Missed Questions
Fixed UITs invest in
Either Stocks or Bonds
Variable UITs invest in
Mutual Funds
Term Life
Term life insurance is pure insurance with no investment element. For the premium paid, the purchaser is buying life insurance coverage for a fixed time period. At the end of that time period, the policy must be renewed to maintain coverage, typically at a higher premium as the insured individual ages (because of the greater mortality risk). When the purchaser of a term life policy is young, the premium is very low; as that person ages, the premium gets higher and higher.
When a growth stock mutual fund advertises its performance data, which of the following statements are required? I Investment return and principal will fluctuate II An investor who redeems may receive more or less than the original cost III This fund is appropriate only for aggressive investors IV Performance statistics do not reflect taxes and an investor's return may be more or less A. I and II only B. II and III only C. III and IV only D. I, II, III, and IV
The best answer is A. A mutual fund that advertises performance data must include a disclosure statement that investment return and principal fluctuate and that an investor who redeems may receive more or less than original cost. There is no requirement to disclose the type of investor for whom the fund is appropriate; nor to disclose that performance figures do not reflect taxes. Note, however, that performance figures must either reflect the deduction of non-recurring sales charges (up-front sales loads); or must include a statement that these are not reflected, and that their deduction will reduce results.
A balanced fund's investment manager anticipates a sharp rise in the stock market. The manager's near-term strategy would be to buy: A. common stocks B. preferred stocks C. corporate bonds D. both common stock and corporate bonds
The best answer is A. Balanced funds invest in a "balance" of equities and debt securities. The theory is that these 2 classes of securities "balance" each other out in changing economic times. In good times, stocks will outperform bonds and the manager will increase the equity portion of the portfolio and decrease the bond portion. In bad times, bonds will outperform stocks and the manager will increase the bond portion of the portfolio and decrease the equity portion. Thus, the portfolio should give a better overall return as the economy moves through its cycle (in theory, anyway!).
Which of the following statements concerning mutual fund dividends is correct? A. Dividend distributions are made from net investment income B. Dividend distributions must be made at least semi-annually C. Dividend distributions are one of the largest operating expenses for a fund D. The sources of dividend distributions include appreciation on assets in the investment portfolio
The best answer is A. Dividend distributions are made from net investment income, which is gross investment income less all operating expenses. They are not a fund operating expense and can be paid as frequently as the fund wishes. The source of dividend distributions paid by the fund is the income earned from the fund's portfolio. This income includes dividends received from stock investments and interest received from bond investments. Asset appreciation cannot be used to pay dividends. If appreciated assets are sold by the fund, the resulting capital gain is reported separately to the shareholder.
On their federal income tax returns, investors must report interest annually from all of the following securities EXCEPT: A. Series EE bonds B. Treasury Bonds C. Treasury Notes D. Series HH bonds
The best answer is A. Series EE savings bonds are long term obligations sold at par and are redeemed with interest paid at maturity. A major benefit of Series EE bonds is that the interest is not taxed until redemption. Series HH bonds, T-Bonds, and T-Notes pay interest semi-annually and the interest is taxable annually at the Federal level.
Which of the following written contracts for a principal underwriter for a mutual fund was properly approved? I A majority of the independent directors voted to approve the contract II A majority of the directors voted to approve the contract III A majority of the outstanding shares voted to approve the contract IV The investment adviser voted to approve the contract
The best answer is A. The contract with the principal underwriter must be in writing. The contract must be approved annually by either a majority vote of the outstanding shares or a majority vote of the members of the board of directors that are independent of the fund distributor.
The custodian bank usually performs all of the following functions for a mutual fund EXCEPT: A. supervising the investment adviser B. mailing proxies to shareholders C. receiving and sending dividends D. holding the securities of the investment portfolio in safekeeping
The best answer is A. The custodian bank safeguards the cash and securities in the investment portfolio. The custodian bank also typically is appointed as transfer agent and paying agent. In this function, it maintains the list of shareholders, issues and redeems shares, and mails out dividend and capital gains distributions, proxies, and semi-annual reports. The custodian bank does not supervise the investment adviser. This function is performed by the Board of Directors of the fund.
