Quiz on Questions you Got Wrong (88%)

An investor desiring safety of principal, modest returns, and having a 5-year investment horizon should choose which of the following?

T Notes Treasury notes best suit the investor's objective of safety and expectation of modest returns. They have two-to-ten year maturities suitable to his investment time horizon as well.

If the current market value of a 5% callable corporate bond goes up, which of the following is true?

The current yield will decrease. Rationale: Current yield is calculated by taking the annual interest of the bond and dividing it by current market value. In this example the 5% coupon will pay $50.00 of interest each year. If we start with a current yield calculation of $50.00 divided by $1000, the current yield is 5%. If we increase the current market value to $1050, the current yield calculation is $50.00 divided by $1050 and the current yield has decreased 4.76%.

Which of the following is a characteristic of bearer bonds?

They have interest coupons attached to the bond certificate. Bearer bonds, which are not registered to a specific holder, must have the interest coupons attached to the bonds.

You plan to obtain a loan at your local bank for which you will use your 500 shares of ABC stock as collateral. To determine how much collateral value it will assign to the stock, the bank will check the Federal Reserve Board's Regulation:

U. Regulation U is the regulation governing banks and the amount of money they can lend to customers using securities as collateral.

A client purchasing a single premium deferred variable annuity would expect to see that the contract called for

a contingent deferred sales load In almost all cases, single premium deferred variable annuities are sold with a contingent deferred sales load (CDSL). There is no maximum sales charge for variable annuities; the rule only states that the sales charge must be reasonable.

Your customer has his own sole proprietorship. He and his wife are the only full-time employees. He would like to start a retirement plan for his business but would like to have access to the funds in the account by means of loans. You would recommend:

a solo 401(k) plan. The solo, or self-employed, 401(k) plan offers flexible contributions and loans on the principal. It is for sole proprietorships that have no full-time employees but proprietor and spouse.

An investor is looking into the purchase of Series EE bonds through payroll deduction at his place of employment. If the investor decides to purchase the bonds, he would receive the earned interest:

at redemption. Interest on Series EE bonds is received at redemption of the bonds. Series EE bonds are purchased at face amount, and interest is credited monthly and paid at redemption (or maturity).

All of the following are true regarding nonqualified deferred compensation plans EXCEPT:

employees may use accumulated funds as collateral for a bank loan. Deferred compensation is a promise made by an employer to defer a certain amount of an employee's salary (that he or she will receive) upon retirement. The employee has no rights to the money until retirement, death, or disability, and thus cannot use it as collateral.

Your customer wishes to increase and diversify his equity holdings as simply as possible. He is not risk averse, and he would like to gain some returns from growth, but he does not want to engage in a large number of transactions. You might suggest that he:

invest in a blend/core fund. The blend/core fund would allow the investor to diversify his equity holdings and, in exchange for the usual risks of equity securities, make some possible gains from growth while investing in a single mutual fund.

The record date:

is set by the issuing corporation to determine which stockholders will receive a declared dividend. The record date is set by the corporation, at which time a list of stockholders who will receive a dividend is compiled.

With fluctuating interest rates, the price of which of the following will fluctuate most?

long term bonds The longer the term to maturity, the greater the risk to the bondholder, resulting in greater price fluctuation for long-term bonds.

An investor might expect to receive the greatest gain on an investment in a corporate bond by purchasing:

long-term bonds when interest rates are high. NOT long-term bonds when interest rates are low. If an investor purchases bonds when market interest rates are high, a drop in interest rates will lead to a corresponding increase in bond value. Long-term debt instruments will fluctuate to a greater degree than those with short-term interest rates. Thus, long-term debt offers the greater chance at gain. YOU'RE AN IDIOT. ONCE YOU BUY THE BOND THE INTEREST RATE WILL REMAIN HIGH EVEN IF THE INTEREST RATE ON OTHER BONDS DROPS. SO THERE IS NO REASON TO PICK A LONG TERM BOND WITH A LOWER INTEREST RATE

DMF Company has convertible bonds (convertible at $50) outstanding. The current market value of DMF's stock is $42. The bond indenture contains an antidilution feature. If DMF declares a 10% stock dividend, the new conversion price will be

lower than $50 With an antidilution feature, the issuer will increase the number of shares available upon conversion if the company declares a stock split or stock dividend. This is done to keep the bondholder whole. Originally, the bond converts to 20 shares ($1,000 ÷ 50), because of the 10% stock dividend, the bond needs to convert to 22 shares, which means the conversion price is reduced to $45.45 ($1,000 ÷ 22 = $45.45).

