Chapter 7
greg puts $10,000 in an equity indexed annuity which allows compounding on gains within the annuity. the product has a minimum guaranteed return of 3% annually. greg's participation rate is 90% of the S&P 500 index in years exceeding the minimum guaranteed return. there is also a cap of 10% on gains. after 3 years and no fees taken into consideration, Greg is trying to figure out the value of his equity indexed annuity. returns were as follows: - year 1: 12.5% - year 2: 4% - year 4: 5% with these returns, greg should find that the balance of his annuity is approximately which of the following after year 3?
a) $11,750 b) $11,840 c) $12,032 d) $12,167 B) greg put $10,000 in the equity indexed annuity. in year 1, returns were 12.5%. 90% participation would be 11.25% which exceeds the 10% cap, in year 2, greg's returns were negative, so the minimum guaranteed return of 3% kicks in in year 3, greg's returns were 5%. 90% participation would be 4.5%, which is below the cap of 10%. year 1: 10,000 x 10% = $11,000 year 2: 11,000 x 1.03 = $11,330 year 3: 11,330 x 1.045 = $11,840
which of the following are benefits of a Health Savings Account (HSA) 1. tax free withdrawals are permitted for any medically-related expense 2. earnings within the account are tax deferred 3. contributions to the HSA are tax deductible up to limitations 4. HSAs can be established as investment accounts
a) 1 and 3 only b) 1, 2, and 3 only c) 2, 3, and 4 only d) 1, 2, 3, and 4 C) tax free withdrawals are permitted in HSAs for "qualified medical expenses", so it would be incorrect to say that tax free withdrawals are permitted for "any" medically related expense, bc that could include elective plastic surgeries, etc. all other choices are true of HSAs
a 30 year treasury bond has been trading at 4.5% and comparable high grade corporate bonds at 5.3%. what is the spread in basis points
a) 80 b) 8 c) 0.8% d) 8% A) the credit spread on debt securities is the difference between 2 bonds of similar maturity. the yield difference between these 2 bonds is 0.8%. 1% is equal to 100 basis points, so 0.8% = 80 basis points
Joe has recently sold a put option on ABC common stock. should this option be exercised, Joe would be obligated to do which of the following?
a) buy 100 shares of ABC common stock b) sell 100 shares of ABC common stock c) close out the position in Put immediately in order to avoid the exercise d) purchase a call option to offset the risk of the exercise A) when an investor sells a put option, they are in a position where they are obligated to "buy" the 100 shares of the underlying stock being put to them should the option be exercised
the difference between the yield on a corporate bond and the yield on a treasury bond, each with the same maturity date, is referred to as
a) debit spread b) yield to maturity c) risk yield d) credit spread D) a credit spread on bonds is the difference between 2 bonds of similar maturity, generally a corporate bond as compared to a treasury bond with the same or similar maturity
a capital needs analysis should be based on all of the following except
a) inflation b) life expectancy c) market volatility d) future earnings of the client C) all of the choices offered would be important factors to consider when doing a capital needs analysis, except market volatility will not affect the client's needs
which of the following types of risk would apply most to an investor that purchased a variable annuity contract
a) mortality risk b) interest rate risk c) investment risk d) social risk C) the investor carries the investment risk, and could incur a loss if the value of the portfolio declines
an investor buys 1 corn futures contract at $1.14. later in the day, the investor sells the future contract at $1.75. a corn futures contract has a size of 5,000 bushels. what is the result of this transaction
a) $1.75 gain b) $0.61 gain c) $0.61 loss d) $3,050 gain D) $1.75-$1.14 = $0.61 gain x 5,000 bushels = $3,050 gain
a client invests $10,000 in an equity indexed annuity that has a participation rate of 90% and a cap rate of 10%. the returns of the index for the next 2 years are 12% and 5%. what is the value of the indexed annuity at the end of year 2
a) $11,495 b) $11,760 c) $11,450 d) $12,150 A) for year 1, return is 12%, but the participation rate is 90% so the investor receives 12% x 90% = 10.8%. the cap rate is at 10%, so the annuity value increases only by 10%, not by 10.8% at the end of year one, which is $11,000. for year 2, the return is 5% so 5% x 90% = 4.5% $11,000 x 4.5% = $495, so at the end of year 2 it would be $11,000 + $495 = $11,495
a real estate investor is single and buys a home for $300,000 today. the investor resides in the home for 18 months and then sells it for $600,000. what amount will be subject to federal taxation from this sale?