Which of the following is TRUE about variable annuities? A. The owner's cost basis is the premium payments B. The issuer invests the premiums in its general account C. The owner assumes the mortality risk D. The issuer assumes the investment risk
The best answer is A. The premiums paid into the separate account for a non-qualified variable annuity are not deductible. These are "post-tax" dollars and represent the customer's cost basis in the contract. Both earnings and capital gains in the separate account are reinvested during the accumulation phase and build tax deferred until payout. These are "pre-tax" dollars. At payout, only the portion of each payment attributable to the "build-up" (pre-tax dollars) is now taxable at ordinary income tax rates. The cost basis (premiums paid into the contract) is a tax-free return of capital invested (since these are post-tax dollars).
Which of the following statements describes a universal life insurance policy? A. The policy owner can change the schedule of premium payments B. The cash value is invested in equities in separate accounts C. The death benefit is fixed and guaranteed for the insured's entire life D. Premium payments are low for a young insured and increase with age
The best answer is A. With a universal life insurance policy, the policy owner can change the schedule of premium payments. After the cash value increases, the owner can skip a premium payment or the policy owner can use the cash value to buy additional insurance. The cash value is not invested in equities, but is invested in the insurer's general account. Whole life offers a fixed death benefit that is guaranteed for the insured's entire life. Term life has low premiums for young insured individuals, but the premiums increase with each renewal as that person ages.
When the issuer of a bond does not provide the investor with a bond certificate, the bond is issued in what format? A. Coupon B. Book Entry C. Registered D. Fully registered
The best answer is B Coupon bonds have a bond certificate and interest coupons. Registered (or "fully registered") bonds have no coupons, but they do have a bond certificate. Book entry bonds have no certificate; the Transfer Agent maintains the only record of ownership and automatically sends interest payments to the owner of record.
When a registered representative receives a sell order from a customer, which of the following must be noted on the order ticket?I Whether the securities are in good, deliverable formII Where the customer wants the money sent after saleIII Discussion of the location of the securitiesIV Whether the customer is subject to backup withholding taxes A. I and II only B. I and III only C. II and III only D. III and IV only
The best answer is B. At the time a customer gives an order to sell, the registered representative must note on the order ticket whether the securities are in good, deliverable form; and that the representative asked the customer about the location of the securities and the customer's ability to deliver the securities to the member within 2 business days. Also note that this rule really does not apply to customer orders to redeem mutual fund shares, since there are no physical stock certificates issued. It would apply to sell orders for closed-end fund shares that trade like any other stock. Finally, with a Series #6 license, you cannot accept orders to trade closed-end fund shares (a Series #7 is needed), so why is this asked on the exam??!!
When deposits or withdrawals of over $10,000 in cash occur in a customer's account, a securities firm is required to take what action? A. Provide a customer with an opt-out notice B. Submit a Currency Transaction Report (CTR) to FinCEN C. Submit a Suspicious Activity Report (SAR) to FinCEN D. Develop procedures to prevent misuse of nonpublic information
The best answer is B. Deposits or withdrawals of over $10,000 in cash in a customer's account require the submission of a CTR to FinCEN within 15 days. Such deposits and withdrawals are not necessarily suspicious. If such a deposit or withdrawal is suspicious, an SAR report must be filed with FinCEN as well.
The premiums that are invested in a separate account for a variable product can be invested in which of the following ways? A. Direct investment in fixed annuities and indirect investment in mutual funds B. Indirect investment in mutual funds and direct investment in stocks and bonds C. Direct investment in fixed annuities and indirect investment in limited partnerships D. Direct investment in stocks and bonds and indirect investment in limited partnerships
The best answer is B. Direct investment means that the variable annuity separate account is structured as a management company that makes "direct" investments in common stocks and bonds. Indirect investment means that the variable annuity separate account is structured as a unit investment trust that buys shares of a designated mutual fund. Thus, the separate account is making indirect investments in common stocks and bonds via the purchase of the mutual fund shares. Variable annuity separate accounts do not invest in fixed annuities, nor in illiquid limited partnerships.
Under SEC Rule 35d-1, if a mutual fund wishes to advertise itself as a growth fund, what percentage of its assets must be invested in growth stocks? A. 75% B. 80% C. 90% D. 100%
The best answer is B. If a mutual fund wishes to advertise itself as a particular type of fund, it must have at least 80% of its assets invested in that type of security under SEC Rule 35d-1. Also, do not confuse this with the Investment Company Act of 1940 requirement that a mutual fund have at least 75% of its assets invested in securities as one of the requirements to be a "diversified" fund.
