Chapter 3 Practice Questions

The free-look period for a variable annuity is typically _____ or more.

10 days

There is a _____ penalty on withdrawals from variable annuities before the age of _____.

10%, 59 1/2

According to the IRS, a REIT must return what percentage of its taxable income to shareholders in the form of dividends? A. 90% B. 75% C. The IRS does not specify a percentage D. 100%

A. 90%

When proposing mutual funds to a customer, POP enters the conversation when discussing: A. A shares B. B shares C. C shares D. All of the choices listed

A. A shares

When recommending a large investment in mutual fund shares to a customer with a long investment horizon, the most suitable investment would typically involve: A. A shares B. B shares C. C shares D. M shares

A. A shares

When interest rates rise, which of the following is typically true about an open-end bond fund? I. The NAV of the fund will go down. II. The NAV of the fund will remain unchanged. III. The fund's yield will increase in the longer term. IV. The fund's yield will decrease in the longer term. A. I and III B. II and III C. I and IV D. II and IV

A. I and III

Which of the following entities identifies the tax status of distributions made to shareholders? A. Investment adviser B. Transfer agent C. Custodian D. Underwriter

A. Investment adviser

Jane has a deferred annuity with a surrender period of seven years. At four years in, she decides she wants to surrender the account. What is the result? A. Jane will pay a charge for surrendering the account. B. Jane will lose any additional earnings beyond the initial investment. C. Jane will not be penalized for surrendering the account. D. Jane must wait the full seven years to access her account.

A. Jane will pay a charge for surrendering the account.

Maggie wants to invest in a 529 education savings plan for her daughter, Michelle. Which of the following is not true? A. Maggie can remove her contributions from the plan if she is willing to pay a 10% penalty on the amount she takes out. B. Michelle will probably not have to pay state taxes on the earnings if Maggie chooses the plan for the state where they live. C. Michelle will not have to pay federal taxes on the earnings in the plan if she uses it for qualified school expenses. D. If Michelle does not use all the money by the time she graduates, Maggie can roll the remainder over to Michelle's brother, Daniel.

A. Maggie can remove her contributions from the plan if she is willing to pay a 10% penalty on the amount she takes out.

All of the following are characteristics of ETFs except: A. Redeemable at NAV B. Low expense ratios C. Tax efficient D. Flexible trading

A. Redeemable at NAV

How are taxes on a variable annuity determined once it enters the annuitization phase? A. The IRS splits the annuity into original investment and earnings, and taxes the earnings only. B. The IRS will assume the LIFO method and tax earnings first. C. The annuitant will pay taxes on the entire amount once the original investment equals capital gains. D. Like Roth IRA withdrawals, variable annuity withdrawals are not taxed during the annuitization phase.

A. The IRS splits the annuity into original investment and earnings, and taxes the earnings only.

Why is a declining back-end load called a contingent deferred sales charge? A. The sales charge is deferred until the investor sells, and the percentage charged is contingent on when the sale occurs. B. The sales charge is deferred until the investor sells, and the percentage charged is contingent on interest rates at that time. C. The sales charge declines until the investor sells and is contingent on the relationship of the shares' POP to NAV at the time of sale. D. The sales charge declines until the investor sells and is contingent on the fees that have already been charged.

A. The sales charge is deferred until the investor sells, and the percentage charged is contingent on when the sale occurs.

Why is late trading of mutual fund shares prohibited? A. To ensure that all purchasers of mutual fund shares are on equal footing as to price and information on any given day. B. Forward pricing puts investors who purchase shares before the NAV is calculated at a disadvantage. C. Because the NAV is calculated at market close, late-breaking news is reflected in the calculation. D. Late trading makes a fund's long-term investors pay higher fees due to the transaction costs of short-term trading.

A. To ensure that all purchasers of mutual fund shares are on equal footing as to price and information on any given day.

Which comes first, the payout phase or the accumulation phase?

Accumulation phase

Typically, how long is the free-look period for a variable annuity? A. 7 or more days B. 10 or more days C. 30 or more days D. 2 business days

B. 10 or more days

What percentage of a REIT's assets must be invested in real estate sources? A. 90% B. 75% C. 95% D. 50%

B. 75%

What percentage of a REIT's gross income must come from real estate sources? A. 90% B. 75% C. 95% D. 50%

B. 75%

A mutual fund share that may include a contingent deferred sales charge if an investor doesn't own it long enough is known as a/n: A. A share B. B share C. Variable annuity D. Closed-end fund

B. B share

David is considering an investment with the following characteristics: it is actively managed and invests exclusively in Asia, currently trades at a premium to the value of its underlying investments, can be bought and sold on the New York Stock Exchange, is not redeemable, and uses leverage to increase returns. What type of security is David considering? A. Mutual fund B. Closed-end fund C. Unit investment trust D. ETF

