Series 65- Chapter 13 STC
What method of crediting an equity indexed annuity's returns is based on the index value over a specified period? A. American style B. Point-to-point C. Binary D. Capped
B. Point-to-point Equity index annuities (EIAs) provide returns that are based on the return of an equity index; however, if the market falls, they also provide a minimum rate of return. Insurance companies will credit the annuitants' accounts periodically. Some insurance companies credit their policyholders monthly, annually, or bi-annually, while others do it on a specific date (e.g., the starting point may be the value of the index on the date of issuance and the ending point is the value of the index on a particular date), which is referred to as "point-to-point." The amount of credited interest will then be based on the increase or decreased in the indexed value since the last time it was credited.
A client is interested in trading actively, purchasing on margin, and having broad exposure to the U.S. equity market. Which of the following investments is the LEAST suitable? A. A closed-end fund B. An S&P 500 Index ETF C. An S&P 500 Index mutual fund D. A DJIA Index ETF
C. An S&P 500 Index mutual fund Open-end investment company (mutual fund) shares are not appropriate for short-term trading, do not trade on an exchange, and cannot be purchased on margin. On the other hand, most ETFs and closed-end fund shares trade on an exchange and allow the use of margin and short selling.
In which TWO of the following ways do exchange-traded funds (ETFs) differ from mutual funds? ETF share prices may change throughout the trading day ETF share prices are determined at the close of the market each day ETF shares may be sold short When ETF shares are purchased, buyers pay a sales charge A. II and III B. I and II C. II and IV D. I and III
D. I and III ETFs differ from mutual funds in the following ways: the shares trade on an exchange, the share prices change throughout the day based on supply and demand, and the shares may be sold short and purchased on margin. Also, rather than paying a sales charge, an investor will pay a commission on her ETF trades.
Real estate limited partnerships: A. Pass through only income B. Are subject to double taxation C. Are typically exchange-traded D. Pass through both income and losses
D. Pass through both income and losses Real estate limited partnerships (RELPs), like all partnerships, pass through both income and losses to their partners. This tax treatment is preferential to C-Corporations which are subject to double taxation. RELPs are typically not listed on stock exchanges.
When analyzing a structured product, which of the following risks is of the LEAST concern? A. Regulatory risk B. Liquidity risk C. Complexity risk D. Credit risk
A. Regulatory risk Although all securities could have losses due to regulatory risk, structured products are not typically associated with it. Structured products are created by broker-dealers and are customized to fit the needs of specific investors. They're created as unsecured bonds, which means they have credit risk. The returns on a structured product can be based on a basket of equities, debt instruments, and derivates. As a result, predicting the returns in different market scenarios is complex. In addition, most structured products are not exchange-traded, which means that they also have liquidity risk.
A customer wishes to invest $50,000 in three different mutual funds. The investment adviser representative should notify the customer that if she invested the entire $50,000 in one fund, she could save money because of the quantity discounts available through: A. Sales charge breakpoints B. The availability of a withdrawal plan C. The possibility of exchanging one fund for another without paying a sales charge D. Automatic reinvestment of dividends and capital gains
A. Sales charge breakpoints The investment adviser representative should advise the client that she could save money because of the quantity discount option on large purchases available through purchases at sales charge breakpoints
What characteristic generally makes universal life insurance policies more attractive than other forms of life insurance? A. Universal life insurance policies offer the ability to adjust coverage amounts as needs arise B. Universal life insurance policies allow policyholders to lock in short-term rates of return C. Universal life insurance dividends may be reinvested to buy more insurance coverage D. There are no fees assessed against a universal life insurance policy
A. Universal life insurance policies offer the ability to adjust coverage amounts as needs arise The biggest benefit of a universal life insurance policy is the flexibility of the death benefit. If policyowners need additional coverage, they may increase the death benefit. Similarly, they may lower the coverage if their insurance needs decrease.
A whole life insurance policy may be referred to as :Permanent life Term life Ordinary life Straight life A. I and IV only B. I, III, and IV only C. I, II, and IV only D. I and III only
B. I, III, and IV only Whole life insurance may be called permanent, ordinary, or straight life insurance. Term insurance is a completely different type of policy that only provides coverage for a specific period
When investing in a variable annuity, investors would be MOST concerned with which of the following risks? A. Interest-rate risk B. Investment risk C. Legislative risk D. Mortality risk
B. Investment risk In a variable annuity contract, an investor's principal is invested in a separate account. The separate account contains a pool of securities that will fluctuate over time. A variable annuity client would be most concerned with the fact that the value of his investment will fluctuate due to changes in the overall market.
Which of the following statements is NOT TRUE of hedge funds? A. They are not sold with a prospectus. B. They are typically registered with the SEC under the Securities Act of 1933. CThey may charge performance fees DThey are often sold under Regulation D Rule 506.
