Missed Investment Company Questions

The shorter the expected annuity period the ------ the payment

longer

Unit refund annuity

pays a lumpsum if a person dies early

Joint and last survivor annuity

pays a spouse when one person dies

What is the MOST important item to disclose to a customer who invests in a fund of hedge funds? A The illiquidity of the investment B The high fees and expenses of the investment C The high risk of speculative options strategies used by hedge fund managers D The lack of disclosure about the underlying hedge funds Previous

All of the items listed are "problems" with funds of hedge funds that should be disclosed. The investment company that is formed buys into hedge fund investments, which are illiquid. Hedge funds typically only allow redemption 1 time per year, or maybe 1 time per quarter - and the percentage of one's investment that can be redeemed is limited as well (say 25% of one's investment can be redeemed each quarter). Unlike mutual funds, these shares cannot be redeemed at any time. A fund of hedge funds will adhere to the same rules for redemption. The fact that an investor cannot get out of the investment easily is the most important item to disclose to a client. The high fees (2 layers of fees - the underlying hedge fund fees and the management fees to the manager choosing the hedge fund investments) are another disclosure item, but maybe not as important as the fact that an investor can't get his or her money out of the fund at will. The use of risky strategies by hedge fund managers is another item that should be disclosed. Additionally, the fact that there is not much information about the underlying hedge fund investments because the hedge funds themselves are unregistered investment vehicles. These facts do not impact the customer the same way as the fact that you can't readily get out of the investment.

If the fund shares that are sold have appreciated what does the IRS consider this

Capital gains tax liability

Life with Period Annuity

Continues to pay for a fixed time period if the person dies early

Dollar cost averaging will result in a lower average per share price only if: I the price of the stock remains fixed II the price of the stock fluctuates III a fixed dollar amount is invested periodically IV a varied dollar amount is invested periodically A I and III B I and IV C II and III D II and IV

Dollar cost averaging requires that an investor make periodic payments (say monthly) of a fixed dollar amount (say $100 per month) to buy a given security. If the price of the security is fluctuating, the average purchase cost per share will be lower for the investor than the simple mathematical average price of the shares over the same period. Dollar cost averaging does not work if the price of the stock remains fixed, nor does it protect against loss i

Which term BEST describes an ETF? Correct Answer A. Stock B. Mutual Fund Incorrect Answer C. Derivative D. Bond

Record your answer Review this concept Print this question The best answer is A. ETF stands for Exchange Traded Funds. These are fund shares that trade like any other stock. They are not mutual fund shares because they cannot be redeemed at any time with the sponsor. Rather, they are negotiable securities.

"SPIDERS" trade on the: A. Pink Sheets Correct Answer B. American Stock Exchange C. Chicago Mercantile Exchange Incorrect Answer D. NASDAQ Stock Market Record your answer Review this concept Print this question The best answer is B. SPIDERS is the trade name for the "SPDR" - Standard and Poor's 500 Index Exchange Traded Fund. SPDRs trade on the AMEX, as do - DIAmonds (Dow Jones Industrial Average Index - symbol = DIA). QQQs NASDAQ 100 Index) trade on the NASDAQ Stock Market. question # 7-2-66-3

Record your answer Review this concept Print this question The best answer is B. SPIDERS is the trade name for the "SPDR" - Standard and Poor's 500 Index Exchange Traded Fund. SPDRs trade on the AMEX, as do - DIAmonds (Dow Jones Industrial Average Index - symbol = DIA). QQQs NASDAQ 100 Index) trade on the NASDAQ Stock Market.

"SPIDERS" trade on the: A. Pink Sheets Correct Answer B. American Stock Exchange C. Chicago Mercantile Exchange Incorrect Answer D. NASDAQ Stock Market question # 7-2-66-3

Record your answer Review this concept Print this question The best answer is B. SPIDERS is the trade name for the "SPDR" - Standard and Poor's 500 Index Exchange Traded Fund. SPDRs trade on the AMEX, as do - DIAmonds (Dow Jones Industrial Average Index - symbol = DIA). QQQs NASDAQ 100 Index) trade on the NASDAQ Stock Market.

