Kaplan - Customer Information, Risk and Suitability, Product Information

All of the following statements regarding commercial paper are correct EXCEPT: A) it is quoted as a percentage of par. B) it is quoted on a discount yield basis. C) it is unsecured. D) Interest is received at maturity.

A Commercial paper is short-term, unsecured corporate debt. It is issued and traded at a discount of face value and does not pay periodic interest. Like all zeroes, it is quoted on a discounted yield basis.

A company reported annual earnings of $2.40 per share and paid annual dividends of $.60. If the dividends were distributed quarterly, what was the amount and payout rate? A)$.15 at 6.25%. B) $.15 at 25%. C)$.60 at 25%. D) $.60 at 10%.

C One quarter of $.60 is $.15. $.60 is 25% of $2.40.

If a customer sells a zero-coupon bond before maturity, gain or loss will be the difference between sales proceeds and: A) discounted value. B)par value. C)original cost. D)accreted value.

D Zero-coupon bonds must be accreted for tax purposes. Each year, the annual accretion is taxable to the holder. In addition, the customer may adjust the cost basis of the zero upward by the amount of the annual accretion.

Treasury STRIPS and Treasury receipts are quoted based on A) yield to maturity B) 0.03125 (1/32 of a point in dollars) C) 0.125 (1/8 of a point in dollars) D)amortization of premiums

ytm Noninterest-bearing securities, like zeroes, are quoted based on their yield to maturity. They are sold at a discount and mature at par.

Customer A and Customer B each have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments? Receiving cash distributions may reduce Customer A's proportional interest in the fund. Customer A may use the cash distributions to purchase shares later at NAV. Customer B's reinvestments purchase additional shares at NAV rather than at the offering price. Due to compounding, Customer B's principal will be at greater risk.

A) I and III. If the customer elects to receive distributions in cash while other investors purchase shares through reinvestment, his proportional interest in the fund will decline. The option to have distributions automatically reinvested allows those purchases to be made at NAV but a purchase made later would be made at the POP like any other new purchase.

Which of the following regarding corporate debentures are TRUE? I. They are certificates of indebtedness. II. They give the bondholder ownership in the corporation. III. They are unsecured bonds issued to finance capital expenditures or to raise working capital. IV. They are the most senior security a corporation can issue. A) I and II. B)I and III. C)III and IV. D)II and IV.

B Debentures are debt securities that represent unsecured loans of the issuer. They are senior to common and preferred stock in claims against an issuer. They are issued to finance capital expenditures or raise working capital.

A customer is interested in an exchange-traded fund (ETF). With regard to the trading of ETFs, the customer should be aware that I. ETFs can be purchased throughout the trading day II. ETFs use forward pricing, the same as mutual funds do III.real-time quotes are available for ETFs IV. the NAV calculated at the end of the day, plus a sales charge, will equal the trading price

B ETFs can be traded throughout the trading day. Changing price quotes are available in real time as investors buy and sell. Although ETFs have an NAV that is calculated on the basis of the portfolio holdings, the trading price is determined by supply and demand in the open market, with customers paying commissions.

The function of the Federal National Mortgage Association (FNMA) is to: A) provide financing for government-assisted housing. B) purchase FHA-insured, VA-guaranteed, and conventional mortgages. C) guarantee the timely payment of interest and principal on FHA and VA mortgages. D) issue conventional mortgages.

B The FNMA buys FHA, VA, and conventional mortgages and uses them to back the issuance of debt securities. FNMA currently issues debentures, mortgage-backed securities, and certificates.

An investor sells 10 5% bonds at a profit and buys another 10 bonds with a 5-1/4% coupon rate. The investor's yearly return will increase by: A) $2.00 per bond. B)$2.50 per bond. C)$1.00 per bond. D) $1.50 per bond.

B The first bonds are 5% and pay $50 per year per bond. The new bonds are 5-1/4% and pay $52.50 per year per bond, for a difference of $2.50 per bond.

