Series 6

Which of the following is NOT an advantage of mutual fund investment? A) The investor retains personal control of investments in the fund's portfolio. B) The ability to qualify for reduced sales loads based on accumulation of investment within the fund. C) Exchange privileges within a family of funds managed by the same management company. D) The ability to invest almost any amount at any time.

Answer: A Control over the investments in the fund's portfolio is given to the investment manager. Exchange privileges, the ability to invest any amount at any time, and reduced sales loads are all considered advantages.

Which of the following are among the purposes and objectives of FINRA? I. Solely to facilitate trading on the exchanges. II.To promote self-discipline among members. III. To ensure that members enjoy high profits. IV. To investigate and adjust grievances between members. A) II and IV. B) I and III. C) I and II. D) III and IV.

Answer: FINRA is the self-regulatory organization (SRO) for the over-the-counter markets and for NYSE members. It enforces the Conduct Rules, provides mediation and arbitration services, and promotes self-discipline among members, all with the end in view of protecting the investing public.

When a registered representative refers to a corporate bond using the term guaranteed, it means that the bond is A) guaranteed as to payment of principal and interest by another corporation B) required to maintain a self-liquidating sinking fund C) guaranteed as to payment of principal and interest by the U.S. government D) a secured bond

Answer: A A guaranteed corporate bond is one guaranteed by another corporation that typically has a higher credit rating than the issuing corporation, and is in a control relationship with it. An example would be a parent company guaranteeing a bond offering of one of its subsidiaries. A guaranteed bond is unsecured; there is no collateral backing the bond.

Your client is interested in an investment program that is sensitive and responsive to anticipated market moves. You might recommend: A) an asset allocation fund. B) dollar cost averaging. C) a value fund. D) a growth fund.

Answer: A A money management strategy that switches among asset classes in response to anticipated market moves is asset allocation.

Which of the following statements regarding the withdrawals from a qualified retirement plan are TRUE? The employee will be taxed at the ordinary income tax rate on his cost basis. Funds may be withdrawn after retirement (as defined) with no tax on the withdrawn amount. Funds may be withdrawn early by the beneficiary if the covered person dies. All qualified plan provisions must be in written form. A) III and IV. B) I and IV. C) II and III. D) I and II.

Answer: A A qualified planholder has no cost basis at retirement. Beneficiaries of planholders may withdraw funds without penalty if the planholder dies. Qualified plans must always be in written form and must be communicated to employees.

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

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

Which of the following statements regarding industrial revenue bonds are TRUE? They are a primary obligation of the city issuing the bond. They are issued by municipalities to provide funds for local industries. The bonds' credit rating is the same as the municipality's credit rating. The debt will be paid off by the corporation leasing the facility. A) II and IV. B) I and III. C) I and IV. D) II and III.

Answer: A Although municipalities issue IRBs to provide funds for local industries, IRBs are a primary obligation of the corporation, not the issuing municipality. The municipality merely acts as a conduit in issuing the bonds. Thus, the bonds' credit rating depends on the corporation's credit rating, not the municipality's.

A breakpoint sale is: A) the sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions to incur the higher sales charge. B) the sale of investment company shares in anticipation of a distribution soon to be paid. C) the sale of shares where the client pays the smallest sales charge. D) the payment of compensation to a registered representative after he ceases to be employed by a member.

Answer: A Breakpoint sales are a violation of the Conduct Rules. A breakpoint sale is the sale of fund shares just below the point where a sales charge is reduced in order to maintain the higher commission.

If a registered representative wishes to distribute a copy of a national magazine article about the GAON Mutual Fund, which of the following statements is CORRECT? I. Because this material is already in the public domain, it is excluded from the rules on communication with the public. II. This material meets the definition of an independently prepared reprint. III. The article may be used without prior approval of a principal of the member firm. IV. The article may not be sent without prior or concurrent delivery of the GAON Fund prospectus. A) II and IV. B) II and III. C) I and III. D) I and IV.

Answer: A Copies of published articles, neither paid for nor sponsored by the investment company, are considered independently prepared reprints and must be approved by the appropriate principal before use. As with any directed communication relating to investment companies, delivery of a prospectus is required.

Which of the following statements characterize the accumulation phase of a variable annuity? I. The number of accumulation units remains constant as investment continues. II. The value of an accumulation unit increases only if the separate account outperforms AIR. III. The number of accumulation units increases as investment continues. IV. The value of an individual accumulation unit depends only on the performance of the separate account, regardless of AIR. A) III and IV. B) I and IV. C) II and III. D) I and II.

Answer: A During the accumulation phase of a variable annuity, the investor is purchasing accumulation units. The number of accumulation units increases each time a periodic payment is made, and their value depends only on the performance of the separate account. AIR becomes a factor only if the account is annuitized.