B. They are typically registered with the SEC under the Securities Act of 1933. Hedge funds are private investment pools that are typically sold under an exemption (Regulation D Rule 506) and are therefore not required to register with the SEC under either the Securities Act of 1933 or the Investment Company Act of 1940. Since hedge funds are not subject to the Act of 1933 or Act of 1940, they are not required to sell with a prospectus. The first hedge funds used leverage and short selling strategies in an attempt to outperform the market. Modern hedge funds invest in a wide variety of financial instruments and employ a number of different aggressive investment strategies. Hedge funds are typically available to a limited range of professional or wealthy investors and these investors are often charged performance fees by the fund managers
Which of the following will a syndicator of a blind pool real estate investment trust include in the investment policy statement? A. The estimated location of the real estate purchases B. A disclosure that investment losses are guaranteed by SIPC C. A statement which breaks down the contributions made by limited partners D. The estimated timing of the real estate purchases
C. A statement which breaks down the contributions made by limited partners Blind pool real estate investment trusts (REITs), which are more commonly referred to as "non-traded" REITs, are pooled investments in real estate. However, unlike a traditional REIT, blind pool REITs give the investment manager broad authority over investment choices. The specific location and timing of the investments will not be disclosed in the investment policy statement. Although the investment policy statement of a blind pool REIT will not provide significant insight into the REIT's investments, the syndicator must disclose the break down of contributions made by limited partners.
A client wants an insurance contract in which he can accumulate a market-competitive return on the cash value in his insurance contract. He also wants the ability to pay fixed premiums. He should buy a: A. Whole life policy B. Term policy C. Variable life policy D. Pure insurance policy
C. Variable life policy A variable life insurance policy charges level premiums, while allowing for the possibility of higher market-based returns than a whole life policy.
Which investment offers income tax relief? A. Apartment building B. Index fund C. Growth mutual fund D. Stock fund
A. Apartment building Real estate investments offer tax breaks that mutual funds cannot offer. For real estate, one of the largest tax breaks is the interest deductions on loans. If a person purchases an apartment building with a mortgage, the interest paid on the loan can be deducted against the rent received from tenants. Similarly, owners of apartment buildings can also depreciate the cost of their buildings.
How are shares of ETFs priced? A. Based on the supply and demand for their shares on SEC registered stock exchanges. B. By calculating the net asset value of the shares at 4:00 p.m. ET each trading day. C. By using a formula that was created by the Investment Company Act of 1940. D. By adding up the total assets in the portfolio, then subtracting the liabilities, and then dividing by the number of shares outstanding.
A. Based on the supply and demand for their shares on SEC registered stock exchanges. Exchange-traded funds (ETFs) are exchange-traded portfolios that are typically designed to track an index. Like closed-end funds, ETFs are valued based on the bids and offers of investors and traders on stock exchanges.
Which of the following statements about variable annuities is FALSE? A. The annuity feature protects investors from capital losses B. The assets in a separate account are managed with a specific investment objective C. A change in investment objectives requires voter approval D. The portfolio may be invested in shares of other mutual fund companies
A. The annuity feature protects investors from capital losses Variable annuity assets are directed into a separate account and invested in a portfolio that fluctuates with the market. Therefore, an investor's principal will fluctuate over time as it remains invested in a variable annuity. Mutual funds are often an investment choice within an annuity. If an investor is interested in principal protection and a guaranteed rate of return, he should consider a fixed annuity.
A sales breakpoint of a mutual fund is: A. The minimum share amount of a purchase of a mutual fund where a volume discount is given B. The minimum dollar amount of a purchase of a mutual fund where a volume discount is given C. The point at which a letter of intent can be obtained D. The point at which a letter of intent may be backdated
B. The minimum dollar amount of a purchase of a mutual fund where a volume discount is given A sales breakpoint of a mutual fund is the minimum dollar amount (not the share amount) of a purchase of a mutual fund where a volume discount is given. The percentage of sales charge declines when certain minimum dollar amounts are reached
A client is considering purchasing a fund of hedge funds. Which of the following statements is TRUE concerning this investment? A. These securities must be held for a minimum of six months. B. These securities have higher management fees than hedge funds. C. These securities will outperform traditional mutual funds over time. D. Funds of hedge funds may be purchased only by investors who meet standards that are established by the SEC.
B. These securities have higher management fees than hedge funds. A fund of hedge funds is a mutual fund that invests in unregistered, private hedge funds. Although hedge funds themselves are not required to register with the SEC, funds of hedge funds are typically required to register with the SEC and are able to be sold to both accredited and non-accredited investors. A fund of hedge funds typically has higher management fees. The fund of hedge funds is assessed a management fees by each hedge fund in which it invests and will also have its own investment adviser that assesses a management fee.
