Things to Remember Test 6
Money market instruments guaranteed by a bank that are used to provide capital for exporters to foreign countries are called:
banker's acceptances. BAs provide short-term financing for importers and exporters.
An investor purchasing a convertible debenture would most likely NOT be seeking to:
maximize current income.
If your customer holds ten KLP 6% bonds, how much money will he receive in total at the debenture's maturity?
$10,300. The holder of 10 bonds will receive $10,000 in principal at maturity. Each bond pays 6% annual interest, or $60. Thus, ten bonds pay a total of $600 per year in two semiannual payments of $300. At maturity, the bondholder will receive the $10,000 face amount plus the final semiannual payment ($10,000 + $300 = $10,300).
If a mutual fund paid $.30 in dividends and $.75 in capital gains during the year, and the offering price at the end of the year is $6.00, the fund's current yield for the year is:
5% A mutual fund's current yield is annual dividend ($.30 in this case) divided by the public offering price ($6.00). Gains are not included in calculation of current yield; they are accounted for separately.
To be in compliance with the Investment Company Act of 1940, every registered investment company must report to shareholders no less frequently than every:
6 months Investment companies must report to customers on the state of the company at least twice a year with one audited annual report and one unaudited semiannual report.
Which of the following permits the highest annual contributions?
A SEP IRA. Under most circumstances, the annual contribution to a SEP IRA will be higher than those allowed for ESAs or traditional or Roth IRAs.
A registered representative is hired by a broker-dealer on May 1. On June 2 the representative contacts former customers at her previous firm in an attempt to move the assets in their accounts to his new firm. Which of the following statements regarding FINRA Rule 2273 are TRUE?
A disclosure of costs to transfer assets, financial incentives received by the representative and differences in products and services must be sent to the customer within three business days of contact. NOT If the former customer reaches out to the rep or firm within three months after the hire to transfer assets, no educational material is required to be sent to the former customer. SO THREE BUSINESS DAYS FOR SENDING CUSTOMER DISCLOSURE STUFF NEW HIRE IS REGULATED BY RULE 2273 FOR THREE MONTHS AFTER HIRING FINRA Rule 2273 is applicable for three months after the hire. Educational material that discloses costs and incentives must be sent within three business days of the contact. If the former customer contacts the new firm to transfer assets within the three months of hire, the firm must deliver the educational material with account approval documentation.
capital risk
Capital risk is the potential of loss of part or all of an investment. It applies to the whole gamut of assets that are not subject to a guarantee of full return of original capital. Investors face capital risk when they invest in stocks, non-government bonds, real estate, commodities and other alternative assets.
SEC
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government. The SEC holds primary responsibility for enforcing the federal securities laws, proposing securities rules, and regulating the securities industry, the nation's stock and options exchanges, and other activities and organizations, including the electronic securities markets in the United States.[2]
SEC Rule 17f-2 requires fingerprinting of certain employees of registered broker-dealers. Included in this rule are individuals who: handle customer funds and/or securities. supervise those who prepare records of original entry. work in the back office as a filing clerk. prepare research reports on stocks and bonds.
I and II Any employee who either handles, or who supervises the handling of, customer cash, securities, or original books and records, must be fingerprinted. Sales representatives and their supervisors are also required to be fingerprinted.
Which of the following statements are NOT true concerning revenue bonds? They are secured by a specific pledge of property. They are a type of general obligation bond. Generally, their interest is tax-exempt at the federal level. They are analyzed primarily on the project's ability to generate earnings.
I and II Revenue bonds are not secured by a specific pledge of property and are not a type of general obligation bond. They are secured by user fees, such as tolls. Revenue bonds interest tax exempt at the federal level! explains why they are a TAX PREFERENCE ITEM
Which of the following statements describe the Securities Exchange Act of 1934? It created the SEC. It requires registration of broker-dealers with the SEC. It provides for registration of new issues. It regulates the activities of investment advisers.
I and II The Securities Exchange Act of 1934 (the People Act) requires registration of people and exchanges transacting securities business in order to prevent manipulative and deceptive practices. The Act of 1934 also created the SEC and mandated the creation of SROs.
You are reviewing an investor's balance sheet. Which of the following items would be found on a balance sheet and help you determine the client's net worth? 401(k) balance Credit card balance Monthly income Electric bil
I and II The balance sheet reflects a person's net worth by comparing assets and liabilities. 401(k) balance is an asset and credit card debt is a liability. Income and monthly bills such as the electric bill are found on the income statement.
