66 Qbank

A 35-year-old client purchases a variable life insurance policy. Under current regulations, the maximum sales charge permitted over the life of the policy is

9% not to exceed 20 years

Which of the following individuals would be considered a noninterested person in a mutual fund?

A) A member of the board of directors who is also employed as the investment adviser B) A shareholder who owns 10% of the fund's shares C) A person who holds a position with the fund's underwriter D) A member of the board of directors who does not hold another position within the investment company The Investment Company Act of 1940 defines an interested person as someone employed by or who has a material business relationship with the fund, its adviser, or underwriter. Someone who owns 5% or more of the outstanding shares (an affiliated person) is also considered "interested." Merely sitting on the board does not make someone an interested person. Thus, a director with no other relationship with the fund qualifies as a noninterested person.

If an investor is looking for an open-end investment company with an objective of providing current income to its shareholders, she would most likely choose

A) a hedge fund B) a growth fund C) an income fund D) a venture capital fund

In general, an investor wishing to gain economic exposure to commodities would find it easiest to do so by

A) buying the commodity directly B) investing in futures contracts C) growing the commodity D) investing in forwards contracts

A fundamental analyst researching a stock is concerned with all of the following EXCEPT

A) management efficiency B) capitalization ratio C) the stock's market price as a multiple of the company's earnings D) volume of shares traded

A REIT and a direct participation program are similar because they both

A) pass through losses to investors B) are operated by a centralized management C) can be described as a limited partnership D) are traded actively in the secondary market 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.

Surrender charges may cause a reduction to all of the following EXCEPT

A) the cash value of a variable life insurance policy B) the liquidation value of a variable annuity C) the death benefit of a variable life insurance policy D) the redemption value of Class B mutual fund shares surrender charges are never related to death benefit

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) the principal underwriter of the fund B) FINRA C) 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 D) the SEC 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.

In the banking industry, the term POD refers to an account similar to the TOD designation used by broker-dealers. An old, but sometimes still used term to describe this kind of account, is

Totten Trust

Formula methods of investing that involve selling equities in rising markets and buying them in falling markets would include

constant dollar plan constant ratio plan

Which of the following describes an investment management style?

large cap

Two of the major factors involved in the capital asset pricing model (CAPM) are

stock risk premium market risk premium

A securities analyst does not believe that markets are highly efficient. This analyst most likely follows which of the following investing strategies?

tactical

Sector rotation would most likely be employed by an investment adviser using which of the following investment styles?

tactical

One of your clients approaches you looking for an investment that will provide ready marketability and income. Which of the following would be the least appropriate recommendation?

A) A limited partnership in rental real estate B) NYSE-listed preferred stock C) A money market mutual fund D) U.S. Treasury notes The client could expect income from a DPP investing in rental real estate, but the liquidity is missing.

Which of the following categories of assets is most likely classified as an alternative asset?

A) Convertible bonds B) Real assets C) Cash D) Preferred stocks Traditional investments include cash, bonds, and stocks, regardless of the adjective used. Alternative investments include 4 major categories: real assets, hedge funds, private equity, and structured products.

Which of the following items is NOT required under the customer identification program (CIP)?

A) Date of birth B) Visa details for non-citizens C) Physical address D) Sex

Which of the following might be used by an analyst to approximate a reasonable price for a common stock?

A) Par value B) Yield to maturity C) The dividend discount model D) Book value per share

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

If general interest rates increase, the interest income of an open-end bond fund whose sales exceed redemptions will likely

A) increase B) decrease C) remain unchanged D) It cannot be determined from the information given

In general, when describing the characteristics of equity index annuities and variable annuities, each of the following would be a true statement EXCEPT

A) only the EIA has a minimum guaranteed return B) both are issued by life insurance companies C) both offer an opportunity for unlimited gain D) only the variable annuity is considered a security EIAs almost always come with a cap rate, a ceiling beyond which earnings cannot be credited to the investor's account. There is, theoretically, no limit as to how much one could earn with a variable annuity. Both are issued by life insurance companies, and only the EIA offers a guaranteed floor (minimum return). Based on court rulings in effect at this time, the equity index annuity is not considered a security.

A technical analyst (chartist) with a long position in a particular stock would most likely enter a sell stop order below that stock's

A) previous high B) 200-day moving average C) support level D) resistance level A breakthrough of a support level is believed to forecast a major market price decline.