a) $300,000 b) $50,000 c) $250,000 d) $500,000 A) current tax law provides an exclusion form taxes on realized long term capital gains on the sale of the home ($250,000 for single filers and $500,000 for joint filers) if the owner has lived in the house for 2 of the last 5 years. the investor lived in the home for 18 months, so the profit on the sale doesn't qualify for the exclusion. therefore, the full gain of $300,000 is taxable
when trading equity options which 2 of the following would represent a bullish strategy? 1. buying a call 2. selling a call 3. buying a put 4. selling a put
a) 1 and 3 b) 1 and 4 c) 2 and 3 d) 2 and 4 B) buying calls and selling puts are both bullish, the investor would expect the market price of the stock to be rising
the distribution to an annuitant during the payout period of a non-qualified variable annuity contract would be taxed as:
a) capital gain only b) ordinary income on the amount of excess over the original cost basis c) ordinary income only d) capital gain on the amount of excess over the original cost basis B) in a non-qualified annuity, the principal invested has already been taxed, so it would not be taxed again when withdrawn from the annuity. any increase in monies over the original amount invested is considered ordinary income
one of your clients owns a permanent life insurance policy. he needs cash. he knows that he can cash surrender the policy but doesn't want to lose his life insurance protection. he asks you about how a policy loan works. you should tell him all of the following except
a) the loan will have to be paid back with interest b) outstanding policy loans that are unpaid at death will be subtracted from the policy proceeds c) the loan amount is not subject to federal income taxes d) the amount that the policy holder can borrow is generally limited to 50% of the cash surrender value D) policy loans are generally available up to 100% of the cash value of a permanent policy (for variable life is it limited at 90%). if the policy holder defaults on the repayment of a policy loan there are no negative consequences bc the interest will continue to accrue and the insurance company is fully collateralized by the cash value
with respect to liquidity risk, mutual fund shares have
a) very high liquidity risk, bc investors are forced to hold shares until they have reached the age of retirement, regardless of the age at which shares were purchased b) a moderate level of liquidity risk, due to the fact that the manager of the fund determines when assets can be sold to accommodate redemptions c) relatively low levels of liquidity risk, bc mutual fund shares can be redeemed on any trading day using forward pricing d) no liquidity risk, bc investors can withdraw their funds at any time, similar to withdrawing cash from a checking account C) mutual fund shares, also known as shares of an open end investment company, are redeemable using forward pricing. investors can elect to redeem shares on any trading day, so mutual fund shares have relatively low levels of liquidity risk. the other statements are false
all factors considered, which of the following bonds would carry the least amount of risk to an investor
a) corporate bonds with AAA rating, maturing in 15 years b) municipal bonds with AA rating, maturing in 2 years c) US govt bonds with AAA rating, maturing in 30 years d) yankee bonds with a BBB rating, maturing in 10 years B) the best answer is the muni bonds with 2 year maturity bc of the proximity to maturity. having money tied up for only 2 years carries significantly less risk than maturities of 10+ years
daniel owns a variable annuity containing $100,000 in investments. he named his son matthew as a beneficiary on the variable annuity. if daniel passed away, what would be the tax consequences on the death benefit to matthew?
a) if taken as a lump sum, ordinary income tax would be required on the full amount b) if taken as periodic payments, ordinary income tax would be required on the full amount of the benefit c) if taken as periodic payments, the full amount would be tax free d) if taken as a lump sum, the full amount would be tax free D) if the death benefit on a variable annuity is taken as a lump sum by the beneficiary, that full amount would be tax free. however, if periodic payments are taken then the 100k that was passed as a death benefit would be tax free, but earnings that continued to grow would be taxed as ordinary income tax. therefore, the full amount would partially be tax free, partially taxed as ordinary income
john and mary are a young married couple with 3 children. they are on a tight budget and john is the primary breadwinner. they have no life insurance. which of the following life insurance policies should john consider buying based on his situation
a) term insurance b) whole life insurance c) universal life insurance d) variable life insurance A) the primary purpose of life insurance is to replace the income lost when the breadwinner dies prematurely. term insurance provides the highest amount of policy proceeds (death benefit) per dollar of premium paid. term insurance does not accrue cash values (living benefits) and therefore is cheaper to buy than permanent policies that include cash values (other choices)
is market volatility normally a key consideration in a client's capital needs anaylsis
a) yes, bc with proper diversification, it is possible to eliminate all risk associated with volatility from a client's portfolio b) yes, bc with proper market timing, an investor can see significant gains related to playing market volatility c) no, bc a capital needs analysis focuses on more predictable, long term numbers like inflation and future earnings d) no, bc the consideration of market volatility exceeds the importance of a capital needs analysis for the majority of clients C) a capital needs analysis focuses on client needs and the needs of the client's beneficiaries upon the client's death, most often for insurance coverage purposes. anticipated inflation, anticipated life expectancy, anticipated earnings from employment, and anticipated earnings from investments would all be considerations. as well, the needs of beneficiaries, such as a remaining spouse with a mortgage and higher education for children would be considerations
bob and sue have 2 children. they have decided to evaluate their insurance needs to ensure that should anything happen to them, their children would be well taken care of and that their children's education needs would be met. using a capital needs analysis calculator, which of the following items would be relevant? 1. the expected income of both parents 2. the general life expectancy of both sue and bob 3. the current rate of inflation 4. the expected fluctuation in the market value of securities owned by bob and sue
a) 1 and 2 only b) 2 and 3 only c) 1, 2, and 3 only d) all of the above C) when determining capital needs analysis, expected income, life expectancy, rate of inflation, number of children, mortgage obligations, savings, and debt would all be considerations. you would not consider fluctuations or volatility in the market value of securities, since that changes daily
