Unit 2 Checkpoint Exam

Real estate investing can be passive or active. An example of a passive real estate investment would be A) a real estate limited partnership B) managing an apartment building C) renting out single-family homes D) flipping houses

Ans. A) a real estate limited partnership DPPs, such a real estate limited partnership offering, are passive investments because the investor takes no part in the management or running of the enterprise. In each of the other choices, the investor must do some work. Reference: 10.3 in the License Exam Manual

Which of the following are characteristics of negotiable jumbo CDs? I. Issued in amounts of $100,000 to $1 million. II. Typically pay interest on a monthly basis. III. Always mature in 1 to 2 years with a prepayment penalty for early withdrawal. IV. Trade in the secondary market. A. I and IV B. II and III C. I and III D. II and IV

Ans. A. I and IV. Negotiable jumbo CDs are issued for $100,000 to $1 million and trade in the secondary market. Most jumbo CDs are issued with maturities of one year or less. Being negotiable, there is no prepayment penalty. These CDs generally pay interest on a semi-annual basis, not monthly. Reference: 6.1.1.2 in the License Exam Manual

Hedge funds are issued by A) limited partnerships B) Administrators C) portfolio advisers D) investment companies

Ans. A. Limited partnerships Almost all hedge funds are issued as limited partnerships with the investment adviser (portfolio manager) having an investment in the fund. Reference: 10.1 in the License Exam Manual

While listening to a commentator on cable TV, you hear the statement, "the flight to quality has ended." What would you expect the effect of this to be? A) pessimism is spreading B) yield spreads are narrowing C) yield spreads are widening D) airline stocks are in for a beating

Ans. B) yield spreads are narrowing The term yield spread refers to the difference in yield between very high quality debt instruments, such as US government bonds, and those with lower ratings. The spread compensates for the additional risk. When investors perceive that the risk has lessened, they won't demand as much in return from the lower rated instruments. Reference: 5.1.4 in the License Exam Manual

MNO is planning to raise capital through an offering of 30-year bonds. Which call price would be most beneficial to MNO? A) 104 B) 110 C) 102 D) 106

Ans. C 102 MNO would benefit most from the ability to call bonds at the lowest possible price. The call feature enables MNO to buy the bonds before maturity to reduce their fixed interest costs. A call price of 102 requires the lowest call premium of the options shown. Reference: 5.2.1 in the License Exam Manual

A 45-year-old investor wants the greatest possible monthly income with the preservation and stability of capital as secondary objectives. Which of the following investments would you recommend? A) Growth and income fund B) Money market mutual fund C) Long-term bond fund D) Growth mutual fund

Ans. C) Long-term bond fund The only choice that provides stability of capital is the money market fund, but that is not one of the investor's objectives and the monthly income is quite low. Although the two other funds don't offer stability, they certainly don't provide a high income (even the growth and income fund). If you want income, you invest in bonds, especially those with longer maturities. Reference: 7.1.5 in the License Exam Manual

From first to last, in what order would claimants receive payment in the event of bankruptcy? I. Holders of secured debt. II. Holders of subordinated debentures. III. General creditors. IV. Preferred stockholders. A. III, I, II and IV. B. IV, I, II and III C. I, III, II and IV D I, II, III and IV

Ans. C. I, III, II and IV. The liquidation order is as follows: wages, taxes, secured debt holders, unsecured debt holders (including general creditors), holders of subordinated bonds, preferred stockholders, and common stockholders. Reference: 5.1.2.7 in the License Exam Manual

Which of the following are considered debt securities? I. Equity-linked notes II. Leveraged funds III. Inverse funds IV. Structured notes A. II and IV B. II and III C. I and IV D. I and III

Ans.C. I and IV. Equity-linked notes (ETNs) are debt securities as are structured notes. Leveraged funds and inverse funds, whether they are management companies or ETFs, are equity products. Reference: 7.1.11 in the License Exam Manual

The term "derivative" would apply to all of the following EXCEPT A) hedge funds B) options C) forwards D) futures

ans. A) hedge funds Hedge funds are pooled investments, a form of investment company, and are not derivatives as are the other three choices. This is one example of a question where you get the correct answer by knowing the other three choices are not the exception. Reference: 9.1.5 in the License Exam Manual

The current yield on a bond with a coupon rate of 7.5% currently selling at 105-½ is approximately: A) 6.50%. B) 7.10%. C) 8%. D)7.50%.