B. Closed-end fund

Investment companies that make an initial public offering only once are called: A. Open-end funds B. Closed-end funds C. Open-end funds investing in IPOs D. Open-end funds reopening to new investors

B. Closed-end funds

Which of the following would be considered advantages of investing in a mutual fund? I. Diversification II. Liquidity III. Protection of principal IV. Tax-deferral A. I only B. I and II C. I and IV D. I, II, and IV

B. I and II

Distribution fees may also be known as: I. Fees paid for marketing and selling fund shares, such as advertising, printing, and mailing II. Front-end fees III. 12b-1 fees IV. Management fees A. II and IV B. I and III C. I and IV D. II and III

B. I and III

What classes of shares are sold at NAV with no up-front load? I. A shares II. B shares III. C shares IV. H shares A. I and IV B. II and III C. I and III D. III and IV

B. II and III

Which of the following two terms are associated with open-end management companies? I. Premium II. POP III. Accumulation units IV. NAV A. I and IV B. II and IV C. III and IV D. II and III

B. II and IV

What is an important defining characteristic of a mutual fund? A. The shares can be bought and sold on the primary, secondary, or OTC market. B. Investors buy from and sell directly to the mutual fund; shares are newly issued to investors and expire once sold back to the fund. C. Mutual funds provide diversification against systematic risk. D. Mutual funds mostly focus on a particular industrial sector or geographic region.

B. Investors buy from and sell directly to the mutual fund; shares are newly issued to investors and expire once sold back to the fund.

Leo and Katherine have been married for 25 years. Leo wants to set up an annuity so that his wife will receive payments beginning at his death and continue to receive them until her own death. Which of following payout options would be the best fit? A. Life with period certain B. Joint life with last survivor C. Life income D. None of the above

B. Joint life with last survivor

Mel wants to take out an annuity contract that offers him the maximum monthly payouts. He is unmarried and doesn't wish to include a beneficiary in his contract. Which would be most appropriate? A. Life with period certain B. Life income C. Joint life with last survivor D. Life with amount certain

B. Life income

A mutual fund breakpoint allows an investor to: A. Avoid a surrender charge by holding past a certain point B. Lower the sales charge by investing more than a certain amount C. Lower 12b-1 fees by investing more than a certain amount D. Exchange one fund for a different kind of fund within the same mutual fund family

B. Lower the sales charge by investing more than a certain amount

What price will you receive when you purchase shares of a no-load mutual fund? A. Market price B. Next calculated NAV C. Most recently calculated NAV D. Weighted average volume price

B. Next calculated NAV

According to the Investment Company Act of 1940, for 75% of its assets, a diversified mutual fund has: A. No more than 5% of its assets in any one company and owns no more than 5% of any company's outstanding shares B. No more than 5% of its assets in any one company and owns no more than 10% of any company's outstanding shares C. No more than 10% of its assets in any one company and owns no more than 5% of any company's outstanding shares D. No more than 10% of its assets in any one company and owns no more than 10% of any company's outstanding shares

B. No more than 5% of its assets in any one company and owns no more than 10% of any company's outstanding shares

Does a REIT pass through losses to its investors? A. Yes, just like a DPP in the real estate business B. No, unlike a DPP or a RELP C. Yes, like a DPP but unlike a RELP D. No, unlike a DPP but like a RELP

B. No, unlike a DPP or a RELP

What is the purpose of rights of accumulation? A. Rights of accumulation allow an investor to choose whether to apply accumulation (appreciation) in her account to cash dividends or purchase of new shares. B. Rights of accumulation allow an investor to pay a sales charge based on a lower breakpoint calculated by including account accumulation (appreciation) and new investment funds. C. "Rights of accumulation" is an IRS term that helps define capital tax rates paid on account accumulation (appreciation). D. Rights of accumulation are the basis for an automatic investment program that purchases shares regularly and thus uses dollar cost averaging.

B. Rights of accumulation allow an investor to pay a sales charge based on a lower breakpoint calculated by including account accumulation (appreciation) and new investment funds.

Bob wants to redeem his 100 shares in a mutual fund, which is held in street name by his brokerage. Bob sends his request by postal mail on a Tuesday and the investment company receives it on Thursday. How long does the mutual fund company have to redeem Bob's shares? A. Seven business days from the request receipt date B. Seven calendar days from the request receipt date C. Seven calendar days from the receipt of Bob's signature guarantee D. Seven days from Tuesday

B. Seven calendar days from the request receipt date

Which of the following is not a difference between open-end and closed-end funds? A. Shares of open-end funds are purchased through the issuer, while shares of closed-end funds are not. B. Supply and demand dictates the price of open-end funds but not the price of closed-end funds. C. Shares of open-end funds are redeemable, while shares of closed-end funds are not. D. Shares of open-end funds are priced once a day, while shares of closed-end funds are priced continually throughout the day.