Your customer has applied for a social security number but has not received it yet. An account was opened and mutual fund shares were purchased. If the fund distributes a dividend, what will happen? A) The distribution is subject to a withholding tax. B) Nothing; the dividend is distributed per the owner's instructions. C) The distribution is placed in escrow pending receipt of the social security number. D) The distribution must be reinvested into the fund.

Answer: A In the absence of a tax ID number (social security number) for a customer, funds must withhold a percentage of distributions.

When a customer wants income from an annuity and chooses the option of life with 20-year period certain, how will distributions be taxed? A) As ordinary income based on an exclusion ratio B) As capital gains based on an exclusion ratio C) As ordinary income based on LIFO accounting D) As capital gains based on LIFO accounting

Answer: A Life with 20-year period certain is an annuitization option. When an annuity is annuitized, ordinary income taxes are paid based on an exclusion ratio (cost basis divided by expected return = how much of the distribution is a return of cost basis and NOT subject to income taxes).

If interest rates in general are rising, the price of T-bills should: A) fall. B) remain steady. C) rise. D) fluctuate.

Answer: A Like the price of other debt instruments, the price of outstanding T-bills decreases as interest rates rise.

The holders of which of the following securities are considered owners of the issuing corporation? Collateral trust bonds. Convertible debentures. Cumulative preferred stock. Common stock. A) III and IV. B) I and III. C) I and II. D) II and IV.

Answer: A Persons who own stock in a company are considered owners; thus, both common and preferred shareholders have ownership (equity) in a corporation. Bondholders are creditors of the corporation. Although convertible bonds convert into shares of common stock, convertible bonds remain a debt of a corporation until they are actually converted.

When does a customer have to receive the Options Disclosure Document? A) Prior to account approval B) Within 15 days of account approval C) With the confirmation of his first options transaction D) Within 5 business days of the first options trade

Answer: A Prior to opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an Options Disclosure Document entitled "Understanding the Risks and Uses of Options", the broker-dealer satisfies the risk disclosure requirements.

If ABC common stock closed at 20 yesterday and ABC is currently paying a quarterly dividend of $.40, what is the stock's current yield? A) Between 5% and 10%. B) Less than 1%. C) Between 1% and 5%. D) More than 10%.

Answer: A The annual dividend is $1.60 (4 × $0.40). The current yield is the dividend of $1.60, divided by the current price ($20). Thus, the yield of 8% is more than 5% (1/20) and less than 10% (2/20).

One of your clients is interested in purchasing a new issue convertible bond. Which of the following statements regarding convertible bonds is NOT true? A) You should expect a higher coupon rate than you would receive with a nonconvertible bond of the same maturity and rating. B) This security offers bondholders an option to trade their debt holding for equity in the issuer. C) Increased earnings by the issuer could lead to possible profit opportunities for convertible bondholders. D) This type of security offers possible downside protection during a period of falling stock prices.

Answer: A The conversion feature allows bondholders to convert their bonds into shares of stock. Increased earnings may have a positive effect on stock prices and bonds generally offer an investor some downside protection when stock prices are falling. These are all desirable to the bondholder. Adding the desirable conversion feature to the bond allows the issuer to pay a lower coupon rate than they would pay with a nonconvertible bond.

A money market mutual fund portfolio might contain: I. common stock issued less than one year ago. II. negotiable, unsecured bank certificates of deposit. III. T-bills. IV. T-bonds maturing in two years. A) II and III. B) III and IV. C) I and II. D) I and IV.

Answer: A The portfolio of a money market mutual fund would contain money market securities. Those are defined as high-quality debt issues with one year or less to maturity. T-bills and negotiable bank CDs (jumbo CDs) meet that definition. Common stock, regardless of when issued, is equity, not debt. T-bonds would be included only if they were due to mature in one year or less.

The transfer agent of a mutual fund: I.redeems shares. II. sells shares of stock in the fund's portfolio. III. holds custody of fund securities. IV. handles name changes of mutual fund share ownership. A) I and IV. B) II and III. C) I and III. D) II and IV.

Answer: A The transfer agent redeems shares of a mutual fund at the price next calculated after receiving a request for redemption. The transfer agent also handles transfers of account ownership for such transactions as an inheritance or gift. The fund custodian holds custody of fund securities.

Under the Code of Arbitration Procedure, how much time does a client have to submit a claim against a registered representative or member firm? A) Six years. B) Ten years. C) One year. D) Six months.

Answer: A Under the Code of Arbitration Procedure, a dispute or claim is eligible for submission to arbitration up to 6 years after the date of the dispute's occurrence.

All of the following trade actively in the secondary market EXCEPT: A) Series EE bonds. B) common stock. C) options on stock. D) warrants.

Answer: A Warrants, common stock, and options all have an active secondary market. Series EE bonds do not trade; they are redeemable.

