Series 66: Investment Vehicle Char (20% of Exam)

Bond prices are quoted as a percentage of A) par value B) stated value C) conversion value D) market value

A) par value Bond prices are quoted as a percentage of par value. On the exam, the par value of bonds is always $1,000.

The current yield on a bond with a coupon rate of 5.5% selling at 110 is A) 5.5% B) 5% C) 2% D) 6%

B) 5% The current yield of any security, equity, or debt is always the income return (dividend or interest) divided by the current market price. In this case, it is the annual interest of $55 ($1,000 x 5.5%) divided by $1,100 and that equals 5%.

Nonsecurities derivatives would include I. forward contracts II. futures contracts III. hedge funds IV. REITs A) I and IV B) I, II, and IV C) I, II, and III D) I and II

D) I and II Forward contracts and futures contracts are known as nonsecurities derivatives because they derive their value from something that is not a security. REITs and hedge funds are securities, not derivatives.

Which of the following is used in technical analysis in an attempt to modify fluctuations of stock prices over the long term into a smoothed trend? A) Trend lines B) Support and resistance C) Moving averages D) Consolidation

C) Moving averages To avoid the volatility frequently present in stock price trends, analysts will frequently use moving averages. These averages reduce short-term distortions to a minimum.

Which of the following would NOT be considered a derivative? A) Options B) Warrants C) ETFs D) Forwards

C) ETFs ETFs are investment companies (exchange-traded funds) and are not included in the definition of derivative.

Daniel has a number of investment company products within his retirement portfolio. One of these investments trades on an exchange, may trade at a premium or discount to its net asset value, and has a fixed capital structure. These features are most likely found in what type of investment? A) Closed-end investment company B) Unit investment trust C) Hedge fund D) Open-end investment company

A) Closed-end investment company A closed-end investment company (closed-end fund) is a type of investment company whose shares trade in the secondary market.

Which of the following commodities is least likely to be affected by the weather? A) Silver B) Orange juice C) Wheat D) Pork bellies

A) Silver Silver is a precious metal and its price is not influenced by the weather. Crops, such as wheat and oranges, certainly are and livestock is affected as well.

The offering document for a fund states that the minimum initial investment is $500,000. This is most likely what type of fund? A) Hedge B) Small-cap growth C) Balanced D) Specialized

A) Hedge Hedge funds, due to their much higher risk, usually limit their investors to those who can afford to take that higher risk by having very high minimums. Do not be surprised if you see a test question referring to the hedge fund offering document as a prospectus. That is an acceptable term even though we tend to think of a prospectus referring to a registered issue (and hedge funds do not register with the SEC or the state).

An 8% corporate bond is offered on a 8.25 basis. Which of the following statements are TRUE? I. Nominal yield is higher than YTM. II. Current yield is higher than nominal yield. III. Nominal yield is lower than YTM. IV. Current yield is lower than nominal yield. A) II and III B) I and III C) I and IV D) II and IV

A) II and III A bond offered on an 8.25 basis is the same as at a YTM of 8.25%. Because the yield quoted is higher than the 8% coupon, the bond is trading at discount to par. For discount bonds, the nominal yield is lower than both the current yield and the yield to maturity.

Which of the following are regulated under the Securities Exchange Act of 1934? I. New issues II. Broker-dealers III. Transfer agents A) II and III B) I and III C) I only D) I, II, and III

A) II and III The Securities Exchange Act of 1934 was designed to regulate securities transactions, securities markets, and the securities firms who do the trading. While the Securities Act of 1933 covers requirements relating to new issues, the Securities Exchange Act of 1934 covers almost everything else in the securities industry. Its greatest impact is on the securities firms and the people who sell securities (i.e., broker-dealers and their agents) in the secondary market. Of the choices listed, new issues would be regulated by the Securities Act of 1933.

Which of the following statements regarding a $1,000 corporate 8.50% bond offered at 110 is true? A) The bond's current yield is calculated by dividing its annual interest by its current market price. B) The bond is a discount bond. C) To determine the bond's current yield, its stated rate must be compared against other fixed-rate investments in the client's portfolio. D) The bond's current yield is lower than its yield to maturity.

A) The bond's current yield is calculated by dividing its annual interest by its current market price. A bond's current yield is calculated by dividing its annual interest by its current (market) price. In this case, it would be $85 ÷ $1,100. The current yield will be higher than its yield to maturity, which takes into consideration the $100 difference between the purchase price and the par value (a loss of $100). The determination of a bond's yield is unrelated to other bonds. In addition, this bond is selling at a premium (more than $1,000), not at a discount (less than $1,000).

What would likely happen to the market value of existing bonds during an inflationary period coupled with rising interest rates? A) The price of the bonds would decrease. B) The price of the bonds would stay the same. C) The price of the bonds would increase. D) The nominal yield of the bonds would increase.

A) The price of the bonds would decrease. Bond prices fall when interest rates rise because bond prices have an inverse relationship with interest rates.

The most common form of investment vehicle for venture capital is A) the venture capital fund of funds. B) the corporate venture capital funds. C) the limited liability company. D) the limited partnership.

D) the limited partnership. The limited partnership structure is by far the most common for venture capital.

Which of the following statements regarding nonqualified annuities is CORRECT? A) Because only insurance companies issue variable annuities, they are not considered securities. B) It is possible to receive distributions from an annuity before age 59½ without incurring tax penalties. C) The exclusion ratio applies to accumulation units only. D) Because taxes on earnings are deferred, all money withdrawn will be subject to income tax when received.

B) It is possible to receive distributions from an annuity before age 59½ without incurring tax penalties. Nonqualified annuities, fixed or variable, are those where contributions are made with after-tax dollars. Withdrawals due to death or disability or taking substantially equal annuity distributions over the life of the insured can begin before age 59½ without being subject to a tax penalty. The exclusion ratio only applies during the payout period. Even though taxes on earnings are deferred, that portion of the withdrawal that represents a return of principal on a nonqualified annuity, is not subject to tax or penalty.

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

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

When doing cash flow analysis on a mortgage-backed pass-through security, you would want to know A) size of the tranche being analyzed B) the average maturities C) whether there is a real estate "bubble" D) the quality of the mortgages

B) the average maturities Mortgage-backed pass-through securities pass through interest and principal payments to their investors. The rate at which the cash flows are generated depends, among other things, on the rate at which the mortgages mature.

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

C) $475,000. The death benefit of a variable life insurance policy is the current face amount ($525,000) or the guaranteed minimum, whichever is greater, less any outstanding loans ($50,000).

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

C) 20 shares The conversion ratio always uses the par value ($1,000), never the current market price. With a par value of $1,000 and a conversion price of $50 per share, this bond is convertible into 20 shares ($1,000 / $50). Remember, the number of shares in a conversion never changes. When the market price changes, the parity price changes, but that isn't relevant to this question.

If yields should change by 75 basis points, which of the following bonds would have the greatest price change? A) JKL 4s 2020 B) GHI 4s 2030 C) ABC 4s 2040 D) DEF 4s 2035

C) ABC 4s 2040 When all coupons are the same, the bond with the longest maturity will have the longest duration and, therefore, will be subject to the greatest price fluctuations.

An investor invests $25,000 into the KAPCO Balanced fund. It would be unlikely for this investor to be required to pay a CDSC when redeeming A) Class C shares B) any shares, regardless of Class C) Class A shares D) Class B shares

C) Class A shares Class B shares are known for their back-end load. Class C shares usually only have one for 1 year; but, if the investor redeems within that period, there will be a CDSC. Class A shares do not carry a back-end load, except under conditions that are beyond the scope of this exam. A contingent deferred sales charge (CDSC) is a fee, sales charge or load, which mutual fund investors pay when selling Class-B fund shares within a specified number of years from the original purchase date. This fee is also known as a "back-end load" or "sales charge." For mutual funds with share classes that determine when investors pay the fund's load or sales charge, Class-B shares carry a contingent deferred sales charge during a five- to 10-year holding period calculated from the time of the initial investment. The financial industry usually expresses a CDSC as a percentage of the dollar amount invested into a mutual fund. Sometimes, the finance industry may refer to a CDSC as an exit fee or a redemption charge.

