SIE Unit 4
When a customer chooses to annuitize a variable annuity, all of these are factors the insurance company will use in calculating the initial payout amount except A) historic inflation rate. B) balance of the separate account. C) age of the annuitant. D) gender of the annuitant.
A, Insurance companies do not consider inflation when making this calculation. The components are GAAPI: gender, age, account balance, payout option, and interest rate (AIR).
Which of these would not affect the NAV per share of a mutual fund share? A) Portfolio securities that had to be sold for a big capital loss B) The portfolio's market value undergoes a large increase C) The fund receives a dividend from one of the portfolio stocks D) The fund pays its monthly operating expenses like utility bills
A, Selling securities out of the portfolio, whether for a gain or a loss, simply replaces the securities with an equivalent amount of cash, leaving the NAV per share unchanged. The other choices involve changes in net assets with no accompanying change in the number of shares outstanding, which would change the NAV per share.
All of these are part of the expense ratio of a mutual fund except A) CDSC. B) legal and accounting costs. C) management fees. D) a 12b-1 fee.
A, The Contingent Deferred Sales Charge (CDSC) is charged against the proceeds of a sale of the fund's shares, not against the fund's assets.
Which of the following investment companies terminates business on a predetermined date? A) Hedge fund B) Nonfixed unit investment trust (UIT) C) Mutual fund D) Fixed unit investment trust (UIT)
A fixed UIT typically has bonds in its portfolio that mature on a specific date. Before that date, the trust buys and redeems units of beneficial ownership in the portfolio. When the bonds mature and pay off, the trust distributes the remaining interest and principal to the current unit holders and dissolves.
Which class of shares have a 12b-1 fee as the primary sales charge? A) Class B shares B) Class C shares C) Class A shares D) No load
B, Class C shares charge a level load built into the expense ratio, usually as a 12b-1 fee. Class B shares have back-end loads that reduce over time (contingent deferred sales charge, or CDSC). Class A shares charge an upfront load. No load funds have no sales charge.
All of these are true regarding no-load shares except they A) offer more return-per-dollar invested versus load funds if investing results are the same. B) have fees associated with sales and redemptions. C) are sold by the fund with no sales charges or fees of any kind. D) are redeemed with no charges or fees of any kind.
B, No-load shares have expenses that are not considered sales charges. Some broker-dealers may charge fees for transactions, but these fees are not from the fund.
A mutual fund has been in existence for 15 years. The prospectus must disclose the fund's performance A) for each year over the last 10 years. B) over the last 1, 5, and 10 years. C) over the last 1, 5, 10, 15, 20, and 25 years. D) broken out as an average over the last 10 years.
B, The prospectus of a mutual fund must show the fund's performance over the last 10 years or the life of the fund, whichever is shorter. The data must be shown as the last year's performance, the performance over the last 5 years, and the performance over the last 10 years. With this fund, the 15-year performance need not be shown.
Which of these would not be included in a mutual fund's list of expenses? I Shareholder records and service II Investment adviser's fee III Broker-dealer sales charges IV Underwriter's sales loads A) II and IV B) I and III C) III and IV D) I and II
C, Costs to maintain shareholder records, costs to provide services to shareholders, and the investment adviser's fees are all expenses to the fund. The costs paid in the form of sales charges (loads) to an underwriter, or broker-dealers selling mutual funds to the public may never be treated as an expense to the fund. These are expenses to the investor.
The investment return of a variable annuity comes from A) the performance of the selected subaccounts within a separate account. B) the insurance company's general account. C) computing the excess of the premiums received over the mortality experience. D) the assumed rate stated in the policy documents
A, A key feature of the variable annuity is that most of the premium is invested into the insurance company's separate account rather than the general account. Within the separate account, a number of subaccounts may be selected, depending on the investor's objectives. It is the performance of these subaccounts that provides the annuity's investment return.
A mutual fund's public offering price is $10.50. An investor who wishes to invest $1,000.00 in the fund is able to purchase A) 96 and owe $8.00. B) 95.238 shares. C) Partial shares are not allowed. D) 95 shares with $2.50 left.
B, (1,000/10.50) Mutual funds may be purchased in even dollar amounts and partial shares may be issued.
