Investment Vehicles Review.
If a customer purchases in a 300% leveraged ETF, the customer can lose: Athe investment amount Bmore than the investment amount Cthree times the investment amount Dan unlimited amount
The best answer is A. A leveraged ETF is designed to move at a faster rate than the overall market. A 300% leveraged ETF will move at three times the rate of the general market. If the market rises by 10%, the ETF will rise by 30%. If the market falls by 10%, the ETF would fall by 30%. However, the maximum potential loss is still that person's investment!
To form a limited partnership, there must be at least: A1 limited partner and 1 general partner B1 general partner for every 10 limited partners C1 limited partner for every 10 general partners D100 limited partners
The best answer is A. A limited partnership consists of at least one General Partner and one Limited Partner. There can be multiples of each. The General Partner is the manager of the venture and assumes unlimited liability. The Limited Partner is the passive investor whose liability is limited to his investment.
Hedge funds are most often structured as: ALimited partnerships BGeneral partnerships CC Corporations DS Corporations
The best answer is A. Hedge funds are set up as limited partnerships with only 99 investors to avoid having to register under the Investment Company Act of 1940 (which requires registration if there are more than 100 investors).
A customer buys 1 ABC Feb 50 Call @ $7 when the market price of ABC is $52. The customer's maximum potential loss is: A$700 B$4,300 C$5,700 Dunlimited
The best answer is A. In a falling market, a long call position will expire "out the money" and the holder loses the premium paid. This is the maximum potential loss.
A customer sells 1 ABC Jul 40 Put at $6 when the market price of ABC is 38. The customer's maximum potential gain is: A$600 B$3,400 C$4,000 Dunlimited
The best answer is A. The maximum gain for the writer of a naked call or put is the premium collected. This happens if the contract expires "out the money".
Which statements are TRUE about the alternative minimum tax computation? I The alternative minimum tax computation is required for all taxpayers II The alternative minimum tax computation is required only for investors in limited partnerships III If the alternative minimum tax amount is greater than the regular income tax amount, the larger amount must be paid IV If the alternative minimum tax amount is greater than the regular income tax amount, the smaller amount must be paid AI and III BI and IV CII and III DII and IV
The best answer is A. While the Alternative Minimum Tax usually is an issue only for taxpayers who have invested in limited partnerships, items are included in the AMT that affect other taxpayers, such as very large charitable contribution deductions and interest income from non-essential use, private purpose municipal bond issues. Technically, all taxpayers are subject to the AMT, though it really only affects high income taxpayers. The higher amount of the regular income tax computation; or the AMT computation; must be paid by the taxpayer.
Under partnership democracy provisions, the partnership agreement must give detailed disclosure of all of the following EXCEPT: A the procedures for allocating profits from investments to thelimited partners B the procedures for allowing limited partners to assign specific properties C thegeneral partner'scompensation arrangement D the limited partners' claim to assets upon dissolution
The best answer is B. Limited partners cannot assign properties or perform management functions. Performing these actions would cause that person to be viewed as a general partner - who takes on unlimited liability. Partnership agreements will include provisions on allocating profits; compensation to the general partner; and claim to assets upon dissolution.
A customer owns a perpetuity that pays $500 per month. Assuming that the market rate of return is 5%, the value of the contract is: A$10,000 B$100,000 C$120,000 D$150,000
The best answer is C. A perpetuity makes payments forever. To calculate the value of the contract, you take the annual (not monthly) payment received and divide it by the market rate of interest. $6,000 annual payment received / .05 = $120,000
Payments made on fixed annuities are: A based on a formula that is linked to the market as a whole B based on the market value of the securities held in the separate account C the same after annuitization occurs D fixed as to minimum but not as to maximum
The best answer is C. Fixed annuities are an insurance product - they are not defined as a "security." The purchaser will receive a fixed annuity amount. The level payments do not vary with the performance of the investments funding the annuity. Fixed annuities are invested in the insurer's general account, which is required to be invested primarily in fixed income investments.
Which statement is TRUE about a leveraged ETF? ALeveraged ETFs are a suitable investment for a client with a low risk tolerance level because they are index funds BLeveraged ETFs could put the customer in the position of losing more than the amount invested CLeveraged ETFs are highly liquid and can be readily traded in the market DLeveraged ETFs are assessable securities where the holder can receive a capital call from the sponsor to put up additional funds
The best answer is C. Leveraged ETFs are exchange-traded index funds that use leverage (borrowing) to magnify the velocity of price movements. For example, a 3X leveraged ETF would move 3 times as fast as the reference index. Therefore, the client must have a high risk tolerance, making Choice A incorrect. While leveraged ETFs are designed to move faster than the market, the maximum loss is the amount invested, making Choice B incorrect. ETFs are highly liquid and are actively traded, making Choice C correct. Finally, the sponsor of the ETF has no right to demand additional capital from the ETF holder. The right of assessability only exists in partnership units, where the partners can be assessed to put up more capital.
A speculator that initiates a long futures position in Euros: I believes that the Euro will decline II believes that the Euro will increase III will need to sell Euro futures to close his position if he wants to avoid taking delivery in the future IV can only satisfy the terms of the contract by taking delivery of Euros on the delivery date AI and III BI and IV CII and III DII and IV
The best answer is C. When one goes long a futures contact, this is a "bet" that the price of the reference asset will increase. Futures contracts can be offset at anytime by trading, so the contract can be closed with an offsetting sale. If the contract is not closed with an offsetting sale, then the buyer is required to take delivery and pay for the Euros on the delivery date.
What type of flexible insurance policy has a savings component? ATerm Life BStraight Life CWhole Life DUniversal Life
The best answer is D. Term life is pure insurance and has no savings component. Whole life, also known as straight life, requires that the same annual premium be paid, part of which pays for insurance and part of which is "invested" and builds cash value that can be borrowed. Because the annual premium does not change, it is not "flexible." Universal life is similar to whole life, in that it has an insurance component and an investment component, however, the premium paid can be lowered or increased. If it is lowered to the minimum, the policy operates like term insurance and no cash value is built. If it is increased, any amount above the cost of insurance is credited to cash value, which earns interest.
A speculator that initiates a long futures position in Euros: I believes that the Euro will decline II believes that the Euro will increase III will need to sell Euro futures to close his position if he wants to avoid taking delivery in the future IV can only satisfy the terms of the contract by taking delivery of Euros on the delivery date A I and III B I and IV C II and III D II and IV
The best answer is C. When one goes long a futures contact, this is a "bet" that the price of the reference asset will increase. Futures contracts can be offset at anytime by trading, so the contract can be closed with an offsetting sale. If the contract is not closed with an offsetting sale, then the buyer is required to take delivery and pay for the Euros on the delivery date.
