Series 6
An annuity is
a contract issued by life insurance companies in which the purchaser makes payments (premiums) that are invested in a tax-deferred account.
an investment company is
a corporation, trust, or partnership that issues packaged securities to investors
dividend
a distribution of a portion of a company's earnings
Policy loans are not considered
a distribution of cash value and are not taxable
Typically, preferred stock is issued with
a fixed dividend based on a percentage of the par value of the stock. It is assumed for this exam that corporations will issue preferred stock with a $100 par value.
Once annuitization occurs and ownership of the assets changes, the accumulation units are converted to
a fixed number of annuity units.
when opening an account, most firms require customers to sign
a form W-9 (us res) or W-8 (non-us res) NOT required to sign the new account form
Interval Funds
a form of closed-end fund that do not trade on exchanges
Asset-Backed Securities
a form of pooled fixed income investment (mortgages, auto loans, CC debt, home equities)
mutual fund sales charges are paid as
a front-end load
underwriting syndicate
a group of investment banking firms formed to spread out the risk associated with the purchase and distribution of a new issue of securities
An indenture, or trust indenture
a legal agreement outlining the terms of the loan between the corporation and the bondholders. A trustee is appointed to represent the bondholders and protect their interests.
Options
a legal financial contract between two parties: the option writer (seller) and the option holder (buyer).
This information ONLY can also be distributed to existing or potential investors in the form of a "summary prospectus," if
a legend on the cover provides an internet address, toll free (or collect) telephone number, and e-mail address that investors can use to obtain the statutory prospectus, and the disclaimer that investors may want to view the full prospectus before investing
A full surrender (termination of the contract) occurs as
a lump sum distribution. All earnings are taxable at ordinary income rates and subject to surrender charges and early distribution penalties, if applicable.
diversified investment company
a management company that meets the requirements of the 75-5-10 rule
Variable annuities are
a more aggressive choice for investors which makes them most suitable for younger investors looking for a potential hedge against inflation
Relationship Between NAV and POP
a mutual fund POP cannot exceed the NAV by more than 8.5% of the POP
Deferred Compensation Plans
a nonqualified retirement plan in which employees defer a portion of their income to a specified later date. allows senior management or high compensated employees to pay taxes based on a lower tax bracket
Growth Funds
a portfolio of stocks that seek capital appreciation as the primary goal typically invest in common stock industry leaders with above average growth in earnings, reinvesting back into company
prior to the final official statement,
a preliminary official statement is prepared for potential customers which describes the details, excluding price and interest rates
portfolios in management investment companies are selected by
a professional investment advisor (portfolio manager)
Example of IDRs
a prominent stock exchange was considering leaving its current city of residence for tax breaks available somewhere else. The city that was housing this exchange did not want to see the exchange, and the tax revenues that it pays each year, leave. So, it offered to arrange financing through an IDR to build a new trading floor near its present location. Ultimately, this bond would be backed by the lease payments that the exchange makes to the city each month.
mutual fund sales require
a prospectus delivery (must be updated annually)
A defined contribution plan is
a qualified retirement plan in which employees direct the employer to withhold a "defined" amount of compensation for contribution to a plan maintained by the employer.
The board of directors will review 12b-1 fee spending on a
a quarterly basis and approve the 12b-1 fee annually, assuming no changes are made to the 12b-1 fee
Industry rules do not require
a registered representative's or customer's signature on a new account application.
For tax purposes, exchanges are treated as
a sale and a new purchase (taxable event)
Hedge Funds
a security often structured as a limited partnership and mainly available to accredited investors
Most funds will impose a redemption fee as
a short-term trading penalty to discourage this practice.
Commercial Paper
a short-term unsecured debt instrument issued by a corporation as a promissory note to help finance accounts receivable and seasonal inventory overages $50,000 min. face amount top 3 moody/sp ratings matures in less than 270 days
International Funds
are those that invest in non-U.S. stock throughout the world. Some funds authorize the purchase of foreign securities' ADRs listed on U.S. stock exchanges. relies on strength of currency to determine full worth
after IPO, closed end funds
are publicly traded on the secondary market and referred to as publicly traded funds
Equipment Trust Certificates
are secured bonds backed by equipment.
taxable distributions for nonqualified variable annuity
are subject to ordinary income tax rates
Roth IRAs
are subject to the same maximum annual contribution limits and catch-up provisions as the traditional IRA. An individual can have both a traditional IRA and a Roth IRA, but the contribution limits apply per person, not per account.
Dividend distributions
are taxable in the year they are paid to the investor
Ordinary dividends
are taxed as ordinary income
Qualified dividends
are taxed at long-term capital gains rates.
Withdrawals are treated as
first-in, first-out (FIFO) based on the cost basis of the policy. This means that withdrawals are not taxable until the cost basis (amount of premiums paid) is exhausted
The face value (death benefit) of the whole life policy is
fixed and the premiums remain level throughout the insured's lifetime
preferred stock dividends are
fixed based on a stated rate as specified
Systematic Withdrawal Plans for mutual funds
fixed dollar amount fixed share amount fixed percentage fixed time period
common stock may pay dividends that
fluctuate based on the market
Capital Loss Events
for a mutual fund investor occurs when the investor sells fund shares for less than the cost basis
Capital Gain Events
for a mutual fund investor occurs when the investor sells fund shares for more than the cost basis. taxable based on holding period
underwriting agreement
formal contract: includes the underwriter fees and compensation, POP, underwriting spread per share, and net proceeds to be received by issuer, and any conditions where the UW may terminate the contract
investment income from a 529 plan is
free from federal taxation if it is used for qualified education expenses
sales charges are NOT
fund expenses and not part of the expense ratio
Value Funds
fund managers seek stocks of established large-cap companies that currently are thought to be undervalued in price believe inefficiencies in market account for low trading prices long history or paying/increasing dividends
Taxation of Nonqualified Variable Annuity Contracts
funded with after tax dollars considered the cost basis and is returned tax free
Municipal Bonds
debt instruments issued by state and local governments or quasi-governmental agencies, such as authorities or school districts NOT subject to federal taxation (sometimes state and local)
Corporate bonds
debt instruments issued by the corporation (issuer) and sold to investors
U.S. Government Agency Securities
debt securities backed by a us gov issuing authority but are not issued by the gov
universal life insurance
gives customer flexible premiums deposited in the general account, adjustable death benefit, and builds cash value at min interest rate but could be higher
call option
gives the holder the right (but not the obligation) to buy 100 shares of stock at the strike price up until the expiration date of the option contract
options contract
gives the option holder the right to buy or sell 100 shares of a specific stock at a predetermined price, called the strike price, for a specified time period
put option
gives the option holder the right, but not the obligation, to sell 100 shares of stock at the strike price, up until the expiration date of the option contract.
Additional Features for variable annuities
guaranteed min income benefit long term care rider for home/nursing care waiver of premium benefit
large-cap company
has market capitalization of $10 billion or more
mid-cap company
has market capitalization of $2 billion to up to $10 billion
small-cap company
has market capitalization of $300 million up to $2 billion
interval funds charge
high fees 3.5% annually, and front end sales charges, commissions, and redemption fees as high as 2%
Hedge Funds are
high-risk investments for sophisticated investors who seek an aggressive yield, and they use advanced investment strategies and tactics to protect against downside market risk
To cover the cost of the selling concession, Class B shares have
higher annual expenses
investors of hedge funds are subject to
higher fees, large investment min ($1M+)
Why choose us gov securities?
highly liquid, backed by the full faith, credit, and taxing power of the US gov virtually default risk free subject to interest rate risk
If growth is the primary objective, the fund will invest in
in growth common stock
Hedging
in the options market involves protecting an appreciated stock position against large losses
Qualified plans must be
in writing and follow the rules established under ERISA to ensure that they are not discriminatory and the fiduciaries do not misuse the plan assets.
Interested persons
include affiliates as well as legal counsel and immediate family members of affiliates
After the final prospectus, a material event occurs. The issuer must
include this info in the registration statement and prospectus by filing an amendment and is effective upon SEC decision
Level Load or Class C Shares
the customer pays a fixed percentage each year Class C shares charge customers an annual fee, in addition to higher 12b-1 fees ST or uncertain time horizons, non-convertible
underwriting spread
the difference in price between what the public pays and what the issuer receives
Policy holders taking a distribution from the policy are taxed only on
the earnings generated within the policy with the contributions (premiums) being returned tax-free.
Single Premium
A lump sum payment is deposited into the annuity account.
identifying customer information must be retained for
5 years after the account is closed
Qualified distributions from a Roth IRA are not subject to income tax if the account has been held for at least:
5 years or more and to age 59 1/2
Corporations that invest in the stocks of other domestic corporations can exclude what % of the dividend income derived from those holdings from their corporate income tax liability?
50
Failure to take the distribution results in a penalty of
50% of the RMD that was not distributed.
A life insurance policy is classified for income tax purposes as a modified endowment contract or MEC if it fails the ____ pay test.
7
IRA Contributions may only be made until the account holder reaches age
70½. An annual 6% penalty applies on any excess contributions until the excess amount is withdrawn. Growth on the excess contribution loses its tax-deferred status.
The account holder of a qualified plan must take required minimum distributions (RMDs) no later than April 1st of the year after the account owner turns age:
72
Under the Investment Company Act of 1940, a management investment company is diversified if it meets which of the following rules?
75-5-10
under FINRA rules, mutual funds sales charges cannot exceed
8.5% unless they offer beneficial features
A mutual fund must invest at least _____% of the value of its assets in investments based on the name of the fund.
80
funds must invest at least _____ of its assets in investments based on the fund
80%
Conversely, a 68-year-old investor also wants to maximize diversification and invest in an asset allocation fund. The fund recommendation for this investor is
80% bonds, 15% stock and 5% cash
For an issuer to qualify for an exemption under Rule 147, there are 4 possible conditions that must be met. All the following would qualify, except:
80% of the issuer's employee's must be based within the state
For example, a 28-year-old investor wants to maximize diversification and invest in an asset allocation fund. The fund recommendation for this investor is
80% stock, 15% bonds, and 5% in money market instruments.
If XYZ Corporation issued 10 million shares of common stock and has 1 million in its treasury, how many shares are considered outstanding?
9 million
A letter of intent can be backdated for up to how many days?
90
Which of the following is false regarding tax-exempt funds:
90% of their income must be exempt from federal income tax
Under Subchapter M, the IRS requires investment companies to pass at least
90% of their net investment income (NII) to their investors to be classified as RICs
A mutual fund is offered at NAV $10 POP $10.50. What class of share is being offered?
A
A mutual fund may offer reduced sales charges as an incentive to investors who purchase what class of shares?
A
Global Funds
A global fund will invest in foreign and domestic stock to take advantage of whatever market is performing well at a specific time.
Reduction for Qualifying
A group that is established as "qualified" will be able to aggregate the group's accounts for purchases in determining the applicable sales charge for the group's accounts.
Issuer
A legal entity offering securities to the public to raise capital
Tombstone Ads
A tombstone may contain only basic information about the offering, such as: The name of the issuer The security being offered and the amount A brief indication of the type of business the issuer is in The price of the security (and for bonds, the yield) The names of the underwriters
401(k) Plans
A type of profit sharing plan in which the employee has the option of taking employer contributions as cash or they can be left in the plan and the employer may make a matching contribution.
SEC
Unlit are enforcer of federal securities laws
most money market funds will offer
check writing privileges due to the price stability.
Variable Universal Life (VUL) Policies
combine the investment choices of the separate account in a variable life policy with the flexibility offered in a universal policy.
Equity funds invest in
common and/or preferred stocks, depending on the specific investment objective of the fund
What securities can a mutual fund offer to the public?
common stock
mutual fund capitalization
common stock full or fractional shares
closed end management company capitalization
common stock, preferred stock, bonds full shares only
Redemption of Mutual Fund Shares
contact RR distributor of fund fund itself done via phone or online some still require written redemption instructions if fund allows checks, can write a check for the amount if held by customer, must be signed
non-documentary methods to verify an investor's identity
contacting the customer, obtaining information from a consumer reporting agency, and checking references from other financial institutions
Municipal bonds generally are exempt from federal income tax. To be federally tax-exempt, municipal bond issues must
contain the opinion of legal counsel that the bond qualifies as a municipal issue—and all interest is exempt from federal income tax.
Statement of Additional Information (SAI)
contains supplementary information on many of the items found in the prospectus such as fund holdings, transactions, and fees. Although there is no requirement for periodic mailing of the SAI to shareholders, this document must be furnished upon request.
While many variable annuities shares typically do not charge a front-end sales charge, most impose a
contingent deferred sales charge (CDSC) when an investor withdraws money during the accumulation period. A CDSC normally declines and will eventually be eliminated the longer one holds the contract.
Open-End Management Investment Company/Mutual fund
continuously offer new shares to investors in the primary market, giving the fund the ability to raise an unlimited amount of money.
Roth 401(k)
contributions with after tax dollars and qualified distributions at retirement are received income tax free starting at 59.5
Spousal equivalents are
couples or partners that are not married, but have essentially the same relationship as a married couple
ROllover- If the distribution is made within the 60-day window,
no tax liability is incurred. If the assets are not placed in the new account within the required 60 days, a distribution is deemed to have taken place. Taxes will be due as well as penalties if the account owner is not 59½ years of age.
The Investment Company Act of 1940 requires that at least a majority of the board must be
non-affiliated independent or disinterested members
Selling groups are
not liable for any unsold shares
Selling groups are...
not liable for any unsold shares
The death benefit includes all earnings in the contract while the insured was alive and is
not subject to income tax when paid to the beneficiary.
Policy loans are
not taxable and interest is charged on the loan until either repaid, the policy is cancelled, or the insured dies.
Breakpoint Sales Violation
occurs when a registered representative purposely makes a sale just below the breakpoint to earn a higher sales load (or divides investable dollars among different fund families)
Prepayment Risk
occurs when interest rates decline in the market
extension risk
occurs when interest rates in the market rise.
Capital Gain Distributions
occurs when the fund manager sells securities in the portfolio for a profit and then shares the profit with fund investors
unrealized capital loss
occurs when the value of an investment decreases after it was purchased, but the security has not been sold. Unrealized capital losses are not deductible.
unrealized capital gain
occurs when the value of an investment increases after it was purchased. Unrealized capital gain—mere appreciation—is commonly known as a "paper gain" and is not taxable.
interval funds are required to
offer a repurchase of shares at set intervals, usually a specific percentage of investors holdings at NAV (5-25%) and can create new shares to meet needs
hedge funds are not
offered to the general public, do not have to register with SEC, use a private offering memorandum, NOT regulated by the investment company act of 1940
advertisements are OK when:
offering is only made to accredited investors
Revenue Bonds
often used by municipal authorities to finance specific projects being constructed, such as toll roads, parking structures, airports, convention centers or local sports stadium. fees charged pay back principal and interest (project operator is responsible) subject to default risk
According to the Investment Company Act of 1940, a fund can only pay out capital gain distributions
on an annual basis
ETFs can be bought
on margin and sold short (unlike mutual funds)
follow on offering
once a company has gone public, they have a primary offering in the primary market selling additional securities to raise more capital
mutual funds can only issue
one class of security which is common stock, and must have a clearly defined investment objective
Diversification is
one of the main advantages of an investment company offering since most investors can't achieve this by investing on their own.
12b-1 fee can be used for
ongoing costs associated with the fund, including trailing commission
One major difference between the Roth and the traditional IRA is
ontribution eligibility. All individuals that have earned income may contribute to a traditional IRA, but a Roth IRA requires investors to have an adjusted gross income (AGI) below a certain threshold to be eligible to make any Roth contributions
ETFs are registered as
open-end funds under the Investment Company Act of 1940
The investment account, or separate account,
operates similarly to that of a mutual fund and is considered a security
UITs have lower
operating costs and fewer taxable transactions year-to-year
Prior to the insured's age 59½, any money taken from a MEC in the form of loans, partial surrenders, or withdrawals, is subject to
ordinary income tax plus a 10% IRS penalty. However, the death benefit will still be tax-free.
selling group
other brokerage firms that help the underwriting syndicate sell issue to the public
Government 457 plans may be rolled over to
other qualified plans or IRAs whereas non-government plans cannot.
If an option has no intrinsic value, it is
out-of-the-money
High-Yield Bond Funds
own a larger proportion of lower rated bonds, including the lowest-rated "junk bonds," all of which have a higher level of default risk. The higher risk translates into higher interest income, and when bonds are performing well, these funds often provide spectacular returns due, in part, to capital appreciation in addition to income
short term capital gains
owned for 12 months or less, taxed at ordinary income rates in year sold
long term capital gains
owned for longer than 1 year, taxed at preferential rates in year sold
The final payment due to a bondholder is
par value plus the semiannual interest payment
SEC Disclaimer
"These securities have not been approved or disapproved by the Securities and Exchange Commission or by any state securities commission, nor has the Securities and Exchange Commission or any state securities commission passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense."
