Ch. 13: Mutual Funds and Insurance

The fee that is payable on the purchase of Class A shares is referred to as a: a. Trailer b. Front-end load c. Breakpoint d. Commission

b. Front-end load Explanation: The fee or charge that is paid up-front when mutual fund (open-end) Class A shares are purchased is referred to as a front-end load. Commissions are charged on transactions involving closed-end fund shares and other securities that trade in the secondary market. Breakpoints are provided to mutual fund investors in order to reduce the overall sales charge percentage on their purchases, and trailers are recurring fees that are paid out of a 12b-1 plan when certain mutual fund shares are purchased.

If a mutual fund shareholder decides to reinvest the dividends that are paid by the fund and purchase additional shares, what is the tax treatment? a. The dividend is not taxed if it is reinvested and used to buy additional shares b. The dividend is taxed even if it is reinvested c. The dividend reduces the cost basis of the shares that are purchased through reinvestment d. The dividend is only taxed when the shares are redeemed

b. The dividend is taxed even if it is reinvested Explanation: When a mutual fund makes a dividend distribution, an investor is able to reinvest the distribution and use the funds to buy additional shares at their net asset value. However, the dividend is still taxed as ordinary income for the investor.

The life insurance policy that allows for the greatest flexibility regarding the payment of premiums is: a. Variable b. Universal c. Split-dollar d. Decreasing term

b. Universal Explanation: Universal life allows the policyholder to vary the premium payments. The holder can elect to pay for the entire policy in one payment, allowing the insurance company to withdraw premium payments as required. Premium payments can also be made in specified intervals. However, payments that are too low may cause the policy to lapse if they do not cover the cost of insurance and other policy expenses.

A whole life insurance policy may be referred to as: I. Permanent life II. Term life III. Ordinary life IV. Straight life a. I, II, and IV only b. I and IV only c. I, III, and IV only d. I and III only

c. I, III, and IV only Explanation: Whole life insurance may be called permanent, ordinary, or straight life insurance. Term insurance is a completely different type of policy that only provides coverage for a specific period.

An investor is long a 3x Bearish Inverse Leveraged Nasdaq 100 Index ETF. If the index declines by 10%, the value of the ETF will: a. Increase by 10% b. Decrease by 10% c. Increase by 30% d. Decrease by 30%

c. Increase by 30% Explanation: For inverse leveraged ETFs, their value should move in the opposite direction of the underlying index by the given leverage factor (e.g., 3x). In this question, if the index declines by 10%, the value of the ETF will increase by three times that amount, (i.e., 30%).

Which one of the following statements regarding variable annuities is FALSE? a. On average, mutual funds have lower fees and expenses than annuities b. In a variable annuity, your investment grows tax-deferred c. On average, variable annuities have lower fees and expenses than mutual funds d. Investors may invest in various asset classes inside of a variable annuity

c. On average, variable annuities have lower fees and expenses than mutual funds Explanation: Mutual funds are often an investment selection within a variable annuity contract. And, since the investor would pay for the cost of the annuity in addition to the costs associated with operating the mutual fund, variable annuities typically have higher fees and expenses.

A variable life insurance contract is appropriate for all of the following clients, EXCEPT: a. A client who is willing to assume market risk b. A client who feels that traditional insurance products do not provide adequate returns CA client who is young and c. A client who is young and has just started a family d. A client who needs to meet her short-term savings goals

d. A client who needs to meet her short-term savings goals Explanation: Variable life insurance is unsuitable for a client who needs to meet a short-term savings goal. Instead, variable life insurance is suitable for clients who have a long-term investment need, are willing to assume risk, and want market-based returns. Keep in mind, traditional life insurance policies provide a fixed or guaranteed return.

The NAV of an ETF is calculated: a. Throughout the day b. Quarterly c. At the open of each trading day d. At the close of each trading day

d. At the close of each trading day Explanation: Although exchange-traded funds (ETFs) are bought and sold on registered stock exchanges, they also have a net asset value (NAV) that's similar to mutual funds. For an ETF, the NAV is typically calculated at the close of exchange trading. However, investors don't necessarily buy and/or sell their ETF shares at the NAV; instead, they trade their ETF shares at market prices that are based on supply and demand.

Regarding equity-indexed annuities, which of the following statements is TRUE? a. Since equity-indexed annuities are not securities, they're considered risk-free securities. b. If the index declines in value, there's no floor as to how much an investor may lose. c. If the index increases in value, there's no limit as to how much an investor may gain. d. If the annuitant withdraws money before the surrender period is over, she's required to pay a surrender fee.

d. If the annuitant withdraws money before the surrender period is over, she's required to pay a surrender fee. Explanation: Although equity-indexed annuities (EIAs) are insurance products, they're subject to many FINRA rules. Broker-dealers must always have adequate controls in place to supervise the sales activities of their RRs. EIAs are generally issued with both a floor (that limits loss on the downside) and a cap (that limits the gain on the upside).

Regarding inverse ETFs, which of the following statements is TRUE? a. Inverse ETFs are designed for long-term investors. b. Inverse ETFs will reset their portfolios quarterly. c. Inverse ETFs move in tandem with the underlying index. d. Inverse ETFs use derivatives in order to move in opposition to the underlying index.

d. Inverse ETFs use derivatives in order to move in opposition to the underlying index. Explanation: Inverse ETFs are designed to give investors a return that's roughly equivalent to shorting a stock index. When the underlying index is falling, inverse ETFs should be increasing in value. The inverse ETF does this by actually selling stock short and using derivatives, such as options and futures. These products will actually reset their portfolios on a daily basis and are typically suitable for short-term investors.

If a client's objective is long-term capital appreciation, all of the following insurance policies may be recommended by an adviser, EXCEPT: a. Variable life b. Whole life c. Term life d. Universal life

c. Term life Explanation: A term life policy would not provide future capital as it does not accumulate cash value. A whole life policy would accumulate cash value, though generally at a low rate. Universal life would also accumulate cash value that can be used to pay the premium, which reduces the cash value. With a variable life policy, a portion of the premium is invested in the separate account, which historically would provide a higher market based return.

When recommending a hedge fund as an investment vehicle, an adviser would disclose all of the following points to her client, EXCEPT: a. The name of the general partner b. The fact the fund may use leverage c. When the fund was registered with the SEC d. The performance fees

c. When the fund was registered with the SEC Explanation: Hedge funds are exempt from registration with the SEC and there is a lack of regulatory oversight. In many cases, hedge funds can employ complex strategies like short selling, trading derivatives, and using leverage. Unlike mutual funds, the shares are not publicly traded and they often have relatively high performance fees.