A customer wishes to purchase a Direct Participation Program Offering. The registered representative should know which of the following about the customer in order to give advice about such an investment? I Annual income II Net worth III Age IV Portfolio holdings AI only BII only CI, II, III DI, II, III, IV
The best answer is D. Common sense dictates that to recommend a direct participation program (tax shelter) to a customer, the registered representative should know about the customer's income, net worth, age, and existing portfolio holdings.
The purchase of a call has all of the same characteristics as buying stock EXCEPT: Aunlimited gain potential in a rising market Blimited loss potential in a falling market Clow liquidity risk if the position is to be liquidated Dno erosion of value as the position is held
The best answer is D. The purchase of a call has unlimited gain potential, as does the purchase of stock. The maximum loss for a call holder is the premium paid; the maximum loss for a stockholder is his investment - so loss potential is limited for both. Both options and stocks are actively traded on exchanges, so there is little liquidity risk for both. The holder of a call faces the loss of time premium as the position nears expiration; this is not true for stock positions.
The purchase of a call has all of the same characteristics as buying stock EXCEPT: A unlimited gain potential in a rising market B limited loss potential in a falling market C lowliquidity riskif the position is to be liquidated D no erosion of value as the position is held
The best answer is D. The purchase of a call has unlimited gain potential, as does the purchase of stock. The maximum loss for a call holder is the premium paid; the maximum loss for a stockholder is his investment - so loss potential is limited for both. Both options and stocks are actively traded on exchanges, so there is little liquidity risk for both. The holder of a call faces the loss of time premium as the position nears expiration; this is not true for stock positions
Under partnership democracy provisions, the partnership agreement must give detailed disclosure of all of the following EXCEPT: Athe procedures for allocating profits from investments to the limited partners Bthe procedures for allowing limited partners to assign specific properties Cthe general partner's compensation arrangement Dthe limited partners' claim to assets upon dissolution
Under partnership democracy provisions, the partnership agreement must give detailed disclosure of all of the following EXCEPT: A the procedures for allocating profits from investments to the limited partners Bthe procedures for allowing limited partners to assign specific properties Cthe general partner's compensation arrangement Dthe limited partners' claim to assets upon dissolution
Which statements are TRUE about fixed annuity contracts? I A fixed annuity contract is regulated by each State as an "insurance" product II A fixed annuity contract is regulated by the SEC as a "security" III Investment risk is borne by the purchaser of the contract IV Investment risk is borne by the insurance company that issues the contract A I and III B I and IV C II and III D II and IV
Which statements are TRUE about fixed annuity contracts? I A fixed annuity contract is regulated by each State as an "insurance" productII A fixed annuity contract is regulated by the SEC as a "security"III Investment risk is borne by the purchaser of the contractIV Investment risk is borne by the insurance company that issues the contract Incorrect answer A. You chose this answer. A I and III Correct answer B. You did not choose this answer. B I and IV Incorrect answer C. You did not choose this answer. C II and III Incorrect answer D. You did not choose this answer. D II and IV
A customer sells short 100 shares of ABC stock at 40 and buys 1 ABC Mar 40 Call @ 5. The maximum potential gain is: A$500 B$3,500 C$4,500 Dunlimited
The best answer is B. If the stock falls, the customer gains on the short stock position. He sold the stock for $40. If it falls to "0," he can buy the shares for "nothing" to replace the borrowed shares sold and make 40 points. He lets the call expire "out the money" losing 5 points, so the maximum potential gain is 35 points.
Which of the following guarantees do insurance companies typically give with BOTH fixed and variable annuities? I Mortality guarantee II Expense guarantee III Investment return guarantee IV Benefit amount guarantee AI & II only BI & IV only CII & III only DIII & IV only
The best answer is A. Insurers give mortality and expense guarantees for both fixed and variable annuities. Only issuers of a fixed annuity guarantee the investment return and the benefit payment amounts. The investment return and benefit payment amounts from a variable annuity contract are not guaranteed by the issuer - the actual amount to be paid depends on the performance of the underlying securities held in the separate account. Thus, the purchaser of a variable annuity contract assumes the investment risk.
A customer buys 100 shares of ABC stock at $58 and buys 1 ABC Jul 55 Put @ 2.50 on the same day. The maximum potential loss is: A$250 B$550 C$5,550 Dunlimited
The best answer is B. If the market should fall, the customer will exercise the put and sell the stock at the strike price, limiting potential loss. The put contract gives the customer the right to sell the stock at $55. Since the stock was purchased at $58, 3 points will be lost on the stock. In addition, 2.50 points were paid in premiums for a maximum potential loss of 5.50 points or $550.
The purchaser of an immediate 15-year period certain annuity will receive payments for: Aa 15-year time frame following annuitization, even if the purchaser dies before the end of the 15-year term Ba minimum 15-year time frame, or the life of the annuitant, if this is shorter Cthe life of the annuitant, but will pay for a minimum of 15 years if the annuitant dies before this period elapses Dany selected 15-year time frame, even if the purchaser dies before the end of the 15-year term
The best answer is A. The question is simply asking about an immediate 15-year period certain annuity. This would not be an annuity option in a variable annuity contract. It is only available as a fixed annuity. The purchaser makes a lump sum payment, which is immediately annuitized and which will then pay for 15 years. There is no life annuity feature associated with this. It is a type of annuity that can be purchased from an insurance company that only pays for a stated time period - in this case 15 years. These are used most often to bridge a gap between early retirement and when social security payments start. For example, if an individual retired at age 55 and full social security payments started at age 70, he or she could buy this contract to provide payments for that 15-year gap.
Which statements are TRUE when comparing index options to index futures? I Index options are defined as security II Index options are not defined as a security III Index futures are defined as a security IV Index futures are not defined as a security AI and III BI and IV CII and III DII and IV
The best answer is B. Index options are regulated by the SEC and the States as a "security." In contrast, futures are not a security - they are regulated as "commodities futures" regulated by the CFTC.
Which of the following investments trades in the market independent of NAV? AMutual fund BClosed-end fund CVariable annuity DHedge fund
The best answer is B. Limited partnerships are illiquid - they do not trade because partnership units are not transferable unless the general partner approves. Most hedge funds are set up as limited partnerships. Closed-end funds are listed and trade like any other stock; in contrast, open end funds (mutual funds) do not trade - they are redeemable, not negotiable. Variable annuities use a mutual fund held in a separate account to fund the annuity - they are also not negotiable.