Ans. B) 7.10%. A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 ÷ $1,055 = 7.109%, or approximately 7.1%. Reference: 5.3.1 in the License Exam Manual

You have a client who has sold short 100 shares of RIF, a stock listed on the NYSE. If the client wished to use options to protect against unlimited loss, you would suggest the client A) sell 1 RIF put B) buy 1 RIF call C) buy 1 RIF put D) sell 1 RIF call

Ans. B) buy 1 RIF call Buying a call option on a stock you are short will give you a guaranteed covering cost, thus preventing against unlimited loss. This is the best way to hedge a short position. Reference: 9.1.4.3 in the License Exam Manual

A client has told you that she has been reading in the financial press about something known as an "alternative investment." Which of the following would fit that description? I. Direct participation programs II. CEFs III. ETNs IV. Preferred stock A. I and III B. I and II C. III and IV. D. I, II and III

Ans. A. I and III There are a number of investments referred to as alternatives. Among them are DPPs and exchange-traded notes (ETNs). Preferred stock and closed-end investment companies (CEFs) are not considered alternative investments. Reference: 10.2 in the License Exam Manual

Which of the following regarding U.S. government agency obligations are TRUE? I. They are direct obligations of the U.S. government. II. They generally have higher yields than direct U.S. obligations. III. The Federal National Mortgage Association is a publicly traded corporation. IV. Securities issued by GNMA trade on the NYSE floor. A. I and III B. II and IV. C. I and II D. II and III

Ans.D. II and III U.S. government agency debt is an obligation of the issuing agency. This causes agency debt to trade at slightly higher yields reflecting this greater risk. FNMA was created as a government agency but was spun off in 1968 and is now (because of the problems it had during mortgage meltdown of 2008-9), traded on the OTC Bulletin Board rather than the NYSE. GNMA pass-through certificates trade OTC. GNMAs are the only agency whose securities are direct US government obligations. Reference: 5.1.1 in the License Exam Manual

An analyst wishes to assess the value of a fixed income security by taking the income payments scheduled to be received over a given future period and adjusting that for the time value of money. This analytical tool is known as: A) yield to maturity. B) duration. C) future value. D) discounted cash flow.

Ans D. Discounted cash flow The discounted cash flow (DCF) for a fixed income security (bond) is a summary of the expected interest payments that has been adjusted to reflect the time value of money. With all other things being equal, the bond with the higher DCF is the better investment. Reference: 5.3.3.2 in the License Exam Manual

In a variable life contract, which of the following has a guaranteed minimum? A) The death benefit. B) The maturity value. C) There are no guarantees. D) The cash value.

Ans. A) The death benefit. There is a guaranteed minimum death benefit. The cash value will vary according to the performance of the investments in the separate account. Reference: 8.2.4.7.3 in the License Exam Manual

One of the advantages of owning a corporation's debentures is that you have prior claim over A) preferred stockholders B) secured creditors C) employees D) general creditors

Ans. A) preferred stockholders Holders of a company's debentures are general creditors and, as such, only have prior claim over equity holders. Reference: 5.1.2.7 in the License Exam Manual

The dividend discount model is A) primarily used by technical analysts B) an analytical tool used to project the future price of a common stock using projected dividends C) based on the dividend payout ratio D) the inverse of the price/earnings ratio

Ans. B) an analytical tool used to project the future price of a common stock using projected dividends There are two widely accepted forms of common stock price projection using dividends - the dividend discount model and the dividend growth model. Neither would be used by technicians because they rely on fundamentals. Reference: 4.1.9.1 in the License Exam Manual

A client wishing to invest in precious metals could consider each of the following EXCEPT A) gold B) lead C) platinum D)silver

Ans. B) lead Although it has always been the alchemist's dream to convert lead into gold, until that becomes a reality, lead is not considered a precious metal. Reference: 10.4 in the License Exam Manual

Open- and closed-end investment companies have all of the following in common EXCEPT that they both A) compute their net asset values B) have stated investment objectives C) actively manage their portfolios D) trade their shares in the secondary market

Ans. D) trade their shares in the secondary market Open-end companies do not trade shares in the secondary market. However, both open-end and closed-end companies compute their net asset values, actively manage their portfolios, and have stated investment objectives. Reference: 7.1.1.3.1 in the License Exam Manual.

Prepayment risk is a major concern to an investor purchasing: A) industrial revenue bonds. B) CMOs. C) convertible debentures. D) callable bonds.

