Final Exam 6
A customer's initial transaction in a margin account is the purchase of 100 shares of XYZ at $15 per share. What amount must be deposited by the customer in this new account?
$1,500 **The key to this question is recognizing that this represents the customer's initial purchase of securities in the new margin account. The minimum initial equity requirement is 100% of the purchase or $2,000, whichever is less. Since the transaction represents a $1,500 purchase (which is less than $2,000), the customer must deposit the full $1,500. A broker-dealer will not provide a loan in a new margin account unless the customer has equity of at least $2,000.**
A customer's initial trade in a margin account is the short sale of 500 shares of DEF stock at $20. After making the required deposit, the credit balance in the account is:
$15,000 **The credit balance in a short margin account is determined by adding the short sale proceeds and the Reg T deposit. In this example, the short sale proceeds are $10,000 (500 shares x $20). The Reg T requirement is $5,000 ($10,000 x 50%). The credit balance is $15,000.**
A customer writes an XYZ June 60 straddle for a 5-point premium. At expiration, the market price of XYZ is 50 and the put side is exercised. The customer then sells the stock that was put to her at the current market price. The customer has realized a:
$500 loss **The customer has received a total of $5 in premiums or $500 for the straddle. The call side of the straddle expires, but the put is exercised. The writer must buy the stock at $60 per share (the exercise price). The stock is then sold at the $50 market price, which results in a $1,000 loss ([$60 - $50] x 100 shares). However, since the customer initially received a premium when she wrote the straddle, the loss is only $500 ($1,000 loss from exercising the put - $500 premium).**
An investor is long 200 shares of ABC stock at $58 and short 1 ABC May 60 call at 2. What is his breakeven point?
$57 **Since this is a position that involves a stock position PLUS an option position, using the phrase "call up and put down" will not work to calculate breakeven. For positions like this, the first step in determining the breakeven point is to calculate the investor's net investment amount. In this question, the investor paid out a total of $11,600 (200 shares x $58 per share), but received $200 in premium on the sale of the call. Therefore, the investor's net investment amount is $11,400. The second step is to recognize that since the investor has a 200 share position, the $11,400 must be divided by 200 to determine the breakeven point of $57. Theoretically, if ABC stock is trading at $57, the investor would lose 1-point per share for each 100 share position ($200 total loss); however, since the call option is out-of-the-money and expires worthless, the investor would keep the $200 premium. The $200 loss in the stock is offset by the $200 received in option premium and the investor will break even.**
The amount of margin that must be deposited by the purchaser of an option contract is: _________%
100% **According to Federal Reserve Board Regulation T, options may not be bought on margin. Therefore, the buyer will need to deposit 100% of the purchase price, which is the premium.**
Unless registration is delayed, the effective date of a registration statement is generally on the: ____th day __________ the registration statement is filed
20th, after **Although there are exceptions, unless registration is delayed, the registration statement is effective on the 20th day after filing.**
A U.S. corporation has contracted to buy machinery from a Japanese company and pay in Japanese yen. The payment date is in June. What basic option strategy will the U.S. corporation employ to protect itself against an increase in the yen? A) Buy JY calls B) Sell JY calls C) Buy U.S. dollar puts D) Buy U.S. dollar calls
A) Buy JY calls The U.S. corporation, in order to protect itself against an increase in the Japanese yen (which it currently does not own), would buy JY call options. If the Japanese yen should increase in value by payment date for the machinery, the U.S. corporation could either liquidate the call or exercise the options. The profit on the options will help to offset the loss on the rising value of the yen. The cost of this insurance to the U.S. corporation is the premium paid for the calls. If the yen does not increase in value, the most the corporation could lose is the premium paid. There are no listed options on the U.S. dollar.