Which of the following investments trades in the market independent of NAV? ALimited partnership BClosed-end fund CVariable annuity DHedge fund
The best answer is B. Limited partnerships are illiquid - they do not trade because partnership units are not transferable unless the general partner approves. Most hedge funds are set up as limited partnerships. Closed-end funds are listed and trade like any other stock; in contrast, open end funds do not trade - they are redeemable, not negotiable. Variable annuities use a mutual fund held in a separate account to fund the annuity - they are also not negotiable.
The principal difference between a structured product and an ETN is: Ainvestment time horizon Bliquidity risk Ccredit risk Dreference index
The best answer is B. Regarding structured products, each bank's version has different features. They are "buy and hold" securities - there is almost no trading market. ETNs are "Exchange Traded Notes." They are an equity index linked structured product, that is listed and trades on an exchange. Because they trade, the liquidity risk aspect of structured products is eliminated.
Which of the following investments trades in the market independent of NAV? A Limited partnership B Closed-end fund C Variable annuity D Hedge fund
The best answer is B. Limited partnerships are illiquid - they do not trade because partnership units are not transferable unless the general partner approves. Most hedge funds are set up as limited partnerships. Closed-end funds are listed and trade like any other stock; in contrast, open end funds do not trade - they are redeemable, not negotiable. Variable annuities use a mutual fund held in a separate account to fund the annuity - they are also not negotiable.
Which of the following are risks of investing in a Real Estate Limited Partnership (RELP)? I Business risk II Liquidity risk III Regulatory risk IV Reinvestment risk AI and II only BIII and IV only CI, II, III DI, II, III, IV
The best answer is C. Limited partnerships are illiquid - they do not trade and a limited partner can only sell his or her unit with general partner approval. So liquidity risk is a major issue. Because these are tax shelters that use provisions of the tax code to reduce tax liability, owners of limited partnerships face increased risk of tax audit; and also are subject to regulatory risk, which is the risk of tax law change. There are no dividends or interest payments received that must be reinvested, so there is no reinvestment risk. However, business risk is another big issue here - because the business venture may fail.
Which actions taken regarding a universal variable life insurance policy could result in tax liability? I Cash surrender II Partial withdrawal III Loan of up to 95% IV Payout of death benefit AI and II only BIII and IV only CI, II, IV DI, II, III, IV
The best answer is C. Proceeds distributed from a variable life insurance policy are taxable income if there is a distribution of benefits above the amount invested (tax basis) in the separate account. This would include a cash surrender (surrender of the entire policy for its current cash value, terminating the policy) or making a partial withdrawal from the policy. The payment of a death benefit from the policy, while not taxable income to the recipient, is included in the taxable estate of the deceased individual. If the aggregate value of the estate exceeds the estate tax exclusion, there will be estate tax liability. The only way to get cash out of a variable policy without a potential tax consequence is to borrow against the policy. In general, most "cash value" policies only permit a loan of up to 75% of cash value; but if the policy is fully paid, often the loan amount is raised to 95%.
Variable Universal Life Insurance (VULI) policies provide policy owners with: Aguaranteed minimum cash values Bvariable premiums and the guarantees of term insurance Cflexibility with respect to premium payments, investment options, and death benefits Dthe guarantees of whole life insurance plus the investment flexibility of variable life insurance
The best answer is C. Variable Universal Life Insurance (VULI) is a combination of universal life insurance and variable life insurance. Thus, it provides flexibility in premium payments, investment-funding choices, and flexibility of death benefits based on investment results. VULI does not guarantee minimum cash value like whole life insurance, since investments are made in a separate account and the amount of cash value depends on separate account performance, making Choice (A) incorrect. VULI does not guarantee a fixed insurance amount, as is the case with term insurance. The amount of coverage will vary with the performance of the separate account, though there is a minimum guaranteed insurance amount, so Choice (B) is incorrect. VULI does not guarantee a fixed rate of return, as does a whole life policy, making Choice (D) incorrect.
Which statement concerning variable universal life policies is correct? APremium amounts are fixed and coverage amounts can vary BPremium amounts can vary and coverage amounts are fixed CPremium and coverage amounts are fixed DPremium and coverage amounts can vary
The best answer is D. Universal life policies allow the policy owner to change premium payments up or down to buy a higher or lower death benefit. With a variable universal life policy, the insurer invests premium dollars in a separate account to provide the death benefit. These policies offer a minimum guaranteed death benefit; however, the death benefit will increase if the separate account investments perform better than anticipated. Thus, premiums may vary, and the death benefit may vary, depending upon separate account performance.
The holder of a call on a listed stock exercises. The holder MUST: I deliver stock II deliver cash III take delivery of stock IV take delivery of cash AI and III BI and IV CII and III DII and IV
The best answer is C. If the holder of a call option on listed stocks exercises, he must buy 100 shares of stock, for which the holder will pay the strike price in cash.
All of the following life insurance policies offer cash values to the policy owners EXCEPT: Aterm life Buniversal life Cwhole life Dvariable universal life
The best answer is A. Term life insurance is pure insurance with no investment element. For the premium paid, the purchaser is buying life insurance coverage for a fixed time period. At the end of that time period, the policy must be renewed to maintain coverage, typically at a higher premium as the insured individual ages (because of the greater mortality risk). When the purchaser of a term life policy is young, the premium is very low; as that person ages, the premium gets higher and higher. Whole life insurance protects the purchaser for his or her whole life from increasing premiums as that person ages. There are no renewals - the policy is good for that person's life. With a whole life policy, the annual premium is level, and will start out higher than a term life policy. Part of the premium is invested in the insurance company's general account and is guaranteed to grow at a fixed rate. As the general account investment portion grows, the policy builds "cash value" - meaning that part of the investment value can be borrowed against the policy. Any borrowed funds reduce the benefit payment upon death. Universal life combines elements of term life and whole life policies. The premium is broken down into an insurance element (the term component) and a savings element that is invested in the insurance company's general account (savings component). The policy owner's account is credited for the interest income earned on the general account. The rate of return can vary from year to year. The policy owner can use cash value to increase the death benefit or to skip some premium payments. Variable life products invest a portion of the premium in a separate account rather than the general account, and the investment return of the separate account will determine the amount of insurance coverage, which can vary.