The Investment Company Act of 1940 requires that mutual funds pay dividends from their:

net investment income. Mutual fund dividends are paid from net investment income (interest received plus dividends received minus expenses).

More on economics stuff

raising the serve requirement DRIVES UP INTEREST RATES and CONTRACTS the economy reducing the reserve requirement has the OPPOSITE EFFECT (reserve requirement is the amount of money backs are required to hold in reserve requirements at the FED Raising or lowering the reserve requirements is so influential that it has a multiplier effect (an exaggerated effect on the money supply) and is the last monetary policy initiative that the FED pursues as a result Higher federal funds rate (rate banks get for borrowing overnight from other banks to meet reserve requirement for amounts of one million or more) mean that there is LESS available cash in the economy as banks want a higher interest rate lower federal funds rate could result from an excess in deposits Raising the discount rate INCREASES THE COST OF MONEY AND CONTRACTS THE ECONOMY Buying t-bills in open market operations INCREASES THE AMOUNT OF MONEY IN THE SYSTEM AND BENEFITS THE ECONOMY as banks make more loans and offer lower interest rates. First monetary initiative FED will pursue. SELLING T-Bills takes money out of the system and contracts the economy LOWERING INTEREST RATES INCREASES THE MONEY SUPPLY IN THE SYSTEM AND GROWS THE ECONOMY and is BULLISH FOR THE STOCK MARKET

Interest rates in the United States have dramatically increased. This will tend to: REVIEW THIS QUESTION

result in a surplus in the balance of payments. NOT a deficit High U.S. interest rates will attract foreign investment money into the United States and result in a balance of payments surplus. This will have the effect of strengthening the dollar and thus weakening foreign currencies compared to the dollar. Basically, a surplus is when MORE money is flowing INTO the country than out a deficit is when more money is flowing OUT OF the country than in Largest component of the balance of payments is the balance of trade (the import and export of merchandise). On the US credit side are sales of American products to foreign countries that cause dollars to flow into the country. on the debit side are US purchases of foreign goods that cause US dollars to flow out of the country. When debits (imports) exceed credits (exports), a DEFICIT in the balance of payments occurs when credits exceed debits a SURPLUS exists THEIR EXPLANATION DEFICIT OCCURS WHEN INTEREST RATES IN ANOTHER COUNTRY ARE HIGH AS MONEY FLOWS TO WHERE IT WILL EARN THE HIGHEST RETURN SO FOR THIS ANSWER, INTEREST RATES IN THE US ARE UP SO INTEREST RATES HERE WILL CAUSE INVESTORS FROM OTHER COUNTRIES TO INVEST HERE AND CAUSE A SURPLUS

Regarding communications, filing with FINRA is required for

retail communication that includes a ranking by an independent entity NOT radio interview Any retail communication that includes a ranking, whether independent or not, must be filed with FINRA. The radio interview is a public appearance with no filing requirements as there is no indication of any script, slides, or handouts (which would require filing). SO NO FILING REQUIREMENTS FOR PUBLIC APPEARANCES

Agency issues

taxed at federal and state level

A qualified profit-sharing plan offered by a corporation to its employees has all of the following features EXCEPT:

the amount of the contribution is tax deductible to the employee. NOT the employee may elect to rollover a lump-sum distribution into a traditional IRA. NOT the corporation may elect to omit or reduce contributions in years when profits from business operations fall. (So both those things are true) The amount of the contribution to the plan is deductible to the employer, not the employee. A major difference between a profit-sharing plan and a pension plan is that contributions to the former are not mandatory.

All of the following statements regarding Treasury STRIPs are true EXCEPT:

the interest is taxed as a capital gain. The interest on the bond is paid at maturity but it is taxed as interest income over the life of the bond, not as a capital gain.

A generic ad for an investment company placed by a broker-dealer would contain:

the name of the broker-dealer placing the ad, but not the name of the investment company. Generic advertising of investment companies presents a nonspecific introduction to investment company shares. A specific fund or investment company is not mentioned in generic advertising, but the broker-dealer who is placing the ad must be named. SO investment company in this instance = the specific fund

All of the following statements regarding government and agency securities are true EXCEPT:

they are always directly backed by the federal government. Only GNMAs are directly backed by the federal government. FNMAs and FHLMCs are only indirectly backed but are still considered less risky than corporate debt. Income from all three are taxable at federal, state, and local levels, and all were authorized by Congress. SO agency issues ARE authorized by Congress.