An investor who expects an increase in volatility in the equity markets will MOST likely adopt which of the following strategies? A) Buying VIX call options B) Creating a VIX credit call spread C) Creating a VIX debit put spread D) Buying VIX put options
A) Buying VIX call options **The VIX is the CBOE's Volatility Market Index option. It is a broad-based index option and is calculated using the S&P 500 Index option bid and ask quotes. The VIX (volatility index) is often referred to as the "fear index" since it is a gauge of investors' fears of volatility. The index increases or decreases based on the expected volatility of the market. If an investor expects volatility to rise, she is bullish on the VIX. A bullish option strategy, such as long calls, put credit spreads (executed for a net credit), or call debit spreads (executed for a net debit) will enable the investor to profit if the VIX increases. Many investors buy VIX call options as a hedge against a possible decline in the market since the VIX usually moves in an inverse direction to the equity market.**
Which of the following statements is TRUE regarding Class B shares of a mutual fund? A) Contingent deferred sales charges are assessed, but typically decline to zero after six years B) The shares convert to Class C shares after three years C) The shares have lower annual operating expenses than Class A shares D) A portion of the initial investment is applied as a sales charge and is not invested
A) Contingent deferred sales charges are assessed, but typically decline to zero after six years **Class B shares, also referred to as back-end sales charge shares, have a declining sales charge. After six years, the sales charge percentage is typically reduced to zero. There is no conversion to Class C shares; however, Class B shares usually convert to A shares after six years. Class B shares tend to have higher operating expenses than A shares, due to a higher percentage that is applied as 12b-1 fees. Since there is no front-end sales charge, the full investment in Class B shares is applied to the purchase of the shares.**
_____________ does NOT rate fixed-income securities.
AMBAC **AMBAC insures new municipal bond issues. Moody's, Standard & Poor's, and Fitch are credit rating services.**
A client has reached retirement age and decides to annuitize her nonqualified variable annuity. What amount of the payments made to her would be considered her cost basis? Only the amount she paid when __________________ units, since reinvestments of ____________________ were in ______________ dollars
Accumulating, distributions, Pretax **When purchasing a nonqualified variable annuity, the purchases made by the individual are in after-tax dollars and thus, the cost basis. Reinvestment of distributions is automatic and done in pretax dollars.**
Which of the following statements about technical analysis is TRUE? The __________-________ index is a good indicator of the strength of a bull or bear market
Advance-decline **The advance-decline index is a measurement of advancing stocks versus declining stocks over a specified period. It is a good indicator of the strength of a bull or bear market. The other technical analysis theories are just the opposite of how they should be stated**
Roundville Bank is considering an investment in Roundville County bonds. The bonds contain a provision that permits banks to deduct 80% of the interest cost being paid to depositors on the funds used to purchase the bonds. These securities are known as _________-____________ Bonds
Bank-qualified Bonds **Bank-qualified municipal bonds allow banks to deduct 80% of the interest cost paid to depositors on the funds used to purchase the bonds. This is done to encourage banks to invest in municipal securities. To qualify, a municipality may only issue up to $10,000,000 annually.**
An advantage a corporation receives when it issues a convertible bond is that It's able to_________ money at a __________ rate of interest
Borrow, Lower **Convertible bonds allow corporations to borrow money at a lower rate of interest (lower coupon) since the convertible feature is an attraction for investors. Investors are willing to accept the lower interest rate in exchange for the opportunity to convert the bonds into common stock. In addition, the investor has some downside protection because, even if the price of the stock falls, the convertible bond still has inherent value as a bond.**
A client buys 5 EW April 75 puts and sells 5 EW April 80 puts. This type of strategy is:
Bullish **By buying and selling put options with the same expiration month and different exercise prices, the client is creating a vertical (price) spread. Since the put option being sold has a higher strike price, and the right to sell a security (put) at a higher price is more valuable, this option will have a higher premium. This is a put credit spread and the client will profit if the underlying security rises (bullish).**
Which of the following choices will NOT affect the SMA in a long margin account? A) Cash dividends paid on securities in a margin account B) Cash deposited in the account to reduce the debit balance C) Stock dividends paid on securities held in the margin account D) Appreciation in market value of the securities in a margin account