An investment would be made in a variable annuity in order to get: Amarket participation and tax deferred growth Bmarket risk reduction tax and tax deferred growth Cmarket participation and tax free income at retirement Dmarket risk reduction tax and tax free income at retirement
The best answer is A. The contribution to a variable annuity is not deductible, but the earnings build tax deferred. Income taken at retirement age is taxable on the portion attributable to the never-taxed build-up.
An investment would be made in a variable annuity in order to get: I market participation II market risk reduction III tax deferred growth IV tax free income at retirement AI and III BI and IV CII and III DII and IV
The best answer is A. The contribution to a variable annuity is not deductible, but the earnings build tax deferred. Income taken at retirement age is taxable on the portion attributable to the never-taxed build-up. Contributions are invested in a separate account holding shares of a designated mutual fund, typically an equity growth fund. If stock prices rise, the mutual fund shares will rise in value, which will increase annuity payments, so the investment offers market participation. On the flip side, equity values can also drop, which would reduce the mutual fund's value, which would reduce the annuity payments - so there is no market risk reduction.
Which statement about variable life insurance is FALSE? AThe policy value may be reduced to zero by poor performance of the separate account BThe policy value is included in the estate of the deceased individual CThe policy value is not taxable to the beneficiary DIn lieu of taking the death benefit as a lump sum, the beneficiary can choose to take it as an annuity
The best answer is A. Variable life gives a guaranteed minimum insurance coverage, regardless of performance in the separate account, making Choice A false. With any life insurance, the policy value is included in the deceased's estate (the only way to remove it is for the individual to put the policy into a non-revocable trust prior to death). With any life insurance, the proceeds go to the beneficiary without tax due. With a variable life policy, the beneficiary can choose to take the death benefit as annuity payments instead of as a lump sum.
A customer buys an annuity requiring an initial payment of $100,000. The annuity offers a 4% Bonus Credit. This means that: Athe insurance company will pay an extra $4,000 into the contract on top of the customer's $100,000 payment Bthe customer receives a guarantee that the separate account will grow at a minimum 4% rate per year Cthe insurance company will issue a check to the customer for $4,000 upon acceptance of the contract Dthe customer will receive a $4,000 credit from the insurance company that can be used to buy an additional life insurance policy offered by that company.
The best answer is A. When a variable annuity contract offers a "bonus credit," the company matches any customer payment made into the contract with an extra payment of anywhere from 1-5% of the amount paid. Since this customer is paying $100,000, the bonus credit of 4% means that the insurance company will pay an extra 4% of $100,000 = $4,000 into the contract. Usually annuity contracts with a "bonus credit" have higher annual expense ratios - a classic example of the fact that "you don't get something for nothing."
A customer has a large portfolio of diversified blue chip stocks and would like to increase the income from the investments. Which strategy is suitable? A Covered call writing B Naked call writing C Covered put writing D Naked put writing
The best answer is A. Covered call writing is suitable for securities that are expected to remain relatively constant in price. If the price remains constant, the calls expire and the premium is earned, with no gain or loss on the stock position. Blue chip stocks are less volatile than lesser quality stocks and are good candidates for covered call writing strategies. If covered calls are sold against these stocks, there is no margin required on the sale of the call. Downside risk is limited to the loss of the investment net of premiums received. Naked call writing exposes the writer to unlimited risk and is not suitable. Put writing strategies are used to increase income against short stock positions.
Which of the following would cause payment of a term life policy death benefit claim to be denied? AThe policy names a minor as the beneficiary BThe policy has lapsed because of non-payment of premiums CThe policy has completed the contestability period DThe policy was in force at the time of death
The best answer is B. A life insurance claim will not be paid out if the policy has lapsed because of non-payment of premiums. The insurance company sends the policyholder multiple advance notices when premiums are not paid regarding the fact that the policy will no longer be in force and that any claims would be denied.If a minor is named as a beneficiary on a life insurance policy, the proceeds cannot be paid upon the insured's death to a minor. This will cause a delay in the payment, but payment will not be denied. A court must appoint a guardian over the minor in order for the death benefit to be paid to the "guardian for the benefit of the minor."Most life insurance policies have an initial "contestability period" where the death benefit will not be paid if the insured dies within the first 1 or 2 years after the policy is issued and the insurance company believes that there was misrepresentation or fraud involved with the issuance of the policy. If death occurs during the contestability period, the insurance company has the right to investigate whether the information provided in the application was accurate. This is done to make sure that someone who is really ill (and who did not disclose this fact on the application) does not take out a policy in anticipation of imminent death, in order to improve the financial situation of the named beneficiary.
As the economy fluctuates, the holder of a fixed annuity contract should know that: Apayments will fluctuate based upon the actual return that the separate account earns Bpayments will not fluctuate over time Cduring periods of negative economic growth, annuity payments are subject to reduction Dduring periods of negative economic growth, it is likely that annuity payments will increase
The best answer is B. Fixed annuities are just that - fixed. No matter how well or poorly the insurance company's general account performs, or how much the economy fluctuates, the annuitant receives a fixed monthly amount
A customer buys 1 ABC Jul 50 Put at $4 when the market price of ABC is 51. The maximum potential loss to the holder is: A$0 B$400 C$4,000 Dunlimited
The best answer is B. The holder of a put buys the right to sell at a fixed price. If the contract expires "out the money," the maximum loss is the premium paid. This occurs if the market price rises above the strike price.
All of the following statements concerning a whole life insurance policy are correct EXCEPT: Apremium payments are level and fixed for the insured's lifetime Bthe cash value increases based on equity investments Cthe death benefit is fixed and guaranteed for the insured's entire life Dpolicy loans will reduce the amount paid at death
The best answer is B. Whole life insurance protects the purchaser from increasing premiums as that person ages, and there are no renewals - the policy is good for that person's "whole" life. With a whole life policy, the annual premium is level, and will start out higher than a term life policy. Part of the premium is invested in the insurance company's general account and is guaranteed to grow at a fixed rate. As the general account investment portion grows, the policy builds "cash value" that can be borrowed. Any borrowed funds reduce the benefit payment upon death. Variable life invests premiums in a separate account and typically invests in equities, whereas both whole life and universal life invest premiums in the general account, which must be heavily invested in fixed income securities.
Which statements are TRUE about fixed annuity contracts? I A fixed annuity contract is regulated by each State as an "insurance" product II A fixed annuity contract is regulated by the SEC as a "security" III Investment risk is borne by the purchaser of the contract IV Investment risk is borne by the insurance company that issues the contract AI and III BI and IV CII and III DII and IV
The best answer is B. With a fixed annuity, the insurance company collects a premium from the purchaser and invests it in its general account (which holds the investments made by the insurance company). The performance of the investments held in the general account does not affect the amount of the annuity promised to the purchaser. Thus, the insurance company bears the investment risk - which is the risk that its investment value does not grow as fast as its obligations to fixed annuity holders. A fixed annuity is defined as an "insurance" product and not as a security precisely because the insurance company bears the investment risk, not the purchaser. All insurance is regulated at the State level only - there is no Federal regulation of insurance products.