Which statements are TRUE regarding a Roth IRA? I Roth IRAs allow a greater contribution than Traditional IRAs II Roth IRA contributions are not tax deductible III Distributions from a Roth IRA are not taxable if the investment is held for at least 5 years IV The legal maximum contribution amount can be made to both a Roth IRA and a Traditional IRA annually A I and III B I and IV C II and III D II and IV

Roth IRAs, introduced in 1998, are an alternate to the Traditional IRA. Both allow the same contribution amount - a maximum of $5,500 per person in 2017 for individuals under age 50. If one contributes the maximum to a Traditional IRA, a contribution cannot be made to a Roth IRA; and vice-versa. Roth IRA contributions are not tax deductible. However, all distributions from a Roth IRA made after age 59 1/2 are 100% excluded from taxation as long as the investment has been held for 5 years. Compared to a Traditional IRA which allows a tax deduction for the contribution, a Roth contribution is not tax deductible. The benefit is that when distributions commence from a Roth IRA, there is no tax due (in contrast, distributions from Traditional IRAs are taxable).

To sell a variable annuity, what license(s) is (are) needed? A Series 6 only B Series 7 only C Series 6 or Series 7 D Series 6 or Series 7 plus a state insurance license Previous Next

Search Question Feedback The best answer is D. Because variable annuities are both a securities and insurance product, a State insurance license is needed, in addition to the Federal Series 6 (Investment Company Securities) or Seri

A client surrenders a variable annuity contract 5 years after purchase because of poor performance. Any surrender fee imposed: A increases cost basis B reduces cost basis C is deductible D is not deductible Previous

Search Question Feedback The best answer is D. If a customer surrenders a variable annuity contract early (typically due to poor performance or a pressing financial need), then the customer's cost basis is the amount invested and the sale proceeds is the amount received on redemption. Any loss is deductible as an ordinary loss, but any portion of the loss due to the surrender fee is not deductible! If a customer invested $50,000 in a variable annuity and redeemed it when the NAV was $40,000, however the customer only received $37,000 because a $3,000 surrender fee was imposed, then of the $13,000 ordinary loss, $10,000 is deductible and $3,000 is non-deductible.

Which statements are TRUE regarding mutual funds? I That day's closing price is the basis for fund purchase price computations II That day's closing price is the basis for fund redemption price computations III The next day's closing price is the basis for fund purchase price computations IV The preceding day's closing price is the basis for redemption price computations A I and II B III and IV C I and IV D II and III Previous

The best answer is A. An order placed to buy or redeem mutual fund shares is "filled" at that day's closing Net Asset Value adjusted by any sales charges or redemption fees.

The minimum price at which an open end fund share can be purchased is: A Net Asset Value B Net Asset Value plus a commission C Market Price D Market Price plus a commission Previous

The best answer is A. Mutual fund (open-end management company) shares are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a "sales load." For a "no load" fund, the customer would simply pay Net Asset Value - this is the minimum price for an open-end fund. This contrasts to a closed end fund, where the fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed-end fund share is purchased at the prevailing market price plus a commission.

An individual earning $60,000 in 2017 makes an annual contribution of $2,000 to a Traditional IRA. Which statement is TRUE? Correct Answer A. This person can contribute a maximum of $3,500 to a Roth IRA B. This person can contribute a maximum of $4,500 to a Roth IRA Incorrect Answer C. This person can contribute a maximum of $5,500 to a Roth IRA D. This person is prohibited from contributing to a Traditional Individual Retirement Account in that year Record your answer Review this concept Print this question

The best answer is A. The maximum permitted annual contribution to a Traditional IRA or Roth IRA for an individual is $5,500 total in 2017. This can be divided between the 2 types of accounts. In this case, since $2,000 was contributed to the Traditional IRA, another $3,500 can be contributed to a Roth IRA for that tax year. Also note that this individual's income is too low for the Roth IRA phase-out (which occurs between $118,000 and $133,000 for individuals in 2017).