Ans. B) CMOs. CMOs are a form of mortgage-backed security. When interest rates fall, there is an increase in refinancing causing the mortgages to be paid off ahead of schedule. This results in the investor receiving a return of principal ahead of time, but only able to reinvest at the current lower rate. This is called prepayment risk. Reference: 6.1.2.4 in the License Exam Manual

If a customer buys 1 US Treasury 7-½% due Dec 2019 at 102, which of the following statements regarding this bond is TRUE? A) It has a yield to maturity of more than 7-½%. B) Interest paid on it is subject to federal income tax. C) It has a nominal yield of less than 7-½%. D) Interest paid on it is subject to state and local taxes.

Ans. B) Interest paid on it is subject to federal income tax. Interest earned on U.S. government obligations is subject to federal tax. This bond is trading at a premium ($1,020), so its yield to maturity is lower than the nominal yield of 7-½%. The nominal yield is the same as the coupon rate (7-½%). Interest on U.S. government obligations is exempt from state and local taxes. Reference: 5.3.1.5 in the License Exam Manual

Your client has heard about investment opportunities in life settlements. Among the risks involved with this investment is A) the insured may change the beneficiary without notifying the investor B) the insured may live well past the expected mortality date C) the insured may cease paying premiums, leading to a policy lapse D) the insurance company may not have the funds to pay the death benefit

Ans. B) the insured may live well past the expected mortality date Although it is always possible that the insurance company could default, that is so rare as to not being a consideration. Life settlements are priced based on providing a stated return assuming normal mortality. If the insured lives far past that, the rate of return to the investor goes way down. The insured does not pay the premiums (the investor does) and the insured no longer has the rights to change the beneficiary (the investor does). Reference: 8.2.5 in the License Exam Manual

All of the following characteristics are advantages of a REIT EXCEPT A) liquidity B) diversification C) tax deferral D) professional management

Ans. C Tax deferral A REIT is a professionally managed company that invests in a diversified portfolio of real estate holdings. REITs are traded on exchanges and OTC, which provides liquidity. The IRS does not permit tax deferrals on REIT investments. Please note: We recognize that, over the past few years, there has been an enormous growth in non-traded REITs (exactly what that says - they don't trade; there is no liquidity). However, we have received no feedback about that issue and, unless something in the question refers to a non-traded REIT, assume that all REITs are publicly traded either on the stock exchanges or OTC. Reference: 7.1.7 in the License Exam Manual

An investor in the 25% federal income tax bracket is considering the purchase of some fixed-income instruments. Which of the following would provide the investor with the greatest after-tax return? A) 4.8% AAA rated insured municipal bond. B) 6% FDIC insured CD. C) 7% Ba rated corporate bond. D) 5% U.S. Treasury bond.

Ans. C) 7% Ba rated corporate bond. The greatest after-tax return is provided by the instrument listed that, after subtracting 25% for income tax, leaves the investor with the greatest amount. Since the Treasury bond, the CD, and the corporate bond are all taxable at the same rate, the 7% bond must be the best deal. Even though the municipal bond is not taxed, its 4.8% net yield is far lower than the 5.25% ($70 − 25% tax) return on the corporate bond. Reference: 5.3.1.5 in the License Exam Manual

Which of the following is a possible advantage of scheduled premium variable life insurance over whole life insurance? A) Flexibility of premium payments B) Greater guaranteed cash value C) Less risk in the underlying investment instruments D) Possible inflation protection for the death benefit

Ans D. Possible inflation protection for the death benefit. Scheduled (fixed) premium variable life has fixed, not flexible, premium payments. The distinguishing factor is the variable death benefit. The insured assumes more risk, not less, in exchange for the possibility that the death benefit will provide protection from inflation.

Although there are a number of risks to owning a debt security that are common to all investors, which specific risk is avoided when a U.S. resident purchases a Eurodollar bond? A) Default risk B) Inflation risk C) Currency risk D) Interest rate risk

Ans. C) Currency risk Eurodollar bonds are denominated in dollars; therefore, no currency risk exists for a U.S. resident. Reference: 5.1.5.1 in the License Exam Manual

All of the following statements about variable annuities are true EXCEPT: A) the number of annuity units becomes fixed when the contract is annuitized. B) the rate of return is determined by the underlying portfolio's value. C) a minimum rate of return is guaranteed. D) such an annuity is designed to combat inflation risk.