C) Stock dividends paid on securities held in the margin account **Stock dividends paid on securities held in a margin account will not increase the SMA. The market value of the stock already in the account will be reduced by the amount of the stock dividend as the number of shares of the stock increases. The total dollar value will remain the same. All the other choices will have an effect on the SMA.**
The penny stock rules apply under which of the following circumstances? A) The stock is listed on the NYSE. B) The selling broker-dealer is not a market maker in the stock. C) The transaction is recommended by the broker-dealer. D) The customer has previously bought penny stocks on five different occasions
C) The transaction is recommended by the broker-dealer. **According to SEC rules, penny stock is a stock that sells for less than $5.00 and is not listed on Nasdaq or the NYSE. Instead, these low-priced stocks are quoted on the OTC Bulletin Board or OTC Pink Marketplace. However, penny stock rules don't apply under the following conditions: 1) The customer is defined as an existing customer (i.e., a person who has maintained an account with a broker-dealer for more than one year or has previously engaged in three or more transactions involving penny stocks) 2) The transaction is non-recommended or unsolicited 3) The transaction is executed by a broker-dealer that's not a market maker in the security**
Which of the following option strategies has the greatest risk? A) Buying a long straddle B) Writing an uncovered put C) Writing an uncovered call D) Buying a long combination
C) Writing an uncovered call **An uncovered (naked) call has unlimited risk. The underlying stock could theoretically continue to rise in price. If the option were exercised, the writer would be required to buy the stock to deliver. In choices (a) and (d), the investor has purchased options and the maximum loss is the premium. In choice (b), the investor has written an uncovered put, which has a limited loss potential (strike price minus the premium received).**
Which of the following investors is LEAST likely to purchase a collateralized debt obligation (CDO)? A) Agawam Commercial Bank & Trust Company B) Oakdale Pension Fund C)Robert & Susan Abramowitz, JTWROS D) Lincolnshire Hedge Fund
C)Robert & Susan Abramowitz, JTWROS **Due to their highly complex nature, CDOs are generally not suitable for retail investors. A CDO (collateralized debt obligation) is a sophisticated financial instrument that begins with an individual loan (such as a mortgage or corporate debt). These loans are placed in a pool, and investors then purchase a security (bond, tranche, slice) that represents an interest in that pool. Each of these securities has a different maturity and credit risk, depending on the nature of the collateral behind it. This type of investment carries many risks and considerations that make it largely unsuitable for a typical retail investor.**
A registered representative invites 20 institutional clients to a seminar and allows each client to bring one guest. The sales script used for the presentation is considered:
Correspondance **The key to this question is to identify the number of retail investors who are receiving the communication. Although the communication is being delivered to 40 total investors, only 20 are retail investors; therefore, the communication is considered correspondence. Correspondence is defined as any written or electronic message that a member firm distributes or makes available to 25 or fewer retail investors within a 30-calendar-day period. As long as the number of retail investors is limited to 25, FINRA is willing to allow the communication to be delivered without a significant amount of oversight. On the other hand, retail communication is defined as any written or electronic communication that a member firm distributes or makes available to more than 25 retail investors within a 30-calendar-day period. For numerical purposes, retail investors may be existing and/or prospective.**
As far as variable annuities are concerned, which of the following statements is TRUE? A) The investment risk is borne by the insurance company as in a fixed annuity B) Payments of a variable annuity can be decreased because of an increase in the expenses of the insurance company C) RRs selling variable annuities are not required to register with the SEC or FINRA D) Variable annuity nonqualified separate accounts are registered under the Investment Company Act of 1940
D) Variable annuity nonqualified separate accounts are registered under the Investment Company Act of 1940 **The only true statement listed concerning variable annuities is variable annuity nonqualified separate accounts (the mutual fund portion) are registered under the Investment Company Act of 1940. The investment risk (fluctuation in the market value of the separate account) is borne by the annuity owner, not by the insurance company as in the case of a fixed annuity. Payments of a variable annuity cannot be decreased because of an increase in the expenses of the insurance company. RRs selling variable annuities are required to register with the SEC and FINRA.**
Regarding cash dividends, which of the following statements is TRUE? A cash dividend becomes a ___________ ___________ when it is declared
Current Liability **Of the choices given, the only true statement is that a cash dividend becomes a current liability when it is declared.**
If an analyst wants to determine a company's ability to pay its liabilities that will be maturing in one year with its liquid assets, he will be most interested in the __________ ____________.
