Part 3

A letter of intent for a mutual fund purchase may be backdated to include previous investments in the same fund during the past 10 business days 5 business days 90 calendar days 30 calendar days

90 calendar days

To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least what percent of its taxable income to shareholders annually in the form of dividends? 90% 70% 50% 75%

90% (to qualify as a REIT, a company must have the bulk of its assets and income must distribute at least 90% of its taxable income to shareholders annually as dividends. At least 75% of its income from real estate or 75% of its assets needs to be invested in real-estate related assets)

Which of the following is unlikely to be issued at a discount? Treasury bill Zero-coupon bond Jumbo CD Commercial paper

Jumbo CD (Jumbo (negotiable) CDs are one of the few money market instruments issued at face value. Unlike those issued at a discount, they are interest bearing.)

Nurturing growth of the enterprise would be the objective of which of the following types of investments? Growth fund 529 plan Private fund Investment adviser

Private fund

Which of the following statements regarding corporate zero-coupon bonds is TRUE? The discount is in lieu of periodic interest payments. They are beneficial for investors in higher tax brackets They have lower price volatility than other bonds Interest is paid semiannually.

The discount is in lieu of periodic interest payments. (The bond is purchased at a deep discount and redeemed at par at maturity. That discount from par represents the interest that will be earned at maturity date.)

A new client is looking for a recommendation. The client is 72 years old, has sufficient income from Social Security and a pension plan to cover all of her living expenses. She has just inherited $100,000. She wants to invest this money to have a bit more income so she can spoil her grandchildren. Which of the following would be antipodal to her wishes? Treasury bonds Treasury strips Public utility stock Jumbo CDs

Treasury strips (If she wants additional income, she cannot get that from Treasury strips. They are zero-coupon bonds and pay nothing until maturity.)

A pooled investment with a share price generally different from its net asset value (NAV) per share is most likely an exchange-traded fund. an index fund. a closed-end fund. an open-end fund.

a closed-end fund. (Closed-end funds' share prices can differ significantly from their NAVs. Open-end fund shares are purchased and redeemed based on their NAVs)

All of the following statements regarding scheduled premium variable life insurance are correct EXCEPT the policyowner has the right to change the selection of subaccounts premiums are determined based on age and sex of the insured better than anticipated results in the separate account could lead to a reduction in annual premium once selected, the policyowner may change payment modes

better than anticipated results in the separate account could lead to a reduction in annual premium (Scheduled (fixed) premium variable life premiums are fixed)

The tax consequence of transferring proceeds from one fund to another within the same family of funds is: on the date of the transaction, any gain or loss is recognized for tax purposes no gain or loss is recognized until redemption losses are deducted and gains are deferred gains are taxed and losses are deferred

on the date of the transaction, any gain or loss is recognized for tax purposes (An exchange is the sale and then a purchase of a new security and is therefore a taxable event.)

A client has invested $25,000 into a variable annuity which has grown to $150,000 over the accumulation period. At age 60, the account is liquidated. The tax treatment of the withdrawal would be partly ordinary income and partly capital gains depending on the length of time the variable annuity was in force. ordinary income tax on $125,000 with a 10% tax penalty. capital gains tax on $125,000. ordinary income tax on $125,000.

ordinary income tax on $125,000. (Any increase in the value of a variable annuity is taxed as ordinary income, never capital gain. In this case, there is no 10% penalty tax because the client is over 59½ years old.)

An investor purchases a TIPS bond with a 4% coupon. If during the first year the inflation rate is 9%, the approximate principal value of the security at the end of that year will be $1,092. $1,090. $1,040. $1,045.

$1,092. ($1,000 x 104.5% x 104.5% = $1,092.025.)

One of the more popular money market instruments is the negotiable CD. These normally are found in minimum denominations of $100,000 $1,000,000 $500,000 $25,000

$100,000

A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. How is the distribution taxed? (2) The entire amount is taxed as ordinary income. The growth portion is taxed as ordinary income. The growth portion is taxed as a capital gain. The growth portion is subject to a 10% penalty.

The growth portion is taxed as ordinary income. The growth portion is subject to a 10% penalty.

The most common collateral securing a Brady bond is U.S. Treasury zero-coupon bonds with a maturity corresponding to the maturity of the individual Brady bond the credit standing of the sovereign nation issuing the Brady bond the credit standing of the banking institution acquiring the Brady bond an asset, or group of assets, pledged by the borrowing entity

U.S. Treasury zero-coupon bonds with a maturity corresponding to the maturity of the individual Brady bond

All of the following are characteristics typical of a money market fund EXCEPT it has a high beta and is safest in periods of low market volatility the underlying portfolio consists of short-term debt instruments it is offered as a no-load investment its net asset value normally remains unchanged

it has a high beta and is safest in periods of low market volatility (A money market fund has almost no price volatility, because the underlying portfolio consists of low-beta instruments, and the fund is deliberately managed for low beta)

When contrasting preemptive rights and warrants, it would be correct to state that, at issuance, rights have intrinsic value while warrants have intrinsic and time value. rights have intrinsic and time value while warrants only have time value. rights have intrinsic and time value while warrants only have intrinsic value. rights have time value while warrants have intrinsic and time value.

rights have intrinsic and time value while warrants only have time value. (At the time of issuance, preemptive rights always offer the stock at a price below the current market thus creating intrinsic value.)

A terminally ill client wishing to access a portion of the cash value in his whole life insurance policy while still providing a death benefit for his beneficiaries could do so by surrendering the policy for its cash value taking out a policy loan converting it into a term policy selling the policy in a viatical settlement

taking out a policy loan (One of the benefits of whole life insurance is the ability to borrow against the guaranteed cash value in the policy)

A customer purchased a variable annuity from an agent 5 years ago with an initial investment of $200,000. The annuity's surrender fee will expire in year 7, which coincides with the customer's anticipated need for the funds. In the 5th year of the contract, the value of the annuity increased from $300,000 to $375,000. The agent notices that the general market is on the decline and recommends she enter a 1035 exchange of the variable contract for another, thus increasing her death benefit and locking it in at a higher minimum. This recommendation is? unsuitable unless the customer agrees with the recommendation suitable because of the increased death benefit suitable because 1035 exchanges have no adverse tax consequences unsuitable because of surrender fees

unsuitable because of surrender fees

The Investment Company Act of 1940 states that: no more than 50% of the board of directors of an investment company may be officers or employees of the company or investment advisers to the company an investment company must have $5 million capital before its securities can be offered to the public it is unnecessary for the prospectus to disclose the management fee open-end companies may issue common stock only

open-end companies may issue common stock only

A life insurance policy where the premium increases each time the policy is renewed while the face amount remains level is variable universal decreasing term renewable level term increasing term

renewable level term (Level term insurance offers a fixed face amount over the life of the policy)

A speculator, believing that a drought in the Midwest will lead to a weak corn crop, would probably take a long position in corn futures take a long position in orange juice futures take a short position in corn futures take a long position in corn forwards

take a long position in corn futures (A weak corn crop means a shortage in the supply. That will lead to an increase in prices. When one is speculating that prices will go up, the best position is a long one)

Nonsecurities derivatives include futures and forwards. Among the differences between futures and forwards is that futures contracts are not regulated by the CFTC while forwards are. are preferred to forwards by producers. are rarely exercised while forwards generally are. are nonstandardized while forwards are.

are rarely exercised while forwards generally are. (In the vast majority of the cases, futures contracts are closed out prior to expiration. That is one reason they are more popular with speculators than forwards)

Jasper Whitlock is considered an affiliated person of the Tahor Clean Energy Mutual Fund. Under the Investment Company Act of 1940, Mr. Whitlock is prohibited from all of the following EXCEPT selling anything to the fund, except shares of the fund buying anything from the fund, except shares of the fund borrowing from the fund (money or property) being elected to the fund's board of directors

being elected to the fund's board of directors

All of the following statements regarding bonds selling at a discount are correct EXCEPT they can indicate that interest rates have risen they will appreciate more than comparable bonds selling at a premium if interest rates fall they can indicate that the issuer's credit rating has fallen they are more likely to be called than comparable bonds selling at a premium

they are more likely to be called than comparable bonds selling at a premium

An investor signed a letter of intent to purchase $50,000 worth of Sky-High Mutual Fund. At the end of 13 months, he had only invested $48,000 in the fund. Which of the following is TRUE? There are no additional requirements; he will receive the breakpoint. He has 90 days to invest the additional $2,000 for the breakpoint. He must sign a new letter for the $2,000 to receive the breakpoint. The fund will liquidate shares to meet the additional sales charge.