An investor is considering the purchase of some bonds to diversify his portfolio. If he should decide to purchase Treasury STRIPS instead of Treasury Bonds, his major risk would be

A) reinvestment risk B) interest rate risk C) credit risk D) purchasing power risk Treasury STRIPS are zero-coupon bonds and, as such, have a longer duration than those paying semiannual interest. The longer the duration, the greater the interest rate risk. Because both are guaranteed by the U.S. government, there is no credit risk. Both have the same purchasing power risk, and there is no reinvestment risk with a zero-coupon bond.

Net asset value per share for a mutual fund can be expected to decrease if

A) the issuers of securities in the portfolio have made dividend distributions B) the fund has made dividend distributions to shareholders C) the fund has experienced net redemptions of shares D) the securities in the portfolio have appreciated in value If dividends are distributed to shareholders, the fund's assets will decrease and value per share will fall accordingly. Appreciation of the portfolio and dividends paid to the portfolio will increase the value. If issuers have made distributions to the portfolio, the net asset value will increase. Net redemptions have no effect on the net asset value, because the money paid out is offset by a reduced number of shares outstanding.

One of the major financial decisions to be made by a family is the amount and type of life insurance to purchase. The form of insurance that offers flexible premiums without a fixed cash value is

A) variable life. B) term life. C) whole life. D) universal life universal premiums are flexible not fixed/sched.

Which of the following are fiduciaries?

ALL: Executor of an estate Administrator of a trust Custodian of an UGMA account Investment adviser representative granted with discretionary authority over the account

A high net worth client of yours invested $250,000 into an oil and gas limited partnership drilling program for which she received a 10% interest in the project. Unfortunately, after 2 years of drilling without success, the project was foreclosed with outstanding debt of $4 million. Your client is liable for

A) $400,000 B) $0 C) $150,000 D) $250,000 not liable for anything, they just lost their original investment

Which of the following are asset classes?

A) Large cap stock funds B) Forward contracts C) Options D) REITs The general consensus is that the major classes, for purposes of an asset allocation program, are equity, debt, cash (or cash equivalents), real estate, and commodities. Large cap stock funds are not an asset class; they are a way to invest in the asset class known as equity. Derivatives, such as options, are not generally considered an asset class, and it is the actual commodity (precious metals, oil, and so forth), not a forward or futures contract, that is the asset class. Most agree that REITs are a proxy for real estate itself.

A client was reading an offering document for an oil and gas drilling limited partnership program and noticed that one of the features was flow-through benefits. How would you explain this?

A) Once the program has paid taxes on its income, the entire remaining balance passes through to the investors. B) Losses generated by the program pass through to the investor and may be deducted in full against ordinary income. C) Rather than being a separate taxable entity, the program's income or losses pass through directly to the investors. D) Investors in the program are assured of a steady flow of income if the drilling is successful.

Investing in commodities could involve investing in any of these EXCEPT

A) consumer durables B) industrial items C) animals D) agricultural items

A client who is interested in investing in commodities might look at any of the following EXCEPT

A) debentures B) corn C) heating oil D) gold

One way in which active and passive real estate investing differ is that

A) there are circumstances under which losses from active real estate investing can be deducted against ordinary income B) only real estate professionals can deduct losses from active real estate investing. C) there are circumstances under which losses from passive real estate investing can be deducted against ordinary income D) losses from active real estate investing can only be deducted against income from other active investing projects

A client with limited assets seeking additional income in retirement would probably find which of the following investment choices to be the least suitable?

A) Insured bank CDs B) Treasury bonds C) ETNs D) ETFs The question describes an individual with a low risk tolerance, so the Treasury bonds and CDs would certainly be considered appropriate. Because ETNs are a debt security backed solely by a single issuer while an ETF based on a specific index of debt securities represents a large group of issuers, they are only suitable for those who can understand and take the risks involved.

Under modern portfolio theory (MPT), all portfolios that can be constructed from a given set of stocks is referred to as

A) the efficient set B) the correlation coefficient C) the capital market line D) the feasible set

During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from

A) the person with a durable power of attorney B) the person named as executor of the estate C) the person appointed as administrator of the estate D) the spouse Dying intestate means that there is no valid will. In that case, the state will appoint someone as administrator of the estate with the responsibility of handling all of the affairs of the deceased. Only when there is a will is there an executor, and a durable power of attorney is canceled upon the death of either party to the power. Only if the account were registered as JTWROS with the spouse (or if the spouse were named the executor) would the spouse have any authority.