For the past year, the yields on new issues of preferred stock have been falling. Which of the following statements concerning preferred stock issued last year are correct? I Prices are now higher II Prices are now lower III Yields are now higher IV Yields are now lower A. I & III only B. I & IV only C. II & III only D. II & IV only
The best answer is B. If yields on new issues have fallen in the past year, market interest rates must have also been falling. When this happens people bid up the prices of current outstanding preferred stock in the market (I). As these prices rise, yields fall (IV) to the current market levels. Remember: as prices go up, yields go down.
During the payout period of a fixed annuity contract, the annuitant assumes: A. mortality risk B. purchasing power risk C. expense risk D. investment risk
The best answer is B. In a fixed annuity, the insurance company assumes mortality risk, expense risk and investment risk.Mortality risk is the risk that the purchaser lives longer than the insurance company expects, and the insurance company is obligated to pay for as long as that person lives.Expense risk is the risk that the insurance company's expenses increase faster than expected - the insurance company caps the expenses that it can charge against the annuity. If these increase beyond the capped amount, this is the insurance company's problem.Investment risk is the risk that the insurance company's return on its investments does not keep pace with its payment obligations to fixed annuity holders. If its investments fare poorly, the insurance company does not reduce the amount of the fixed annuity payments. With a fixed annuity, the purchaser assumes purchasing power risk - the risk of inflation. If there is inflation, the monthly annuity payments do not increase, so the annuitant's purchasing power declines over time.
Which of the following statements concerning initial public offerings (IPOs) is correct? A. With IPOs, proceeds of the offering do not go to the issuer B. IPOs are offered OTC, rather than on an exchange C. IPOs only occur after a company's stock is publicly traded D. IPOs are usually large trades by an investment banking firmWhich of the following statements concerning initial public offerings (IPOs) is correct?
The best answer is B. Initial Public Offerings are made OTC, in a managed offering where an underwriter manages the sale of the issue to the public. The net proceeds of the offering are received by the issuing company. Once the offering is completed, the underwriter "closes the books" on the deal and the shares are either listed on an exchange or trade OTC. Therefore, the IPO occurs before the shares are publicly traded, making Choices c and d incorrect.
Variable life policies have which characteristics? I Fixed premium amounts II Variable premium amounts III Fixed coverage amounts IV Variable coverage amounts A. I & III only B. I & IV only C. II & III only D. II & IV only
The best answer is B. Premiums paid into a variable life policy are fixed amounts (e.g., $100 a month for 120 months), similar to a whole life policy. The insurance company invests the money in a separate account to provide the death benefit, instead of investing the premiums in its general account. These policies offer a minimum guaranteed death benefit; however, the death benefit will increase if the separate account investments perform better than anticipated. Thus, premiums are fixed, while death benefits can vary depending upon separate account performance.
Joe purchased a variable annuity for $100,000, but he died at age 52 before the annuity reached the payment stage. At that time, the NAV is $140,000 and this death benefit is paid to Joe's younger sister. What is the tax consequence to the sister of receiving this death benefit? A. The sister will receive the death benefit of $140,000 with no income tax liability B. The sister must report $40,000 of the death benefit as ordinary income C. The sister must report $100,000 of the death benefit as ordinary income D. The sister must report $140,000 of the death benefit as ordinary income
The best answer is B. Remember that the "build-up" in the separate account has not yet been taxed - and when funds are distributed from the account, someone has to pay the income tax on the build-up portion. In this case, the cost basis is $100,000 and the build-up is another $40,000. When the $140,000 is paid to the sister, the sister must report the $40,000 build-up amount as ordinary income. There is no 10% penalty tax on a death benefit. Also note that the $140,000 amount is also included in Joe's estate for estate tax purposes, but this is not asked in the question.
For a variable annuity, all of the following fees and expenses are imposed annually on the separate accounts EXCEPT: A. Administrative expenses B. Sales load C. Mortality risk charge D. Investment management fee
The best answer is B. The sales charge is imposed at the time of purchase and is not an annual charge to the separate account. The charges that are imposed annually against net assets include the mortality risk charge; expense risk charge; administrative expense charge; and investment management fee (by the underlying mutual fund).