What's the formula for calculating the net asset value (NAV) of a fund? a. (Current Assets - Current Liabilities) ÷ Current Assets b. (Fund Return - Risk-Free Rate) ÷ Standard Deviation of Returns c. There is no formula, since the NAV is based on supply and demand for the fund's shares. d. (Assets - Liabilities) ÷ Number of Shares Outstanding

d. (Assets - Liabilities) ÷ Number of Shares Outstanding Explanation: A mutual funds' net asset value must be calculated daily by taking the fund's assets, subtracting liabilities, and then dividing by the number of shares outstanding. The fund's Sharpe Ratio is found by taking the fund's return, subtracting the risk-free rate, and then dividing by the standard deviation of the fund's returns. The quick asset ratio is calculated by taking a company's current assets, subtracting its current liabilities, and dividing by its current assets.

Which one of the following investments trade independently from its net asset value (NAV)? a. Open-end fund b. Closed-end fund c. Unit investment trust (UIT) d. Variable annuity

b. Closed-end fund Explanation: Mutual funds (open-end funds), unit investment trusts, and variable annuities are priced based on their net asset values. A closed-end investment company share may sell at, above, or below its net asset value since it trades on the stock exchange.

Which investment provides the BEST hedge against inflation? a. A Treasury bill b. A fixed annuity c. A bank-issued CD d. A variable annuity

d. A variable annuity Explanation: Compared to the other investment choices, variable annuities provide the best hedge against inflation because of the portfolio's potential to rise in a growing economy. Conversely, fixed-income investments (e.g., bonds and fixed annuities) have the highest inflation risk.

The disadvantages of hedge funds for investors include all of the following choices, EXCEPT: a. Lack of liquidity b. Lack of transparency c. Complicated tax structures d. Sophisticated investment strategies

d. Sophisticated investment strategies Explanation: Some of the disadvantages of hedge funds are illiquidity, less transparency than other investments, and more complicated tax structures. An advantage of hedge funds for most investors is that they engage in sophisticated investment strategies.

A client of an IAR is 35 years old and single with three children, ages 7, 9, and 12. She has 15 years remaining on her home mortgage. She would like to ensure her children will be able to attend college and that the mortgage will be paid off in the event of her death. She does not currently have a great deal of discretionary income. Which of the following would be most suitable for the IAR to recommend? a. A 15-year term life insurance policy b. A whole life policy with a 15-year term rider c. A whole life policy, cancelable after 15 years d. A universal life policy with increased premiums after 15 years

a. A 15-year term life insurance policy Explanation: Based on the client's future obligations and lack of discretionary income, term life offers the least expensive policy for the period she needs it for. A whole life policy charges higher premiums. A whole life policy with a term rider would be even more expensive, and the same is true of universal life.

Chuck, an IAR, is discussing an equity-indexed annuity with a client. In discussing the participation rates of the annuity, Chuck explains that if the S&P 500 Index gains more than 10%, the annuity will be credited with no more than 7%. Chuck is describing what type of annuity? a. A capped equity-indexed annuity b. A limited participation annuity c. A Rachet annuity d. A high-water-mark annuity

a. A capped equity-indexed annuity Explanation: In a capped equity-indexed annuity, the participation rate is capped, regardless of how much the index increases, thus limiting any gain potential.

Which of the following will a syndicator of a blind pool real estate investment trust include in the investment policy statement? a. A statement which breaks down the contributions made by limited partners b. A disclosure that investment losses are guaranteed by SIPC c. The estimated timing of the real estate purchases d. The estimated location of the real estate purchases

a. A statement which breaks down the contributions made by limited partners Explanation: Blind pool real estate investment trusts (REITs), which are more commonly referred to as "non-traded" REITs, are pooled investments in real estate. However, unlike a traditional REIT, blind pool REITs give the investment manager broad authority over investment choices. The specific location and timing of the investments will not be disclosed in the investment policy statement. Although the investment policy statement of a blind pool REIT will not provide significant insight into the REIT's investments, the syndicator must disclose the break down of contributions made by limited partners.

Which TWO of the following choices are advantages of trading exchange-traded funds (ETFs)? I. They can be purchased on margin II. Investors can receive breakpoints III. There is no fee to liquidate shares IV. They can be sold short a. I and IV b. I and III c. II and III d. III and IV

a. I and IV Explanation: Exchange-traded funds (ETFs) represent a basket of securities. They are structured to represent an index of securities such as the Nasdaq 100 or the Dow Jones Industrial Average. Their shares are purchased and sold on an exchange. Therefore, they can be purchased on margin and sold short. Mutual funds may not be purchased on margin or sold short since they are sold under a prospectus and not on an exchange. Investors pay a commission whenever they buy or sell shares of ETFs. Investors receive breakpoints on sales if they purchase a specified amount of a mutual fund, not an ETF.

A client buys shares of a closed-end fund: a. In the secondary market b. At the NAV only c. Below the NAV only d. Above the NAV only

a. In the secondary market Explanation: Although a closed-end fund has a calculated NAV, it is unlikely that its shares will trade at that price. Instead, the shares may be purchased either above or below the NAV. The shares of a closed-end fund trade in the secondary market. This is unlike an open-end management company (mutual fund) whose shares constantly remain in the primary market.

Which of the following is TRUE regarding management companies? a. Investors will liquidate open-end fund shares at their NAV, but closed-end fund shares may be liquidated below their NAV. b. Investors will liquidate both open-end and closed-end fund shares at their NAV. c. Investors will liquidate closed-end fund shares at their NAV, but open-end fund shares may be liquidated below their NAV. d. Investors will liquidate neither open-end nor closed-end fund shares at their NAV.

a. Investors will liquidate open-end fund shares at their NAV, but closed-end fund shares may be liquidated below their NAV. Explanation: Open-end management companies (i.e., mutual funds) must always be bought and sold at their net asset value (NAV) plus any applicable sales charges. However, closed-end fund shares are exchange-traded. Closed-end funds will have a NAV, but investors will buy and sell their shares at the current price that's available on the exchange. In other words, closed-end fund shares may trade at either a premium or discount to their NAV.

If required life insurance premiums are not paid on time, a policy will: a. Lapse b. Automatically pay out any existing cash value c. Lapse, but will be automatically reinstated d. Continue to honor any stated death benefit

a. Lapse Explanation: The failure to pay life insurance premiums will cause the policy to lapse. Some policies allow policyholders to borrow against their cash value to pay premiums. However, the policyholder is not allowed to skip a payment. Since cash value will not automatically be paid out, it is usually forfeited.