Which of the following would cause payment of a term life policy death benefit claim to be denied? A The policy names a minor as the beneficiary B The policy has lapsed because of non-payment of premiums C The policy has completed the contestability period D The policy was in force at the time of death
The best answer is B. A life insurance claim will not be paid out if the policy has lapsed because of non-payment of premiums. The insurance company sends the policyholder multiple advance notices when premiums are not paid regarding the fact that the policy will no longer be in force and that any claims would be denied. If a minor is named as a beneficiary on a life insurance policy, the proceeds cannot be paid upon the insured's death to a minor. This will cause a delay in the payment, but payment will not be denied. A court must appoint a guardian over the minor in order for the death benefit to be paid to the "guardian for the benefit of the minor." Most life insurance policies have an initial "contestability period" where the death benefit will not be paid if the insured dies within the first 1 or 2 years after the policy is issued and the insurance company believes that there was misrepresentation or fraud involved with the issuance of the policy. If death occurs during the contestability period, the insurance company has the right to investigate whether the information provided in the application was accurate. This is done to make sure that someone who is really ill (and who did not disclose this fact on the application) does not take out a policy in anticipation of imminent death, in order to improve the financial situation of the named beneficiary.
A vehicle that gives the right, but not the obligation, to buy a reference asset at a stated price for a stated period of time is a(n): Aforward contract Bfutures contract Coptions contract Dswap contract
The best answer is C. A key difference between an option contract and a futures or forward contract is that the holder of an option has the right to exercise, but is not required to do so. In contrast, a futures or forward contract obligates the buyer of the contract to buy the underlying reference asset at the delivery date, unless the contract is closed prior to this date.Swaps are custom OTC contracts that allow for a "swapping" of cash flows between 2 parties, with the most common being an interest rate swap, where a fixed interest rate is "swapped" for a floating rate.For example, Party A agrees that it will pay a fixed 4% interest rate for 5 years on a $100 million principal amount to Party B. Party B agrees that it will pay a floating rate of LIBOR (say it is currently at 3%) + 1% to Party A over this period. Party A "wins" if interest rates rise over this period; Party B "wins" if interest rates fall over this period.
A whole life insurance policy is in force for: Aa predetermined length of time Bthe duration of the beneficiary's lifetime Cthe life span of the insured Da period certain as stated in the policy
The best answer is C. A whole life insurance policy remains "in force" as long as the premiums are paid. It is "in force" for the entire life span of the insured individual. When that individual dies, the insurance benefit will be paid to the policy beneficiary. The lifespan of the beneficiary has nothing to do with the time that the insurance policy is "in force."
The Assumed Interest Rate (AIR) associated with variable annuities is the: Arate at which the annuity payments are scheduled to increase each year Binterest rate paid to the annuitant Cestimated future earnings rate needed to maintain level payments to the annuitant Daverage of past and assumed future rates of return earned by the annuity
The best answer is C. AIR stands for Assumed Interest Rate. It is a conservative estimate of annual return needed for the insurance company to maintain a constant annuity payment amount. The AIR is chosen by the customer at the beginning of the payout period, based on an interest rate range set by the State. It is an estimated interest rate that the separate account investments must earn to maintain payment amounts. Once the first annuity payment is made based on the chosen AIR, if the earnings in the separate account are greater than the AIR, the next payment increases. If the earnings in the separate account are less than the AIR, the next payment decreases.Variable annuities do not provide scheduled increases in payment amounts. The insurance company bases payouts on the value of annuity units when it pays them out.
A customer, age 60, has a fixed annuity contract with a value of $16,000. The cost basis in the contract is $10,000. If the customer withdraws $5,000 and the IRS taxes distributions on a LIFO basis, the tax consequence of a withdrawal will be: A$0 taxable/$0 penalty B$0 taxable/$500 penalty C$5,000 taxable/$0 penalty D$5,000 taxable/$500 penalty
The best answer is C. Annuity contract contributions are not tax deductible, so the original contribution of $10,000 represents dollars that were already taxed. Any earnings in the account build tax-deferred. So the $6,000 excess value above the cost basis of $10,000 represents the untaxed build-up. IRS rules require that annuity distributions be taxed on a LIFO (Last In First Out) basis - with the build-up portion being the "Last In;" therefore these are the first dollars to be distributed. Thus, all $5,000 will be taxable. In addition, since this individual is over age 59½, there is no penalty tax on the distribution.
A 62-year old client makes her first withdrawal from a non-tax qualified annuity. This will result in: A capital gains taxed at capital gains rates Bordinary income taxed at ordinary income tax rates that is subject to a penalty Cordinary income taxed at ordinary income tax rates that is not subject to a penalty Dcapital gains taxed at ordinary income tax rates
The best answer is C. Distributions from non-tax qualified retirement plans are accounted for on a LIFO - Last-In; First-Out basis. The first item that went into the plan was the original non-tax deductible contribution. The next item than went into the plan was the reinvestment of dividends, interest, and capital gains over time - all of which have been building tax deferred. When distributions commence, the first dollars out of the plan are accounted for as the return of the "build-up" - which was never taxed. Thus, the first distributions out of the plan are 100% taxable at ordinary income tax rates. There is no penalty tax (10%) due as long as the money is taken out after reaching age 59½, which is the case here.
The primary risk associated with investing in ETNs is: Amarket risk Bliquidity risk Ccredit risk Dlegislative risk
The best answer is C. ETNs are "Exchange Traded Notes." They are an equity index linked structured product, that is listed and trades on an exchange. Because they trade, the liquidity risk aspect of structured products is eliminated. What is not eliminated, however, is credit risk. These products are only as good as the guarantee of the issuing bank. They typically have a 7 year life - and a lot can go wrong in 7 years (just ask anyone who purchased Lehman Brothers structured products or ETNs).