Which method will most likely enable a corporation to retire its bonds for less than face value? A. In whole call B. Repurchase in the open market C. Sinking fund call D. Redemption at maturity
The best answer is B. When a corporation repurchases its bonds in the open market, they may be selling at a discount, and the corporation could retire the bonds for less than face value. The other methods of retiring bonds require the corporation to pay face value or more.
I-Shares allow investors to invest in stock indexes based on all of the following EXCEPT: A. Industry sector B. Industry performance C. Country D. Market capitalization
The best answer is B. Exchange traded funds based on indexes by industry sector, country, or market capitalization, are known as "I-Shares," as in "Index Shares."
Which of the following transactions does NOT qualify for a tax-free exchange under Section 1035? A. Annuity contract to annuity contract B. Annuity contract to insurance contract C. Insurance contract to annuity contract D. Insurance product to insurance product
The best answer is B. Under Section 1035 of the tax code, tax-free exchanges are permitted between a(n): - annuity exchanged for another annuity (either variable or fixed); or - life insurance policy exchanged for another life insurance policy; or - life insurance policy exchanged for an annuity (either variable or fixed). Note, however, that a Section 1035 tax-free exchange is NOT permitted if a variable annuity is exchanged for an insurance policy. This is true because proceeds paid from a variable annuity are taxable, but proceeds from a life insurance policy are not taxable. Therefore, one cannot convert a variable annuity into a life insurance policy unless the tax is paid on the build-up in the separate account.
The main benefit of incorporation for a common shareholder is the: A. right to decide the amount of dividends to be paid B. ease of ownership transfer C. limitation on loss to the amount invested D. permanence of the corporate form
The best answer is C A major advantage of incorporation is the limited liability or the lack of personal liability on the part of the owners. The owners risk only the amount of their investment and not their other personal assets. The other main business form is a partnership, and if one is a general partner, he or she has unlimited liability. The dividend decision is made by the Board of Directors of the company - not the shareholders. Corporate shares are easy to transfer to someone else - this is a benefit, but it is the the "main" benefit of incorporation.
Which of the following reasons make companies likely to issue convertible preferred stock? A. The companies sell additional shares of common stock more easily B. Exercising conversion rights dilutes the common stockholders' ownership C. Convertibility means preferred stockholders will accept a lower stated dividend D. The companies receive additional capital when the shares are converted
The best answer is C Since the conversion privilege gives the holders of convertible preferred stock the right to exchange for common stock at a fixed price, this benefit becomes valuable when the common stock price rises. Holders of this type of preferred stock will readily accept a lower stated dividend rate as compared to non-convertible preferred stock to get the benefit of conversion. Exercising conversion rights does dilute common stockholders' positions (there are more common shares over which earnings are spread). The existing shareholders must vote to approve the issuance of convertible preferred stock, because of this potentially dilutive impact. They approve it because they feel that the company will be able to use the additional capital profitably, which will ultimately increase the common stock price. When holders of preferred stock convert to common stock, the company does not receive additional capital. The company received the capital at the point when the convertible preferred was sold to the public.
Which of the following statements are TRUE about 529 Plan accounts? I Contributions are tax deductible. II Rollovers are permitted between family members III Investment growth is tax-free IV Distributions must be used to pay for higher education only A. I and II only B. I and IV C. II and III D. II, III, IV
The best answer is C. 529 Plans termed "municipal fund securities" because they are State established plans that allow for contributions that are invested in designated mutual funds. The plan assets are used to pay for higher education expenses; and for up to $10,000 of expenses annually for schooling under the college level. The donor's contributions to the plan are not deductible from Federal taxes; the earnings in the account build tax-free; and when distributions are taken to pay for education expenses, the distribution is tax-free. Beneficiaries may use distributions from a 529 Plan account only to pay education expenses such as tuition, books, fees, room and board. 529 plans allow rollovers between family members. Contribution limits are set by each State and are generous. Contributions above the Federal gift tax exclusion amount ($15,000 in 2020) will subject the donor to gift tax. A 1-time gift of 5 times the exclusion amount may be given without gift tax (5 x $15,000= $75,000 in 2020).