Which of the following insurance policies allows the owner to skip her premium payments? A. Whole life insurance B. Universal life insurance C. Term life insurance D. Variable life insurance
B. Universal life insurance Universal life policies, including universal variable life policies, offer flexible premiums. Provided there is sufficient cash value, the owner can stop making premium payments. However, if cash value is insufficient, the policy will lapse. All of the other choices require the owner to pay premiums over a predetermined time period
If a client's objective is capital needs, which of the following insurance policies would an adviser recommend? A. Universal life B. Variable life C. Whole life D. Term life
B. Variable life A term life policy would not provide future capital as it does not accumulate cash value. A whole life policy would accumulate cash value, though generally at a low rate. Universal life would also accumulate cash value that can be used to pay the premium, which reduces the cash value. With a variable life policy, a portion of the premium is invested in the separate account, which historically would provide a higher return than the other policies.
Which one of the following investments trade independently from its net asset value (NAV)? A. Open-end fund B. Unit investment trust (UIT) C. Closed-end fund D. Variable annuity
C. Closed-end fund Mutual funds (open-end funds), unit investment trusts, and variable annuities are priced based on their net asset values. A closed-end investment company share may sell at, above, or below its net asset value since it trades on the stock exchange
Mark purchases an equity-indexed annuity contract that guarantees a 5% return with an 80% participation rate and a 12% interest-rate cap. The index to which the funds are tied rises in value by 10% this year. What return does Mark receive? A. 10% B. 5% C. 12% D. 8%
D. 8% In an equity-indexed annuity, the owner receives a guaranteed minimum interest rate with potential upside based on the performance of the designated index. If the return on this index is less than the guaranteed rate, the owner receives the minimum. If the index return is greater than the guarantee, the owner receives the greater return up to the capped maximum. Many contracts only pay a portion of the index return. In this example, the client is entitled to 80% of the index return capped at a 12% maximum. The index increased by 10%, so the client's contract is credited with 80% of that amount, or 8%.
An investment advisory firm is searching for prospective investors for a new hedge fund. Which of the following investors would probably be the most A. A young, very aggressive investor with an income of more than $100,000 and a liquid net worth between $50,000 and $100,000, who has repeatedly stated that he wants to invest with the big boys B. A husband and wife in their mid-fifties, both of whom are employed, with an annual income of more than $100,000 and a liquid net worth more than $1 million C. An older, retired investor with an annual income between $50,000 and $100,000 and a liquid net worth of more than $1 million D. A municipal pension fund that is seeking an income-generating, liquid investment
B. A husband and wife in their mid-fifties, both of whom are employed, with an annual income of more than $100,000 and a liquid net worth more than $1 million Hedge funds are generally illiquid investments with high minimum purchase requirements. Most are offered under Regulation D, which requires individual purchasers to meet minimum income and liquid net worth requirements (an annual income of at least $200,000 or a liquid net worth of at least $1 million). The municipal pension fund is seeking a liquid investment. The young, aggressive investor is unlikely to meet the minimum financial requirements to invest in a hedge fund. The other investors would all meet the minimum net worth requirements but a retired, older investor would not be the most suitable candidate for a hedge fund. This type of investor generally should not commit large portions of her portfolio to illiquid investments since she may need access to her money to pay for her living expenses and other needs
A management company may be established as either open-end or closed-end. What is the difference between the two types? A. Closed-end funds redeem their own shares B. Closed-end shares may trade at a premium or discount to the NAV C. Open-end fund shares trade in the secondary market D. Open-end funds may issue bonds in order to raise additional capital
B. Closed-end shares may trade at a premium or discount to the NAV Closed-end fund shares trade in the secondary market at either a premium or discount to their NAV. Although closed-end funds may issue senior securities (preferred stock or bonds) to raise additional capital, open-end funds cannot. Also, open-end fund securities are able to be redeemed; they do not trade in the secondary market.
Which TWO of the following types of insurance have fixed premiums? Whole life insurance Universal life insurance Variable life insurance Variable universal life insurance A. III and IV B. I and III C. II and IV D. I and II
B. I and III Universal life policies, including variable universal life, have flexible premiums. Variable universal life is sometimes called flexible-premium variable life insurance. Whole life and variable life insurance policies have fixed premiums.
Jack has a substantial amount of cash value built up in his variable life insurance policy. He would like to use some of it for a home renovation project. Which TWO of the following choices would be used to explain to Jack his options for accessing his cash value? If he withdraws some of his cash value, it will be treated as taxable earnings first, then a tax-free return of premiums (LIFO). If he withdraws some of his cash value, it will be treated as a tax-free return of premiums first, then taxable earnings (FIFO). If he takes a loan against the cash value, it will be taxed as earnings first, then treated as a tax-free return of premiums (LIFO). If he takes a loan against the cash value, it will be tax-free. A. II and III B. II and IV C. I and III D. I and IV
B. II and IV Any withdrawal of cash value from a life insurance policy is considered a return of premiums first, which would be tax-free. Withdrawals above the amount of premiums paid will be considered interest and, therefore, taxable as income. Policyholders usually prefer to borrow against their cash value, since this would be tax-free. The loan does not need to be repaid, but any amount still outstanding upon the death of the insured will be subtracted from the death benefit
Regarding equity-indexed annuities, which of the following statements is TRUE? A. If the index increases in value, there's no limit as to how much an investor may gain. B. If the annuitant withdraws money before the surrender period is over, she's required to pay a surrender fee. C. Since equity-indexed annuities are not securities, they're considered risk-free securities. D. If the index declines in value, there's no floor as to how much an investor may lose.