B. Supply and demand dictates the price of open-end funds but not the price of closed-end funds.

Which of the following is not a disadvantage of a variable annuity? A. The annuitant bears the investment risk. B. The annuitant is usually subject to purchasing power risk. C. High commissions and fees. D. Surrender charges if the annuitant pulls money out early.

B. The annuitant is usually subject to purchasing power risk.

Which of the following statements about the sale of mutual fund shares is not true? A. The underwriter prepares sales literature. B. The mutual fund company sells shares to the transfer agent at the NAV. C. The transfer agent receives the investors' payments and issues new shares to buyers. D. The custodian safeguards the proceeds of the sale.

B. The mutual fund company sells shares to the transfer agent at the NAV.

What does "beneficial interest" mean? A. The owner of the shares owns an actual share of the real estate the REIT owns. B. The owner of the shares does not own any of the REIT's real estate but is entitled to benefits from owning shares. C. The shareholder does not really own the shares but benefits from the REIT's business success. D. The REIT takes a beneficial interest in any real estate the shareholder owns.

B. The owner of the shares does not own any of the REIT's real estate but is entitled to benefits from owning shares.

What is the purpose of a letter of intent? A. A letter of intent accompanies the prospectus and explains the terms of sale to potential investors. B. A letter of intent allows an investor to place a price-per-share bid on an intended purchase. C. A letter of intent allows an investor to pay a sales charge based on a lower breakpoint on sales during a specified period of time. D. A letter of intent allows an investor to reserve shares for a future purchase at a specified time when he has the money.

C. A letter of intent allows an investor to pay a sales charge based on a lower breakpoint on sales during a specified period of time.

Which of the following could invest in an LGIP? A. An individual investor worth more than $10 million B. An institutional investor C. A public utility company D. A church

C. A public utility company

All of the following help an investor partially lower his sales load on mutual fund purchases except: A. Breakpoints B. Letters of intent C. Conversion privileges D. Rights of accumulation

C. Conversion privileges

Which of the following are true of fixed annuities? I. Investments are deposited into the insurance company's general account. II. Investments are deposited into separate subaccounts that take on more risk. III. A fixed annuity is a security. IV. An equity-indexed annuity is an example of a fixed annuity. A. I and III B. II and IV C. I and IV D. II and III

C. I and IV

Which statements are true? I. Growth funds have capital appreciation as their primary goal and have limited dividend payouts. II. Value funds invest in companies whose stocks are trading for a relatively high value; that is, the price to earnings ratio is relatively high. III. Any lifecycle fund can be recommended for an investor of any age because such funds are designed to provide payouts throughout a person's lifecycle. IV. Among bond funds, yield and risk vary. A. I and II B. II and IV C. I and IV D. II and III

C. I and IV

"Rights of accumulation" refers to an investor's right to: A. Reinvest her capital gains and dividends without paying a new sales charge B. Accumulate new shares of a mutual fund before other investors who did not previously own the fund C. Receive a lower sales charge if her existing investment appreciates past the next breakpoint D. Combine different mutual funds from the same family when she has accumulated a minimum amount

C. Receive a lower sales charge if her existing investment appreciates past the next breakpoint

Sarah, a registered representative of a broker-dealer, has an exciting idea to increase business. She decides to hold a one-day sale on Black Friday (the Friday following Thanksgiving). She is going to cut the sales charge and discount the price of the mutual funds she sells. She decides to take out a large ad in the local newspaper to advertise this great deal. Which of the following is true? A. Sarah's plan is acceptable as long as she gets her advertising pre-approved by FINRA. B. Sarah's plan is acceptable as long as she gets the discounts and the advertisement approved by a principal in writing. C. Sarah's plan is a violation of securities laws. D. Sarah's plan is acceptable as long as she does not discount the securities below the NAV and gets her advertisement pre-approved by FINRA and her principal.

C. Sarah's plan is a violation of securities laws.

Susan purchased an annuity in a lump sum. She has chosen to have the payment of her benefits delayed for five years. Which of the following purchasing methods did she use? A. Immediate annuity B. Periodic payment deferred annuity C. Single premium deferred annuity D. Periodic payment immediate annuity

C. Single premium deferred annuity

A mutual fund's sales charge can be calculated by: A. Adding the POP and the NAV B. Subtracting the POP from the NAV C. Subtracting the NAV from the POP D. Multiplying the NAV by the 12b-1 fees

C. Subtracting the NAV from the POP

All of the following are characteristics of 529 plans except: A. Earnings in a 529 account are tax-deferred. B. They are designed to help pay for tuition and other education expenses. C. The beneficiary gains control at the age of majority. D. They can be useful as estate planning tools.

C. The beneficiary gains control at the age of majority.

Which of the following is not true of the role of mutual fund shareholders? A. They vote to select board members. B. They vote on changes in fees. C. They vote to decide what percentage of the profits should be retained. D. They vote to approve an independent auditor.

