Customer Information, Risk and Suitability, Product Information
Which of the following investments is most suitable for an investor seeking monthly income? A) Money- market mutual fund. B)Mutual Fund investing in small-cap issues. C) Growth Stock. D)Zero-Coupon bond.
A) Money-Market mutual funds. The money market mutual funds is the most suitable investment for an investor seeking monthly income. The other securities offer higher long-term growth potential, but they are not designed to provide monthly income.
Growth companies tend to have all of the following characteristics EXCEPT: A) low PE ratios. B) potential investment return from capital gains rather than income. C) low dividend payout ratios. D) high earnings retention ratio.
A) low PE ratios. Growth companies have high PE ratios and a low dividend payout ratio because they retain most if not all of their earnings. Investors anticipating fast growth bid up prices so PE ratios tend to be high. Growth companies retain most of their earnings to fund future growth. Investors select growth companies for capital gain potential, not for investment income.
If an investor practices value investing, which of the following stock types is he least likely to purchase? A)A stock with an above-average price-to-earnings ratio. B)A stock that has exhibited a high dividend yield in the past. C)A stock with a low price-to-earnings ratio. D)A stock that is presently selling for two-thirds of net current assets.
A)A stock with an above-average price-to-earnings ratio. A growth investor looks for stocks with above-average price-to-earnings ratios. Conversely, a value investor focuses on stocks with low PE ratios, a low price-to-book value, and historically high dividend yields.
An investor that is age 50 would like to save for a child's college education which begins in 10 years. The investor is willing to take a moderate amount of risk. Which of the following would be the least appropriate recommendation? A)Fund an existing IRA with a municipal bond fund. B)Buy an BBB zero coupon bond that matures in 10 years C)Open a Coverdell ESA. D)Fund a variable annuity and use equity based sub accounts.
A)Fund an existing IRA with a municipal bond fund. Although investing within an IRA in anticipation of needing the money after age 59 ½ is a pretty good idea, municipal bonds, which provide federally tax-free income, are not suitable for retirement accounts. The federally tax-free interest income will be fully taxable upon withdrawal. In addition, municipal bonds are low risk, not moderate risk as indicated in the question.
A married couple both hoping to retire within the next 5 to 7 years have expressed having a low risk tolerance regarding the stock market. They have a combined income of $350,000. Given this information which of the following portfolio mixes would be most suitable? A)Treasury bills, corporate bonds, preferred stock B)Treasury notes, municipal bonds, GNMAs C)Direct participation programs, real estate investment trusts, preferred stock D)Treasury bills, common stock, options
B) Treasury notes, municipal bonds, GNMAs In light of their low risk tolerance, U.S. government securities would certainly be suitable and the time frame noted for retirement allows for middle term T-notes to be useful. Given their higher income level, tax-free municipals bonds could also have a place in the portfolio. Longer term GNMAs would accommodate monthly income should that be desirable upon retirement. The remaining product suggestions are either illiquid (DPPs) or do not align with their risk aversion (common, preferred, options, and REITs).
The following items are all correct statements regarding liquidity EXCEPT: A) the most liquid of assets is cash. B) it is the inability to find willing buyers for an asset. C) liquid assets include CDs and Treasury bills. D) a liquid asset can easily be converted to cas
B) it is the inability to find willing buyers for an asset. Liquidity and marketability are often used synonymously. Liquidity is the ability to turn an asset into cash whereas marketability is the ability to easily find buyers for an asset. If an asset is easily marketable this would imply that it is also liquid.
If a customer is in a low federal income tax bracket and his main investment objective is current income, which of the following securities should the agent recommend? A)U.S. government bond. B)Zero-coupon bond. C)Investment-grade corporate bond. D)City of Milwaukee GO bond.
C)Investment-grade corporate bond. If an investor is in a low-tax bracket any benefit from receiving tax-free municipal bond interest is diminished, making municipal bonds a less suitable investment. Zero-coupon bonds pay no interest until maturity and therefore are not suitable for someone seeking current income. To maximize income, the best recommendation of the choices listed is the corporate bond which offers a higher yield than a government bond with a similar maturity.
What is the profit to a syndicate member if a syndicate is offering an 8½% bond at 100, the syndicate manager is giving a .75 concession and a 1-point total takedown, and the syndicate member sells 1,000 bonds? A) 1000 B) 17500 C) 7500 D) 10000
D) 10000 When a member of the syndicate sells a bond they are entitled to the total takedown. In this case, 1 point ($10) per bond (1,000 bonds sold × $10 per bond = $10,000 profit). Remember that the concession would only go to those who are not members of the syndicate but are part of the selling group instead.
If a client is moderately risk-averse and has an investment objective of capital preservation, what types and allocation of investments would you recommend for this customer? A)A preponderance of speculative stocks and high-yield bonds. B) A mix of high yield bonds and cash/cash equivalents. C) A preponderance of growth stocks and limited partnership vehicles. D) A mix of investment-grade bonds and cash/cash equivalents.
D) A mix of investment-grade bonds and cash/cash equivalents. An individual with an investment objective of capital preservation should be investing in a mix of investment grade bonds and cash/cash equivalents. Lower risk capital appreciation vehicles, such as large-cap common stock, should also be considered. The other choices noted are too risky for a risk-averse investor.
A new client, age 26, has begun to search for her first home. She's been told that finding the right home within her budget might take 4 to 6 months depending on the availability of homes in the area she is targeting. With $45,000 currently in a checking account to use for the down payment, which of the following would represent the most suitable recommendation for those funds until the right home is found? A) U.S. government T-bonds, U.S. government T-notes, mutual fund A shares B) U.S. government T-notes, GNMA, real estate direct participation program C) IRA, variable annuity D) Savings account (cash), money market account, short-term T-bills (1-3 months)
D) Savings account (cash), money market account, short-term T-bills (1-3 months) For short-term liquidity, savings or checking accounts are always options; money market funds would generally allow for a slightly better return as would short-term T-bills. In light of the time horizon and liquidity needs, nothing long term (T-notes or bonds), illiquid (VAs, DPPs), or instruments not intended for short-term trading (mutual funds, particularly front load A shares) would be appropriate.
While reviewing a new customer's investment profile, you determine that the customer is willing to tolerate a high degree of risk and does not anticipate utilizing the invested funds for at least 15 years. What would be a suitable recommendation regarding asset allocation for the customer's portfolio given the customer's risk tolerance and time horizon criteria? A)45% debt, 45% equities, and 10% money-market instruments B)65% debt and 35% equities C)25% debt, 25% equities, 25% money market instruments, and 25% real estate D)70% equities, 20% debt, and 10% money-market instruments
D)70% equities, 20% debt, and 10% money-market instruments For an investor who has a long-term investment time horizon and is willing to tolerate higher levels of risk, a recommendation having a higher percentage of the portfolio in equities would be suitable. Of the asset mixes presented only one has a majority percentage in equities. The remaining choices with higher percentages in debt securities are too conservative.
A registered representative is interviewing a new customer, age 27. The customer wants to list capital appreciation as the primary investment objective for the account and is willing to take a moderate degree of risk at this time in his life. The customer also notes concern about inflation and how it will impact his portfolio over time. Which of the following investments is the most suitable recommendation? A)Corporate debt securities B)Municipal debt securities C)Long-term government bonds D)Equities such as common and preferred stock
D)Equities such as common and preferred stock Equities would be the most appropriate investment given the customer's age, capital appreciation investment objective and willingness to accept moderate risk. The remaining answer choices, while each has varying risk characteristics, are not likely to meet the capital appreciation objective.