Contributions are valued in
"accumulations units", which are comparable to shares of a mutual fund
Preferred shareholders own
"non-voting" stock and are more interested in the income stream shares are expected to provide through quarterly dividends
IRA If an investor is not eligible (or is limited) to make deductible contributions due to income restrictions
"nondeductible" contributions (after-tax money) may still be made. These amounts will be distributed tax-free upon distribution.
A schoolteacher has invested $8,000 into a 403(b) plan over a 10-year period. The annuity now has a current value of $12,000. If the teacher completely liquidated this amount, how much may be excluded from taxable income?
$0
The principal value of a bond is typically:
$1,000
ABC Corporation issued a $1,000 10% coupon bond. At maturity, what is it required to pay out to its bondholders?
$1,050
Retail money market funds transact at a stable NAV of
$1.00
ABC Growth Fund has a calculated NAV per share of $9.20 and the sales charge is $0.80. What is the POP for ABC Growth Fund?
$10.00
If a mutual fund's NAV per share is $10 and the sales charge is $.50, what is the POP per share?
$10.50
What amount of initial capitalization is required of a mutual fund?
$100,000
par value, or face value, for a bond
$1000
An investor has three ABC 6% bonds and three XYZ 6.4% bonds. What is the difference in annual interest between the two positions?
$12
An individual has invested $160,000 in a variable annuity that has a current market value of $126,000. During the accumulation period, the annuitant unexpectedly dies. What funds will the heirs be entitled to upon the annuitant's death?
$160,000
An investor purchases ABC Corporation 10%, 100 par preferred stock. ABC Corporation pays dividends quarterly, what will the investor receive for each dividend payment per share?
$2.50
The minimum investment for an institutional money market fund could be as high as
$25,000,000 (have a NAV that fluctuates)
An individual works 40 hours a week for P.L. Industries, earning $35,000 per year and also owns a painting business earning $20,000 per year. How much can they contribute to a Keogh plan?
$4,000, which is 20% of $20,000. Mathematically, 25% of "post-contribution income" is the same as 20% of gross earnings. Income earned as an employee for P.L. Industries cannot be included.
An investor's fund has a net asset value of $10,000. They originally invested $11,000 and signed a letter of intent for an additional $14,000. The investor only put in an additional $8,000. How much more would have to be added to get to their $25,000 breakpoint?
$6,000
An investor who purchases 1000 shares of a mutual fund with a POP of $11.25 and a sales charge of 7% will pay a sales charge of:
$787.50 (POP ($) x Sales Charge (%) = Sales Charge ($), in this example $11.25 x .07= 0.7875 this investor purchases 1000 shares x 0.7875 SC = $787.50 total sales charge.)
An investor owns XYZ common stock. Last year, XYZ paid dividends totaling $3 per share on its 6% cumulative preferred stock. For this investor to receive a dividend this year on the common stock owned, the cumulative preferred stockholders must receive a dividend of:
$9 per share
Calculating the sales charge percentage when the NAV and POP are given:
(POP - NAV) ÷ POP = Sales Charge Percentage
All annuity contracts permit a certain amount of withdrawal that can be taken without a surrender charge
(usually 10% of the first year or last anniversary account value).
UIT portfolio composition
-fixed -NO active management -contains stocks and bonds
A no-load mutual fund can assess a 12b-1 fee, however the maximum 12b-1 fee a no-load fund can assess is
0.25%, or 25 basis points annually.
12b-1 fees used specifically to pay marketing and distribution expenses, including compensation to broker-dealers and registered representatives, cannot exceed
0.75% of a fund's average net assets per year.
The maximum allowable annual 12b-1 fee is
1% (usually between 0.25%-1%)
Roth IRA- The first rule for qualified distributions is that the account must be open for at least
5 years
Mutual funds are required to follow a specific format for the first few pages of their full prospectus.
1. The fund's investment objectives 2. Fees and expenses 3. Investment risks and performance information 4. Information on the investment adviser and portfolio manager(s) of the fund 5. Information on buying and selling shares 6. Tax information 7. Details on financial intermediary compensation
Registration requirements for investment companies
1. register with SEC 2. file registration statement 3. deliver prospectuses to all investors 4. a series 6 RR may sell shares by prospectus ONLY and as new issues
If a mutual fund has adopted a 12b-1 plan, what is the maximum fee that can be assessed annually?
1.0% of the fund's average net assets
The PDQ Fund has a front load sales charge of 3% and a 12b-1 fee of .5%. The fund has a management fee of 1.0% per year and charges an administrative fee of .23%. What is the expense ratio of this fund?
1.73%
If a withdrawal is taken from a nonqualified annuity prior to age 59½, a penalty tax of _____ % may be assessed on the taxable portion of the early distribution.
10
To meet the requirements of a diversified investment company, a management company cannot own more than what percentage of one company's outstanding voting stock?
10
Free look provision
10 days
A qualifying group is one that has:
10 members Been in existence for at least 6 months A purpose other than the purchase of mutual fund shares at a discount Agreed to include fund sales publications in mailings to members
ROAs must be offered for at least
10 years and multiple accounts within the same fund family may be combined in order to reach a breakpoint.
roth ira- Distributions outside of these guidelines are subject to a
10% penalty and ordinary income tax on the earnings.
A mutual fund must have a minimum of how many investors?
100
The Investment Company Act of 1940 requires registration when a company has a certain number of investors. What is that number?
100
Most whole life policies, by design, are scheduled to mature when the insured reaches age
100. While it is unlikely, if the insured is still living when the policy matures, the face amount of the policy pays as an endowment and coverage ceases
Only one rollover is allowed per
12-month period for the same funds.
What is the name of the fee that can be paid by the fund out of its assets to cover distribution expenses and sometimes shareholder service expenses?
12b-1
Raising Capital as a Corporation Steps
1: become corporation 2: Create BOD 3: file Articles of incorporation 4: when approved, state issues a certificate or charter which gives the corporation a legal "person" status
Liquidation Priority
1st Secured creditors (includes secured bondholders) 2nd Taxes, unpaid wages, trade creditors 3rd Debenture holders 4th Subordinated debenture holders 5th Preferred shareholders 6th Common shareholders
How long is the initial mutual fund investment advisory contract good for?
2 years
If a rollover occurs due to moving assets from a qualified employer-sponsored plan into an IRA in a lump sum, the same 60-day rollover rule applies, but the employer is required to withhold what % of the distribution and send this amount to the IRS?
20
SEP eligibility
21 years old at least $600 annual income in 3/5 years
Variable life conversion period
24 months
How long is the typical reinstatement provision?
30 days (Mutual funds will state in their prospectus that the withdrawn money must be replaced promptly, usually within 30 days, to qualify for the sales charge waiver. The investor is allowed to do this on an infrequent basis, usually only once per year)
According to the Investment Company Act of 1940, what is the maximum amount an open-end fund can have in debt after borrowing from a bank to meet its liquidity needs for short-term redemptions?
33% of its NAV
Qualified Plans
401(k) 403(b) Defined Benefit Profit Sharing HR-10
Which type of retirement plan permits employees of a small printing company to take a reduction in their present wages and defer that amount into a retirement account?
401(k) plan
What is the name of the plan that was created for eligible employees of public school systems and qualified 501(c)(3) nonprofit organizations, including religious organizations, colleges, universities, hospitals, and museums?
403(b)
Broker
A firm that acts as an agent, executing orders on behalf of customers, who gets paid a commission
Closed-End Management Investment Company
A fixed number of common stocks, preferred stocks, and/or bonds of the closed-end fund are registered with the SEC and are sold through an IPO in the primary market by prospectus.
Which of the following debt issues is considered a money market security?
A 10-year U.S. treasury note 9 months prior to maturity
Timely Payment by Fund
A Fund company must transmit redemption proceeds to the investor within 7 calendar days of request, assuming the customer's request is in good order. This 7-day requirement may be extended if the NYSE is closed for a reason other than a holiday or the weekend, which is rare.
Savings Incentive Match Plans for Employees (SIMPLE)
A SIMPLE plan can be adopted by small businesses (self-employed, sole proprietors, partnerships, and corporations) that employ 100 or fewer employees and do not have another qualified plan available.
Which statement best describes an industrial revenue bond?
A bond issued by a municipality to finance an asset that is leased to a private firm
coupon rate
A bond's annual interest rate stated as a percentage of its par value AKA nominal yield
variable annuities Administrative Expenses
A charge for record-keeping and other administrative expenses. This might be charged as a flat account maintenance fee on a monthly or annual basis. Some refer to this as a policy fee and it can be waived once the policy has exceeded a certain value, such as $100,000.
Deferred Annuity
A deferred annuity will begin to make payments starting at a specified time in the future longer than 1 year from the issue date. Deferred annuities can be purchased with single premiums or periodic premiums
Omitting Prospectus
A document that contains a summary of information regarding the fund. It contains the fund objectives and goals, principal investment strategies, and the principal risks of the fund. The document must follow SEC Rule 482 and may not include an application to invest.
Prospectus
A document that contains information regarding the fund's objectives, investment policies and restrictions, methods of purchase and redemption, sales charges and annual expenses, the services offered, and financial statements. It also contains extensive background information on the fund's management, must be updated every 16 months, and cannot be altered.
Summary Prospectus/Mutual Fund Profile
A document that contains the fund's objectives and goals, fees and expenses, risks and performance data, investment adviser and portfolio manager, ways to purchase and redeem shares, tax information, and compensation for wholesalers and broker-dealers. It can include an application to invest as long as there is a notice on the front-page detailing how the investor can acquire a prospectus from the fund company
BD
A firm in the business of executing securities trades for commission
Dealer
A firm that acts as a principal, trading for its own account, and who charges a markup on purchases or markdown on sales instead of being paid commission.
Geographical Focus
A name suggesting that the fund focuses its investments in a particular country or geographic region is not allowed, unless the fund has adopted a policy to invest, under normal circumstances, at least 80% of the value of its assets in investments that are tied economically to the particular country or geographic region suggested by its name.
Speculator
A person who predicts which direction the market will take to anticipate profitable movement in the market and is said to be speculating. This is also called market anticipation.
Which of the following fund types would be an appropriate investment choice for an investor wishing to hedge against inflation?
A precious metals fund
Who makes the investment decisions for an investment company?
A professional investment manager or investment adviser
A variable contract must be sold by:
A prospectus
Indications of interest may be collected by the registered representatives with which of the following?
A red herring
What offering document may be distributed to a customer during the cooling-off period?
A red herring
Which two of the following are true regarding Roth IRAs?
A required minimum distribution is not required beginning at 72 and contributions are not tax deductible
A person has received a check representing retirement money that they must reinvest within 60 days to avoid a taxable event. What term is used to describe what this person is in the process of doing?
A rollover
Rollovers
A rollover occurs when assets are moved from one IRA to another IRA and the account owner physically takes possession of the assets. The assets must be placed in a new IRA within 60 days
Which of the following would likely have the highest coupon?
ABC Corporation callable bond
An investor is considering the differences between ABC fund and DEF fund. ABC fund has a NAV of $9.20 and a POP of $9.90. DEF fund has a NAV of $10.85 and the current market price is $10.10. Which of the following statements is most likely true?
ABC fund is an open-end fund and DEF is a closed-end fund
There may only be one
ABLE account for each eligible person; the plan does not need to be in the person's state of residence
Differences between mutual funds and ETFs:
ALL ETFs are passively managed and have lower management fees - Most mutual funds are actively managed and have higher fees ETFs can be traded throughout the day - Mutual funds are only traded at the end of the day and based on forward pricing ETF investors are charged commission for purchases and sales - Mutual fund investors pay a sales charge for purchases and redemption
A client currently has $275,000 in a variable annuity. This client is planning on retiring in 3 years and will start receiving monthly income at that time. The client's current holdings are described as:
Accumulation units
What does MSRB oversee?
Activities such as underwriting, trading, and selling federal tax exempt bonds, municipal securities, and 529 college savings plans.
variable annuities Charges for Special Features
Additional fees and charges apply to special features added to a variable annuity, such as the stepped-up death benefit, guaranteed minimum income benefit, or long-term care insurance rider.
The following charges are deducted from the PREMIUM:
Administrative fees State premium taxes Sales charges (maximum 9%)
Savings Incentive Match Plans for Employees (SIMPLE)
Adopted by small businesses (self-employed, sole proprietors, partnerships and corporations) that employ 100 or fewer employees and do not have another qualified plan available.
single offering
All Regulation D offers and sales of the same class made within the 6 months preceding and the 6 months following the Reg D offering are considered a single offering.
Mutual fund advantages: Systematic Purchase and Withdrawal Plans
Allows investors to invest and withdraw at regularly scheduled intervals.
Mutual fund advantages: Exchange Privilege
Allows investors to move investments from one fund to another within the same fund family with no sales charge.
Investors do NOT vote on which of the following?
Amounts of dividend payments
offering circular
An abbreviated prospectus used by corporations issuing less than $5 million of stock.
Mortality Guarantee
An annuity guarantees payments for the life of the annuitant
Which of the following insurance products is defined as a security?
An annuity with a variable stream of income
What is the par value for common stock?
An arbitrary number
Immediate Annuity
An immediate annuity generates income immediately after the first deposit is made into the account. To be considered an immediate annuity, income must begin within one year of the issue date and there is no accumulation period. Immediate annuities must be funded with a single premium.
Registered Representative (RR)
An individual who is registered with a broker-dealer and solicits or conducts securities business.
The federal government has the moral obligation, but not the legal liability to back the issue of:
FNMA securities
security
An investment contract offered through a legal entity managing the efforts for an expected profit
Roth IRA statements is true
An investor can continue to contribute after age 72 if they have earned income If an individual investor exceeds a specific amount in income, the investor may not be able to contribute to the plan Earnings grow tax deferred and can potentially be withdrawn tax free
Under a withdrawal plan:
An investor could take out a specific amount, even though it exceeded the earnings on his shares
T Strips Example
An investor purchases a 15-year, $1,000 T-STRIPS for $550. The difference between the purchase price and redemption ($450) must be accreted annually for 15 years. In this example, $30 is taxable at the investor's marginal tax rate at the federal level annually.
Death benefit calculation
Annual basis
How often must the death benefit on a variable life insurance policy be calculated?
Annually
Life Income (Pure or Straight Life)
Annuity income is payable for as long as the annuitant lives, and upon death all payments cease. This option provides the highest monthly income than any of the other options.
Life Income Period Certain
Annuity income is payable for life, or for a specified period of time, whichever is longer. If the annuitant lives beyond the stated period, benefits continue for the life of the annuitant. If the annuitant dies prior to the end of the period certain, a beneficiary receives the balance of the payments for the remaining time period.
Life Income with Refund
Annuity income is payable for the lifetime of the annuitant. Upon death, if an annuitant has not received an amount equal to the total of all payments made into the annuity (not the growth), the balance is refunded to the beneficiary, either in a lump sum cash refund, or in installments.
Joint and Last Survivor
Annuity income is payable to 2 named annuitants (in one check) while both are living. Upon the death of the first annuitant, survivor benefits continue, either paying the full amount or reduced to 2/3 or 1/2 for the survivor's income until the survivor dies. These options may be referred to as Joint and Full Survivor, Joint and 2/3 Survivor, or Joint and ½ Survivor.
Cumulative Preferred Stock
Any back dividends owed to the holder (dividends in "arrears"), plus the current year dividend, must be paid out to the cumulative preferred stockholder before the common stock receives a dividend.
Associated Person
Any partner, officer, director, or branch manager; any person under common control, or any employee of a broker or dealer ( registered representative is included in the definition of an associated person).
A mutual fund can own what type of securities?
Any security that is consistent with the fund's stated objectives
IRA- begin taking required minimum distributions (RMDs) no later than
April 1 of the year after they reach age 72 calculated using a formula based on the investor's life expectancy and account balance
Open-end investment companies are not sold on exchanges because they:
Are continuously offered in the primary market only
Key Concept Interval funds:
Are registered as closed-end funds Are not traded Are illiquid Have higher fees Have varying risks Can only be redeemed on set dates, at set percentages
Callable Bonds
Are subject to early retirement at the issuer's discretion Often pay more than $1,000 if called Are typically called when interest rates fall Carry higher coupons when compared with non-callable issues
Regulated Investment Company (RIC)
As defined by the Internal Revenue Code Subchapter M, a regulated investment company is one that distributes a minimum percentage of net investment income to investors.
Which fund alters the percentages of stocks, bonds, and cash based on the investor's investment objective?
Asset allocation funds
With a straight life annuity payment option, what happens at the annuitant's death?
At death, all payments cease
Cash value calculation
At least monthly
Mutual funds are required to furnish:
Audited annual reports to the SEC and shareholders Semi-annual reports to shareholders
Long Put
Buyer/Holder Paid Premium Right to Sell Stock Bearish (Market Falls) Max Gain = STRIKE PRICE less PREMIUM PAID Max Loss = PREMIUM PAID B/E = STRIKE $ - PREMIUM
Which of the following convert to Class A shares after a specified period?
