Series 6 Annuities/ Taxation and Economics

10%

Early withdrawal tax penalty for certain retirement plans

ERISA

Employee Retirement Income Security Act

The rules for ensuring that money will be available in a retirement plan (for paying out to participants during their retirement) are covered by which of the following types of requirements?

Funding.

Office of Supervisory Jurisdiction (OSJ)

A designated office of a member firm where certain management reviews take place, including reviews of customer orders, approval of new accounts and approval of retail communication. Contrast with Branch office.

Simplified Employee Pension Plan

A type of pension plan that combines a corporate pension plan and an IRA. Under a SEP, the employer makes a contribution to the employee's IRA.

To charge an 8.5% sales load, a mutual fund must offer all of the following rights and privileges EXCEPT: I) conversion (exchange) II) breakpoints III) rights of accumulation IV) redemption checks sent within 7 days of request A) I and II B) I and IV C) II and IV D) II and III

B) I and IV conversion (exchange) redemption checks sent within 7 days of request Did you miss the word EXCEPT? Offering conversion privileges is not a must in order to charge 8.5%. Redemption checks must be sent within 7 days of request no matter what the sales charge is. In order to charge 8.5%, the mutual fund must offer breakpoints and rights of accumulation.

Class C shares.

Mutual fund shares that carry a level load are:

Roth IRA

With a ___________, the contributions are not deductible from current income. Withdrawals after age 59½ are tax free, provided the money has been in the account for at least five years beginning with the first tax year for which a contribution was made to any Roth IRA established for the individual. There is no age at which withdrawals must begin or contributions must cease.

U.S. Treasury bills

_________ are issued with 4, 13, 26, and 52-week maturities. There are no 39-week T-bills.

Rider

is a provision or feature that may be purchased separately from an insurance policy to provide additional benefits at additional cost.

The management fees paid by an investment company are part of:

the operating expense of the fund.

broker call loan rate.

When investors purchase stock and other securities on margin, the broker-dealer borrows part of the purchase price from a bank. The interest rate charged the broker-dealer is known as the

TCB wants to offer $7 million worth of common stock in its home state and in three other states. To clear the offer for sale, TCB must file a(n): A) preliminary prospectus. B) offering circular. C) registration statement. D) letter of notification.

C) registration statement. TCB must file a standard registration statement because it is a nonexempt issuer selling securities interstate.

profit-sharing plan

Distributions from a _______ plan are made from the individual's account, reflecting the accrued amount of contributions and earnings on the contributions.

Which of the following is covered by the Securities Investor Protection Corporation? A) Fraudulent transaction. B) Issuer default. C) Market risk. D) Broker-dealer failure.

SIPC protects customer accounts against broker-dealer failure-not market risk, issuer default, or losses due to fraud.

6%

Tax penalty on excess IRA contributions (those above the maximum)

all or none.

The type of underwriting where the deal is cancelled if the underwriter is unsuccessful at placing the entire issue is known as: -The all or none underwriting is unique in that it requires that the entire issue be subscribed to or the deal is called off. It is a type of best efforts underwriting

SEP IRAs

__________ are used primarily by small businesses because they are easier and less expensive to set up than other plans. They are also used by self-employed persons. The employer sets up and administers the SEP IRA through an account held by a bank or another financial institution.

In a period of deflation, corporate bond prices are:

increasing.

In May, an investor bought 100 shares of ABC for $16 per share. If he decides to give the stock to his nephew in December when the stock is selling for $25 per share, what is his nephew's cost basis? A)$41 per share. B)$16 per share. C)$9 per share. D)$25 per share.

$16 per share. The donor of securities will pass his cost basis to the recipient if the market value at the time of the gift is greater than the donor's cost.

Your father purchased $10,000 of ABC stock 10 years ago and purchased an additional $5,000 on April 1. On September 1, when the current market value of the stock is $25,0000, your father passes away and you inherit the ABC stock. On November 1, you sell the stock for $30,000. What do you report on your tax return? A)$5,000 long-term capital gain B)$15,000 short-term capital gain C)$5,000 short-term capital gain D)$12,000 long-term capital gain and a $3,000 short-term capital gain

$5,000 long-term capital gain The holding period for stock inherited is always long-term, no matter when the stock was purchased. The cost basis of the stock is automatically stepped up to the current (fair) market value at the time of death. Therefore, the cost basis for the stock is $25,000 and when it is sold for $30,000 (two months later) it will result in a $5,000 long-term capital gain.

If a corporation's investment account received $100,000 in dividends and $20,000 in interest; how much of the $120,000 received would be subject to taxation? A) $20,000 B) $90,000 C) $120,000 D)$50,000

$50,000 Corporations that receive dividends from investments have a 70% dividend exclusion. This means that out of the $100,000 received, only 30%, or $30,000 is subject to taxation. No such exclusion exists for interest received. Therefore, $30,000 plus $20,000 equals $50,000 subject to taxation.

All-or-None (AON)

(1) A type of order where the client wants the entire order executed or none of it. (2) A type of best efforts underwriting in which the issuer will sell the entire amount, or cancel the entire issue.

Margin

(1) On Margin: The use of credit to finance securities transactions. (2) Account: An account established by a broker-dealer to extend credit to a customer

Market risk

(the risk that investors may lose principal due to price volatility of the overall market) is a systematic risk. This type of risk cannot be diversified away.

Index

1) A statistical benchmark expressed in terms of percentages of a base year or years. For instance, the Federal Reserve Board's index of industrial production is based on 1967 as 100. An index is not an average. 2) A statistical measure of a group of stocks such as the S&P 500. Indices can be broad based (which cover a wide range of companies and mirror the market as a whole) or narrow based (which consists of securities from a particular industry.

Jack Smith, in the 35% tax bracket, has an opportunity to buy a 5.3% municipal bond. What corporate yield would provide an equivalent return? A) 8.15%. B) 3.5%. C) 15.2%. D) 5.3%.

8.15%. To determine the taxable equivalent yield, divide the tax-free yield by the complement of the individual's tax bracket (1 − the tax bracket %). 5.3% / 65% = 8.153. Note: the corporate bond would have to yield more than the municipal bond to provide the same after-tax return, but not almost triple the return, as called for with the 15.2% corporate yield.

C) a back-end sales charge that decreases the longer the investor holds the shares. contingent deferred sales charge, assessed with Class B shares, is a back-end load that decreases over time. Typically, CDSCs begin at 5% or 6% and decrease at the rate of 1% per year invested. If an investor remains in a fund long enough, the charge decreases to 0%. Once the CDSC has dropped to 0%, the shares are typically converted to Class A shares, which not only have no back-end load but also have a lower expense ratio and lower 12b-1 fees. Reference: 4.2.2.3 in the License Exam Manual

A contingent deferred sales charge is best described as:

When an annuitant dies during the accumulation period of a nonqualified annuity, the proceeds exceeding the annuity's cost basis are taxable as ordinary income to the beneficiary.

A customer establishes a nonqualified periodic payment deferred annuity and makes payments for three years. If the customer suddenly dies, which of the following statements correctly identifies the tax consequences to the beneficiary? A) The beneficiary must pay ordinary income tax on proceeds exceeding the cost basis.

If a customer intends to invest an amount just below a breakpoint threshold, he should be informed of the breakpoint discount, as well as the various methods by which he can receive it. place the order as instructed.

A customer with no other mutual fund investments wishes to invest $47,000 in the XYZ Technology Fund. If the Class A shares are eligible for a breakpoint sales charge discount at the $50,000 investment level, the action least appropriate for an agent is to:

Modified Endowment Contract (MEC)

A life insurance policy which has been funded with more money than is allowed under federal tax laws. If a life insurance policy becomes an MEC, it is no longer considered life insurance by the IRS.