a variable universal life insurance policy is a type of permanent life insurance that has which of the following characteristics? 1. combines variable death benefits and cash values 2. has surrender charges 3. a sub account which includes the investments 4. flexible premiums payments
a) 1 and 2 only b) 2 and 3 only c) 2, 3, and 4 only d) 1, 2, 3, and 4 D) all choices are true with regard to a VUL insurance policy. also, keep in mind that VUL policies do not offer a term feature. term life insurance is its own type of insurance which offers a death benefit only
which two of the following are true with relation to real estate investment trusts (REITs)? 1. REITs must invest at least 75% of their total assets in real estate assets 2. REITs must invest at least 90% of their total assets in real estate assets 3. REITs must distribute at least 75% of taxable income to shareholders annually in the form of dividends 4. REITs must distribute at least 90% of taxable income to shareholders annually in the form of dividends
a) 1 and 3 b) 1 and 4 c) 2 and 3 d) 2 and 4 B) in order to qualify as a REIT, at least 75% of total assets must be invested in real estate assets and the REIT must distribute at least 90% of its taxable income to shareholders annually in the form of dividends. dividends paid to investors are taxable at the investor's ordinary income tax rate
a conservative investor with a large portfolio of blue chip stocks decides to sell a couple of call options on several of the larger stock holdings in his portfolio. which of the following would be correct regarding this scenario 1. the investor will be covered with the stock contained in their portfolio and would not have to put up margin requirements for uncovered sale of calls 2. the investor would not be covered with the stock contained in their portfolio and would have to put up margin requirements for the uncovered sale of calls 3. the investor can expect to exercise the calls and make money from the difference between the strike price and the market price at the time of exercise 4. the investor can expect to receive premium income from the sale of the calls
a) 1 and 3 b) 1 and 4 c) 2 and 3 d) 2 and 4 B) when an investor has large stock holdings and sells a small amount of call options against those holdings, you can be reasonably assured that the investor is covered and will not have to put up the margin required when selling uncovered options. the investor in this case has sold call options. the maximum profit potential for this investor would be the amount taken in with regards to the premiums. as the seller of the calls, the investor is not in charge of if and when the options will be exercised. as well, if the option is exercised against this seller, the seller is obligated to sell 100 shares of the underlying stock at the exercise price. therefore, the investor would not be expecting to exercise and make money from the difference between the strike price and the market price of the stock. this would be the buyer of the call if an exercise took place
a client at the firm regularly purchases multiple call or multiple put options on securities in which the client has an interest. which of the following would be reasons that this client would buy options 1. as a means of generating income from premiums for their portfolio 2. way to speculate on the underlying securities without actually buying the securities and putting them into the portfolio 3. buy call options to hedge long stock positions and can buy put options to hedge short stock positions 4. as a means of leveraging a smaller amount of money in attempt to magnify gains
a) 1 and 3 b) 1 and 4 c) 2 and 3 d) 2 and 4 D) if an investor is buying options, whether calls or puts, this is not a means to gain premium income, since the investor would be required to pay the premium. this would be investing or speculating on the direction of the market value of the stock. calls would be purchased if upward movement expected, and puts would be purchased if downward. investors use long options to leverage smaller amounts of money. the leverage provided by an option contract allows the investor to pay a lower amount, specifically the premium price instead of the stock price, while working with the largest amount of shares possible (100 per contract). this magnifies an investor's gains and losses on the positions, as small stock increases and declines can have significant impacts on premium values. investors can hedge using options, but one would hedge a long stock position with a long put, and one would hedge a short stock position with a long call. you wouldn't hedge long stock positions with long calls and you wouldn't hedge short stock positions with long puts
regarding term life insurance, which of the following is correct regarding the death benefit: 1. the level death benefit options means the death benefit remains the same during the entire term of the policy 2. the level death benefit option means the premium amount remains the same during the entire term of the policy 3. the decreasing benefit option means the death benefit will decrease each year, but the premium remains the same 4. the decreasing benefit option means the premium amount will decrease each year along with the death benefit
a) 1 and 4 b) 2 and 3 c) 1 and 3 d) 2 and 4 C) the two correct statements are - the level death benefit of options means the death benefit remains the same during the entire term of the policy. the premium, however, may remain the same or rise - the decreasing benefit option means the death benefit will decrease each year, but the premium remains the same
jane is a conservative investor who doesnt like to take large risks within her portfolio. she feels strongly that over the long term, ABC incorporated stock is going to be going down. what can jane do in this scenario to capitalize off of the drop in price of ABC stock while protecting her portfolio from risk 1. sell ABC stock short in her portfolio and buy call options to hedge her short stock position 2. sell ABC stock short in her portfolio and buy put options to hedge her short stock position 3. buy ABC stock in her portfolio and sell covered calls to hedge 4. buy ABC stock in her portfolio and sell puts to hedge
a) 1 only b) 1 and 3 c) 2 and 3 d) 2 and 4 A) jane is conservative and doesn't like to take risks. generally, selling short is a strategy that is reserved for investors with higher risk tolerance, but if she wishes to capitalize from a decrease in the market price of ABC stock by selling the stock short, she can buy call options to protect her short stock position in the event the price goes up. each of the other choices would not give jane downside profit potential with upside protection. she should not be buying a stock she feels will go down in price. as well, selling short and also buying puts is putting 2 bearish strategies together, essentially doubling down. for short stock, a long call is the best hedge. for long stock, a long put is the best hedge
Louie purchased an equity indexed annuity 4 years ago. the annuity has a 3.5% guaranteed minimum return on an annual basis. it has a participation rate of 75% and an interest rate cap of 12.5% on annual returns. the following are the index returns for the 4 years the index was held: Year 1 - 15% Year 2 - 3% Year 3 - 8% Year 4 - 2.5% What was Louie's average annual return on the equity indexed annuity for the 4 years that the annuity was held?