B Shares
Selling Agreements
BD signs a selling agreement with the UW that specifies rules of distribution and percentage of sales charge to be paid as compensation distributor is responsible for paying BDs from sales charge
common stockholders can vote for
BOD, mergers and acquisitions, stock splits, changes in the authorized number of shares
General Obligation Bonds
Backed by the full faith, credit and taxing power of the issuer
The purpose of the registration statement is to provide potential investors with all material (relevant) information about the offering, including:
Background information on the business Proposed amount of funds to be raised Proposed price per share Intended use of proceeds (funds raised in the offering) Accounting statements and other financial information Risk factors
Expenses of the Fund
Board of directors' stipends Investment adviser management fees—largest component Custodial services Transfer agent fee 12b-1 fee, if charged Administrative fee, including legal, accounting, and day-to-day expenses
A qualified retirement plan has been funded exclusively with pretax contributions. What is the tax treatment of qualified distributions?
Both contributions and earnings are taxed at ordinary income rates
ABC mutual fund family offers Class A shares at a 4% sales charge for investments greater than $50,000, but less than $100,000. A registered representative places an investor's $60,000 into two different mutual fund families, ABC and XYZ, which have maximum sales charges of 5.75%. What is this called?
Breakpoint sales violation
Which of the following must be registered under the Securities Exchange Act of 1934?
Broker-dealers
Bullish Options
Buy Call Sell Put
Bearish Options
Buy Put Sell Call
Long Call
Buyer/Holder Paid Premium Right to Buy Stock Bullish (Market Rises) Max Gain = UNLIMITED Max Loss = PREMIUM PAID B/E* = STRIKE $ + PREMIUM
Hedge funds all have the following characteristics:
Unregistered Illiquid High investment minimums and fees
Hedge funds are:
Unregulated, typically unregistered, and not publicly traded
Which of the following is not considered a money market instrument?
CDs offered by banks to their depositors
Blended Funds
Capital appreciation is primary with a mix of value and growth stocks.
Growth Funds
Capital appreciation primary objective, portfolio of common stock.
Conservative Growth Funds
Capital appreciation primary, common stock in large-cap companies for lower risk.
Aggressive Growth Funds
Capital appreciation with rapid growth, common stock in small-cap emerging growth companies—technology, younger investors with risk tolerance, high risk.
Value Funds
Capital appreciation, common stock in established large-cap companies with undervalued stock due to market inefficiency and long increasing dividend payment history.
Closed-end investment companies have all the following characteristics, except:
Capitalization similar to an open-end company
A majority of the fund's voting shares is required for all the following actions, except:
Change in the holdings of the fund
A majority of the fund's outstanding (or voting) shares is required for all of the following actions:
Changes in the investment objectives and policies Charge or increase 12b-1 fees Change in sales loads Make loans Change in business structure (no longer be an investment company) Change in type of management company (open-end to closed-end) Change in diversified/nondiversified status Change in administrative fees or ratify selection of independent auditors Issue or underwrite securities of other entities Purchase or sell real estate
When the Securities and Exchange Commission has reviewed a prospectus, it means the SEC has:
Checked the prospectus for required information
All the following statements regarding closed-end funds are true, except:
Closed-end funds are always sold with a prospectus
Which type of investment company may have an NAV that is higher than its offering price?
Closed-end management company
A debt instrument that is secured by another company's security is a(n):
Collateral trust certificate
Combination Privilege
Combining accounts allows individual investors or groups of related investors to combine their account holdings within the same fund family to qualify for breakpoint discounts.
All the following statements are true about common and preferred stock, except:
Common stock and preferred stock are interest-rate sensitive
Which of the following has the lowest priority claim on assets if a corporation goes bankrupt?
Common stockholders
Sector Funds
Concentrated groups of securities in a particular industry
The following companies might be specified as top holdings in ABC's International Emerging Markets Fund prospectus, except:
Connecticut Automotive, Inc.
Sector Funds
Considered aggressive growth investment—investments are concentrated in a particular industry or geographic region.
Periodic Premium
Continuous premiums are paid into the account, typically on a monthly basis. Periodic premiums can be fixed or flexible.
IRA contribution limits
Contributions are only allowed by investors with earned income. 100% of earned income or income limit (lesser)
All of the following are true about Roth IRAs, except:
Contributions can be made even if the individual has no earned income
Which type of preferred stock allows the investor the opportunity to better capture the value in their holdings as the company grows?
Convertible
Corporate Dividend Exclusion
Corporations that invest in the stocks of other domestic corporations can exclude 50% of the dividend income derived from those holdings from their corporate income tax liability.
Rule 504
Covers offerings not exceeding 5 million within 12 months.
hich of the following types of preferred stock pays dividends in arrears?
Cumulative
A reasonable effort must be made to also obtain the following information:
Customer occupation and employer Discretionary income Tax status Experience with investing Marital status
A registered representative is meeting with a client to discuss the features of a variable annuity. The representative is trying to determine if the client would benefit from the tax-deferred growth, underlying subaccounts, contract riders, and other product features and enhancements. What type of suitability is the representative attempting to determine?
Customer-specific suitability
Distribution Elections
Customers must declare on the application if they want the dividends, interest, and/or capital gains paid in cash or reinvested. Automatic reinvestment is usually the default option. Records must be kept regardless of whether a transaction results in a taxable event.
A married couple would like to put some money aside for their one-year-old child in an UGMA account. What would be the most appropriate fund for them to choose?
Domestic growth fund
What is the name of the risk for when borrowers pay back their loans slower than anticipated?
Extension
important dividend dates
DERP
Separate account valuation
Daily
Most distributions taken from an IRA, if under age 59½, are subject to an additional 10% early distribution penalty on the taxable portion unless certain exceptions apply. Exceptions to the rule occur in the event of:
Death Disability Unreimbursed medical expenses exceeding 10% of AGI Health insurance premiums for unemployed individuals First-time home buyer - $10,000 Higher education expenses Substantially equal periodic payments Married couples may withdraw $5,000 each within the first year after their child's birth or adoption
All the following statements are true regarding the taxation of nonqualified variable annuity contracts, except:
Death benefits pass to the beneficiary tax-free
Early distributions (distributions prior to age 59½) may be subject to a 10% penalty on the taxable amount of the distribution. The 10% tax doesn't apply to:
Death or disability of the employee Qualified medical expenses Qualified birth or adoption expenses Upon termination prior to age 59½, the employee receives substantially equal periodic payments based on life expectancy until age 59½ or 5 years, whichever is later (this is referred to as a Rule 72(t) withdrawal)
Which one of the following corporate debt instruments is unsecured?
Debenture
Nonqualified Plans
Deferred Compensation plan 457Plan
FIFO (First In, First Out)
Determines the cost basis by identifying first shares purchased as the first shares redeemed. This is usually the worst-case scenario if the account has appreciated.
Share Identification
Determines which specific shares are redeemed at the time of redemption. This method may be determined by an accountant.
All the following are defined as affiliated or interested persons, except:
Director with no significant business relationship with the fund
Roth IRA
Distributions are generally tax-free Contributions nondeductible No RMD
Traditional IRA
Distributions generally taxable as ordinary income RMD at age 72 Contributions may be deductible Contributions allowed until 72
All the following are advantages of mutual fund investing, except:
Distributions reinvested are always income tax-free
Equity Income Funds
Dividend income primary, typically preferred stock, dividend paying large-cap companies, energy, utilities.
The ex-dividend date for stocks is set by:
FINRA
all retail communication used by registered BDs is subject to
FINRA filing and review
Aggressive growth fund
Dr. Lee, a 31-year-old successful orthopedic surgeon, has a $3 million portfolio and a very substantial income. Even at his age, he has significant exposure to the risks of investing in the stock market and is comfortable with volatility. After a 5-minute meeting between appointments, Dr. Lee writes a check for $50,000 and requests an investment in a fund with a potential for significant capital appreciation. For Dr. Lee, an aggressive growth fund is recommended for young investors with a high risk tolerance looking for rapid capital appreciation.
Municipal bond fund
Dr. Lumbaro, a 45-year-old chiropractor, earns $370,000 per year. Dr. Lumbaro was required to pay an additional $7,000 in taxes to the IRS last year and hopes to avoid that same situation this year. For Dr. Lumbaro, municipal bond funds are a good choice for customers whose primary objective is tax relief.
indications of interest
During cooling-off period, RR's may collect names of interested investors. May not accept any money during this time.
What type of retirement plan does ERISA require employers to establish for employees?
ERISA does not require an employer to establish any type of retirement plan for their employees
Employee Retirement Income Security Act of 1974 (ERISA)
ERISA regulates private sector retirement plans. Plans established by the government, a municipality, nonprofit organizations, or individual plans are not regulated by ERISA.
Tax Treatment of an Annuitized Contract
Each check will consist of a combination of principal and earnings. The principal, which has already been taxed, is considered the cost basis of the contract and is returned tax-free. The earnings portion of the distribution is taxable as ordinary income.
Taxation of Qualified Plans
Employees are able to contribute on a pre-tax basis and have earnings grow tax-deferred. Upon withdrawal, if subject to taxation, the amount will be taxed at the investor's current ordinary income rate.
Catch-up Provisions
Employees over age 50 can make an additional contribution to a qualified plan.
Defined Benefit
Employer assumes the investment risk Employer contributes Main plan: Pension Plan
Which debt instrument involves using the issuing corporation's property as collateral?
Equipment trust certificate
Summary of Board Functions
Establish investment policy (objectives and restrictions) Appoint officers to manage day-to-day operations Select and oversee all professionals hired by the fund Establish dividend and capital gains policy Approve 12b-1 fees
Keogh (HR-10 Plans)
Established as a defined benefit or defined contribution plan and are available to unincorporated self-employed persons (owner-employees) and any full-time employees who meet the ERISA requirements.
An issuer can begin to sell a new issue of securities once the SEC:
Establishes the registration's effective date
Final Prospectus or Statutory prospectus
Exact number of shares available Where or how shares may be purchased The offering price All material financial information concerning the issuer, its executive officers, and its board of directors An application to purchase
net transactions
Exchanges within the same fund family
Private placements offered under Regulation D are:
Exempt transactions
What ratio is used as a method for measuring a mutual fund's annual expenses against the average net assets to show how efficiently the fund is operating in comparison to others?
Expense
The following charges are deducted from the SEPARATE ACCOUNT:
Expense risk fee Mortality risk fee Investment management fee
Mutual fund advantages: Professional Portfolio Manager
Experienced investment adviser manages day-to-day portfolio transactions.
mutual fund marketing is not directly subject to
FINRA oversight, but most are sold by BDs who are members of FINRA
Hedge Strategies
Hedging is like buying insurance to protect a stock position. For hedging, an investor would buy (long) an option contract. Long stock with a long put Short stock with a long call
An issuer is required to do which of the following to offer a new issue of securities to the public?
File a registration statement with the SEC
How are SROs financed?
Financed and operated by member firms
All the following must be contained in a mutual fund profile, except:
Financial reports for the fund
variable annuities Mortality and Expense Risk
Fixed fees the insurance company charges to cover lifetime income and other operating expenses.
Features of variable life insurance policies:
Fixed premiums invested in both the general and separate account Cash value growth dependent upon performance of separate account Actual death benefit fluctuates, but the face amount is the guaranteed minimum
VUL policies
Flexible premiums deposited directly in the separate account No general account Cash value growth dependent upon performance of separate account No guaranteed minimum death benefit
Why would an investor buy an asset-backed security (ABS)?
For a higher interest rate (They were created to take advantage of higher interest rates of other types of debt.)
misstatement of fund name example
For example, a Technology Fund must invest at least 80% of its assets in technology companies.
Global Fund
Foreign and domestic stock
All the following are typical risks associated with asset-backed securities, except:
Foreign currency
the taxpayer must report mutual fund distributions on
Form 1040 or 1040A
to qualify for exemption, issuers are required to file
Form D with SEC within 15 days of first use
What is the name of the rule which mutual funds use to price their shares?
Forward pricing
Sector fund
Frank Laslow is looking to invest a $10,000 profit sharing bonus. He's been researching the nanotechnology industry, and is looking for a way to invest in it. For Frank Laslow, sector or specialized funds are a good choice for investors looking to gain exposure to a particular segment of the market.
Balanced fund
Fred and Theresa Melnor are looking for a suitable investment in which to save for the college education of their 4-year old son. The Melnors have purchased mutual funds through their retirement plans at work and are somewhat familiar with the basics of investing. They are looking for a "middle of the road" investment. For the Melnors, balanced funds are often a good choice for those investors seeking potential appreciation with a moderate amount of risk.
expense ratio formula
Fund Expenses ÷ Average Net Assets = Expense Ratio
Mutual fund advantages: Diversification
Fund can invest in many different securities, providing investors with undivided interest.
Mutual fund advantages: Liquidity
Fund must send sale proceeds to the investor within 7 calendar days of redemption request.
Mutual fund shareholders approve all the following, except:
Fund objective
Mutual fund advantages: Minimum Investment
Funds allow customers to invest as little as $25 after the initial investment ($500 or less).
Which of the following issues securities that are guaranteed by the full faith and credit of the U.S. government?
GNMA
Which of the following bonds is backed by the full faith, credit and taxing power of the issuer?
General obligation
An investor would sell an options contract to:
Generate income from the sale of the contract
Country/Regional Funds (Geographic Funds)
Geographically focused funds allow investors to custom tailor a portion of their portfolio, risk exposure, and diversification. A geographic area, such as a specific region or state, can offer unique investment opportunities. These funds also carry significant risk as they are exposed to risks that may affect an entire geographic area, such as an earthquake or hurricane.
Investment objectives can be classified based on any one or combination of the following:
Growth Income Safety Liquidity Inflation Protection
Treasury stock:
Has no voting rights Does not receive dividends Is purchased by the issuer to increase earnings per share
Letters of intent:
Have a maximum life of 13 months May be backdated for up to 90 days Are not binding on the investor Can only be fulfilled with new money invested; reinvestment of dividends and gains will not count toward LOI
What is not true regarding hedge funds?
Hedge funds have no restrictions as to the numbers and types of investor
Corporate Bond Funds
Higher risk than U.S. government and Municipal bond funds—invests in corporate debt instruments.
SEPs establish
IRAs for each employee, funded by employer. up to 25% of employee salary all contributions fully vested can be addition to 401k
The fund reports dividends to the investors each year using
IRS Form 1099, which also distinguishes the type of dividend
Example of corporation capitalization
If a corporation has sold $40 million in stock and $30 million in bonds, its current capitalization is $70 million.
Misuse of No-Load Terminology
If a fund has a front-end load, a contingent deferred sales charge, or an asset-based 12b-1 fee greater than 0.25% of its average net assets, it cannot be referred to as a no-load fund.
Example of Stock Certificates
If an investor purchases 525 shares of stock, they will receive 1 certificate for 500 shares (5 round lots) and 1 certificate for the remaining 25 shares.
DERP Example
If stock is purchased on Wednesday the 3rd, which is only 1 day before the record date, the trade will settle on Friday, and the dividend will not be received by the new owner. The investor's name will not appear in the company's record books until Friday. To receive the dividend, the trade must have been executed on Tuesday and settled on Thursday.
deficiency letter
If the SEC believes the registration statement to be incomplete or misleading, it sends this to the issuer. This restarts the 20 day cooling off period
Voluntary Accumulation Plan
If the investor agrees to make automatic monthly purchases of shares of at least $25 or $50, funds will waive investment minimums. Funds usually offer automatic EFT transfers from the investor's checking account to make investing regularly easier. There are no penalties for terminating the purchase plan, and the plan can be discontinued at any time, subject to account minimum funding requirements.
issuer's primary place of business
If you have a business in another state, you can make offers and sales in the state where your business runs
Transfers
In a transfer, the account holder never touches the assets. Assets are moved from one trustee or custodian directly to another. This is often the preferred method to move assets since no tax implications exist. There is no limit to the number of transfers that may occur within a year.
Tax-Exempt Funds
In order to call a fund "tax exempt," at least 80% of its investments must be in tax exempt vehicles. For example, 80% of the investment must be municipal bonds that are federally tax exempt and, depending on the state where the investor lives, also exempt from state taxes.
Subordinated Debentures
In the event of bankruptcy, a subordinated debentures holder's claim will come after secured bondholders and straight debenture holders, but prior to preferred and common stockholders. These bonds carry a higher default risk and would have to pay a higher interest rate to investors.
Income Strategies...
Income strategies generate income for the investor by selling (short) an option contract. Long stock with a short call Short stock with a short call Short stock with a short put
Which of the following is considered a passive investment strategy?
Index fund
Which of the following municipal bonds could be subject to federal income tax?
Industrial development revenue bond (considered private activity and interest benefiting a corp may be subject to federal income tax)
What is one advantage an investment company offers?