6s 2020 93:20 - 94:16 An investor reads this typical newspaper listing quote on a U.S. Treasury bond with a par value of $1,000. Disregarding transaction costs, if purchasing this bond, the investor would expect to pay:

$945 A buyer would expect to pay the offering price, in this quote, 94.16. Since Treasury bonds are quoted in points and 1/32's, where a point is $10, the price would be $940 plus 16/32 of $10, or $945.

Under FINRA rules, the carrying member, after receiving account transfer instructions from the receiving member must validate the positions in the account within how many business days of receipt?

1 DAY NOT 5 days Within 1 business day following receipt of the transfer initiation form (TIF), the carrying firm must validate the positions in the account and within 3 business days following validation, the carrying firm must complete the transfer of the account. SO within 1 day of receiving TIF, transfer must occur

Which of the following statements is TRUE for an individual calculating taxes on distributions she received from a municipal bond fund for this year?

Any capital gains distributions she received from the fund are taxable at capital gains rates. NOT All distributions she received from the fund, both income and gains, are exempt from federal income tax. Interest in the form of dividends paid from a municipal bond fund would be exempt from federal income tax. Capital gains distributions from the sale of portfolio securities would be subject to capital gains taxes. BECAUSE IT IS A MUTUAL FUND IT IS TAXED AS CAPITAL GAINS YOU DINGBAT

If ABC common stock closed at 20 yesterday and ABC is currently paying a quarterly dividend of $.40, what is the stock's current yield?

Between 5% and 10%. The annual dividend is $1.60 (4 × $0.40). The current yield is the dividend of $1.60, divided by the current price ($20). Thus, the yield of 8% is more than 5% (1/20) and less than 10% (2/20).

All of the following concerning CMOs are true EXCEPT:

CMOs are issued by government agencies. CMOs are created by broker-dealers, who buy pass-through securities from government agencies and government-sponsored corporations, place the certificates in trust, and issue participation interests in the trusts that are tied to specific maturity periods (tranches). Since they are backed by mortgages, they tend to be highly rated.

An investor wishes to start a dollar cost averaging program by investing $100 per month. Which of the following would be the least appropriate investment vehicles for this plan? Closed-end investment company. Exchange-traded fund. Open-end investment company. Variable annuity.

I and II Closed-end investment company shares and exchange-traded funds trade like any other stock. Smaller investment levels involve high commission costs relative to the amount being invested. Also, there are no provisions for rights of accumulation and reinvestment of distributions.

Which of the following describe premiums for a variable life insurance policy? Fixed as to the premium amount. Variable as to the premium amount, depending on the cash value in the account. Fixed as to time of payment. Variable as to time of payment.

I and III Don't confuse variable life, with a universal life policy. VL contracts have fixed, scheduled premiums.

Which of the following 'funds' are not redeemable securities? Hedge funds. Growth funds. Exchange-traded funds. Principal-protected funds.

I and III Hedge funds and exchange-traded funds do not provide for redemption of shares by the fund.

Which of the following are types of preferred stock? Participating. Adjustable price. Callable. Fixed interest.

I and III Preferred stock can be issued as straight, callable, cumulative, convertible, participating, or adjustable rate. There is no fixed interest or adjustable price preferred.

How long is the free-look period for a variable life insurance policy? 10 days after delivery. 10 days after issue. 45 days after delivery. 45 days after application.

I and IV The insurer must extend a free-look period to the owner of a variable life policy for 45 days from the execution of the application, or for 10 days from the time the owner receives the policy, whichever is longer. During the free-look period, the policy owner may terminate the policy and receive all payments made.

Which of the following are characteristics of negotiable jumbo CDs? Issued in amounts of $100,000 to $1 million or more. Always FDIC insured to face value. Always mature in one to two years. Trade in the secondary market.