a) 22.5% b) 5.625% c) 24.25% d) 6.0625% D) in years where the minimum return was not met, Louie can expect the minimum guaranteed return of 3.5%. this covers years 2 and 4. in years where the minimum is exceeded, Louie can expect 75% participation in index returns. this would be 11.25% in year 1 and 6% in year 3. louie's overall return when added together would be 24.25%, but the question asks for the average annual return, so we divide this by 4 years, giving us 6.0625% (15% x 75% participation) + 3.5% minimum + (8% x 75% participation) + 3.5% minimum = 24.25%/4 years = 6.0625%
if a bond's duration is 3 and market rates are expected to move 0.5% percentage points, the bond's price would be expected to move by
a) 3% b) 1.5% c) 0.5% d) 0.015% B) a bond with a duration of 3 would be expected to move 3% in price for every market movement of interest rates of 1%. if rates moved only half of that amount (0.5%), then the bond's price would be expected to move by 1.5% (half of 3%)
Dwight bought into a mutual fund and after sales load acquired 2,000 shares with an after-sales-load value of $100,000. over a period of 10 years, he has made no further contributions. he opted for a reinvestment plan that included all dividend distributions and capital gains distributions. presuming each of the following facts are true, which would be the least relevant to Dwight when calculating the total return in his mutual fund shares?
a) Dwight has paid both ordinary income and long term capital gains taxes on a total of $62,500 over the 10 year investment period b) Dwight lump sum purchase netted him 2,000 shares at a cost of $50 per share c) the current price per share of the fund is $75 d) following 10 years of reinvestment, Dwight owns a total of 3,260 shares A) the taxed amount would be the least relevant factor in this case bc it is not part of the calculation of total return in calculating Total Return on a mutual fund offering a reinvestment plan, the calculation considers the beginning price ($50/share in this case), the beginning number of shares (2,000 in this case), the ending price ($75 per share in this case), and the ending number of shares (3,250 in this case)
all of the following are true about using futures contracts for hedging purposes except:
a) a long hedge would be used to protect against rising prices b) a short hedge would be used to protect against falling prices c) hedging is typically used by speculators d) hedging is typically used by the producers or consumers of the underlying commodity C) hedging is typically used by the producers or consumers of the underlying commodities to protect against the risk of future adverse price movements. speculators are the counterparties who are willing to assume the risk to make a profit if they bet right as to the direction of prices
a written statement of a customer's net worth must be obtained by a RR before offering a customer all of the following investments except
a) a real estate partnership b) an equipment leasing program c) a real estate investment trust d) a cattle breeding program C) real estate investment trusts do not require a specific net worth for the investor
mary is the insured and the owner of a whole life insurance policy issued by Gotham. a life insurance agent from another company shows her a comparison with its whole life policy that appears to have higher benefits and lower premiums. mary is in good health and insurable and is seriously considering replacing her Gotham policy. which of the following statements about replacing life insurance is untrue
a) a written comparison of the key provisions of the existing and replacement policies must be delivered to mary b) any tax on any gain on the surrender of the existing policy can be deferred by complying with the requirements of Sec 1035 of the IRS code c) mary should be sure that she understands any surrender charge that may apply to her Gotham life policy d) replacement of policies is prohibited when the replaced policy is a permanent policy D) replacing any inforce policy with a new policy is permitted, but is highly regulated. delivery of a written comparison is required, among other things. any taxable gain on the cash surrender of the inforce policy can be deferred until the surrender of the replacement policy by complying with Sec 1035 of the IRS code
the fixed income component of a structured product pays interest to investors:
a) annually b) semi annually c) at maturity only d) at a specified rate and interval D) structured products are created with 2 main components -- a fixed income component and a derivative component the fixed income component of structured products pays interest to the investor at a specified rate and interval. it may pay interest annually and semi-annually but the frequency varies across structured products. the derivative component sets a payment at maturity based on the performance of the underlying asset
an investor purchases shares of a mutual fund that have a contingent deferred sales load. it is true to state that these shares
a) are eligible for sales charge breakpoints on large volume purchases b) will have a sales load that will remain constant over time and be paid upon redemption c) will have the lowest annual expense charges of all classes of mutual fund shares that are available d) are typically labelled as class b shares and that if held for an extended number of years, the sales load can be reduced D) mutual fund shares that have a contingent deferred sales load are usually referred to as class b shares. the contingent deferred piece of the sales load means that the sales load is paid on the back end (upon redemption) and if shares are held for a longer period of time, the sales load on these shares can be reduced. generally, class a mutual fund shares will have the lowest annual expense charges of all classes of mutual fund shares available (not b or c shares)
payments from a mutual fund that are received by an investor