Instant diversification
With respect to variable life policy loans:
Insurance companies typically allow the policyowner to borrow up to 75% of the cash value If separate account performance deteriorates, policyowners have a grace period (often 31 days) to repay at least a portion of outstanding loans
Net Yield =
Interest on Corporate Bond x (100% minus tax bracket)
Tax-Equivalent Yield =
Interest on Municipal Bond ÷ (100% minus Tax Bracket)
What would be happening in the interest-rate market to expose an investor in asset-backed securities to prepayment risk?
Interest rates would be declining
A bond that has a maturity date of 6 years is considered:
Intermediate term
Precious Metals Funds
Invest in mining companies that produce gold, silver, platinum, but also can invest directly in the commodities—may provide a hedge against inflation.
professional money management
Investment companies hire experts who have resources to monitor the day-to-day activity in the market resources
High Grade Bond Fund -
Investment grade, lower risk, lower yield.
Fixed Share Amount
Involves liquidating the same number of shares each month (e.g., 10, 25, 50) and sending the customer the proceeds. Since the share prices will most likely fluctuate, the customer's monthly check will vary.
Fixed Percentage
Involves selling a fixed percentage of the customer's portfolio (perhaps 1% a month). Once again, the amount of each check may vary based on the fluctuating market value of the portfolio.
Fixed Dollar Amount
Involves sending a check out each month for a designated amount (e.g., $1,000).
What is a characteristic of a general obligation municipal bond?
Is backed by the full faith and credit of the issuing jurisdiction
Dollar-cost averaging:
Is the purchase of the same dollar amount at fixed intervals Provides no guarantee of profitability or loss avoidance Will result in an average cost that is lower than the average price
Revenue Bonds
Issued by municipal authorities to finance specific projects being constructed, such as toll roads, parking structures, or local sports stadiums
Which of the following is the correct formula for calculating a corporation's number of outstanding common shares?
Issued shares - treasury shares
Industrial Development Revenue Bonds
Issued to finance the construction or acquisition of a commercial facility that will be leased to a private entity
When an issuer sells securities in a primary offering, the net proceeds are paid to the:
Issuer
Which of the following is not true regarding the assumed interest rate (AIR) of a variable annuity?
It changes each year throughout the life of the contract
Which of the following about dollar-cost averaging is false?
It guarantees a profit
All the following are true regarding treasury stock, except:
It has voting rights
U.S. Treasury Securities Funds
It invests in securities issued by the U.S. government, such as T-bills, T-notes, and T-bonds, which are safer for investors due to the miniscule default risk. not guaranteed by us gov subject to interest rate risk and inflation risk
What is the one disadvantage of exchanging mutual fund shares within the same fund family?
It is considered a taxable event
Which statement concerning a preliminary prospectus is NOT correct?
It may be accompanied by the firm's most recent research report
Which of the following is not true regarding dollar-cost averaging?
It provides protection from losses during market corrections
What would happen to the market value of a preferred share of stock issued with a $100 par value and a fixed dividend rate of 5%, when interest rates are at 7%?
It would go down
U.S. government bond fund
Jack Kenley is a 72-year-old retiree living on a small pension and Social Security. Last year, he suffered a substantial loss due to a bad investment and is very concerned about losing any more of his money in the stock market. Jack's primary goal is to supplement his retirement income. For Jack Kenley, U.S. Government funds are suitable investments for risk averse clients seeking income.
Tax-free money market fund
Jim Willis is a successful 48-year-old cruise ship captain. Jim has just won $500,000 in the lottery. Captain Jim, who considers himself to be an aggressive investor, wants to use the lottery winnings to open up a new para-sailing franchise within the next year. Investors who are successful are considered to be wealthy and in a high-income tax bracket. Due to the fact Captain Jim wants to use his lottery winnings within the next 2 years, he is considered a short-term investor, suitable for a type of money market fund. Whenever the investor is in a high tax bracket and needs the money soon, they should invest in a tax-free money market fund.
When will the underwriter set the public offering price?
Just before the effective date
S&P 500 index fund
Katherine Balson is a 32-year-old concert violinist. She has been successfully trading individual stocks in the market for the past 4 years. Due to an increased travel schedule, she can no longer devote adequate time to her stock trading and has decided to place her assets in a mutual fund. She is looking for an investment that will mirror the growth of the stock market and has low management fees. Katherine's goal to have an investment that matches the market with low management fees make her a good candidate for the S&P 500 index fund.
Money market fund
Kevin Menley's Aunt recently left him a $16,000 inheritance. He has never had the means to invest for his retirement and is unsure of what to do with his inheritance. He knows that he wants to eventually earn substantial returns, but is still deciding how to invest long-term. He is unwilling to expose himself to market risk for the time being. After several meetings, the unsure customer reluctantly makes an initial investment. For Kevin Menley, undecided or unsure investors should park their funds in a liquid money market portfolio until they are able to commit their assets to a long-term investment. For unsure investors in a higher income bracket, a tax-free money market may be suitable.
Partial surrenders and withdrawals made from an annuity are taxed on a
LIFO basis, where earnings will be withdrawn first and subject to ordinary income tax.
Which of the following is not one of the accounting methods that can be used to determine cost basis per share?
Last In, First Out (LIFO)
A purchaser of cumulative preferred stock is entitled to:
Later payment of omitted dividends
FINRA
Leading SRO in the US, regulating BDs and RRs in the securities industry
Put in order from highest annuity payment to lowest:
Life income Life income period certain life income with refund joint and last survivor
A client has invested $100,000 into a variable annuity. At the time of annuitization, the payout option chosen will pay for the life of the annuitant. However, a beneficiary will receive payment for the difference if the annuitant dies before receiving the amount contributed. What payout option was selected?
Life income with refund
IRA funds can be invested in all of the following, except:
Life insurance
Tax-free 1035 exchange is permitted for:
Life insurance to life insurance Annuity to annuity Life insurance to annuity Exchanges from annuity to life are not permitted under Section 1035 and are taxable
Which of the following option contracts would a bearish investor seek?
Long put
Which of the following positions indicates a bearish investor?
Long put and short call
Which of the following SROs regulates broker-dealers and banks engaging in municipal securities business?
MSRB
Defined Contribution
Main plan: 401(k) Plan Employee assumes the investment risk Employer and Employee contribute
All the following are functions of a mutual fund's board of directors, except:
Make investment selections for the fund's portfolio
Government National Mortgage Association (GNMA or Ginnie Mae)
Make monthly payments to investors Make payment made up of interest and principal Pay rates that are often higher than Treasuries Have interest and principal guaranteed by the U.S. government
Underlying Fund Expense for variable annuities
Management fees relate to the underlying fund expenses and are separately charged in each of the subaccounts and are the same as an investment adviser's fee in a mutual fund. These fees will vary depending on the various subaccount options within the annuity.
Which type of investment company is organized as a corporation, operates under a board of directors, and issues shares to investors?
Management investment company
All the following are functions performed by the board of directors, except:
Management of fund portfolio
Investment Adviser
Manager of the fund Research and trading Compensated on a % basis
The underwriting spread compensates the following:
Managing Underwriter Syndicate Selling Group
Summary of Investment Adviser Functions
Managing the fund's investment portfolio Research and analysis of financial/economic trends Implement investment strategies in compliance with the fund's objective Ensure conformity with federal securities and tax laws Provide tax information to shareholders
The 12b-1 distribution fee includes:
Marketing, advertising, and other costs of distributing fund shares Advertising includes the printing and mailing of prospectuses and sales literature to new investors, but not existing investors
529 Savings Plans
Maximum contributions are determined by the individual plan or state Contributions are nondeductible No taxation on earnings used for qualified education Account balances may be transferred to another relative No income limits for eligibility They are considered municipal fund securities regulated by the MSRB
12b-1 fee breakdown:
Maximum to pay marketing and distribution is 0.75%, to attract new investors Maximum shareholder services expenses 0.25% Total 12b-1 fee not to exceed 1%
The policyowner instructs the insurance company on how to vote for:
Members of the board of managers (insurance companies have managers, not directors) Ratification of the election of an independent registered public accounting firm Approval of investment advisers Any other matters subject to the vote of contract owners
All the following are true concerning Roth IRAs, except:
Minimum distributions are required
Index Funds
Mirrors the performance of the market by investing in stocks of a specific index (such as S&P 500)—lower management fees, passively managed.
A bond backed by real estate owned by a corporation, such as an office building is a(n):
Mortgage bond
Collateralized Mortgage Obligations (CMOs)
Mortgages are segmented into tranches (classes), according to their maturity, and the cash flows provided by each tranche are typically structured in a sequential manner.
Mutual fund advantages: Reinstatement
Most funds allow an investor to reinvest the amount withdrawn within 30 days at no sales charge.
Mutual fund advantages: Reduced Sales Charges
Most funds offer breakpoints (volume discounts), letters of intent, rights of accumulation, and combination privileges to receive lower sales charges.
Example of tax-equivalent yield
Municipal bond coupon rate is 7% Corporate bond coupon rate is 9.2% Which investment should the investor choose? Marginal income tax rate = 25% .07 ÷ (100% minus 25% = .75) = 9.33% Tax-Equivalent Yield The tax-exempt municipal bond at 7% is a better investment than the taxable 9.2% yield on the corporate bond.
Net Yield Example
Municipal bond coupon rate is 7% Corporate bond coupon rate is 9.2% Which investment should the investor choose? Marginal income tax rate = 25% From previous example: 9.2 x (100% minus 25% = .75) = 6.9% Net Yield. The corporate bond provides a 6.9% after-tax yield to an investor in the 25% tax bracket. Again, the investor is better served by the 7% municipal bond
A registered representative meets with a new client that lives in state A. In building the client profile, the representative noted the client is in the 32% tax bracket. This client is seeking income and is generally conservative. Which of the following securities would be the most appropriate for this client, given this information only?
Municipal issues from state A
Why can municipal securities be federally tax exempt free?
Municipalities reciprocate with the federal government by exempting interest earned on U.S. government securities from state income tax.
Summary of an Underwriter's Functions
Must be a FINRA member Marketing and selling fund shares to public Forming a selling group Wholesale marketing of fund shares to broker-dealers Payment of compensation to dealers Preparation of retail communication
To calculate POP given NAV and the sales charge in dollars:
NAV + SC = POP
redemption of mutual fund shares is made at
NAV and there is no refund of sales charges to the shareholder
Changes in NAV
NAV falls bc of distributions to shareholders reflected on ex dividend date payments of fees impact NAV sale or purchase of portfolio securities will not affect NAV when an investor purchases or redeems from the fund, it will not affect NAV
(Assets - Liabilities) ÷ Number of shares outstanding is the calculation for:
NAV per share
For example, calculate the NAV/share using the following information: Total Assets: $100,000,000 Total Liabilities: $2,000,000 Shares Outstanding: 1,000,000
NAV per share = (assets - liabilities) ÷ # shares outstanding = ($100,000,000 - $2,000,000) ÷ 1,000,000 shares = $98,000,000 ÷ 1,000,000 = $98.00
No-Load
NAV will equal the POP can assess a 12b-1 fee no more than 0.25% per year
Class A shares that are purchased through automatic reinvestment of the fund's dividends or capital gains are acquired at
NAV without a sales charge
With an exchange, the investor will purchase the new fund shares at
NAV, without paying a sales charge, assuming a sales charge was assessed on the previous fund owned
Capital gains distributions are not considered part of
NII
The mutual fund's NAV per share is calculated by dividing the net assets by the number of shares outstanding.
Net Asset Value = Net Assets ÷ Number of Shares Outstanding
Which of the following statements best describes the amount of money an investor receives when liquidating shares of an open-end fund?
Net asset value multiplied by the number of shares, minus any redemption fees, and sales charges
All the following may issue municipal bonds, except:
New York Stock Exchange
When the NAV and POP are given, the sales charge dollar amount is calculated as follows:
POP - NAV = Sales Charge (in dollars)
Calculating POP when the NAV and sales charge percentage are given:
POP = NAV ÷ (100% - Sales Charge %)
Which of the following is an arbitrary number used for accounting purposes?
Par value
An investor buys a bond from an issuer for $1,000. At maturity, interest rates have gone down dramatically. How much will the investor receive from the issuer?
Par value plus the last interest payment due
Which preferred stock has a minimum dividend but not a maximum?
Participating
Summary of Transfer Agent Functions
Perform record keeping functions Name and address changes Cancels/issues shares Distribution of capital gains or dividends Shareholder mailings
All the following regarding taxation of life insurance policies are true, except:
Policy surrenders trigger a tax on all the values paid out
A summary of the registration statement that contains material information about the offering, including an estimated offering price range is called:
Preliminary prospectus
Variable Payout; annuitant's initial payment based on the following factors:
Principal balance of the contract Annuitant's age Payout option selected Assumed interest rate (AIR)
When must all customers be provided with the most current mutual fund prospectus?
Prior to or at the time of confirmation
Transfer Agent
Processing agent Cancels/Issues shares Distributions of dividends/capital gains Mailings
A _____________ is used with the sale of municipal fund securities.
Program disclosure document
When a mutual fund is being offered to a prospective buyer, what must be delivered at or prior to confirmation of sale?
Prospectus
Bond Funds (Fixed-Income)
Provides current income—portfolio of a variety of debt securities, investor does not own bonds, but common stock of bond fund, interest passes through as a dividend.
Balanced Funds
Provides moderate growth and income through a portfolio of stocks and bonds—moderate risk.
Which of the following statements is false regarding retirement plans?
Qualified retirement plans grow tax-free
combination privilege allows for
ROA gives the investor a discount on current mutual fund purchases by combining both current and previously purchased and held fund transactions to reach a breakpoint.
What document can RRs use with customers to gather indications of interest for a new issue?
Red herring
Primary function of SROs
Regulate the activities of its members through the creation and enforcement of industry rules
SEC has broad powers to
Regulate the financial markets and has established accounting standards to provide clearer insight into the business of publicly traded corporations
How are mutual fund distributions treated for tax purposes?
Reportable regardless if taken in cash or automatically reinvested in additional shares
Key Concept Preferred Stock:
Represents equity (ownership) Fixed dividend Interest rate sensitive No voting rights Preference over common stock in regard to dividends and bankruptcy
Initial Goals of SEC
Require issuers to provide investors with full and fair disclosure, accurate and balanced information regarding their securities, and to create and enforce penalties for those looking to cheat the system
CIP customer identification program
Requirement, where financial institutions need to verify the identity of individuals wishing to conduct financial transactions with them and is a provision of the USA Patriot Act
Retail vs Institutional Money Market
Retail accounts can only be held by individual investors while institutional accounts can held by larger investors, such as small businesses, corporations, and pension plans.
To charge the maximum 8.5% sales charge, a fund must offer:
Rights of accumulation Breakpoints
Whenever an individual receives monies from a qualified plan, the IRS allows the individual to place the monies into an IRA without having to pay income tax on the amounts placed into the IRA. What is this procedure?
Rollover
Who enforces rules for BDs?
SEC And FINRA
to underwrite a new municipal offering,
SEC needs the offering documents to be completed. UW must perform due diligence on the offering and provide the Final Official Statement to the MSRB no later than 1 day after issuer provides it to them. (Done on EMMA)
ETFs can track a variety of indexes including:
SPDRs (Spiders) which track the S&P 500 Index QQQx (Cubes) which track the Nasdaq 100 Index DIA (Diamonds) which track the Dow Jones Industrial Average
MSRB
SRO that governs the BDs and banks that engage in the municipal securities business
Money Market Securities
ST debt instruments maturing in one year or less highly liquid safety of principal (ST and issued by highly creditworthy issuers)
Summary of Custodian Functions
Safeguard fund assets Collect interest/dividends Payable/receivable functions for securities transactions
Custodian
Safeguards fund assets (cash and securities)
Money Market Funds
Safety and high liquidity—invests in short-term debt instruments, check writing privileges.
GNMA Bond Funds
Safety and income are key—invests in mortgage-backed securities backed by the federal government—interest-rate, extension and prepayment risk.
U.S. Treasury Funds
Safety and preservation of capital: invests in T-bills, T-notes, T-bonds, virtually default-free (the mutual fund shares are not guaranteed by government), interest—rate risk.
No Discounts
Sales of mutual funds to any member of the public cannot be discounted beyond the amounts stated in the prospectus. Shares must be offered at the public offering price.
municipal fund securities include
Section 529 Plans, ABLE Programs, and Local Government Investment Pools.
If ABC Corporation were to fail and claim bankruptcy, what is the priority of claims to assets?
Secured bondholders, debenture holders, preferred stockholders, common stockholders
Double-barreled Bond
Secured by the revenues generated from an income-producing facility and the full taxing power of the issuing state or municipality
Which of the following is the primary federal law regulating the sale of new issues of securities?
Securities Act of 1933
Mutual fund advantages: Safekeeping of Portfolio Securities
Securities acquired by fund portfolio are held by the custodian.
What is the primary factor causing mutual fund share prices to increase or decrease?