Current Ratio **The current ratio is a comparison of current assets to current liabilities for a one-year period and is used as an indicator of a company's ability to pay those liabilities. On the other hand, the acid-test (quick asset) ratio excludes the company's inventories and is usually for a one- to three-month period.**
Which of the following statements is TRUE concerning the use of bond volatility ratings when marketing a mutual fund? A) This practice is inherently deceptive and expressly prohibited under SEC regulations. B) These ratings must comply with the uniform standard set by Standard & Poor's and Moody's rating agencies. C) These ratings are often called risk ratings and are used for high yield funds exclusively. D) These ratings may account for NAV changes due to currency fluctuations.
D) These ratings may account for NAV changes due to currency fluctuations. **Bond volatility ratings are independently produced ratings that attempt to quantify how sensitive a given bond fund's NAV is to changes in the economy such as interest rate and/or currency fluctuations. There is no standardized scale for this measurement and these ratings may never be referred to as risk ratings.**
An airport deducts all of the following expenditures before arriving at its net revenues, EXCEPT _________ _____________ expenses.
Debt Service Expenses **Debt service expenses are paid first only in gross revenue pledges. It is assumed that the airport is using a net revenue pledge that results in all maintenance and operation expenses being deducted before arriving at net revenues.**
A 7% convertible bond has a conversion ratio of 40. The bond has a nondilutive feature and the common is selling at $43 a share. If the company distributes a 10% stock dividend, which of the following statements is TRUE regarding the convertible bond? The conversion price _________________ to $___.____and the conversion ratio ___________________ to ______
Decreases to $22.73, increases to 44 **A nondilutive feature requires that the conversion features be adjusted should there be a stock split or stock dividend. The conversion ratio will be increased and the conversion price will be reduced. The new conversion ratio will be 44 [the old ratio (40) plus the old ratio times the percentage dividend (40 x 10% = 4)]. The new conversion price will be the par value of the bond divided by the new conversion ratio ($1,000 divided by 44 equals $22.73).**
The process of a customer instructing his bank to deliver cash when securities are received from the clearing firm, is referred to as ___________________ vs ____________________
Delivery versus Payment (DVP) **DVP (Delivery versus Payment) and COD (Cash on Delivery) are general acronyms used to describe a relationship in which a customer uses a bank to settle trades with executing firms. The firm delivers securities against the bank payment and pays against the bank delivery of securities. When discussing a given transaction, a DVP occurs when the dealer delivers securities to the bank in return for a cash payment from the bank. An RVP (Receipt versus Payment) occurs when the dealer receives securities from the bank and makes a cash payment to the bank. The transaction described in the question is an example of a DVP transaction in which the customer's bank is delivering cash in return for securities from the broker-dealer (clearing firm). It is important to remember that customers (usually institutions) set up brokerage accounts and place orders at these firms. However, trades settle through custodian banks designated by the customers. The broker-dealer will contact the bank, which will send payment or receive securities on behalf of the customers. The broker-dealer will not hold the customer funds or securities.**
An investment that outperforms the market as it goes up but underperforms the market as it goes down would have a beta: _____________ than 1
Greater **Beta is a measure of a stock's or portfolio's volatility in relation to the market as a whole. The market is typically represented by the S&P 500 Index and is assigned a beta of 1. If an investment has a beta of greater than 1, it will outperform the market as it goes up and underperform the market as it goes down. Negative betas are associated with stocks or portfolios that move in an opposite direction of the market.**
The Investment Company Act of 1940 regulates _________.
ETFs **ETFs (exchange traded funds) must register with the SEC as either an open-end investment company or a unit investment trust. Hegde funds are private investment pools. REITs, real estate invesment trusts, are not a type of investment company. The commissions or sales charges on mutual funds is established by FINRA.**
On the day prior to the ex-dividend date for an ordinary cash dividend, a holder of a call tenders an exercise notice. The investor will be: ____________ to the Dividend
Entitled **The holder of a call will get a dividend only if the option is exercised prior to the ex-dividend date. This will result in the buyer being listed as holder of record on the books of the transfer agent.**
Which of the following statements is TRUE concerning a customer who purchases an original issue discount (OID) U.S. government security? Each year the customer will pay only _______________ income tax.