All of the following statements regarding contract exchanges under Internal Revenue Code Section 1035 are true EXCEPT: A) policyholders can exchange a variable life policy for another variable life policy of a different company without generating any tax consequences. B) under Section 1035, an exchange can occur tax free only if it is made between policies of the same company. C) permanent life insurance can be exchanged for an annuity contract without generating any tax consequence. D) a fixed annuity policyholder cannot use a transfer under Section 1035 to exchange it for a life insurance policy.

Answer: B Under Internal Revenue Code Section 1035, to accomplish a tax-free exchange, the approved policies do not have to be issued by the same company.

When a brokerage firm sells stock from its own inventory, it is acting in the capacity of A) an agent and charges a mark-up B) a principal and charges a mark-up C) an agent and charges a commission D) a principal and charges a commission

Answer: B A broker dealer that purchases securities for, or sells securities from, its inventory is acting in the capacity of a principal. Principals charge mark-ups on sales from inventory. When acting in the capacity of agent (facilitating a transaction between a buyer and seller), the broker-dealer receives a commission.

Your client is interested in a variable annuity that offers to add a small percentage of each of his premium payments to the account. You explain that, in return for this enhancement, the annuity has a longer surrender period than the insurance company's standard variable annuity products, meaning that surrender charges are applicable for a longer period of time. What type of annuity is this? A) Indexed annuity. B) Bonus annuity. C) Guaranteed annuity. D) No-surrender annuity.

Answer: B Bonus or enhancement variable annuities add a small percentage of each premium payment to the account. They are most often associated with longer surrender periods, eight or nine years versus the typical seven years. The annuitant agrees to this in return for the added bonus or enhancement.

All of the following concerning CMOs are true EXCEPT: A) most CMOs are highly rated. B) CMOs are issued by government agencies. C) CMOs are issued by broker-dealers. D) Some CMOs provide investors with more prepayment protection than pass-through securities.

Answer: B CMOs are created by broker-dealers, who buy pass-through securities from government agencies and government-sponsored corporations, place the certificates in trust, and issue participation interests in the trusts that are tied to specific maturity periods (tranches). Since they are backed by mortgages, they tend to be highly rated.

Under the Securities Act of 1933, which of the following actions may a broker-dealer take before the effective date of a new offering? A) Accept client orders. B) Give a client a preliminary prospectus. C) Give a client sales literature concerning the offering. D) Give a client a preliminary prospectus together with sales literature concerning the offering.

Answer: B During the cooling-off period, the broker-dealer may not accept orders for, or provide sales literature about, the new issue. However, the broker-dealer may provide a preliminary prospectus.

Which of the following 'funds' are not redeemable securities? Hedge funds. Growth funds. Exchange-traded funds. Principal-protected funds. A) II and IV. B) I and III. C) II and III. D) I and IV.

Answer: B Hedge funds and exchange-traded funds do not provide for redemption of shares by the fund.

Which of the following stock features would cause a preferred stockholder to receive a greater amount of dividend income than the fixed rate stated on the stock certificate? Convertible Callable Participating Cumulative A) I and II. B) III and IV. C) I and IV. D) II and III.

Answer: B Holders of participating preferred may receive a portion of the common dividend in addition to their fixed dividend, at the discretion of the board of directors. Holders of cumulative preferred receive dividends in arrears to make up for preferred dividends that the corporation has missed paying in past years.

A regulated investment company: A) offers only nonredeemable shares. B) acts as a conduit for dividend distributions. C) is managed by the SEC. D) is in court receivership.

Answer: B If an investment company distributes at least 90% of its net investment income to shareholders, it is considered to act as a pipeline or conduit for the distribution; it will receive special tax treatment and is classified as a regulated investment company under Sub Chapter M of the Tax Code. Investment companies are registered with, not managed by, the SEC. Open- and closed-end companies may be regulated.

Which of the following risk factors would be least important to disclose in recommending CMO securities with an active secondary market to public customers? A) Extension risk. B) Liquidity risk. C) Prepayment risk. D) Interest rate risk.

Answer: B If there is an active secondary market for the CMO, investors won't have a difficult time turning their investment back into cash (CMO's with complex characteristics may have limited or nonexistent liquidity). The other risks are inherent to mortgage-backed securities like CMOs.

When an investor receives payments during the annuity period of a nonqualified variable annuity, how will he be taxed? A) Both as ordinary income and long-term capital gain rates, according to which type of return the account has generated. B) At ordinary income rates on the growth portion. C) At short-term capital gain rates on the growth portion. D) At long-term capital gain rates on the growth portion.

Answer: B In a nonqualified annuity, the investor invests using after-tax dollars. When he receives payments during the annuity period, he will pay ordinary income taxes on the growth portion only.

A mutual fund may temporarily suspend the redemption provision under all of the following circumstances EXCEPT: A) if a suspension of the service is applied for and granted by the SEC. B) at the discretion of the investment company management. C) if an emergency condition exists and with SEC approval. D) if the New York Stock Exchange is closed on a day other than a weekend or holiday. Explanation The 7-day redemption guideline is law and may be suspended only with SEC permission, which generally requires an emergency condition of some sort, or if the NYSE is closed on a day other than customary holidays and weekends.