C. They vote to decide what percentage of the profits should be retained.

John, a registered representative of a broker-dealer, has come up with a strategy that reduces the time he spends doing paperwork. Instead of submitting mutual fund orders every day, he submits his mutual fund orders every three days. Which of the following is true? A. This is not a violation, because the mutual fund has seven days to redeem the shares. B. This is not a violation, because John has three business days to transmit an order to the investment company. C. This is a violation. D. This is not a violation if all the orders are defined as small orders (under 100 shares).

C. This is a violation.

Issuing new shares, canceling shares that sellers redeem, and distributing dividend and interest income to investors are all responsibilities of the investment company's: A. Underwriter B. Custodian C. Transfer agent D. Broker-dealer

C. Transfer agent

The distinction between an international fund and a global fund is: A. There is more political risk in an international fund. B. There is more currency exchange risk associated with an international fund. C. A global fund will tend to be more diversified than an international fund. D. All of the choices listed.

D. All of the choices listed.

Members of the board of directors: I. Can include employees of the custodian firm II. Must include at least 40% non-interested persons III. Assist with day-to-day portfolio management IV. Vote on a change of investment adviser A. II and IV B. I and III C. II and III D. I and II

D. I and II

For a mutual fund investor, which of the following are advantages of having capital gains and dividends automatically reinvested? I. Avoiding taxation on the gains II. Avoiding market timing considerations by dollar cost averaging III. Purchasing new shares at POP IV. Purchasing new shares at NAV A. I and II B. II and III C. I and IV D. II and IV

D. II and IV

Rank the following categories of mutual funds in order of volatility, from highest to lowest. I. Growth and income II. Balanced III. Growth IV. Equity income A. I, III, II, IV B. III, II, I, IV C. III, I, II, IV D. III, I, IV, II

D. III, I, IV, II

Which of the following is not a benefit of a variable annuity? A. Earnings grow tax deferred B. No contribution limits C. Death benefit D. LIFO tax treatment for random withdrawals

D. LIFO tax treatment for random withdrawals

Which statement is true regarding NAV per share? A. NAV is the amount an investor will pay for her shares in a mutual fund. B. NAV is used to determine breakpoints. C. NAV is calculated just before the markets open on trading days. D. NAV represents the current value of a mutual fund share.

D. NAV represents the current value of a mutual fund share.

What does REIT stand for? A. Real estate investment transfer B. Real estate investment tax C. Revenue enhancing investment trade D. Real estate investment trust

D. Real estate investment trust

Which of the following is true of mutual funds? A. When shareholders redeem shares, the transfer agent resells those shares to new buyers. B. Dealers purchase shares from the sponsor at NAV and charge a fee when they resell the shares. C. Underwriters typically hold an inventory of mutual fund shares from which they sell to investors. D. The transfer agent distributes income and sends out shareholder reports.

D. The transfer agent distributes income and sends out shareholder reports.

The most well-known ETF is the Standard & Poor's

Depository Receipts (SPDR)

Money market funds pay dividends based on prevailing long-term interest rates.

False

The REIT corporate income tax exemption means that it's generally best for investors to hold REIT shares in a taxable account rather than a tax-advantaged account such as an IRA.

False

A UIT sells units of securities also known as

Shares of beneficial interest

ETFs investors do not have to pay a front- or back-end sales charge, but they do have to pay a/n _____.

broker's commission

Blend funds

combine growth funds and funds that invest in stocks with low price-to-earnings ratios which could mean these stocks are trading for less than they are worth.

Non-traditional ETFs use _____ to generate profits.

derivative products

An advantage and disadvantage of investing in a UIT is that the portfolio _____.

does not change

In a fixed annuity, the customer's investment is deposited in a [separate account/general account], while in a variable annuity, the customer's investment is deposited in a [separate account/general account].

general account; separate account

Equity funds

invest in common stock.

Value funds

invest in companies that are believed to be trading for less than they're worth.

Income funds

invest in companies that pay good dividends.

Growth and income funds

invest in stocks of companies with strong growth potential as well as in stocks of established companies that pay dividends.

Growth funds

invest in stocks that pay low or no dividends and have high price-to-earnings ratios.

Which of the following pays the smallest monthly check? Which pays the largest? [life with period certain/life income/joint life with last survivor]

joint life with last survivor; life income

ETFs offer more _____ than mutual funds, in that they can be bought and sold at any time throughout the day, and investors don't have to wait for the NAV price.

liquidity

The investment portfolios held by ETFs and other UITs are not actively managed, so the investor has no

management fees

UIT units must be sold with a/n _____.

prospectus

ETFs track an index, but imperfectly due to cash held, fund fees, and how liquid an asset or a market is; thus, an ETF is subject to _____ risk.

tracking