Modified endowment contract (MEC)

A life insurance policy which has been funded with more money than is allowed under federal tax laws. If a life insurance policy becomes an MEC, it is no longer considered life insurance by the IRS.

Accretion

A method of adjusting a taxpayer's cost basis of a bond bought at an original issue discount. The annual accretion is treated as interest for tax purposed

Contingent Deferred Sales Charge (CDSC)

A method of assessing a sales charge in a variable annuities and mutual funds where the actual percentage of the sales charge is dependent upon the length of time that the investor holds the contract and is payable upon redemption of the shared (Also, referred to as a Back-End Load) see Class B shares

Dividend Exclusion

A rule that allows corporations to subtract dividends received from income for tax purposes. Dividend exclusion is permitted for domestic corporations in the United States and allows for the exclusion of a percentage of dividend income received from other domestic corporations under income tax provisions. 70% dividend exclusion

Wash Sale

A sale of securities at a loss with the subsequent disallowance of the loss by the IRS. If an individual sells a security at a loss and, within 30 days, repurchases substantially the same security, the IRS with consider it a wash sale and will disallow the loss.

American Depository Receipt (ADR)

A security issued by a U.S. bank in place of the foreign shares held in trust by that bank, thereby facilitating the trading of foreign shares in the U.S. markets

Defensive stock

A stock that is resistant to changes in general economic activity. Examples include food, utility, and tobacco stocks

Profit-Sharing Plan

A tax-deferred retirement account that allows employers to make flexible, non-mandatory contributions that are typically based on corporate profitability.

Flat

A term that refers to a bonds that are traded without accrued interest. Bonds that are in default income bonds, and zero-coupon bonds usually trade with interest, where the buyer pays to the seller the market price plus interest accrued since the last payment date . See also Accrued Interest

Selling Dividends

A violation of the Conduct Rules. If a registered representative convinces a client to purchase shares of common stock or a mutual fund because of an impending dividend, the representative can be cited for this action. Since both common stock and mutual fund prices are adjusted downward in the amount of the dividend, there is no monetary benefit to acquiring securities in order to receive a dividend.

Each of the following are characteristic of a mutual fund voluntary accumulation plan EXCEPT: A) minimum initial purchase. B) declining sales charges on new investment as money accumulates. C) obligatory purchase goal. D) minimum but optional additional purchases.

A voluntary accumulation plan is just that-voluntary, not binding. The company may require that the initial investment meet a certain minimum dollar amount. It may also specify that any additions meet set minimums (e.g., $50). The plan may qualify for breakpoints based on the accumulated value.

One of the most important functions of a banker's acceptance is its use as a means of:

A) facilitating trades in foreign goods. A banker's acceptance is a time draft typically used to facilitate an overseas trading venture. It is guaranteed by a bank on behalf of a corporation in payment for goods or services.

You have a client who is in the 30% tax bracket. She has an opportunity to purchase a 9% corporate bond. This would be tax-equivalent to a municipal bond with a coupon of: A) 6.3% B) 6.9% C) 2.7% D) 12.9% Explanation

A) 6.3% The corporate bond is fully taxable, while the municipal bond is tax-free. The formula to use is: Corporate yield × (1−tax bracket) = municipal equivalent. 9% × (1−.30) = 6.3%.

Baa bonds may yield more than Aaa bonds because

A) Baa bonds carry more default risk than Aaa bonds Baa bonds carry a greater default risk, so they will most likely pay greater interest to induce investors to purchase them.

Tombstone Ad

Ad advertisement of a new issue of securities. It is placed by the underwriters and gets its name from the fact that is has a black border. It includes the name of the issuer, the price of the security, and the name of the underwriter from whom it can be purchased.

Although nonqualified, a 457 plan is a type of deferred compensation plan for state and local governments and tax-exempt employers for their employees. As such, the money in the plan has never been taxed, therefore all of the distributions will be taxed as ordinary income.

An investor who works for the city is ready to retire. The city has operated a Section 457 plan for its employees, in which he has participated. What portion of his withdrawals will be taxable? A) Growth and earnings only B) The entire amount C) None D) Cost base only

Universal Life Insurance

Another type of permanent life insurance which also allows policy owners to accumulate cash values is the _________. For policyholders, the major advantage of _________ is that is more flexible than traditional whole life insurance. Policy owners are able to adjust the amount of their death benefit and their premiums in order to accommodate any changes in their personal circumstances.

From which of the following is the 12b-1 fee deducted?

Assets of the fund. A 12b-1 fee is charged quarterly as a percentage of the average annual assets.

Which of the following securities are exempt from the 1933 Act? Federal and state governmental issues. Stocks being issued in more than one state. Nonprofit organizations. A 20-year corporate bond being offered nationwide. A) II and III. B) I and III. C) I and IV. D) II and IV.

B) I and III. Federal and municipal issues are exempt from registration. Corporate securities being offered in more than one state are not.

Your client calls you to inform you that he has recently sold his home and is in the process of constructing a new one. He has approximately $150,000 in proceeds from the sale on which he would like to earn a return. The funds must be available in about six months to pay the contractor. Which of the following might you suggest? ABC 8% preferred stock, callable at par in five months. U.S. 5% Treasury bond, maturing in six months. Banker's acceptance XYZ common stock, listed on the NYSE. A) I and II. B) II and III. C) III and IV. D) I and III.

B) II and III. This client's needs are best met by placing the funds into the money market, defined as high-quality debt securities with one year or less to maturity. The banker's acceptance and the Treasury Bond meet those criteria.

A defensive investment strategy would be best described as one where the investor builds a portfolio consisting largely of:

B) public utilities, food manufacturers and tobacco companies.

A bond is convertible at $25. The market value of the stock is $30. What is the parity price of the bond? A) $750. B) $1,200. C) $1,100. D) $800.

B) $1,200. If a bond is convertible at $25, each $1,000 bond will convert to 40 shares. 40 shares × $30 =$1,200 parity of the bond.

If an investor pays 95.08 for a Treasury bond, how much did the bond cost? A )$95.08. B) $952.50. C) $950.80. D )$9,508.

B) $952.50. Treasury bonds are quoted as a percentage of par plus 32nds. In this case, the price is $950 plus 8/32 (i.e., ¼) of $10, for a total of $952.50.

If an investor pays 95.08 for a Treasury bond, how much did the bond cost? A) $950.80. B) $952.50. C) $95.08. D) $9,508.

B) $952.50. Treasury bonds are quoted as a percentage of par plus 32nds. In this case, the price is $950 plus 8/32 (i.e., ¼) of $10, for a total of $952.50.

An investor sells EGH common stock that she has owned for six months at a loss of $2,500 on February 16. Two weeks later, she purchases preemptive rights to EGH common stock at a price of $1.50, exercisable at a price of $35. Which of the following best describes the tax treatment of this transaction? A) The purchase of the rights reduces the cost basis in the stock acquired. The investor may write off the full $2,500 loss on the current year's tax return. B) The purchase of the rights, according to IRS rules, represents the reestablishment of the investor's position in substantially identical securities, and any potential losses will be disallowed under wash sale rules. C) By purchasing the rights, the investor reduces the cost basis of the shares sold at a loss by the full purchase price of the rights. The losses incurred are, therefore, reduced by the purchase price of the rights. D) The purchase of the rights, according to IRS rules, increases the cost basis of the shares sold at a loss and allows for a greater write-off on the current year's taxes. The maximum, however, is $3,000 in net losses. Explanation

B.) The purchase of the rights, according to IRS rules, represents the reestablishment of the investor's position in substantially identical securities, and any potential losses will be disallowed under wash sale rules. IRS rules do not allow an investor to claim a tax loss from the sale of securities if the investor effectively reestablishes his position within 30 days before or after the sale. Because rights allow the purchase of the same stock, the investor has created a wash sale and any loss is disallowed.