A client considering an investment in a real estate investment trust would benefit from all of the following advantages, EXCEPT: a. Protection against rising interest rates b. Diversification c. Stable dividend income d. The ability to buy and sell shares easily

a. Protection against rising interest rates Explanation: Real estate investment trusts offer investors a stable dividend based on the income produced by owning a diversified portfolio of properties and/or mortgages. Most REITs trade on an exchange offering investors liquidity. Since investors usually purchase REITs for their high dividend yield, if interest rates increase, the value of their shares will usually decrease as other newly issued income-earning securities become more attractive.

When analyzing a structured product, which of the following risks is of the LEAST concern? a. Regulatory risk b. Credit risk c. Liquidity risk d. Complexity risk

a. Regulatory risk Explanation: Although all securities could have losses due to regulatory risk, structured products are not typically associated with it. Structured products are created by broker-dealers and are customized to fit the needs of specific investors. They're created as unsecured bonds, which means they have credit risk. The returns on a structured product can be based on a basket of equities, debt instruments, and derivates. As a result, predicting the returns in different market scenarios is complex. In addition, most structured products are not exchange-traded, which means that they also have liquidity risk.

Regarding equity-indexed annuities, which of the following statements is FALSE? a. Supervision of the firm's sales practices is not required since these are insurance products b. Performance is typically linked to a stock index c. If the index declines in value, there is a floor as to how much an investor may lose d. If the index increases in value, there is a cap as to how much an investor may gain

a. Supervision of the firm's sales practices is not required since these are insurance products Explanation: Although they are insurance products, equity-indexed annuities are subject to many FINRA rules. Broker-dealers must always have adequate controls in place to supervise the sales activities of their RRs. The product is issued with both a floor (that limits loss on the downside) and a cap (that limits the gain on the upside).

Which of the following statements about variable annuities is FALSE? a. The annuity feature protects investors from capital losses b. The portfolio may be invested in shares of other mutual fund companies c. The assets in a separate account are managed with a specific investment objective d. A change in investment objectives requires voter approval

a. The annuity feature protects investors from capital losses Explanation: Variable annuity assets are directed into a separate account and invested in a portfolio that fluctuates with the market. Therefore, an investor's principal will fluctuate over time as it remains invested in a variable annuity. Mutual funds are often an investment choice within an annuity. If an investor is interested in principal protection and a guaranteed rate of return, he should consider a fixed annuity.

A sales breakpoint of a mutual fund is: a. The minimum dollar amount of a purchase of a mutual fund where a volume discount is given b. The minimum share amount of a purchase of a mutual fund where a volume discount is given c. The point at which a letter of intent may be backdated d. The point at which a letter of intent can be obtained

a. The minimum dollar amount of a purchase of a mutual fund where a volume discount is given Explanation: A sales breakpoint of a mutual fund is the minimum dollar amount (not the share amount) of a purchase of a mutual fund where a volume discount is given. The percentage of sales charge declines when certain minimum dollar amounts are reached.

What characteristic generally makes universal life insurance policies more attractive than other forms of life insurance? a. Universal life insurance policies offer the ability to adjust coverage amounts as needs arise b. Universal life insurance dividends may be reinvested to buy more insurance coverage c. Universal life insurance policies allow policyholders to lock in short-term rates of return d. There are no fees assessed against a universal life insurance policy

a. Universal life insurance policies offer the ability to adjust coverage amounts as needs arise Explanation: The biggest benefit of a universal life insurance policy is the flexibility of the death benefit. If policyowners need additional coverage, they may increase the death benefit. Similarly, they may lower the coverage if their insurance needs decrease.

Five years ago, a registered representative sold a variable annuity to a 65-year-old client. The annuity carries a seven-year surrender fee. The client made a lump-sum investment of $100,000 into a growth-oriented separate account which has grown to $150,000. The RR expects a major market correction in the near future and recommends that the client conduct a 1035 Exchange into a fixed annuity. The RR explains to the client that the surrender fee will be less than the anticipated decrease in account value. This recommendation is: a. Unsuitable, since there is no benefit in surrendering the annuity due to the other investment options that are available in the separate account. b. Suitable, since the RR is acting in the client's best interests. c. Suitable, since the surrender fees have been disclosed to the client. d. Unsuitable, since the market correction will have little consequence over the short-term.

a. Unsuitable, since there is no benefit in surrendering the annuity due to the other investment options that are available in the separate account. Explanation: A 1035 Exchange permits the direct transfer of funds in a life insurance policy, endowment policy, or annuity into another policy, without creating a taxable event. However, incurring a surrender fee and then signing a new, long-term contract is not an appropriate recommendation. Since the separate account of a variable annuity will offer numerous investment objectives, the client could move her investment to another offering within the separate account without incurring surrender charges.

If a client's objective is capital needs, which of the following insurance policies would an adviser recommend? a. Variable life b. Term life c. Universal life d. Whole life

a. Variable life Explanation: A term life policy would not provide future capital as it does not accumulate cash value. A whole life policy would accumulate cash value, though generally at a low rate. Universal life would also accumulate cash value that can be used to pay the premium, which reduces the cash value. With a variable life policy, a portion of the premium is invested in the separate account, which historically would provide a higher return than the other policies.

When would a variable annuity be most suitable for a client? a. When the client wants capital appreciation or growth over a long period b. When the client wants a fixed rate of return c. When the client wants to receive a predictable amount of income at retirement d. When the client wants an inflation-adjusted rate of return

a. When the client wants capital appreciation or growth over a long period Explanation: Variable annuities are suitable for clients who are willing to invest for the long term and want to invest in the markets. The investment objective of variable annuities is capital appreciation (growth). Since a variable annuity's performance is tied to the market, its return is unpredictable and is not based on inflation.

Which of the following funds may an agent describe as no-load? a. A fund with no front-end sales charges or contingent deferred sales charges together with a 12b-1 fee of less than 1% b. A fund with no front-end sales charges or contingent deferred sales charges together with a 12b-1 fee of .25% c. A fund with no front-end sales charges, but having a contingent deferred sales charge of 1% and no 12b-1 fee d. A fund with no front-end sales charges, but having a contingent deferred sales charge of less than 1% and no 12b-1 fee

b. A fund with no front-end sales charges or contingent deferred sales charges together with a 12b-1 fee of .25% Explanation: An investment company (mutual fund) may be called a no-load fund only if it has no front-end sales charges, no contingent deferred sales charge, and a 12b-1 fee that is equal to or less than .25% of the fund's average asset value.