B. If the annuitant withdraws money before the surrender period is over, she's required to pay a surrender fee. Although equity-indexed annuities (EIAs) are insurance products, they're subject to many FINRA rules. Broker-dealers must always have adequate controls in place to supervise the sales activities of their RRs. EIAs are generally issued with both a floor (that limits loss on the downside) and a cap (that limits the gain on the upside).
An investor is long a 3x Bearish Inverse Leveraged Nasdaq 100 Index ETF. If the index declines by 10%, the value of the ETF will: A. Increase by 10% B. Increase by 30% C. Decrease by 10% D. Decrease by 30%
B. Increase by 30% For inverse leveraged ETFs, their value should move in the opposite direction of the underlying index by the given leverage factor (e.g., 3x). In this question, if the index declines by 10%, the value of the ETF will increase by three times that amount, (i.e., 30%).
Which of the following is the BEST feature of a variable annuity? A. It provides tax-free income to investors at retirement B. It provides investors with an opportunity to invest in equities and defer the taxes until annuitization or liquidation C. It provides additional benefits when placed inside of qualified retirement accounts D. It provides investors with a guaranteed payment every month
B. It provides investors with an opportunity to invest in equities and defer the taxes until annuitization or liquidation The primary reason that investors purchase variable annuities is the ability to buy into a portfolio of securities and to defer the payment of taxes on any appreciation. Investors are taxed only when the annuity is surrendered, liquidated, or annuitized. Variable annuities do not provide tax-free income or guaranteed performance. Although investors may purchase a variable annuity in a qualified account, they will not receive additional tax benefits. Since an annuity is an insurance product, it may provide a death benefit and a life payout option.
What are structured products? A. A contract in which two parties agree to exchange cash flows based on different financial instruments. B. Securities which are created by financial institutions that customize returns and risks to fit the needs of specific investors. C. An investment trust that manages a portfolio of real estate investments. D. Contracts that derive their value from the return on an underlying security.
B. Securities which are created by financial institutions that customize returns and risks to fit the needs of specific investors. Structured products are securities which are created by financial institutions (e.g., broker-dealers) and are often customized to fit the specific needs of customers. Although structured products are legally created as debt instruments, their rates of return are often linked to equities and derivatives. One of the most popular types of structured products is the exchange-traded note (ETN). Derivatives (e.g., options) are contracts that derive their value from an underlying security. REITs are investment trusts that manage portfolios of real estate investments. Swap contracts are agreements to exchange cash flows based on financial instruments.
Which of the following funds may an agent describe as no-load? A. A fund with no front-end sales charges, but having a contingent deferred sales charge of less than 1% and no 12b-1 fee B. A fund with no front-end sales charges, but having a contingent deferred sales charge of 1% and no 12b-1 fee C. A fund with no front-end sales charges or contingent deferred sales charges together with a 12b-1 fee of .25% D. A fund with no front-end sales charges or contingent deferred sales charges together with a 12b-1 fee of less than 1%
C. A fund with no front-end sales charges or contingent deferred sales charges together with a 12b-1 fee of .25% An investment company (mutual fund) may be called a no-load fund only if it has no front-end sales charges, no contingent deferred sales charge, and a 12b-1 fee that is equal to or less than .25% of the fund's average asset value.
Which of the following choices is a characteristic of equity-indexed annuities? A. A guaranteed minimum rate of return that is equal to the value of the underlying index B. A standardized rate of return that is set annually by the National Association of Insurance Companies (NAIC) C. A rate of return that varies with the value of the underlying index D. A rate of return that is determined by the subaccounts selected by the contract owner
C. A rate of return that varies with the value of the underlying index In an equity-indexed annuity, the insurance company guarantees the contract owner a minimum rate of return. However, the guaranteed return is never as high as the return of the actual index. The insurance company usually guarantees that the investor will receive most of her premium payments back plus a fixed return based on current interest rates. The investor's ultimate return may be higher than the minimum guaranteed rate depending on the performance of the index to which the contract is linked (choice [b])
Shares of which type of investment company are redeemable? A. A fund that's exempt from registration under the Investment Company Act of 1940 B. An investment company that has registered with the SEC C. An open-end management company D. A closed-end management company
C. An open-end management company Shares of open-end management companies (mutual funds) are redeemable. This means that investors who want to sell their mutual fund shares, must sell them back to the mutual fund, rather than to another investor on a stock exchange. Shares of closed-end funds are exchange-traded. Simply being registered with the SEC doesn't give any indication as to whether a fund's shares are redeemable.