a) are normally reinvested back into the fund with no sales load and without taxation b) will always reduce the NAV of the mutual fund, regardless of the type of distribution, any reinvestment plan, or the investor's tax status c) are made to the investor prior to deduction of operating expenses, which are paid separately by the investor d) will always be comprised of dividends, interest, and short term gains in the portfolio of the mutual fund B) payments from a mutual fund that are received by an investor will always reduce the NAV of the fund. this is the case regardless of the type of distribution, any reinvestment plan in place, or the investor's tax status. each of the other statements is false. payments to investors are subject to taxation in the year received, regardless of reinvestment. operating expenses are deducted from the fund's NAV prior to payment of dividends. payments can be comprised of long term capital gains to the fund or dividends, interest, and short term capital gains in the fund
Bridgette is new to investing and has approximately $10,000 to invest. in opening up her account, she discusses her desire for growth and diversification with an agent. she also informs the agent that she would like to have access to the funds in about 2 years. of the choices listed, which is the best for Bridgette given her objectives and time horizon?
a) class a mutual fund shares b) class b mutual fund shares c) class c mutual fund shares d) the agent should recommend that she create her own diversified portfolio of common stocks C) the best recommendation here is going to be the Class C mutual fund shares. these shares will have no sales load, provide diversification, can provide for growth if the right fund is chosen, and allow for easy access to the funds in 2 years' time. class A and B shares will have a sales load that makes these shares less than ideal for a 2 year time horizon. Bridgette is new to investing and does not have a significant amount of money to invest, so creation of her own diversified portfolio of common stocks is also not ideal in this scenario
maria is an investment advisor who is working through investment objectives and risk tolerance with a new client - bobby. bobby indicates that he'd like to see some capital appreciation, achieve at least some income, and wants to maintain a relatively high level of safety and principal protection. the best recommendation that maria can make to bobby is that bobby invest in:
a) common stock from several established, well managed companies b) preferred stock from companies in certain sectors where participation in growth of the company is a feature of the shares c) long-term bonds from various issuers that are currently selling at par value with anticipation of decreasing interest rates over the next several years d) mutual fund shares with balanced investments in equities, debt securities, and cash equivalents D) the best recommendation for bobby in this scenario is to invest in a balanced fund, which is a mutual fund with balanced investments in equities, debt securities, and cash equivalents. each of the options provided would at least partially satisfy the requirements given by bobby, but the balanced fund is the best investment choice due to the high levels of diversification and lower level of risk
the best definition of bond "convexity" for a non-callable, interest bearing bond is
a) convexity measures the actual price change in a bond in response to an interest rate change over 1% b) convexity measures the estimated price change in a bond in response to an interest change up to 1% c) convexity describes the convex curve used in an inverted yield curve d) none of the above A) interest rate risk is a universal risk for bond buyers. the risk is that as interest rates rise, bond prices will fall (and bond yields will rise). the reverse is also true. the principal measure of this risk is called duration. duration is the estimated percentage change in the price of a bond for a 1% (100 basis points) change in interest rates. for interest rates moves over 1%, convexity is used to measure price sensitivity bc small interest rate changes result in symmetrical percentage changes in bond prices whereas large interest rate changes result in asymmetrical percentage changes in bond prices. convexity measures the actual price change in a bond in response to an interest rate change over 1%
a customer is considering investing in a structured note. one of the risks her advisor discusses is that if the customer does not hold the structured note until maturity, the customer may not be able to sell the note in the secondary market. this risk is best described as
a) credit risk b) principal risk c) liquidity risk d) reinvestment risk C) liquidity risk is the risk that an investor may not be able to sell a structured product before its maturity date. issuers of structured products do not guarantee a secondary market, and many structured products listed on an exchange are very thinly traded. so, even if it can be sold, it could be at a significant discount to what the investor initially paid
using an insurance approach to capital needs analysis, an investment advisor would
a) determine the securities to be selected based only on the customer's financial objectives, financial situation, and risk tolerance b) calculate the insurance coverage needed to complete the customer's financial objective should the customer die prior to the objective being met c) invest in securities that offer an insurance feature d) only invest in securities issued by insurance companies B) when utilizing an insurance approach, the investment advisor should determine if the insurance coverage is sufficient to fund future financial goals if an untimely death occurs. this is referred to as a capital needs analysis
an investor has a portfolio of blue chip stocks and anticipates stability in the market with the possibility of minor declines. this investor decides to write covered calls on the securities held in the portfolio. in this scenario, the investor