Federal **The upward adjustment in the purchase price of an original issue discount bond is called accretion. The amounted accreted each year is considered interest income, which may or may not be taxable depending on the type of security. The interest on U.S. government securities is subject to federal income tax, but exempt from state and local income taxes.**
To determine how much of a mutual fund's distributions are required to be included in taxable income, the shareholder should examine ___________ ______________.
Form 1099 **Shortly after the end of each calendar year, mutual fund investors will receive a copy of IRS Form 1099-DIV for each fund they own. The form will describe how fund distributions are to be treated for tax purposes.**
A stock trades ex-dividend on Monday the 20th. What is the last day an investor can purchase the stock and be entitled to the dividend?
Friday the 17th **To be entitled to receive the dividend, the stock must be purchased prior to the ex-dividend date. Friday the 17th is the last day an investor could purchase the stock and be entitled to the dividend, since it is the business day prior to the ex-date.**
A bond with an 11% coupon is purchased at 103. The maturity of the bond is 20 years. The bond is callable in 10 years at par. The yield will be: ____________ if held to maturity.
Higher **If the bond is held to maturity, the investor will be able to amortize the premium over a longer period, thereby realizing a higher yield. If the bond is called in ten years, the premium is amortized over half the time, resulting in a lower yield. A bond purchased at a premium and callable at par will always have a lower yield to call than to maturity. The opposite is true for a bond purchased as a discount callable at par. The yield to maturity will be lower than the yield to call.**
In which of the following cases would an investor own accumulation units? I) In a periodic payment deferred annuity II) In a single payment deferred annuity III) In an immediate life annuity IV) In an immediate annuity with a 10-year period certain
I and II only **During the pay-in period of a variable annuity, an individual owns accumulation units. These units will be owned until the money is to be withdrawn. Once a person wishes to begin receiving benefit checks, the accumulation units are exchanged for annuity units. Individuals having deferred annuities wish to receive benefit checks at some future date and will hold accumulation units until that date. Those owning immediate annuities, wish to receive payments immediately and do not hold accumulation units.**
Structured products may: I) Offer returns linked to equity securities II) Not offer returns linked to commodities III) Not offer returns linked to interest rates IV) Be formulated to provide principal protection
I and IV **Structured products are prepackaged securities that often combine securities, such as a bond with a derivative. The structured security may be linked to equity securities, commodities, or interest rates. The products may also be structured to provide principal protection. Structured products are not bank deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC). This fact should be disclosed by an RR when offering this product to clients.**
Which TWO of the following statements are TRUE about the market price of an option? I) The more volatile the underlying stock, the smaller the premium II) The current market price of the stock compared to the strike price influences the size of the option's premium III) The longer the period of time remaining until the option expires, the greater the premium IV) Out-of-the money options have no time value
II & III **An option's premium is determined by the volatility of the underlying stock, the current market price of the underlying stock, and the time remaining until the option expires. The market price of the stock compared to the strike price determines whether the option is in- or out-of-the-money and the intrinsic value. An out-of-the-money option has no intrinsic value, its premium is all time value. The more volatile the underlying stock, the larger the premium. The longer the time remaining until the option expires, the greater the premium.**
Which TWO of the following conditions apply and would permit the sale of securities outside the U.S., without registration with the SEC? I) Any offer or sale is permitted to be made only to qualified institutional buyers II) Any offer or sale must be made through an offshore transaction III) No direct selling effort may occur in the U.S. IV) The issuer must be a publicly traded company headquartered outside the U.S.