A representative is making a presentation to a married couple, ages 77 and 81, about their need for continuing income as the expected life spans of the general population have increased. The representative is strongly recommending that the couple buy an equity indexed annuity (EIA). Which statements made by the representative would be misleading and fraudulent? I "EIAs guarantee a minimum rate of return that is equal to the Standard and Poor's 500 Index" II "I do not earn any commissions when I sell you an EIA" III "EIAs are tax qualified, allowing you to reduce your taxable income by deducting any contribution that you make" IV "EIAs provide a minimum guaranteed rate of return that is guaranteed by the issuing insurance company" AI and III BI and II CI, II, III DI, II, III, IV
The best answer is C. Equity indexed annuities (EIAs) are an insurance product that falls somewhere between a fixed annuity and a variable annuity. They give a return linked to a well-known index, such as the Standard and Poor's 500 Index, but the return is typically capped to a maximum interest rate per year. Thus, if the cap is 10% and the S&P 500 Index grows by 15%, the customer only gets a 10% return for that year. Thus, Choice I is a misleading statement. Technically the salesperson does not earn a commission, but he or she does earn a very steep sales charge, so Choice II is misleading. There is no deduction for contributions to the contract (these are non-qualified plans) making Choice III a misleading statement. Choice IV is true - the contracts have a minimum guaranteed rate of return (like around 4%) that is guaranteed by the insurance company. Of course, if the insurance company fails (which rarely happens, but it has happened), then the guarantee is worthless.
Which statements are TRUE when comparing exchange traded index funds to index mutual funds? I Expense ratios for exchange traded index funds are higher than those for index mutual funds II Expense ratios for exchange traded index funds are comparable to, or lower than, those for index mutual funds III Net asset values for exchange traded index funds are calculated continuously through the day; while net asset values for mutual funds are computed once each day IV Net asset values for exchange traded index funds are calculated once each day; while net asset values for mutual funds are computed continuously through the day AI and III BI and IV CII and III DII and IV
The best answer is C. Expense ratios for ETFs - Exchange Traded Funds - are comparable to, or lower than, those for mutual funds. Whereas mutual funds can be bought or redeemed at that day's closing Net Asset Value (plus a sales charge, if applicable), ETFs are continuously traded throughout the day at that moment's Net Asset Value (plus a commission for doing the trade).
Payments made on fixed annuities are: Abased on a formula that is linked to the market as a whole Bbased on the market value of the securities held in the separate account Cthe same after annuitization occurs Dfixed as to minimum but not as to maximum
The best answer is C. Fixed annuities are an insurance product - they are not defined as a "security." The purchaser will receive a fixed annuity amount. The level payments do not vary with the performance of the investments funding the annuity. Fixed annuities are invested in the insurer's general account, which is required to be invested primarily in fixed income investments.
If it is expected that the price of an asset will rise in the future, which strategy is profitable? A Buy a put B Sell a call C Buy a future D Sell a future
The best answer is C. If a put is purchased and the market rises above the strike price, the put will expire worthless "out the money" and the premium will be lost. If a call is sold and the market rises above the strike price, the call will be exercised, obligating the call writer to deliver the stock at the strike price in a rising market. In order to make the delivery, the customer must buy the stock at the higher market price and will lose. If a futures contract is purchased, the customer has a contract to buy the commodity or financial asset at a fixed price at a fixed future date. If the asset price goes up, the client will gain. If a futures contract is sold, the customer has a contract to sell the commodity or financial asset at a fixed price at a fixed future date. If the asset price goes up, the client will lose (because the asset must be purchased at the current higher price and delivered at the lower contract price).
If it is expected that the price of an asset will rise in the future, which strategy is profitable? ABuy a put BSell a call CBuy a future DSell a future
The best answer is C. If a put is purchased and the market rises above the strike price, the put will expire worthless "out the money" and the premium will be lost. If a call is sold and the market rises above the strike price, the call will be exercised, obligating the call writer to deliver the stock at the strike price in a rising market. In order to make the delivery, the customer must buy the stock at the higher market price and will lose. If a futures contract is purchased, the customer has a contract to buy the commodity or financial asset at a fixed price at a fixed future date. If the asset price goes up, the client will gain. If a futures contract is sold, the customer has a contract to sell the commodity or financial asset at a fixed price at a fixed future date. If the asset price goes up, the client will lose (because the asset must be purchased at the current higher price and delivered at the lower contract price).
During the payout period of a variable annuity, which risks does the insurance company assume? I Mortality risk II Expense risk III Investment risk AI only BII only CI and II only DI, II, and III
The best answer is C. In a variable annuity contract, the insurer assumes mortality risk (the risk that the annuitant may live longer than expected, causing the insurer to make a larger than expected payout) and expense risk (the risk that the expenses of operations may exceed the maximum limit set in the policy). However, the insurer does not assume investment risk. The insurer invests variable annuity premiums through a separate account. If the account performs better than expected, the annuity increases. If it performs worse than expected, the annuity decreases. Thus, the investment risk is borne by the annuitant.
A vehicle that gives the right, but not the obligation, to buy a reference asset at a stated price for a stated period of time is a(n): Incorrect answer A. You did not choose this answer. A forward contract B futures contract C options contract D swap contract
The best answer is C. A key difference between an option contract and a futures or forward contract is that the holder of an option has the right to exercise, but is not required to do so. In contrast, a futures or forward contract obligates the buyer of the contract to buy the underlying reference asset at the delivery date, unless the contract is closed prior to this date.Swaps are custom OTC contracts that allow for a "swapping" of cash flows between 2 parties, with the most common being an interest rate swap, where a fixed interest rate is "swapped" for a floating rate. For example, Party A agrees that it will pay a fixed 4% interest rate for 5 years on a $100 million principal amount to Party B. Party B agrees that it will pay a floating rate of LIBOR (say it is currently at 3%) + 1% to Party A over this period. Party A "wins" if interest rates rise over this period; Party B "wins" if interest rates fall over this period.
The Assumed Interest Rate (AIR) associated with variable annuities is the: A rate at which the annuity payments are scheduled to increase each year B interest rate paid to the annuitant C estimated future earnings rate needed to maintain level payments to the annuitant D average of past and assumed future rates of return earned by the annuity
The best answer is C. AIR stands for Assumed Interest Rate. It is a conservative estimate of annual return needed for the insurance company to maintain a constant annuity payment amount. The AIR is chosen by the customer at the beginning of the payout period, based on an interest rate range set by the State. It is an estimated interest rate that the separate account investments must earn to maintain payment amounts. Once the first annuity payment is made based on the chosen AIR, if the earnings in the separate account are greater than the AIR, the next payment increases. If the earnings in the separate account are less than the AIR, the next payment decreases.Variable annuities do not provide scheduled increases in payment amounts. The insurance company bases payouts on the value of annuity units when it pays them out.