a) gains leverage on the underlying security by writing options contracts b) will collect premiums received and will not take losses bc the options positions sold are covered c) can expect exercise notices on the calls if the price of securities held in the portfolio goes down d) can expect income from the premiums when selling covered calls and capital gains taxes if the calls expire unexercised D) when an investor sells covered calls and anticipates stability or minor declines in the market, the investor is looking for income from the premiums. the investor does not gain leverage by selling calls, which obligate the investor to sell the stock. collection of premiums will occur, but losses are still possible, depending upon the purchase price of the stock and the premiums received on the options contracts. when options are sold, the premiums received are taxed as a capital gain to the seller if the options expire unexercised
all of the following are true of a whole life insurance policy, except:
a) generally, beneficiaries do not owe taxes on death benefits of a whole life policy b) unpaid policy loans are deducted from the policy proceeds at death c) lapsed policies may be reinstated with evidence of insurability and the payment of unpaid premiums d) taxes on earnings in the policy are payable annually as earned D) earnings on the cash values in the policy are tax deferred until distributed. the other choices are all true
which of the following would be the most common issuer(s) of agency CMOs
a) government agencies which include: fannie mae, freddie mac, ginnie mae b) private institutions such as banks, investment banks, and home builders c) real estate investment trusts d) direct participation programs A) agency CMOs are govt agency securities issued and/or guaranteed by fannie mae, freddie mac, and ginnie mae
an investor looking for which of the following investment goals would be BEST served by a deferred variable annuity?
a) investors who prefer a fixed rate of return b) investors seeking capital appreciation over a long period of time c) investors looking to maximize their current level of income d) investors interested in receiving inflation adjusted returns B) deferred variable annuities are designed to provide long term capital appreciation. they do not provide immediate income. they do not adjust their returns for inflation and they are not fixed rate securities
what is annual reset
a) it is a valuation method used for equity indexed annuities, in which the annuitant locks in gains from the beginning of the year to the end of the year b) it measures the movements from a high point of an index and compares it to the index value at the beginning of the period c) it is a valuation method used for managers to determine if they are managers which produce profits for a hedge fund d) it is when securities in an account are rebalanced to keep the original asset allocation A) choice a is the definition of annual reset. the annuitant locks in gains every year the index is positive
jerry has purchased an equity indexed annuity. his participation in increases in the index is capped at 4%. if the index goes up by 25%, how much will jerry get
a) jerry will see 4% of 25%, or an increase of 1% b) jerry will see a total of 4% of increase c) jerry will see an increase of 21% in the value of the equity indexed annuity d) jerry will see an increase of 25%, since this exceeds 4% B) when the structure of an equity indexed annuity involves a cap, that is the most that investor will receive in appreciation in that year, despite the fact that the index could have gone up significantly more. even though the index went up 25%, jerry will be limited to 4% increases in the value of his equity indexed annuity bc of the cap that is discussed
exchange traded notes (ETNs) allow investors to
a) participate in sectors that are considered speculative, risky, and often unsuitable for the average investor b) eliminate fees while allowing performance similar to that of an ETF c) gain access to securities markets without opening a securities account through a broker dealer d) profit from increases in an underlying asset class on a tax-free basis A) ETNs allow investors to participate in sectors such as commodities, foreign currency, and emerging markets. these sectors can be considered speculative, risky, and often unsuitable for the average investor. the ETN allows a standardized securities product that provides the ability to participate in those markets without having to open specialized accounts or accounts in foreign markets. ETNs do have investor fees. these products must be purchased in an appropriate securities account which would be available via a broker-dealer firm. when profits are realized, they are taxable to the investor as capital gains
an investor owns an indexed annuity. which of the following is not a method used to evaluate the interest that will be credited to the client's account
a) point to point b) spread fee c) interest rate cap d) participation rate A) there are 3 basic means of determining how the interest will be calculated and credited to the client's indexed annuity account. spread/margin/asset fee, participation rate, and interest rate cap. point to point is used to measure the actual change in the index to which the annuity is tied. the other index measurement methods are high water mark and annual reset
each of the following would be risks associated with investment in precious metals, except:
a) price volatility and the influence of speculation in the market b) significant domestic currency devaluation c) increased supply of the precious metal d) safekeeping of bullion in the form of bars and coins B) significant domestic currency devaluation would typically cause an increase in the demand and value of precious metals. each of the other items are risks associated with investment in the precious metals
mortgage real estate investment trusts generally invest in which of the following
a) properties handled by developer or builders b) income producing properties c) residential mortgage loans d) oil and gas properties A) mortgage REITs lend money to builders and developers and then pass the income onto shareholders
XYZ is currently trading at $40. an investor who is long 1,000 XYZ shares believes the shares will trade lower within the next 6 months. which options strategy best protects the investor's long position?