II & III **Regulation S provides companies with certain guidelines through which securities may be sold outside the U.S., without SEC registration. There are two general conditions that must be met in order for this safe harbor to apply. Any offer, sale, or resale is made in an offshore transaction. No direct selling effort may be made in the U.S. in connection with the transaction.**
Which TWO of the following metrics may be calculated by examining the income statement of a company? I) The debt-to-equity ratio II) The operating profit margin III) The bond coverage ratio IV) The current ratio
II & III **The operating profit margin is found by dividing the sales by the operating income or profit. The bond coverage ratio is found by dividing the interest expense by EBIT. All of this information can be found in the income statement. The debt-to-equity ratio and current ratio can be calculated by examining a company's balance sheet.**
A company that manufactures solar panels has approached an investment banker to help the firm raise capital for its new manufacturing plant in Colorado. The firm wants to raise capital in a private placement, and the CFO of the company wants to know the difference between convertible debt and debt with warrants attached. Which TWO of the following statements are TRUE? I) Both convertible debt and debt issued with warrants attached will trade as one unit each II) Convertible debt trades as one unit, but debt issued with warrants attached trades as two separate units III) Both convertible debt and debt issued with warrants attached have a potential dilutive effect on the common stockholders IV) Convertible debt has a dilutive effect on common shares, but debt issued with warrants does not
II and III **A convertible bond is a hybrid security consisting of a bond with an imbedded call option permitting the purchase of a share of common stock at a fixed price. A convertible bond trades as one unit. A bond issued with warrants attached will trade as two separate units. When the bond is issued, the warrants are detached from the bond and will trade as a separate unit. An event that will reduce the proportionate claim of common stockholders to the earnings of a corporation is considered to be dilutive. The conversion of convertible securities into common stock and the issuance of additional shares of common stock (e.g., based on the exercise of warrants) will each result in additional shares owned by new shareholders.**
Various tranches of a long-term speculative bond issue are called by the issuer. The effect on the remaining outstanding bonds is likely to be ____________ quality.
Improved **When part of an issue of long-term speculative bonds is called, the effect on the remaining outstanding bonds will be an improvement in their quality. The issue will have less debt outstanding and there will be less interest charges to pay, which improves the quality of the issue.**
A purchaser representative must be _____________________& ________________________ in Business & Financial Patterns
Knowledgeable & Experienced **A purchaser representative must be knowledgeable and experienced in business and financial matters. His function is to assist a nonaccredited investor in evaluating the risks of the product. A purchaser representative may not be an affiliate or an employee of the issuer unless he is related to the client.**
An official statement for a general obligation bond says that property taxes may not be raised above a certain level. This is known as a: __________ _____ Bond
Limited Tax Bond **A GO bond is backed by taxes. The issuer promises to raise taxes, if necessary, to pay principal and interest on the bonds. A limited-tax GO bond has a ceiling on how high the tax rate may be raised.**
When comparing an Albany, New York hospital revenue bond to a Buffalo, New York hospital revenue bond, you notice that they have similar maturities but the Buffalo bond has a higher yield. A possible reason for this is There are _________ hospitals located in ___________ than in ___________.
More, Buffalo, Albany **Competing hospitals could affect the project's revenue and, therefore, could reduce the bond's security. Each of the other choices relates to taxes, which do not secure revenue bonds.**
A municipal offering in which two or more issues of bonds have the same priority of claim against pledged revenues is referred to as a __________ bond.
