CH 5 Quiz Other Pooled Investments
All the following are true regarding 529 plans, except: A Account balances may not be transferred to another relative B Contributions are nondeductible C No taxation on earnings used for qualified education D Maximum contributions are determined by individual plan or state
A 529 plans have the following features: maximum contribution are determined by individual plan or state, contributions are nondeductible, no taxation on earnings used for qualified education, account balances may be transferred to another relative, and no income limits for eligibility.
A client inherits a substantial sum of money and wants to have the money distributed to their heirs over the rest of the client's life. Which product offered by the life insurance industry will allow them to accomplish this? A An immediate annuity B Flexible pay out arrangement C Deferred distribution arrangement D Systematic installment
A An immediate annuity involves payment of a single sum to the annuity, with periodic payments commencing within 1 year of deposit of the sum.
ABC insurance company has issued a variable annuity contract. The contract offers numerous investment options, including subaccounts which hold bonds, domestic equities, and foreign securities. Which of the following risks does ABC incur when issuing this contract? A Mortality and expense risk B Inflation and interest-rate risk C Currency and expense risk D Mortality and currency risk
A Annuity contracts offer similar guarantees to those offered by other insurance products. The expense guarantee assures that higher than anticipated administrative or operational expenses will not be passed on to the annuitant. The contract's mortality guarantee works in the opposite direction of a life insurance contract. Annuity benefits must continue to be paid even if the annuitant outlives the account balance.
Which of the following statements about a fund of hedge funds is false? A They can be redeemed at any time B They are more expensive than traditional investment company securities since they have 2 sets of fees C Broker-dealers created funds of hedge funds so smaller investors could participate in hedge funds D These funds must be registered under the Investment Company Act of 1940
A Broker-dealers created funds of hedge funds so smaller investors could also participate. These funds must be registered under the Investment Company Act of 1940 and usually have a minimum investment amount of $25,000. Because the underlying investments are hedge funds, they are considered very aggressive investments. They are also more expensive than traditional investment company securities since they have two sets of fees: one for the hedge fund managers and one for the investment manager of the fund. The composition of hedge funds also makes them more illiquid than traditional funds, and they cannot be redeemed any time. Funds of hedge funds usually have specific time frames where investors can liquidate all or a portion of their holdings.
Once a variable annuity is annuitized, which of the following statements is true? A The value of the annuity units fluctuates based on the performance of the separate account B The annuitant chooses the AIR, payout option, and frequency of payments C The number of annuity units fluctuates based on the performance of the separate account D The annuitant has the right to go back to the accumulation phase if done within 30 days
A In the process of annuitizing, the insurance company converts the investor's accumulation units into annuity units, based on all the relevant factors, such as age and payout option. Once the number of annuity units has been determined, the number of annuity units remain unchanged for the life of the contract. However, the value of an annuity unit may change month-to-month based on the relationship between the performance of the separate account and the contract's assumed interest rate (AIR).
A client has invested $10,000 into a variable annuity. After subtracting any premium charges, the insurance company will place this client's remaining investment amount into: A The separate account B The insurance company's general account C A mutual fund invested in real estate D Any individual security that the client chooses
A Premiums paid by variable annuity purchasers are placed into the insurance company separate account. The assets in the separate account are invested in a wider range of securities than those in a fixed annuity. The separate account is often divided into several subaccounts, each of which may have a different asset mix or risk profile.
Which of the following is intended to help individuals and their families living with disabilities? A ABLE accounts B 529 plans C UTMA accounts D Coverdell ESAs
A The ABLE (Achieving a Better Life Experience) Act established 529A plans, or ABLE accounts, and are intended to help individuals and their families living with disabilities. Often persons with disabilities are limited to the amount of cash savings they can report without losing disability benefits. In other words, disabled individuals needed to remain almost destitute to maintain their Medicaid or Medicare benefits. Under the ABLE Act, disabled persons can hold up to $100,000 in an ABLE account without losing their eligibility for Social Security, Medicaid, and Medicare benefits.