An equity-indexed annuity is a type of: A. Fixed annuity that tracks the performance of a designated mutual fund B. Variable annuity that tracks the S&P 500 Index C. Fixed annuity that offers the potential for greater returns D. Variable annuity that tracks the DJIA
C. Fixed annuity that offers the potential for greater returns An equity-indexed annuity is a type of fixed (non-variable) annuity; therefore, SEC registration is not required for these contracts. The owner receives a guaranteed minimum rate of return, but has significant upside potential since the annuity's return is tied to a benchmark index (e.g., the S&P 500 Index. If the index underperforms, the investor will simply receive the minimum rate. On the other hand, if the index performs well, the investor will receive the indexed return based on contractual provisions.
Which TWO of the following choices are advantages of trading exchange-traded funds (ETFs)? They can be purchased on margin Investors can receive breakpoints There is no fee to liquidate shares They can be sold short A. III and IV B. II and III C. I and IV D. I and III
C. I and IV Exchange-traded funds (ETFs) represent a basket of securities. They are structured to represent an index of securities such as the Nasdaq 100 or the Dow Jones Industrial Average. Their shares are purchased and sold on an exchange. Therefore, they can be purchased on margin and sold short. Mutual funds may not be purchased on margin or sold short since they are sold under a prospectus and not on an exchange. Investors pay a commission whenever they buy or sell shares of ETFs. Investors receive breakpoints on sales if they purchase a specified amount of a mutual fund, not an ETF.
William purchased $10,000 worth of VULC when he was 60 years old. At the age of 98, William dies and leaves the shares of VULC to his grandson James. James learns that the shares are now worth $300,000. According to the IRS, which TWO of the following statements are TRUE regarding the shares of VULC? The cost basis of the shares is $10,000 The cost basis of the shares is $300,000 The holding period of the shares for James is short-term The holding period of the shares for James is long-term A. II and III B. I and III C. II and IV D. I and IV
C. II and IV According to the IRS, when securities are inherited, the recipient's cost basis is the market value of the securities at the time of the deceased's death. The recipient's holding period for the stock will be long-term, regardless of the deceased's actual holding period
Which of the following statements is TRUE regarding inverse ETFs? A. Inverse ETFs trade in tandem with their benchmark. B. Inverse ETFs are exempt from both state and federal securities regulations. C. Inverse ETFs are considered derivatives. D. Inverse ETFs trade in the same direction as an index.
C. Inverse ETFs are considered derivatives. Inverse ETFs move in the opposite direction of the benchmark or index to which they're linked. For example, if an index is up 10%, then an inverse ETF that's linked to that index should fall by 10%. Most ETFs are not considered derivatives because they actually own the shares that make up an index. However, inverse ETFs are different because they cannot directly hold the securities in an index. In fact, inverse ETFs often use derivatives and futures contracts to create a return that's opposite of an index. Since inverse ETFs don't hold the positions they're trying to track directly, they're considered to be derivatives. Although ETFs are considered federal covered securities (and exempt from registration) under the Uniform Securities Act, they're typically required to be registered under the Investment Company Act of 1940 (i.e., they're not exempt from federal securities laws).
Regarding inverse ETFs, which of the following statements is TRUE? A. Inverse ETFs move in tandem with the underlying index. B. Inverse ETFs are designed for long-term investors. C. Inverse ETFs use derivatives in order to move in opposition to the underlying index. D. Inverse ETFs will reset their portfolios quarterly.
C. Inverse ETFs use derivatives in order to move in opposition to the underlying index. Inverse ETFs are designed to give investors a return that's roughly equivalent to shorting a stock index. When the underlying index is falling, inverse ETFs should be increasing in value. The inverse ETF does this by actually selling stock short and using derivatives, such as options and futures. These products will actually reset their portfolios on a daily basis and are typically suitable for short-term investors.
What type of insurance policies have level premiums and level death benefits? A. Universal life and term life B. Whole life and variable life C. Term life and whole life D. Whole life and universal life
C. Term life and whole life Both term life and whole life insurance policies have fixed premiums and fixed death benefits. On the other hand, the premiums on universal life policies can be changed and the death benefits of variable life policies can fluctuate.
From what is an exchange-traded note (ETN) derived? A. A portfolio of securities that's held by a custodian B. The value of guarantees made by SIPC C. The creditworthiness of the issuer D. The credit rating of the stocks in the index that's being tracked
C. The creditworthiness of the issuer Exchange-traded notes (ETNs) are unsecured bonds that promise to pay a rate of return that mirrors the return of a portfolio of securities. This means that ETNs are created based on the creditworthiness of the issuer.
Which of the following statements is TRUE regarding funds of hedge funds? A. They have lower expenses than most mutual funds. B. The parent company invests in a number of mutual funds representing different asset classes. C. They are generally illiquid investments. D. They are a good choice for investors who wish to use dollar cost averaging.
C. They are generally illiquid investments. A fund of hedge funds is a type of registered investment product in which the parent fund invests in a number of hedge funds. They are usually illiquid investments. Funds of funds tend to have higher expenses than mutual funds.