A letter of intent may be backdated to include a prior purchase up to A) 6 months. B) 13 months. C) 90 days. D) indefinitely.
C, LOIs may be backdated up to 90 days. The obligation under the LOI must be met within 13 months from the date of the letter.
Which of the following would cause a mutual fund's net asset value (NAV) per share to fall? I The fund purchases securities for the portfolio. II The fund pays a dividend to shareholders. III The market value of the portfolio declines. IV A large number of shares are redeemed. A) I and IV B) I and III C) II and III D) II and IV
C, Paying a dividend and suffering market decline both reduce the net assets of the fund without reducing the number of shares; hence, the NAV declines. Purchasing portfolio securities simply replaces portfolio cash with an equivalent value of securities; hence the NAV remains unchanged. Redemption of shares reduces the fund's net assets, but the number of shares declines by an equivalent proportion; hence, the NAV remains unchanged.
If a fund sponsor allows an investor to move funds from one fund to another within its fund family, this is called A) a reinvestment right. B) a right of accumulation. C) a 12b-1 waiver. D) an exchange privilege
D,
Under the Investment Company Act of 1940, which of the following is not considered an investment company? A) Unit investment trust B) Face-amount certificate company C) Separate account within a variable annuity D) Hedge fund
D, Investment companies include face-amount certificates, unit investment trusts, and management companies (both open- and closed-end). The separate account within a VA is a type of open-end management company. Hedge funds are organized as private investment companies (often limited partnerships), which are excluded under the definition of investment company under the Investment Company Act of 1940.
Under the Investment Company Act of 1940 all of these are examples of management companies except A) A growth fund option for a VA. B) A Windmill Income Fund, an exchange-listed:closed-end fund. C) An S&P 500 Index Trust ETF. D) A Windmill Income UIT.
D, Unit investment trusts are investment companies, but not management companies under the act. Closed-end funds, ETF's, and separate accounts are all types of management companies.
A mutual fund's share class determines A) how the shares are delivered to the investor. B) how sales charges and related expenses are paid. C) how many shares the investor may purchase. D) the net asset value per share.
b, Individual mutual funds are often available to investors as Class A, Class B, or Class C, and there are other classes varying from fund to fund. The share class determines when and how the sales charge is paid. Class A shares have it paid when the shares are purchased, Class B shares have it paid when the shares are redeemed, and Class C shares have a small charge removed from the investor's account every quarter.
Which of the following are associated with manipulative, deceptive, or fraudulent devices? I Breakpoint sale II Good til canceled III Fill-or-kill (FOK) IV Churning A) I and II B) I and IV C) III and IV D) II and III
B, Breakpoint sales is an expression that means those sales that are just below the breakpoint. Allowing a sale to occur in an amount just below a breakpoint can be viewed as an effort by representatives to share in the higher sales charges. Churning is trading that is excessive in frequency or size and does not serve an investment purpose. Both of these violations are inconsistent with just and equitable principles of trade.
Which class of shares have a front end sales charge? A) Class B shares B) Class A shares C) No load D) Class C shares
B, Class A shares have a front end load. Class B shares have a back-end load (CDSC). Class C share have a level load charged as part of the expense ratio. No load funds have no sales charges.
One characteristic of an open-end investment company that distinguishes it from a closed-end one is that A) it may be either diversified or nondiversified. B) there is a continuous public offering. C) there are a wide variety of objectives available for investors to select from. D) it may avoid taxation by distributing all of its net investment income to shareholders.
B, The key difference between open-end investment companies and closed-end investment companies is the fact that new shares are continuously being offered for open-end companies. In the case of the closed-end, once the IPO is over, the only way to acquire shares is in the secondary market. Both types of funds may operate as regulated investment companies and avoid taxation, both may choose to be diversified or not, and both offer a wide variety of investment objectives.
Under the IRC Subchapter M, if the WWF Fund only distributes 85% of its net investment income to its shareholders, then which of these is true? I The fund must pay taxes on the undistributed 15% of net investment income. II The fund must pay taxes on 100% of the net investment income. III The shareholder pays no tax if the income is reinvested. IV The shareholder must pay taxes if the income is received in cash or reinvested. A) II and III B) II and IV C) I and III D) I and IV
B, To avoid triple taxation according to the IRC Subchapter M, an investment company must distribute at least 90% of its net investment income. Since WWF Fund only distributed 85% of its net investment income, it must pay taxes on 100% of the net investment income. Shareholders always pay taxes on taxable income whether received in cash or reinvested.