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

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

An investor is considering purchasing an equity exchange-traded fund (ETF) to further diversify his portfolio. All of the following are reasons for him to purchase this investment EXCEPT A) lower annual expenses than those of mutual funds. B) lower taxable distributions than most mutual funds. C) ETFs offer tax benefits similar to a limited partnership. D) shares may be purchased and sold throughout the day.

C) ETFs offer tax benefits similar to a limited partnership. Equity ETFs are organized as regulated open-end investment companies or unit investment trusts, not as as limited partnerships. That means the tax benefit of the flow-through of operating income or loss does not apply. As regulated investment companies, they must distribute at least 90% of their net investment income and capital gains. However, the way in which capital gains occur is different resulting is fewer taxable distributions than is the case with a mutual fund. Expenses are generally lower as well, and ETFs trade during the day just like any stock.

Which of the following types of mutual funds would be most likely to have capital appreciation as its stated objective? A) Municipal bond B) Income C) Growth D) Balanced

C) Growth As the name implies, a growth fund looks for growth of capital (capital appreciation). Income funds are looking for income, municipal bond funds for tax-free income, and balanced funds for both income and growth with minimal risk to capital.

Which of the following is considered an advantage of annuitization? A) Payments under a variable annuity could be reduced if there is a declining market. B) Once annuitized, the client's draw from the annuity is limited to the annuity payment. C) It guarantees income that will last for the client's lifetime. D) A fixed, level periodic payment tends to lose buying power over time due to inflation.

C) It guarantees income that will last for the client's lifetime. Annuities offer a guarantee of income that will last for a client's lifetime. The other statements, while true, represent disadvantages of annuitization. Annuitization does limit liquidity and flexibility.

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

C) Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis Contributions to a nonqualified annuity are made with the owner's after-tax dollars. Distributions from such an annuity are computed on a LIFO basis with the income taxed first. Once the cost basis is reached, any further withdrawals are a nontaxable return of principal. Because the client is older than 59½ at the time of distribution, the additional 10% penalty tax is not incurred.

An investor is looking to add some bonds to her portfolio. One of the bonds she is analyzing has a 3% coupon and the other a 6% coupon. Assuming both bonds have the same maturity date, a change in interest rates will have a more profound effect upon the market price of which bond? A) The 6% coupon B) Changes in interest rates affect both bonds equally C) The 3% coupon D) The bond with the lower rating

C) The 3% coupon The longer a bond's duration, the more its price is affected by changes to interest rate. When bonds have the same maturity, the one with the lowest coupon has the longest duration. Ratings have little or nothing to do with price changes caused by interest rate changes.

Duration is A) the deviation of a bond's returns from its average returns B) identical to a bond's maturity C) a measure of a bond's price sensitivity with respect to a change in interest rates D) equivalent to the yield to maturity

C) a measure of a bond's price sensitivity with respect to a change in interest rates Duration measures a bond's sensitivity to a change in interest rates. The longer the duration, the greater the change in a bond's price with respect to interest rate changes.

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

D) BB Investment-grade bonds run from a highest Standard and Poor's rating of AAA (Aaa − Moody's) down to BBB (Baa − Moody's). When the rating gets to BB (or Ba) the bond is considered high yield, or a junk bond.

Which of the following statements about preemptive rights are TRUE? I. Preemptive rights give shareholders the right to purchase shares in new stock issues in direct proportion to the number of shares they already own. II. Preemptive rights allow shareholders to buy as many new shares as they want at any time. III. Preemptive rights allow shareholders to maintain their proportionate share of ownership in the corporation. A) I, II, and III B) I and II C) II and III D) I and III

D) I and III Preemptive rights give shareholders the right to purchase, in direct proportion to the number of shares they already own, shares in new issues of stock before they are offered to the general public. This allows current shareholders to maintain their proportionate share of ownership in the corporation.

If a customer's portfolio is heavily invested in common stock mutual funds, what is the customer's greatest risk? A) Loss of liquidity B) Changes in interest rates C) Loss of diversification D) Loss of principal

D) Loss of principal A mutual fund with a portfolio of common stock is subject to market risk. If the market falls, the value of the fund's shares also fall, subjecting the owner to loss of principal.

A viatical sale would generally involve A) a security with a large increase in value. B) a leveraged ETF. C) the sale of a term life insurance policy. D) an individual with a terminal illness.

D) an individual with a terminal illness. The term "viatical" comes from a Latin word with a religious connotation involving prayers for those near death. Viatical settlements stem from that definition and are generally used by those with a terminal illness and a life expectancy of 2 years or less. It is the sale of a life insurance policy, almost always whole life or another form of permanent insurance - rarely a term insurance policy.

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

D) Prices increase When interest rates drop, prices will rise, decreasing effective yield. Thus, there is an inverse relationship between interest rates and bond prices.

Kellie is a senior equity analyst for a large brokerage firm. She primarily uses fundamental analysis techniques to assist her in picking stocks for her firm's clients. Today, she is reviewing the XYZ Corporation. The company is a manufacturer of computer keyboards and is currently going through an expansion phase. Which of the following techniques would Kellie be least likely to use to determine whether to buy, sell, or hold this company's stock? A) She may consider trends towards tablets and smart phones. B) She may calculate the intrinsic value of the stock using one or more of the stock valuation models. C) She may examine the overall state of the economy, the computer industry, and then XYZ Corporation. D) She may review the company's stock 200-day moving average.

D) She may review the company's stock 200-day moving average. Reviewing the company's stock 200-day moving average is a technique used by technical analysts (chartists). All of the other techniques are used by fundamental analysts. The process of examining the economy, the specific industry, and the specific company is a reflection of top-down fundamental analysis.

Which of the following statements is TRUE concerning variable life separate account valuation? A) Unit values are computed monthly and cash values are computed daily. B) Unit values are computed monthly and cash values are computed weekly. C) Unit values are computed weekly and cash values are computed monthly. D) Unit values are computed daily and cash values are computed monthly.

D) Unit values are computed daily and cash values are computed monthly. Unit values are computed each day. Policy cash values are a monthly computation.

The long party is a futures contract that has entered the contract as A) a liquidity provider. B) a market maker. C) a seller. D) a buyer.

D) a buyer. Long is the industry term describing the buyer of a futures contract. The long is committed to buying the underlying asset at the pre-agreed price on the specified future date. Short is the industry term describing the seller of the futures contract. The short is committed to delivering the underlying asset in exchange for the pre-agreed price on the specified future date. Market maker is a term used for securities, not futures, and liquidity provider is a concept that is not tested (as is the case with many incorrect answer choices).

A review of the prospectus of an open-end investment company reveals that its portfolio consists entirely of negotiable CDs, Treasury bills, and commercial paper. This is probably A) an exchange-traded fund (ETF) B) a balance fund C) an index fund D) a money market fund

D) a money market fund Money market funds hold money market instruments like negotiable CDs, Treasury bills, and commercial paper.

Mr. Beale buys 10M 6.6s of 10 at 67. What will his annual interest be? A) $660.00 B) $820.00 C) $670.00 D) $1,000.00

A) $660.00 Interpret "10M" as "$10,000 worth of." Beale receives the nominal yield of the bonds, which is 6.6% of $10,000. The M is from the roman numeral for 1,000.

Louis owns an investment that is an unmanaged portfolio in which the money manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the investment portfolio terminates. This statement best describes which type of investment? A) Unit investment trust B) Hedge fund C) Closed-end investment company D) Open-end investment company

A) Unit investment trust A unit investment trust (UIT) is a type of investment company whose units are sold in the secondary market and is generally unmanaged, or passively managed. The trust manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the UIT terminates.

Last year, the bond market was profitable and ABC fund had 70% of its assets in bonds. Next year, the fund's managers expect the equity market to outperform and will adjust the fund's portfolio so that 60% of its assets will be invested in stock. ABC is most likely A) an asset allocation fund B) a growth fund C) an income fund D) a specialized fund

A) an asset allocation fund A mutual fund whose portfolio managers have the flexibility to allocate between different investment classes is known as an asset allocation fund.

A sector fund is one where the assets are A) concentrated in a particular industry or geographical area B) invested in emerging growth companies C) invested in other mutual funds D) invested in special situations

A) concentrated in a particular industry or geographical area Sector funds (specialized funds) target at least 25% of their investments toward a specific industry or geographical location.