Ans. C) a minimum rate of return is guaranteed. The return on a variable annuity is not guaranteed; it is determined by the underlying portfolio's value. Variable annuities are designed to combat inflation risk. The number of annuity units becomes fixed when the contract is annuitized; it is the value of each unit that fluctuates. Reference: 8.1.4.2 in the License Exam Manual

Which of the following statements regarding nonqualified stock options (NSOs) is(are) CORRECT? I. The exercise of NSOs does not create taxable income. II. The NSO is taxable to the recipient at the time of exercise to the extent of the difference between the fair market value of the stock and the exercise price. III. Unlike ISOs, NSOs are publicly traded​. A. II only B. I and III C. I only D. II and III

Ans. A II only. The so-called "bargain element" of an NSO is taxed to the recipient as salary income at the time the option is exercised. ​Neither of the employee stock options are publicly traded.​ Reference: 4.1.8 in the License Exam Manual

The best time for an investor seeking returns to purchase long-term, fixed-interest-rate bonds is when: A) short-term interest rates are low and beginning to rise. B) short-term interest rates are high and beginning to decline. C) long-term interest rates are high and beginning to decline. D) long-term interest rates are low and beginning to rise.

Ans. C) long-term interest rates are high and beginning to decline. The best time to buy long-term bonds is when interest rates have peaked. In addition to providing a high initial return, as interest rates fall, the bonds will rise in value. Reference: 5.3.2.3 in the License Exam Manual

Your client is interested in investing in preferred stocks in an effort to receive dividend income. The client's target goal is a 6% current return on investment (ROI). If the RIF Series B preferred stock is paying a quarterly dividend of $.53, your client's goal will be achieved if the RIF can be purchased at A) $35.33 B) $22.55 C) $50.00 D) $8.83

Ans. A) $35.33 First, take the quarterly dividend and annualize it (4 × $.53 = $2.12). Then, divide that number by 6% and you get $35.3333, which rounds down to $35.33. Or, if you wish, but it takes more time, multiply each of the choices by 6% to see which one equals $2.12. Reference: 5.3.1.1 in the License Exam Manual

A bond with a par value of $1,000 and a coupon rate of 6% paid semi-annually, is currently selling for $1,200. The bond is callable in 15 years at 105. In the computation of the bond's yield to call, which of these would be a factor? A) Interest payments of $30 B) Future value of $1,200 C) 15 payment periods D) Present value of $1,050

Ans. A) Interest payments of $30 The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price and the call price. A bond with a 6% coupon will make $30 semi-annual interest payments. With a 15 year call, there are 30 semi-annual payment periods, not 15. The present value is $1,200 and the future value is $1,050, the reverse of the numbers indicated in the answer choices. Reference: 5.1.3.4 in the License Exam Manual

As defined in the Investment Company Act, investment companies include: A) diversified companies, nondiversified companies, and face-amount certificate companies. B) face-amount certificate companies, management companies, and unit investment trusts. C) mutual funds, closed-end companies, and unit investment trusts. D) open-end companies, closed-end companies, and unit investment trusts.

Ans. B) face-amount certificate companies, management companies, and unit investment trusts. The act defines investment companies as being management companies, face-amount certificate companies, or unit investment trusts. Management companies are further categorized as being open-end or closed-end, diversified or nondiversified. Reference: 7.1.1 in the License Exam Manual

The residual right of common stockholders refers to their right to: A) receive all announced dividends in accordance with the number of shares held. B) vote in elections for the board of directors and in other important business decisions, such as changes to the charter. C) claim company assets in bankruptcy after wages, taxes, creditors and preferred shareholders have been paid. D) examine the corporation's annual reports and other reports, and take legal action if irregularities are found.

Ans. C) claim company assets in bankruptcy after wages, taxes, creditors and preferred shareholders have been paid. The residual right of common shareholders refers to their position in the event of bankruptcy. Reference: 4.1.3 in the License Exam Manual

You are meeting with a relatively unsophisticated investor who doesn't understand very much about stocks and bonds. When asked, "can you list the advantages of owning common stock as compared to bonds?" among other reasons, you could reply A) bonds must be surrendered at maturity or at a call while the owner of common stock can pick when to sell and realize a capital gain B) bonds have priority over any equity security in the event of liquidation C) income payments are more reliable D) there is limited liability

Ans. A) bonds must be surrendered at maturity or at a call while the owner of common stock can pick when to sell and realize a capital gain Although there are many positive benefits to owning bonds compared to common stock, among them priority in the event of liquidation and regular payment of interest, one negative is that the bond will ultimately mature or be called and the bondholder has no choice but to surrender the security. With common stock, the investor has total control over when to sell the stock. Yes, common stock has limited liability, but the same is true of the bondholder - if the company goes under, the bondholder's maximum loss is the investment. Even then, because of its seniority, it is less likely that the entire investment will be lost. Reference: 5.2.1.1 in the License Exam Manual