Securities portfolio price fluctuations
SRO
Self-Regulatory Organizations that supervise day to day activities of member firms and their RRs
Short Put
Seller/Writer Received Premium Obligation to Buy Stock Bullish (Market Rises) Max Gain = PREMIUM RECEIVED Max Loss = STRIKE PRICE less PREMIUM RECEIVED B/E = STRIKE $ - PREMIUM
Short Call
Seller/Writer Received Premium Obligation to Sell Stock Bearish (Market Falls) Max Gain = PREMIUM RECEIVED Max Loss = UNLIMITED B/E = STRIKE $ + PREMIUM
Forward Pricing:
Sellers of mutual funds receive the next calculated NAV. Buyers pay the next calculated POP. Always assume the fund's NAV is calculated each business day at 4 p.m. Eastern, when the market closes
Which of the following is not a characteristic of a separate account?
Separate account values are fixed and guaranteed
Board of Directors
Sets fund objectives Oversight of other professionals Protects shareholder interest A majority must be disinterested
right of accumulation (ROA)
Shareholders can use their existing account balances, combined with their additional purchases, to qualify for breakpoints on any new money invested into the account
All the following are true regarding the trading of closed-end management company shares, except:
Shares are redeemed through the fund
Outstanding Shares
Shares of stock that are in possession of investors
Treasury Shares
Shares that have been previously issued and repurchased by the company
Variable Insurance Policy Valuations; Separate Account Valuation
Similar to a mutual fund, the separate account net asset value (NAV) is calculated daily at 4 p.m. Eastern, the close of the NYSE.
Distributions
Since neither the contributions nor the earnings have been taxed, all distributions will be taxed as ordinary income based on the employee's tax bracket in the year the withdrawal is taken if subject to taxation per the IRS.
variable annuities Premium Taxes
Some states impose a "State Premium Tax" against the purchase payments. These are deducted before the premium is invested.
High Yield Bond Fund -
Speculative (junk bonds), higher risk.
Married couples with only one spouse working may set up a separate
Spousal IRA and may make an additional contribution for the non-working spouse, as long as the total contribution for each account does not exceed the specified annual limit up to 100% of the working spouse's earned income.
Retirement plans can be funded by all of the following, except:
Spousal contributions
Items in underwriting agreement
Spread per share POP UW fees and compensation net proceeds received by the issuer
Prospectus Contents
Statement of objectives Investment policies and restrictions Methods of purchase and redemption Sales charges and annual expenses Services offered Financial statements
Who is the sponsor of 529 plans?
States
Aggressive Growth Funds
Stock in small-cap companies
Blue-Chip Funds
Stocks in large-cap companies
Traditional IRAs are established under a formal agreement with a trust or custodian. The funds can be invested in:
Stocks, bonds, CD's, annuities, mutual funds, government securities, savings accounts, or any combination. U.S.-denominated gold coins, and annuities (but is suspect)
Growth & Income Fund
Stocks, bonds, money market instruments and cash
One of your customers is a 62-year old widower who is nearing retirement and looking to annuitize their variable contract. The customer has eight children that are all financially secure and are not counting on any inheritance. Which of the following payout options would maximize the customer's retirement income?
Straight life
Which of the following bonds would pay out the highest interest rate to investors?
Subordinated debentures (These bonds carry a higher default risk and would have to pay a higher interest rate to investors.)
Which statement regarding aggressive growth fund portfolios is not true?
Such a portfolio offers little potential protection to investors against loss of purchasing power
In recommending the purchase or exchange of a variable annuity contract the registered representative must make sure that the recommendation is:
Suitable for the client
money market securities include
T bills, T notes, and T bonds with 1 year or less until maturity commercial paper maturing in less than 270 days BAs Negotiable CDs maturing in 1 year or less
Treasury securities include
T-bills, T-notes, T-bonds, STRIPS, and TIPs.
Maturities of treasury securities ranging from shortest to longest:
T-bills, T-notes, and T-bonds (Bill knows bonds)
Money Market Fund
T-bills, commercial paper, BAs, Negotiable CDs and cash
Which of the following has the longest maturity?
T-bonds
All the following debt instruments are backed by the U.S. government, except:
T-receipts
How are earnings in a variable annuity during the accumulation phase treated for tax purposes?
Tax deferred
Municipal Bond Funds
Tax-free income at federal level (and possible state and local)—invests in portfolio of municipal bonds, recommended for investors in higher tax bracket.
A 45-year-old individual has invested $74,000 into a nonqualified variable annuity. The contract value is currently $220,000. If they withdraw $10,000 to pay for private high school tuition for their son, what will be the tax implications?
Taxes on $10,000 and a $1,000 penalty
A registered representative is working with a client that has $15,000 to invest. The mutual fund that the representative is discussing with the client has a breakpoint at $25,000 The client states that the $15,000 is all that is currently available for this investment, and the sale is made. One month later the client is talking with the representative and says I wish I had held off on making that investment! I just got a $20,000 bonus at work and I would have liked to save money on those sales charges! What should the representative tell the client?
That's OK, it's not too late to do a letter of intent, we can backdate it for up to 90 days. So, if you plan on making additional purchases, the original purchase will also qualify for the reduced sales charge.
no approval clause
The SEC informs customers that it does not vouch for the adequacy or accuracy of the information contained in the prospectus via the "no approval clause," which is prominently displayed on the cover of each prospectus.
Which of the following statements regarding unit investment trusts is false?
The UIT's investment adviser is passive
Conduit (or Pipeline) Theory
The ability to transfer the income tax liabilities to the investor
A public-school principal has contributed $300,000 to a 403(b) plan on a pretax basis. The account is currently worth $500,000. What will be the tax treatment of any distributions taken from the account upon retirement?
The account has a zero cost basis and all distributions will be treated as ordinary income
What happens if a customer refuses to provide all requested information at the time of account opening?
The account may still be opened at the firm's discretion
roth IRa- Once the 5-year requirement has been met, the account holder must meet at least one of the following requirements to avoid penalties and taxation:
The account owner reaches age 59½ The death or disability of the account owner The account owner takes a distribution as a qualified first-time home buyer of no more than $10,000
Variable Annuity Contract Life Cycle Step 5
The accumulation units are converted into a fixed number of annuity units.
Variable Annuity Contract Life Cycle Step 3
The accumulation units grow on a tax-deferred basis.
Principal
The amount of money borrowed, or amount still owed
Lump Sum
The annuitant has the option of cashing out the annuity in a lump sum instead of electing to receive a stream of income. There could be tax penalties depending on the age of the annuitant.
Variable Annuity Contract Life Cycle Step 6
The annuitant's payment will fluctuate each month based on the actual performance of the separate account compared to the AIR.
Which one of the following is true regarding a convertible bond?
The bondholder can change holdings into common stock of the same company
Breakeven Point
The breakeven point is the point at which the option buyer will not make any money or lose any money if the contract is exercised—this means that the market price is above or below the strike price by the exact amount of the premium paid.
Variable Annuity Contract Life Cycle Step 4
The contract owner trades the accumulation units in return for a lifetime income stream upon annuitization.
If a corporation has callable preferred stock outstanding, when would the corporation call the issue?
The corporation will call the shares when interest rates are low
Record Date
The date on which an investor must own the stock to receive the dividend. This date is set by the board of directors. Only "shareholders of record" will receive a dividend.
Declaration Date
The date on which the board of directors announces the company will pay a dividend to its shareholders
Payable Date
The date on which the company pays the dividend to the shareholders of record. This date is set by the board of directors and usually is a week or more after the record date, so the company has enough time to ensure all shareholders entitled to receive payment are accurately paid.
Variable Insurance Policy Valuations; Death Benefit
The death benefit on a variable life insurance policy is calculated on an annual basis.
Annuitization
The election to receive payments from the annuity account for life, or for a specified period, depending on the settlement option selected.
filing date
The end of the pre-registration period is the filing date, the date the registration statement is filed with the SEC. This is also the beginning of the next phase of the process, the cooling-off (waiting) period.
A client invested $40,000 into a nonqualified variable annuity that is worth $200,000 upon retirement. If this client takes a distribution of $100,000, how will the IRS treat that withdrawal?
The entire $100,000 is taxed as ordinary income
Expiration Date
The expiration date is the last date the option can be exercised. Once this date passes, the option is of no value.
Mutual fund advantages: Simplified Tax and Recordkeeping Services
The fund distributes one annual 1099 for all tax liabilities.
All the following statements about corporate bonds are true, except:
The higher the credit rating of the corporation, the higher the interest rate it will offer
Holder/Buyer/Long an Option
The holder/buyer, who is also the owner of the contract, has the right to buy or sell shares of a specific stock and is said to be in a long position because they own the option.
Once an annuity is annuitized, who takes ownership of the funds in the annuity?
The insurer
Fixed Time Period
The investor instructs the fund to systematically liquidate all holdings within a specified time period (e.g., 5 years). The fund will periodically sell the investor's holdings to exhaust the account balance within this time frame.
Which of the following statements is not correct concerning the risks borne by the holder of a U.S. Treasury bond?
The investor is exposed to liquidity risk
When the SEC has cleared an issue for sale, which of the following statements is true?
The issuer has filed the registration statement with no further comments or requirements from the SEC
Over the past year, yields on new issues of preferred stock have been increasing. Which of the following statements concerning preferred stock issued last year is correct?
The market prices are now lower, and the yields are now higher
What is one key difference between retail and institutional money market accounts?
The minimum investment required at account opening
Which of the following statements is true regarding annuity units in a variable annuity contract?
The number of units redeemed per payout remains fixed, but the value of the units may fluctuate
Variable Annuity Contract Life Cycle Step 2
The owner chooses the mix of subaccounts to invest in.
Par Values key concept
The par value of one bond is assumed to be $1,000, the par value of one share of preferred stock is assumed to be $100. The par value of common stock is an arbitrary number set by the issuer and does not affect the investor.
Which of the following events determines whether a mutual fund's capital gains distribution is short term or long term?
The period that the fund held the security
403(b) Plans
The plan is available for eligible employees of public school systems and qualified 501(c)(3) nonprofit Organizations and allows for employee salary deferral (salary reduction) contributions up to an annual limit.
403(b) plan is a tax-sheltered annuity (TSA), or it may be referred to as a tax-deferred annuity (TDA).
The plan is available for eligible employees of public school systems and qualified 501(c)(3) nonprofit organizations, including religious organizations, colleges, universities, hospitals, and museums. Since the employer is a nonprofit organization, contributions are not tax deductible to the employer.
Variable Insurance Policy Valuations; Cash Values
The policy's cash value will fluctuate based on the performance of the underlying investments held in the separate account, and must be calculated at least monthly.
Premium
The premium is the amount an investor will pay for an option; this number is based on 100 shares of the underlying security. An option with a premium of 2 would cost a buyer $200.
Variable Annuity Contract Life Cycle Step 1
The premiums are invested in the separate account and used to purchase accumulation units.
An investor purchases a $1,000 TIPS with a 3% coupon and 10-year maturity. Six months later, the CPI reports an inflation rate increase of 4%. Which of the following statements is true?
The principal amount is adjusted to $1,040
redemption
The repayment of principal on the maturity date
PPZ Industries will file a registration statement with the SEC for a public offering of 10 million units, where each unit will contain one share of common stock and one warrant. Prior to the registration's filing date, the underwriters may distribute:
No written communication regarding the offering
International Fund
Non-U.S.stock throughout the world
Who is listed on a tombstone ad?
Normally, the first underwriters listed are the lead or managing underwriters, with the remaining syndicate members listed in order of decreasing participation. Selling group members are NOT listed on the tombstone.
Annuity Phase
Number of units are fixed Pay-out phase Upon death of investor, beneficiary may receive a payout based on payout option selected Withdrawals are a mix of principal and interest
Accumulation Phase
Number of units increase as money is contributed Pay-in phase Upon death of investor, beneficiary receives the greater of the contributions made into the annuity or the dollar value Withdrawals during this phase are always LIFO
Mutual fund advantages: Reinvestment
Offer to reinvest dividends and capital gains without a sales charge.
Private Placements
Offerings that are not made public are sold under Regulation D, which consists of SEC Rules 501-508
When municipal issuers have a competitive underwriting, how do they inform potential underwriters how and where to submit bids?
Official notice of sale
Evidence of Ownership (Stock Certificate)
On the face of each certificate is the name of the shareholder and the number of shares owned, typically based on a round lot, which is 100 shares. Shares sold in amounts less than 100 are called odd lots and will receive a certificate in the value of the amount below 100.
Ex-Dividend Date
On this day, the security begins to trade without the value of the dividend in the stock price. The ex-dividend date is 1 business day before the record date (R-1). This date is set by FINRA.
Effective Date
Once the SEC has no further comments on the registration statement, it will set an effective date for the issue.
According to SEC and FINRA rules, all the following are true concerning the delivery of a prospectus, except:
Only customers purchasing over $5,000 of mutual fund shares are required to receive a prospectus
A mutual fund is which kind of investment company?
Open-end management
Which of the following only issues common stock to raise capital?
Open-end management company
Option Income Fund
Option income funds are funds that purchase common stock then the fund manager will write a call option against the portfolio uses covered call writing to increase income payout
Which of the following is false regarding options?
Options must be exercised
Issued Shares minus Treasury Shares =
Outstanding Shares
Calculate NAV when the POP and sales charge percentage are given:
POP ($) x Sales Charge (%) = Sales Charge ($) POP ($) - Sales Charge ($) = NAV ($)
Seller/Writer/Short an Option
The seller or writer of the contract has the obligation to buy or sell shares of a specific stock and is said to be in a short position because they sold the option and do not own it.
Deductibility of IRA contributions may be limited depending on all of the following factors, except:
The state in which the taxpayer lives
Strike Price
The strike price is an agreed price as stated in the contract and at which an option holder has the right to buy or sell 100 shares of specific stock.
Which of the following is an example of a 1035 exchange?
The tax-free exchange of one variable annuity for another
What backs a general obligation bond?
The taxing power of the municipality
Contributions to deductible IRAs may be limited depending on several factors:
The taxpayer's income Tax-filing status Participant status in an employer-sponsored qualified retirement plan If a company does not have a retirement plan, income limitations do not apply and the contribution is 100% tax deductible
call protection
The time during which the issuer of the bond is not allowed to exercise the call option. redeemed at or above face value.
Cost basis includes:
The total purchase price of the investment if purchased with after-tax dollars An investor who reinvests dividends and/or capital gains to buy new shares of the fund will receive an adjusted cost basis since taxes have already been paid on the earnings. This is because taxes are paid the year dividends and capital gains are received.
Who is responsible for the preparation of mutual fund retail communication?
The underwriter
What is the maximum loss for a stockholder of a corporation?
The value of the investment in the company
Which statement is true regarding the writer of a put option?
The writer is obligated to buy from the buyer
Which of the following statements is true of the cash value in variable life insurance?
There is no guarantee of cash value
Corporate Bond Funds
These are bond funds that invest in corporate debt instruments and have a higher risk and quite possibly higher returns than government or municipal bond funds.
Special Situation Funds
These funds look to make investments in companies that are undergoing a major change, or that have a specific event coming up that could dramatically affect their fortunes such as mergers
Aggressive Growth Funds
These funds seek capital appreciation with the objective to achieve rapid growth in the shortest time period possible small cap emerging companies with high growth potential, expected to provide capital gains over short time risk usually younger investors who are ok with risk
All the following are characteristics of traditional ETFs, except:
They are actively managed and have high management fees (ETFs are not actively managed, they passively managed and have lower ongoing expenses.)
An employee earned $85,000 working for NOP, Inc. this year. The company does not offer any kind of retirement plan for its employees. If this employee decided to contribute funds into an IRA, which of the following is true?
They can deduct the entire contribution
All of the following are characteristics of a bond, except:
They represent an ownership position in the issuer
What is an advantage of investing in hedge funds?
They seek to achieve aggressive returns, offering high potential rewards
Publicly traded companies may also offer company stock options as an investment in a 401(k).
This can allow employees to purchase company stock at a lower price than the current market value.
mortality expense charge
This charge compensates the insurance company for the life expectancy risks it assumes under the annuity contract. typically in the range of 1% to 1.25% per year
Investment Advisory Contract
This contract will define the objectives of the fund, compensation structure for the investment adviser, and any investment restrictions placed on the manager
An individual, age 53, wants to take a lump sum distribution from their 401(k) plan to buy a boat. Which of the following statements is correct?
This distribution is subject to a 10% penalty and the entire amount is taxable as ordinary income
Stepped-up Death Benefit
This feature guarantees a death benefit based on the account value as of a specified date and may provide for a greater death benefit if the separate account investments have performed well. There is an additional charge for this feature.
Redemption Fees
This fee is usually charged by the fund to discourage short-term traders by assessing the fee on clients who have not held their shares for some minimum designated time period.
breakpoint investments
This includes investments in all mutual fund accounts, retirement accounts, and 529 college savings plans.
Equity Income Funds
This is a stock-based mutual fund that pays consistent dividends. invests in common and preferred stock with lower volatility than market pays consistent dividends, includes utility stock. usually consumer dependent industries
Late Trading Prohibition
This is a violation of federal securities laws since the late trader can take advantage of market moving information and purchase or redeem shares at prices determined before the information was released. Knowing the price is an advantage because the late trader can develop an investment strategy based on information not available to the general public.