The fund will liquidate shares to meet the additional sales charge.

Investment adviser representatives are often called upon to help clients select an appropriate mutual fund. When making a recommendation, which of the following would not be a consideration? The fund's net asset value per share The fund's expense ratio The portfolio manager's tenure The fund investment objective

The fund's net asset value per share (The price per share (NAV per share) of a fund is not a relevant factor when considering recommending a mutual fund)

Which of the following are features of Class C mutual fund shares? (2) Typically charge no front-end load Typically charge a front-end load Typically impose lower CDSCs than Class B shares for a shorter period Typically convert to Class A shares after they are held for a defined period

Typically charge no front-end load Typically impose lower CDSCs than Class B shares for a shorter period

All of the following factors have an inverse relationship to a bond's duration except time to maturity. coupon rate. yield to maturity. current yield.

time to maturity. (the longer the time until the bond matures, the higher (longer) the duration)

Marianne has a fixed-premium variable life policy in which the separate account has been performing extremely well, and the face value has been increasing as a result of the investment performance. However, recently the separate account performance has been negative. If this continues, the face value could decrease to 50% of the original face value to 0 to the original face value to the original face value minus any future negative performance

to the original face value

Which of the following would best describe a Yankee bond? A U.S. dollar-denominated bond issued by a U.S. entity inside the United States. A U.S. dollar-denominated bond issued by a U.S. entity outside the United States. A U.S. dollar-denominated bond issued by a non-U.S. entity inside the United States A U.S. dollar-denominated bond issued by a non-U.S. entity outside the United States.

A U.S. dollar-denominated bond issued by a non-U.S. entity inside the United States

An investor purchases a Treasury note and the confirmation shows a price of $102.21. Rounded to the nearest cent, the investor's cost, excluding commissions, is $1,022.21. $102.21. $1,022.10. $1,026.56.

$1,026.56. (Treasury notes are quoted in 32nds where each 32nd equals $.3125. The 102 in the quote equals $1,020 and the 21/32 is an additional $6.56 bringing the total to $1,026.56)

Under the 1940 Investment Company Act, an investment company may take all of the following forms EXCEPT: a closed-end investment company a unit investment trust an open-end investment company a limited partnership with partners as passive investors

a limited partnership with partners as passive investors

An investor purchases a single premium deferred index annuity with a 6% bonus feature. The premium was $100,000. The annuity has an 80% participation rate with a 10% cap. If the underlying index increased by 15%, the account's value at the end of the year would be closest to $116,000. $118,720. $116,600. $110,000.

$116,600. (The 6% bonus means that the client's initial payment is increased by 6%. That means the account shows a starting balance of $106,000. Although the index increased by 15% and the participation rate of 80% would be a 12% growth rate, the cap of 10% comes into play. That makes the calculation: $106,000 x 110% or $116,600)

Which of the following statements regarding letters of intent used in connection with mutual fund purchases are TRUE? (2) The letter can cover a period totaling 16 months. The letter may be backdated 90 days. Some shares purchased are held in escrow until the letter is completed. During the period covered by the letter, the customer may not redeem his shares.

The letter may be backdated 90 days. Some shares purchased are held in escrow until the letter is completed.

Which of the following bonds would be the least price sensitive to changes in market interest rates? 10% BB bond due in 21 years with a YTM of 8.7% Zero due in one year with a YTM of 6% 6% AA bond due in 18 years with a YTM of 6.8% 4.5% Treasury bond due in 20 years with a YTM of 4.1%

Zero due in one year with a YTM of 6% (In almost every question like this, the zero will have the longest duration and the greatest price sensitivity to interest rate changes. This is the odd case where the zero is due so soon that its duration is by far the shortest of any of the choices. Shorter duration means less price sensitivity.)

A U.S. dollar-denominated bond issued by a non-American company (or government), sold outside the United States and the issuer's country, but for which the principal and interest are stated and paid in U.S. dollars is best described as a Brady bond. a Eurodollar bond. a Eurobond. a Yankee bond.

a Eurodollar bond. (This is the definition of a Eurodollar bond. Yes, it is also a Eurobond, but, because the question specifies U.S. dollars, the more accurate choice is Eurodollar bond. A Yankee bond is U.S. dollar-denominated, but is issued in the United States; Eurodollar bonds are not. Brady bonds are issued only by foreign governments, usually, but not always, U.S. dollar-denominated and are available for purchase in the U.S.)

Starflier Mutual Fund, regulated under the Investment Company Act of 1940, wishes to change its investment policy. It may do so with approval of a majority of the outstanding shares the fund's investment adviser a majority of the board of directors no one because they do not need approval

a majority of the outstanding shares

A sudden decrease in market interest rates will have the effect of increasing the trading price of an existing bond because a reduction in market interest rates generally signifies a stronger economy the future value of the bond's present cash flows increases the present value of the bond's future cash flows increases lower interest rates will result in a higher rating for the bond

the present value of the bond's future cash flows increases

To protect against possible inflation, your clients purchase some TIPS with a 2.5% coupon. If, over the next 6 years, the annual inflation rate is 6%, the principal value of each TIPS will be closest to $1,161 $1,360 $1,150 $1,426

$1,426 (The principal of a TIPS is adjusted every 6 months for the inflation rate. With an inflation rate of 6%, that means a 3% adjustment, twice per year. With the simple calculator provided at the test center, you would take the initial $1,000 and multiply that times 103% and continue to do that 12 times)

Your client purchased an index annuity from you last year with an investment of $100,000. The particular index tied to this product had an annual return of -4%. If the participation rate is 90% with a cap of 5% and no annual minimum guarantee, the value of the account would be $103,600. $100,000. $96,000. $96,400.

$100,000. (Please note that the return is negative (-4%). An index annuity does not participate in losses of the index, only gains. With no gain, and no guaranteed annual minimum, the account value remains at $100,000.)

The Investment Company Act of 1940 requires certain types of investment companies to compute their net asset value on a regular basis. Excluded from that requirement are face-amount certificate companies. closed-end management investment companies. unit investment trusts. open-end management investment companies.

face-amount certificate companies. (The two investment companies offering redeemable securities, open-end funds, and UITs, must compute their NAV on a daily basis. Closed-end funds can do it daily; many compute every Friday. The concept of NAV makes no sense with a FACC)

An owner of an annuitized annuity can do all of the following EXCEPT receive the benefits on a monthly basis until the time of death. receive the benefits for life with a certain minimum period of time guaranteed. have a joint life with last survivor clause, with payments paid, until the death of the last survivor. receive monthly payments for a defined period and then 2 years later change the contract to payment for life

receive monthly payments for a defined period and then 2 years later change the contract to payment for life

An individual wishing to invest $15,000 into a mutual fund with the intent of having it remain invested for at least 15 years should probably purchase Class A shares with a 5.5% front-end load and a 12b-1 fee of .25%. Class C shares with a 12b-1 fee of .75% and a CDSC of 1% during the first year. Class B shares with a 12b-1 fee of .75% and a 6-year declining CDSC after which they convert to Class A shares. Class I shares with no load, no 12b-1 fee, and no CDSC.