A customer would like to know which of the following mutual funds has the highest potential for capital growth. Which would you choose? A) Long-term bond fund. B) Small-cap technology stock fund. C) Blue-chip growth stock fund. D) Blue-chip preferred stock fund.

Bond funds and preferred stock funds offer income and little, if any, potential for growth. A blue-chip stock fund offers conservative growth potential. A technology fund invests in risky stocks and has the highest potential for growth. The customer should be aware that high growth potential also carries high risk.

All of the following are characteristics of convertible bonds EXCEPT: the price of the bond can be affected by the price of the underlying stock. the coupon is invariably lower than similar nonconvertible corporate bonds. the coupon is invariably higher than similar nonconvertible corporate bonds. at issue, the conversion price is set lower than the market value of the underlying stock. A) I and II. B) II and III. C) III and IV. D) II and IV.

C) III and IV. the coupon is invariably higher than similar nonconvertible corporate bonds. at issue, the conversion price is set lower than the market value of the underlying stock. The coupon on convertible bonds is invariably less than the coupon of similar nonconvertible bonds. This is because investors are willing to accept less interest income for the privilege of being able to convert the bond into stock. When convertible bonds are issued, the conversion price is set higher than the current market value of the stock; otherwise, the bonds would be instantly converted.

Common stockholders of publicly traded companies have a residual claim to assets of a corporation at dissolution and are entitled to receive an annual report containing audited financial statements. Stockholders never get to vote on dividends.

Common stockholders of a publicly traded corporation have which of the following rights and privileges? Residual claim to assets at dissolution. Right to a vote for stock dividends to be paid. Right to receive an audited financial report on an annual basis. Claim against dividends in default. A) I and III. B) II and III. C) I and IV. D) II and IV.

A retired public school teacher, age 65, has deposited a total of $10,000 into a nonqualified variable annuity, and her account's current value is $16,000. If she wishes to take a lump-sum withdrawal of the full amount, how much of this withdrawal is taxed at the ordinary income tax rate? A) $0.00 B) $16,000.00 C) $10,000.00 D) $6,000.00

D) $6,000.00 Contributions to a nonqualified annuity represent cost-base dollars. When the contributions are paid out, cost base represents a return of capital and is not subject to tax. The growth in an annuity is tax-deferred and is taxable upon receipt. In this case, of the total distribution of $16,000, the return of contributions was $10,000, leaving $6,000 taxable as ordinary income.

On February 14, an investor purchases 1,000 shares of ACE Bond Fund, with an objective of providing the highest possible level of income on a monthly basis. On August 15, the investor informs his agent that he has changed his mind and wishes to exchange his bond fund shares for shares of a common stock growth fund with an objective of capital appreciation within the same family of funds. If the investor's bond fund shares increase in value before the exchange, how will they be taxed? A) As income because the bond fund's objective was to provide current income on a monthly basis. B) Because the shares were exchanged within a family of funds, the increase in the bond fund shares' value is not taxed, but it increases the cost base in the common stock fund investment. C) As a long-term gain because the exchange of the bond fund shares was made into a common stock fund with an objective of long-term capital appreciation. D) As a short-term gain because the bond fund was held for less than 12 months.

D) As a short-term gain because the bond fund was held for less than 12 months. Because the investor held the bond fund shares for less than 12 months, the gain is short term. An exchange privilege does not exempt the transfer of funds from taxation. The exchange is a taxable event.

Which of the following statements regarding a two-for-one stock split are TRUE? The share price is reduced by half. The total market value of the outstanding stock decreases. The total market value of the outstanding stock may increase or decrease as a result of the split. The number of shares outstanding doubles.

D) I and IV. The share price is reduced by half. The number of shares outstanding doubles. Explanation In a two-for-one stock split, the number of outstanding shares is doubled and the price is halved. The total market value of the issuer's stock therefore remains the same.

ABC is engaged in a stock rights offering with the help of Alpha Securities as managing underwriter. If Alpha Securities agrees to purchase the unused rights for any stock that ABC cannot sell to current stockholders, and use them to purchase stock for resale to the public, what type of underwriting arrangement is this? A) Special. B) All or none. C) Best efforts. D) Standby.

D) Standby. Explanation A standby underwriting allows a corporation to sell as much of a new issue to current stockholders as possible, backed by the underwriter's promise to purchase any unsold rights. Remember that a standby underwriting agreement is associated with a rights offering.

A mutual fund shareholder purchases no-load shares at the beginning of an investment period and, at the end of the investment period, sells the shares for a gain. Which of the following statements is TRUE? A) The total assets of the fund could have been higher or lower at the beginning, depending on the securities held in the portfolio. B) The NAV per share was higher at the beginning. C) The expenses of the fund were lower at the end than at the beginning. D) The NAV per share was lower at the beginning. Explanation For a shareholder to have realized a gain on the sale of the mutual fund shares, the NAV of the shares would have been lower at the initial purchase compared to the NAV at the sale of the shares.

D)The NAV per share was lower at the beginning. For a shareholder to have realized a gain on the sale of the mutual fund shares, the NAV of the shares would have been lower at the initial purchase compared to the NAV at the sale of the shares.

Which of the following forms of written communication must a principal approve before use? A) Interoffice memorandum B) Letter to a customer confirming an annual account review appointment C) Letter sent this month to 50 prospective customers offering advice about a stock D) Preliminary prospectus Which of the following forms of written communication must a principal approve before use? A) Interoffice memorandum B) Letter to a customer confirming an annual account review appointment C) Letter sent this month to 50 prospective customers offering advice about a stock D) Preliminary prospectus

Explanation Letters sent to more than 25 retail investors within any 30-calendar-day period are considered retail communication and must be approved by a principal before use. Letters sent to fewer than 26 retail investors within a 30 calendar-day period are considered correspondence, which does not need prior approval, but it is subject to subsequent review.

Which of these interest rates is the most volatile? A) Prime B) Federal funds C) Broker call loan D) Discount

Federal funds Short-term interest rates are more volatile than longer-term rates. The federal funds rate, which changes at least daily, is the most volatile of the rates given.

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.

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. A) I and IV B)II and III C) I and III D) II and IV

Which of the following concerning Section 529 plans are TRUE? Qualified withdrawals are exempt from federal income tax. Contributions are tax qualified. Some states will tax the withdrawals as income. Withdrawals may be used for any expenses incurred by a student. A) II and III. B) I and IV. C) II and IV. D) I and III.

I and III. The withdrawals from Section 529 plans are federally tax exempt, but they may be taxed as income in some states. The money that is invested in a Section 529 plan is always after tax. The withdrawals must be used for qualified education expenses (e.g., tuition, books, lecture fees, lab fees) and not simply for any expense of a student.

Which of the following are characteristics of exchange-traded funds (ETFs)? They are redeemable securities. They are priced by supply and demand. They are designed to track an index. They try to diversify within a particular industry. A) II and IV. B) I and IV. C) II and III. D) I and III.

II and III. ETFs trade on an exchange and, like all securities traded there, are priced based upon supply and demand. Virtually all ETFs track a specified index.

Fees such as mortality and risk expenses are deducted from the: I) premium payment for flexible premium policies. II) premium payment for scheduled premium policies. III) separate account cash value for flexible premium policies. IV)separate account cash value for scheduled premium policies. A) III and IV. B) I and II. C) I and IV. D) II and III.

III and IV. III) separate account cash value for flexible premium policies. IV)separate account cash value for scheduled premium policies. Expenses are deducted from the separate account cash value for both scheduled and flexible premium Variable Lifer contracts.