Answer: B The 7-day redemption guideline is law and may be suspended only with SEC permission, which generally requires an emergency condition of some sort, or if the NYSE is closed on a day other than customary holidays and weekends.

A FINRA member quotes 32.25 - 32.50 on an over-the-counter stock. A customer who wishes to sell at that price informs the broker-dealer of this, and the trade is completed. The customer delivers the stock the next day, but now the price is 28.75. According to the rules, the trade will be: A) canceled. B) completed at 32.25. C) completed at 32.50. D) completed at 28.75.

Answer: B The customer sells at the bid price, which is 32.25. The trade terms are fixed as of the trade date, regardless of price movements before settlement.

A customer purchases 1,000 ABC mutual fund Class A shares and wishes to redeem the shares 30 days later. Which of the following will occur? A) The full amount of the investment will be returned to the customer. B) Shares will be redeemed at a price equal to the next calculated net asset value. C) All sales charges will be refunded and no redemption fee will apply. D) The customer will be charged a redemption fee but all sales charges will be returned.

Answer: B The customer will receive the next calculated net asset value (NAV).

Which of the following statements about 401(k) plans is NOT true? A) Employer contributions generate tax-deferred earnings. B) Employer contributions are determined by the company's profits. C) Employee contributions may be matched wholly or in part by employer contributions. D) Employee contributions generate tax-deferred earnings

Answer: B The employer contribution in a 401(k) plan typically matches a portion of the employee contribution. It is profit-sharing plans that call for the employer contribution to be determined by the company's profits.

Your customer, who owns a small business, would like to make provision for his retirement. You might suggest to him any of the following EXCEPT: A) a self-employed 401(k) plan. B) a Section 457 plan. C) a Roth IRA. D) a variable annuity.

Answer: B The only choice that is firmly eliminated is the Section 457 plan. That type of retirement plan is open only to state and local governments and tax-exempt employers.

Ginnie Mae issues pass-through certificates. What does this mean? A) The investor receives principal and interest passed through after taxes and interest. B) The investor receives principal and interest after the homeowner has made his monthly mortgage payment. C) The issuer receives principal and interest passed through from the Treasury. D) The issuer will pass through all losses.

Answer: B The term pass-through means that Ginnie Mae has received money from the homeowner and passed it through to the investor.

Which of the following concerning Section 529 plans are TRUE? Qualified withdrawals are exempt from federal income tax. Contributions are tax qualified. Some states will tax the withdrawals as income. Withdrawals may be used for any expenses incurred by a student. A) II and III. B) I and III. C) I and IV. D) II and IV.

Answer: B The withdrawals from Section 529 plans are federally tax exempt, but they may be taxed as income in some states. The money that is invested in a Section 529 plan is always after tax. The withdrawals must be used for qualified education expenses (e.g., tuition, books, lecture fees, lab fees) and not simply for any expense of a student.

What happens to outstanding fixed-income securities when interest rates decline? A) Yields increase. B) Prices increase. C) No change. D) Coupon rates increase.

Answer: B When interest rates drop, prices will rise, decreasing effective yield. Thus, there is an inverse relationship between interest rates and bond prices.

Which of the following statements about municipal bonds is NOT true? A) Municipal bonds generally carry lower coupon rates than corporate bonds of the same quality. B) The interest on municipal bonds is usually not subject to federal income tax. C) Municipal bonds are generally considered riskier than corporate bonds. D) Municipal bonds are bonds issued by governmental units at levels other than the federal.

Answer: C Municipal bonds are generally considered second only to treasury instruments in relative safety.

A contractual plan company is what type of investment company? A) Closed-end company. B) Mutual fund. C) Unit investment trust. D) Face amount certificate company.

Answer: C A contractual plan company is a unit investment trust that purchases mutual fund shares for its customers on a contractual basis. Though contractual plans are no longer sold, there are still many such contracts in force.

GEM Metals Fund, a diversified open-end investment company, invested 5% of its total assets in ABC Minerals and Mining, Inc. The market soared, and because of ABC's phenomenal appreciation, ABC securities now make up 8% of GEM Fund's total assets. In this case, which of the following statements is TRUE? A) GEM fund is no longer a diversified investment company. B) GEM Fund must sell enough ABC securities to reduce its holdings in ABC to 5% of its total assets. C) GEM Fund does not have to sell ABC shares but may not buy more ABC shares and still advertise itself as a diversified company. D) GEM Fund must sell out its holdings in ABC completely.

Answer: C A fund does not lose its diversified status because of market movement. Although this fund may not purchase more ABC shares, it need not sell off any of its ABC holdings to retain diversified status.