I and IV NOT I and III Negotiable jumbo CDs are issued for $100,000 to $1 million or more and trade in the secondary market. Most jumbo CDs are issued with maturities of less than a year. The FDIC insures only up to $250,000. SO DO TRADE IN THE SECONDARY MARKET, DONT ALWAYS MATURE IN ONE TO TWO YEARS, ACTUALLY MATURE IN LESS THAN A YEAR

Which of the following would cause an increase in NAV? The fund purchases $10 million in portfolio securities. Investment income is received by the fund. The securities in the portfolio appreciate. Capital gains are distributed by the fund.

II and III Dividends and interest received by the fund and appreciation of the portfolio cause an increase in NAV. The purchase of securities with cash results in no change of NAV because the outlay of cash is offset by the increased value of portfolio securities. Any dividends or gains distributed by the fund would cause a decrease in NAV.

Which of the following statements regarding interest rates and price fluctuations of debt securities are TRUE? Short-term prices fluctuate more than long-term prices. Long-term prices fluctuate more than short-term prices. Short-term interest rates fluctuate more than long-term rates. Long-term interest rates fluctuate more than short-term rates.

II and III Long-term bond prices move more in response to interest rate changes than short-term bond prices because of the compounding effect of interest on bonds with longer maturities. Short-term interest rates fluctuate significantly in response to Federal Reserve Board actions and other changes in interest rates. Although long-term rates also respond and move in the same direction, their movements are not as large.

Which of the following statements regarding corporate zero-coupon bonds are TRUE? Interest is paid semiannually. The discount is in lieu of periodic interest payments. The discount is taxed annually as phantom income. The discount is not taxed until maturity.

II and III The investor in a corporate zero-coupon bond receives the return in the form of growth of the principal amount over the bond's life. The bond is purchased at a deep discount and redeemed at par at maturity. The discount from par represents the interest that will be earned at the maturity date. However, the discount is accreted annually and the investor pays income taxes yearly on the imputed interest.

A variable annuity contract guarantees: a minimum rate of return. fixed mortality expense. capped administrative expense. against investment risk.

II and III. A variable annuity does not guarantee an earnings rate; it lets the investor take the investment risk. However, it does guarantee payments for life (mortality), and normally guarantees that expenses will not increase above a specified level. SO VARIABLE ANNUITY DOES GUARANTEE PAYMENTS FOR LIFE (JUST NOT THE VALUE OF THOSE PAYMENTS)

Which of the following statements regarding sales charges on variable contracts of insurance companies are TRUE? The Conduct Rules call for a maximum sales charge on variable annuities of 8.5% of the purchase payment. The Conduct Rules do not impose a specific maximum on sales charges for variable annuities. Variable life insurance contracts are limited to a maximum sales charge of 9% over the life of the contract. Variable life insurance contracts are limited to a maximum sales charge of 9% over the life of the contract, but not to exceed 20 years.

II and IV Variable annuities' sales charges are held only to a standard of reasonableness. The Investment Company Act of 1940 sets the limits for variable life insurance.

The payout of an annuitized variable annuity account changes from month to month in a manner determined by which of the following? The separate account performance compared to last month's separate account performance. This month's payout compared to the initial payout upon annuitization. The separate account performance compared to an assumed interest rate. This month's payout compared to last month's payout.

III and IV A variable annuity payout is determined by comparing account performance with AIR, and this month's payout with last month's payout.

Which of the following statements characterize the accumulation phase of a variable annuity? The number of accumulation units remains constant as investment continues. The value of an accumulation unit increases only if the separate account outperforms AIR. The number of accumulation units increases as investment continues. The value of an individual accumulation unit depends only on the performance of the separate account, regardless of AIR.

III and IV During the accumulation phase of a variable annuity, the investor is purchasing accumulation units. The number of accumulation units increases each time a periodic payment is made, and their value depends only on the performance of the separate account. AIR becomes a factor only if the account is annuitized.

Bob Smith, who is in his 40s, has just been placed into an extremely generous defined benefit plan at his company. He has decided he no longer needs his variable annuity for retirement purposes and wants to use the money for a trip to Africa. Over the years, he has invested $60,000 in the annuity, and its total value is now $80,000. How much will Bob owe in taxes and penalties if he cashes it in?

Income tax on $20,000 and a $2,000 penalty If an annuity is cashed in, the growth and accumulation portion of its value ($20,000 in this case) is taxable as ordinary income. If the annuitant is under the age of 59½, he must also pay a 10% tax penalty on the growth withdrawn, a penalty of $2,000 in this case.