D)Callable. When the stock is called, dividend payments are no longer made. With callable preferred stock, to compensate for that possibility, the issuer pays a higher dividend than with straight preferred. Cumulative and convertible preferred have positive characteristics that would justify a lower fixed dividend than straight.

If all other factors are equal, an investor would expect which type of preferred stock to pay the highest stated dividend rate? A)Convertible. B)Cumulative. C)Straight. D)Callable.

majority vote of the outstanding shares. The Investment Company Act of 1940 requires the fund to have a clearly defined investment objective. The only action that can be taken to change the investment objective is a majority vote of the outstanding shares (shares vote, not shareholders).

If an open-end investment company wishes to change its investment objective, it may only do so with a:

Non-Cumulative Preferred Stock

If preferred stock is ____________ than any missed dividends are not paid to stockholders. In any given year, only the current dividend is required to be paid before common stock dividends may be paid.

B) Thursday, January 15 The record date for corporate securities is 2 business days after the ex-(dividend)date or, in this case, Thursday, January 15.

If the ex-date for a stock is Tuesday, January 13, what is the record date? A) Friday, January 9 B) Thursday, January 15 C) Saturday, January 17 D) Monday, January 19

An appreciation in value of fund assets, without a corresponding increase in liabilities, leads to an increase in the fund's net asset value (total assets minus liabilities equals net assets).

If the value of securities held in a fund's portfolio increases, and the amount of liabilities stays the same, the fund's net assets: A) decrease. B) increase. C) stay the same. D) are more liquid.

two-for-one stock split

In a _________________, the number of outstanding shares is doubled and the price is halved. The total market value of the issuer's stock therefore remains the same.

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.

Expense Risk

Is the risk that an insurance company assumes by guaranteeing that the charges involved in administering the contract will not increase beyond a certain level. Most variable life insurance policies include an expense guarantee provision. This provision limits the amount by which a company may raise the administrative charges of its policies if these costs are ultimately higher than the company had anticipates.

A resident of Georgia purchases an Albany, New York general obligation bond. If the investor is in the 28% federal income tax bracket and the 6% state income tax bracket, which of the following statements relating to this bond's interest are TRUE? It is free of federal income tax. It is federally taxable as ordinary income. It is free of state income tax. It is taxable as ordinary income on the state level. A)I and IV. B) I and III. C) II and III. D) II and IV.

It is free of federal income tax. It is taxable as ordinary income on the state level. Explanation The interest paid to an investor on a municipal general obligation bond is always free of federal income tax. In most cases, there is no state income tax if the issuer is a political subdivision of the investor's state of residence. In this case, a Georgia resident will be liable for Georgia state income tax on the interest paid on a New York bond.

If interest rates are increasing and the market prices of bonds are decreasing, what happens to the value of straight preferred stock during this period? A) Its value remains the same. B) Its value decreases. C) Its value increases. D) Interest rates and the price of bonds have no impact on the value of preferred stock.

Its value decreases. Preferred stocks are interest-rate sensitive, as are other fixed- income investment securities, such as bonds. Thus, if interest rates increase, the fixed return may be surpassed by the return provided by other investments. The value of preferred stock will thus decrease when interest rates rise.

Under the Investment Company Act of 1940, which of the following are considered management companies? Open-end companies. Closed-end companies. Unit investment trusts. Face-amount certificate companies. A) I and III. B) II and IV. C) I and II. D) III and IV.

Management companies are subclassified into open-end companies (mutual funds) and closed- end companies. Unit investment trusts are a type of investment company that is not managed, as are face-amount certificate companies.

Which of the following would be considered money market instruments? A Treasury bond with 11 months to maturity. Ten shares of preferred stock sold within 270 days. An American depositary receipt (ADR) held for less than one year. A $200,000 negotiable certificate of deposit. A) I and IV. B) I and III. C) III and IV. D) II and III.

Money market securities are high-grade debt securities with one year or less to maturity. Preferred stock and ADRs are equity securities.

According to the Conduct Rules, a FINRA member firm may give certain selling concessions to which of the following?

Other member firms. Members may give other members selling concessions, but sales to the public and to nonmember firms must be made at the public offering price.

The federal act that regulates securities markets and broker-dealers is the:

Securities Exchange Act of 1934. The Securities Exchange Act of 1934, often called the People Act because the investing citizenry came under protection with this act, requires the registration of broker-dealers and their employees who deal with securities and the public and introduced the suitability and customer protection rules.

Class B Shares

Shares of a mutual fund that generally assesses a contingent deferred sales charge if the shares are sold within a certain period. Class B shared generally have higher 12b-1 fees than Class A shares.

created the Securities Investor Protection Corporation (SIPC) to protect securities investors against losses resulting from the financial failure of broker-dealers. SIPC does not provide protection against securities losses arising from decreases in market value. Reference: 3.10 in the License Exam Manual

The Securities Investor Protection Act of 1970

Death Benefit

The ___________ (face value) of an insurance policy is the amount of money that a beneficiary receives at the time of the insured's death

If a variable annuity has an assumed interest rate of 5% and the annualized return of the separate account is 4%, the value of the: accumulation unit will rise. annuity unit will rise. accumulation unit will fall. annuity unit will fall. A) I and II. B) III and IV. C) II and III. D) I and IV.

The accumulation unit will increase in value because the portfolio earned 4%. However, the annuity unit value will decrease because the actual return of the portfolio (4%) was less than the assumed interest rate of 5% necessary to maintain payment amount.

discount The difference between a bond's par (or face) value and a market price lower than par is known as the bond's discount from par.

The difference between par and a lower market price on a bond is called the:

Front-End Contractual Plans

The difference between the two types of Contractual Plans is the method by which the sales charge is collected. With front-end load plans, up to 50% of the year's payments may be deducted for sales charges. However, the maximum cumulative sales charge for all contractual plans may not exceed 9% over the life of the plan. The plan participants may also be required to pay fees to the plan's custodian. -Must receive an informational letter that details the plan's sales charges. -Offers a free-look period that lasts for 45 days after this letter is sent. During this time, the investors may cancel the plan and receive a refund that is equal to the shares' current NAV plus all of the sales charges. Even if the plan is cancelled, there is a risk for the investors since the current NAV plus all of the sales charges. Even if the plan is cancelled, there is a risk for the investors since the current NAV may be less than what they originally paid. -An additional provision is available to investors who cancel their plans after the free-look period, but within 18 months of purchasing the plan. If cancelled during this time they will receive the shares' current NAV plus any sales charges that exceed 15% of their total investment. However, if they terminate the plan after 18 months, they wull only receive the shares' current NAV.

Section 529 plans

The features of _____________, including their contribution limits and fees, vary widely from state to state. Section 529 plans have no age limits as to participation; they are open to both children and adults who plan to attend college or graduate school. For college savings plans, there is no state residency requirement for either owners or beneficiaries of Section 529 plans.

Accrued Interest

The interest due on a bond since the last interest payment was made. The buyer of the bond pays the market price plus accrued interest .

Which of the following interest rates would be of most direct concern to a business enterprise looking to borrow money for next year's business operations? A) The federal funds rate. B) The prime rate. C) The discount rate. D) The broker call loan rate.

The prime rate is the rate charged by large commercial banks to their most creditworthy commercial customers for business, commercial, and industrial loans. The published prime rate is an average of prime rates from representative regions around the country and is the minimum that a business enterprise must plan on paying for a business loan.

Which of the following transactions may be made on margin?

The purchase of NYSE-listed closed-end fund shares Closed-end company shares may be purchased on margin like other listed securities that trade in the secondary market. Open-end shares (mutual funds), are continuous primary offerings, and new issues of securities are not marginable. Option contracts, like mutual funds, may be purchased IN a margin account, but may not be purchased ON margin (they must be paid for in full). Margin trading is not allowed in a custodial account.