A client who purchased a variable life insurance policy is not pleased with his decision. Within the first 24 months of issue, the owner has the right to A) convert the policy into any form of term insurance currently offered by the company B) cancel the policy and receive a full refund of all sale charges paid C) convert the policy into a whole life policy using the original policy issue date D) cancel the policy and receive a full refund of all premiums paid

Answer: C A unique feature of variable life insurance is the ability to convert or exchange the policy into a whole life policy as of the original policy issue date for a period of no less than 24 months (two years) from the date of issue. For those insurance companies that do not offer whole life policies, the prospectus will indicate the available exchange policy, frequently universal life

All of the following actions are violations of the Conduct Rules EXCEPT: A) offering mutual fund shares to a customer at a discount from the appropriate POP. B) recommending a growth fund to a customer whose sole investment objective is income. C) opening a cash account for a customer without the customer's signature on the new account form. D) delivering a prospectus 48 hours after the sale of a mutual fund

Answer: C Although it seems strange, for a cash account, the Conduct Rules only require the signature of the principal accepting the account. Discounts from the POP are available to member firms only.

Your client wishes to purchase units in a municipal bond UIT that was issued two years ago. These units would be purchased: A) directly from another investor. B) in the over-the-counter market. C) from the UIT's sponsor. D) on an exchange.

Answer: C Although only a limited number of units are sold in the IPO, UIT sponsors maintain a secondary market where units that have been redeemed from the original investors are resold to new ones.

A customer is considering entering into an accumulation plan with his mutual fund. He is worried about committing to sending in so much per month that he may have trouble meeting the obligation, but he doesn't wish to commit to so little per month that his account does not build rapidly enough to meet his investment objectives. The registered representative explains that accumulation plans: I. are binding on the investor. II. are binding on the mutual fund. III. are not binding on the investor. IV. are not binding on the mutual fund. A) III and IV. B) I and IV. C) II and III. D) I and II.

Answer: C An investor is not obligated to meet the terms of an accumulation plan, even if it is a contractual plan that he has signed. If he cannot send money in for some period, he need not. The plan is, however, binding on the fund. When the fund does receive a payment, it must use it to purchase the appropriate shares.

A customer of yours owns a corporate bond fund with a long duration. Mortgage rates are going up. What impact will this have on the investment? A) the price of the shares will increase. B) the current yield should decrease significantly. C) the current yield will increase since the price of the shares can be expected to fall. D) the existing bonds in the portfolio will generate more income.

Answer: C Bonds (the chief investment of this fund) display an inverse relationship between prices and interest rates. Since interest rates are going up, bond prices can be expected to decrease. A given bond, then, will experience a decrease in price and a corresponding increase in the calculated current yield. The same can be expected of mutual funds that invest in bonds.

SEC regulations for securities issued by investment companies prohibit which of the following? Closed-end funds from issuing preferred stock. Open-end funds from issuing preferred stock. Closed-end funds from issuing bonds. Open-end funds from issuing bonds. A) I and III. B) I and IV. C) II and IV. D) II and III.

Answer: C Closed-end funds may issue more than one class of security, including debt issues and preferred stock. Open-end funds may issue only one class of security: redeemable, voting common stock; they may not issue senior securities.

Investment Company Directed Brokerage Arrangements provisions refer to: members favoring sales of investment company shares. breakpoints and letters of intent. short sales of fund shares in a down market. member execution of investment company portfolio transactions. A) II and IV. B) II and III. C) I and IV. D) I and III.

Answer: C FINRA rules prohibit members from favoring the sale of shares of any investment company on the basis of brokerage commissions received or expected to be received.

If an investor is in a low tax bracket and wishes to invest a moderate sum to gain some protection from inflation, which of the following would you recommend? A) Money market mutual fund. B) GNMA fund. C) Growth mutual fund. D) Municipal unit investment trust.

Answer: C Growth funds invest chiefly in common stock. Historically, common stock provides greater protection from inflation than debt securities do.

A broker-dealer with a sales agreement with a mutual fund must return all concessions to the underwriter if a customer redeems his shares: A) under no circumstances. B) within five business days of the initial purchase. C) within seven business days of the initial purchase. D) within ten business days of the initial purchase.

Answer: C If any security issued by a mutual fund is tendered for redemption within seven business days after the date of an initial transaction, the broker-dealer must refund to the underwriter the full concession allowed to the broker-dealer on the original sale.

If a customer fails to pay for XYZ mutual fund shares within the required amount of time, the broker-dealer may: A) cancel the order. B) charge the customer double the sales load. C) sell the securities and charge the customer for any loss. D) fine the customer based on the dollar amount of the sale.

Answer: C If the customer fails to pay for the shares, the broker-dealer may liquidate them to pay transaction costs. Any gain or loss is settled between the broker-dealer and the customer because the order has been executed and cannot be cancelled.