Which of the following are the most likely to make monthly or quarterly payments for the life the investor? a Fixed annuity b Unit investment trust (UIT) c Mutual fund d Variable annuity
a & d, Both a fixed and variable annuity is an insurance contract designed to provide retirement income. The term annuity refers to a stream of payments guaranteed for a certain period including the life of the annuitant. In the case of a variable annuity, the actual amount to be paid out may or may not be guaranteed, but the stream of payments itself is. Because an annuity can provide an income for life, the contract has a mortality guarantee. Mutual funds and UITs have no such guarantee.
Which of the following would cause a change in the net asset value (NAV) of a mutual fund share? I Many shares are redeemed. II Securities in the portfolio are sold for a capital gain. III The fund pays a small dividend. IV The market value of the portfolio declines. A) I and IV B) II and III C) I and II D) III and IV
d, Paying a dividend would reduce the net assets of the fund without reducing the number of shares outstanding, which would reduce the NAV per share. A decline in the market value of the portfolio would have the same effect. Sales and redemptions of shares change the net assets but also change the number of shares outstanding to the same degree, leaving the NAV per share unchanged. Selling securities for a capital gain simply replaces securities in the portfolio with an equivalent amount of cash, leaving the NAV unchanged.
An investor asks for a copy of mutual funds Statement of Additional Information (SAI). The request must be satisfied within A) five calendar days, free of charge. B) five calendar days, with a fee for postage permissible. C) three business days, with a fee for postage permissible. D) three business days, free of charge.
d, Requests for an SAI must be complied with within three business days free of charge.
A variable annuity's investment return each month is based on A) the assumed interest rate stated in the contract. B) the performance of the separate account. C) the performance of the insurance company's general account. D) the contracts stated guaranteed monthly return.
b, A key feature of the variable annuity is that the premium is invested into the insurance company's separate account rather than the general account. It is the performance of the separate account that provides the annuity's investment return each month. There are no guarantees as to the separate account performance or return each month.
Which of the following would be unlawful regarding use of a mutual fund prospectus? A) Calling an investor's attention to a section that may be interesting B) Failing to highlight a small section the customer has specifically asked about C) Sending a prospectus to someone who has shown no interest in the fund D) Leaving a typographical error in the text unmarked
A, A prospectus for any security, not just one for a mutual fund, may not be marked, highlighted, or otherwise altered in any way, nor may steps be taken to call an investor's attention to some passage or section that might be of special interest, even if the potential customer asked that it be done.
ACE, an open-end investment company, operates under the conduit, or pipeline, tax theory. Last year, it distributed 91% of all net investment income as a dividend to shareholders. Therefore, which of the following statements is true? A) ACE paid taxes on 9% of its net investment income last year. B) ACE paid no taxes last year because it qualified as a regulated investment company under IRC Subchapter M. C) ACE paid taxes on 91% of its net investment income last year. D) ACE paid taxes on 9% of its net investment income and capital gains last year.
A, ACE pays taxes on any portion of income it does not distribute, as long as it distributes at least 90%; ACE paid taxes on 9%.
An investor can take advantage of intraday price changes due to normal market forces when investing in which of these? I Closed-end funds II Exchange-traded funds III Hedge funds IV Open-end funds A) I and II B) III and IV C) II and III D) I and IV
A, Both closed-end funds and ETFs trade in the marketplace based upon supply and demand. Open-end funds use forward pricing and generally price only once per day (usually at the end of the trading day). Most hedge funds are organized as private investment partnerships and are considered illiquid. Some have minimum holding requirements known as lock-up provisions, and in that light, their interests do not reliably trade intraday. Information on ETFs can be found in Unit Five under Learning Objective 5.l.