The ex-dividend date for open-end investment company shares is: A. two business days after the record date B. four business days before the payment date C. the date designated by the fund board of directors D. the day after the company receives payment of dividends from portfolio securities
The best answer is C. Because mutual fund shares do not trade, the ex-date is not set by an exchange. Rather, the ex-date for a mutual fund is set by the Board of Directors of the fund. The ex-date for mutual fund shares is the business day following the record date - this is the date the fund actually pays out the distribution. This is the first day that an order placed to buy fund shares will no longer entitle the purchaser to the dividend.
Exchange Traded Funds (ETFs) are: I registered under the Investment Company Act of 1940 as closed-end management companies II registered under the Investment Company Act of 1940 as open-end management companies III regulated by the SEC and FINRA IV regulated by FDIC and the Department of Treasury
The best answer is C. ETFs are almost a "hybrid" type of investment company structure because they allow for the creation of additional shares, like an "open-end" fund; but they are listed and trade like a "closed-end" fund. Technically, most ETFs are structured as open-end investment companies, since they allow for the creation of additional shares in minimum "creation units" of $50,000 - $100,000. If the shares are trading in the market at a discount to NAV, institutional investors can buy new creation units and short the equivalent shares that compose the units, in an arbitrage trade. This mechanism insures that the fund shares will not trade at a discount to NAV. Because new shares can be created, these are registered as open-end funds under the Investment Company Act of 1940. Since ETFs are securities, they are regulated by the SEC and FINRA.
Which of the following employees may be excluded from a Keogh plan? I Employees under 21 years of age II Employees with less than 12 months of service III Part-time and seasonal employees with less than 1,000 hours of service IV Employees that have reached the age of 59 1/2 A. I and II only B. III and IV only C. I, II and III only D. I, II, III and IV
The best answer is C. Keogh plans may exclude employees under age 21, employees with less than 12 months of service and part-time employees that work less than 1000 hours per year. There is no exclusion for employees over age 59 ½.
Which of the following statements concerning borrowing by open-end and closed-end companies is TRUE? A. Open-end and closed-end companies can borrow using their portfolio securities as collateral B. Closed-end companies can borrow using portfolio securities as collateral but open-end companies cannot C. Open-end companies can borrow using portfolio securities as collateral but closed-end companies cannot D. Neither open-end nor closed-end companies can borrow using their portfolio securities as collateral
The best answer is C. Open-end companies can borrow using portfolio securities as collateral but closed-end companies cannot. To raise additional capital, a closed-end company can only issue senior securities such as preferred stock or bonds.
A customer bought $5,000 of a growth stock mutual fund on September 1st and received a distribution of dividends and capital gains on October 31st. How will the distributions be treated for federal income tax purposes? A. The capital gains are taxed as short-term capital gains and the dividends are taxed as ordinary income B. The capital gains and dividends are taxed as ordinary income C. The capital gains and dividends are taxed at the same rate as for long-term capital gains D. The capital gains are taxed as long term capital gains and the dividends are taxed as ordinary income
The best answer is C. The customer's holding period was from September 1st to October 31st, a total of 2 months, but this has no bearing on how distributions from the fund will be taxed to the shareholder. Even though the customer's holding period was less than one year, the capital gains distribution is taxed at long-term capital gains rates (a maximum of 15% or 20% - 15% for individuals who are not in the maximum tax bracket; 20% for individuals who are in the maximum tax bracket). Since the customer owns shares in an equity growth fund, any dividend distributions will qualify for the lower 15% or 20% tax rate as well. Note that if the customer owned a money market fund or a bond fund, the dividend distributions would have been taxed at ordinary income tax rates of up to 37%, since interest received does not qualify for the lower 15% or 20% tax rate.
What is the front-end sales load for mutual fund shares? A. The fees paid to the registered representative selling the shares B. The amount added by the underwriter to the public offering price C. The difference between the public offering price and the net asset value D. The commissions paid to the distributors of the shares by the fund
The best answer is C. The definition of the sales load is the difference between the public offering price and the proceeds invested in the customer's account, which is the net asset value.
Question:Which type of insurance provides a guaranteed cash value? A. Term insurance B. Variable life insurance C. Whole life insurance D. Variable universal life
The best answer is C. The insurance company guarantees the cash value for a whole life policy and includes this guaranteed amount in a schedule in the policy. Term insurance has no cash value. The cash value of variable and variable universal life depends upon the results of the separate account investments, which are not guaranteed.