In a portfolio containing common stock, straight preferred stock, convertible preferred stock, and adjustable rate preferred stock, changes in interest rates would be most likely to affect the market price of the A) straight preferred stock B) adjustable rate preferred stock C) convertible preferred stock D) common stock

Ans. A) straight preferred stock Fixed income securities, such as straight preferred stock, are the most sensitive to interest rates among the alternatives listed. Convertible preferred stock is influenced more by the common stock because it is convertible into the underlying security. Because the dividend rate on adjustable rate preferred stock it usually tied to changes in interest rates, the price of this stock remains stable in the face of rising or falling rates. Reference: 4.1.4 in the License Exam Manual

Options positions can either create rights or obligations. In which option position has the investor created the possible obligation to purchase stock? A) Purchasing a call. B) Selling a put. C) Purchasing a put. D) Selling a call.

Ans. B) Selling a put. When you sell, (write, go short) an option, you create an obligation. In the case of a put, you are obligated to purchase stock that is "put" to you. In the case of a call, you are obligated to sell stock that is "called" away from you. Option buyers have rights, they can choose what they wish to do - there are no obligations. Reference: 9.1.3.4 in the License Exam Manual

Many investors with a long position in common stock employ the technique of writing call options on the underlying stock for the purpose of A) generating income B) protecting the premium C) participating in the growth of the company D) increasing the dividend return

Ans. A) generating income A covered call option is one where the writer (seller) owns the stock on which the call is sold. There are two reasons to write covered calls. The primary one is that the sale generates income in the form of the premium received from the buyer. A secondary reason is that, at least to the extent of the premium received, there is some downside protection for the long stock. This action has no impact upon the amount of the dividends received. It is the uncovered (or naked) call option that has unlimited risk. Reference: 9.1.3.2 in the License Exam Manual

One of your clients approaches you looking for an investment that will provide ready marketability and income. Which of the following would be the most appropriate recommendation? A) bank insured CDs B) NYSE listed common stock C) U.S. Treasury notes D) limited partnership in rental real estate

Ans. C) U.S. Treasury notes The key is meeting both needs - marketability and income and only the treasury notes supply both. A CD will provide income, but they are non-marketable - they can only be redeemed at the bank and, if done prior to maturity, will invariably suffer a penalty to interest, principal, or both. NYSE common stock will be marketable, but there are no guarantees as to the income and the limited partnership will almost always have limited to no marketability. Reference: 10.2 in the License Exam Manual

Rank the following bonds in order of shortest to longest duration. I. ABC 8s of 2040 II. DEF 9s of 2041 III. GHI 5s of 2039 IV. JKL zeros of 2035 A. II, I, III, IV B. IV, II, I, III C. I, II, IV, III D. III, I, II, IV

Ans. A. II, I, III, IV A bond's duration consists of two interrelated components; the coupon and the length to maturity. When the coupon rates are approximately the same, the bond with the nearest maturity will have the shortest duration and that with the latest maturity, the longest duration. When the maturities are approximately the same, the bond with the highest coupon will have the shortest duration and the one with the lowest coupon (and you can't get lower than zero) will have the longest duration. Unless maturing very soon, zero coupon bonds (certainly on the exam) will always have the longest duration because they receive no interest payments over the life of the bond. In this example, the maturity dates for the interest bearing bonds are very close (a 2 year spread on bonds maturing in about 25 years) and the zero's maturity is not nearly soon enough to be a factor. Therefore, the bond with the 9% coupon will have the shortest duration, followed closely by the 8% and a good bit behind, the 5%, with the zero bringing up the rear. Reference: 5.3.3 in the License Exam Manual

In the past 20 years, 55-year-old James has put $27,000 into accumulation units in his nonqualified variable annuity. The current value of his units is $36,000. He wishes to withdraw $16,000 to assist with his grandchild's college education. If he is in the 28% tax bracket, what is his tax consequence on the withdrawal? A) $2,520.00 B) $4,480.00 C) $0.00 D) $3,420.00