To register new securities, an investment company must supply detailed information about itself to the SEC. supply detailed information about the new securities to the SEC. obtain the SEC's approval of the issue. obtain FINRA's approval of the issue.
I and II The registration statement and prospectus filed with the SEC must disclose all material facts of the issuer and the security being issued. The SEC does not approve new issues, nor does any SRO.
Asset-based distribution fees, also known as 12(b)-1 fees: are based on the fund's annual average daily net assets. are based on the fund's annual sales of shares. must be reviewed at least quarterly by the fund's board of directors. must be reviewed at least annually by the fund's board of directors.
I and III Fees charged under Section 12(b)-1 are assessed against the fund's annual average daily net assets and must be reviewed at least quarterly by the investment company's board of directors.
Arbitration and mediation are two services provided by FINRA to settle disputes between members. Regarding these services, which of the following statements are NOT true? Mediation is mandatory; arbitration is not. Arbitration always results in a binding decision; mediation may not. If arbitration is unsuccessful, the dispute moves on to mediation. A mediator in a dispute may not serve as an arbitrator in the same dispute.
I and III NOT II and IV You read this wrong and reversed it as a result Arbitration is mandatory in disputes between members. If mediation takes place and is not successful, the dispute moves on to arbitration. The person who served as mediator may not be an arbitrator in the same dispute.
When the annual report of a mutual fund is used as sales literature, which of the following statements are TRUE? The principal of the firm must approve its use for that purpose. A prospectus need not accompany the report, provided it includes instructions for obtaining a prospectus. The figures contained in the report must be as of a specific date. The report must contain a list of the industries in which the fund invests.
I and III Sales literature is going to be defined as a retail communication. The principal of the firm must approve the use of the annual report as sales literature, and the figures contained must be current and complete. A prospectus is always required, as is a complete portfolio list, not merely a list of industries in which the fund invests.
Which of the following would be considered excessive transactions? A customer orders 100 shares. The representative places an order for him for 200 shares. A representative places a customer's securities into the firm's investment account. A customer orders 5,000 shares of an over-the-counter stock. The representative orders 100 shares for himself before placing the customer's order. A representative buys and sells the same security for a customer three times during a single day.
I and IV Ordering more shares than the customer wants may increase a commission but is an excessive transaction. The same applies to churning -that is, futile trades designed only to generate commissions. Commingling and front-running are prohibited practices, but are not excessive transactions. SO this (A representative places a customer's securities into the firm's investment account.) is COMINGLING
A type of life insurance where the death benefit varies based upon the investments selected by the policyowner is known as
variable life. NOT universal life Although variable life offers a guaranteed minimum death benefit, because the policyowner can select the separate accounts into which a portion of the premium will be invested, that death benefit will vary with account performance.
According to the rules that established self-regulatory organizations (SROs), these organizations are regarded as which of the following? Accountable to the SEC for supervising the securities business within their assigned jurisdictions. Government agencies. Publicly traded. Membership organizations that report to the SEC.
I and IV SROs such as FINRA were established to ensure compliance with SEC regulation in particular jurisdictions, including exchange-based and over-the-counter trading. Because all SROs are independent membership corporations, they may not issue capital stock.
If a variable annuity has an assumed interest rate of 5% and the annualized return of the separate account is 4%, the value of the: accumulation unit will rise. annuity unit will rise. accumulation unit will fall. annuity unit will fall.
I and IV The accumulation unit will increase in value because the portfolio earned 4%. However, the annuity unit value will decrease because the actual return of the portfolio (4%) was less than the assumed interest rate of 5% necessary to maintain payment amount.
.The rules on communications with the public apply to a registered representative: appearing on a TV show to discuss market trends. conducting a Bible study class every Wednesday evening. sending an email to 17 existing clients regarding their upcoming 25-year college reunion. writing a seminar script to be used by the firm's vice president of sales.
I and IV The rules on communications with the public deal with public appearances, such as a TV program and seminar scripts, as long as the topic is related to the investment business. Making a presentation dealing with religious studies or a school reunion is not covered by public communications rules.
The Investment Company Act of 1940 requires that a mutual fund do which of the following? Provide a monthly balance sheet to investors. Have $100,000 minimum capitalization. Provide semiannual reports to shareholders. Redeem shares at the net asset value per share calculated as of the close of the next business day following the redemption request.