Easing of Credit

The ultimate approach to be taken by the FRB will be based on the evaluation of the economy's current growth rate and whether it considers that growth rate inflationary. If the FRB believes that it needs to stimulate the economy because growth is sluggish, it will seek to lower interest rates. This approach is referred to as an ______ and is intended to lead to more borrowing in an effort to encourage growth.

Hedging

The use of a security (e.g., an option) to reduce the market risk of a current holding. The hedging security (the option) is expected to perform well under market conditions in which the other security would perform poorly.

Principal-Protected Funds

These funds predominately or exclusively invest in securities that offer principal protection (e.g., zero-coupon bonds), which means that the owners are guaranteed to receive back at least what they originally invested if they remain invested for the guaranteed period. Early distributions may result in loss of principal. Although these funds are low risk investments, they often have relatively low reurns and do not perform well in bull (up) markets. These funds are most suitable for investors who need a lump-sum at a point in the future.

Which of the following is classified as an independently prepared reprint (IPR)? A) Wall Street Journal article on investing B) article on investing produced by the member firm C) market letter D) billboard

Wall Street Journal article on investing An IPR consists of any article reprint that meets certain standards designed to ensure that the reprint was issued by an independent publisher (like the Wall Street Journal) and was not materially altered by the member.

TSA (Tax Sheltered Annuity) [403(b) Plan]

What does TSA stand for?

The Employee Retirement Income Security Act of 1974 (ERISA) is aimed at private sector qualified plans. Deferred compensation and payroll deduction plans are not qualified, and a county employee plan is not private sector. A defined benefit plan, on the other hand is a corporate qualified plan.

Which of the following retirement plans would have to conform to the requirements of the Employee Retirement Income Security Act? A) A corporate deferred compensation plan. B) A corporate defined benefit plan. C) A retirement plan for county employees. D) A payroll deduction plan.

Spread-Load Contractual Plans

With a spread-load plan, the plan company may not deduct more than 20% in sales charges during any one year and, for the first four years, the sales charges may not exceed an average of 16%. -Must receive an informational letter that details the plan's sales charges. -Offers a free-look period that lasts for 45 days after this letter is sent. During this time, the investors may cancel the plan and receive a refund that is equal to the shares' current NAV plus all of the sales charges. Even if the plan is cancelled, there is a risk for the investors since the current NAV plus all of the sales charges. Even if the plan is cancelled, there is a risk for the investors since the current NAV may be less than what they originally paid. -For Spread-load plans, if the investors terminate the plans after 45 days free-look period, they will only receive the shares' current NAV. They will not be refunded any of their sales charges.

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 A) the stock's current market price B) higher than $50 C) $50 D) 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).

If ZB Invest Fund seeks capital appreciation, has a low dividend yield, and invests chiefly in the stock of large, well-performing companies that have earnings momentum; it is probably a:

ZB Invest Fund's objective describes a growth fund.

No-load Funds

_____ are mutual funds that are sold to the public at their net asset value, without any sales charges assessed. In other words, these funds have a net asset value and a public offering price that are the same. For a fund to marker itself as a no-load fund, the guidelines listed below must be followed: - It may not assess a front-end sales charge -It may not assess a back-end sales charge, and -It may not assess a 12b-1 fee that is greater than .25% of its average annual net assets Therefore, even if a fund does not assess a sales charge, but it has a 12b-1 fee of 1%, it is not a no-load fund. No-load funds are permitted to assess redemption fees.

Contractual Plan

_________ are established when an investor agrees to invest a specified amount at regular intervals for a number of years (usually 10 to 15 years). -Are sold by companies that have entered into an agreement which gives them the ability to buy a mutual fund's shares for the specific purpose of selling them to investors. The shares are actually held in trust for the plan participants who then receive trust certificates which represent their interest in the fund's shares. Since there are two securities involved (the fund shares and the plan certificates), investors in contractual plans must receive two prospectuses. +++ The two types of contractual plans are front-end load plans and spread-load plans.

Convertible Preferred Stock

_____________ - appeals to investors who want higher, more secure income than common stocks typically provide, but also want the higher potential for capital appreciation that is usually offered by common stocks. The trade-off is that this type of preferred stock has a lower dividend rate than other types of preferred stock.

Bearer bonds

_______________, which are not registered to a specific holder, must have the interest coupons attached to the bonds.

SIPC (Securities Investor Protection Corporation)

________________ for each separate customer is $500,000, with cash coverage not to exceed $250,000.

The gross domestic product (GDP) The Consumer Price Index (CPI)

_________________ (__) is the total productive output of a country in a year. It includes exports, government spending, and a host of other quantities and is a direct measure of productivity. __________________ (___) compares prices for representative commodities with prices for the same commodities in the past and is a direct measure of inflation.

Callable

a bond issue, all or part of which may be redeemed before maturity by the issuer under specified conditions. The term also applies to preferred shares that may be redeemed by the issuing corporation.

anti-dilution provision

a provision in an option or a convertible security, and it is also known as an "anti-dilution clause." It protects an investor from equity dilution resulting from later issues of stock at a lower price than the investor originally paid. These are common with convertible preferred stock, which is a favored form of venture capital investment.

Each of the following is a defined contribution plan EXCEPT: A) a 401(k) plan. B) a stock option plan. C) a money-purchase pension plan. D) a profit-sharing plan (qualified).

a stock option plan. Money-purchase pension plans, 401(k) plans, and qualified profit-sharing plans are all examples of defined contribution plans.

A regulated investment company:

acts as a conduit for dividend distributions. If an investment company distributes at least 90% of its net investment income to shareholders, it is considered to act as a pipeline or conduit for the distribution; it will receive special tax treatment and is classified as a regulated investment company under Sub Chapter M of the Tax Code. Investment companies are registered with, not managed by, the SEC. Open- and closed-end companies may be regulated.

Cumulative Preferred Stock

all of the preferred dividends that are in arrears (unpaid) must be paid before common stockholders are paid any dividends.

Coverdell Education Savings Accounts

allow after-tax contributions of up to $2,000 per student, per year, for children until their 18th birthday. If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty, or rolled over into a different Coverdell ESA for another family member.

A standby underwriting

allows a corporation to sell as much of a new issue to current stockholders as possible, backed by the underwriter's promise to purchase any unsold rights. Remember that a standby underwriting agreement is associated with a rights offering.

Distributions from a profit-sharing plan made to an employee after retirement are from the:

amount allocated to the individual's account plus accumulated earnings during the employee's participation in the plan.

Series EE bonds

are nonnegotiable or nonmarketable securities. They may only be purchased from the government or a bank (acting as their agent) and they cannot be resold; only redeeme

T-bills

are sold at a discount by auction and mature at par in less than one year.

Code of Procedure

describes the disciplinary process that is used in the event that a member firm or any of its associated persons violate FINRA rules, SEC rules, or fail to pay dues to assessments

One of your clients owns a small business. She would like to start an employer-sponsored qualified IRA. A SIMPLE plan might be appropriate as long as her firm:

does not already have a qualified plan has 100 or fewer employees To have a SIMPLE plan, the employer may not have any other qualified plan in place and must have 100 or fewer employees.

ADRs are used to facilitate the:

domestic trading of foreign securities. An ADR is a negotiable security that represents an ownership interest in a non-U.S. company. Because they trade in the U.S. marketplace, ADRs allow investors convenient access to foreign securities.

A meeting between the issuer and underwriter to ensure that the prospectus is true and accurate is called:

due diligence meeting. The final meeting before the end of the cooling-off period is known as a due diligence meeting and is always held before the effective date of the new offering.

Term insurance

is a policy with a set duration limit on the coverage period. Once the policy is expired, it is up to the policy owner to decide whether to renew the term life insurance policy or to let the coverage end. This type of insurance policy contrasts with permanent life insurance, in which duration extends until the policy owner reaches 100 years of age (i.e. death).