a) sell 10 XYZ calls b) buy an XYZ put c) sell an XYZ call d) buy 10 XYZ puts D) investors who are long stock would buy puts for downside protection. buying a put gives the best protection bc you are theoretically protected all the way down to a market price of zero. selling a call only gives you protection up to the amount of the premium received, therefore, you only have limited protection. also, with selling a call, you run the risk of having the stock called away from you if the option is exercised. also, one option contract equals 100 shares of the underlying stock. this investor has 1,000 shares so 10 option contracts are required to fully protect the long position
when jake was 45, he started contributing to a non-qualified variable annuity. he is now 65 and wants to start taking withdrawals. his cost basis in his variable annuity is $75,000 and the annuity value is now $100,000. which of the following are true of jake's withdrawals
a) since jake contributed money pre-tax or was able to deduct when making contributions, all of the money withdrawn will be taxable as ordinary income in the year received b) since jake contributed money on an after tax basis, the earnings in the account will be taxed as long term capital gains in the year received and jake's contributions will be tax free when withdrawn c) since jake contributed money pre-tax or was able to deduct when making contributions, all the money withdrawn will be taxable as capital gains in the year received d) since jake contributed money on an after-tax basis, the earnings in the account will be taxed as ordinary income first and jake's contributions will be tax free when withdrawn D) jake opened a non-qualified variable annuity, meaning he will be contributing after tax dollars to the plan and have a cost basis in the account. his earnings will be taxable as ordinary income in the year received and his cost basis in the annuity will not be taxable
a client asks her IAR to review her whole life insurance policy to assess whether she has enough life insurance to meet her financial goals. the IAR performs the review considering the client's expected income, stock market volatility, general life expectancy, inflation rate, savings, and number of dependents. he concludes her policy is insufficient and recommends she cancel the policy. which of the following statements is correct regarding the IAR's assessment?
a) stock market volatility should not be a consideration in this assessment b) the IARs recommendation is appropriate and fulfills his fiduciary obligation to the client c) the inflation rate should not be a factor in the IAR's analysis d) using historical stock volatilities would be reasonable but the IAR should exclude stock market projections A) the IAR should not have included stock market volatility (fluctuations) bc unlike variable policies, a whole life insurance policy does not have investment risk rather the insurance company has the investment risk
a beneficiary of a life insurance policy receives a lump sum of $100,000. the policy holder was in a 35% federal tax bracket at the time of his death and the beneficiary is in a 20% tax bracket. who is liable for the taxes on this payment and how much
a) the beneficiary, $0 b) the beneficiary, $20,000 c) the policyholder, $35,000 d) the beneficiary, $10,000 A) lump sump payments are generally tax exempt to the beneficiary but may be taxable under the transfer for value rule if the policy had been sold to a third party prior to death. there is no indication in the question that this happened, so no taxes are due by beneficiary
when calculating yield to call, which of the following is typically used
a) the bond's next available call date b) a call date that is mid-way between the first call date and the maturity date on the bond c) the bond's final maturity date d) a call date specified in the bond's indenture A) yield to call is typically calculated to the bond's next available call date
a client is looking for growth and future income in an investment product, but does not want to pay taxes on earnings until they are withdrawn. how should this client invest
a) the client should begin trading options with advanced option strategies such as spreads and combinations b) the client should research and purchase several municipal bonds issued by stable local and state governments c) the client should open up a variable annuity and begin contributions immediately d) the client should begin trading in gold and commodities C) the variable annuity is the only investment that meets the criteria listed in the question. earnings are tax deferred in such an account and the investor can participate in growth of the underlying securities. income is provided at a later date when the plan is annuitized and the investor will pay taxes on earnings at that time
one of your clients is looking to hedge a recent stock purchase. the client bought 200 shares of ABC with a market price of $75 per share. which option contract will be the best hedge for this client?
a) the client should sell 2 call contracts, each with a strike price of $75 b) the client should buy 2 call contracts, each with a strike price of $75 c) the client should sell 2 put contracts, each with a strike price of $75 d) the client should buy 2 put contracts, each with a strike price of $75 D) the best hedge would occur if the client buys 2 put contracts with a strike price of $75. this will allow the client to "put" the stock to the seller of the put at a strike price of $75 and reduce the amount of loss if the stock price goes down
john, an agent of a broker-dealer, is evaluating several bonds for his client paul. paul is a conservative investor and has an investment objective of safety. which of the following would not be critical to evaluating whether or not a particular bond is safe?