Parity **A parity bond is defined as a revenue bond in which two or more issues have the same claim to the pledged revenues. A double-barreled bond is one that is backed by a source of revenue as well as the full faith and credit of an issuer that has taxing power [i.e., a general obligation (GO) bond issuer].**
On the NYSE, an investor enters an order to buy 400 shares of HRJ at $56 per share. Which of the following statements is TRUE regarding this order? The order may be ____________ filled
Partially **Since the order specifies a price, it is a limit order. A limit order may be executed at the limit price or better. In this question, the investor is wants to buy HRJ at $56 or lower (i.e., the order is not required to be executed at exactly the limit price). Since the order does not indicate an all-or-none (AON) qualifier, a portion of the order may be filled. Also, since the order does not indicate an immediate-or-cancel (IOC) qualifier, it is not required to be executed immediately. As for the remaining choice (an order must be executed at $56 before this order can be executed), an order is not required to be executed at $56 for this order to receive execution.**
Paid-in capital is BEST defined as he amount of any _____________ __________the stock's par value that is paid by investors for the shares that a corporation sells publicly
Premium above **Paid-in capital is the amount of any premium above the stock's par value that is paid by investors for the shares that a corporation sells publicly. For example, if a company's IPO is priced at $18.00 and the par value is $5.00, the paid-in capital is $13.00.**
The written supervisory procedures (WSP) manual of a broker-dealer would NOT include the: ________________ that must be followed in the event of a ____________________ business disruption
Procedures, Catastrophic **The WSP manual includes the policies and procedures governing all aspects of a firm's business as well as identifying those responsible for implementing the procedures. The procedures that must be followed in the event of an emergency or significant business disruption are included in the firm's Business Continuity Plan.**
The major risk of investing in long-term, high-grade bonds is: ____________-__________ Risk
Purchasing-power risk **Long-term, high-grade bonds are relatively safe investments since interest payments and repayment of principal are relatively secure. However, long-term bonds, even T-bonds, have a significant amount of purchasing-power risk. This is because the amount of interest is fixed. The purchasing-power of the interest income may decline over the long term because of inflation, which would reduce the amount that could be purchased with the fixed amount of dollars.**
In a discussion with a client, a registered representative refers to a bond yield that has been reduced by the inflation rate. This yield is known as the: __________ ____________ rate
Real Interest Rate **The real interest rate is the yield of a security reduced by the inflation rate. While it represents earnings remaining once inflation is taken into account, the real interest rate does not factor in the tax consequences. The discount rate is the rate of interest that the Federal Reserve charges member banks for loans. LIBOR (the London Interbank Offered Rate) is the rate of interest that banks in London charge each other for short-term loans.**
What type of risk do zero-coupon bonds eliminate? ______________ risk
Reinvestment Risk **Zero-coupon bonds are issued at a discount and do not pay semiannual interest. Therefore, there are no interest payments to reinvest, eliminating reinvestment risk. When investing in fixed-income investments, one of the uncertainties is whether interest rates will allow an investor to realize the total return that was calculated at the time of the investment (yield to maturity). Zero-coupon bonds do not have reinvestment risk, but they do have extreme interest-rate risk because the bonds' duration will equal the years to maturity.**
A client has annuitized a variable annuity which has an AIR of 4% but was sold to her by an RR who used an illustration containing a 7% growth rate. This past period, the separate account grew at a rate of 4%. The client's next payment will ___________ the ____________
Remain the same **When an investor annuitizes a variable annuity the investor exchanges accumulation units for a fixed number of annuity units. The number of annuity units and value of each unit is determined by 3 factors: 1) the value of the contract at annuitization; 2) the life expectancy of the investor in years multiplied by the frequency of payments (monthly, quarterly, annually, etc.); and 3) An assumed investment rate (AIR). This rate is only an assumption that the funds chosen in the separate account will continue to grow in the future as they have in the past. There is no guarantee that this will occur. After each payment, we compare actual performance to what was initially assumed. If the funds in the separate account grow faster than what was assumed, the liquidation value of the remaining units will be worth more and the payments will increase. Should the funds underperform what was assumed at annuitization, payments will decrease. If the funds perform exactly as assumed, the payment amounts will remain the same. An illustration is a marketing tool only. It is used by the rep during the initial sale to project hypothetical results. It has no bearing on the terms of the contract nor the actual results achieved. A hypothetical illustration is not part of the annuity contract and cannot be used to imply actual results.**
All of the following are typical characteristics of a 401(k) plan, EXCEPT that Employers __________ _____________ employee contributions
must match **In a 401(k) plan, an employee can usually make a pre-tax contribution into the plan and reduce taxable income. Employee contributions and growth in the account are tax-deferred. Employers are not required to match contributions but may do so.**
Joanne is a 50-year-old woman who just left the job she had held for 20 years. She has a substantial amount accumulated in her 401(k), which she's rolling over into an IRA. If she's planning to use this money to retire in 12 to 15 years, which of the following investments is the most appropriate for her? A ___________ Fund
Stock **Joanne's time horizon is long enough to make a stock fund an appropriate choice for her IRA. Since Joanne is already receiving the benefits of tax-deferred growth, a variable annuity is not an appropriate option. Generally, buying a variable annuity for a tax-deferred retirement account is often an expensive way of needlessly duplicating the tax benefits that most of these accounts already provide. Municipal bond funds are appropriate for investors who are seeking tax-exempt income.**
Michelle Gladstone has noticed that many of her elderly clients do not bother to read the prospectus prior to making a purchase. They consider these documents much too confusing and far too time consuming to go through. They generally rely on Michelle's advice when pondering investment selections. Michelle is uncomfortable with her clients' lack of due diligence and is attempting to come up with a better way to educate them about the risks and rewards of investing in a particular fund. Under SEC rules, Michelle may engage in which of the following activities? She may provide her clients with a ____________ _____________ obtained from the fund's _________________.