A representative is making a presentation to a married couple, ages 77 and 81, about their need for continuing income as the expected life spans of the general population have increased. The representative is strongly recommending that the couple buy an equity indexed annuity (EIA). Which statements made by the representative would be misleading and fraudulent? I "EIAs guarantee a minimum rate of return that is equal to the Standard and Poor's 500 Index" II "I do not earn any commissions when I sell you an EIA" III "EIAs are tax qualified, allowing you to reduce your taxable income by deducting any contribution that you make" IV "EIAs provide a minimum guaranteed rate of return that is guaranteed by the issuing insurance company" A I and III B I and II C I, II, III D I, II, III, IV
The best answer is C. Equity indexed annuities (EIAs) are an insurance product that falls somewhere between a fixed annuity and a variable annuity. They give a return linked to a well-known index, such as the Standard and Poor's 500 Index, but the return is typically capped to a maximum interest rate per year. Thus, if the cap is 10% and the S&P 500 Index grows by 15%, the customer only gets a 10% return for that year. Thus, Choice I is a misleading statement. Technically the salesperson does not earn a commission, but he or she does earn a very steep sales charge, so Choice II is misleading. There is no deduction for contributions to the contract (these are non-qualified plans) making Choice III a misleading statement. Choice IV is true - the contracts have a minimum guaranteed rate of return (like around 4%) that is guaranteed by the insurance company. Of course, if the insurance company fails (which rarely happens, but it has happened), then the guarantee is worthless.
Which statement is TRUE about a leveraged ETF? A Leveraged ETFs are a suitable investment for a client with a low risk tolerance level because they are index funds B Leveraged ETFs could put the customer in the position of losing more than the amount invested C Leveraged ETFs are highly liquid and can be readily traded in the market D Leveraged ETFs are assessable securities where the holder can receive a capital call from the sponsor to put up additional funds
The best answer is C. Leveraged ETFs are exchange-traded index funds that use leverage (borrowing) to magnify the velocity of price movements. For example, a 3X leveraged ETF would move 3 times as fast as the reference index. Therefore, the client must have a high risk tolerance, making Choice A incorrect. While leveraged ETFs are designed to move faster than the market, the maximum loss is the amount invested, making Choice B incorrect. ETFs are highly liquid and are actively traded, making Choice C correct. Finally, the sponsor of the ETF has no right to demand additional capital from the ETF holder. The right of assessability only exists in partnership units, where the partners can be assessed to put up more capital.
A customer has a young disabled child with multiple sclerosis and wishes to invest enough money to provide $5,000 a month in perpetuity to pay for ongoing medical expenses. Upon the death of the disabled individual, the principal amount will be left to a charity searching for a cure for the disease. Assuming that the principal can be invested at a 6% annual rate of return, the required principal amount is: A$50,000 B$100,000 C$500,000 D$1,000,000
The best answer is D. A perpetuity is a "perpetual payment" - so it is an annuity that goes on forever. If $1,000,000 is invested at 6%, it gives annual income of 6% of $1,000,000 = $60,000 without eating into the principal amount. $60,000 annual income / 12 months = $5,000 month income. The best way to deal with this type of question is to take 6% of the principal amount given in each choice to get the annual income and divide it by 12 months a year.
The "AIR" of a variable annuity contract is set when the: Aprospectus is delivered to the client Bpurchase contract is completed Csurrender period of the contract has been completed Dcontract is annuitized
The best answer is D. AIR stands for Assumed Interest Rate. It is a conservative estimate of annual return needed for the insurance company to maintain a constant annuity payment amount. The AIR is chosen by the customer at the beginning of the payout period, based on an interest rate range set by the State. It is an estimated interest rate that the separate account investments must earn to maintain payment amounts. Once the first annuity payment is made based on the chosen AIR, if the earnings in the separate account are greater than the AIR, the next payment increases. If the earnings in the separate account are less than the AIR, the next payment decreases.
The investment performance of an ELN (Equity Linked Note) is determined by all of the following EXCEPT: A cap on the investment return B floor on the investment return C participation rate in the investment return D interest rate credit set by weekly auction
The best answer is D. An Equity Linked Note (ELN) or Exchange Traded Note (ETN) is a type of structured product offered by banks that gives a return tied to a benchmark index. The note is a debt of the bank, and is backed by the faith and credit of the issuing bank. The annual return is not going to be the actual return of the reference index, because there is a participation rate (usually 80%), where the note is only credited with 80% of the return of the reference index. So if the reference index increases by 10%, the note will only be credited with 8% interest. Furthermore, the annual interest credit is capped to a maximum rate; and in return for this, there is a minimum floor on the annual interest credit. This is not an auction rate security, so there is no weekly setting of an interest rate return via auction.
The investment performance of an ELN (Equity Linked Note) is determined by all of the following EXCEPT: Acap on the investment return Bfloor on the investment return Cparticipation rate in the investment return Dinterest rate credit set by weekly auction
The best answer is D. An Equity Linked Note (ELN) or Exchange Traded Note (ETN) is a type of structured product offered by banks that gives a return tied to a benchmark index. The note is a debt of the bank, and is backed by the faith and credit of the issuing bank. The annual return is not going to be the actual return of the reference index, because there is a participation rate (usually 80%), where the note is only credited with 80% of the return of the reference index. So if the reference index increases by 10%, the note will only be credited with 8% interest. Furthermore, the annual interest credit is capped to a maximum rate; and in return for this, there is a minimum floor on the annual interest credit. This is not an auction rate security, so there is no weekly setting of an interest rate return via auction.
When evaluating an investment in a limited partnership, an investor should consider which of the following? I Economic soundness of the program II Program objectives III Sponsor track record IV Sponsor conflicts AI and II only BIII and IV only CI, II, III DI, II, III, IV
The best answer is D. An investment in a limited partnership should be made based on the economic merits of the program - an investment made solely for tax benefits can easily result in an after tax loss to the partners. The factors to consider when evaluating a program are: the economic soundness of the program; program objectives; sponsor track record; sponsor compensation; sponsor conflicts; and before and after tax return projections of the project.