Which of the following choices is a characteristic of equity-indexed annuities? a. A standardized rate of return that is set annually by the National Association of Insurance Companies (NAIC) b. A rate of return that varies with the value of the underlying index c. A guaranteed minimum rate of return that is equal to the value of the underlying index d. A rate of return that is determined by the subaccounts selected by the contract owner

b. A rate of return that varies with the value of the underlying index Explanation: In an equity-indexed annuity, the insurance company guarantees the contract owner a minimum rate of return. However, the guaranteed return is never as high as the return of the actual index. The insurance company usually guarantees that the investor will receive most of her premium payments back plus a fixed return based on current interest rates. The investor's ultimate return may be higher than the minimum guaranteed rate depending on the performance of the index to which the contract is linked (choice [b]).

What name is given to the type of units used during the payout phase of a variable annuity? a. Payment units b. Annuity units c. Accumulation units d. Paid-in units

b. Annuity units Explanation: When annuitization begins, accumulation units are exchanged for annuity units. Investors then receive payments based on the value of a fixed number of annuity units. The value of the annuity units will fluctuate based on the performance of the variable annuity's separate account, which will cause the payments to rise or fall.

When recommending a leveraged ETF to a client, an agent should disclose that: a. A leveraged ETF's performance will improve as the underlying index increases in value over time b. Due to the daily resetting of the portfolio, a leveraged ETF's performance does not provide true tracking of the underlying index over long periods c. Since leveraged ETFs may only be purchased on margin, the leveraging factor is reduced d. Since leveraged ETFs are considered long-term investments, short-term strategies are unsuitable

b. Due to the daily resetting of the portfolio, a leveraged ETF's performance does not provide true tracking of the underlying index over long periods Explanation: Since an ETF's underlying portfolio is reset daily, price changes are based on a percentage value for one day only. Therefore, a leveraged ETF's performance does not provide true tracking of the underlying index over longer periods. Keep in mind, purchasing a leveraged ETF on margin increases leveraging; it does not decrease it. Due to the daily resetting feature, leveraged ETFs are not considered to be suitable long-term investments.

An equity-indexed annuity is a type of: a. Fixed annuity that tracks the performance of a designated mutual fund b. Fixed annuity that offers the potential for greater returns c. Variable annuity that tracks the S&P 500 Index d. Variable annuity that tracks the DJIA

b. Fixed annuity that offers the potential for greater returns Explanation: An equity-indexed annuity is a type of fixed (non-variable) annuity; therefore, SEC registration is not required for these contracts. The owner receives a guaranteed minimum rate of return, but has significant upside potential since the annuity's return is tied to a benchmark index (e.g., the S&P 500 Index. If the index underperforms, the investor will simply receive the minimum rate. On the other hand, if the index performs well, the investor will receive the indexed return based on contractual provisions.

Hedge funds are: a. Usually tied to an underlying index b. Generally illiquid investments c. Registered investment companies d. Suitable for all accredited investors

b. Generally illiquid investments Explanation: Hedge funds are usually illiquid, leveraged investments. The investor's money is often locked up for long periods and there is no active secondary market for hedge fund shares. Hedge funds are generally unregistered investment companies and are not necessarily suitable for all accredited investors. The regulators have stated repeatedly that meeting the financial standards for an accredited investor under Regulation D does not automatically mean that hedge funds are suitable. Hedge funds typically seek absolute positive performance. They set a definite performance goal (e.g., 8%) rather than measuring their performance against an index.

When explaining the differences between a fixed annuity and a variable annuity, an IAR should disclose which of the following information to her client? I. The insurance company guarantees the return on a fixed annuity. II. The annuitant assumes the risk in a variable annuity. III. In a fixed annuity, monies are invested in the separate account. IV. In a variable annuity, monies are invested in the general account. a. III and IV only b. I and II only c. I and III only d. II and III only

b. I and II only Explanation: In a fixed annuity, the annuitant's money is invested in the insurance company's general account. The company assumes the investment risk and guarantees the future payout. In a variable annuity, the annuitant's money is invested in the separate account, managed by the insurance company, which continues a number of subaccounts, where the annuitant assumes the investment risk. Future payments will vary, based on the performance of the subaccounts.

A client who recently retired, received a $100,000 lump-sum payout from his company's pension plan. His objective is to receive fixed monthly payments starting immediately. As the IA, you may recommend a(n): a. Immediate, variable annuity b. Immediate, fixed annuity c. Deferred, fixed annuity d. Deferred, variable annuity

b. Immediate, fixed annuity Explanation: In an immediate annuity, payments begin after one payment period. For instance, if the client chose a monthly payout, the first payment will be made after one month. By choosing a fixed annuity, the insurance company guarantees the payouts, whereas with a variable annuity, payments are unpredictable.

What are structured products? a. An investment trust that manages a portfolio of real estate investments. b. Securities which are created by financial institutions that customize returns and risks to fit the needs of specific investors. c. A contract in which two parties agree to exchange cash flows based on different financial instruments. d. Contracts that derive their value from the return on an underlying security.

b. Securities which are created by financial institutions that customize returns and risks to fit the needs of specific investors. Explanation: Structured products are securities which are created by financial institutions (e.g., broker-dealers) and are often customized to fit the specific needs of customers. Although structured products are legally created as debt instruments, their rates of return are often linked to equities and derivatives. One of the most popular types of structured products is the exchange-traded note (ETN). Derivatives (e.g., options) are contracts that derive their value from an underlying security. REITs are investment trusts that manage portfolios of real estate investments. Swap contracts are agreements to exchange cash flows based on financial instruments.

A person who invests in a variable annuity is most concerned with the performance of the insurance company's: a. Auditors b. Separate account c. General account d. Profitability

b. Separate account Explanation: The performance of a variable annuity is related to the performance of the insurance company's separate account. On the other hand, an insurance company's general account backs the company's fixed annuities and other traditional (guaranteed) insurance products. Although an investor may be concerned with the overall profitability of the insurance company, it has no bearing on the performance of the variable annuity's separate account.

If a client has no life insurance and low income, what life insurance policy should be recommended? a. Universal life b. Term life c. Whole life d. Variable life

b. Term life Explanation: If a client currently has no insurance and low income, a term life policy is likely the best choice. A term policy is the cheapest alternative since the insured is simply paying for pure insurance. Unlike the permanent insurance policies (e.g., whole, universal, or variable), a term policy does not build cash value.

What type of insurance policies have level premiums and level death benefits? a. Universal life and term life b. Term life and whole life c. Whole life and universal life d. Whole life and variable life

b. Term life and whole life Explanation: Both term life and whole life insurance policies have fixed premiums and fixed death benefits. On the other hand, the premiums on universal life policies can be changed and the death benefits of variable life policies can fluctuate.