Which of the following are true regarding mutual fund sales charges? I They are used to defray fund expenses, such as operating costs and salaries. II They are set by the fund's transfer agent. III They are not an expense to the fund, but to the investor. IV They are used to compensate the fund's underwriter and sales representatives. A) III and IV B) I and IV C) I and II D) II and III
A, Sales charges are not among the standard business expenses of a mutual fund and may not be considered part of them. They are intended to compensate the underwriter and broker-dealers and their sales representatives who sell the fund shares to the public, and are thus expenses to the investor, not to the fund.
The Windmill Growth Fund has breakpoints at $10,000, $25,000, and $50,000. Your customer places an unsolicited purchase through you for $47,000. You place the trade as requested without question or comment. This action is A) a rules violation. B) acceptable because the transaction is unsolicited. C) unsolicited trade are not allowed in mutual funds. D) acceptable in all situations.
A, This trade, though unsolicited, would still require the representative to disclose the existence of the breakpoint. Unsolicited trades are allowed in mutual funds. The representative's duty is to disclose the existence of the breakpoint, failure to do so is a breakpoint sale.
Under which of the following conditions will an investor be able to purchase mutual fund shares and pay no sales charge? A) Under the automatic reinvestment privilege B) If the customer has made a special arrangement with the fund's underwriter C) Upon application to the fund at least 10 days in advance D) If the customer has been in good standing for some minimum time period
a, A mutual fund investor may receive up to five payments during the year: four dividend distributions and a long-term capital gains distribution. The investor may choose to have the payments automatically reinvested in the fund rather than distributed to them. In this case, the shares are purchased with no sales charge. Note that choosing to reinvest does not limit the investor's tax liability. The investor will still have to pay income tax on the dividend distributions and capital gains tax on the capital gains distribution, because the investor is considered to have enjoyed constructive receipt of the payments.
Advantages to the investor offered by investment companies include I ability to invest small amounts in many different securities. II special securities prices available only to investment companies. III elimination of market risk through pooling of investments. IV increased purchasing power in the marketplace. A) I and IV B) II and IV C) I and III D) II and III
a, Investors who can only invest relatively small amounts of money can nevertheless purchase interest in many different securities through investment companies. By the same token, they also gain access to increased purchasing power by pooling their investments with others.
All of the following would be included in the expense ratio of a fund except A) front-end or back-end load. B) salaries and administrative fees. C) 12b-1 fee. D) portfolio management fee.
a, The expense ratio includes ongoing operating expenses but not sales charges. A front- or back-end load is a sales charge.
Which of the following prospectus must be provided no later than confirmation of the sale? A) Statutory prospectus B) Rule 498 prospectus C) Statement of additional information D) Summary prospectus
a, The summary prospectus and the rule 498 prospectus are the same thing. They can be used to discuss key information, but the statutory prospectus is still required at or prior to confirmation. The statement of additional information is only provided if requested by the customer.
Which of the following need not be included in the annual reports a mutual fund provides to its shareholders? A) A graph comparing fund performance to an appropriate index B) A list of the most poorly performing portfolio securities C) Names and titles of those responsible for portfolio management D) Factors and strategies that materially affected performance
b, Aside from the basic financial data a mutual fund must provide at least semiannually, additional disclosures specific to mutual fund companies - investment strategies, comparative performance, personnel managing the portfolio - are intended to enhance and align with full disclosure. A separate list of either good or poorly performing investments is not among the required disclosures.
Which of the following are true regarding mutual fund sales charges? I They are used to defray fund expenses, such as operating costs and salaries. II They are set by the fund's transfer agent. III They are not an expense to the fund, but to the investor. IV They are used to compensate the fund's underwriter and sales representatives. A) I and IV B) I and II C) II and III D) III and IV
d, Sales charges are not among the standard business expenses of a mutual fund and may not be considered part of them. They are intended to compensate the underwriter and broker-dealers and their sales representatives who sell the fund shares to the public, and are thus expenses to the investor, not to the fund. LO 4.d
What does the mortality guarantee of a variable annuity insure? A) That each monthly payment will meet a specific minimum B) That total payments over the annuitant's life will meet a specific minimum C) That payments will continue for the annuitant's life expectancy D) That payments will continue for the life of the annuitant
d, The mortality guarantee of a variable annuity, which the insurance company assumes as part of mortality risk, insures that payments will continue for the life of the annuitant. It does not guarantee the size of the payments.