Class B shares with a 12b-1 fee of .75% and a 6-year declining CDSC after which they convert to Class A shares (First is recognizing this is an individual investor. Although Class I shares generally offer the best deal, that share class is sold only to institutional investors. Next, we see that the size of the investment is $15,000. That is too small to reach any significant breakpoint. Finally, the client intends to hold the investment for at least 15 years so the CDSC attached to the Class B shares becomes irrelevant)

A benefit of active investment in real estate that is not available to purchasers of REITs is the Section 1031 exchange privilege. the Section 1035 exchange privilege. dividends from active investments are generally qualified. greater liquidity.

the Section 1031 exchange privilege. (Under Internal Revenue Code Section 1031, no gain or loss is recognized on the exchange of real estate held for investment if such property is exchanged solely for real estate of like-kind which is to be held for investment. This does not apply to REITs where an exchange is considered a sale with a realized gain or loss for tax purposes)

When the market interest rate is 8%, which of the following equally-rated bonds will have the potential for the greatest relative price volatility to changes in interest rates? 8% coupon bond with 12 years to maturity 8% coupon bond with 6 years to maturity 12% coupon bond with 12 years to maturity 12% coupon bond with 6 years to maturity

8% coupon bond with 12 years to maturity (The bond with the lowest coupon (8%) and longest maturity (12 years) is subject to the greatest price volatility. The bond with the shortest duration, and least price volatility, would be the one with the highest coupon (12%) and the nearest maturity (6 years).)

Your client with $100,000 to invest is looking for maximum current income. Which of the following would offer the highest current return? $100,000 of zero-coupon bonds with a yield to maturity of 6% $200,000 of utility common stock paying a current dividend of 3.5% $100,000 AA-rated corporate bonds trading at par with a 6% coupon rate $100,000 market value of corporate bonds selling at a premium and yielding 6% to maturity

$100,000 market value of corporate bonds selling at a premium and yielding 6% to maturity (Bonds selling at a premium have higher coupons than those selling at par)

One of your clients purchases a European-style put option on a stock. The premium is $3 and the exercise price is $35. If the price of the underlying asset is $40 on the exercise date, the client has lost $200. lost $300. made $200. made $500.

lost $300. (This option is out of the money and is therefore worthless. Remember, European-style options are exercisable only at expiration and a $35 put is worth zero unless the market price of the underlying asset is less than $35)

You have a 70-year-old client with a $500,000 whole life insurance policy purchased 25 years ago. The policy currently has a cash value of approximately $150,000. With all of the children on their own and successful, the client no longer feels the need for the insurance, and asks you if there is any option that might result in netting more than surrendering the policy for its cash value. You might recommend keeping the policy because the cash value will continue to grow canceling the policy, but leaving the cash value with the insurance company with interest engaging in a life settlement using IRS Section 1035 to transfer the cash value into a deferred annuity

engaging in a life settlement (A life settlement, involves selling an existing life insurance policy for an amount in excess of the cash value, but less than the death benefit)

DERP Corporation's 5% convertible debentures maturing in 2030 are currently selling for 120. The conversion price is $40. One would expect the DERP common stock to be selling somewhat above $48 per share somewhat above $30 per share somewhat below $48 per share somewhat below $30 per share

somewhat below $48 per share (The first step here is to compute the parity price. A conversion price of $40 means the debenture is convertible into 25 shares of the common stock (par of $1,000 divided by $40 = 25 shares). With a current market price of $1,200, the parity price of the stock would be $48.)

The long party to a put option contract has the obligation to buy the underlying asset. the obligation to sell the underlying asset. the right to buy the underlying asset. the right to sell the underlying asset.

the right to sell the underlying asset. (Being long a put option means owning the option. Owners have rights while sellers have obligations.)

A TIPS bond pays interest at the rate of 4%. If the annual inflation rate is 5%, what is the principal value after the 4th year? $1,171.66 $1,218.40 $1,200.00 $1,215.51

$1,218.40 (A TIPS bond's principal increases every 6 months based on the inflation (not the coupon) rate. An annual inflation rate of 5% means the adjustment every 6 months is 2.5% of the principal. At the test center, enter $1,000 and then multiply times 102.5%. Take that result and continue to multiply times 102.5% a total of 8 times (there are 8 six-month periods in 4 years)

An investor has unexpectedly received $30,000 from an old debt he had written off. This money will come in handy for a business venture planned for 3 years from now. Meanwhile, he would like to generate some income on the money with as little risk and expense as possible. Which of the following recommendations is likely to be the most suitable for this customer? Class A shares of the MNO High-Yield Bond Fund Class C shares of the ABC Investment-Grade Bond Fund Class B shares of the ABC Investment-Grade Bond Fund Class B shares of the XYZ Growth Fund

Class C shares of the ABC Investment-Grade Bond Fund (The customer wants income with as little risk as possible, so our answer must be one of the choices that offer an investment-grade bond fund. Of those offered, Class C shares would be best because the customer would pay no front-end sales charge and no CDSC after a short time, probably 1 year.)

A widowed customer with no children has a portfolio invested in mutual funds valued at $250,000. The portfolio generates a monthly income of $1,600, an amount that exceeds her living expenses by $300. The investment portfolio is her sole source of income. Her agent recommends she sell $30,000 worth of her mutual funds and purchase a deferred variable annuity to take advantage of the tax deferral and death benefit features. This recommendation is suitable because it offers a growth opportunity with a death benefit for a portion of her holdings suitable because it provides tax deferral features suitable because it provides diversification unsuitable

unsuitable (The customer has no need for the death benefit (she has no immediate survivors) or tax deferral features (with $19,200 in annual income, there are virtually no income taxes due) of a variable annuity, so this transaction is unsuitable)

A bond's duration is expressed as a percentage longer for a 10-year bond with a 5% coupon than it is for a 10-year bond with a 10% coupon an indication of a bond's yield that ignores its price volatility identical to its maturity for an interest-bearing bond

longer for a 10-year bond with a 5% coupon than it is for a 10-year bond with a 10% coupon (Duration measures a bond's price volatility by weighting the length of time it takes for a bond's cash flow to pay for itself. If 2 bonds with differing coupon rates have identical maturities, the one with the lower coupon has the longer duration)

A 47-year-old investor purchases a single premium deferred variable annuity from the ABC Insurance Company with an initial premium payment of $25,000. Six years later, a 1035 exchange is made to an annuity offered by the XYZ Insurance Company when the value of the account is $35,000. Seven years later, the account has a current value of $50,000 and the investor withdraws $20,000. The tax consequence of this withdrawal is ordinary income tax on $15,000. ordinary income tax on $20,000. no tax until the withdrawal exceeds $25,000. ordinary income tax on $20,000 plus a 10% penalty.

ordinary income tax on $20,000. (Withdrawals from nonqualified annuities (all annuities on the exam are nonqualified unless otherwise specified) are taxed on a LIFO basis. That is, the last money in (the earnings) is considered the first money withdrawn)

The current yield on a bond with a coupon rate of 5.5% selling at 110 is 2% 5% 6% 5.5%

5% (The current yield of any security, equity, or debt is always the income return (dividend or interest) divided by the current market price)

Regarding open-end investment companies, which of the following sales charges is based on the NAV per share? 12b-1 fee Redemption fee Commission Sales load

Redemption fee

A bond purchased at $900 with a 5% coupon and a 5-year maturity has a current yield of 5.00% 7.80% 5.56% 7.40%

5.56% ($50 ÷ $900 = 5.56%)

A 54-year-old individual invests $25,000 into a nonqualified single premium deferred variable annuity. Five years later, with an account value of $35,000, the investor engages in a Section 1035 exchange into a variable annuity issued by a different insurance company. Four years later, with an account value of $50,000, the investor withdraws $20,000. The tax consequence of the withdrawal is $20,000 of ordinary income. $20,000 of ordinary income plus a 10% penalty tax. $15,000 of ordinary income, $5,000 nontaxable return of principal. $15,000 of ordinary income, $5,000 of long-term capital gain.