II and III The Investment Company Act of 1940 requires that an investment company's assets amount to at least $100,000 and that it furnish shareholders with at least semiannual reports. The forward pricing rule requires use of the next calculated NAV, which MAY be available on the day the redemption request was received.
Which of the following statements regarding sales charges on variable contracts of insurance companies are TRUE? The Conduct Rules call for a maximum sales charge on variable annuities of 8.5% of the purchase payment. The Conduct Rules do not impose a specific maximum on sales charges for variable annuities. Variable life insurance contracts are limited to a maximum sales charge of 9% over the life of the contract. Variable life insurance contracts are limited to a maximum sales charge of 9% over the life of the contract, but not to exceed 20 years.
II and IV. NOT II and III Variable annuities' sales charges are held only to a standard of reasonableness. The Investment Company Act of 1940 sets the limits for variable life insurance. So for variable life insurance the sales charge is 9% over the life of the contract, not to exceed 20 years Variable Annuities DO NOT have a max sales charge
Your customer has a salaried, full-time position with a 401(k) plan. He also gives paid evening seminars and wishes to use the fees to help fund his retirement. If he wanted to be able to take a tax deduction for his contributions, you would tell him he could use a portion of his fee income to fund a
Keogh plan Compensation from self-employment may be used to fund a Keogh plan. The term "tax-sheltered" annuity refers to one in which the contributions are deductible. That would only be appropriate if he were an employee of a 403(b) or 501(c) entity. Had the choice been a non-qualified annuity, it would not have been correct either because, although he could fund it, the contributions would not be tax deductible.
The rules regarding who may be covered in a retirement plan are stated within which of the following sections?
Participation. The description of who qualifies to participate in a company's retirement plan is stated in the plan's participation requirements. A company may exclude certain employees through eligibility standards; however, any such eligibility limitations may not discriminate in favor of a select group of employees.
Your customer, a self-employed, incorporated small-business woman, wishes to establish a Keogh plan for herself and her two employees. According to IRS rules, which of the following is TRUE?
She and her employees are not eligible for a Keogh plan. Keogh plans are only available to self-employed, nonincorporated businesses. This customer and her employees cannot participate in a Keogh plan because the business is incorporated.
If the owner of a $1 million IRA leaves it to his daughter, which of the following best describes the income tax treatment to the daughter?
She will pay income taxes on the full amount she withdraws each year. An inherited IRA will be subject to income taxes to the beneficiary at time of withdrawal, on the same terms as if it had been distributed to the original owner.
Three 3% bonds are listed in the newspaper. One bond will mature in one year, another bond will mature in ten years, and the third bond will mature in 20 years. If interest rates are going up, which bond will have the greatest decrease in value?
The bond with the 20-year maturity. Long-term bonds have the greatest interest rate risk. A bond with only one year to maturity will trade very close to par.
Under the Uniform Gifts to Minors Act, how may stock subscription rights or warrants be handled in a custodial account?
The custodian may exercise or sell the rights as he deems prudent.
A letter of intent for a mutual fund does NOT contain which of the following provisions?
The fund may halt redemption during the time the letter of intent is in effect. A letter of intent is a nonbinding contract entered into by an investor for the purpose of obtaining reduced sales charges. If the client were to redeem the entire account before fulfilling the terms of the letter, or if the 13 months elapsed without the full amount being invested, the escrowed shares would be redeemed and the proceeds used to pay the additional sales charge.
Three years ago, a customer purchased 300 shares of ACE Fund. He sold the shares on August 15 for a loss of $400. If he then purchased 300 shares on September 4 of the same year, how would he record the loss for tax purposes?
The loss is not deductible. The customer repurchased the shares within 30 days of the loss transaction, so the loss is disallowed. A wash sale occurs when the same fund is purchased within 30 days before or after the date of sale at a loss.
An investor traveling abroad receives communication from his broker-dealer that a stock he has been following has moved to a price of $17 per share, including all commissions and expenses. The investor wishes to buy 100 shares at that price. He executes an international wire transfer for the equivalent of $1,700 in euros ($2,600 USD) and sends it to his broker-dealer with an order to buy. What action is called for by the broker-dealer?