An individual earning $60,000 in 2017 makes an annual contribution of $2,000 to a Traditional IRA. Which statement is TRUE? Correct Answer A. This person can contribute a maximum of $3,500 to a Roth IRA B. This person can contribute a maximum of $4,500 to a Roth IRA Incorrect Answer C. This person can contribute a maximum of $5,500 to a Roth IRA D. This person is prohibited from contributing to a Traditional Individual Retirement Account in that year Record your answer Review this concept Print this question The best answer is A. The maximum permitted annual contribution to a Traditional IRA or Roth IRA for an individual is $5,500 total in 2017. This can be divided between the 2 types of accounts. In this case, since $2,000 was contributed to the Traditional IRA, another $3,500 can be contributed to a Roth IRA for that tax year. Also note that this individual's income is too low for the Roth IRA phase-out (which occurs between $118,000 and $133,000 for individuals in 2017).

The best answer is A. The maximum permitted annual contribution to a Traditional IRA or Roth IRA for an individual is $5,500 total in 2017. This can be divided between the 2 types of accounts. In this case, since $2,000 was contributed to the Traditional IRA, another $3,500 can be contributed to a Roth IRA for that tax year. Also note that this individual's income is too low for the Roth IRA phase-out (which occurs between $118,000 and $133,000 for individuals in 2017).

The primary function of the investment adviser is to: A manage the fund B set the investment objective for the fund C safekeep the assets of the fund D prepare the financial statements of the fund Previous

The best answer is A. The primary function of the investment adviser is to manage the fund within its stated objective - choosing the securities to be purchased and sold in the fund portfolio. For this, the adviser is paid a management fee. The custodian bank safekeeps the assets of the fund. The custodian bank can also perform the clerical functions of transfer agent and paying agent. The investment objective of the fund is initially set by the sponsor. The financial statements of the fund are prepared by the outside accountants.

of variable annuities represent an investment interest in underlying: A mutual fund shares B life insurance policies C direct participation programs D pension fund investments Previous Next

The best answer is A. To fund variable annuity contracts, the monies paid in by contract holders are invested in a separate investment account that buys designated mutual fund shares. Thus, the separate account "accumulation units" really represent an interest in underlying mutual fund shares. The contract holder has the choice of different types of mutual fund investments that can be made by the separate account.

Any changes in value of a variable annuity unit are directly related to changes in the: A Standard and Poor's 500 Average B Value of the securities funding the separate account C Consumer Price Index D Dow Jones Averages

The best answer is B. Since the separate account of investments funds a variable annuity, annuity unit values are directly influenced by changes in the values of the securities in the separate account.

All of the following statements are true about SEP IRAs EXCEPT: A the plan is established by the employer B the plan is only available to companies with 100 or fewer employees C the annual contribution percentage can be changed D the maximum annual contribution is significantly greater than for a Traditional or Roth IRA Previous Next

The best answer is B. A SEP IRA is a "Simplified Employee Pension" plan that must be set up by the employer, with deductible contributions made by the employer. They are easier to set up and administrate than regular pension plans and allow for a very large annual contribution (25% of income statutory rate; 20% effective rate, capped at $54,000 in 2017). The employer sets the actual contribution percentage, which must be the same for all employees. A major advantage of SEP IRAs is that there is flexibility regarding the annual contribution to be made - the employer can change the contribution percentage each year. So this plan is a good option for a smaller business that has variable cash flow. Also note that this type of plan is available to any size business - in contrast, SIMPLE IRAs are only available to business with 100 or fewer employees.

Distributions from variable annuity contracts at retirement age are: A non-taxable B taxable as ordinary income on any amount above the customer's cost basis C taxable as long term capital gains on any amount above the customer's cost basis D 100% taxable Previous

The best answer is B. Contributions to variable annuity contracts are not tax deductible. Therefore, they go into the separate account as "after-tax" dollars and are considered to be the "cost basis" in the account for tax purposes. Any "build-up" (earnings) in the account is tax deferred. When distributions commence, only the "build-up" portion is taxed - this is the amount above the cost basis in the account.