$20,000 of ordinary income. (When $20,000 is withdrawn, all of it represents the earnings and that is taxed as ordinary income. There is never capital gains taxation on an annuity and there is no 10% penalty tax because this investor is older than 59½ at the time of the withdrawal.)

An investor owns five DEF call options with a strike price of $40. The options are European style. If the holder exercises, the cost will be zero because European options are exercisable only at expiration. $2,000. $20,000. $4,000.

$20,000.

A TIPS bond is issued in the principal amount of $1,000, paying 3.5%. Over the security's 5-year term, the inflation rate is 4%. What is the amount of the final semiannual interest check? $21.33 $42.66 $35.00 $17.50

$21.33 ($1,219 ($1,000 × 102% ten times). Therefore, the final interest check is for $1,219 × 1.75%)

An individual purchased a variable life insurance policy 10 years ago. The policy has a $500,000 face amount which has grown to $525,000 due to the performance of the selected separate account subaccounts. Three years ago, the insured borrowed $50,000 against the policy which has never been repaid. The effect of this is that the total death benefit today is $500,000. $475,000. $450,000. $525,000.

$475,000.

Mr. Beale buys 10M RAN 6.6s of 32 at 67. What is his total purchase price? $6,700 $10,200 $6,600 $10,000

$6,700 (The price is 67, which represents 67% of $10,000, or $6,700.)

An investor owns a TIPS bond with an initial par value of $1,000. The coupon rate is 6% and, during the first year, the inflation rate is 9%. How much interest would be paid for the year? $65.40 $60.00 $64.11 $90.00

$64.11 ($1,000 x 104.5% = $1,045 x 3% = $31.35 plus, $1,045 x 104.5% = $1,092 x 3% = $32.76. Adding the 2 interest payments together results in a total of $64.11 for the year.)

An investor owns a TIPS bond with an initial par value of $1,000. The coupon rate is 6%, and during the first year, the inflation rate is 9%. How much interest would be paid for the year? $60.00 $64.11 $65.40 $90.00

$64.11 ($1,000 × 104.5% = $1,045 × 3% = $31.35 plus, $1,045 × 104.5% = $1,092 × 3% = $32.76. Adding the 2 interest payments together results in a total of $64.11)

A corporate bond that pays interest semiannually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. What is the value of the bond today if the coupon rate is 8%? $1,144.31 $1,051.23 $1,221.17 $922.78

$922.78 (When a bond has a yield to maturity that is greater than its coupon rate, the bond must be selling at a discount and that only leaves one possible answer)

According to federal law, an insurance company under the provisions of the Investment Company Act of 1940 must allow a variable life policyholder the option to convert the policy into a whole life contract for a period of 45 days 24 months 18 months 12 months

12 months

According to the Investment Company Act of 1940, all of the following statements are true EXCEPT investment companies can own no more than 3% of the shares of another investment company mutual fund shareholders must be sent semiannual statements that identify compensation paid to directors, officers, and other affiliated persons persons convicted within the past 10 years of a securities industry crime are not allowed to serve as directors without SEC permission 12b-1 distribution charges must be approved semiannually by a majority vote of the outstanding shares and by the board of directors

12b-1 distribution charges must be approved semiannually by a majority vote of the outstanding shares and by the board of directors

BFJ Corp's 5% convertible bond is trading at 120. The bond is convertible at $50. An investor buying the bond now and immediately converting into common stock, would receive 2.4 shares 20 shares plus cash for fractional shares 20 shares 24 shares

20 shares (The conversion ratio always uses the par value ($1,000), never the current market price. With a par value of $1,000 and a conversion price of $50 per share, this bond is convertible into 20 shares ($1,000 / $50).)

A bond investor's portfolio consists of the following 3 bonds: ABC First Mortgage bond, current market value of $4 million with a duration of 5 years. DEF Debenture, current market value of $5 million with a duration of 8 years. U.S. Treasury bond, current market value of $1 million with a duration of 10 years. What is the average duration of the portfolio? 7 years 7.67 years 6.54 years 3.04 years

7 years (ABC is 40% of the portfolio so we take 40% of its 5-year duration (2). Then, we do the same with the other two bonds. DEF is 50% of 8 (4) and the Treasury bond is 10% of 10 (1). When we add the 3 numbers together, it results in an average duration of 7 years.)

An investment adviser representative has a client who prefers the safety of securities guaranteed by the U.S. Government, yet is concerned about volatility due to uncertainties in the future direction of interest rates. Which of the following recommendations would best address these concerns? 5% Treasury bond, maturing in 2037 8% Treasury bond maturing in 2036 6% Treasury bond maturing in 2035 Treasury STRIPS, maturing in 2036

8% Treasury bond maturing in 2036 (Generally speaking, those bonds with the highest coupons have the shortest duration, therefore, are the least subject to interest rate risk. STRIPS, which are zero-coupon bonds, are the most volatile because they have the longest duration.)

A 35-year-old client purchases a variable life insurance policy. Under current regulations, the maximum sales charge permitted over the life of the policy is 9% 9% per premium payment 8.5% per premium payment 8.5% of total premiums over the life of the plan

9% (A variable life insurance plan may charge a maximum sales charge of 9% over a period not to exceed 20 years.)

Clients should be aware of the potential effects of volatility on their portfolios. Which of the following would most likely have the lowest volatility? A large-cap fund A balanced fund A money market fund A government bond fund

A money market fund

Which of the following terms best describes ETNs and leveraged ETFs? Registered investment companies Speculative investments Alternative investments Forms of hedge funds

Alternative investments (These are two popular alternative investments. The leveraged ETF is a registered investment company, but the ETN is not.)

Many fixed-income investors are looking to avoid loss of principal. Which of the following would likely have the lowest degree of exposure to credit risk? A-rated general obligation municipal bond Ba-rated corporate mortgage bond Aa-rated corporate debenture Baa-rated municipal revenue bond

Aa-rated corporate debenture (A bond's rating takes into consideration all factors, including collateral and tax base. The higher the rating, the lower the credit risk.)

Which of the following are NOT considered money market instruments? (2) American depositary receipts Commercial paper Corporate bonds Jumbo (negotiable) certificates of deposit

American depositary receipts Corporate bonds (A money market instrument is a high-quality, short-term debt security with maturity of 1 year or less)

The Straitened Corporation has filed for bankruptcy. One of your clients held a mortgage secured by the corporation's building. When the building was sold, the proceeds were less than the mortgage balance creating a deficiency balance. Where does this investor's claim stand? As a general creditor on a pro rata basis After the unsecured creditors After the secured creditors There is no further claim once the building has been sold

As a general creditor on a pro rata basis (Secured creditors, such as those holding mortgage bonds, always have priority in a liquidation. If it happens, as in this question, that the asset(s) securing the debt are insufficient to satisfy the claim, the balance is considered to be an unsecured debt. In that case, those bondholders are considered general creditors and share in any remaining assets proportionate to the amount of the deficiency.)

High-yield bonds are frequently called junk bonds. Which of the following expresses the highest rating that would apply to a junk bond? BB BBB CCC CC

BB

Why are "country" funds organized as closed-end funds? Because redemption at net asset value within 7 days is assured So that additional capital may easily be raised Because the United Nations Investment Act of 1952 requires that they all be closed-end Because it is often difficult to liquidate the foreign securities to get their value into the U.S.