Which of the following investments is most susceptible to interest rate risk? A) Preferred stock B) Federal funds rate C) 30-year Treasury bond D) A balanced fund

Answer: C Interest rate risk refers to the sensitivity of an investment's price or value to fluctuations in interest rates. Although preferred stock prices move inversely with interest rates and so do the bonds within a balanced fund, 30-year Treasury bond prices will be affected the most because the greater the maturity, the greater the sensitivity.

When referring to employee retirement plans, the term nonqualified refers to plans: not approved by the IRS. that offer tax-deductible contributions and tax-deferred growth. under which employers may discriminate as to the inclusion of employees in the plan. under which employers may deduct contributions made on behalf of employees as the contributions are made. A) II and IV. B) III and IV. C) I and III. D) I and II.

Answer: C Nonqualified retirement plans do not require IRS approval. Nonqualified plans also allow employers the right to discriminate as to who participates in the plan. Contributions are not tax deductible, and employers can deduct contributions only when they are paid to employees, not when they are made by the company.

Which of the following securities is issued at par? A) Treasury STRIPS B) Zero coupon bond C) Treasury notes D) Treasury bills

Answer: C Of the securities shown, only treasury notes issue at par and pay semiannual interest. The others issue at a discount, pay no interim interest, and are redeemed at par.

A unit investment trust has 90% of its portfolio invested in high-grade bonds with an average maturity of almost 25 years. If the industry consensus were that long-term interest rates were about to increase sharply, which of the following actions would most likely be taken? A) Switch to short-term bonds. B) Ladder the maturities. C) No action would be taken. D) Liquidate and begin to move into cash or cash equivalents.

Answer: C One of the key distinctions of a UIT is its lack of management. Once the portfolio has been created, it is fixed until maturity, in the case of debt securities, or until some predetermined liquidation point, in the case of an equity trust.

All of the following are true of negotiable, jumbo certificates of deposit EXCEPT: A) they usually have maturities of less than one year. B) they are readily marketable. C) they are fully insured in any denomination by the FDIC. D) they are usually issued in denominations of $100,000 to $1 million.

Answer: C The FDIC insures only up to $250,000, any issue greater than that amount is an unsecured promissory note of the bank.

An issuer who sells mutual funds that have been registered under the Securities Act of 1933 is allowed to make which of the following statements? A) The SEC has passed on the accuracy of the information contained in the prospectus. B) The securities have been approved by the SEC. C) The securities offered are registered with the SEC. D) The SEC has passed on the adequacy of the information contained in the prospectus.

Answer: C The SEC only clears or releases a security for sale. It neither approves nor disapproves the offering, nor does it pass on the accuracy or adequacy of the information contained in the prospectus. A disclaimer regarding this fact must be on the front page of the prospectus.

A customer owns 200 shares of ABC Growth Fund, which has a POP of $12 and an NAV of $11. She wants to convert these shares to ABC Balanced Fund, which has a POP of $14.77 and an NAV of $13.66. ABC offers a conversion privilege. At what price will the ABC Balance Fund shares be purchased? A) $12. B) $11. C) $13.66. D) $14.77.

Answer: C The fund offers conversion privileges so that conversion occurs at the net asset value. Since the customer is exchanging into the ABC Balanced Fund, she will purchase shares at its NAV of $13.66.

An investor purchased 200 shares of ACE Fund when the POP was $11.60 and the NAV was $10.60. ACE Fund's current POP is $12.50, and current NAV is $11.50. If the investor liquidates his 200 shares now, he will have a: A) gain of $20. B) gain of $200. C) loss of $20. D) loss of $200.

Answer: C The investor's cost basis in the shares is $11.60. If he liquidates, he will receive the net asset value of $11.50, resulting in a loss of $.10 per share. Liquidating 200 shares results in a total loss of $20 (200 × $.10).

A customer has invested $9,000 and signed a letter of intent for a $15,000 mutual fund investment. If his reinvested dividends during the 13 months total $720, how much money must he contribute to fulfill the letter of intent? A) $5,280. B) $9,000. C) $6,000. D) $15,000.

Answer: C The shareholder must contribute the full $15,000, so he owes an additional $6,000. Reinvested dividends and changes in the NAV do not count toward a breakpoint during the period of a letter of intent.

Which of the following is accurate with regard to using a summary prospectus for the sale of a mutual fund? A statutory prospectus must precede or accompany delivery of the summary prospectus. A statutory prospectus may be delivered after the summary prospectus. Electronic delivery of the statutory prospectus is allowed after the sale. A paper prospectus must be delivered within 3 days of the sale. A) I and III B) III and IV C) II and III D) II and IV

Answer: C The summary prospectus may include an application for sale. The statutory or full prospectus must be available online.

Under the exchange provision, within the first 24 months, a variable life policy may be converted into a: A) term insurance policy. B) variable annuity. C) whole life policy. D) mutual fund shares.