Ans. D) $3,420.00 Because this is nonqualified, the investments are in after-tax dollars. Therefore, any value of the account over the investment is growth. Withdrawals from tax-deferred plans treat the growth as ordinary income for tax purposes. The portion attributable to growth is considered to be withdrawn first under the Tax Code. Here, we have $9,000 worth of growth taxable at 38% (28% + 10% penalty) because James is younger than 59-½. Yes, the earnings on a non-qualified annuity are subject to the 10% penalty; it is only the principal that escapes the tax and penalty. The remaining $7,000 withdrawn is considered a withdrawal of principal and is therefore nontaxable. Reference: 8.1.5 in the License Exam Manual

A client of an IAR mentions that he has received a prospectus for a variable annuity, but does not really understand the product. It would be reasonable for the IAR to explain that a variable annuity offers an investor A) the insurance company's backing of the annuity' performance B) a product very similar to a mutual fund, but with lower costs and expenses C) lifetime income guaranteed never to drop below the initial rate D) the opportunity to invest in equity securities on a tax-deferred basis

Ans. D) the opportunity to invest in equity securities on a tax-deferred basis One of the most attractive features of variable annuities is that all earnings are tax-deferred until withdrawal. The sub-accounts are usually invested in equities (although there are some with fixed income as the primary component of the portfolio), but the expenses are generally higher than for a mutual fund with similar goals. There are no guarantees on the amount of income when the VA is annuitized. Reference: 8.1.5.4 in the License Exam Manual

The owner of a convertible debt issue A) is generally in a senior position to other bondholders B) is a creditor of the issuer C) has the choice of receiving the bond's interest or dividends on the underlying stock, whichever is higher D) generally expects a higher current return than with a nonconvertible bond of the same quality and maturity

Ans. B) is a creditor of the issuer The owner of any bond is a creditor of the issuer. Dividends are only paid on stock and the investor will have to convert in order to be a stockholder. Because of the growth potential of the common stock, holders of convertible securities invariably accept a lower coupon rate. In almost all cases, convertible debt securities are debentures and therefore junior to secured bonds. Reference: 5.2.2 in the License Exam Manual

An agent presenting a variable life insurance (VLI) policy proposal to a prospect must disclose which of the following about the insured's rights of exchange of the VLI policy? A) Within the first 18 months, the insured may exchange the VLI policy for either a permanent form of life insurance or universal variable policy, issued by the same company, with no additional evidence of insurability. B) Federal law requires the insurance company to allow the insured to exchange the VLI policy for a permanent form of life insurance policy, issued by the same company, for two years, with no additional evidence of insurability. C) The insurance company will allow the insured to exchange the VLI policy for a permanent form of life insurance policy within 45 days from the date of the application or 10 days from policy delivery, whichever is longer. D) The insured may request that the insurance company exchange the VLI policy for a permanent form of life insurance policy, issued by the same company, within two years. The insurance company retains the right to have medical examinations for underwriting purposes.

Ans. B. Federal law requires that issuers of variable life insurance policies allow exchange of these policies for a permanent form of life insurance policy, issued by the same company for a period of no less than two years. The exchange must be made without additional evidence of insurability. Reference: 8.2.4.7.1 in the License Exam Manual

Larry purchased a deferred annuity and, at age 65, annuitized the product under a life with 15-year certain option. His wife, Linda, is the beneficiary. Which of the following statements is CORRECT? A) Payments would be made to Larry until he is 80, then cease. B) Payments would be made to Larry until his death, then to his wife for another 15 years. C) Payments would be made to Larry as long as he lives, and then to Linda should Larry die prior to reaching age 80. D) Payments would be made to Larry until he is 80, then to his wife for the remainder of her life.

Ans. C) Payments would be made to Larry as long as he lives, and then to Linda should Larry die prior to reaching age 80. Larry selected the life with 15-year certain option. This pays Larry for his life, regardless of how long, but continues to pay his beneficiary (Linda) if he dies before the end of 15 years. That is the 15-year certain part. Reference: 8.1.4.1.2 in the License Exam Manual

One of your customers notices that the short interest on KAPCO common stock is high. When she asks you for an interpretation, you should tell her this signals A) a bearish outlook B) that a change in interest rates is coming C) a bullish outlook D) a shortage of enough stock to go around

Ans. C) a bullish outlook Even though short interest represents the number of shares sold short (typically by bearish investors), technical analysts believe that when it gets high, it is a bullish indicator. Each share that has been sold short must be replaced (covered) at some point. To replace the stock shorted, an investor must go into the market to buy that stock. When all of those short sellers have to buy back stock they shorted, it puts upward pressure on the price of that stock. Reference: 4.1.11 in the License Exam Manual