A defensive strategy

is one that concentrates investments into those industries that are less likely to suffer during an economic decline. Regardless of current economic conditions, people still eat, smoke and use their utilities.

Regulation U

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

Mortality Risk

is the risk that an insurance company assumes to provide the death benefit. The risk is tied to the possibility that the insured will die earlier than expected.

An investor purchases $10,000 of the Class B shares of the KAPCO Growth Fund. Two years later, the client redeems the shares. The redemption charge is a percent of the:

lesser of the NAV or purchase price.

A preliminary prospectus:

may be used to gather indications of interest. A preliminary prospectus, or red herring, is prepared after the filing of a registration statement with the SEC. It is the only item allowed to be given to prospective investors while gathering indications of interest during the cooling off period. Sales literature may accompany a final prospectus but may not accompany a red herring.

If a company starts a pension plan for an employee who already has an IRA, this employee:

may continue to contribute to his IRA, but the contributions may not be 100% deductible, depending on his level of compensation. The employee is still allowed contributions to an IRA up to the indexed maximum per year. However, because the employee is covered by another qualified plan, the contributions may or may not be deductible depending on his adjusted gross income.

Qualified plans

may not discriminate between eligible employees. They must have a set vesting schedule, the plans must be in writing, not voice recorded, and an employer must update the status of all employees at least annually.

The GDP

measures growth in the economy. To retain an accurate comparison of one year to the next, it must be measured with constant dollars (inflation-adjusted dollars).

The result of dollar cost averaging is to: A) obtain a lower average cost per share than average price per share. B) take advantage of a bullish market by buying more shares in a rising market. C) obtain a lower average price per share than average cost per share. D) take advantage of a non-fluctuating market.

obtain a lower average cost per share than average price per share. The result of dollar cost averaging is to obtain a lower average cost per share than the average price per share. This is accomplished by making regular investments of a fixed amount when prices are fluctuating.

The management fees

paid by an investment company are part of the operating expenses of the fund. Custodial fees are also part of the operating expenses. A sales load is a selling cost contained within the underwriting agreement.

Commercial paper is a:

promissory note issued by a corporation. A corporation issues commercial paper as a short-term, unsecured promissory note.

Index Funds

seek to duplicate the price and yield performance of a selected index.

The discount rate is set by:

the Federal Reserve Board. The discount rate is set by a vote of the Federal Reserve Board. Member banks borrow from the Fed at the discount rate.

A qualified profit-sharing plan offered by a corporation to its employees has all of the following features EXCEPT: A) the amount of the contribution is tax deductible to the employee. B) the corporation may elect to omit or reduce contributions in years when profits from business operations fall. C) the employee may elect to rollover a lump-sum distribution into a traditional IRA. D) the earnings on the contribution are tax deferred until payout.

the amount of the contribution is tax deductible to the employee. 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.

Flexible premium payments are a feature of:

universal variable life. Only universal and universal variable life policies have flexible premium payments.

Mutual fund shareholders are not taxed on:

unrealized capital gains. Interest, dividends, and realized capital gains are all taxed. However, unrealized capital gains are not taxed. Unrealized gains contribute to NAV appreciation and to a shareholder's capital gain upon redemption.

ABC Corporation has a 10% noncumulative preferred stock outstanding at $100 par value. Two years ago, ABC omitted its preferred dividend, and last year, it paid a dividend of $5 per share. To pay a dividend to common shareholders, each preferred share must be paid a dividend of:

$10. Because this is noncumulative preferred stock, the company must pay only this year's full stated dividend of $10 per share before paying dividends to the common shares.

Last-In, First-Out (LIFO)

(1) An inventory valuation method that assumes the newest inventory (last-in) is sold first (first-out) (vs. FIFO). (2) The method of determining the taxable portion of a random withdrawal from an annuity. Taxable earnings are treated as being withdrawn before the tax-free return of contributions.

FINRA (Financial Industry Regulatory Authority)

-Is the self-regulatory organization (SRO) for the over-the-counter markets and for NYSE members. - It enforces the Conduct Rules, provides mediation and arbitration services, and promotes self-discipline among members, all with the end in view of protecting the investing public.

A 403(b)(7) plan is a

-type of tax-sheltered annuity available through mutual fund companies. -A 403(b)(7) plan, a type of tax-sheltered annuity, allows employees to set up retirement plans directly with mutual fund companies.

A registered representative elected to terminate her registration while raising her child. She would be able to re-affiliate with a FINRA member in the same license capacity without re-examination if she filed a Form U-4 within:

2 years of the effective date of her Form U-5 filing. Once a registered person leaves the business, they can return without having to re-test as long as the new Form U-4 is filed no later than 2 years after the effective date filing of the Form U-5 to terminate.

Excess IRA contributions are subject to a penalty of:

6% Excess IRA contributions are subject to a yearly penalty of 6% until they are either withdrawn together with associated growth or applied to the following year's contribution limit.

Revenue bond

A bond issue that is secured by pledge of the revenues of a specific project.

If a member firm is notified by FINRA that it must begin tape-recording the phone calls of its assistant representatives and registered representatives to existing and potential customers, it must do so within how many days of notification?

A firm has 60 days to secure the equipment and begin recording.

SEC Form BD

A form that is completed and submitted to the Securities and Exchange Commission in order to apply for registration as a securities broker-dealer, including for government securities. The form requires that the firm disclose background information, including management policies that direct the company, the names of executives and general partners, successor information and any current legal proceedings or previous securities violations.

Defined Contribution Plan

A qualified retirement plan in which the level of contributions is based on a percentage of the employee's compensation. The money is invested by the employee according to the options available. The benefit at retirement depends on the performance of the investment account.

Coverdell Education Savings Account (ESA)

A tax-deferred account that provides tax-free withdrawals to cover educational expenses. Formerly referred to as an Education IRA. -provides that any withdrawal made for qualified education expenses is free of income tax. Contributions are made with after-tax dollars and may be made by anyone who falls within the earnings limits.

Payroll Deduction Plan

A type of non-qualified Retirement Plan that allows employees to use after-tax deductions from their paychecks to purchase life insurance, mutual funds, and variable annuities. Employers may also choose to match their employees' contributions. For employees, the benefit is that the sales charge being assessed are often lower than they would pay if they purchased these products separately.

Deferred Compensation Plan

A type of non-qualified retirement plan under which participants agree to defer compensation until retirement, disability, termination , or death. The theory is that by deferring some of their compensation, employees may pay taxes on that compensation when they are retired and in a lower tax bracket.

Firm Commitment

A type of underwriting in which the underwriters agree to purchase the entire issue from the issuer. If they do not sell the entire issue, they are prohibited from returning the unsold portion to the issuer.

Which of the following concerning Section 529 plans are TRUE? Qualified withdrawals are exempt from federal income tax. Contributions are made with pre-tax dollars. Contribution limits are set at the state level. Qualified withdrawals may be used for pre or post-secondary education. A) I and III. B) II and III. C) I and IV. D) II and IV.

A) I and III. Contribution amounts vary from state to state. Only "qualified" withdrawals are tax exempt when used for post-secondary education. Contributions are always made with after-tax dollars

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) a solo 401(k) plan. B) a traditional IRA. C) a Roth IRA. D) a Keogh plan.

A) 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.

