).

The owner of a fixed annuity is protected against

longevity risk Because a fixed annuity promises a fixed monthly payment for life, longevity risk is not a concern. However, the fixed payments are subject to purchasing power risk, also known as inflation risk. One other risk is that of dying after only receiving payments for several months after having chosen the life only option.

A mutual fund would have net redemptions when A) the number of shares being liquidated by investors exceeds those being purchased B) the fund is performing below the average of other funds with the same objectives C) the fund manager is selling more securities in the portfolio than are being purchased D) the fund increases its sales charge

the number of shares being liquidated by investors exceeds those being purchased One of the characteristics of an open-end investment company (mutual fund) is the ease of redeeming holdings. When the dollar amount of shares being redeemed exceeds that of those being purchased, the result is net redemptions. Although poor performance could lead to net redemptions, that is not always the case, so it is not always a true statement.

Bond X has an internal rate of return (IRR) of 7%. Bond Y has an IRR of 9%. Both bonds pay interest semiannually. If the required rate of return is A) 7%, the net present value (NPV) of Bond Y will exceed the NPV of Bond X. B) 7%, the net present value (NPV) of Bond X will exceed the NPV of Bond Y. C) 9%, the net present value (NPV) of Bond X will exceed the NPV of Bond Y. D) 9%, both bonds will have a positive NPV.

A- 7%, the net present value (NPV) of Bond Y will exceed the NPV of Bond X. We know that when a bond's IRR equals the required rate of return (the discount rate), the NPV of that bond is zero. That is the case with Bond X when the required rate of return is 7%. When the bond's IRR is above the required rate of return, it has a positive NPV. That is the case with Bond Y whose IRR is higher than the 7% required return. With a required return of 9%, Bond X has a negative NPV and Bond Y's NPV is zero. That is the technical explanation. The simple explanation is to compare the IRR with the required rate of return. Anytime the IRR is above the required rate, you've got a good deal (and that is what a positive NPV tells us).

Which of the following statements regarding nonqualified annuities is CORRECT? A) Because only insurance companies issue variable annuities, they are not considered securities. B) It is possible to receive distributions from an annuity before age 59½ without incurring tax penalties. C) Because taxes on earnings are deferred, all money withdrawn will be subject to income tax when received. D) The exclusion ratio applies to accumulation units only.

Nonqualified annuities, fixed or variable, are those where contributions are made with after-tax dollars. Withdrawals due to death or disability or taking substantially equal annuity distributions over the life of the insured can begin before age 59½ without being subject to a tax penalty. The exclusion ratio only applies during the payout period. Even though taxes on earnings are deferred, that portion of the withdrawal that represents a return of principal on a nonqualified annuity, is not subject to tax or penalty.