Call Example Buy 1 ABC Feb 55 Call @ 3
This is an example showing a long call. The investor is buying 1 contract on ABC stock. The option expires in February. The strike price is $55, and this contract is a call. The premium paid is shown as "@3"; this means a $3 premium is paid per share represented in the contract. Each contract represents 100 shares, so this investor paid $300 in premium.
Reinstatement Provision
This provision allows mutual funds to make it easy for people to replace money that they have previously withdrawn To make sure that people don't start treating their funds as secondary checking accounts, funds will state in their prospectus that the withdrawn money must be replaced promptly (usually within 30 days in order to qualify for the sales charge waiver) and that the investor is allowed to do this on an infrequent basis.
Waiver of Surrender Charges
This provision will waive or reduce the surrender charge penalty if the annuitant needs access to the annuity funds due to a disability or confinement in a nursing home
A registered representative is meeting with a client who has $100,000 to invest. The representative recommends the client invests $25,000 into XYZ Growth Fund, $25,000 into ABC Money Market Fund, $25,000 into DEF Balanced Fund, and $25,000 into LMN High-Yield Bond Fund. Which of the following statements is true regarding this recommendation?
This recommendation is a breakpoint sales violation
RRs and approving principals must be provided training regarding variable annuity contacts.
This training must be developed and documented by the BD.
Blue-Chip Funds
This type of fund invests in large-cap companies with strong product lines and robust financial positions only invest in blue chip stock
How does a corporation increase its capitalization over time?
Through retained earnings
XYZ Corporation declares a dividend on August 1 to stockholders of record on Friday, August 9. When is the ex-dividend date?
Thursday, August 8
16-Month Maximum Shelf Life
To comply with federal regulations, mutual funds are required to update their prospectuses every 16 months. RRs must always make sure that they are in possession of the most recent version, since they are required to distribute the "current" prospectus to all potential customers.
A bankers' acceptance is used for which of the following purposes?
To finance a transaction between companies in two separate countries
A stock split is used for all the following reasons, except:
To give current shareholders more money right away
It takes a majority vote of the shares to effect all of the following, except:
To increase the amount of any declared dividend
Why does SEC regulate the securities market and its participants?
To maintain a fair, orderly and efficient market
Average Cost Basis
Total Dollars Invested ÷ Total Number of Shares Held = Average Cost per Share
Average Cost per share
Total amount invested / Number of shares purchased
Traditional money market funds include:
Treasury bills, notes, and bonds (all with one year or less to maturity) Commercial paper (usually 270 days or less to maturity to avoid registration) Bankers' acceptances (270 days or less to maturity) Negotiable CDs Cash
Which of the following securities is not guaranteed by the full faith, credit, and taxing power of the U.S. government?
Treasury receipts
Which of the following typically acts as the custodian for a mutual fund?
Trust companies or commercial banks
If the Quasinyx Corporation declares a dividend on August 8 to stockholders of record on Wednesday, August 23, on what date will the stock trade ex-dividend?
Tuesday, August 22
Growth & Income Funds
Type of hybrid fund that has two objectives: capital appreciation and current income—invests in a mix of growth stock and income-bearing securities such as bonds and/or preferred stock.
Asset Allocation Funds
Type of hybrid fund where the objective is to protect against significant losses by dividing the portfolio (allocating a % of investment) among stocks, bonds, and cash and rebalancing to maintain those percentages. Target date funds are asset allocation funds designed to become more conservative the closer they get to a target date.
Key Concept UITs
Typically invest in a fixed portfolio of securities Units are referred to as shares of beneficial interest Are redeemable with the issuer Have a predetermined end date Are not actively managed
conversion privilege
Typically, Class B shares are converted to Class A shares after the CDSC drops to zero will reduce the annual expenses, but only after conversion
Which of the following is NOT a money market instrument?
U.S. savings bond with 4 weeks until maturity
types of bond by risk from least to most risky:
US Gov bond Mortgage bond Debenture Subordinated Debenture Income bond
Exempt securities include:
US Government and agency issues, municipal issues, money market issues, bank issuers, common carrier issues, insurance company issuers, and nonprofit or religious organization issues
Mutual funds are required to furnish all the following reports, except:
Unaudited annual reports to shareholders
A broker-dealer assisting the issuer in selling the new issues to the public must sign a formal contract called the:
Underwriting agreement
When an investor does not own specific securities in a portfolio, but they do own a specific number of shares of the mutual fund portfolio, it is referred to as:
Undivided interest
Which type of investment company is established or organized under a trust indenture, is operated by a board of trustees who supervise the operations, and traditionally invests in a fixed portfolio that may consist of equity securities (stocks) or debt securities (bonds)?
Unit investment trust
most investment companies are
Unit investment trusts and management investment companies
Simplified Employee Pension (SEP)
Used by corporations, partnerships, or sole proprietors (self-employed) and are designed to be a cost-efficient way for smaller employers to meet their employees' retirement needs by establishing an Individual Retirement Account for each employee that is fully funded by the employer.
Which of the following funds will hold stocks of mature companies with a long history of paying dividends?
Value fund
Variable universal life is really a combination of:
Variable and universal life
Conversion or Contract Exchange
Variable contract owners may convert or exchange their policy to whole life within 24 months from the date of issuance without evidence of insurability.
An investor is looking for a life insurance product that also provides an inflation hedge. Which of the following choices would be the most suitable recommendation?
Variable life
A client has approximately $10,000 earmarked for their grandchildren. They are most concerned with finding a suitable insurance product that would provide their heirs with a current substantial death benefit and protection for their savings against the ravages of inflation. Which of the following products would best meet this client's needs?
Variable life insurance
preferred stock is interest rate sensitive meaning
When current interest rates rise, preferred stock prices decrease When current interest rates fall, preferred stock prices increase
When do issuers typically call bonds?
When interest rates are falling
All the following statements are true regarding open and closed-end funds, except:
When selling a closed-end fund in the secondary market, a prospectus must be delivered to investors
Under what circumstances would it make sense to recommend a lower yielding bond to an investor over a higher yielding bond?
When the higher yielding bond has a lower after-tax return than the lower yielding bond
Dollar-cost averaging is applicable to variable annuities.
When the variable annuity investment value is decreasing, a fixed amount of invested dollars will buy more accumulation units than when the securities are more highly priced. Conversely, if the annuity investment value is increasing, the fixed dollar amount will buy fewer accumulation units.
Underwriter
Wholesaler, sponsor Distributes fund shares to BDs and the public Prepares retail communication
A client bought shares in XYZ Fund on the record date. The fund's quarterly dividend was $.28 per share. The client has elected to re-invest dividends. This investor:
Will purchase additional shares
All the following redemptions from a 529 plan would not be subject to a 10% withdrawal penalty, except:
Withdrawal for expenses relating to an injury that occurred on campus
In any annuity, if a withdrawal is taken prior to age 59½, a 10% federal penalty tax is assessed on the taxable portion of the early distribution, except in the following instances:
Withdrawal upon the annuitant's death or disability Distributions taken as a series of substantially equal payments based on the annuitant's life expectancy, whether from an immediate annuity or a deferred annuity, regardless of the annuitant's age
Annuity owners making early distributions may be subject to
a 10% penalty on the taxable portion of the distribution only.
IRA- If an individual exceeds the allowable contribution limits, the excess contributions are subject to
a 6% penalty each year until withdrawn from the account. Withdrawals of excess contributions made prior to age 59½ may also be subject to the 10% penalty tax.
underwriter or investment banker
a BD that helps issuers sell securities to the public
A back-end load is referred to as
a Contingent Deferred Sales Charge (CDSC)
The investment company provides each investor with
a Form 1099 showing the amounts of dividends and capital gains distributions reportable as ordinary income or long-term capital gains. The investor then uses Form 1099 to prepare the investor's tax return.
Investors purchasing or selling shares in an ETF typically pay
a brokerage commission on each transaction, although some firms have begun to offer no-commission ETFs
Covered Call Writing
a call option is sold and the writer is long the underlying security
Policy surrenders are treated as
a cancellation and taxed on the earnings
advisor sold
are offered through broker-dealers in the state and often have different investment options
An investor in a high tax bracket who is seeking liquidity and/or capital preservation would invest in
a tax-free money market fund versus a traditional money market fund due to the federal tax-free dividend income afforded to the investor.
receiving cash payment for fractional shares is considered
a taxable event where any gains are taxed based on the investor's original holding period
The Pension Benefit Guaranty Corporation can provide coverage in the event that
a terminated defined benefit plan does not have sufficient assets to provide the benefits earned by the participants.
Whole life insurance is
a traditional form of permanent insurance that will remain in force for the life of the insured as long as premiums are paid
a unit investment trust is established under
a trust indenture
customers wishing to move assets from an employer-sponsored plan to an IRA may wish to do
a trustee-to-trustee transfer to avoid the 20% withholding requirement
Industrial Development Revenue Bonds
a type of revenue bond issued to finance the construction or acquisition of a commercial facility that will be leased to a private entity (corporation). The bonds are backed by the lease payments pledged by a corporation. subject to AMT
Articles of Incorporation
a written legal document that defines ownership and operating procedures and conditions for the Corporation
A registered investment company cannot make a dividend distribution of its net income unless the payment is accompanied by
a written statement that discloses the source of the payment.
12b-1 fee
an annual asset-based charge that covers the distribution costs for the fund that are borne by the fund versus the broker-dealer or wholesaler
when market interest rates decline, mortgages
are paid off early or refinanced. causing accelerated principal payments to the tranches.
Voting rights are described in the prospectus for the contract. Typically, one vote is obtained for every $100 of contract value. The number of votes is determined by
account value as of the record date for the meeting, which can be 90 days or more prior to the meeting.
Contributions to a Roth are always made on an
after-tax basis, meaning they are nondeductible, and there is no age limit restriction to make contributions. Individuals may continue to make contributions if the investor has earned income. There is no minimum required distribution.
Nonqualified annuities are purchased with
after-tax dollars by individuals, generally to provide a supplemental source of monthly retirement income.
preemptive rights
allow current shareholders the ability to maintain their proportionate ownership if the corporation issues additional common shares
Right of free transfer
allows negotiable securities to be transferred without restrictions
Convertible Preferred Stock
allows the owner to exchange preferred shares for a fixed number of common shares at a specified price, called the conversion price
When paid at the time of purchase, the sales charge is
always a percentage of the POP (not the NAV) and is always expressed as a percentage of the POP, not a dollar amount
syndicate agreement
an agreement among underwriters which will set forth the terms of the offering and each underwriter's percentage participation in the offering and sale
Bond Funds (Fixed Income Funds)
are mutual funds that seek current income and can invest in a variety of debt securities, including bonds issued by corporations, municipalities, and/or the U.S. government interest paid in form of dividend
he insurance company is required to send
an annual statement to the policyholder detailing the contract's current death benefit and cash value. The annual report must also list any policy loans outstanding and provide a record of all premium payments made and expenses related to the contract over the past year.
Blended Funds
an equity fund that combines the investing styles of value stocks and growth stocks. Blended funds are often categorized by capitalization. For example, an S&P 500 Index fund would be a large-cap blend fund.
preferred stock
an equity security offering ownership interest to investors
Exchange-Traded Funds (ETFs)
an exchange-listed product investing in a portfolio of stocks that tracks a particular index, such as the S&P 500
Broker-dealers, investment companies, and investment advisers must provide their customers with
an initial notice of their privacy policies and practices at the time the relationship is established and an annual notice every year after
Dollar-Cost Averaging
an investing strategy in which the investor purchases a fixed-dollar amount of a mutual fund on a regular basis, without concern for the share price. LT
Qualified plans are subject to
annual changes of contribution limitations. Contributions that exceed the required limit are subject to an annual 6% excess contribution penalty until the excess is withdrawn.
CDSCs decrease
annually and applied only to the shares redeemed in that year. after a certain number of years (usually 6) the charge drops to zero
An investor can utilize a 1035 exchange from one insurance policy to
another insurance policy, one annuity contract to another annuity contract, or a life insurance policy to an annuity contract. An exchange from an annuity to a life policy is not permitted.
exempt issuers are still subject to
anti-fraud provisions of the Act
Shareholders are taxed on
any amounts distributed
dividends are not guaranteed for
any class of stock, including preferred
POP will not change because of
any purchase or reinvestment of dividends or capital gains but will change day to day as the NAV changes
Surrender Charge
applies for a specific number of years as identified in the contract.
Free Look Provision
applies to all variable insurance policy sales. The policyowner can return the policy and receive a full refund of all premiums paid within 45 days from the date of application or 10 days from receipt of the policy, whichever is later.
Breakpoints
apply only to Class A shares and vary from one fund to another fund. They're based on the dollar amount of the purchases in a specific family of funds
Employee Stock Ownership Plans (ESOP)
are a type of defined contribution plan all or part of the employer contributions are used to purchase stock in the employer's company and contribute that stock to the employee's qualified retirement plan
target date funds (life cycle funds)
are asset allocation funds which will adjust the holdings and asset mix of the portfolio over time, based on the customer's intended retirement date
Secured Bonds
are backed by specific collateral to reduce the risks associated with lending.
Mortgage Bonds
are backed by the corporation's real estate, such as office buildings, apartment complexes, shopping malls or other tangible property owned by the issuer.
Put buyers
are bearish, since their options become more valuable as the stock goes down.
Debentures
are bond issues that are not secured by any form of collateral. They are backed by the general creditworthiness and reputation of the issuer.
Collateral Trust Certificates
are bonds backed by securities of another company
Call buyers
are bullish and want stocks to go up since they can buy the stock at the guaranteed, "locked in" strike price no matter what the market value.
Convertible Bonds
are convertible into common stock of the same issuing company. have lower coupon.
Variable annuity sales charges, if applicable,
are deducted before the premium is invested into the separate account.
High-Grade Bond Funds
are described as investment grade and they primarily hold only the most highly rated debt securities. Such funds will have somewhat lower yields in exchange for their higher credit ratings and reduced default risk
Money Market Funds
are established for investors seeking capital preservation and/or liquidity.
Tax-Free Money Market Funds
are for investors seeking capital preservation and/or liquidity invests in ST debt from municipalities (municipal notes)
Municipal Fund Securities
are funds or trusts that are offered by individual states or local governments.
ABLE Programs
are intended to help individuals and their families living with disabilities non-deductible contributions can be made by anyone on an after-tax basis, and qualified withdrawals are federally income tax free
GNMA Funds (Mortgage-backed Agency Funds)
are mutual funds that invest in a pool of GNMA Pass-Through Certificates. Since GNMA funds invest in pools of mortgages which receive interest and principal payments monthly, the fund will also pay out monthly dividends to investors. mortgage backed is NOT guaranteed by us gov.
457 Plans
are nonqualified deferred compensation plans. There are 2 basic types of plans: government and nongovernment.
Unsecured Bonds
are not backed by underlying assets or collateral.
Growth and Income Funds
are traditionally conservative equity funds designed for investors that wish to invest for growth and also receive income invest in large cap stocks (blue chip or utility) or preferred stock
Guarantee Bonds
are unsecured bonds backed not only by the promise of the issuer to pay, but also a parent company that will back-up the issuer's promise. similar to a co-signer on an automobile.
Back-End Load or Class B Shares
assess a back-end sales charge, giving investors the ability to have their entire amount invested immediately into the fund
The Investment Company Act of 1940 requires a fund to calculate the NAV
at a minimum of once per day
to be considered a diversified company,
at least 75% of the fund's total assets must be invested in the following way: less than 5% invested in any 1 corp fund cant own more than 10% voting stock of any 1 corp
When is the final prospectus provided to investors?
at or prior to confirmation of the sale
closed end funds calculate the NAV
at the end of each trading day
Maturity Date
at which time the borrower will repay the face value or principal balance to the bondholder
Issued Shares
authorized shares that have been sold to investors
Upon redeeming mutual fund shares, there are 3 accounting methods that can be used to determine the cost basis per share:
average cost basis share identification FIFO (first in, first out)
The value of a 1035 Exchange is
avoiding a current income tax liability
When the accumulation period ends, as determined by the owner or annuitant,
the annuitant can elect to cash out or begin income benefits.
Failure to pay the semiannual interest means
the corporation is in default and can be forced into liquidation by the investors
General Obligation Bonds (GO Bonds)
backed by full faith, credit, and taxing power of the issuer. (must be able to levy taxes). no specific use of funds or source of repayment generally viewed as safe but still subject to default and interest rate risk
Negotiable Certificates of Deposit (CDs)
bank issued to attract deposits outside their normal clients bought by large institutional investors $100,000 min denomination bank guaranteed matures in 1 year or less may be traded in the secondary market and have low risk (ST)
Shareholder lists, including names and addresses, must
be made available to shareholders upon demand
Rule 147 offerings must:
be registered under Blue Sky Laws (state securities laws) AND include an appropriate legend stating any restrctions
Investment Company Act of 1940 defines an investment company as
being in the business of holding and managing a portfolio of securities for its investors or that has 40% of its total assets held in investment securities. In addition, the company must have at least $100,000 in net assets, a minimum of 100 shareholders, and a clearly defined investment objective under which it will operate.
who operates trusts
board of trustees who establish its investment objective and supervise the operations
Interest-Rate Risk
bond pricing is also affected by current interest rates in the market.