Standby Underwriting

An arrangement in which a securities firm is used to underwrite any unsubscribed shares of a rights offering. See also: Rights

Expense Ratio

An investor is able to compare the costs of different funds by examining each ________. Factors that influence the expense ratio include the fund's size (small funds often charge higher ratios since they spread expanses among a smaller number of investors), sales charges, and the adviser's management style. Most funds have expense ratios that range from .2% to 2.0%. The following formula is used to calculate a mutual fund's expense ratio: Expense Ratio= Total Expenses/ Average Net Assets

Best Efforts

An offering in which the investment banker agrees to distribute as much of the offering as possible to return any unsold shares to the issuer. See also: All-Or-None (AON)

Branch Office

An office of a member firm in which securities business is conducted.

A customer has $250,000 in securities and $200,000 in cash with his brokerage firm. If the brokerage firm were forced to liquidate, how much of the account would SIPC cover? A) There is no coverage, SIPC insurance protects investors against fraud, theft, and embezzlement, not bankruptcy. B) All of the securities and all of the cash. C) $200,000 of the securities and $250,000 of the cash. D) All of the securities and $150,000 of the cash. Explanation

Answer B) All of the securities and all of the cash. SIPC covers cash and securities up to $500,000 total, with cash losses not to exceed $250,000. SIPC protects investors when broker-dealers become insolvent.

When a customer wants income from an annuity and chooses the option of life with 20-year period certain, how will distributions be taxed? A) As ordinary income based on LIFO accounting B) As ordinary income based on an exclusion ratio C) As capital gains based on LIFO accounting D) As capital gains based on an exclusion ratio

Answer: B As ordinary income based on an exclusion ratio Life with 20-year period certain is an annuitization option. When an annuity is annuitized, ordinary income taxes are paid based on an exclusion ratio (cost basis divided by expected return = how much of the distribution is a return of cost basis and NOT subject to income taxes).

Several customers have failed to make payment for their trades within the time period required under Regulation T, and the broker-dealer is faced with selling out their securities. Which of the following customers need NOT have their positions closed out? I.) The KLP Company, whose account owes $1,050 on a small equity trade. II.) Joe Bennett, who owes $850 on a closed-end fund purchase. III.) Bill Smith, who is close friends with his registered representative and who still owes $1,100 on a stock trade. IV.) Mr. and Mrs. J. F. Wilson, who owe $540 on a zero-coupon bond trade. A) I and IV. B) I and III. C) II and IV. D) II and III.

Answer: D II and IV. II) Joe Bennett, who owes $850 on a closed-end fund purchase. IV) Mr. and Mrs. J. F. Wilson, who owe $540 on a zero-coupon bond trade. Explanation: If a customer has not made payment in accordance with Regulation T (2 business days after settlement date), his broker-dealer need not close out his positions or freeze his account if the amount owed does not exceed $1,000.

Which of the following transactions may be made on margin? A) The purchase of listed stock in a custodial account. B) The purchase of option contracts. C) The purchase of open-end funds. D) The purchase of NYSE-listed closed-end fund shares.

Answer: D) The purchase of NYSE-listed closed-end fund shares. Closed-end company shares may be purchased on margin like other listed securities that trade in the secondary market. Open-end shares (mutual funds), are continuous primary offerings, and new issues of securities are not marginable. Option contracts, like mutual funds, may be purchased IN a margin account, but may not be purchased ON margin (they must be paid for in full). Margin trading is not allowed in a custodial account.

Non-Qualified Retirement Plans

Are not required to meet IRS standards regarding employee coverage, contribution limits, and vesting. In addition, they are not required to be made available to all employees. The money being contributed to these plans is not tax-deductible to the employer; however, the earnings grow on a tax deferred basis.

1035 Exchange

As described with annuities, ________ of the Internal Revenue Code provides a person with the ability to exchange an insurance policy that he owns for a new life insurance policy which insures the same person without tax on the investment gains that he has earned on the original contract. The tax code actually allows for a tax-free exchange from a life insurance policy to another life insurance policy or from a life insurance policy to an annuity. HOWEVER, a person is not permitted to exchange an annuity contract for a life insurance policy.

ACE, an open-end investment company, operates under the conduit, or pipeline, tax theory. Last year, it distributed 91% of all net investment income as a dividend to shareholders. Therefore, which of the following statements is TRUE?

B) ACE paid taxes on 9% of its net investment income last year. ACE pays taxes on any portion of income it does not distribute, as long as it distributes at least 90%; ACE paid taxes on 9%.

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, which of the following are insiders for purposes of insider trading? I) Attorney who writes an offering circular for a company. II) An investor holding 4% of the company's stock. III) The next-door neighbor of a board member of a company. IV) Brother of a company's president. A) II and IV. B) I and IV. C) I and III. D) II and III.

B) I and IV. Attorney who writes an offering circular for a company. Brother of a company's president. The Explanation: The Securities Exchange Act of 1934 defines an insider as an officer, director, or stockholder owning more than 10% of a company's outstanding voting equity. The definition also includes anyone else who has or could have access to insider information, such as immediate family members. Merely being someone's neighbor does not classify someone as an insider. Any professional who takes part in preparing the registration statement is automatically considered to have insider information.

Which of the following is a debt instrument that pays no periodic interest? A) Treasury note. B) STRIPS. C) Treasury bond. D) GNMA.

B) STRIPS. STRIPS are Treasury bonds with the coupons removed. STRIPS do not make regular interest payments. Instead, they are sold at a deep discount and mature at par value.

Your customer is 61 years old. He would like to take a lump-sum distribution from his SIMPLE plan. What is the tax treatment of this distribution?

B) Taxed as ordinary income The distribution is taxed as ordinary income. A 10% penalty would apply if the customer were younger than age 59½.

A corporation needs shareholder approval for which of the following? A) Cash dividend. B) 10% stock dividend. C) Four-for-one split. D) Repurchase of 100,000 of the company's own shares.

C) Four-for-one split. Shareholders have a right to vote on such items as mergers, reorganizations, recapitalizations, and stock splits. Shareholders never vote on payment or size of dividends. Repurchase of shares for the treasury is a decision for the board of directors.

Customers of financial institutions must be given the opportunity to opt out of information sharing with nonaffiliated third parties. Which of the following opt-out procedures would be unacceptable under Regulation SP? A) Providing an email address to opt out if the customer elected electronic delivery. B) Including an opt-out form with a pre-addressed envelope to mail back. C) Requiring a written letter to opt out. D) Providing a toll-free number to call to opt out.

C) Requiring a written letter to opt out. Regulation SP under the Gramm-Leach-Bliley Act requires that all firms providing privacy notices make it as easy as possible for their customers to opt out. Requiring the client to write a letter is considered too much effort and is not permitted.

If a registered representative left her firm three years ago but is ready to return to the industry, which of the following statements is NOT true? A) Her new firm must file a Form U-4. B) Her previous firm filed a Form U-5. C) She is not required to requalify by examination. D) Her registration was terminated.

C) She is not required to requalify by examination. After a leave of absence of more than two years, a registered representative must requalify by examination. When the representative left the old firm, her registration was terminated and the firm filed a Form U-5. When a new firm hires the representative, she must reapply for registration on a Form U-4.

If a customer has securities worth $250,000 in a cash account, $150,000 worth of fully-paid-for securities in a margin account, and $195,000 worth of securities in a joint account with his wife, what is the total SIPC coverage?

Combined $400,000 in the cash and margin account and $195,000 in the joint account. The cash and margin account are combined for SIPC purposes. Since the combined balances do not exceed the maximum coverage limits, both balances are covered. The joint account is covered separately under SIPC. The balance in the joint account is also below the SIPC coverage limits and would be covered in full.

Which of the following changes to a U-4 form must be communicated to the registered representative's broker-dealer and to FINRA? A) Purchase of property. B) Marital status. C) Birth of a child. D) Bankruptcy.

D) Bankruptcy. The broker-dealer and FINRA must be notified if a registered representative files for bankruptcy; the other occurrences listed do not require FINRA notification.