According to the Investment Company Act of 1940, a diversified mutual fund may hold, at most, what percentage of a corporation's voting securities? A) 75%. B) 100% C) 5%. D) 50%.

B To be considered a diversified investment company, 75% of the funds assets must be diversified such that the mutual fund owns no more than 10% of a target company's voting securities. Additionally, within that 75% of assets, no diversified investment company may invest more than 5% of its portfolio in a single company's securities. However, there are no restrictions on the other 25%. That can all be in one stock making 30% of the fund's assets in one company. Those assets can theoretically buy all of the outstanding voting shares of a company and control 100%.

Which two statements are true regarding Section 529 education savings plans?Contributions are considered gifts under federal law.Contributions are tax deductible under federal law.Earnings generated are taxable each year.Earnings generated are tax deferred. A) II and III B) I and IV C) I and III D) II and IV

B Under federal law, contributions made into Section 529 plans are considered gifts and are not deductible at the federal level. Furthermore, earnings generated each year are tax deferred and, on withdrawal, are tax free at the federal level-if used for qualified education expenses.

A customer seeks a significant long-term investment in the Ajax fund, a growth-oriented mutual fund. To take advantage of breakpoints applicable to large investments, the customer should purchase: A) Class C shares. B)Class A shares. C)Class B shares. D)Class D shares.

B For initial purchases, breakpoints are only available if the customer purchases Class A shares, which are sold with a front-end load deducted from the initial investment. A substantial purchase can often reduce the sales charge to zero. Class-B and Class-C shares are sold with annual 12b-1 fees as well as a contingent deferred sales charge. Class D shares are sold with a level sales load plus a redemption fee.

Which of the following statements regarding negotiable CDs are TRUE? I. The issuing bank guarantees them. II. They are callable. III. Minimum denominations are $1,000. IV. They can be traded in the secondary market. A) I and III. B) II and IV. C) I and IV. D) II and III.

C Negotiable CDs are issued primarily by banks and backed by the issuing bank. The minimum denomination is $100,000. These are sometimes referred to as jumbo CDs.

A registered representative explaining variable annuities to a customer would be CORRECT in stating that: I. a variable annuity guarantees an earnings rate of return. II. a variable annuity does not guarantee an earnings rate of return.a III. a variable annuity guarantees payments for life. IV. a variable annuity does not guarantee payments for life. A) I and IV. B)I and III. C) II and III. D)II and IV.

C A variable annuity does not guarantee an earnings rate because earnings will depend on the performance of the separate account. However, it does guarantee payments for life (mortality).

If an investor has received dividends and capital gains distributions on mutual fund shares she has held for 4 months, the investor will pay: A) no tax until she liquidates the shares. B)ordinary income tax rates on the capital gains and dividends. C)capital gains rates on capital gains distributions and ordinary income rates on dividends. D)long-term or short-term capital gains rates, depending on the length of time the customer has held the fund shares.

C Capital gains distributions are taxed as capital gains, with their holding status depending on how long the fund has held the securities, not how long the investor has held the mutual fund shares. Dividend distributions are taxed as ordinary income.

Characteristics common to penny stocks would include which of the following? I. Market price less than $5 per share. II. Market price greater than or equal to $5 per share. III. Nasdaq OTC stock IV. Non-Nasdaq OTC stock. A) II and IV B) I and III C) I and IV D) II and III

C Penny stocks are generally defined as those with a market price below $5 per share that are not traded on any exchange or Nasdaq.

The main purpose of dividend reinvestment in a mutual fund accumulation plan is to: A) A) avoid commissions or sales charges. B) avoid taxes. C) compound the growth of a mutual fund investment. D) protect against capital loss.

C Reinvesting dividends compounds the growth of the fund with periodic purchases of new shares. Taxes are due on dividends whether or not they are reinvested. Capital gains or losses will occur whether or not dividends are reinvested. The purchase of additional shares with reinvested dividends may increase the capital gain or loss in proportion to the dividends reinvested. Avoiding commissions or sales charges is not the main rationale for reinvesting dividends, even though sales charges are not applied to reinvested dividends.