a) the corporation's debt to equity ratio b) the corporation's profit margin c) the corporation's cash flow to debt ratio d) the assets backing the bond B) of the choices offered the least relevant with regard to measuring safety of a bond issue would be the profit margin or profitability of the corporation. remember that bonds are an obligation which have to be repaid upon maturity of the bond regardless of the profit margin of the company
it is accurate to state that when it comes to corporate bonds,
a) the outlook and rating of bonds from a particular issuer is likely to improve if the bond issuer refunds 5% coupon bonds with 7.5% coupon bonds b) long term bond buyers would not be concerned about a corporation with a significant amount of outstanding debt that has failed to meet earnings projections for the past 2 quarters c) an overall reduction in the interest rate markets can lead to refunding of callable bonds, increases in bond rating, and increases in the creditworthiness of bond issuers d) bonds rated as "speculative grade" by S&Ps or Moodys are safer than bonds that are unrated C) an overall reduction in interest rates can lead corporations with outstanding callable bonds to refund those bond issues to achieve lower interest costs. if a company reduces expenses related to debt, then this can improve the company's bond rating and creditworthiness. each of the other statements is false. a refunding from a lower rate to a higher rate would increase interest costs to the issuer and is unlikely to improve a bond's outlook or rating
a registered equity indexed annuity is sold with a prospectus by a registered rep. of the following statements, which is true regarding this siutation
a) the sale is subject to the same supervision requirements that apply to transactions in other securities b) training related to such products is only required for those supervising sales c) rules require heightened surveillance of this type of product d) a principal must approve each sale of an equity indexed annuity A) equity indexed annuities provide annuity payments linked to a specific stock index, like the S&P 500. supervision of sales of this product is required similar to any other securities transaction
the characteristics of a futures contract include all of the following except:
a) the terms of the contract are standardized and established by the futures exchanges b) the price is established by supply and demand on the floor of a futures exchange c) the contract may be traded d) delivery and settlement of the contract occurs presently D) delivery and settlement of the contract will occur on a future date unless the contract is "liquidated" or closed by an equal and opposite trade before the delivery/settlement date
corporation x is a large company that has issued common stock, as well as callable and convertible preferred stocks and bonds. the bonds are a rated by standard and poors. corporation x has been outperforming earnings estimates and growing substantially over the past year. the company decides to do a partial call on the bonds, calling in 50% of all outstanding issues at the next available call date. which of the following is the least likely outcome in relation to this call?
a) there will be a reduction in corporation x's liquid assets such as cash b) the call will be disappointing to investors, causing the bond's outlook and rating to decrease c) the reduction in debt by corporation x will help reduce liabilities and could push the market price of the common stock higher d) the market price of the preferred stock may increase incrementally due to the reduction of debt by corporation x B) despite the fact that investors who own the bonds may be disappointed, a company that calls in bonds generally improves its bond outlook and rating, rather than seeing a reduction in the bond outlook and rating. early repayment of debt is seen as a sign of creditworthiness and is a positive, not negative. when a company calls in bonds, liquid assets are used to repay that debt ahead of schedule, which leads to a reduction in current assets (liquid assets). the reduction of debt is likely to push the market price of the common stock higher and may incrementally increase the market price of preferred stock as well
which of the following is the best advantage that is provided by a variable annuity?
a) these annuity plans provide a guaranteed level of income on a monthly basis when annuitized b) variable annuities provide an investor with tax-free investment income throughout the pay-out period as well as during the pay-in period c) these annuity plans often are a beneficial addition when included in other types of qualified retirement plans d) variable annuities provide an investor with the opportunity to invest in equities without paying taxes on growth until the plan is annuitized D) a variable annuity allows an investor to participate in market fluctuations on a tax-deferred basis. taxes are paid on earnings once the plan is annuitized and typically when the investor is in a lower tax bracket. variable annuities do not provide income during the pay in period, they never guarantee any level of income on a monthly basis, and the fees associated with a variable annuity make it unwise as an investment within another retirement product
an IAR has a customer who is a conservative investor with a low risk tolerance. he tells his rep that he is interested in owning corporate bonds. the credit spread between 30 year corporate bonds and treasury bonds has been increasing, so the IAR buys corporate bonds for the customer. did the IAR make a prudent decision
a) yes, bc he fulfilled the customer's request b) the spread was increasing so the IAR made the right decision to buy c) the IAR should have purchased the treasury bonds rather than the corporate bonds d) no, bc the increasing spread implies corporate bonds are becoming riskier D) a credit spread in bonds is the difference in the rates between 2 bonds of the same or similar maturity, generally a corporate bond and a treasury bond. an increasing or widening of the spread between the 2 bonds means the corporate bonds are becoming riskier. we know that this is a conservative investor with a low risk profile, so it was not a prudent decision to buy the corporate bonds right now. buying treasury bonds is not an appropriate action bc that is not what the customer requested. the IAR would have been better off waiting to see if the spread narrowed before deciding to purchase corporate bonds
a 60 year old investor is in a 28% income tax bracket and owns a variable annuity. she has paid $15,000 into her variable annuity so far and its current market value is $50,000. the investor makes an $8,000 withdrawal. what tax penalty would the investor pay on the withdrawal
a) $0 b) $500 c) $1,400 d) $1,900 A) an investor must pay a 10% tax penalty on the amount she withdraws from the variable annuity if she is under 59 1/2. this investor is 60 years old, so she would have to pay income taxes on the withdrawal, but not a penalty. the question asks for the penalty amount, which would be $0