Which of the following statements about FINRA are TRUE? It has authority to regulate the OTC market in nonexempt securities. I)It has authority to regulate the OTC market in nonexempt securities. II) All branch offices of a member broker-dealer must be registered with FINRA. III) All broker-dealers must hold FINRA membership. IV) If a FINRA member firm is an exchange member at all, it may only belong to the New York Stock Exchange. A) III and IV. B) II and IV. C) I and III. D) I and II.

D) I and II. Firms transacting business in the over-the-counter market and/or members of the New York Stock Exchange must register with the SEC and are eligible for membership in FINRA. If a broker-dealer is a member, each branch office of the broker-dealer must be registered with FINRA. Not all broker-dealers are required to be FINRA members, and they may also hold membership in other exchanges.

Which of the following statements are NOT true concerning revenue bonds? I) They are secured by a specific pledge of property. II) They are a type of general obligation bond. III) Generally, their interest is tax-exempt at the federal level. IV) They are analyzed primarily on the project's ability to generate earnings. A) III and IV. B) I and III. C) II and IV. D) I and II.

D) I and II. Revenue bonds are not secured by a specific pledge of property and are not a type of general obligation bond. They are secured by user fees, such as tolls.

All of the following statements about a bond selling above par value are true EXCEPT: A) the yield to maturity is lower than the nominal yield. B) the nominal yield always stays the same. C) the current yield is higher than the yield to maturity. D) the nominal yield is lower than the current yield.

D) the nominal yield is lower than the current yield. Nominal (i.e., coupon) yield is fixed and stays the same with all bonds. A bond selling above par is selling at a premium, so the yield to maturity is lower than the current yield, which, in turn, is lower than the nominal yield.

A customer purchased a variable annuity from an agent five years ago with an initial investment of $200,000. The annuity's surrender fee will expire in year seven, which coincides with the customer's anticipated need for the funds. In the fifth year of the contract, the value of the annuity increased from $300,000 to $375,000. The agent notices that the general market is on the decline and recommends she enter a 1035 exchange of the variable contract for another, thus increasing her death benefit and locking it in at a higher minimum. This recommendation is: A) suitable because 1035 exchanges have no adverse tax consequences. B) unsuitable unless the customer agrees with the recommendation. C) suitable because of the increased death benefit. D) unsuitable because of surrender fees.

D) unsuitable because of surrender fees. Incurring the surrender fee for the 1035 exchange of one contract and initiating a new long-term contract is inappropriate for a customer in general, and particularly for this customer considering her need to access her funds only two years later.

Your customer has applied for a social security number but has not received it yet. An account was opened and mutual fund shares were purchased. If the fund distributes a dividend, what will happen?

In the absence of a tax ID number (social security number) for a customer, funds must withhold a percentage of distributions.

The Central Registration Depository (CRD)

Is an automated database that contains information regarding the employment and disciplinary histories of registered persons. This system may also be used to process applications for agent registrations at the state-level as well as for processing withdrawal applications for both agents and broker-dealers. If any information on a person's Form U4 changes, an amendment must be promptly filed with the CRD.

General Account

Is the investment account of an insurance company which is uses to fund its traditional (not variable) insurance products. The investments in the general account are owned by the insurance company

Savings Incentive Match Plan for Employees (SIMPLE IRA)

SIMPLE IRAs allow small employers to establish traditional IRAs for their employees into which both employers and employees may contribute. These plans are ideally suited as start-up retirement savings plans for employees that do not currently sponsor any other type of qualified retirement plan. Employees may elect to make annual pre-tax contribution of up to $12,500. Any employees who are age 50 or older may make additional contributions. Employers must typically contribute from 1% to 3% of the employee's salary and the employees are immediately vested in these contributions.

Section 529 College Savings Plans

Similar to Coverdell Education Savings Accounts, _______ are NOT retirement accounts. Instead, they are a form of tax-advantaged account and are used to specifically save for higher education expenses. - There are two types of Section 529 College savings Plans, both of which are administered by the states and referred to as municipal fund securities-prepaid tuition plans and savings plans.

The NYSE is an auction market, i

The NYSE is an auction market, in which the highest bids and the lowest ask prices represent the current best market for a security.

The Securities Act of 1933

The __________________ requires a prospectus and registration statement disclosing the relevant facts concerning a new issue to be filed with the SEC. The act further requires a prospectus to be distributed before or during a solicitation for sale so that a prospective purchaser will be fully informed and fairly treated.

The over-the-counter market

The over-the-counter market is a negotiated market. Within it, market makers are broker-dealer firms that provide a source for stock that customers wish to buy and a repository for stock that customers wish to sell.

The Securities and Exchange Commission

The___________- was created by the Securities Exchange Act of 1934 as a federal commission with the power to enforce the Securities Act of 1933 and all subsequent federal securities acts. If a security is being offered in only a single state, however, it need not register with the SEC but only in the state where it is being offered.

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.

a principal and charges a mark-up A broker dealer that purchases securities for, or sells securities from, its inventory is acting in the capacity of a principal. Principals charge mark-ups on sales from inventory. When acting in the capacity of agent (facilitating a transaction between a buyer and seller), the broker-dealer receives a commission.

When a brokerage firm sells stock from its own inventory, it is acting in the capacity of

Vesting

When employee becomes entitled to benefits in a retirement plan

Under which of the following conditions does the Investment Company Act of 1940 require a written statement disclosing the source of a dividend payment?

Whenever all or part of the dividend payment comes from a source other than current income or accumulated undistributed net income. The Investment Company Act of 1940 requires disclosure when all or part of the dividend payment comes from a source other than current income or accumulated undistributed net income.

Answer: D I and II Hedge funds and Exchange-traded fund Hedge funds, which commonly use far riskier strategies for profits than may be used by conventional investment companies, are mostly off-shore limited liability companies that do not register with the SEC; they may not be sold by a Series 6 registered representative. Exchange-traded funds are traded in the secondary market without prospectus and may not be sold by a Series 6 registered representative.

Which of the following funds may NOT be sold by a Series 6 registered representative? I) Hedge fund. II) Exchange-traded fund. III) Fund of hedge funds. IV) Speculative bond mutual fund. A) II and IV. B) I and III. C) III and IV. D) I and I

C) The exercise price of a right is generally above the market value at issue; the exercise price of a warrant is generally below the market value at issue. The exercise price of a right is typically below the market value of the stock at the time of issuance, to provide a benefit for the rights holder. The exercise price of a warrant is above the market value at the time of issuance; otherwise, the warrant would simply be instantly exercised.

Which of the following statements regarding rights and warrants is NOT true? A) Warrants are frequently issued in bond offerings to improve the marketability of the bond; preemptive rights are offered to existing stockholders to maintain proportionate ownership. B) If not exercised, rights usually expire in 30 to 45 days; warrants usually expire in two to ten years. C) The exercise price of a right is generally above the market value at issue; the exercise price of a warrant is generally below the market value at issue. D) Rights and warrants can be traded in the secondary market before they expire.

Money market instruments guaranteed by a bank that are used to provide capital for exporters to foreign countries are called:

banker's acceptances. BAs provide short-term financing for importers and exporters.

The contribution in a defined benefit plan will:

vary with the actual requirements to fund a certain benefit. The contribution in a defined benefit plan will vary with the actual requirements to fund the specified benefit. These requirements are determined actuarially based upon a number of factors. Older, highly compensated employees benefit most from this type of plan.

Gramm-Leach-Bliley Act of 1999 - GLBA

was a regulation that Congress passed on November 12, 1999, which attempts to update and modernize the financial industry. The main function of the Act was to repeal the Glass-Steagall Act that said banks and other financial institutions were not allowed to offer financial services, like investments and insurance-related services, as part of normal operations. The act is also known as Gramm-Leach-Bliley Financial Services Modernization Act.