Answer: C The variable life exchange provision allows a policyholder to convert the variable policy into a whole life policy within the first 24 months of variable policy ownership. The insurance company must use the initial contract date and cannot require proof of insurability.

Your married customers are both 42 years old, have two children ages 14 and 12, and they have spent the last ten years accumulating money to provide for their children's education. Their oldest child will enter college in four years, and the customers are very cautious investors. If they need a safe investment that provides regular income to help them meet tuition payments, which of the following mutual funds is the most suitable for these customers? A) RST Balanced Fund. B) ATF Overseas Opportunities Fund. C) LMN Investment-Grade Bond Fund. D) ABC Stock Index Fund.

Answer: C These clients cannot afford a downturn in the stock market between now and the time they want to send their children to college. An investment-grade bond fund will provide the income and safety required for accumulating additional funds for college expenses.

Your customer owns two accounts with your firm: a cash account and a margin account. He and his wife own a joint account. He is also the custodian of UTMA accounts for their two older sons, and his wife is the custodian for an UTMA account for their youngest son. The Securities Investor Protection Corporation would consider this to be how many customers? A) Two - the man and his wife, each taken together with the UTMA accounts they manage. B) Four - the man's two accounts taken as a single customer, his wife with her account, and the UTMA accounts taken collectively. C) Five - the man's two accounts taken as a single customer, the joint account with his wife taken as another customer, and each of the three UTMA accounts taken separately. D) Three - the man, his wife, and their sons' UTMA accounts taken collectively.

Answer: C Though the man has two accounts, he is still a single customer. The other accounts are all considered separate customers.

Which of the following statements regarding a corporate bond quoted as QRS Zr 20 is TRUE? A) The interest payable is tax free. B) The bond pays $200 interest annually. C) The bond pays $20 interest annually. D) The bond pays no interest until maturity.

Answer: D QRS Zr 20 represents a zero-coupon bond issued by the QRS Company maturing in 2020. Zero-coupon bonds are bought at a discount and mature at face value. If a bond is held to maturity, the difference between the purchase price and the maturity price is considered interest, though it is taxed on a yearly basis.

6s 2020 93:20 - 94:16 An investor reads this typical newspaper listing quote on a U.S. Treasury bond with a par value of $1,000. Disregarding transaction costs, if purchasing this bond, the investor would expect to pay: A) $932. B) $941.60. C) $936.25. D) $945.

Answer: D A buyer would expect to pay the offering price, in this quote, 94.16. Since Treasury bonds are quoted in points and 1/32's, where a point is $10, the price would be $940 plus 16/32 of $10, or $945.

A convertible bond of the KLP Corporation has a conversion ratio of 20. This means that: the conversion price of the bond is $20 per share. one bond can be exchanged for 50 shares of KLP common stock. one bond can be exchanged for 20 shares of KLP common stock. the conversion price of the bond is $50 per share. A) I and III. B) I and II. C) III and IV. D) II and IV.

Answer: D A conversion ratio of 20 means that one bond can be exchanged for 20 shares of common stock. Since the par value of the bond is $1000, this corresponds to a conversion price of $50 per share.

A letter of intent for a mutual fund does NOT contain which of the following provisions? A) The time limit is 13 months. B) The letter may be backdated 90 days to include a previous deposit. C) The fund will keep some of the initially issued shares in an escrow account to ensure payment of the full sales load. D) The fund may halt redemption during the time the letter of intent is in effect.

Answer: D A letter of intent is a nonbinding contract entered into by an investor for the purpose of obtaining reduced sales charges. If the client were to redeem the entire account before fulfilling the terms of the letter, or if the 13 months elapsed without the full amount being invested, the escrowed shares would be redeemed and the proceeds used to pay the additional sales charge.

Under the Investment Company Act of 1940, which of the following describes an investment company? A) A company formed to underwrite the issuance of new securities. B) A group of individuals formed for mutual interest and benefits. C) A company that offers investment advice to new companies. D) A company whose primary business is investing its owners' money in securities issued by other companies.

Answer: D An investment company is a corporation or trust whose only business is investing its owners' money in the securities of other companies instead of manufacturing goods or providing services. The company must have a clearly defined investment objective

If a corporation's investment account received $100,000 in dividends and $20,000 in interest; how much of the $120,000 received would be subject to taxation? A) $120,000 B) $20,000 C) $90,000 D) $50,000

Answer: D Corporations that receive dividends from investments have a 70% dividend exclusion. This means that out of the $100,000 received, only 30%, or $30,000 is subject to taxation. No such exclusion exists for interest received. Therefore, $30,000 plus $20,000 equals $50,000 subject to taxation.

The interest from which of the following bonds is subject to federal income tax? State of Nebraska. City of Duluth. Treasury notes. FNMA. A) II and IV. B) I and III. C) I and II. D) III and IV.

Answer: D Direct federal debt, such as a Treasury note, is subject to federal income tax but exempt from state tax. FNMA bonds are subject to federal, state, and local taxes. State and city bonds, being municipals, are exempt from federal income tax.