Because it is often difficult to liquidate the foreign securities to get their value into the U.S.

Which of the following mutual fund share classes generally has a 1% CDSC that is eliminated once the shares have been held more than 1 year? Class C Class B Class A Class 1%

Class C (It is the Class C shares that have no front-end load, but they do have a 1% CDSC for a period of 1 year.)

Which of the following investment companies registered under the Investment Company Act of 1940 can include senior securities in its capital structure? Closed-end management investment companies Face-amount certificate companies Unit investment trusts Open-end management investment companies

Closed-end management investment companies (Only the closed-end company is legally permitted to issue senior securities: preferred stock and bonds)

When it comes to issuing a debt security, which of the following features will generally enable the issuing corporation to borrow at the lowest interest rate? Zero-coupon Cumulative Callable Convertible

Convertible (Because the convertible feature offers potential growth through the exercise of the conversion option, the interest rate on these securities is generally lower than other debt issues of the same corporation)

An 8% corporate bond is offered on a 8.25 basis. Which of the following statements are TRUE? (2) Nominal yield is higher than YTM. Current yield is higher than nominal yield. Nominal yield is lower than YTM. Current yield is lower than nominal yield.

Current yield is higher than nominal yield. Nominal yield is lower than YTM.

Bright-Lite Incandescent Bulb, Inc., has recently suffered significant operating losses and is planning a bankruptcy filing. Which of the following debt issues have the most junior claim? Common stock Mortgage bonds Debentures Senior notes

Debentures (Although the most junior claim of all is that of the common stockholder (equity), this question is about the priority of debt issues. In that case, the most junior (last in line) of the creditors are the holders of the company's debentures)

Which of the following most accurately identifies a private equity investment in income-producing real estate? Direct ownership of real estate properties Investment in a real estate investment trust (REIT) Investment in a real estate mutual fund Private market mortgage lending by an insurance company

Direct ownership of real estate properties (Real estate investments take 4 major forms: private equity, publicly traded equity, private debt, and publicly traded debt. Private equity investment in real estate refers to direct ownership of real estate properties)

Which of the following most accurately identifies a private equity investment in income-producing real estate? Investment in a real estate investment trust (REIT) Direct ownership of real estate properties Private market mortgage lending by an insurance company Investment in a real estate mutual fund

Direct ownership of real estate properties (Real estate investments take four major forms: private equity, publicly-traded equity, private debt, and publicly-traded debt. Private equity investment in real estate refers to direct ownership of real estate properties.)

Which of these features are common to both variable annuities and scheduled premium variable life insurance? (2) Income earned in the separate account is tax deferred. Separate account performance below the AIR causes a reduction in cash value. Fixed contributions are required. Contract owners have voting rights.

Income earned in the separate account is tax deferred. Contract owners have voting rights. (All variable products offer tax deferral of earnings in the separate account. Unit holders of a variable annuity vote on the basis of the number of units they own)

Which of the following securities is eligible for a Section 1031 exchange? Annuities Direct participation programs Listed stocks Investment real estate

Investment real estate

Which of the following statements regarding REITs are NOT true? (2) Investors receive flow-through benefits of income as well as loss. Hybrid REITs own properties, as well as make loans on others. Equity REITs are prohibited from using leverage to acquire properties. REITs are easily traded in the secondary market.

Investors receive flow-through benefits of income as well as loss. Equity REITs are prohibited from using leverage to acquire properties. (It is not true that REITs offer flow-through of losses; they are not DPPs. As with most real estate purchasers, leverage, usually in the form of a mortgage, is used to acquire property)

Which of the following are TRUE of a REIT? (#) It can qualify for special tax treatment under Subchapter M of the Internal Revenue Code if it distributes at least 90% of its taxable income. It may loan money for commercial construction projects. It generates income by the spread between rental income, the combined mortgage interest, and operating expenses of the property. It is only suitable for an investor who is in a 28% or higher tax bracket, who has a net worth in excess of $200,000, or who is able to benefit from the flow-through of losses.

It can qualify for special tax treatment under Subchapter M of the Internal Revenue Code if it distributes at least 90% of its taxable income. It may loan money for commercial construction projects. It generates income by the spread between rental income, the combined mortgage interest, and operating expenses of the property.

If a resident of New York City purchases an Albany, New York, general obligation bond that yields $600 of interest during the course of the year, how is the interest taxed? It is not subject to federal income tax. Taxation is deferred until the bond matures. It is subject to state income tax at ordinary rates. It is subject to federal income tax at ordinary rates.

It is not subject to federal income tax.

What is the most typical organizational structure of a private equity investment? Sole proprietorship. S corporation. C corporation. Limited partnership.

Limited partnership.

Which of the following statements correctly expresses requirements under the Investment Company Act of 1940? Renewal of the advisory contract can only be done with majority vote of the fund's board of directors A registered open-end investment company using a bank as custodian must choose one that has FDIC coverage No investment advisory contract may be entered into that does not provide for termination with no more than 60 days' notice in writing No registered investment company may acquire less than 3% of the shares of another investment company

No investment advisory contract may be entered into that does not provide for termination with no more than 60 days' notice in writing

A client has purchased a nonqualified variable annuity from a commercial insurance company. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. What is the taxable consequence of this withdrawal to your client? A 10% penalty plus the payment of ordinary income tax on all of the funds withdrawn Capital gains taxation on the earnings withdrawn in excess of the owner's basis Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis A 10% penalty plus the payment of ordinary income tax on funds withdrawn in excess of the owner's basis

Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis (Contributions to a nonqualified annuity are made with the owner's after-tax dollars. Distributions from such an annuity are computed on a LIFO basis with the income taxed first.)

Which of the following would be a difference between a universal life insurance policy and a scheduled premium variable life insurance policy? Premiums on a scheduled premium variable life policy are fixed, while those on a universal life policy are flexible. The universal life policy will generally outperform the variable life policy during a period of falling interest rates and rising stock prices. There is a greater choice of separate account subaccounts in the universal life policy. There is a minimum guaranteed return on the variable life, while there is no guaranteed return on the universal.

Premiums on a scheduled premium variable life policy are fixed, while those on a universal life policy are flexible. (Scheduled premium is just another way of saying fixed premium)

To be in compliance with the Securities Act of 1933, the sale of which of the following securities would require delivery of a prospectus? (2) Primary offering of a closed-end investment company registered under the Investment Company Act of 1940 Primary offering of 5-year U.S. Treasury notes sold to an individual investor Private placement sold under the provisions of Regulation D Sale of shares of an open-end investment company whose first public offering was 23 years ago

Primary offering of a closed-end investment company registered under the Investment Company Act of 1940 Sale of shares of an open-end investment company whose first public offering was 23 years ago (Any primary offering, unless the security is exempt, requires timely delivery of a prospectus. Treasury notes and private placements are exempt.)

One of the most important definitions found in the Investment Company Act of 1940 is that of "investment company." Included in that definition are all of the following EXCEPT face-amount certificate companies management investment companies REITs unit investment trusts

REITs (Even though REITs share many of the same characteristics of investment companies, they are not included in the definition as found in the Investment Company Act of 1940.)

If an investor wants to invest in the electronics industry but does not want to limit his investments to only one or two companies, which type of fund would be most suitable? Bond Hedge Money market Specialized

Specialized (A specialized or sector fund invests 25% or more of its assets in a particular region or industry.)