A prospect has primary investment objectives of current income and safety of principal. During the initial public offering of a closed-end government bond fund, an agent explains to the prospect that the fund invests in U.S. government-backed bonds, which are very safe as to principal, and plans to make monthly distributions. Little could therefore go wrong. Taken as a whole, this representation is A) misleading because closed-end fund shares are subject to market pricing B) accurate because the fund invests in government bonds C) accurate because the fund offers current income D) misleading because government bonds experience considerable credit risk

A) misleading because closed-end fund shares are subject to market pricing Explanation Though parts of the agent's presentation are factually accurate, overall, the statements are misleading because the value of the fund is subject to unpredictable change. Closed-end funds can, and often do, trade below their net asset value, thus subjecting the customer's principal to risk.

Which of the following is not a characteristic of hedge funds? Hedge funds A) offer managers high fixed fees. B) invest in private securities, real assets, derivatives, and structured products. C) are privately organized and generally unregistered. D) use leverage, short positions, and concentrated positions.

A) offer managers high fixed fees. Hedge funds attempt to attract the top managers because they offer performance-based fees, which vary based on fund performance. The typical fee structure is 2% + 20% where 2% is the fixed fee and 20% of the profits is the performance portion.

An investor who is long XYZ stock would consider going long an XYZ call to A) protect against an increase in the market price of XYZ stock B) hedge the long position C) obtain income from the premium D) protect against a decrease in the market price of XYZ stock

A) protect against an increase in the market price of XYZ stock Going long a call means that you have bought it. Only sellers of options generate income. If you wish to hedge your long stock position, you buy a put, not a call. That leaves us with two choices that are polar opposites. Good test-taking skills teach us that, in almost all cases, when we see that, one of those must be the right answer. Buying a call is bullish. Forget the first part (you are long the stock). You would buy a call so that, if the price of the stock went up, you could exercise at the lower strike price of your call option.

Investment companies must send financial reports to shareholders A) semiannually B) quarterly C) monthly D) annually

A) semiannually Investment company financial reports must be sent twice a year and must include a portfolio list, income statement, statement of compensation paid to the board of directors and the advisory board, and a statement of the total dollar amount of securities bought and sold during the period. One of these reports must be the audited annual report.

When compared to mutual funds, which of the following statements regarding hedge funds is least accurate? Hedge funds A) tend to be more diversified in order to hedge risk. B) use derivatives to a greater extent. C) are generally only appropriate for qualified investors. D) can take both long and short positions.

A) tend to be more diversified in order to hedge risk. Hedge funds portfolios are more concentrated (i.e., less diversified), so that individual positions provide a significant contribution to the portfolio's return. In most cases, only accredited investors may invest in hedge funds. A major difference between hedge funds and mutual funds is the ability of the hedge fund to take short positions and one way the hedge fund obtains greater leverage is through the use of derivatives.

One of the questions investors should ask when evaluating a mutual fund is about the tenure of the fund manager. This refers to A) the length of time the manager has managed the fund. B) the length of time the manager has been registered. C) the inability to discharge the manager. D) the fund's performance for the past 1, 5, and 10 years.

A) the length of time the manager has managed the fund. A fund manager's tenure refers to the length of time that person has managed the fund's portfolio. Unlike the academic term which generally means that the individual may not be terminated without just cause, management contracts for an investment company must be renewed each year (after the initial 2-year contract) so it is relatively easy to remove the manager.

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

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

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

B) I and III Class C shares generally have the following features: no front-end sales charge, lower CDSCs than Class B shares for a shorter period, and no conversion to Class A shares regardless of how long they are held. Because of these features, Class C shares may be less expensive for investors with shorter investment horizons. They may be more expensive for investors who plan to hold their shares for a long time, because the level load never discontinues.

Which of the following statements is NOT true? A) It is the general partners rather than the limited partners who bear the liability for partnership debt. B) Limited partners have the option of actively managing the business operations. C) Limited partners are not liable for funds in excess of the amounts they have invested or otherwise committed for. D) Management of the enterprise is solely within the jurisdiction of the general partner(s).

B) Limited partners have the option of actively managing the business operations. Limited partners are passive investors in a partnership whose liability is limited to the amount of funds they have invested and committed to, but have not yet contributed. They do not manage the funds in the partnership; the general partner has that responsibility.

To a technical analyst, the resistance level signifies the price at which a stock's supply would be expected to A) decrease substantially. B) increase substantially. C) cause the stock price to "break out". D) remain constant.

B) increase substantially. This is about comparing support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down. The lower limit to these fluctuations is called a support level - the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level - the price range where a stock appears expensive and initiates increased selling. This selling represents an oversupply of the stock which results in downward pressure on the stock.

An investment adviser who is discussing forward contracts with a client would most likely be referring to an investment in A) a diversified portfolio B) an agricultural commodity C) an equity index annuity D) puts and calls

B) an agricultural commodity Forward contracts are available on commodities, such as agricultural products (e.g., corn, wheat, and soybeans). Puts and calls are options, not forward contracts; although this could be a way to diversify the portfolio, that does not directly answer the question.

One of your clients just inherited some money and wishes to invest $250,000 into the GEMCO International Equity Fund. The client is attracted to the Class B shares because there is no up-front sales charge on them while the Class A shares have a 3% front-end load. The appropriate response would be that A) the client is doing the smart thing by avoiding the sales charge, even though you will be losing out on the opportunity to earn a nice commission B) because of the higher 12b-1 charges levied against the Class B shares as well as the CDSC, Class A shares are recommended for a purchase of this size C) as long as the client will hold the Class B shares no longer than 4 years, the higher 12b-1 fees will be much less than the load paid on the Class A shares D) you feel so strongly that the Class A shares represent a more attractive solution for the client that you will rebate your share of the commissions

B) because of the higher 12b-1 charges levied against the Class B shares as well as the CDSC, Class A shares are recommended for a purchase of this size In the real world, there is probably no fund group that would accept a $250,000 order for Class B shares; more than likely, no fund group would even accept one above $100,000. That is because at that level, the reduced front-end load available on the Class A shares due to reaching a breakpoint, combined with the lower (or lack of) 12b-1 charge and no redemption charge (CDSC), makes them a better deal than the Class B shares. Rebating of commissions is not permitted, and even at the 4-year holding period, there still is a CDSC.

Knowing the average maturities would be most important when doing a cash flow analysis on A) REITs B) mortgage-backed securities C) common stock D) preferred stock

B) mortgage-backed securities Mortgage-backed pass-through securities pass through interest and principal payments to their investors. The rate at which the cash flows are generated depends, among other things, on the rate at which the mortgages mature.

News reports indicate that the wheat crop scheduled to be harvested in 3 months will be much larger than normal. To hedge, a wheat farmer would most likely A) take a long position in wheat futures. B) take a short position in wheat futures. C) sell wheat stocks short. D) grow corn instead.

B) take a short position in wheat futures. A bumper crop means lower prices for the producers (farmers). The appropriate protection is a short hedge - selling wheat futures. Think of it this way - if you thought a stock's price was going to decline, you would sell that stock short. Here, believing that wheat prices will decline, you take a short position in that commodity futures contract. There is no such thing as wheat stock and the wheat has already been planted; it is too late to switch crops.

A mutual fund would have net redemptions when A) the fund manager is selling more securities in the portfolio than are being purchased B) the number of shares being liquidated by investors exceeds those being purchased C) the fund is performing below the average of other funds with the same objectives D) the fund increases its sales charge

B) the number of shares being liquidated by investors exceeds those being purchased One of the characteristics of an open-end investment company (mutual fund) is the ease of redeeming holdings. When the dollar amount of shares being redeemed exceeds that of those being purchased, the result is net redemptions. Although poor performance could lead to net redemptions, that is not always the case, so it is not always a true statement.

A fundamental analyst researching a stock is concerned with all of the following EXCEPT A) management efficiency B) volume of shares traded C) the stock's market price as a multiple of the company's earnings D) capitalization ratio

B) volume of shares traded A fundamental analyst is concerned with the economic climate, the inflation rate, how an industry is performing, a company's historical earnings trends, how it is capitalized, and its product lines, management, and financial statement ratios, such as the P/E ratio. A technical analyst is concerned with trading volumes or market trends and prices.