This transaction need not be reported. There is nothing suspicious regarding this transaction. Broker-dealers are required to file suspicious activity reports (SARs) involving transactions of $5,000 or more when financial behavior appears commercially illogical and serves no apparent reasonable business or legal purpose.
Which of the following would be appropriate recommendations for a customer looking for income?
Utility fund NOT income bond Many securities are purchased for income; these include stocks, bonds and mutual funds that pay consistent dividends such as a utility fund. The other answer choices are not purchased for income purposes: A long call option gives the right to buy stock at a designated price. An income bond is issued by a company coming out of bankruptcy and pays interest only if the corporation has enough income. A warrant is a certificate granting its owner the right to buy securities from the issuer at a specified price, normally higher than the market price when issued.
An investor who purchases a fixed premium variable life contract on July 1 and cancels the policy four days after receiving notification of his free-look right would receive:
a full refund of all money paid to date. According to the Act of 1940, if the investor cancels his variable contract plan within the free-look period (45 days from the execution of the contract or ten days from delivery of the policy, whichever comes later) he will receive all money paid. REVIEW
If a broker-dealer decides to give a $300 bonus to the registered representative that obtains the most new clients in a firm sponsored sales contest, this arrangement is:
acceptable. NOT unacceptable, since it involves a gift of material value. A sales contest for employees of the member firm is strictly up to the firm itself and is not a violation of FINRA rules. If the contest was specific to a particular fund or fund family, that would be a problem as suitability may take a back seat to winning the contest. SO within a fund, a sales contest is not an issue as long as it doesn't incentivize selling a particular fund or family of funds
When a member firm opens an account for a registered representative of another member, the employer-member must be sent written notification:
before executing an order. NOT within five business days. NOT either by the representative or by the firm opening the account. When a registered representative of a member firm opens a brokerage account with another member firm, the firm opening the account must send written notification to the registered representative's employer before the execution of any transaction. So before executing an order is the key threshold here
All of the following statements about joint tenants with rights of survivorship are true EXCEPT:
checks can be made out to either party. In a joint account, checks must be made out to all parties to the account; either party may make trades or receive mail regarding the account.
A client invests $10,000 into a large-cap growth fund. Five years later, the account value is $15,000. At the same time, the CPI has increased 25%. In terms of constant (real) dollars, the client's account is worth:
more than $10,000, but less than $15,000. The client's account has appreciated by 50%, but the CPI has increased by 25%. In order to measure real growth, we must factor in that increase to the cost of living so the account would now have a value, in constant dollars, of something between $10k and $15k.
Market conditions have been very difficult, and a registered representative is at risk of losing his home to foreclosure. One of his customers, a former college roommate, has a substantial net worth and has offered to lend the representative $100,000 at below-market interest rates until things improve. This arrangement is:
permitted if the firm has written procedures authorizing loans from clients and the lending arrangement has been preapproved in writing. The Conduct Rules permit registered personnel to borrow from clients with whom they have a personal relationship outside of the broker-customer one (and the college roommate certainly meets that requirement), and if the member firm has written procedures allowing for such borrowing and the loan meets certain requirements.
Mutual fund tombstone advertisements complying with SEC Rule 482 may include all of the following information EXCEPT:
the address where a check to purchase shares is to be mailed. SEC Rule 482, the omitting prospectus rule, deals with mutual fund tombstone ads and allows them to contain far more detailed information than a traditional stock or bond tombstone. However, these ads may not be used in place of a prospectus. A customer would have to receive a prospectus before he could order shares.
All of the following statements regarding branch offices are true EXCEPT
they must have a resident principal Branch offices need not have a resident principal; they may use a qualified registered representative to serve as branch manager. branch offices DO have to register with FINRA
An announcement of a new issue of a security that gives the name of the issuer, the price and the name of the underwriter is called a(n):
tombstone. A tombstone is an announcement of a new issue that includes the name of the issuer, the price of the security, and the name of the underwriter from whom it can be purchased.
A nonqualified variable annuity valued at $400,000 is annuitized and the annuitant received $220,000 in payments until his death. At his death, if his wife received a lump sum payment of $180,000, this example illustrates a:
unit refund annuity. When the unit refund option is chosen, the insurer guarantees, at minimum, to distribute the amount of money that funded the annuity. At the annuitant's death, if the guaranteed amount has not been fully distributed, the survivor receives the balance of the account; typically, in a lump sum payment.