Shareholders have the right to inspect the corporation's
books and records
If a rollover occurs due to moving assets from a qualified employer-sponsored plan into an IRA in a lump sum, the same 60-day rollover rule applies,
but the employer is required to withhold 20% of the distribution and send this amount to the IRS. This 20% withholding may be refunded when the customer files her next tax return.
How can shareholders vote remotely?
by proxy, which provides written instructions on how an appointed agent will vote the shares
12b-1 fee is split by
by the broker-dealer and the fund's wholesaler
Corporate voting is based on
the number of shares owned
advertisements are NOT OK when:
the offering includes any non-accredited investors
Uncovered/Naked Call Writing
the option writer does not own the underlying security
Dividends can be paid in the form of
cash or stock
Netting Capital Gains and Losses
calculate net ST then calculate net LT
Simplified Employee Pension (SEP)
can be established by corporations, partnerships, or sole proprietors (self-employed) and are designed to be a simple and cost-efficient way for smaller employers to meet their employees' retirement needs.
cost basis
the original purchase price of a security, plus any costs associated with that purchase.
Another benefit of a defined contribution plan is that
the assets are portable and can be transferred or rolled over into another qualified plan upon termination of employment.
Banker's acceptances
debt securities used to finance foreign trade. When money is due from a foreign company, the U.S. corporation may sell this debt to the bank as a letter of credit at a discounted price. The U.S. company is effectively paid sooner, and the bank earns the difference between the purchase price and the face value of the money owed.
Investors who are not active participants in an employer sponsored plan may always
deduct IRA contributions. Deductibility of contributions made by investors who participate in qualified plans is dependent on their income level.
Employer contributions can be
deducted for the year in which the contribution was made.
the rate of cash value build up in variable life insurance is
dependent on the performance of the separate account can fluctuate but will never drop below the guaranteed min death benefit
The exclusion ratio is the formula used to
determine the portion of each payment that is a return of cost basis, and therefore excluded from taxation in fixed annuities. Although a bit more complex, it may simply be described as the cost basis divided by the expected lifetime payments, or "dollars in divided by expected dollars out."
The exclusion ratio
determines the return of cost basis.
Under the ABLE Act,
disabled persons can hold up to $100,000 in an ABLE account without losing their eligibility for Social Security, Medicaid, and Medicare benefits
the UW is referred to as a
distributor, wholesaler, or sponsor
Preferred stock receives preferential treatment over common stock in regard to
dividend payments and bankruptcy proceedings
stockholders do not vote for
dividends
nondiversified funds
do not meet 75=5=10 rule
Nonqualified retirement plans
do not meet ERISA standards and therefore may lose some or all of these benefits.
Exempt securities
do not need to be registered with the SEC, since it would not make sense for certain issuers to go through the time and expense of filing the registration statement.
Death benefits on annuity contracts
do not pass tax-free to the beneficiary. Any benefit above the contract's cost basis is taxable to the beneficiary.
prospectus
document used for corporate securities and must be given to all purchasers of the security for up to 90 days following the offering
The death benefit on an annuity
during the accumulation period is the greater of the current market value or owner's cumulative premiums paid, less any withdrawals. Death benefits may or may not be paid after the contract has been annuitized, depending upon which settlement option is selected.
ETFs can be traded
during the day, unlike mutual fund shares (use forward pricing)
An IRA can be established for any individual with
earned income.
In addition to surrender charges, all money withdrawn from nonqualified annuities comes from
earnings first, then as a return of cost basis. This is also known as "last-in, first-out" or LIFO.
SIMPLE can be
either an IRA or a 401k plan. employees can contribute based on a percentage limit, can be deducted from taxable income. employer-tax deductible to business
The charter issued by the state authorizes the corporation to
enter into contracts, sue and be sued, hire employees, and borrow money; it also specifies the type and amount of securities that can be offered for sale
municipal bond revenue tax
exempt from fed but may have AMT state taxable unless state of residence
us gov securities
exempt from state and local taxation taxed as ordinary income in year received
interval funds invest in
farmland, hedge funds, private equity funds, and real estate securities
corp bond tax
federal and state taxable
municipal general obligation bond tax
federal tax exempt state taxable unless state of residence
gov agency tax
federal taxation state exempt
us gov bonds tax
federal taxation state exempt
Misstatement of Fund Name
includes names suggesting a fund is guaranteed or approved by the United States government, or that a fund invests in certain securities or industries in which the fund has not invested.
A regulated investment company (RIC), which may be a mutual fund, closed-end fund, or unit investment trust, is eligible to transfer
income tax liabilities on net investment income (dividends and interest less expenses) to shareholders. This prevents double taxation
Conversion from Traditional to Roth
income taxes must be paid on the taxable portion of the converted amount. There is no 10% penalty imposed.
taxes levied may inclue
income, property (ad valorem), sales, and real estate taxes
growth funds types
index fund sector fund blue chip fund value fund
Affiliated persons
individuals who work for the fund, including officers, certain directors, and professionals hired by the fund
UW contract with the fund
initial 2 year contract requires annual approval by voting shares or disinterested BOD
the BOD hires fund manager under an
initial two year contract, after is renewed annually by either majority voting shares or the disinterested members. (or terminated)
advantages of an investment company
instant diversification, undivided interest, professional money management
Premium Deductions
insurance company deducts its administrative fees, state premium taxes, and sales charge from the premium.
Index Funds
intends to mirror as closely as possible the movement of a specific index (such as the S&P 500® Index) passively managed tax efficient lower operating costs and management fees good for skeptics
An existing bond trading in the secondary market will sell at a premium when
interest rates of new bonds are issued with lower interest rates than the coupon rate (nominal yield) of the existing bond.
municipal bonds pay
interest semi annually not backed by federal gov, subject to default risk
treasury notes (T-notes)
intermediate term gov debt securities offer semi annual interest income
Municipal (tax-exempt) Bond Funds
invest in a portfolio of municipal bonds that earn federal tax-free interest income. suitable for wealthy investors in high tax bracket income oriented not good for retirement plans
who manages day to day trading in mutual funds portfolios?
investment advisors
Local Government Investment Pools (LGIP)
investment pools that are established by state or local government entities to allow for the investment of public funds
Bonds
investor's legal status: creditor maturity: fixed investor objective: interest and repayment of principal
Stocks
investor's legal status: owner maturity: none investor objective: shares of potential profits and growth
undivided interest
investors share in the profits and losses generated within the portfolio in proportion to their own investment, but do not have a beneficial ownership interest in any of the individual securities.
Precious Metals Funds
invests in mining companies that produce gold, silver, platinum, or other precious metals, but can also invest in the commodities themselves protects against inflation
Asset allocation
involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash (including cash equivalents and currencies).
realized capital loss
is a loss resulting from selling an investment at a price lower than the original purchase price or the adjusted cost basis
variable life insurance
is a permanent policy designed to offer more competitive returns to possibly act as a hedge against inflation.
Balanced Funds
is a type of growth and income fund that invests in a fixed portfolio of stocks, bonds, and/or money market instruments. typically more conservative with more bonds determined by the fund manager
summary prospectus
is an abridged form of the statutory prospectus that provides the essential information an investor would need to decide to buy. It includes an application to open a new account and is an "offer to sell." It must inform the customer of the ability to obtain additional information online.
assumed interest rate (AIR)
is an arbitrary interest rate used by the insurance company to project the rate of growth of the separate account during the contract's payout period.
legal opinion
is attached to municipal bond certificates which states that the issue is legal, conforms with applicable laws, and is tax-exempt at the federal level. The legal opinion is written and signed by the bond counsel.
The amount of the retirement benefit in defined contribution
is dependent on the investment performance within the account
A pension annuity
is distributed through the pension plan, not an insurance company, but offers the same payout options.
Individuals contributing to an IRA who have reached age 50 are allowed to
make "catch up" contributions each year, in addition to their normal contribution.
Time value
is greater the further away the expiration date is. Time value represents the additional amount (over intrinsic value) that a buyer of an option is willing to pay in hopes that the intrinsic value will increase as time passes. As the option nears expiration, the time value decreases until there is only intrinsic value represented in the premium price.
income bond, or adjustment bond
is issued by a corporation that is under reorganization and coming out of bankruptcy. high default risk. only pays interest when they can afford to.
nonexempt security
is one that must be registered with the SEC
Management Investment Company
is organized as a corporation, operates under the direction of a board of directors, and issues shares of undivided interest to investors.
NII
is portfolio dividends plus portfolio interest minus expenses. Expenses include the investment adviser's management fee and fees to the board of directors, transfer agent, and custodian.
realized capital gain
is profit resulting from selling an investment at a price higher than the original purchase price or the adjusted cost basis
investment adviser, or fund manager,
is the firm responsible for managing the fund's investment portfolio, providing investment advice to the fund, maintaining appropriate diversification in the portfolio, and conforming to the investment objective established by the board
Intrinsic value
is the in-the-money amount
The accumulation period
is the pay-in phase of the annuity, beginning when the first deposit or premium is made. Earnings grow tax-deferred during this time period.
Late trading
is the practice of placing orders to buy or redeem mutual fund shares after the NAV is calculated, typically after the close of the NYSE, but receiving the price of the previously calculated NAV already determined for that day.
Mutual fund market timing
is the practice of purchasing/redeeming mutual funds to profit from differences between the daily closing NAV and the next days' NAV due to events that occur in between calculations. Investors use this strategy to attempt to make short-term gains
sales charge (sales load) for a mutual fund
is the primary compensation paid to the underwriter and broker-dealers for marketing, advertising, and selling fund shares to the public
nonqualified opinion
is what the company wants because it states that the auditor agrees with the company's financial information.
The Commission has the power to
issue a stop order to halt the offering if it believes investors are not receiving all material information
A company must be registered with the SEC as an investment company to
issue securities to the public
GNMA pass-through certificates are the only securities
issued by agencies that are guaranteed by the full faith, credit, and taxing power of the U.S. government.
Rule 147 Intrastate Offerings (Exempt)
issuer must be a "resident" of that state by meeting 1 of these requirements: 80% gross revenue within state 80% assets in state 80% net proceeds in state majority of employees in state
Rule 506
issuers can raise an unlimited amount of money
Federal National Mortgage Association (FNMA or Fannie Mae)
issues mortgage-backed pass-through securities comprised of conventional and insured mortgages from other agencies, such as FHA and VA. Each security represents an undivided interest in a pool of mortgages. sponsored by gov min denomination is $1000
Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac)
issues mortgage-backed pass-through securities comprised of residential mortgages issued by financial institutions. Like Fannie Mae, Freddie Mac is a publicly traded company that is sponsored, but not guaranteed, by the U.S. government.
The owners of a corporation are referred to as
its shareholders or stockholders
Syndicates are
liable for any unsold shares
Syndicates are...
liable for any unsold shares
IRAs cannot be funded with
life insurance or collectibles, such as antiques, rare stamps, or coins. gold bullion or foreign currency.
A modified endowment contract (MEC)
limits premiums paid into a policy during the first seven years to the total scheduled premiums that would have been paid on a comparable traditional whole life policy during the same time period
A lump-sum distribution
llows the retiree to control the assets and gives them the option of continued tax-deferral with a rollover to an IRA.
reg d offerings are subject to
lock up provisions during the first 6 months
treasury bonds (T-Bonds)
long term debt instruments, pay semiannual interest
T Strips
long term, zero coupon, deep discount securities. HIGH degree of interest rate risk. often used to fund retirements since it is fixed LT and tax-deferred until withdrawn
Capital gain distributions are considered
long-term and are taxable to the investor, in the year received, at preferential rates, usually 15%
blank check hedge funds
look for acquisitions and potential investments without identifying investment objective
Call Risk
loss of income due to early retirement
The 20% withholding only applies to
lump sum employer-sponsored plans-to-IRA rollovers, not IRA-to-IRA rollovers.
High income Roth account holders who no longer meet the income threshold, may continue to hold their account, but cannot
make additional contributions unless their income level drops below the annual threshold amount.
In most defined contribution plans, the employee
makes investment choices and assumes the risk of the account's performance.
reverse stock split
making fewer shares available and raising its market price
mutual fund shares cannot be bought on
margin, must be cash settlement
An index fund does not protect the investor from
market risk (systematic risk). An investor cannot be guaranteed a profit or assured they will experience no loss to principal.
short term bond
matures in 2 years or less
intermediate term bond
matures in 2-10 years
long term bond
matures in more than 10 years
Keogh (HR-10 Plans)
may be established as a defined benefit or defined contribution plan and are available to unincorporated self-employed persons (owner-employees). The plan must also be established for any full-time employees who meet the ERISA requirements.
457 Government plans
may be offered by governments for all eligible employees
457 nongovernment plans
may be offered by tax-exempt organizations, other than churches, with the eligibility usually limited to managers, highly compensated employees, and independent contractors.
signature guarantee
may be required in order to redeem shares of mutual funds This guarantee is a form of customer authentication issued by a bank or trust company that verifies the legitimacy of the signature
401(k) plan participants are typically given a selection of investment choices
may include investments such as mutual funds, individual stocks, bonds, government securities, or variable annuities.
Payout options
may not be changed once a contract has been annuitized.
Securities purchased under Rule 147
may not be sold outside of the state for 6 months
Expense Ratio
method for measuring the annual expenses against the average net assets and shows how efficiently the fund is operating
Requirements of an Open-End Management Company
min net assets $100,000 min 100 investors clearly defined investment objective issue only common stock maintain 3:1 asset to debt ratio
Straight (Stated or Noncumulative) Preferred Stock
missed dividends do not need to be made up
Policies failing to meet the 7-Pay Test are classified as
modified endowment contracts (MECs)
If dividend income is the primary objective, the fund will invest in
more preferred stock and high dividend paying common stocks, such as income common stock.
program disclosure document is used with the sale of
municipal fund securities since they are not subject to prospectus requirements
A qualified retirement plan, as deemed under ERISA
must meet these minimum standards to qualify for certain tax benefits under the Internal Revenue Code (IRC). Such benefits include tax deductions on contributions made by the employer, as well as pre-tax contributions and tax-deferred growth for the plan participant (employee).
These summary prospectuses are also often referred to as
mutual fund profiles and may be accompanied by an application to invest.
hedge funds are structured like
mutual funds because they pool investments to purchase a portfolio of securities but do not meet liquidity standards and can only be liquidated on certain dates
Sector Funds
mutual funds that focused on investing in specific, concentrated groups of securities in a particular industry, such as utilities, electronics, financial service, and healthcare. extremely volatile and can even counter the market. needs industries perform better.
In order to open a new account, broker-dealers are required to obtain the following information on each customer:
name street address DOB taxpayer ID BD signature
Rule 501 of Reg. D defines accredited investor as:
natural person ind/joint net worth $1M $200,000 ind or $300,000 joint for 2 years series 7, 65, or 82 knowledgeable employees, IAs, rural business investment companies, bank, inv company, or insurance company, entity with assets excess of $5M, officer or director of the issuer
disadvantages of UITs
no manager, so you cannot take advantage of market conditions
in variable annuities, The investor assumes the investment risk since
no performance guarantees are made by the insurer.
when a fund does not use an UW and sells shares directly to the public (NO-LOAD FUND), there is
no sales charge included in the POP but can still assess a 12b-1 fee less than 0.25%
pure no load fund
no sales charges or 12b-1 fees
preliminary prospectus (red herring)
part of the registration statement prepared by a company prior to an IPO that is circulated to investors before the stock is offered. Contains price range, but not official price. No application to invest.
ETFs are
passively managed and have lower ongoing expenses compared to actively managed portfolios
annuities are used to
pay a future stream of income over the lifetime of the owner or annuitant
Omitting Prospectus
permits the publication containing a summary of information found in a prospectus for a mutual fund. It must contain the fund's objectives/goals, principal investment strategies, principal risks of the fund and a toll-free number so investors can call to obtain the prospectus.
Qualified Retirement Plan Distribution Options
plans usually allow employees the option of receiving a pension annuity or taking a lump-sum payment
subaccounts
policym owner can allocate premium and account value dollars to a variety of investment accounts within an insurance company's separate account
Participating Preferred Stock
potentially receive extra dividends above and beyond the stated dividend. The extra dividend must be declared by the board of directors and will be distributed after the preferred and common stock dividends have been paid. Participating issues often carry a lower dividend rate as compared to traditional preferred, but have the potential to receive higher dividends based on the company's growth.
advantages of UITs
professional selection of the portfolio lower fees
A defined benefit plan, or traditional pension plan
promises the employee a specific monthly payout that they will receive upon retirement. Monthly benefits are calculated based on the employee's age, years of service, and highest salary (or average of last 3 years).