A customer has $50,000 to invest in a mutual fund with a Net Asset Value per share of $9.42 and a Public Offering Price of $10.30. In the prospectus is the following breakpoint schedule: Purchase AmountSales Charge $0-$10,000 (8 1/2%) $10,001-$25,000 (7 3/4%) $25,001-over (6 1/2%) How many shares of the fund can the customer purchase? A. 4854 B. 4897 C. 4921 D. 4963
The best answer is D Ask price = Bid(NAV)/100% - Sales charge % The customer will pay $10.075 per share. A $50,000 investment will buy $50,000 / $10.075 = 4963 shares.
Which of the following statements concerning municipal securities is correct? A. Interest income is higher than from corporate bonds B. Capital gains are exempt from Federal taxation C. These securities are suitable for investors in all tax brackets D. The interest income is lower than U.S. Government bonds
The best answer is D The nominal yield on municipal bonds is lower than that for both corporate bonds and U.S. Government bonds, because the interest income earned on municipals is exempt from Federal income tax (the big tax bite), while the interest income earned from both corporate and U.S. Government bonds is subject to Federal income tax. Because of this Federal tax exemption, municipal bonds are generally only suitable for customers in high Federal tax brackets. Note that while the interest income from municipal bonds is exempt from Federal income tax, capital gains on municipal bonds are subject to Federal income tax.
Which of the following statements is (are) true about insurance company separate accounts? A. The insurance company holds its separate account investments segregated from those in its general account B. Insurance companies structure most separate accounts as unit investment trusts that will purchase mutual fund shares C. Any offer of an interest in a separate account requires the delivery of a prospectus D. All of the above
The best answer is D. All of the statements are true. The insurance company segregates separate account investments from those it holds in the general account. Most insurance companies structure their separate accounts as unit investment trusts that will purchase mutual fund shares to meet the investment objective for that separate account. Separate accounts can fund both variable annuities and variable life insurance policies. Any offer of an interest in a separate account requires the delivery of a prospectus since separate account interests are defined as non-exempt securities under the Securities Act of 1933.
Which of the following is NOT a potential penalty for insider trading? A. In civil cases, fines of up to three times the profit gained or loss avoided or $1 million, whichever is greater B. Civil suits by persons trading in that security at the time the insider trading occurs seeking restitution of losses incurred or profits forfeited C. Criminal penalties of up to $5 million and 20 years in prison for the person who trades on the inside information D. Criminal penalties of up to $5 million for controlling persons
The best answer is D. Civil penalties for insider trading violations for both the person that traded on the inside information and any "controlling person" are 3 times the profit achieved or loss avoided, or $1,000,000, whichever is greater. Any stockholders who were harmed by that person's insider trading can sue for restitution of losses incurred or profits forfeited. Criminal penalties are imposed for willful violations. For the individual that traded on the information, these are fines of up to $5,000,000 and up to 20 years in jail. For a company that is a controlling person (such as a broker-dealer that "controls" a representative that traded on inside information obtained from that broker-dealer), this is a fine of up to $25,000,000. There is no "jail" for controlling persons since a company can't be put in jail.
FINRA requires registered representatives to do which of the following? I Notify the member firm in writing if he or she wishes to open an account at another broker-dealer II Provide the employing firm with written notification prior to engaging in an outside business activity III Obtain written permission from his or her employer prior to effecting a private securities transaction IV Obtain written approval of each piece of correspondence about securities sent to customers A. I and II only B. III and IV only C. I, II and III only D. I, II, III, IV
The best answer is D. If a representative wishes to open a securities account at another member firm, then prior written notice to the employer is required. Prior written notice to the employer is also required if the representative wishes to engage in an outside business activity. Prior written approval is required if a representative wishes to "sell away" from his or her firm (effecting a private securities transaction from a customer). Finally, each piece of correspondence written by a representative to a customer must be approved by a principal before it is sent out (unless the firm has a correspondence compliance program).
If a variable life policyholder borrows against cash value, which statement is TRUE? A. The amount borrowed is taxable as ordinary income B. The amount borrowed is taxable as capital gains C. The borrowed amount is 60% taxable D. The amount borrowed is not taxable
The best answer is D. Taking out a loan against any asset is not taxable. This includes taking out a loan against the cash value of an insurance policy. Any amount of policy loan reduces the death benefit paid.