Which investment company's shares are transacted at the current bid or asking price on an SEC-registered securities market? A. Variable contracts B. Unit investment trusts C. An open-end management company D. A closed-end management company
D. A closed-end management company Shares of closed-end funds are exchange-traded and will be bought and sold at their current market prices. The market price of a security is made up of a bid and offer. The bid represents an order to buy on the exchange, while the ask (i.e., offer) represents an order to sell a security. Variable annuities, unit investment trusts (UITs), and open-end funds (i.e., mutual funds) are not exchange-traded.
All of the following statements are TRUE regarding open-end and closed-end investment companies, EXCEPT: A. Open-end fund shares only trade at their NAV, but closed-end fund shares may trade either above or below their NAV. B. Open-end funds can issue full or partial shares, but closed-end funds can only issue full shares. C. Open-end fund shares are redeemable, but closed-end fund shares are not redeemable. D. Both open and closed-end funds have fixed capitalizations.
D. Both open and closed-end funds have fixed capitalizations. Open-end investment companies (i.e., mutual funds) are always issuing and redeeming shares in the primary market. This means that their capitalization is always increasing as investors buy new shares, or decreasing as investors redeem old shares. Closed-end investment companies trade on exchange and have a fixed capitalization. Only open-end fund shares trade at their net asset value (NAV). Closed-end fund shares may trade either above or below their NAV depending on the supply and demand on the exchange.
Which TWO of the following choices are differences between exchange-traded funds (ETFs) and exchange-traded notes (ETNs)? ETNs carry credit risk that is tied to the issuer that backs the note and ETFs do not have issuer credit risk ETFs may be sold short and ETNs may not ETF returns are based on the performance of an index and ETNs pay a fixed coupon rate ETNs have a maturity date and ETFs do not A. II and IV B. I and III C. II and III D. I and IV
D. I and IV ETNs are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes because ETN returns are linked to the performance of a commodity, currency, or index, minus applicable fees. ETNs do not usually pay an annual coupon or specified dividend. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. Only ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it can impact the value of the ETN negatively, regardless of how its underlying index performs.
Under the Investment Company Act, which TWO of the following statements are NOT TRUE regarding the redemption of mutual fund shares? The investor will receive the net asset value as previous day's close. The investor will receive the next computed net asset value after the order is entered. The fund must pay the investor within seven days of receipt of the redemption. The fund must pay the investor within three days of redemption. A.I and III B. II and IV C. II and III D. I and IV
D. I and IV Share redemption of mutual funds is based on forward pricing, which means that the investor will receive the next computed net asset value. This value is normally computed at the end of the business day. The client must be paid within seven calendar days of redemption.
All of the following statements are TRUE of the death benefit of a variable life insurance policy, EXCEPT: A. It is included in the estate of the deceased B. The beneficiary may elect to receive the death benefit as an annuity C. It is not taxable to the beneficiary D. It may be reduced to zero by poor performance of the separate account
D. It may be reduced to zero by poor performance of the separate account Although the death benefit of a variable life policy may increase or decrease due to the performance of the separate account, it will not decrease below a minimum guaranteed amount (the face value of the policy
A client considering an investment in a real estate investment trust would benefit from all of the following advantages, EXCEPT: A. Stable dividend income B. The ability to buy and sell shares easily C. Diversification D. Protection against rising interest rates
D. Protection against rising interest rates Real estate investment trusts offer investors a stable dividend based on the income produced by owning a diversified portfolio of properties and/or mortgages. Most REITs trade on an exchange offering investors liquidity. Since investors usually purchase REITs for their high dividend yield, if interest rates increase, the value of their shares will usually decrease as other newly issued income-earning securities become more attractive.
Regarding equity-indexed annuities, which of the following statements is FALSE? A. If the index declines in value, there is a floor as to how much an investor may lose B. If the index increases in value, there is a cap as to how much an investor may gain C. Performance is typically linked to a stock index D. Supervision of the firm's sales practices is not required since these are insurance products
D. Supervision of the firm's sales practices is not required since these are insurance products Although they are insurance products, equity-indexed annuities are subject to many FINRA rules. Broker-dealers must always have adequate controls in place to supervise the sales activities of their RRs. The product is issued with both a floor (that limits loss on the downside) and a cap (that limits the gain on the upside).
Six months ago, an investor purchased shares of a mutual fund and he recently received a long-term capital gain distribution from the fund. What is the tax implication of the distribution? A. The distribution is not taxed since it represents a return of the investor's capital B. The distribution is taxed as a short-term capital gain since he has owned the shares for less than one year C. The capital gain distribution is taxed in the same manner as dividend distributions D. The distribution is taxed as a long-term capital gain regardless of the fact that the investor has owned the shares for less than one year
D. The distribution is taxed as a long-term capital gain regardless of the fact that the investor has owned the shares for less than one year When a mutual fund distributes a capital gain, the tax implication is based on the fund's holding period, NOT the shareholder's holding period. The question indicates that the distribution was a long-term capital gain; therefore, it is both reported and taxed as a long-term capital gain.