Buying stocks with high PE ratios normally reflects which of the following investment styles? A) Special situations. B) Turnaround. C) Growth. D) Value.

C The purchase of stocks with high PE ratios represents a growth investment style. Growth-oriented investors will pay for high PE ratios. Value investment style is associated with the purchase of low PE stocks or stocks trading below their intrinsic value.

Market interest rates have risen steadily over the past several months. The market price of which 2 of the following shares would probably reflect the biggest impact of this change? I. Growth stock. II. Money market mutual fund III. Preferred stock. IV. Public utility stock. A) I and II. B) II and III. C) III and IV. D) I and IV.

C Stocks that are interest rate sensitive will reflect the impact of a change to market interest rates more than others. Preferred stock with its fixed dividend and utility stocks with their high degree of debt leverage are considered interest rate sensitive. The yield of the money market fund will change, but the price is fixed at $1 per share.

You have a client who is about to retire and wants to rearrange his portfolio in order to have predictable income. Which of the following would NOT be a good investment vehicle? A)AA rated debenture. B) U.S. Treasury note. C) AA rated IDB. D) Income bonds.

D Income bonds, also known as adjustment bonds, are issued when a company is reorganizing and coming out of bankruptcy. Income bonds pay interest only if the company has enough income to meet the interest payment. As a result, these bonds normally trade flat, without accrued interest. Therefore, they are not suitable for customers seeking income.

All of the following would be included in a penny stock risk disclosure statement EXCEPT A) risks of investing in penny stock B) definition of penny stock C) investors' legal rights D) broker/dealer's statement of guarantee

D Penny stock disclosure statements must be furnished to all buyers of unlisted, non-Nasdaq stocks of less than $5 per share. The disclosure must include the risks of penny stock investing, the rights of the investors, and the responsibilities of the broker/dealer to the investor. There would be no statements regarding guarantees either implied or expressly written.

An investor purchases 100 shares of CDE on December 20, 2000, for $2,000. On the same day, he purchases 100 shares of QRS for $2,000. On January 3, 2001, he sells the CDE stock for $1,700 and the QRS stock for $2,200. On January 24, 2001, he purchases 200 shares of CDE for $3,000. What capital gains or losses did he realize from these transactions? A) $300 loss in CDE and $200 gain in QRS. B)$300 loss in CDE. C)$300 loss in QRS and $200 gain in CDE. D)$200 gain in QRS.

D The investor in this question has a $200 capital gain to report on the purchase of QRS stock for $2,000 and its subsequent sale for $2,200. Because the investor repurchased the CDE stock (January 24) within 30 days of selling it (January 3), the $300 loss incurred ($2,000 - $1,700 = $300) when sold (January 3) is disallowed under the wash sale rule.

Which of the following statements regarding Coverdell ESAs is TRUE? A) Contributions are tax deductible, and distributions for any reason are tax free. B) Contributions are not tax deductible, and distributions for any reason are tax free. C) Contributions are tax deductible, and distributions are always taxable. D) Contributions are not tax deductible, and distributions are tax free when used for qualified educational expenses.

D Coverdell ESAs offer after-tax contributions of up to $2,000 per student per year for children under age 18. Distributions are tax free as long as the funds are used for education.

A customer expresses the need to invest a fixed dollar sum now that will return a fixed dollar sum in 10 years. He mentions several investments. Of those listed which would not be a suitable recommendation for his objective? A) Treasury Inflation Protection Securities (TIPS) B)A high-yield corporate bond maturing in 10 years C)A zero-coupon bond maturing in 10 years D) Collateralized mortgage obligations (CMOs)

D Due to the interest rate sensitivity of mortgage-backed securities and the possibility of high prepayment risk (receiving the invested funds back earlier than anticipated) CMOs would not be suitable. TIPs, designed to protect against inflation, and the high yield corporate bond if held to maturity, could each meet the objective. Zero coupon bonds are specifically designed to meet the objective of investing a fixed sum now and realizing a fixed sum later and in this regard would be the most suitable of those listed.