What type of ETF uses borrowing techniques and attempts to magnify the returns of an underlying index? A Standard ETFs B Leveraged ETFs C Inverse ETFs D Inverse leveraged ETFs
B Leveraged ETFs use borrowing techniques and attempt to magnify the returns of an underlying index. Leveraged funds can be used as an alternative to margin, which also takes advantage of borrowed money to increase returns. These funds have higher costs and risks that must be disclosed to investors. Leveraged funds are used for short-term investing.
Which type of security offers the best protection of purchasing power? A T-bonds B Variable annuities C Municipal bonds D Fixed annuities
B Of the given choices, variable annuities have the greatest appreciation potential. They provide the greatest protection of purchasing power.
To qualify for special tax treatment on its gross income, a REIT would have to distribute what percentage of its ordinary income to its investors? A 25% B 90% C 100% D 75%
B Under the IRC, special tax treatment is allowed for qualified REITs. To be considered qualified, the REIT must have at least 75% of its assets invested in real estate, cash, or Treasurys, a minimum of 75% of its gross income from real estate activities, and 90% of the ordinary income must be "passed through" (distributed) to holders of the units. If this is done, the REIT is only taxed on the retained amount, and it would be considered a qualified REIT under the IRC Subchapter M.
If a variable annuity charges a CDSC, when is the investor subject to the charge? A When they deposit money into the variable annuity B When the investor withdraws money during the accumulation phase C When the investor withdraws money during the annuity phase D On an annual basis the CDSC will be deducted from the separate account
B While many variable annuities do not charge a front-end sales charge, most impose a contingent deferred sales charge (CDSC) when an investor withdraws money during the accumulation period. A CDSC normally declines, and will eventually be eliminated, the longer the contract is held.
Which of the following is not a characteristic of hedge funds? A Traditionally managed for aggressive yield B Not registered with the SEC C Not subject to antifraud provisions D Purchased by sophisticated investors
C Hedge funds are high-risk investments for sophisticated investors seeking an aggressive yield. They are not offered to the general public and do not have to register with the SEC. They are still subject to the antifraud provisions of the SEC Rule 10b-5, the catch-all fraud rule.
Which of the following securities would typically trade on either NASDAQ or a traditional stock exchange? A Open-end funds B Variable annuities C Unit investment trusts D ETFs and ETNs
D Both ETNs and ETFs are exchange-traded securities. Variable annuities are purchased through the issuing insurance company and do not trade. Mutual funds are redeemed with the issuer and do not trade. Unit investment trusts are typically redeemable back to the issuer.
Which of the following is normally an advantage of investing in a REIT over an investment in a real estate limited partnership? A Favorable tax treatment of earnings B Limitation on liability C Professional management of the property D Marketability
D REITs can be sold in secondary markets, such as the NYSE or OTC, while limited partnerships are less liquid.
When comparing variable life insurance policies to variable annuities, all the following statements are true, except: A Both require a FINRA Series 6 or 7 license in addition to a state insurance license to sell B Variable annuities are intended to generate an income stream, variable life insurance provides a death benefit upon the death of the insured C Both are considered securities D Variable life insurance pays a death benefit to the named beneficiary upon death, but there is no beneficiary named in a variable annuity
D Variable life insurance policies are permanent life insurance products that accumulate cash value and pay a death benefit to the named beneficiary upon the death of the insured. On the other hand, variable annuities are intended to generate an income stream, typically to supplement retirement income. They are both considered securities that require a FINRA Series 6 or 7 license in addition to a state insurance license to sell. There is a beneficiary named with an annuity contract. During the accumulation period, the death benefit on an annuity is the greater of the current market value or the owner's cumulative premiums paid, less any withdrawals, if a death benefit option is selected. Death benefits can apply once the contract has been annuitized, depending on which settlement option is selected.