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

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

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

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

Which of the following statements regarding derivative securities is NOT true? A) An option contract is a derivative security because it has no value independent of the value of an underlying security. B) Derivative securities can be sold on listed exchanges or in the over-the-counter market. C) An owner of a put has the obligation to purchase securities at a designated price (the strike price) before a specified date (the expiration date). D) An option contract's price fluctuates in relationship to the time remaining to expiration as well as with the price movement of the underlying security.

C) An owner of a put has the obligation to purchase securities at a designated price (the strike price) before a specified date (the expiration date). An owner of a put has the right, not the obligation, to sell, not purchase, a security at a designated price (the strike price) before a specified date (the expiration date). Although this exam deals exclusively with listed equity options, there are options traded in the OTC market. Two of the factors affecting the market price of an option (its premium) are the length of time until expiration (the longer the time, the greater the time value) and whether or not the option has intrinsic value (the difference between the stock price and the market price).

One type of alternative investment considered to be a pooled investment vehicle is the exchange-traded note. Exchange-traded notes (ETNs) are I. unsecured debt securities II. unsecured equity securities III. issued by financial institutions, such as banks IV. insured by the FDIC A) II and IV B) I and IV C) I and III D) II and III

C) I and III Exchange-traded notes are unsecured debt securities issued by financial institutions, such as banks. Their prices can be impacted by changes in the credit rating of the issuer, and they are not insured by the FDIC.

Which of the following is designed primarily as a retirement vehicle to help protect contract owners from a decline in purchasing power? A) Flexible premium fixed annuity B) Retirement income life insurance C) Variable annuities D) Life-paid-up-at-age-65 life insurance

C) Variable annuities The tradeoff with lack of guarantees is the potential to keep pace with inflation.

Compared to a publicly-traded fund, a private equity fund is most likely to A) be more concerned with short-term results. B) exhibit stronger corporate governance. C) disclose less information about its financial performance. D) provide more details regarding its financial performance.

C) disclose less information about its financial performance. Private equity funds are not held to the same financial reporting requirements as publicly-traded funds. Less public scrutiny and limited financial disclosure may lead to weaker corporate governance. Private equity funds generally need several years before the fruits of their labor are ready to be harvested.

Bond investors use the discounted cash flow formula to A) evaluate the risk of investing in a bond. B) determine the annual interest paid on a bond. C) translate future cash flows to be received from interest and principal repayment into their present value. D) compute their income tax liability.

C) translate future cash flows to be received from interest and principal repayment into their present value. The discounted cash flow method of valuing a fixed-income security discounts the investment's future cash flows to arrive at a present value. Those cash flows come from two sources: The first is the semiannual interest payments and the second is the final maturity payoff. Each of these is discounted using the required rate of return (usually the current market interest rate) and the result is the present value of those cash flows. The security's rating is not a factor in this computation although it may affect what investors are willing to pay for the security.

An investor purchases two PMJ Dec 16 calls at $.85. If the commission charge is $8, the total cost is A) $328. B) $93. C) $188. D) $178.

D) $178. A premium of 85 cents per share means each contract has a cost of $85. There are two of them making that $170. Adding the $8 commission brings the total to $178.

A mutual fund must redeem its tendered shares within how many days after receiving a request for their redemption? A) 10 B) 3 C) 5 D) 7

D) 7 The 7-day redemption rule is required by the Investment Company Act of 1940.

Which of the following indicates a bond selling at a discount? A) 10% coupon yielding 9% B) 7% coupon yielding 6.5% C) 5% coupon yielding 5% D) 7% coupon yielding 7.5%

D) 7% coupon yielding 7.5% Whenever the yield is higher than the coupon, the bond is selling at a discount from the par value.

An investor has been following the price movements of ABC common stock and believes that the stock is positioned for a significant upward move in the very near term. If the investor's goal is capital gains, which of the following would be the most appropriate position for this investor to take? A) Sell ABC call options B) Sell ABC put options C) Buy ABC put options D) Buy ABC call options

D) Buy ABC call options When an investor is expecting the price of a security to rise, we say that investor has a bullish outlook. Bulls buy call options, especially when the expected market move is anticipated shortly. Put options are purchased by investors who are of the belief that a stock's price will decline in the near term. Selling options is done for income (the premium), not for capital gains.

Investments in which of the following offer the best long-term protection against inflation? A) Fixed annuities B) Government bonds C) Corporate bonds D) Common stock

D) Common stock Common stocks have historically offered returns that outpace inflation over the long term.

All of the following statements regarding investment companies are correct except A) a closed-end investment company is a type of company whose shares trade in the same manner as publicly-traded stocks in the secondary market. B) an exchange-traded fund is an investment that can be bought and sold throughout the trading day. C) a unit investment trust is a type of investment company whose units are redeemable at NAV by the trust's sponsor. D) an open-end investment company is categorized as open end because it is limited in the number of shares that are sold.

D) an open-end investment company is categorized as open end because it is limited in the number of shares that are sold. An investment company is categorized as open-end because it is not limited in the number of shares sold. ETFs and CEFs (closed-end funds) trade in the secondary markets like any stock. UITs are redeemable at NAV by the trust's sponsor.

A client who is interested in investing in commodities might look at any of the following EXCEPT A) heating oil B) gold C) corn D) debentures

D) debentures Debentures are a security; each of the others is a commodity.

Under adverse market conditions, it is not unusual for mutual fund investors who had been investing on a regular basis to cease or reduce their level of financial commitment. This can have the effect of A) a reduction in the fund's net operating income due to a reduction in sales charges received B) reducing the NAV of the fund as the demand for new shares wanes C) reducing the operating expense ratio of the fund D) net redemptions

D) net redemptions In adverse market conditions, not only do some investors stop putting money in, they liquidate their holdings. If new sales fall while liquidations rise, the effect could be net redemptions. The NAV is not affected by supply and demand, and if anything, the expense ratio would rise because some of the expenses would remain the same but would be shared by fewer assets. Mutual funds do not receive the sales charges—they go to the underwriter.

An investor owns a reverse ETF. If the underlying index should decrease in value, A) the fund shares will increase by a factor of 2 B) the fund shares will also decrease in value C) there is no correlation between the fund and the value of the index D) the fund shares will increase in value

D) the fund shares will increase in value A reverse, or inverse, fund will move in the opposite direction of the underlying index. If it were leveraged, then it could move at a rate of 2x or 3x, but nothing in the question mentioned leverage.

A client's bond portfolio consists of 5 Treasury issues in equal amounts. Their durations are: 4, 5, 7, 9, and 15 years. What is the average duration of the portfolio? A) 8 years B) 40 years C) 7 years D) 13.76 years

A) 8 years For purposes of the exam, when given a bond portfolio, the average duration of the portfolio is the average of the individual durations. In this case, add the 5 durations and divide by 5 (40 ÷ 5 = 8). NOTE: This is not totally accurate, but given the tools you have at the test center, this is the only way to come close and that works for NASAA.

Asset-based sales charges will generally be lowest when holding which of the following mutual fund share classes? A) Class A shares B) Class C shares C) Class T shares D) Class B shares

A) Class A shares Class A shares have a front-end load, but a low- or no asset-based sales charge. Class B and C shares don't have a front-end load, but do have a higher asset-based sales charge. Class T shares always have a 12b-1 charge.

Investors with a short time horizon most likely will invest in which class of mutual fund shares? A) Class C shares B) Class A shares, then convert to Class B shares C) Class B shares D) Class A shares

A) Class C shares Class C shares may be less expensive than Class A or B shares for investors with a short time horizon. The front-end load on Class A shares and the back-end load on Class B shares makes them unattractive for short-term investors. A shares do not convert to B shares; it goes the other way.

A company that has issued noncumulative convertible preferred stock A) pays the current dividends on the preferred before paying a dividend on the common B) can force conversion of the preferred trading at a discount to par to avoid paying dividends C) pays past and current preferred dividends before paying dividends on common D) pays the preferred dividend before paying the coupons due on its outstanding bonds

A) pays the current dividends on the preferred before paying a dividend on the common A noncumulative preferred stock, while maintaining a preference to common stock in the payment of a dividend, is not subject to payment of dividends in arrears prior to payment of the common stock dividend. A preferred stock that is required to pay dividends in arrears prior to the common stock dividend would be a "cumulative" preferred stock. Debt obligations and interest must always be paid prior to a preferred stock dividend; debt is a legal obligation of the issuer and preferred stock is an equity position in the issuer. A conversion feature in a security is always subject to the security holder's decision and not the security issuer.