Summary Prospectus, Wholesaler **Many mutual funds are employing shorter summary versions of the prospectus or profiles. These reader friendly documents highlight the most relevant information found in the complete prospectus and are designed to encourage potential investors, who may be intimidated by the complete prospectus, to do their due diligence prior to investing. An investor may buy shares solely based on the contents of this short version prospectus but must be made aware that they are entitled to receive a complete (full version) prospectus prior to making a purchase. Regardless of their intentions, RRs are NOT permitted to modify a traditional prospectus or make up their own summary piece. The only summary document that may be used (a profile) is created by the fund's distributor and filed with the SEC. Clients may make a purchase based on this profile and will receive a complete prospectus with their confirmation.**
When sent to a client, which of the following must be preceded or accompanied by a prospectus? ____________________ _______ ____________________ for the bond mutual funds in the Flyer Group family of funds.
Supplemental Sales Literature **Supplemental sales literature may only be used in the post-effective period and must be preceded or accompanied by a prospectus. These requirements do not apply to generic advertising, tombstone ads, or omitting prospectus ads. The latter two types of ads are often published in newspapers.**
A _____ ______ is the sale and purchase of bonds (or other securities) to realize a capital loss that can be offset against a capital gain
Tax Swap
Your client is considering purchasing a fund of hedge funds. Which of the following statements concerning this investment is TRUE? A) These securities may be purchased only by investors who meet accreditation standards established by the SEC. B) These securities may be redeemed at the conclusion of each trading day. C) These securities will outperform traditional mutual funds. D) These securities are not liquid investments.
These securities are not liquid investments. **A fund of hedge funds is a mutual fund that invests in unregistered, private hedge funds. Although hedge funds are not required to register with the SEC, funds of hedge funds typically do not have this exemption available to them. Since these funds of funds are invested in illiquid securities (the individual hedge funds), they do not typically offer a guaranteed daily right of redemption. (Traditional mutual funds offer this feature.) Liquidity is a term that means an investor can convert her investment into cash quickly. Since there is no guaranteed daily redemption feature offered to investors in hedge funds and funds of hedge funds, these securities are illiquid. Choice (c) is incorrect since there is no guarantee that this type of fund will outperform a traditional mutual fund.**
An investor places an order to buy shares of a mutual fund after that investment company has determined its net asset value for the day. The RR instructs the fund company to purchase the shares at that day's NAV for the investor. Which of the following statements concerning this potential trade is TRUE? This is a sales practice ______________ known as ________ ___________.
Violation, late trading **This activity would constitute a sales practice known as late trading, which is prohibited under federal securities laws. According to securities law, orders placed after the close of trading for the day (and after the determination of the closing NAV) must be filled at the next calculated NAV, which is usually the price at the end of the next business day. Investors placing orders after the close of the market (based on information that they have learned after the close), and seeking to purchase shares at prices determined before the close, are engaging in late trading, which clearly places other investors in that mutual fund at a clear disadvantage. The investor must receive the price as calculated by the fund company at the NAV on the following day.**