Six months ago, an investor purchased shares of a mutual fund and he recently received a long-term capital gain distribution from the fund. What is the tax implication of the distribution? a. The distribution is not taxed since it represents a return of the investor's capital b. The distribution is taxed as a long-term capital gain regardless of the fact that the investor has owned the shares for less than one year c. The distribution is taxed as a short-term capital gain since he has owned the shares for less than one year d. The capital gain distribution is taxed in the same manner as dividend distributions

b. The distribution is taxed as a long-term capital gain regardless of the fact that the investor has owned the shares for less than one year Explanation: When a mutual fund distributes a capital gain, the tax implication is based on the fund's holding period, NOT the shareholder's holding period. The question indicates that the distribution was a long-term capital gain; therefore, it is both reported and taxed as a long-term capital gain.

A small business owner enters your office with multiple insurance policies issued by many different companies. She has over $600,000 of coverage that expires in five years. Which of the following statements BEST describes the policies? a. The policies are variable life b. The policies are term life c. The policies are whole life d. The policies are variable universal life

b. The policies are term life Explanation: A term life policy expires at the end of a period. The other choices are forms of insurance that are permanent and do not have a specific term.

A client is considering purchasing a fund of hedge funds. Which of the following statements is TRUE concerning this investment? a. These securities will outperform traditional mutual funds over time. b. These securities have higher management fees than hedge funds. c. These securities must be held for a minimum of six months. d. Funds of hedge funds may be purchased only by investors who meet standards that are established by the SEC.

b. These securities have higher management fees than hedge funds. Explanation: A fund of hedge funds is a mutual fund that invests in unregistered, private hedge funds. Although hedge funds themselves are not required to register with the SEC, funds of hedge funds are typically required to register with the SEC and are able to be sold to both accredited and non-accredited investors. A fund of hedge funds typically has higher management fees. The fund of hedge funds is assessed a management fees by each hedge fund in which it invests and will also have its own investment adviser that assesses a management fee.

Which of the following statements is TRUE regarding funds of hedge funds? a. They have lower expenses than most mutual funds. b. They are generally illiquid investments. c. They are a good choice for investors who wish to use dollar cost averaging. d. The parent company invests in a number of mutual funds representing different asset classes.

b. They are generally illiquid investments. Explanation: A fund of hedge funds is a type of registered investment product in which the parent fund invests in a number of hedge funds. They are usually illiquid investments. Funds of funds tend to have higher expenses than mutual funds.

Which of the following statements is NOT TRUE of hedge funds? a. They are often sold under Regulation D Rule 506. b. They are typically registered with the SEC under the Securities Act of 1933. c. They may charge performance fees d. They are not sold with a prospectus.

b. They are typically registered with the SEC under the Securities Act of 1933. Explanation: Hedge funds are private investment pools that are typically sold under an exemption (Regulation D Rule 506) and are therefore not required to register with the SEC under either the Securities Act of 1933 or the Investment Company Act of 1940. Since hedge funds are not subject to the Act of 1933 or Act of 1940, they are not required to sell with a prospectus. The first hedge funds used leverage and short selling strategies in an attempt to outperform the market. Modern hedge funds invest in a wide variety of financial instruments and employ a number of different aggressive investment strategies. Hedge funds are typically available to a limited range of professional or wealthy investors and these investors are often charged performance fees by the fund managers.

Which of the following insurance policies allows the owner to skip her premium payments? a. Whole life insurance b. Universal life insurance c. Variable life insurance d. Term life insurance

b. Universal life insurance Explanation: Universal life policies, including universal variable life policies, offer flexible premiums. Provided there is sufficient cash value, the owner can stop making premium payments. However, if cash value is insufficient, the policy will lapse. All of the other choices require the owner to pay premiums over a predetermined time period.

A client wants an insurance contract in which he can accumulate a market-competitive return on the cash value in his insurance contract. He also wants the ability to pay fixed premiums. He should buy a: a. Term policy b. Variable life policy c. Pure insurance policy d. Whole life policy

b. Variable life policy Explanation: A variable life insurance policy charges level premiums, while allowing for the possibility of higher market-based returns than a whole life policy.

Corrine purchases an equity-indexed annuity contract that guarantees a 4% return with a 10% interest-rate cap. The index to which the funds are tied rises 13% in value this year. What return does Corrine receive? a. 4% b. 13% c. 10% d. 14%

c. 10% Explanation: In an equity-indexed annuity, the owner receives a guaranteed minimum interest rate with a potential upside based on the performance of the designated equity index. If the return on this index is less than the guaranteed rate, the owner receives the minimum. If the index return is greater than the guarantee, the owner receives the greater return up to the capped maximum. In this case, the index earned 13% but the client only receives the maximum 10% capped rate.

Mark purchases an equity-indexed annuity contract that guarantees a 5% return with an 80% participation rate and a 12% interest-rate cap. The index to which the funds are tied rises in value by 10% this year. What return does Mark receive? a. 5% b. 10% c. 8% d. 12%

c. 8% Explanation: In an equity-indexed annuity, the owner receives a guaranteed minimum interest rate with potential upside based on the performance of the designated index. If the return on this index is less than the guaranteed rate, the owner receives the minimum. If the index return is greater than the guarantee, the owner receives the greater return up to the capped maximum. Many contracts only pay a portion of the index return. In this example, the client is entitled to 80% of the index return capped at a 12% maximum. The index increased by 10%, so the client's contract is credited with 80% of that amount, or 8%.

Which of the following choices describes a hedge fund? a. A registered investment company that employs short selling b. A popular subaccount investment option in a variable annuity c. A limited partnership whose primary objective is an absolute positive performance d. An investment trust formed to buy, develop, and manage real estate

c. A limited partnership whose primary objective is an absolute positive performance Explanation: There is no uniform definition of a hedge fund. However, most hedge funds are formed as limited liability companies or limited partnerships, and they typically seek absolute investment performance. This means they set a definite performance goal (such as 8%) instead of measuring their performance against an index.

A client is interested in trading actively, purchasing on margin, and having broad exposure to the U.S. equity market. Which of the following investments is the LEAST suitable? a. A closed-end fund b. An S&P 500 Index ETF c. An S&P 500 Index mutual fund d. A DJIA Index ETF

c. An S&P 500 Index mutual fund Explanation: Open-end investment company (mutual fund) shares are not appropriate for short-term trading, do not trade on an exchange, and cannot be purchased on margin. On the other hand, most ETFs and closed-end fund shares trade on an exchange and allow the use of margin and short selling.