An equity-indexed annuity is suitable for which of the following clients? A. An person who needs a minimum guaranteed return with the potential for a greater return than CDs offer B. A person who desires a high rate of return with little risk C. A client who needs tax-free income with limited risk D. A person who needs a guaranteed return for life with no risk
A. An person who needs a minimum guaranteed return with the potential for a greater return than CDs offer Equity-indexed annuities are NOT considered securities. Instead, they are hybrid products that combine elements of both fixed and variable annuities. The return of an EIA is linked to the performance of an underlying stock index. The insurance company that issues an equity-indexed annuity guarantees a minimum rate of return (as in a fixed annuity), but the annuity's ultimate return (which is capped) will vary depending on the performance of the index to which it is linked. To receive the EIA's guarantees, an investor must be willing to accept the limited potential gain.
An individual has a contract which offers guaranteed principal, tax-deferral, fixed premium, fixed benefit, and the insurance company bears the investment risk. What type of insurance contract is this? A. Annuity B. Variable C. Variable life D. Equity-indexed
A. Annuity Annuities, including fixed annuities, provide investors with a way to save for retirement. The annuitant pays an insurance company fixed premiums and, in exchange, receives a fixed rate of return (i.e., benefit). Because the rate of return is fixed, the insurance company assumes the investment risk. Taxes on an annuity are deferred until the annuitant withdraws (i.e., receives benefits).
The NAV of an ETF is calculated: A. At the close of each trading day B. Throughout the day C. Quarterly D. At the open of each trading day
A. At the close of each trading day Although exchange-traded funds (ETFs) are bought and sold on registered stock exchanges, they also have a net asset value (NAV) that's similar to mutual funds. For an ETF, the NAV is typically calculated at the close of exchange trading. However, investors don't necessarily buy and/or sell their ETF shares at the NAV; instead, they trade their ETF shares at market prices that are based on supply and demand.
Which of the following statements is TRUE about ETNs? A. ETNs may lose value even if the underlying index remains stable. B. ETNs are suitable for investors who want to capture long-term growth. C. ETNs are unsecured bonds and investors are secured creditors if the issuer declares bankruptcy. D. Similar to ETFs, ETNs are suitable for passive investors.
A. ETNs may lose value even if the underlying index remains stable. Unlike an ETF which is backed by an independent pool of securities, an ETN is an unsecured bond that's issued by a financial institution. That company promises to pay ETN holders the return on some index over a certain period and return the principal of the investment at maturity. However, if something happens to the issuing company (e.g., bankruptcy) and it's unable to make good on its promise to pay, ETN holders could be left with a worthless investment.
A client buys shares of a closed-end fund: A. In the secondary market B. At the NAV only C. Below the NAV only D. Above the NAV only
A. In the secondary market Although a closed-end fund has a calculated NAV, it is unlikely that its shares will trade at that price. Instead, the shares may be purchased either above or below the NAV. The shares of a closed-end fund trade in the secondary market. This is unlike an open-end management company (mutual fund) whose shares constantly remain in the primary market.
The following two funds are listed in a mutual fund's prospectus: —Short-term Global A—Short-term Global B The difference between these two funds is likely the: A. Manner in which the sales charges are collected B. Capitalization of the funds C. Nature of the investments D. Investment advisory fee
A. Manner in which the sales charges are collected Although they are shares of the same fund, Class A shares have a front-end load, while Class B shares have a contingent deferred sales charge as well as a small 12b-1 fee
If Jane Brown annuitizes her nonqualified variable annuity, how will the series of payments be taxed? A. Part of each payment is taxable earnings and part is a tax-free cost basis B. All taxable earnings first, then all cost basis C. LIFO D. FIFO
A. Part of each payment is taxable earnings and part is a tax-free cost basis A nonqualified annuity has a cost basis consisting of the after-tax dollars invested, as well as earnings that are tax-deferred. If it is annuitized, the cost basis is returned in equal amounts in each payment. The rest of each payment is tax-deferred earnings that become taxable (as income) upon receipt.
Which factor will cause variable annuity payments (contributions) to change from one client to another? A. Profession B. Gender C. Age D. Health
A. Profession Payments into an annuity (i.e., the premiums) are most impacted by an person's profession. High-earning individuals can contribute more than lower earners. During the annuitization phase, the payout from an annuity is driven by the age and gender of the annuity owner
A 30-year-old client needs protection for his family in the event of his death. Currently, his income is low, but he does want to develop cash value. As he moves forward in his career, he may want access to his cash value and have the ability to adjust the policy as his insurance needs change. Which insurance recommendation is the MOST appropriate? A. Universal life B. Term life C. Whole life D. Variable life
A. Universal life Universal life insurance produces cash value which is able to be accessed by a client, while also offering flexibility in regard to premium payment. Unlike whole life, a universal policy's death benefit can be increased or decreased as the insured's needs change. Considering the client's income, a variable policy has too much risk. Although term life insurance is likely the most affordable policy, it doesn't generate any cash value.