Thirty years ago, an investor deposited $100,000 into a single premium deferred variable annuity. Today, the value of the accumulation units is $1.5 million. The investor is ready to annuitize and wishes to maximize monthly payments to be received. You would suggest which of the following settlement options? Joint and survivor Straight life Life with 20 years certain Life with 10 years certain

Straight life (When one annuitizes, the amount of the annuity payment is highest when the annuitant takes the most risk (and the insurance company the least))

An investor interested in investing in sovereign debt would most likely purchase Sweden 2.5s of 2032. bonds backed by gold sovereigns. European Central Bank debt issues. bonds issued by the Bank of the United States.

Sweden 2.5s of 2032. (Sovereign debt refers to bonds and other debt instruments issued by a specific country)

A REIT is able to pass-through which of the following? Taxable income from operations Losses from passive activity Losses from active activity Unrealized capital gains

Taxable income from operations

A customer invests $18,000 in a mutual fund and signs a letter of intent for $25,000 to qualify for a breakpoint. One year later, the shares are valued at $25,100, even though the customer has made no new investments. Which of the following statements is TRUE? The investment no longer qualifies for a breakpoint. Shares held in escrow will be liquidated at the appreciated value. The letter of intent is considered fulfilled. The agent should remind the customer of the letter of intent that was signed 12 months ago.

The agent should remind the customer of the letter of intent that was signed 12 months ago. (A letter of intent must be met with dollars invested within 13 months, so the customer needs to invest an additional $7,000 to fulfill the letter of intent)

Which of the following statements is TRUE if a corporate bond is callable? The owner of the bond may demand that the issuing corporation redeem the bond before it matures. The issuing corporation has the option to redeem the bond before it matures. The issuing corporation may change the coupon rate at any time by giving the owner of the bond written notice. The owner of the bond may exchange it for shares of stock.

The issuing corporation has the option to redeem the bond before it matures. (A callable bond is one that may be redeemed by the issuing corporation before it matures.)

Which of the following statements regarding callable bonds is correct? They usually provide a call risk premium. They are unaffected by changes in market yields. They are only issued by government entities. They offer lower yields than comparable noncallable bonds.

They usually provide a call risk premium. (Callable bonds are normally called only when interest rates fall)

Assuming all of the following mature at about the same time, which of the following bonds should experience the greatest price decline if interest rates rise by 1%? Treasury bond issued at par carrying a 5% coupon Treasury bond issued at par and carrying a 4% coupon Treasury bond issued at par carrying a 6% coupon Treasury bond issued at par carrying a 7% coupon

Treasury bond issued at par and carrying a 4% coupon (With approximately equal maturity dates, the bond with the lowest coupon will always have the longest duration. The longer the duration, the greater the susceptibility to price changes due to fluctuations in interest rates.)

Market interest rates rise by 50 basis points. If each of these bonds has about the same maturity date, which of the following would decline the least? AA corporate bond carrying a 7% coupon Treasury bond issued at par carrying a 7% coupon Treasury bond issued at par carrying a 6% coupon AAA corporate bond carrying a 6% coupon

Treasury bond issued at par carrying a 7% coupon (All other factors being equal, bonds of higher quality experience less price volatility than do bonds of lower quality. When market interest rates rise, bonds having higher coupons will decline less than bonds having lower coupons)

Which of the following investment vehicles provides for redemption by the issuer? Exchange-traded fund (ETF) Face amount certificate (FAC) Unit investment trust (UIT) Closed-end fund (CEF)

Unit investment trust (UIT)

Your client has the following bonds in her portfolio: XYZ 3s of 44. TUV 6s of 45. QRS 9s of 43. NOP 12s of 42. If interest rates were to suddenly rise, which of her bonds would suffer the greatest decline in market price?

XYZ 3s of 44. (The one with the longest duration will be impacted the most by a change in interest rates. The bond with the lowest coupon rate will have the longest duration

A 35 year-old client indicates that he needs $500,000 of life insurance coverage for the next 20 years. The lowest out-of-pocket cost would be if he purchased a 20-year level term policy a 20-pay life policy a whole life policy variable annuity with an extended death benefit

a 20-year level term policy (In almost all circumstances, certainly for short-to-immediate time periods, term life will be the least expensive form of insurance. A 20-pay life is a permanent policy where the premiums are paid in a 20-year period rather than until death. Variable annuities are not life insurance policies, even though they are issued by life insurance companies.)

When an open-end management investment company computes its net asset value per share, each of the following occurrences would have an impact EXCEPT interest payments made on debt securities held in the fund's portfolio a drop in the value of equity securities held in the fund's portfolio a greater value of shares being redeemed than purchased a capital gains distribution

a greater value of shares being redeemed than purchased (Because shares are purchased and redeemed at NAV, net redemptions (this case) or net purchases have no effect on the net asset value of the fund's shares)

As defined in the Investment Company Act of 1940, the term "investment company" would NOT include a unit investment trust a management company a face-amount certificate company a holding company

a holding company

One of the likely consequences of a rating downgrade on a bond is an increase to the coupon by the issuer. the current yield will be reduced. a reduction in the market price of the bond. the call feature will be employed.

a reduction in the market price of the bond. (If the rating agencies downgrade the quality of a bond, potential investors will look to compensate for the increased risk by demanding a greater yield on the issuer's bonds)

If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as a utilities fund a unit investment trust a closed-end company a growth fund

a unit investment trust

A registered investment company whose portfolio consists of equity securities and the portfolio does not change in response to market conditions is probably a closed-end investment company. a unit investment trust. a passively-managed mutual fund. an ETN.

a unit investment trust. (Unit investment trusts are registered investment companies with a fixed portfolio)

A corporation has issued a 4% $60 par convertible stock with a conversion price of $20. With the preferred stock selling at $66 per share, an investor holding 100 shares of this stock would benefit by converting if the price of the common stock was above $20 per share above $18.20 per share above $22 per share below $22 per share

above $22 per share (With a conversion price of $20 and a par value of $60, this preferred stock is convertible into 3 shares of the company's common stock. We divide the current price of the preferred ($66) by the 3 shares to arrive at the parity price of $22)

A mutual fund's expense ratio is found by dividing its expenses by its public offering price income average annual net assets dividends

average annual net assets

An investor will likely exercise a put option when the price of the stock is above the strike price. at the strike price. below the strike price. above the strike price plus the premium.

below the strike price. (The put would be exercised when the price of the stock is below the strike price)

In general, when describing the characteristics of equity index annuities and variable annuities, each of the following would be a true statement EXCEPT only the EIA has a minimum guaranteed return both are issued by life insurance companies only the variable annuity is considered a security both offer an opportunity for unlimited gain

both offer an opportunity for unlimited gain (EIAs almost always come with a cap rate, a ceiling beyond which earnings cannot be credited to the investor's account. There is, theoretically, no limit as to how much one could earn with a variable annuity)

Among the reasons to consider investing in a variable annuity would be all of the following EXCEPT basically, no limit on the amount that can be contributed a guaranteed death benefit for death before annuitization capital gains treatment on any realized gains upon withdrawal avoiding probate upon the death of the investor

capital gains treatment on any realized gains upon withdrawal (In return for granting tax deferral on all gains in the account, the IRS taxes everything over the investor's cost basis as ordinary income. There is never a capital gain with a variable annuity)

All of the following statements regarding futures contracts are correct except purchasing a contract for future delivery is considered taking a long position. a short position will increase in value if the underlying commodity or asset declines in value. completing a futures contract requires the delivery of the commodity. futures contracts can be written on financial assets or commodities.

completing a futures contract requires the delivery of the commodity. (In almost all cases, the holder of the futures contract will purchase an offsetting contract canceling the original position or sell the contract prior to expiration.)

A similarity between the capitalization of closed-end and open-end management investment companies is that both? are traded on listed exchanges or in the over-the-counter market. compute net asset value per share. raise capital through a continuous public offering of shares. can issue common and preferred stock.

compute net asset value per share.