A client has invested $20,000 in a variable annuity. After 10 years, the annuity is valued at $45,000. If the client withdrew $20,000 at age 59, he is subject to: a. Being taxed on the distribution as ordinary income b. A 10% penalty on the amount withdrawn c. Being taxed on the distribution as ordinary income, plus a 10% penalty on the amount withdrawn d. Being taxed on the distribution as a capital gain

c. Being taxed on the distribution as ordinary income, plus a 10% penalty on the amount withdrawn Explanation: If an individual purchases a variable annuity, it is not considered a tax-qualified plan. The contribution is not taxed upon withdrawal; however, any earnings withdrawn prior to age 59 1/2 are subject to a 10% penalty and ordinary income tax.

In which TWO of the following ways do exchange-traded funds (ETFs) differ from mutual funds? I. ETF share prices may change throughout the trading day II. ETF share prices are determined at the close of the market each day III. ETF shares may be sold short IV. When ETF shares are purchased, buyers pay a sales charge a. II and IV b. II and III c. I and III d. I and II

c. I and III Explanation: ETFs differ from mutual funds in the following ways: the shares trade on an exchange, the share prices change throughout the day based on supply and demand, and the shares may be sold short and purchased on margin. Also, rather than paying a sales charge, an investor will pay a commission on her ETF trades.

Which TWO of the following types of insurance have fixed premiums? I. Whole life insurance II. Universal life insurance III. Variable life insurance IV. Variable universal life insurance a. II and IV b. I and II c. I and III d. III and IV

c. I and III Explanation: Universal life policies, including variable universal life, have flexible premiums. Variable universal life is sometimes called flexible-premium variable life insurance. Whole life and variable life insurance policies have fixed premiums.

Which TWO of the following choices are differences between exchange-traded funds (ETFs) and exchange-traded notes (ETNs)? I. ETNs carry credit risk that is tied to the issuer that backs the note and ETFs do not have issuer credit risk II. ETFs may be sold short and ETNs may not III. ETF returns are based on the performance of an index and ETNs pay a fixed coupon rate IV. ETNs have a maturity date and ETFs do not a. II and III b. II and IV c. I and IV d. I and III

c. I and IV Explanation: ETNs are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes because ETN returns are linked to the performance of a commodity, currency, or index, minus applicable fees. ETNs do not usually pay an annual coupon or specified dividend. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. Only ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it can impact the value of the ETN negatively, regardless of how its underlying index performs.

Under the Investment Company Act, which TWO of the following statements are NOT TRUE regarding the redemption of mutual fund shares? I. The investor will receive the net asset value as previous day's close. II. The investor will receive the next computed net asset value after the order is entered. III. The fund must pay the investor within seven days of receipt of the redemption. IV. The fund must pay the investor within three days of redemption. a. I and III b. II and IV c. I and IV d. I and III

c. I and IV Explanation: Share redemption of mutual funds is based on forward pricing, which means that the investor will receive the next computed net asset value. This value is normally computed at the end of the business day. The client must be paid within seven calendar days of redemption.

All of the following statements are TRUE of the death benefit of a variable life insurance policy, EXCEPT: a. It is not taxable to the beneficiary b. The beneficiary may elect to receive the death benefit as an annuity c. It may be reduced to zero by poor performance of the separate account d. It is included in the estate of the deceased

c. It may be reduced to zero by poor performance of the separate account Explanation: Although the death benefit of a variable life policy may increase or decrease due to the performance of the separate account, it will not decrease below a minimum guaranteed amount (the face value of the policy).

A hedge fund investment would be least suitable for a client who is seeking: a. Exposure to a wide range of securities and strategies b. Tax advantages c. Liquidity d. Professional management of their funds

c. Liquidity Explanation:

The following two funds are listed in a mutual fund's prospectus: —Short-term Global A —Short-term Global B The difference between these two funds is likely the: a. Investment advisory fee b. Capitalization of the funds c. Manner in which the sales charges are collected d. Nature of the investments

c. Manner in which the sales charges are collected Explanation: Although they are shares of the same fund, Class A shares have a front-end load, while Class B shares have a contingent deferred sales charge as well as a small 12b-1 fee.

If Jane Brown annuitizes her nonqualified variable annuity, how will the series of payments be taxed? a. FIFO b. All taxable earnings first, then all cost basis c. Part of each payment is taxable earnings and part is a tax-free cost basis d. LIFO

c. Part of each payment is taxable earnings and part is a tax-free cost basis Explanation: A nonqualified annuity has a cost basis consisting of the after-tax dollars invested, as well as earnings that are tax-deferred. If it is annuitized, the cost basis is returned in equal amounts in each payment. The rest of each payment is tax-deferred earnings that become taxable (as income) upon receipt.

What method of crediting an equity indexed annuity's returns is based on the index value over a specified period? a. Binary b. American style c. Point-to-point d. Capped

c. Point-to-point Explanation: Equity index annuities (EIAs) provide returns that are based on the return of an equity index; however, if the market falls, they also provide a minimum rate of return. Insurance companies will credit the annuitants' accounts periodically. Some insurance companies credit their policyholders monthly, annually, or bi-annually, while others do it on a specific date (e.g., the starting point may be the value of the index on the date of issuance and the ending point is the value of the index on a particular date), which is referred to as "point-to-point." The amount of credited interest will then be based on the increase or decreased in the indexed value since the last time it was credited.

A customer wishes to invest $50,000 in three different mutual funds. The investment adviser representative should notify the customer that if she invested the entire $50,000 in one fund, she could save money because of the quantity discounts available through: a. Automatic reinvestment of dividends and capital gains b. The possibility of exchanging one fund for another without paying a sales charge c. Sales charge breakpoints d. The availability of a withdrawal plan

c. Sales charge breakpoints Explanation: The investment adviser representative should advise the client that she could save money because of the quantity discount option on large purchases available through purchases at sales charge breakpoints.

A client wanting only financial protection for her family in case of her premature death should buy: a. Universal life insurance b. Health insurance c. Term life insurance d. Whole life insurance

c. Term life insurance Explanation: Term life insurance buys protection at the lowest cost. If the insured does not die within the policy period, the policy expires without any cash value accumulation.

An investment advisory firm is searching for prospective investors for a new hedge fund. Which of the following investors would probably be the most suitable for this type of fund? a. A municipal pension fund that is seeking an income-generating, liquid investment b. An older, retired investor with an annual income between $50,000 and $100,000 and a liquid net worth of more than $1 million c. A young, very aggressive investor with an income of more than $100,000 and a liquid net worth between $50,000 and $100,000, who has repeatedly stated that he wants to invest with the big boys d. A husband and wife in their mid-fifties, both of whom are employed, with an annual income of more than $100,000 and a liquid net worth more than $1 million

d. A husband and wife in their mid-fifties, both of whom are employed, with an annual income of more than $100,000 and a liquid net worth more than $1 million Explanation: Hedge funds are generally illiquid investments with high minimum purchase requirements. Most are offered under Regulation D, which requires individual purchasers to meet minimum income and liquid net worth requirements (an annual income of at least $200,000 or a liquid net worth of at least $1 million). The municipal pension fund is seeking a liquid investment. The young, aggressive investor is unlikely to meet the minimum financial requirements to invest in a hedge fund. The other investors would all meet the minimum net worth requirements but a retired, older investor would not be the most suitable candidate for a hedge fund. This type of investor generally should not commit large portions of her portfolio to illiquid investments since she may need access to her money to pay for her living expenses and other needs.