Five years ago, a registered representative sold a variable annuity to a 65-year-old client. The annuity carries a seven-year surrender fee. The client made a lump-sum investment of $100,000 into a growth-oriented separate account which has grown to $150,000. The RR expects a major market correction in the near future and recommends that the client conduct a 1035 Exchange into a fixed annuity. The RR explains to the client that the surrender fee will be less than the anticipated decrease in account value. This recommendation is: A. Unsuitable, since there is no benefit in surrendering the annuity due to the other investment options that are available in the separate account. B. Suitable, since the RR is acting in the client's best interests. C. Suitable, since the surrender fees have been disclosed to the client. D. Unsuitable, since the market correction will have little consequence over the short-term.
A. Unsuitable, since there is no benefit in surrendering the annuity due to the other investment options that are available in the separate account. A 1035 Exchange permits the direct transfer of funds in a life insurance policy, endowment policy, or annuity into another policy, without creating a taxable event. However, incurring a surrender fee and then signing a new, long-term contract is not an appropriate recommendation. Since the separate account of a variable annuity will offer numerous investment objectives, the client could move her investment to another offering within the separate account without incurring surrender charges.
What do hedge funds and mutual funds have in common? A. A pooled investment fund B. Registration requirements C. Liquidity D. Transparency
A. A pooled investment fund Both mutual and hedge funds are pooled investments. They aggregate smaller investments from different investors and use the larger portfolio to make investments. Unlike mutual funds, hedge funds are not registered with the SEC and don't send periodic reports to their investors. In addition, hedge funds can freeze redemptions and are considered an illiquid investment.
Which investment provides the BEST hedge against inflation? A. A bank-issued CD B. A variable annuity C. A fixed annuity D. A Treasury bill
B. A variable annuity Compared to the other investment choices, variable annuities provide the best hedge against inflation because of the portfolio's potential to rise in a growing economy. Conversely, fixed-income investments (e.g., bonds and fixed annuities) have the highest inflation risk.
What's the formula for calculating the net asset value (NAV) of a fund? A. There is no formula, since the NAV is based on supply and demand for the fund's shares. B. (Current Assets - Inventory) ÷ Current Liabilities C. (Assets - Liabilities) ÷ Number of Shares Outstanding D. (Fund Return - Risk-Free Rate) ÷ Standard Deviation of Returns
C. (Assets - Liabilities) ÷ Number of Shares Outstanding A mutual fund's net asset value must be calculated daily by taking the fund's assets, subtracting its liabilities, and then dividing by the number of shares outstanding. The fund's Sharpe Ratio is found by taking the fund's return, subtracting the risk-free rate, and then dividing by the standard deviation of the fund's returns. The quick asset ratio is calculated by taking a company's current assets, subtracting its inventory, and then dividing by its current liabilities.
What type of investment company sells its securities exclusively in the primary market, is open-ended, and issues redeemable shares? A. Face amount certificates B. Unit investment trusts C. Mutual funds D. Exchange-traded funds (ETFs)
C. Mutual funds Mutual fund (open-end fund) shares can only be purchased in the primary market and are always open to new investors. When investors choose to sell their shares, they must (redeem)sell them back to the mutual fund, which is referred to as redemption.
What's the net asset value (NAV) of an open-end management investment company that has 25 million shares outstanding, $75 million in assets, and $20 million in liabilities? A. $4 per share B. $0.80 per share C. $3 per share D. $2.20 per share
D. $2.20 per share The net asset value of a mutual fund is calculated by subtracting its liabilities from its assets and dividing by the number of shares outstanding (i.e., NAV = (Assets - Liabilities)/Shares Outstanding). In this question, the NAV is $2.20 per share (($75 million - $20 million ) ÷ 25 million).
What name is given to the type of units used during the payout phase of a variable annuity? A. Paid-in units B. Payment units C. Accumulation units D. Annuity units
D. Annuity units When annuitization begins, accumulation units are exchanged for annuity units. Investors then receive payments based on the value of a fixed number of annuity units. The value of the annuity units will fluctuate based on the performance of the variable annuity's separate account, which will cause the payments to rise or fall.
The NAV per share for both an open-end and closed-end investment company is determined by: A. Average assets over a period divided by the number of common shares outstanding B. Total assets of the portfolio minus the expenses of the portfolio, divided by the number of common shares outstanding C. Total assets of the portfolio divided by the number of common shares outstanding D. Total assets of the portfolio minus the liabilities of the portfolio, divided by the number of common shares outstanding
D. Total assets of the portfolio minus the liabilities of the portfolio, divided by the number of common shares outstanding With both open-end (mutual funds) and closed-end funds the NAV is calculated by taking the total value of all assets in the portfolio and then subtracting the liabilities of the portfolio to arrive at the net assets of the portfolio and then dividing by the number of common shares outstanding