An investor sells ten 5% bonds at a profit and buys another 10 bonds with a 5¼% coupon rate. The investor's yearly return will increase by A) $1.50 per bond B) $2.50 per bond C) $1.00 per bond D) $2.00 per bond

B) $2.50 per bond The first bonds are 5% and pay $50 per year per bond. The new bonds are 5¼% and pay $52.50 per year per bond. 5% coupon rate × $1,000 face value = $50 per year per bond; 5¼% coupon rate × $1,000 face value = $52.50 per year per bond.

Which of the following statements regarding secondary trading in the private equity market is TRUE? A) Secondary trading generally causes investors to have to wait over a longer time period to generate returns from their private equity investment. B) A trade in a secondary market may be motivated by the desire for increased access to deals in the primary market. C) Secondary trading makes it more difficult for investors to make strategic shifts in the private equity allocations within their portfolios. D) Secondary markets are a form of distressed securities markets wherein limited partners sell securities with troubled performance histories.

B) A trade in a secondary market may be motivated by the desire for increased access to deals in the primary market. One of the advantages to secondary trading is that making secondary purchases can give an investor exposure to a general partner, which can create opportunities to gain access to future opportunities from that partner. The other statements are all incorrect. Secondary trading may allow investors to get into a private equity deal at a later stage and, thus, realize positive returns more quickly. Secondary trading provides liquidity and makes it easier for investors to make strategic shifts in their portfolios. Secondary markets are often used by investors due to changing portfolio needs, rather than a change in the value of their private equity funds.

Under the Investment Company Act of 1940, which of the following are considered management companies? I. Open-end companies II. Closed-end companies III. Unit investment trusts IV. Face-amount certificate companies A) II and IV B) I and II C) I and III D) III and IV

B) I and II Management companies are subclassified into open-end companies (mutual funds) and closed-end companies. Unit investment trusts are a type of investment company that is not managed, as are face-amount certificate companies.

Which of the following statements regarding preemptive rights is TRUE? A) Neither common nor preferred stockholders have the right to subscribe to a rights offering. B) Preferred stockholders do not have the right to subscribe to a rights offering. C) Common stockholders do not have the right to subscribe to a rights offering. D) Both common and preferred stockholders have the right to subscribe to a rights offering.

B) Preferred stockholders do not have the right to subscribe to a rights offering. Preferred stockholders have a preference as to liquidation and distribution of dividends, but the right to maintain a proportionate interest in the company only applies to common stock.

Five years ago, an investor purchased an ABC Corporation BBB-rated debenture with a coupon of 6% maturing in 2037. Currently, new BBB-rated debentures maturing in 2037 are being issued with coupons of 7%. Based on the discounted cash flow method, one could say that the present value of the investor's security is A) more than the par value B) less than the par value C) negative D) equal to the par value

B) less than the par value The discounted cash flow method is just a technical way of computing the value of a security that demonstrates the inverse relationship between interest rates and bond prices. The discount rate here is the current market rate of 7%. Because this investor's debenture is paying at a rate of 6%, its cash flow is less valuable than a 7% bond; therefore, it will sell at a discount (below par).

Compared to traditional investments, hedge funds and private equity are most likely to be more A) leveraged and transparent. B) leveraged. C) transparent. D) liquid.

B) leveraged. Alternative investments tend to use more leverage and are typically less liquid and less transparent than traditional investments.

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

B) unsuitable The customer has no need for the death benefit (she has no immediate survivors) or tax deferral features (with $19,200 in annual income, there are virtually no income taxes due) of a variable annuity, so this transaction is unsuitable. Finally, she would be replacing income generating assets with one that does not offer immediate income and that could reduce her income cushion to an uncomfortable margin of safety.

An investor purchases a Treasury note and the confirmation shows a price of $102.25. Rounded to the nearest cent, the investor's cost, excluding commissions, is A) $1,022.50. B) $1,020.25. C) $1,027.81. D) $102.25.

C) $1,027.81. Treasury notes are quoted in 32nds where each 32nd equals $.3125. The 102 in the quote equals $1,020 and the 25/32 is an additional $7.81 bringing the total to $1,027.81.

A 3X leveraged fund priced at $42 tracks an index that is up 2% one day and then down 3% on the next day. What should this fund be approximately priced at following these 2 volatile days? A) $43.18 B) $45.86 C) $40.50 D) $41.55

C) $40.50 Starting with the $42 purchase price, a 2% increase to the index on day 1 equals $0.84 up (0.02 × $42 = $0.84). Given the 3X leverage, this would equate to a $2.52 increase on day one (3 × $0.84 = $2.52). At the start of day 2, the fund would be priced at $44.52 ($42 + $2.52 = $44.52). On day 2, the index falls by 3%. A 3% decrease in the fund equals $1.34 [0.03 × $44.52 ($1.3356 rounds up to 1.34)]. Again due to the 3X leverage structure of the fund, the $1.34 decrease equates to a $4.02 drop in the fund price (3 × $1.34 = $4.02). Therefore, after the 2 volatile days, the fund should be priced at approximately $40.50.

The investment adviser under contract to a regulated, diversified, open-end investment company does NOT A) investigate the tax status of potential investments B) make sure the fund invests in such a manner as to retain its diversified status C) change investment objectives that he believes are in the best interest of the investors D) attempt to fulfill the fund's investment objective by means of careful investing

C) change investment objectives that he believes are in the best interest of the investors The investment adviser is responsible for making investments according to the objective stipulated by the investment company. These decisions should maintain and reflect the diversified status of the fund and should identify the tax status of potential investments. The fund's objective may be changed only by majority vote of the outstanding shares (i.e., by the owners of the company, not the portfolio manager).

Which of the following is a motivation for creating structured products? Structured products A) are less expensive for investors to buy and trade. B) improve profits for broker-dealers. C) improve market completeness. D) reduce costs to issuers.

C) improve market completeness. Primary motivation for financial structuring is to increase market completeness. What does that mean? As stated in the LEM, structured products are created to meet a specific need for which there is nothing available in the current market. Creating this structured product is said to be "completing the market." Creating structured products is a cost to issuers. Investors pay fees to access structured products in addition to transaction costs. They may, in fact, improve the structuring broker-dealer's profits, but that is not what NASAA will be looking for as an answer.

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

C) this is a bonus annuity. It is not uncommon to find index annuities offering a bonus added to the premium. In this case, the bonus appears to be 5%. There are no dividends on index annuities and rebating commissions is prohibited.

Which of the following statements are TRUE of a variable annuity? I. The number of annuity units is fixed when payout begins. II. The value of accumulation units is fixed at purchase. III. The monthly annuity payment is a variable amount. IV. The annuity payments are not subject to income taxes. A) I and II B) II and III C) III and IV D) I and III

D) I and III The number of annuity units is fixed when an annuitant starts the payout process, and the monthly payment will vary with the market value of the securities in the separate account portfolio. The value of accumulation units varies with the value of the portfolio, and the growth portion of the monthly payments is subject to income tax.

An exchange-traded fund whose strategy is to generate performance opposite that of the designated index is called A) a hedge fund. B) a leveraged fund. C) a reverse fund. D) an inverse fund.

D) an inverse fund. Inverse ETFs (also called "short" funds) seek to deliver the opposite of the performance of the index or benchmark they track. There are some who call these reverse funds, but the SEC, FINRA, and NASAA do not use that term. Leveraged ETFs seek to deliver multiples of the performance of the index or benchmark they track. There are leveraged inverse funds, but the term "inverse" would have to be in the description. Hedge funds are not exchange-traded.

If general interest rates increase, the interest income of an open-end bond fund whose sales exceed redemptions will likely A) decrease B) It cannot be determined from the information given C) remain unchanged D) increase

D) increase Most mutual funds do not have 100% of their assets in securities, and they continually receive new money from investors. Any increase in the general interest rate would allow the fund to purchase new, higher-yielding instruments, which would increase the fund's income.