An insurance company that sells an Equity Indexed Annuity (EIA) would use any of the following methods to credit the change in investment value EXCEPT: AAnnual reset BPoint-to-point CHigh-water mark DMoving average
The best answer is D. EIAs base the annuity payments on the performance of a broad-based index, such as the S&P 500 Index. However, the return is capped and there is a minimum guaranteed return, regardless of the performance of the index. The most common methods of measuring index performance are the:Point-to-point method;Annual reset method; andHigh-water-mark method. Assume that a client buys an EIA that is based on a 7-year return. The "point-to-point" method compares the index value at purchase date to the value at the end date, 7 years later. Any value fluctuations that occur in-between the 2 measurement dates are irrelevant. Another common valuation method is the "annual reset" method, which would measure the return achieved each year over a 7-year life and add interest to the annuity based on the annual reset. The annual interest credit is based on the difference between the year-beginning index value and the year-ending index value. This risk here is that the market dumps at year end, so that the credit only equals the floor amount. The "high water mark" method avoids the "bad timing risk" that you can have with the "annual reset" method. Instead of basing the annual interest credit on year-beginning and year-ending index value, it bases the credit on year-beginning index value and the highest value that it had during that year
Forward contracts: I can be closed by trading on an exchange II cannot be closed by trading on an exchange III are standardized IV are not standardized AI and III BI and IV CII and III DII and IV
The best answer is D. Forward contracts require delivery of an asset at a fixed price and date in the future, but they are custom contracts that are created between 2 institutions. They are not standardized and only trade OTC.
How does a closed-end fund differ from an open-end fund? I Open-end funds trade while closed-end funds do not II Closed-end funds trade while open-end funds do not III Open-end funds can be purchased at a discount to NAV while closed-end funds cannot IV Closed-end funds can be purchased at a discount to NAV while open-end funds cannot A I and III B I and IV C II and III D II and IV
The best answer is D. Management companies are either "open-end" or "closed-end." An open-end management company is a mutual fund. Mutual fund shares are bought from the fund company and are redeemable at NAV with the fund company. In contrast, "closed-end" fund shares have a 1-time stock issuance like any other corporate stock offering. Then the books are "closed" to new investment and the shares are listed and trade like any other stock. Just like a company trading for less than its book value, closed-end funds can trade for less than NAV if investors are bearish on the fund. In contrast, mutual funds do not trade and can only be redeemed at NAV - they cannot go to a discount to NAV. Unit investment trusts are redeemable securities as well and do not trade. Face amount certificate companies are obsolete, but also were redeemable.
How does a closed-end fund differ from an open-end fund? I Open-end funds trade while closed-end funds do not II Closed-end funds trade while open-end funds do not III Open-end funds can be purchased at a discount to NAV while closed-end funds cannot IV Closed-end funds can be purchased at a discount to NAV while open-end funds cannot AI and III BI and IV CII and III DII and IV
The best answer is D. Management companies are either "open-end" or "closed-end." An open-end management company is a mutual fund. Mutual fund shares are bought from the fund company and are redeemable at NAV with the fund company. In contrast, "closed-end" fund shares have a 1-time stock issuance like any other corporate stock offering. Then the books are "closed" to new investment and the shares are listed and trade like any other stock. Just like a company trading for less than its book value, closed-end funds can trade for less than NAV if investors are bearish on the fund. In contrast, mutual funds do not trade and can only be redeemed at NAV - they cannot go to a discount to NAV. Unit investment trusts are redeemable securities as well and do not trade. Face amount certificate companies are obsolete, but also were redeemable.
A customer invests $100,000 in an Equity Indexed Annuity contract tied to the Standard and Poor's 500 Index. The contract has a 90% participation rate; a 15% cap and a 3% floor. Interest is credited to the contract under the annual reset method using the simple interest method. The performance of the Standard and Poor's Index over the next 3 years is: Year 1:+20% Year 2:-5% Year 3:+10% At the end of year 3, the customer will have a principal balance of: approximately: A$100,000 B$105,000 C$124,000 D$127,000
The best answer is D. The first year increase in the index of 20% with a 90% participation means that 18% would be credited to the account - however, because of the 15% cap, this is the first year credit of $15,000. ($100,000 principal x .15) Under the simple interest method, the second year interest credit is still based on the $100,000 principal amount (there is no "interest on interest" as is the case with compound interest) and because of the 3% floor, the credit will be $3,000. ($100,000 principal x .03). Under the simple interest method, the third year interest credit is still based on the $100,000 principal amount (there is no "interest on interest"as is the case with compound interest) and because of the 90% participation, 90% of the 10% index increase, or 9% will be credited. The credit will be $9,000. ($100,000 principal x .09). Thus, the principal value after year 3 will be $100,000 + $15,000 + $3,000 + $9,000 = $127,000.
A customer that is short ABC stock in his portfolio buys put options on that stock. Why would the customer do this? ATo protect the ABC stock position from an adverse market move BTo derive additional income from the ABC stock position CTo speculate on the price of the stock going up DTo lock in a price at which the short position can be increased in the portfolio
The best answer is D. The purchase of a put gives the customer the right to sell shares at the strike price. The only reason why a person who is already short that stock would buy puts on the stock would be to give the customer the ability to sell more shares at the strike price if the market price of the stock should move down.
A customer sells 1 ABC Feb 40 Call @ $2 when the market price of ABC is 39.50. The customer's maximum potential loss is: A$200 B$3,950 C$4,200 Dunlimited
The best answer is D. The writer of a naked call is obligated to deliver stock that he does not own. If exercised, the stock must be bought in the market for delivery. Since the market price can rise an unlimited amount, the maximum potential loss is unlimited as well
Which statements are TRUE about variable annuity contracts? I A variable annuity contract is defined as an "insurance" product that is regulated under State insurance laws only II A variable annuity contract is defined as a "security" product that is regulated under both Federal securities laws and State insurance laws III The issuer of a variable annuity contract bears the investment risk IV The purchaser of a variable annuity contract bears the investment risk AI and III BI and IV CII and III DII and IV
The best answer is D. With a variable annuity, the insurance company collects a premium from the purchaser and invests it in a "separate account" (a legally separate account of investments that is segregated from the insurance company's general account). The separate account buys shares of a designated mutual fund. The performance of the investments held in the separate account determines the amount of the annuity that the purchaser will receive - the annuity payments will vary. Thus, the purchaser bears the investment risk in this product, which is why it is defined as a "security" under Federal law. Also note that because insurance companies are regulated separately by each State, their products, including variable annuities, are also subject to State insurance regulation.
A customer sells 1 ABC Feb 40 Call @ $2 when the market price of ABC is 39.50. The customer's maximum potential loss is: A $200 B $3,950 C $4,200 D unlimited
The best answer is D. The writer of a naked call is obligated to deliver stock that he does not own. If exercised, the stock must be bought in the market for delivery. Since the market price can rise an unlimited amount, the maximum potential loss is unlimited as well.