When a minority corporate shareholder dies, the corporation: A. must liquidate and distribute assets remaining after paying debts B. need not liquidate but must buy out the deceased shareholder's position C. becomes a limited partnership D. continues as before and the deceased shareholder's stock becomes part of the shareholder's estate
The best answer is D. The corporation, unlike a partnership, does not cease to exist when a shareholder dies. It has continuity of life and is a permanent entity unless dissolved. A shareholder's stock is personal property, which passes through the estate like any other personal property. This does not depend on whether the shareholder is a majority or minority shareholder.
Which statement applies to both fixed and variable life annuities? A. The issuer bears the investment risk B. The issuer can reduce benefit payments if expenses increase above a maximum amount C. The salesperson must register with both the SEC and the State Insurance Department D. Benefit payments can continue for the life of the annuitant
The best answer is D. Under both fixed and variable life annuities, annuitants will receive payments for life. This means that the insurer assumes the mortality risk for both fixed and variable life annuities. The insurer who issues a fixed annuity also bears the investment risk, but the issuer of a variable annuity does not. Insurers who offer both fixed and variable annuities offer expense guarantees and will not reduce benefit payments merely because expenses increase. The salesperson for a variable annuity must register with both the SEC and the State Insurance Department. A salesperson for a fixed annuity must register only with the State Insurance Department.
A fund's financial report includes which of the following? I Schedule of investments II Statement of assets and liabilities III Income and expense statement IV Statement of changes in net assets A. II and III only B. I, II and III only C. II and IV only D. I, II, III and IV
The best answer is D. A mutual fund must send its financial statements to shareholders semi-annually. These statements include an income statement; balance sheet (assets and liabilities); a listing of all fund holdings at current market value; and a statement that reconciles the difference between period beginning net assets and period ending net assets.
Which statements concerning variable universal life policies are correct? A. Premium amounts are fixed and coverage amounts can vary B. Premium amounts can vary and coverage amounts are fixed C. Premium and coverage amounts are fixed D. Premium and coverage amounts can vary
The best answer is D. Universal life policies allow the policy owner to change premium payments up or down to buy a higher or lower death benefit. With a variable universal life policy, the insurer invests premium dollars in a separate account to provide the death benefit. These policies offer a minimum guaranteed death benefit; however, the death benefit will increase if the separate account investments perform better than anticipated. Thus, premiums may vary, and the death benefit may vary, depending upon separate account performance.
Universal Life
Universal life combines elements of term life and whole life policies. The premium is broken down into an insurance element (the term component) and a savings element that is invested in the insurance company's general account (savings component). This "cash value" is invested in the insurer's general account and the policy owner's account is credited for the interest income earned on the general account. This rate of return can vary from year to year. The policy owner can use cash value to increase the death benefit or to skip some premium payments.
Variable Life
Variable life products invest a portion of the premium in a separate account rather than the general account, and the investment return of the separate account will determine the amount of insurance coverage, which can vary. Variable life is similar to whole life, except that there is no guarantee of investment return. Both have a fixed annual premium, are permanent insurance, and build cash value.
Whole Life
Whole life insurance protects the purchaser from increasing premiums as that person ages, and there are no renewals - the policy is good for that person's "whole" life. With a whole life policy, the annual premium is level, and will start out higher than a term life policy. Part of the premium is invested in the insurance company's general account and is guaranteed to grow at a fixed rate. As the general account investment portion grows, the policy builds "cash value" that can be borrowed. Any borrowed funds reduce the benefit payment upon death.
Class A shares
are the "traditional" mutual fund shares. The shares are sold with an "up front" sales charge and have no, or very low, annual 12b-1 distribution fees.
Class C shares
were a later development. They charge no up-front sales charge; no CDSC; and no redemption fees. However, they charge a very high annual 12b-1 fee (typically .75% annually).
Class B shares
were created when Rule 12b-1 was passed in 1980. This was another way of buying into the same fund, but now there is no up-front sales charge. Instead, there is a redemption fee that declines annually, and which is eliminated totally if the fund is held for a minimum number of years (usually 5-7 years). This is called a "CDSC" - Contingent Deferred Sales Charge. However, these funds impose a relatively high annual 12b-1 fee (typically .50% annually). Once the time period to eliminate the CDSC is completed, these shares convert to A shares, which have no, or very low annual 12b-1 fees.