There are a number of risks inherent in investing in equity securities. Which of the following stocks would be most affected by changes in interest rates? A) Treasury stock. B) Common stock. C) Long term warrants. D) Noncumulative preferred stock

Answer: D For most investors, the primary feature of investing in preferred stock is its fixed dividend. Consequently, it is purchased for income and is more sensitive to changes in interest rates than common stock is. Warrants are not affected by interest rate movement as they only provide a right to purchase underlying common stock.

Each of the following persons would be eligible under a Keogh plan EXCEPT: A) an executive who is employed by a corporation and who gives paid evening seminars on music appreciation. B) a self-employed doctor. C) an engineer receiving extra compensation as an outside consultant. D) an advertising executive who informally advises the board of his corporation on the company's investments.

Answer: D Only an individual with self-employment income may open a Keogh Plan (HR-10).

When discussing the benefits of a Section 1035 exchange with a client, it would be appropriate to point out that the main benefit is: A) saving the death benefit. B) a reduction in surrender charges. C) the opportunity to move from one separate account to another. D) tax savings.

Answer: D Section 1035 of the Internal Revenue code permits the exchange of one annuity for another without incurring any current tax liability. In other words, the earnings continue to be deferred until the money is actually withdrawn.

When discussing the purchase of a scheduled premium variable life insurance policy with a client, it would be CORRECT to state that: A) if a policy loan exceeds the policy cash value, the deficiency must be remedied within ten business days to keep the policy from lapsing. B) you will receive a statement of your death benefit no less frequently than semiannually. C) premiums will vary based upon performance of the separate account. D) by surrendering the policy its cash value may be obtained.

Answer: D Surrender of the contract requires the insurance company to pay out its cash value. Death benefit is adjusted annually.

T-bills are quoted: A) in 16ths. B) in 32nds. C) as a percentage of par. D) on an annualized discount yield basis.

Answer: D T-bills do not bear interest. T-bills trade and are quoted on an annualized discount yield basis.

When a member firm opens an account for a registered representative of another member, the employer-member must be sent written notification: A) within five business days. B) only if requested by the registered representative. C) either by the representative or by the firm opening the account. D) before executing an order.

Answer: D When a registered representative of a member firm opens a brokerage account with another member firm, the firm opening the account must send written notification to the registered representative's employer before the execution of any transaction.

Guaranteed cash value is a standard feature found in which of the policies listed below? A) Term life. B) Variable life. C) Whole life and variable life. D) Whole life.

Answer: D Whole life policies offer guaranteed cash values and death benefits. The insurer assumes the investment risk by promising a fixed rate of policy return, regardless of investment performance. Term insurance is pure insurance protection and builds no cash value. Variable life cash value is not guaranteed, though cash value may be available depending on the performance of investments in the separate account.

Which of the following funds might have income as their primary investment objective? The Ace Capital Appreciation Fund. The Bellner Preferred Equity Fund. The LMN Long-Term Corporate Bond Fund. The Whitfield-Taylor S&P 500 Index Fund.

Answer: II and III Funds specializing in debt instruments or preferred stock offer current income as their primary investment objective. Growth funds and other equity funds offer capital gains, and index funds permit the investor to enjoy the same growth and earnings as the market.

When an agent explains mutual funds to a prospective investor, which of the following statements may be made? A) Mutual funds must make payment within 7 days of a redemption request and guarantee a return of the original investment. B) The redemption value of mutual fund shares fluctuates according to the fund's portfolio value. C) Mutual fund shares are liquid and may be switched from fund to fund without tax liability. D) A fund always redeems shares at NAV, with little chance of a financial loss.

Answer:B Mutual fund redemption values fluctuate according to the value of the securities in the portfolio. The tax liabilities associated with mutual fund switching may not be glossed over. While the redemption rules of the Investment Company Act of 1940 do make mutual funds easily redeemable, investors are not guaranteed to receive an amount equal to the original investment.

A customer is interested in a mutual fund that specializes in mortgage-backed debt instruments such as CMOs. In discussing the characteristics of such a fund, you might make which of the following statements? A) A high prepayment frequency would tend to increase the number of mortgages underlying the fund. B) When interest rates rise, frequency of prepayments tends to increase. C) When interest rates fall, frequency of prepayments tends to increase. D) Interest rates have little or no effect on frequency of prepayments.

Answer:C Falling interest rates encourage homeowners to refinance, paying off their old mortgage by taking out a new one at a lower interest rate. This would tend to reduce the number of mortgages underlying the fund until money is reinvested.

A securities firm that holds stock rather than sells the stock is: A) churning. B) commingling. C) pegging. D) taking a position.

Answer:D A firm that acts as principal by holding stock is taking or holding a long position. The firm purchases the stock, hoping to sell at a later date at a higher price.