If the actual interest rate earned in the separate account underlying a variable annuity contract is lower than the "AIR," the annuity payment: A will increase B will decrease C is unaffected D is fixed at a minimum amount Previous

The best answer is B. The "AIR" is the "Assumed Interest Rate." This is used as an illustration of the annuity payment that will be received if the separate account grows at the AIR. If the assets grow at an interest rate that is higher than the AIR, then the annuity payment will increase. Conversely, if the assets grow at an interest rate that is lower than the AIR, then the annuity payment will decrease.

A customer contributed $20,000 to a variable annuity contract. The account value has grown over the years and the NAV is now $35,000. The customer is now age 60, and takes a lump-sum distribution of $20,000 to pay for expenses. Which statement is TRUE? A The entire $20,000 distribution is not taxable B $5,000 of the distribution is taxable and $15,000 is not taxable C $15,000 of the distribution is taxable and $5,000 is not taxable D The entire $20,000 distribution is taxable Previous

The best answer is C. Variable annuity contributions are not tax-deductible. Earnings in the account build tax-deferred. When distributions are taken, tax is due on the portion that represents the tax-deferred build-up. The portion that represents the original contribution (already taxed dollars) is returned without any further tax due. If a lump-sum distribution is taken, the IRS uses LIFO (Last-In; First-Out) accounting. The Last-In Dollars are the tax-deferred build-up, so these are the First-Out dollars and they are 100% taxable! Any distribution above and beyond the build-up amount is a tax-free return of original capital. In this example, the customer contributed $20,000 and this has grown, tax-deferred, to $35,000. If a lump sum distribution of $20,000 is taken, the first dollars out are the $15,000 of never taxed build-up and this amount is taxable. The remaining $5,000 is a partial tax-free return of the original $20,000 investment (which was not tax deductible).

The essential difference between an open end fund and closed end fund is that a(n): A open-end fund is managed; while a closed-end fund is not managed B closed-end fund is managed; while an open-end fund is not managed C open-end fund has a different capital structure than a closed-end fund

The best answer is C. Both open-end and closed-end management companies use an investment adviser to manage a portfolio within the fund's stated objectives. Open-end funds continuously issue and redeem shares. Closed-end funds have a one-time stock issuance and the fund is closed to new investment. The shares are then listed on an exchange or NASDAQ where they trade. Therefore, open-end and closed-end funds are capitalized differently. Both open-end and closed-end funds compute Net Asset Value per share

Which annuity payout option usually results in the largest periodic payment? A Unit Refund Annuity B Joint and Last Survivor Annuity C Life Annuity D Life Annuity-Period Certain Previous

The best answer is C. The shorter the expected annuity period, the larger the payment. A life annuity lasts only for that person's life - this is the shortest expected period of those given. A life annuity with period certain continues to pay for a fixed time period if the person dies early; a joint and last survivor annuity pays a spouse when one person dies; a unit refund annuity pays a lump sum if a person dies early.

Variable annuity contracts: I have the issuer bear the investment risk II have the purchaser bear the investment risk III are non-exempt securities IV are exempt securities A I and III B I and IV C II and III D II and IV Previous

The best answer is C. Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop. Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus. Typically, accumulation units

A customer wants to switch between 2 different mutual funds within the same "family." You should tell the customer that: A there will be no tax liability B there will be no tax liability if the switch is made within 60 days C there will be no tax liability if all funds are reinvested D taxes will be due if the fund shares that are sold have appreciated

The best answer is D. When a switch is made between two funds, the IRS considers this to be the sale of one fund and the purchase of another fund. If the fund shares that are sold have appreciated, there is capital gains tax liability.

When a switch is made between two funds what is this considered by the IRS

a sale of one fund and purchase of another fund

Which of the following is an Exchange Traded Fund? A SPDRs B REPOs C ADRs D ADSs Previous Close Quiz

earch Question Feedback The best answer is A. SPDRs are "Spiders" - the Standard and Poor's 500 Index exchange traded fund. REPOs are repurchase agreements; ADRs are American Depositary Receipts; and ADSs are American Depositary Shares.