Managers of bond portfolios who anticipate an increase in interest rates should invest in high-yield or junk bonds assume higher risk in the secondary market increase the portfolio duration decrease the portfolio duration

decrease the portfolio duration

In order to achieve its goals, an inverse ETF uses preemptive rights. derivatives and debt. arbitrage. short selling.

derivatives and debt.

A variable annuity has fixed payments once it has been annuitized a high degree of liquidity different investment options known as subaccounts a guaranteed rate of return

different investment options known as subaccounts (Variable annuities pay variable payments once annuitized, do not guarantee a rate of return, and are not considered liquid investments; they do offer multiple investment options through the subaccounts.)

A client is interested in purchasing a REIT and asks you what the differences are between a listed REIT and an unlisted REIT. You could respond that all of the following are differences EXCEPT fees and expenses suitability requirements liquidity regulatory oversight

fees and expenses (The internal operating costs of a REIT, such as management fees and administrative expenses, have nothing to do with where units of the REIT are traded.)

An employee is offered a nonqualified stock option with an exercise price of $20 per share. If the option is exercised when the current market value of the stock is $30, the employee is taxed on $20 per share as if it were salary has a capital gain of $10 per share is taxed on $10 per share as if it were salary is taxed on $30 per share as if it were salary

is taxed on $10 per share as if it were salary (In the case of NSOs, the difference between the exercise (or strike) price and the current market value is considered salary to the employee.)

A client plans to purchase a home within the next 3 months and will require $100,000 for the down payment. The client has the money in her DDA and asks you for your recommendation as to the best place to put the money. Your recommendation would probably be for the client to use the money to buy IPOs until the home is purchased. purchase a GNMA for the monthly income. keep the money where it is. move the money into a 1-year CD.

keep the money where it is. (DDA stands for demand deposit account, usually a checking account at a bank. Because this client cannot afford any risk to principal, and the bank account is covered by FDIC insurance, this is the most attractive option.)

An investor is considering a 10-year stripped U.S. Treasury and a 10-year U.S. Treasury note, both with a yield to maturity of 4.8%. Compared to the note, the strip has more reinvestment risk and less interest rate risk. less reinvestment risk and more interest rate risk. more interest rate risk and less liquidity risk. more liquidity risk and less interest rate risk.

less reinvestment risk and more interest rate risk. (The strip is a zero-coupon security so it has no cash flows to reinvest and therefore no reinvestment risk)

Among the differences between an investment in a limited partnership offering and in a corporation is that only corporations are organized to run a business. limited partners take a more active role in the management of the enterprise than do stockholders of a corporation. only corporations issue securities. limited partnership offerings do not pay dividends; corporations do.

limited partnership offerings do not pay dividends; corporations do.

When advising an investor on the purchase of mutual funds, the registered representative should instruct the client to compare open-end mutual funds with the same objective for all of the following EXCEPT costs liquidity services offered portfolio turnover

liquidity (Shares in an open-end investment company (mutual fund) are liquid. By federal law, all mutual funds are required to redeem shares at their net asset value within 7 days and, therefore, that should not be a consideration in comparing mutual funds with the same objective)

A 68-year-old individual, who purchased a single premium immediate fixed annuity, elected monthly payments for life with a 10-year certain settlement option. If the individual lives to the age of 80, monthly payments will continue to the beneficiary(s) for 10 years after the annuitant's death. monthly payments will continue until death. monthly payments will cease at age 78. monthly payments will remain fixed until age 78 and then reduce until death.

monthly payments will continue until death.

One would look at the average maturities when doing a cash flow analysis for subordinated debentures revenue bonds mortgage-backed pass-through securities Brady bonds

mortgage-backed pass-through securities

One way in which open-end investment companies differ from closed-end investment companies is that an open-end investment company's shares may be priced at a premium or discount relative to its net asset value. are traded in the secondary markets rather than on an exchange. are purchased and redeemed based on supply and demand. outstanding will vary in number at any point in time.

outstanding will vary in number at any point in time. (Open-end investment companies are capitalized with a continuous offering of new shares. As a result, the number of shares outstanding is constantly changing.)

When an investor owns a convertible security where, upon conversion, the account value would remain the same, it is considered that the convertible and the common are selling at the arbitrage level the nominal yield parity equivalent value

parity (Parity means equal. When one could convert the security and realize the same value, it is said that both are at parity.)

A client of yours has been investigating a particular mutual fund. She mentions that she saw a blurb on the internet that the fund has had net redemptions over the past 6 months and asks you to explain how that might affect the fund's performance. You should explain that? (#) this is a good thing because now, with less money to invest, the fund's adviser is able to be more selective performance will probably suffer because the fund's adviser will have to sell positions prematurely in order to meet redemption requests this would be a good time to buy because the supply of shares exceeds the demand many of the fund's expenses are relatively fixed so with less assets in the fund, the expense ratio will probably increase

performance will probably suffer because the fund's adviser will have to sell positions prematurely in order to meet redemption requests many of the fund's expenses are relatively fixed so with less assets in the fund, the expense ratio will probably increase

One way in which universal life and variable life are similar is that both are considered securities permit loans against the cash value have a fixed minimum cash value have flexible premiums

permit loans against the cash value (As long as the policy has cash value, loans are permitted. Neither of these has a fixed minimum cash value, and only universal life has flexible premiums. Only variable life is considered a security.)

One way for an accredited investor with an aggressive stance to reduce the overall risk in his portfolio is by purchasing a hedge fund purchasing U.S. Treasury bills selling uncovered calls purchasing insured bank CDs

purchasing a hedge fund (Although the T-bills and the CDs will reduce the overall risk, they are not the best answer because the question is dealing with an aggressive investor.)

With an annuity: (#) taxes on earned dividends, interest, and capital gains are paid annually until the owner withdraws money from the contract. random withdrawals are taxed on a LIFO basis. money invested in a nonqualified annuity represents the investor's cost basis. upon withdrawal, the amount exceeding the investor's cost basis is taxed as ordinary income.

random withdrawals are taxed on a LIFO basis. money invested in a nonqualified annuity represents the investor's cost basis. upon withdrawal, the amount exceeding the investor's cost basis is taxed as ordinary income.

If general interest rates increase, the interest income of a bond unit investment trust will probably? increase change as soon as the portfolio manager can take advantage of the higher rates now available in the marketplace decrease remain the same

remain the same (Because the portfolio of a UIT is fixed, the income generated by that portfolio will not change. Remember, a UIT does not have a portfolio manager.)

In a mutual fund portfolio, you might find all of the following EXCEPT index options covered calls short stock junk bonds

short stock (A mutual fund is generally prohibited by the Investment Company Act of 1940 Act from taking short stock positions. There are exceptions to this rule, such as in the case of hedge funds.)

Your client in the 25% federal income tax bracket lives in a state where his earnings place him in the 6% bracket for state income tax purposes. If he were to purchase a 4% bond issued by a political subdivision of his state, his total tax-equivalent yield would be slightly more than 5.33% approximately 12.90% 4% slightly less than 5.33%

slightly more than 5.33% (4.0% divided by 0.75 (100% minus the 25% tax bracket) or 5.33%)

When an investor divides the coupon rate of a municipal bond by the reciprocal of her tax rate, she is computing the bond's inflation-adjusted return. discounted cash flow. after-tax rate of return. tax-equivalent yield.

tax-equivalent yield.