A hedge fund is: a. Another name for a balanced fund b. A mutual fund designed for accredited investors c. A private placement vehicle that guarantees flow-through of all profits d. A private investment fund designed for wealthy, sophisticated investors

d. A private investment fund designed for wealthy, sophisticated investors Explanation: Hedge funds are private investment pools designed for wealthy, sophisticated investors. Accredited investors include wealthy, sophisticated individuals, but hedge funds are not mutual funds. While hedge funds do flow through profits to their investors, most keep at least 20% of the profits for the principals of the hedge fund. Therefore, not all of the profits flow through. Hedge funds are not balanced funds.

A limited partnership would be the least suitable for which of the following investors? a. A retired investor with a high liquid net worth, whose main objectives are current income and tax relief b. An individual in his mid-forties investing a lump sum for retirement, whose main goal is capital appreciation and tax relief c. A young aggressive investor with a high income, whose main objectives are capital appreciation and speculation d. A widower investing the proceeds of his deceased spouse's life insurance policy, whose main objectives are current income and capital preservation

d. A widower investing the proceeds of his deceased spouse's life insurance policy, whose main objectives are current income and capital preservation Explanation: A limited partnership may not be a suitable investment for any of these individuals. The use of insurance proceeds are definitely the least suitable based on his circumstances and investment objectives.

An equity-indexed annuity is suitable for which of the following clients? a. B. A person who needs a guaranteed return for life with no risk b. A client who needs tax-free income with limited risk c. A person who desires a high rate of return with little risk d. An person who needs a minimum guaranteed return with the potential for a greater return than CDs offer

d. An person who needs a minimum guaranteed return with the potential for a greater return than CDs offer Explanation: Equity-indexed annuities are NOT considered securities. Instead, they are hybrid products that combine elements of both fixed and variable annuities. The return of an EIA is linked to the performance of an underlying stock index. The insurance company that issues an equity-indexed annuity guarantees a minimum rate of return (as in a fixed annuity), but the annuity's ultimate return (which is capped) will vary depending on the performance of the index to which it is linked. To receive the EIA's guarantees, an investor must be willing to accept the limited potential gain.

A management company may be established as either open-end or closed-end. What is the difference between the two types? a. Open-end funds may issue bonds in order to raise additional capital b. Open-end fund shares trade in the secondary market c. Closed-end funds redeem their own shares d. Closed-end shares may trade at a premium or discount to the NAV

d. Closed-end shares may trade at a premium or discount to the NAV Explanation: Closed-end fund shares trade in the secondary market at either a premium or discount to their NAV. Although closed-end funds may issue senior securities (preferred stock or bonds) to raise additional capital, open-end funds cannot. Also, open-end fund securities are able to be redeemed; they do not trade in the secondary market.

Which of the following is NOT TRUE regarding exchange-traded notes (ETNs)? a. ETNs may be sold short b. The return on ETNs is linked to the performance of an index, commodity, or currency c. At maturity, ETN investors receive the value of the underlying asset d. ETNs are forms of secured debt instruments that have no credit risk

d. ETNs are forms of secured debt instruments that have no credit risk Explanation: ETNs are forms of secured debt instruments that have no credit risk

Which of the following statements is TRUE about ETNs? a. ETNs are unsecured bonds and investors are secured creditors if the issuer declares bankruptcy. b. Similar to ETFs, ETNs are suitable for passive investors. c. ETNs are suitable for investors who want to capture long-term growth. d. ETNs may lose value even if the underlying index remains stable.

d. ETNs may lose value even if the underlying index remains stable. Explanation: Unlike an ETF which is backed by an independent pool of securities, an ETN is an unsecured bond that's issued by a financial institution. That company promises to pay ETN holders the return on some index over a certain period and return the principal of the investment at maturity. However, if something happens to the issuing company (e.g., bankruptcy) and it's unable to make good on its promise to pay, ETN holders could be left with a worthless investment.

What securities are most likely used to create asset-backed securities? a. Jumbo mortgages b. Qualified mortgages c. Stocks d. Home equity loans

d. Home equity loans Explanation: Similar to a collateralized mortgage obligation (CMO), asset-backed securities (ABS) are bonds which are backed by a pool of assets. However, unlike CMOs, ABS are secured by a pool of loans that don't include mortgages. Instead, they typically consist of home equity loans, credit card receivables, auto loans, or student loans.

Which TWO of the following statements are NOT TRUE regarding the investment risk of a life insurance policy? I. Whole life policy writers bear the risk that the general account return will not meet the guaranteed rate. II. Whole life policy owners bear the risk that the general account return will not meet the guaranteed rate. III. Variable life policy writers bear the risk of poor separate account returns. IV. Variable life policy owners bear the risk of poor separate account returns. a. II and IV b. I and IV c. I and III d. II and III

d. II and III Explanation: Since the writer of a whole life policy guarantees the return, the insurer bears the risk that general account returns will not meet the guaranteed rate. In a variable account, the writer does not guarantee increases in death benefits and cash value. They are dependent on the returns in the separate account.

William purchased $10,000 worth of VULC when he was 60 years old. At the age of 98, William dies and leaves the shares of VULC to his grandson James. James learns that the shares are now worth $300,000. According to the IRS, which TWO of the following statements are TRUE regarding the shares of VULC? I. The cost basis of the shares is $10,000 II. The cost basis of the shares is $300,000 III. The holding period of the shares for James is short-term IV. The holding period of the shares for James is long-term a. II and III b. I and IV c. I and III d. II and IV

d. II and IV Explanation: According to the IRS, when securities are inherited, the recipient's cost basis is the market value of the securities at the time of the deceased's death. The recipient's holding period for the stock will be long-term, regardless of the deceased's actual holding period.