529 Prepaid Tuition Plans
promises to keep pace with the tuition of in-state public colleges
mutual fund buyers are always
purchasing new shares and must receive a prospectus at or before the time of sale
persons who purchase a security have the right to
pursue civil tort claims if the items in the filing statements include false statements regarding material facts or omit material facts required to be stated
Mutual fund dividends can be
qualified or ordinary
12b-1 annual fees are charged
quarterly as a percentage of the fund's NAV and are considered an expense to the fund.
mutual fund shares are
redeemable at NAV
Market capitalization of a company
refers to the total dollar market value of a corporation's outstanding shares and determines the size of a company
Cooling off period
registration statement is filed and anyone can view it. Cannot sell the new offering yet. SEC is reviewing and commenting on the registration statement for a minimum of 20 days.
Qualified expenses include
regular tuition, room and board, and other costs associated with attending accredited colleges and universities and up to $10,000 per year per beneficiary to cover tuition for private/religious K-12 education
investment advisor duties include
research and analysis of individual securities suitable for the portfolio as well as general economic and market trends and ensures conformity with securities and tax laws
Regulation S-P requires financial regulators, including the SEC, to implement policies and procedures that
restrict a financial institution ability to disclose non-public personal information about consumers
Over time, a profitable corporation will increase its capitalization through
retained earnings, such as cash savings and investments.
objectives of LGIPs
safety of principal and daily liquidity, like money market funds
primary offering
sale of new securities by an issuer AKA primary distribution
Compensation to Distributors and Dealers
sales charge paid to UW and BDs 12b-1 fees may be used as compensation for sale and reimbursements
Corporate debt can be
secured, backed by some sort of collateral or unsecured, with no collateral backing it.
ETFs represent a "basket" of
securities that have been pledged as the asset base for the fund, but the ETF itself trades as a single security on an exchange
series 6 RRs can
sell mutual funds anytime but can only sell closed end funds during IPO
Items in selling agreement
selling concession amount, responsibilities of members
The responsibilities of the broker-dealers participating in the sale of new issues without any risk or liability are specified in the:
selling group agreement
The option writer
sells the contract to the option holder for a premium and is obligated to fulfill the terms of the contract (either buy or sell the specific stock) as exercised by the holder
bonds pay interest
semiannually
The following rules are used to determine whether the monthly income payment will increase, decrease, or stay the same as the previous month's payment:
separate account>AIR, payment will increase separate account<AIR, payment will decrease if they are the same, payment is same as m
Corporate stock is considered a negotiable security because
shareholders are generally free to give, transfer, assign, or sell shares whenever and to whomever they please without restrictions
exchange or switch
shares from one fund are being redeemed to purchase shares of another fund in the same family of funds
trust's portfolio is divided into
shares of beneficial interest (SBIs) which are redeemable securities.
after 30 days,
shares of mutual funds can be used as collateral in a margin account
Certain tranches are
short term and receive all of their principal before some other tranches receive any payments
Treasury Bills (T-bills)
short term debt securities maturing in 1 year or less, no interest, offered at discount, pays interest at maturity 4, 13, 26, or 52 week (NO 9 month)
SBIs
sold in $1000 increments represents ownership in portfolio redeemable at NAV
Non-Variable Permanent Life Insurance cash value
some accounts have cash value that can be borrowed by the policy owner. these are the living benefits.
Socially-responsible funds (sometimes known as "green" funds) are
specialized funds that invest in companies whose products or practices do not conflict with an investor's religious, moral, political, environmental, or social beliefs.
selling group agreement
specifies the responsibilities of all members
Blue Sky Laws
state regulations
In most cases, bonds purchased in the investor's home state are also exempt from
state tax ("double tax-free")
Section 529 Plans
state-sponsored Qualified Tuition Programs (QTPs) considered gifts not subject to income limitations
blind pool hedge fund
stated investment objective but does not specify the investments
The board members are paid a
stipend, typically per meeting
restricted stock
stock acquired through private placement, cannot be resold for 6 months AKA letter stock
Options exist on
stock, bond yields, bond prices, stock market indices, and foreign currency ASSUME: option is on stock
the trust will end when
stocks: fixed target date bonds: cease to exist upon maturity
coupon (interest) on the bond is
subject to taxation in the year earned at ordinary income rates
registering securities involves
submitting the registration statement (form S-1) which gives all details about the new issue
Agency issues
such as mortgage-backed or pass-through securities, are debt securities backed by a U.S. government issuing authority through either revenue from taxes, interest from lending activities, collateral by a U.S. Treasury security, the full faith and credit of the government, or a moral obligation of the government.
The surrender value of an annuity is the
sum of money an insurance company will pay the annuity owner in the event the contract is voluntarily terminated before it is annuitized.
Defined contribution plans like a 401(k) generally allow individuals to
take a lump-sum distribution, which is immediately taxable, keep the defined contribution account open, take distributions in the form of an annuity to receive guaranteed income, or choose an IRA rollover.
Cash value of both variable and traditional products grows on a
tax-deferred basis.
privatized gov agency tax
taxable at both state and federal levels
stock splits and stock dividends are not considered
taxable events when received since no cash is paid out in either case
Only the earnings in a Roth IRA are subject to
taxation and penalties. Contributions can be withdrawn at any time without penalty.
expense charge
that is equal to a certain percentage of the account value that compensates the insurance company for future operating expense risks it assumes under the annuity contract.
Bearish investors anticipate
that stock prices will fall
Bullish investors anticipate
that stock prices will go up.
The disadvantage of A shares is
that the original investment is less than the total amount invested
457 plan participants are not subject to
the 59½ rule if they are separated from service
underwriter is appointed by
the BOD and must be a FINRA member firm paid from sales charge
For open-end shares, there is a relationship between NAV and POP such that
the POP can be greater than the NAV within limits, equal to the NAV, but never less than the NAV.
The securities held in the separate account must be registered with
the SEC and each offering is considered a new issue, requiring a sale by prospectus only.
Regardless of the amount being invested, the registered representative must disclose
the availability of breakpoints to the investor at the time of the sale, if the customer is close to the breakpoint.
selling at par
the bonds are trading at their original $1,000 issuance
However, if a redemption occurs within 7 days of purchase,
the broker-dealer or representative must return the selling concession to the fund underwriter.
securities contracts, variable life insurance and variable annuities are regulated by
the SEC under federal securities laws, including the Securities Act of 1933 and the Investment Company Act of 1940 Individuals selling these products must obtain a FINRA registered representative registration (a Series 6 or 7), a state securities registration (Series 63), if required by the state, and a state life insurance license
The investment adviser of the fund must be registered with
the SEC under the Investment Advisers Act of 1940.
call premium
the amount by which the call price exceeds the par value of a bond (allows the bondholder some of the future interest income lost due to early redemption)
SIMPLE eligibility
the employee must have earned at least $5,000 in compensation during any 2 years before the current calendar year and is expected to earn at least $5,000 for the current calendar year. These requirements are the maximum and can be reduced by the employer.
Retirement plans may be funded by
the employee, the employer, or a combination of both. Contributions made into the plan by an employee are typically considered a salary reduction. Employer contributions to a qualified plan are tax deductible to the employer.
A profit-sharing plan is a type of defined contribution plan in which
the employer contributes a portion of the firm's profits each year.
The employer bears the investment risk and if the plan is not properly funded,
the employer will be penalized by the IRS and additional contributions may be required
Funding a defined benefit plan is the responsibility of
the employer. It is mandatory for the employer to make sufficient contributions to meet the projected payout needs.
selling group concession
the fee paid to the selling group based on actual shares sold
IPO
the first time a corporation sells its stock to the public
The redemption fee is paid directly to
the fund and the SEC limits the fee to 2% of the value of the customer's fund.
If the offering price exceeds the NAV by more than 8.5%, assume
the fund is closed-end, since closed-end shares trade in the secondary market
The holding period is based on
the fund's holding period for the underlying security, not the investor's holding period on the fund shares
the tax implication of Capital gain distribution is based on
the fund's holding period, not the investors
The document must be titled as a "summary prospectus" and will include on its cover
the fund's name and the share classes that are offered, the fund's exchange ticker symbol, the date of the summary.
Each mutual fund's investment objective is stated in
the fund's prospectus
Common stock carries
the greatest risk of loss compared to any other securities issued by the corporation, but it also provides investors with the highest possible capital appreciation
AIR is a benchmark percentage used in determining the amount of
the initial payment and as a comparison when determining future payments
The number of subaccount choices and the specific subaccount options are chosen by
the insurance company
Funds invested in a variable annuity are held in
the insurance company's separate account, which is registered with the SEC under the Investment Company Act of 1940
investments in the general account have a minimum rate of return that is guaranteed by
the insurance company, any investment risk belongs to the insurance company
If the value of the shares being exchanged for another fund was more than the cost basis,
the investor has a capital gain.
If the value of the shares being exchanged for another fund was less than the cost basis,
the investor has a capital loss.
direct sold plan
the investor purchases the plan directly through their state's 529 Plan website or through the mail
A dividend is
the investor's share in profits from the fund, comprised of earnings received by the fund from the securities held in the portfolio
Callable Preferred Stock
the issuer, at its discretion, has the right to buy back the shares at a specified price after a certain time period and cancel the stock
Failure to comply with a term, condition or requirement of Regulation D will not result in
the loss of the exemption provided it was an insignificant deviation.
Only investors in a high-income tax bracket may be interested in
the lower tax-free yields of municipal bonds. Investors in low tax brackets are better served by higher yielding corporate bonds.
The higher the credit rating of the corporation
the lower the bond's coupon rate will be
the larger the market capitalization,
the lower the risk
A CALL is in-the-money when
the market price of the stock is ABOVE the strike price
A PUT is out-the-money when
the market price of the stock is ABOVE the strike price
A CALL is out-the-money when
the market price of the stock is BELOW the strike price
A PUT is in-the-money when
the market price of the stock is BELOW the strike price
Authorized Shares
the maximum number of shares that the issuer is permitted to sell
sales charges are specified in
the mutual fund prospectus
When an investor automatically reinvests its dividends and capital gains in the investment company
the number of outstanding shares in both the management company and the investor's own shares will increase.
IRA- For those investors who do participate in a qualified employer-sponsored plan, such as a 401(k) plan, the deductibility of their contribution is dependent on
the person's level of adjusted gross income (AGI).
Public Offering Price
the price at which an investor buys shares of a mutual fund
Market Value
the price investors will pay for the stock in the secondary market. Market value is determined by supply and demand through the trading of the shares on a stock exchange or in the over-the-counter market.
Accretion
the process used to determine the amount of annual income that discount bonds have earned but have not yet received
RRs may NOT modify, summarize, or alter
the prospectus in any manner.
registration statement will later become
the prospectus, official statement, or program disclosure document, depending on the security
Use the Net Yield (Tax-Free Equivalent Yield) formula to determine
the rate of return a tax-exempt municipal bond must yield to equal the taxable corporate bond rate of return.
if customer does not provide requested information,
the registered rep can still open the account but cannot make any recommendations.
NAV changes are primarily due to
the rise and fall in prices of the portfolio of securities
If the annuity is surrendered during this period,
the surrender value will be the current cash value less any surrender charges.
Book Value
the theoretical liquidation value of the business
corporation's capitalization (capital structure)
the total amount of money invested in the entity. This includes the amount of equity (stock) sold and the amount of debt (bonds or debentures) issued.
Front-End Load or Class A Shares
the traditional price structure used by the mutual fund industry. For a Class A share, the sales charge is assessed at the time of purchase.
who is responsible for preparing retail communication?
the underwriter
public offering price
the underwriter fees and compensation added to the issuer's required amount determines the POP
The accumulation unit value changes with
the value of the securities held in the separate account divided by the total number of accumulation units outstanding. This is calculated daily at the close of the NYSE.
the number of annuity units remain fixed, but
the value of the separate account may fluctuate based on the performance on the underlying securities in the subaccount portfolios
All distributions from a Roth IRA are tax-free if
the withdrawal follows the qualified distribution guidelines of the IRS.
Once the variable annuity contract application is complete, the RR must promptly transmit the application package to
their office of supervisory jurisdiction (OSJ) to be reviewed and approved by a principal of the firm within 7 business days of receipt
If the holder of a call contract exercises the right to buy stock,
then the call writer must sell the stock to the call holder at the strike price
If a put holder exercises the right to sell stock
then the put writer must buy the stock from the put holder at the strike price.
When a fund manager sells securities in the portfolio for a profit and has held them for 1 year or less,
these short-term gains are passed on to the investors as ordinary dividends.
If the employee is permitted to make contributions,
they are deducted from the employee's salary before taxation, therefore reducing the employee's taxable income.
A company may buy its own stock if
they feel it is undervalued or to boost the price of the common stock in the market. (reported earnings per share will increase)
The advantage of A shares is that
they often have lower annual expenses and 12b-1 fees (if applicable) as compared to other classes of shares
when municipal issuers need to raise capital,
they publish an Official Notice of Sale which details the amount of capital needed, maturity dates, and how/where to submit bids
Due Diligence Meeting
to ensure that all involved parties, including members of the syndicate and selling group, are apprised of the key facts about the new issue.
why are trusts created?
to hold investor funds and securities
IRA subject
to ordinary income rates, NEVER capital gain tax treatment
regular-way settlement date for all corporate securities is
trade date + 2 business days (T + 2).
U.S. Government Securities
treasury bills, notes, and bonds are securities that may be sold and transferred to another investor prior to maturity.
401(k) plan
type of defined contribution plan employee makes pre tax contributions through payroll deductions employer may match tax deferred earnings subject to ordinary income tax upon withdrawal some allow borrowing from the plan . Withdrawals are also permitted from 401(k) plans upon termination of employment, death, or disability of the participant.
management or investment adviser fee
typically based on a percentage of total assets under management cannot be performance based typically the largest ongoing expense for the fund
Annual reports must contain an
uditor's disclosure document, which explains the auditor's findings and whether their opinion is qualified or nonqualified
The AIR benchmark remains
unchanged throughout the life of the contract
although a customer's SSN is needed to open the account,
under CIP the SSN is not an acceptable form of ID for CIP
hedge funds are private placement offerings
under reg D and do not trade. max investors is 99, with 35 being non-accredited.
letter of intent
underwriter signs a LOI outlining the initial terms of the contract, including the required amount needed by the issuer from the sale
CMOs are
unsuitable for small and unsophisticated investors issued by private sector corps and structured as pass-through securities pay principal and interest from pool of securities MONTHLY (1 tranche at a time)
Treasury Inflation Protected Securities (TIPS)
us gov debt securities. principal amount is adjusted semi-annually based on CPI changes. semiannual interest with fixed interest rate NO inflation risk lower interest rate than treasury securities
types of income funds
us gov fund high grade corp bond fund gnma fund high yield bond fund
T-STRIPS (Separate Trading of Registered Interest and Principal Securities)
us treasury zero coupon, backed by us gov. earns phantom/imputed interest (taxable in year added to cost basis)
Inverse Leveraged ETFs
use a combination of leverage and the inverse fund concept. These are often called "ultra short" funds, since they are trying to obtain a return that is a multiple of the Inverse ETF. This strategy is used as a hedge against market declines with added focus on profiting from the declines.
Leveraged ETFs
use derivatives and bonds to magnify the returns of an underlying index.
Inverse ETFs
use derivatives to receive a return from the opposite, or inverse, move of an underlying index "short" funds
hedge strategy
used as protection short stock, long call long stock, long put
official statement
used for new municipal securities AKA "offering documents" exempt from prospectus delivery
Income strategy
used in flat market Long stock, short call Short stock, Short put
Income Strategies
used to provide income when the market is flat. Options are written (sold) to generate additional income when the prices of stock are changing very little or not at all.
Par Value for common stock
usually an arbitrary amount, such as $0.01 or $0.10 per share
the greater the discount and maturity of a bond, the more
volatile it is
Voting by proxy gives another individual permission to
vote on behalf of that shareholder
The contract owner of a variable product has the right to
vote on matters affecting the separate account
Voting by Proxy
when shareholder cant attend meeting, they vote by proxy which can be done electronically. the official documentation is delivered electronically.
401(k) and 403(b) plans share many common features. The primary differences are
who is eligible to participate and whether the employer's contributions are tax deductible.
The face amount, or death benefit of the policy is the amount of money that
will be paid to the beneficiary upon the death of the insured. If a policy has unpaid loans (and unpaid interest) at the time of the insured's death, the death benefit will be reduced by that amount.
unissued shares
will be reserved for future use, if the corporation needs to raise additional capital by selling stock through a primary distribution.
Assume all contributions into a traditional IRA are
with pre-tax dollars unless stipulated otherwise.
every share of open end funds is sold
with prospectus
qualified opinion
would mean that the auditor disagrees with some or all of the company's financial reporting.
Treasury Receipts (T-receipts)
zero coupon security created/issued by BDs. backed by the interest and principal of treasury securities owned by the BD in escrow. (no longer issued)