Pricing of a closed-end fund is determined by A) net asset value B) net asset value plus a commission C) net asset value plus a sales charge D) supply and demand for the shares

D) supply and demand for the shares Shares of closed-end funds are traded in the secondary market where prices are determined by supply and demand. The NAV of a closed-end fund is computed and not determined by the market price or trading price. Closed-end funds do not have sales charges but do have commission charges added to the market price.

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

D) time to maturity. The relationship between the time to maturity (length) and duration is a linear one. That is, the longer the time until the bond matures, the higher (longer) the duration - it is a direct relationship. Yields, on the other hand, have an inverse relationship with duration. That is, the higher the yield, the lower (shorter) the duration.

Which of the following statements is most accurate when describing equity straddle options? I. The option buyer is looking for market volatility. II. The option buyer is looking for market stability. III. The option seller is looking for market volatility. IV. The option seller is looking for market stability. A) I and IV B) II and IV C) II and III D) I and III

A) I and IV A straddle is the combination of a put and a call on the same stock with the same strike prices and expiration dates. The solution to the question is the same for any option position in that option buyers need price movement and option sellers make money from stability. In the case of a straddle, a buyer is expecting sharp movement but does not know the direction of the move. The seller of the straddle will benefit if there is no significant price movement.

Programs allowing for the direct pass-through of losses and income to investors include all of the following EXCEPT A) REITs B) new construction real estate direct participation programs C) oil and gas drilling direct participation programs D) S corporations

A) REITs REITs allow for the direct pass-through of income but not losses. The other choices are forms of business which allow for pass-through of income and losses.

A REIT and a direct participation program are similar because they both A) are operated by a centralized management B) can be described as a limited partnership C) are traded actively in the secondary market D) pass through losses to investors

A) are operated by a centralized management Both a REIT and a DPP are run by centralized management. A REIT may not pass through losses to its investors, and it is not a limited partnership. A DPP cannot be easily traded in the secondary market.

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

A) cash flow. The term physical real estate means that the question is not dealing with a REIT. A significant proportion of real estate investors purchase rental properties. As a result, a major benefit is the cash flow generated from the rental income. We only have to look at the real estate market from 2006 through 2012 to see the volatility of real estate prices. Relative to securities, real estate has low liquidity and most consider that to be a risk rather than a benefit. One benefit of real estate is high leverage, not low leverage.

A bond is selling at a premium over par value. Therefore, its A) current yield is less than its nominal yield B) none of the above C) nominal yield is less than its current yield D) yield to maturity is greater than its current yield

A) current yield is less than its nominal yield Any bond selling at a premium will yield less than the coupon rate (nominal yield). Conversely, of course, a bond trading at a discount will certainly yield more. Remember, there is an inverse relationship between bond prices and bond yields.

All of the following are advantages of mutual fund investment EXCEPT A) investors retain personal control over the investments in the fund's portfolio B) the ability to invest almost any amount whenever desired C) the ability to qualify for reduced sales loads based on accumulation of investment within the fund D) exchange privileges within a family of funds managed by the same management company

A) investors retain personal control over the investments in the fund's portfolio The control of the investment is given over to the investment manager. Exchange privileges, the ability to invest any amount at any time, and reduced sales loads are all considered advantages.

Lisa Brownard is considering investing in gold. She owns a portfolio of stocks, bonds, and money market securities. Relative to her existing portfolio, the primary benefit of the gold investment is most likely A) low correlation between traditional asset returns and gold. B) gold is a renewable resource, so Brownard can profit from the investment for many years. C) gold values are tied to cyclical industries. D) the investment horizon is longer than that of stocks and bonds, balancing the duration of the portfolio.

A) low correlation between traditional asset returns and gold. The returns on gold and other precious metals exhibit low correlation with stock and bond returns. This is generally cited as the key advantage to investing in hard assets. Cyclicality and a long investment horizon are disadvantages of gold investments. Gold is not a renewable resource.

In accordance with the stated provisions of the Investment Company Act of 1940, renewal of an open-end management investment company's investment adviser's contract must be approved by A) majority vote of the fund's board of directors or of the outstanding voting shares, as well as by majority vote of the noninterested members of the board B) FINRA C) the principal underwriter of the fund D) the SEC

A) majority vote of the fund's board of directors or of the outstanding voting shares, as well as by majority vote of the noninterested members of the board When it comes to management investment companies (open-end or closed-end), renewal of the investment adviser's contract is approved annually by the fund's board of directors or a majority vote of the outstanding voting shares. The initial contract must be approved by both the board of directors and a majority vote of the outstanding shares. In both of these cases, initial and renewal, a majority vote of the noninterested (outside) members of the fund's board of directors is also required.

Surrender charges may cause a reduction to all of the following EXCEPT A) the death benefit of a variable life insurance policy B) the cash value of a variable life insurance policy C) the redemption value of Class B mutual fund shares D) the liquidation value of a variable annuity

A) the death benefit of a variable life insurance policy Surrender charges never apply in the case of a death benefit. There may be a surrender charge in the case of early surrender of a variable annuity, taking out the cash value of a variable life policy, or redemption of Class B (back-end load) mutual fund shares.

An individual is deciding between a flexible premium variable life contract and a scheduled premium variable life contract. If she is concerned about maintaining a minimum death benefit for estate liquidity needs, she should choose A) the scheduled premium policy because the contract is issued with a minimum guaranteed face amount B) the scheduled premium policy because earnings do not affect the contract's face amount C) the flexible premium policy because the contract's face amount cannot be less than a predetermined percentage of cash value D) the flexible premium policy because earnings of the contract directly affect the face value of the policy and earnings can never be negative

A) the scheduled premium policy because the contract is issued with a minimum guaranteed face amount A scheduled premium variable life contract is issued with a guaranteed minimum death benefit. If the individual is concerned about having the minimum guarantee, you should recommend the scheduled contract.

One way in which closed-end management investment companies differ from open-end investment management companies is that A) they trade at a price independent of their net asset value B) they were in existence prior to 1940 C) their portfolio may contain common stock, preferred stock and debt securities D) they are federal covered securities

A) they trade at a price independent of their net asset value Unlike open-end companies (mutual funds) where the price is based on the net asset value (NAV), closed-end companies trade at a market price based on supply and demand which could be above, below or the same as the NAV. Both are federal covered, both can have equity and debt in their portfolios (although only closed-end companies can issue senior securities) and both were in existence prior to passage of the Investment Company Act of 1940.

Your married customers, ages 48 and 50, have a combined annual income of more than $200,000. They are concerned about the effects of rising inflation, and because they are heavily invested in bonds, they seek to invest a portion of their portfolio in a fund that will provide additional diversification. Which of the following mutual funds is the most suitable for these customers? A) NavCo Tax-Free Municipal Bond Fund B) ATF Overseas Opportunities Fund C) ABC Investment-Grade Bond Fund D) XYZ Government Income Fund

B) ATF Overseas Opportunities Fund Investment in an overseas equity fund will provide diversification not necessarily subject to U.S. inflation. The tax-free fund will not provide additional diversification nor the best hedge against inflation. A high-grade bond fund will not add diversification.

What can you tell about these investment companies from the information below? NAV-ASK Company A 12.34-12.85 Company B 15.45-14.90 A) Company A and Company B can be either open-end or closed-end. B) Company A can be either open-end or closed-end; Company B must be closed-end. C) Company A must be open-end; Company B must be closed-end. D) Company A is closed-end and Company B is open-end.

B) Company A can be either open-end or closed-end; Company B must be closed-end. All open-end investment companies sell at NAV plus sales charge (if any). Therefore, the asking price can never be less than the NAV. Closed-end company asking prices are determined by supply and demand, so their prices are independent of the fund's NAV.

On the initial public offering, an investor buys a $10,000 Aa-rated, 20-year corporate bond with a 4% coupon rate. One year later, the prevailing market rate is 5% and the bond has had its rating increased to Aa1. Which of the following is most likely TRUE with reference to the current market price of this bond? A) Par value B) Discount C) Cannot be determined from the information given D) Premium

B) Discount When interest rates go up, bond prices go down. Had interest rates remained the same, the slight improvement in rating would have probably caused the bond to sell at a very slight premium, but that rating increase is not nearly strong enough to offset a 25% increase in market interest rates.