Jack has a substantial amount of cash value built up in his variable life insurance policy. He would like to use some of it for a home renovation project. Which TWO of the following choices would be used to explain to Jack his options for accessing his cash value? I. If he withdraws some of his cash value, it will be treated as taxable earnings first, then a tax-free return of premiums (LIFO). II. If he withdraws some of his cash value, it will be treated as a tax-free return of premiums first, then taxable earnings (FIFO). III. If he takes a loan against the cash value, it will be taxed as earnings first, then treated as a tax-free return of premiums (LIFO). IV. If he takes a loan against the cash value, it will be tax-free. a. II and III b. I and III c. I and IV d. II and IV

d. II and IV Explanation: Any withdrawal of cash value from a life insurance policy is considered a return of premiums first, which would be tax-free. Withdrawals above the amount of premiums paid will be considered interest and, therefore, taxable as income. Policyholders usually prefer to borrow against their cash value, since this would be tax-free. The loan does not need to be repaid, but any amount still outstanding upon the death of the insured will be subtracted from the death benefit.

Which of the following is the BEST feature of a variable annuity? a. It provides investors with a guaranteed payment every month b. It provides tax-free income to investors at retirement c. It provides additional benefits when placed inside of qualified retirement accounts d. It provides investors with an opportunity to invest in equities and defer the taxes until annuitization or liquidation

d. It provides investors with an opportunity to invest in equities and defer the taxes until annuitization or liquidation Explanation: The primary reason that investors purchase variable annuities is the ability to buy into a portfolio of securities and to defer the payment of taxes on any appreciation. Investors are taxed only when the annuity is surrendered, liquidated, or annuitized. Variable annuities do not provide tax-free income or guaranteed performance. Although investors may purchase a variable annuity in a qualified account, they will not receive additional tax benefits. Since an annuity is an insurance product, it may provide a death benefit and a life payout option.

All of the following statements are TRUE regarding term life insurance, EXCEPT: a. It provides insurance coverage for a limited period. b. It may be converted to an individual whole life plan. c. It does not build equity against which owners may borrow. d. The policy matures and its cash value is paid out at the end of the term period.

d. The policy matures and its cash value is paid out at the end of the term period. Explanation: Term life insurance policies remain in force for a specified period (e.g., 10 or 20 years) and are the simplest type of life insurance that may be purchased. The policyholder pays the premiums with the agreement that the company will pay the death benefit to the beneficiary if the insured dies while the policy is in force. Term life insurance is best suited for a person who only wants life insurance protection and is not interested in using his life insurance policy for investment purposes, since term policies do not build cash value. Term insurance policies do not have a maturity; instead, they simply provide coverage if the insured dies within the policy's term period.

The NAV per share for both an open-end and closed-end investment company is determined by: a. Average assets over a period divided by the number of common shares outstanding b. Total assets of the portfolio minus the expenses of the portfolio, divided by the number of common shares outstanding c. Total assets of the portfolio divided by the number of common shares outstanding d. Total assets of the portfolio minus the liabilities of the portfolio, divided by the number of common shares outstanding

d. Total assets of the portfolio minus the liabilities of the portfolio, divided by the number of common shares outstanding Explanation: With both open-end (mutual funds) and closed-end funds the NAV is calculated by taking the total value of all assets in the portfolio and then subtracting the liabilities of the portfolio to arrive at the net assets of the portfolio and then dividing by the number of common shares outstanding.

A 30-year-old client needs protection for his family in the event of his death. Currently, his income is low, but he does want to develop cash value. As he moves forward in his career, he may want access to his cash value and have the ability to adjust the policy as his insurance needs change. Which insurance recommendation is the MOST appropriate? a. Whole life b. Term life c. Variable life d. Universal life

d. Universal life Explanation: Universal life insurance produces cash value which is able to be accessed by a client, while also offering flexibility in regard to premium payment. Unlike whole life, a universal policy's death benefit can be increased or decreased as the insured's needs change. Considering the client's income, a variable policy has too much risk. Although term life insurance is likely the most affordable policy, it doesn't generate any cash value.

For a single parent who has a low income and wants to protect her child in the event of her death, what's the best policy? a. Whole life b. Variable annuity c. Variable life d. Term life

d. Term life Explanation: Since term life insurance policies don't accumulate cash value, they have the lowest premiums and are likely the most suitable policies for investors with low income. In this question, it's doubtful that the single parent has enough discretionary income to afford the higher premium that's associated with a permanent insurance policy.

Which of the following insurance contracts have the elements of term insurance, a cash value that is not market-based, and a flexible death benefit? a. Whole life b. Variable life c. Modified endowment policy d. Universal life

d. Universal life Explanation: Universal life is an insurance contract that allows the customer to select the amount of coverage and the size of the premium. Additionally, it has a cash value that grows at a minimum guaranteed rate. However, the performance of the cash value is not market-based

When investing in a variable annuity, investors would be MOST concerned with which of the following risks? a. Investment risk b. Interest-rate risk c. Legislative risk d. Mortality risk

a. Investment risk Explanation: In a variable annuity contract, an investor's principal is invested in a separate account. The separate account contains a pool of securities that will fluctuate over time. A variable annuity client would be most concerned with the fact that the value of his investment will fluctuate due to changes in the overall market.

A client purchases an equity-indexed annuity contract that guarantees a 4% return or 80% of the performance of the S&P 500, whichever is greater. The index declines over the course of the next year. What return will your client receive? a. 4% b. 80% of the value of the decline in the S&P 500 c. 2% d. 3%

a. 4% Explanation: An equity-indexed annuity guarantees the contract owner a minimum interest rate or the performance of a stock index such as the S&P 500 Index. If the return on this index is less than the guaranteed rate, the owner receives the guaranteed rate. If the index return is greater than the guarantee, the owner receives the greater return.

The most appropriate buyer(s) for a variable life insurance policy is/are: a. A person with an understanding of investments who can tolerate risk b. A person who wants the assurance of a guaranteed cash value c. A person who requires the discipline of forced savings d. Parents with a modest income who have young children

a. A person with an understanding of investments who can tolerate risk Explanation: A person who is knowledgeable about investments is a candidate for variable life insurance because stocks and bonds are the foundation of the policy. As the market values of the securities fluctuate, cash value and death benefits change. Therefore, the insured must be able to tolerate risk.

Which of the following is a characteristic of hedge funds? a. They are prohibited from investing in precious metals or commodities b. They may only be marketed to qualified institutional investors c. They are actively traded in the OTC markets d. Their managers usually receive performance-based fees

d. Their managers usually receive performance-based fees Explanation: Hedge fund managers generally receive a fee that is tied to the fund's performance as well as a management fee. For example, the manager may receive a 2% management fee plus a 20% performance fee (two and twenty fee). There is no active market for hedge fund shares; therefore, they are usually illiquid investments. Hedge fund managers may invest in all types of assets, including precious metals and commodities. Hedge funds may be sold or marketed to any investor as long as the recommendation is suitable. However, certain exemptions do apply if they are only sold to accredited retail investors and/or institutional investors.