Series 66- Unit 2

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) Yield spreads are widening B) Yield spreads are narrowing C) Airline stocks are in for a beating D) Pessimism is spreading

B 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: 5.1.4.3 in the License Exam Manual

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

C 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

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.

I & 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

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.

I,III,II,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: 5.1.2.2 in the License Exam Manual

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) flipping houses D) renting out single-family homes

A 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

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) $0.00 B) $3,420.00 C) $2,520.00 D) $4,480.00

B 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. The remaining $7,000 withdrawn is considered a withdrawal of principal and is therefore nontaxable. Reference: 8.1.5 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) NYSE listed common stock B) bank insured CDs C) U.S. Treasury notes D) limited partnership in rental real estate

C. 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: 10.2.3 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. IV.Trade in the secondary market.

I & 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 less than a year. These CDs generally pay interest on a semi-annual basis, not monthly. Reference: 6.1.1.2 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) lifetime income guaranteed never to drop below the initial rate B) a product very similar to a mutual fund, but with lower costs and expenses C) the opportunity to invest in equity securities on a tax-deferred basis D) the insurance company's backing of the annuity' performance

c Explanation 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

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) duration. B) future value. C) yield to maturity. D) discounted cash flow.

D 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