A registered investment company whose capitalization may include preferred stock and/or bonds is? the closed-end management investment company. the unit investment trust. the face-amount certificate company. the open-end management investment company.

the closed-end management investment company. (Only the closed-end company is legally permitted to issue senior securities (preferred stock and bonds))

The market price of a convertible bond depends on all of the following EXCEPT the rating of the bond the conversion prices of bonds from similar companies current interest rates the value of the underlying stock into which the bond can be converted

the conversion prices of bonds from similar companies

With respect to the specific commodity that is the subject of the contract, all of the following are standardized parts to an exchange-traded futures contract except the quantity. the market price. the time for delivery. the quality.

the market price.

Shareholders of mutual funds have all of the following rights EXCEPT: voting rights voting proxies the right to vote on the selection of specific securities for the portfolio receiving semiannual reports

the right to vote on the selection of specific securities for the portfolio

All of the following are true of government agency bonds EXCEPT they are direct obligations of the U.S. government they trade openly they are considered relatively safe investments older ones have coupons attached, new ones are book entry

they are direct obligations of the U.S. government (The only government agency that is a direct obligation of the U.S. government is the Ginnie Mae security. All of the others are moral obligations.)

An investor purchases a single premium deferred index annuity with an initial premium of $200,000. Soon after the purchase, the investor receives a statement from the insurance company showing an initial balance of $210,000. The most likely reason for the $10,000 increase is this is a bonus annuity. the insurance company paid a dividend. the insurance agent's commission was added to the account. the underlying index has had outstanding performance.

this is a bonus annuity. (It is not uncommon to find index annuities offering a bonus added to the premium. In this case, the bonus appears to be 5%.)

A customer in his 20s, who is not risk averse, is in the market for life insurance. His main worry is that what looks like a generous death benefit today may not be sufficient for a beneficiary 40 or 50 years from now. An investment adviser representative might consider recommending an aggressive, long-term strategy of investment in small-cap stocks term life insurance variable life insurance whole life insurance with the option of purchasing additional coverage

variable life insurance (Variable life insurance has the advantage of offering possible inflation protection for the death benefit.)

How often must an investment company file reports with the SEC as required by the Investment Company Act of 1940? Annually Monthly Semiannually Quarterly

Annually

A principal benefit gained by investing in physical real estate is low volatility. low leverage. cash flow. low liquidity.

cash flow.

A client has been contributing to a periodic payment annuity for 20 years. The M&E charge is 1.25% per year. What happens to that charge when the client annuitizes at attained age 68? It continues but at a reduced rate It ceases It continues It increases because the client's mortality risk is higher at the older age

It ceases (The M&E charge is for mortality and expenses. Once an annuity contract, fixed or variable, is annuitized, that charge no longer applies to the account.)

If your 60-year-old customer purchases a nonqualified variable annuity and withdraws some of her funds before the contract is annuitized, what are the consequences of this action? Capital gains tax on earnings exceeding basis Ordinary income tax on earnings exceeding basis 10% penalty plus payment of ordinary income tax on all funds withdrawn 10% penalty plus payment of ordinary income tax on all funds withdrawn exceeding basis

Ordinary income tax on earnings exceeding basis (The income was deferred from tax over the plan's life, so it is taxable as ordinary income once distributed. A 10% penalty applies only if distributions begin before age 59½.)

The fee charged by some mutual fund companies if shares are redeemed within a specified time after being purchased is known as a breakpoint fee a forward pricing fee a 12b-1 fee a contingent-deferred sales charge

a contingent-deferred sales charge (Some mutual funds impose contingent-deferred sales charges (CDSC) on investors who redeem their shares within a specified period after purchasing them.)

A management investment company owns portfolio securities with a current market value of $100 million. The company owes $10 million for securities purchased but not yet paid for and accrued management fees of $5 million. If there are 2,611,437 shares outstanding and the current asking price of the shares is $36.38 per share, it would be correct to state that this investment company is selling at NAV. an open-end investment company. selling at a premium. selling at a discount.

selling at a premium. (When a closed-end investment company is selling at a price in excess of its net asset value, it is said to be selling at a premium. The net asset value per share of a management investment company (either open-end or closed-end) is computed by dividing the net assets (assets minus liabilities) by the number of outstanding shares.)

A customer with an aggressive growth investment objective and short-term (6- to 12-month) time horizon wants to invest $50,000 in a mutual fund. He has a substantial net worth, but none of it is invested in mutual funds. You inform him that mutual fund investments are intended to be long-term investments, but he expresses his intention to make the short-term investment anyway. If the XYZ fund family (one you have dealt with in the past) offers an aggressive growth fund that has a respectable track record, your recommendation should be to buy the XYZ Aggressive Growth Class B shares with a declining CDSC and 0.75% 12b-1 fee buy the XYZ Aggressive Growth Class A shares with a 4% load and 0.25% 12b-1 fee buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and 0.75% 12b-1 fee decline the transaction because short-term trading of funds is not allowed

buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and 0.75% 12b-1 fee (the Class C shares are most appropriate for this customer's objectives; the sales load would be lower than that of either Class A or Class B shares)

Which of the following is not included in the calculation of a mutual fund's NAV per share? Closing values of portfolio assets Accrued custodian bank fees Accrued sales charges Accrued management fees

Accrued sales charges

Which of the following expressions describes the current yield of a bond? Yield to maturity divided by current market price Yield to maturity divided by par value Annual interest payment divided by par value Annual interest payment divided by current market price

Annual interest payment divided by current market price

One of the ways in which U.S. government agency issues differ from those offered directly by the U.S. Treasury is that agency issues frequently trade on the NYSE while Treasuries never do agency issues are taxable on the federal level while Treasury issues are not agency issues are more likely to be issued in larger amounts agency issues typically carry higher returns than Treasury issues because of the lack of direct government backing

agency issues typically carry higher returns than Treasury issues because of the lack of direct government backing

The exchange privilege offered by open-end investment companies allows investors to exchange personally owned securities for shares of the investment company purchase new fund shares from dividends exchange shares of one open-end fund for another in the same fund family at a net asset value basis delay the payment of taxes on shares

exchange shares of one open-end fund for another in the same fund family at a net asset value basis

One of your clients owns 2 different 6% corporate bonds maturing in 15 years. The first bond is callable in 5 years, while the second has 10 years of call protection. If interest rates begin to fall, which bond is likely to show a greater change in price? Bond with the 10-year call Both will increase by the same amount Bond with the 5-year call Both will decrease by the same amount

Bond with the 10-year call (The greater the call protection, the more likely a bond will appreciate if rates fall.)

Which of the following insurance company products is likely to have the longest time for which a surrender charge will be levied? Whole life insurance Variable annuity Bonus annuity Class B shares

Bonus annuity (One of the characteristics of bonus annuities is that their surrender charges tend to be higher for a longer time than other insurance company products. When you see Class B shares on the exam, it will be referring to mutual funds, not insurance company products.

Which of the following statements is NOT true? Open-end investment companies must have a minimum of $1 million in assets to have a public offering. The sale of open-end investment company shares is a continuous public offering and must be accompanied by a prospectus. Mutual funds may be used as collateral in a margin account if they have been owned for more than 30 days. Mutual fund shares may not be purchased on margin because their shares are always public offerings of new shares.

Open-end investment companies must have a minimum of $1 million in assets to have a public offering. (Minimum assets of $100,000 are required)

A popular vehicle for saving for retirement is the variable annuity. An agent explaining the benefits of this product would probably be in violation of the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents by claiming that variable annuities offer the ability to exchange funds between subaccounts without incurring a tax liability under IRS Code Section 1035 lower overall expenses than a mutual fund with similar investment objectives tax deferral on earnings until withdrawn from the account the choice of a large number of different subaccounts with varying objectives

lower overall expenses than a mutual fund with similar investment objectives (In general, variable annuity expenses are higher than those of a mutual fund with similar objectives. That doesn't mean the fund is good and the VA bad, it is that there are guarantees and other features offered by the VA that a fund does not have and they have to be paid for)