Among the special characteristics of a universal life insurance policy is

A) the policy may be overfunded B) early termination could lead to surrender charges C) death benefits may increase above the initial face amount D) that policyowners may borrow against the cash value the policyowner is permitted to pay in an amount in excess of the stated premiums

A 75-year-old customer asks if it is possible to sell his $500,000 variable life insurance policy to a party other than the insurance company that issued the policy. If a sale occurs, known as a life settlement, which of the following would be a violation of industry rules?

A) Requiring the customer to relinquish all ownership rights to the policy B) Quoting the price using an exclusive buyer that handles all the firm's life settlements C) Not requiring the insured to pass a physical exam before the sale D) Disclosing that the buyer becomes responsible for all premiums while the insured is living Because of the limited secondary market for life settlements, any firm that engages in these transactions should obtain several bids to ensure the customer receives a fair price for her policy.

An individual who is a proponent of the efficient market hypothesis (EMH) will likely invest in which of the following?

A) Sector mutual funds B) Growth mutual funds C) Balanced mutual fund D) Index funds An individual who believes in the EMH will likely invest in index funds. Inherent in this strategy is a belief that an investor cannot outperform the market with active portfolio management techniques. The remaining choices all incorporate an active portfolio management philosophy.

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 daily and cash values are computed monthly. C) Unit values are computed weekly and cash values are computed monthly. D) Unit values are computed monthly and cash values are computed weekly.

Under the Investment Company Act of 1940, which of the following statements is TRUE about an investment company that wishes to contract with an outside investment adviser to manage its portfolio?

A) The contract must provide for a minimum notice of at least 2 weeks if the contract is to be terminated. B) The investment adviser must be under common control with the investment company. C) The contract between the investment company and the investment adviser must be in writing. D) The initial contract must be approved by either the board of directors or a majority vote of the outstanding shares.

One method used by some analysts to estimate the future value of a stock is the dividend growth model. This model would probably be most useful in the case of

A) a small-cap stock B) a AAA corporate bond C) a large-cap stock D) a preferred stock The dividend growth model is a method to value the common stock of a company on the basis of assumed constant growth of dividends in the future. Therefore, it can only be applied to a corporation whose dividends might be expected to increase. It is far more likely that a large-cap stock will be paying dividends than a small-cap. Bonds don't pay any dividends, and in any event, their interest, just like the dividends on preferred stock, is fixed; there is no growth possible.

One major difference between the customer identification program (CIP) and the new account opening rules of the regulatory bodies is that

A) the CIP requires date of birth while the regulators only require proof of legal age B) the CIP requires a residence address for individuals while the regulatory bodies will accept a PO Box C) the CIP requires a statement of the customer's goals while the regulators only require current financial information D) the CIP only applies to individuals while the rules of the regulators apply to retail and institutional accounts

A client purchased an index annuity from you 3 years ago and made an initial deposit of $100,000. The contract calls for a 90% participation rate with a 15% cap. The index had a return of +20% in the 1st year, -5% the 2nd year, and +10% the 3rd year. The investor's current value is approximately

$125,350 In the 1st year, the index gained 20%. With a 90% participation rate, the investor might have earned 18%, but was limited by the 15% cap. So, after 1 year, the value was $115,000. In the 2nd year, the index lost money. However, with an index annuity there are never any reductions in a down market, so the account remained at $115,000. In the 3rd year, the investor received 90% of the 10% growth and that increased the account value to $125,350. This resulted in an overall gain of 25.35%,

Which of the following best describes the death benefit provision of a variable annuity?

A) Upon death, the beneficiary will receive the benefit as a lump sum. B) If death should occur before age 59½, the 10% early withdrawal penalty does not apply. C) Upon death, the proceeds pass to the beneficiary free of federal income tax. D) The principal amount at death is the greater of the total of premium payments or the current market value.

An individual purchasing a flexible premium variable life contract should know which of the following? I. Timing and amount of premiums generally are discretionary. II. The death benefit will generally be higher than that of a comparable whole life policy. III. The face amount is fixed at the beginning of the contract. IV. The performance of the separate account directly affects the policy's cash value.

A) I and III B) II and IV C) II and III D) I and IV A flexible premium policy allows the insured to determine the amount and timing of premium payments, provided minimums are met. Depending on the policy, the face amount (death benefit) is recalculated each year. It is intended that the death benefit receive some inflation protection, but this cannot be guaranteed. If separate account performance causes the cash value to drop below an amount necessary to maintain the policy in force, the policy lapses unless the requisite amount is received within 31 days.