Your client has $50,000 to invest. His objective is monthly income that he can receive after he retires to supplement his small pension and Social Security benefits. As part of his profile, he stresses that he has had uncomfortable experiences in the past with the stock market and is not inclined to invest in anything that is based on stock market performance—and he would opt for principal protection instead. Based on the client's profile, which of the following would be the best recommendation? A) Exchange-traded fund (ETF) or exchange-traded note (ETN) B) Fixed annuity C) Mutual fund portfolio consisting of blue-chip stocks D) Variable annuity

B) Fixed annuity Though its stated return might not be as high as the other choice's potential returns, only a fixed annuity fits the objective and risk-averse traits of this client. VAs, blue-chip mutual fund portfolios, ETFs, and ETNs are all tied to market performance in some way and have risk characteristics that would not align in terms of suitability for this client.

Julie owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will she own? I. 125 shares II. 100 shares III. Cost basis of $25 IV. Cost basis of $20 A) II and IV B) I and IV C) I and II D) II and III

B) I and IV Stock dividends make the number of shares owned increase and the cost per share decrease. The overall value should remain unchanged. 125 shares × $20 = $2,500; 100 shares × $25 = $2,500.

One of the features of an index annuity is the ability for the principal value to increase based on the performance of the specified index. Which of the following is NOT used as a method to compute the amount of interest to be credited to the account? A) Point to point B) Participation rate C) High-water mark D) Annual reset

B) Participation rate Although the participation rate is a component of the computation, it is not a method of computing the interest credit. In the annual reset index method, interest, if any, is determined each year by comparing the index value at the end of the contract year with the index value at the start of the contract year. Interest is added to the annuity each year during the term. Using the high-water mark, the index-linked interest, if any, is decided by looking at the index value at various points during the term, usually the annual anniversaries of the date the annuity was purchased. The interest is based on the difference between the highest index value and the index value at the start of the term. Interest is added to the annuity at the end of the term. And finally, with the point-to-point method, the index-linked interest, if any, is based on the difference between the index value at the end of the term and the index value at the start of the term. Interest is added to the annuity at the end of the term. In each of these, the insurance company will specify the participation rate (what percentage of the increase will be credited) and a cap rate (the maximum amount to be credited).

If a technician believed in the importance of volume, which of the following would indicate bullish sentiment? A) Prices increase on light volume. B) Prices increase on heavy volume. C) Prices decrease on heavy volume. D) Prices decrease on light volume.

B) Prices increase on heavy volume. Technicians watch volume changes along with price movements as an indicator of changes in supply and demand. A price increase on heavy volume relative to the stock's normal trading volume is interpreted as an indication of bullish activity.

Adam has a portfolio of bonds worth approximately $125,000. He is concerned that interest rates will increase in the near term. Which of the following would be the least desirable strategy for Adam? A) Sell Treasury bonds and buy Treasury bills B) Sell bonds with a short duration and buy those with a longer duration C) Sell bonds with lower coupons and buy those with higher coupons D) Sell long-term bonds and buy short-term bonds

B) Sell bonds with a short duration and buy those with a longer duration Prices of bonds decline when interest rates rise. An investor expecting an increase in interest rates should sell more volatile bonds and purchase less volatile bonds. Bonds with higher coupons and shorter durations are less price volatile than low coupon, long-term, and long duration bonds.

You have a 70-year-old client who is in excellent health. Both parents lived into their late 90s and the client is concerned about outliving her money. One product that should be considered to alleviate this concern is A) an index fund. B) an annuity. C) whole life insurance. D) a 30-year term policy.

B) an annuity. One of the unique characteristics of an annuity (variable or fixed) is that it guarantees monthly payments for the life of the annuitant. Life insurance provides a death benefit, but not income. An index fund carries no guarantees.

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

B) below the strike price. First of all, we know this investor is long the put. How? Because only those who own options (are long) can decide to exercise. The owner of a put (long put) profits when the stock falls. The put would be exercised when the price of the stock is below the strike price. For example, if this is a 50 put, the investor has the right to exercise and sell the stock at $50 per share. That is a benefit when the market price of the stock is below 50 and the lower the better. Remember the phrase "put down" because a put option becomes valuable to the holder when the market price goes below the exercise (strike) price.

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

B) better than anticipated results in the separate account could lead to a reduction in annual premium Scheduled (fixed) premium variable life premiums are fixed. It is universal life that has flexible premiums.

When discussing the purchase of a scheduled premium variable life insurance policy with a client, it would be CORRECT to state that A) you will receive a statement of your death benefit no less frequently than semiannually B) by surrendering the policy, its cash value may be obtained C) premiums will vary based upon performance of the separate account D) if a policy loan exceeds the policy cash value, the deficiency must be remedied within 10 business days to keep the policy from lapsing

B) by surrendering the policy, its cash value may be obtained Surrender of the contract requires the insurance company to pay out its cash value. Death benefit is adjusted annually.

A company that has issued cumulative preferred stock A) pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common B) pays past and current preferred dividends before paying dividends on common stock C) pays the preferred dividend before paying the coupons due on its outstanding bonds D) forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends

B) pays past and current preferred dividends before paying dividends on common stock Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. Bond interest is always paid before dividends. Dividends in arrears on cumulative preferred have the highest priority of dividends to be paid.

The portfolio manager of a bond fund believes that interest rates are going to increase in the near future. As such, it would be wise for that manager to A) shift into higher-rated bonds. B) shorten the average duration of the portfolio. C) increase the equity portion of the portfolio. D) lengthen the average duration of the portfolio.

B) shorten the average duration of the portfolio. Increasing interest rates lead to declining bond prices, regardless of the ratings. This is interest rate risk. Those bonds with the longest duration have the most sensitivity to that risk, while short-term maturities are only slightly affected. Reducing the average duration of the portfolio means that the average maturities will be shortened, thus reducing the effects of an increase to interest rates.

The yield to maturity is A) determined by dividing the coupon rate by the current market price of the bond B) the annualized return of a bond if it is held to maturity C) the annualized return of a bond if it is held to call date D) set at issuance and printed on the face of the bond

B) the annualized return of a bond if it is held to maturity The yield to maturity reflects the annualized return of a bond if it is held to its maturity. The computation reflects internal rate of return and is frequently referred to as the market required rate of return for a debt security. The rate set at issuance and printed on the face of the bond is the nominal or coupon rate. Dividing the coupon rate by the current market price of the bond provides the current yield. The return of a bond if it is held to the call date is the yield to call.

One reason for including commodities in an investment portfolio is because they have a high correlation to A) the bond market. B) the inflation rate. C) the U.S. dollar. D) the stock market.

B) the inflation rate. Commodity prices tend to have a high correlation with the inflation rate. As inflation goes up, the value of the dollar generally falls. The relationship is inverse, a characteristic of negative correlation. As inflation increases, interest rates invariably do the same leading to a decrease in bond prices. Stock prices have a random correlation to commodities, generally negative.

You have a client who originally invested $25,000 into the ABC Growth Fund. Over the past 5 years, there have been no distributions and the value of the shares is now $35,000. If the client should ask about exchanging the entire holding for shares of the ABC Income Fund, you would explain A) the new shares would be acquired at the public offering price B) there is a long-term capital gain of $10,000 C) that taking advantage of the exchange privilege results in taxes being deferred until the liquidation of the account D) the new shares will have the same cost basis as the old ones

B) there is a long-term capital gain of $10,000 The exchange privilege permits shares of one fund in the family (The ABC Fund Group) to be exchanged for shares of another at net asset value, not public offering price. However, for tax purposes, it is considered a sale and a purchase so there would be a capital gain realized on any difference between the cost basis and the proceeds. In this case, the new shares would have a new cost basis of $35,000.

Flexible premium payments are a feature of A) whole life B) universal variable life C) variable life D) term life

B) universal variable life Only universal and universal variable life policies have flexible premium payments.

Which of the following are regulated under the Securities Exchange Act of 1934? I. Broker-dealers II. Investment advisers III. Pension plans IV. Transfer agents A) II and III B) I and II C) I and IV D) III and IV

C) I and IV The Securities Exchange Act of 1934 regulates broker-dealers and transfer agents. Investment advisers are regulated under the Investment Advisers Act of 1940 (and, to a certain extent, the Investment Company Act of 1940), whereas pension plans in the private sector are regulated under ERISA.

Which of the following statements concerning universal life insurance are CORRECT? I. Universal life has flexible premiums. II. Universal life is based on the assumption that level annual premiums are to be paid throughout the insured's life. III. The death benefit can fluctuate, but never below the guaranteed minimum face amount. IV. Cash values can fluctuate and may even fall to zero. A) I and II B) III and IV C) I and IV D) II and III

C) I and IV Universal life features flexible premiums that add to the cash value account, although there are no guarantees and the cash value can disappear if insufficient premiums are paid. There is no guaranteed minimum death benefit as there is with fixed (scheduled) premium variable life. The assumption that level annual premiums are to be paid throughout the insured's life is associated only with ordinary whole life and scheduled premium variable life policies.

Which of the following statements about open-end investment companies are TRUE? Open-end investment companies are also known as mutual funds. Open-end investment companies continually offer shares for sale to the public. The price at which an open-end investment company will sell shares to the public is based on the share's net asset value (NAV). A) II and III B) I and III C) I, II, and III D) I and II

C) I, II, and III An open-end investment company is also known as a mutual fund. One of the distinguishing characteristics of open-end companies is their continuous offering of new shares. The price at which open-end investment companies sell shares to the public is always NAV plus any sales charge or load indicated in the prospectus.

Which of the following would be common features of mutual funds and hedge funds? A) Portfolio transparency B) Registration with the SEC C) Investors have pooled their money together D) Redemption of ownership interests within 7 days

C) Investors have pooled their money together Both of these are in the category of pooled investment vehicles. Only the mutual fund is registered with the SEC and that means full disclosure, including portfolio holdings. No such disclosure is required of hedge funds. The mutual fund offers the 7-day redemption - no such policy exists with hedge funds. In fact, most have a lock-up period where redemption cannot take place.

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

C) Limited partnership. The most typical organizational structure of a private equity investment is a limited partnership. In a limited partnership, the LPs provide funding and have limited liability. The GP manages the investment fund.

Which of the following would NOT be of interest to a technical analyst? A) Moving averages B) Advance/decline line C) P/E ratio D) Volume

C) P/E ratio A technical analyst charts movement in market price and volume over a period of time. The price-to-earnings ratio is a tool used by fundamental analysts.

Mr. Brown has received preemptive rights from one of the stocks held in his portfolio. Which of the following is NOT an alternative regarding these stock rights? A) Giving the rights to his son B) Selling at the market C) Redeeming them from the issuer for cash D) Exercising

C) Redeeming them from the issuer for cash Rights are not redeemable by the issuer. They may be sold in the secondary market or be given to someone else to exercise. If exercised, rights are exchanged for an appropriate number of shares of the underlying common stock.

In the technical analysis of the value of securities, which of the following items is NOT important? A) The breadth of market volume B) A prevailing market trend in response to shifts in supply and demand C) The amount of a company's past earnings D) Resistance and support levels

C) The amount of a company's past earnings The amount of a company's past earnings is a factor used in the fundamental analysis of securities, but not technical analysis. Technicians rely on market trends and supply and demand factors, as well as chart indications such as resistance and support levels.

A customer purchased new issue bonds at par 2 years ago. Since then, the CPI has declined by almost half and the current yield on his bonds has also declined. Which of the following best describes the value of the bonds he purchased? A) This cannot be determined from the information presented. B) Their market price has declined. C) Their market price has increased. D) Their market price has remained unchanged.

C) Their market price has increased. Because inflation is down and bond yields have declined, the bonds are selling for a premium due to an increase in value.

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

C) a unit investment trust. Unit investment trusts are registered investment companies with a fixed portfolio. That is, at the time of organization, the portfolio is purchased and, because there is no ongoing management company, there are basically no changes made.

When an investor notices that a bond's coupon yield is lower than its current yield, that is an indication that the bond A) is in danger of going into default B) is probably rated investment grade C) is selling at a discount D) is selling at a premium

C) is selling at a discount The coupon yield, or nominal yield, is the rate stated on the face of the bond. It never changes. However, because the current yield is computed by dividing the coupon rate by the current market price, this return will constantly be in flux. Anytime the price of the bond is below par (selling at a discount), its current yield will be higher than the coupon.

All of the following statements regarding a closed-end investment company whose shares are listed on the NYSE are true except A) it differs from a mutual fund B) it is a type of management company C) it may redeem its own shares D) it sells at the market price based on supply and demand

C) it may redeem its own shares A closed-end investment company does not redeem its own shares. The term "mutual fund" refers to an open-end management investment company that issues redeemable shares. Although there is a category of closed-end funds that do redeem their shares, (interval funds), those do not trade in the secondary markets like the NYSE.

Which of the following is NOT a characteristic of hedge funds? Hedge funds A) are privately organized and generally unlisted. B) use leverage, short positions, and concentrated positions. C) offer managers high fixed fees. D) invest in private securities, real assets, derivatives, and structured products.

C) offer managers high fixed fees. Hedge funds tend to attract the top managers because they offer performance-based fees, which vary based on fund performance.

When contrasting call options, preemptive rights, and warrants, it would be correct to state A) only call options and warrants have time value. B) all of these are issued by the underlying corporation. C) only preemptive rights and warrants are issued by the underlying corporation. D) only call options are traded on listed exchanges.

C) only preemptive rights and warrants are issued by the underlying corporation. Corporations issue preemptive rights (if called for in the corporate charter) when issuing additional shares. Warrants are issued by corporations usually as a sweetener to make a bond issue more attractive. Call options are issued by the options exchanges, not the underlying corporation. All three of these products trade on listed exchanges and all of them have time value with warrants generally having the longest expiration date.

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

C) open-end companies may issue common stock only Open-end companies may issue only common stock. The prospectus must state the management fee, and an investment company needs only $100,000 to offer itself to the public. In addition, no more than 60% of the board of directors can be made up of officers or employees of the company.

An investor is looking for a packed product that can provide rental income as well as potential capital gains. You would most likely recommend A) a growth mutual fund. B) a GNMA pass-though. C) a mortgage REIT. D) an equity REIT.

D) an equity REIT. When you see "rental," you immediately think of renting real estate. Of the two basic types of REITs, an equity REIT is the one that owns property. Rental income is received from the users of those properties. As an owner of real estate, there is always potential to sell the property for a gain. Think of the difference between an equity REIT and a mortgage REIT as the difference between a stock and a bond. A stock offers the possibility of income through dividends and a bond through interest. But, it is only the stock (equity) where there is a real potential for capital gain.

Reasons why a corporation might issue a convertible preferred stock would include A) giving those shareholders the ability to convert into the issuer's bonds B) tax savings to the issuer C) a lower cost to the issuer than would be incurred by the issuance of convertible bonds D) giving those shareholders an opportunity to participate in the future success of the company

D) giving those shareholders an opportunity to participate in the future success of the company The benefit of any convertible security, bond or preferred stock, is that the ability to convert into the issuer's common stock allows those investors to participate in the potential future growth of the company. One does not convert into a bond, and because preferred dividends are an after-tax outlay, there are no tax savings, as there would be with bond interest. Because stock is lower in claim than bonds, the dividend rate would have to be higher than the interest rate on bonds.

A support level is the price range at which a technical analyst would expect A) the supply of a stock to increase substantially. B) the supply of a stock to decrease substantially. C) the demand for a stock to decrease substantially. D) the demand for a stock to increase substantially.

D) the demand for a stock to increase substantially. Most stock prices remain relatively stable and fluctuate up and down from their true value. The lower limit to these fluctuations is called a support level, the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level. Generally, a support level will develop after a stock has experienced a steady decline from a higher price level. Technicians believe that at some price during the decline, those investors who have been waiting for a reversal to get into the stock will now buy. When the price reaches this support price, demand surges, and price and volume begin to increase again. Other terms that may be used in this context are overbought and oversold. Overbought generally refers to the resistance level. Interest in buying the stock has begun to dry up and the price of the stock plateaus. Oversold is when the opposite occurs: there are few sellers to be found and the price of the stock bottoms. In either case, the next move is a reversal: down when the stock is overbought and up when oversold.