Series 6 - Final Review

ABC Combination Fund has dual objectives of capital appreciation and current income. Last year, the fund paid quarterly dividends of $.25 per share and capital gains of $.10 per share. The annualized growth rate of the fund was 15%. The current net asset value (NAV) of the fund is $28.50 and the current public offering price (POP) is $30. Advertising and sales literature of the fund may report the fund's current yield to be:

$1 / $30 = .0333 × 100 = 3.33%

A teacher has placed money into a tax-qualified variable annuity over the past 12 years. He has contributed $26,000, and the current value of the annuity is $36,000. If the 62-year-old teacher is in the 30% tax bracket and withdraws $15,000 today, his ordinary income tax liability is:

$4,500 - no cost basis since it's a qualified plan

Jeremy has been investing in a variable annuity for the past six months and has paid $800 in sales charges. If he owns 1,000 accumulation units valued at $5 each, the value of his interest in the separate account is:

$5,000

A customer has invested a total of $10,000 in a nonqualified deferred annuity through a payroll deduction plan offered by the school system where he works. The annuity contract is currently valued at $16,000, and he plans to retire. On what amount will the customer be taxed if he chooses a lump-sum withdrawal?

$6,000

A customer wishes to redeem 1,000 shares of a mutual fund. The NAV and POP are $10, and a redemption fee of 0.5% will be charged. How much will the customer pay in redemption fees?

1,000*$10 = $10,000 -> $10,000*0.005 = $50

An individual who purchased an SPDA 20 years ago with an investment of $100,000 has passed the age of 59½ and is considering annuitizing his account. At the time of the investment, the account was credited with 10,000 accumulation units. The account is now valued at $400,000. If the annuity is annuitized, how many annuity units will be used to calculate the monthly check?

10,000

Your customer would like to do a 1035 exchange of his variable annuity for a life insurance policy and wants to be sure there will be no adverse tax consequences. You tell him:

1035 exchanges are not allowed from annuities to life insurance

Over the first four years, the average sales charge on a spread-load contractual plan can be no more than:

16% per year

One of your customers has a margin account and a discretionary mutual fund account with your firm. He is also custodian of an UTMA account for his son and has a JTWROS margin account with his wife. Under the Securities Investor Protection Act, how many customers is this?

3

Under SEC rules, a mutual fund that receives a request to provide a statement of additional information (SAI) must respond within how many business days?

3

Excess IRA contributions are subject to a penalty of:

6%

A distribution from a corporate pension plan to be rolled over into an IRA must be completed within how many days to maintain its tax-deferred status?

60 days

The minimum percentage that must be available for a policy loan after three years is:

75% of the cash value

FINRA allows sales charges up to a maximum of:

8.5% on mutual funds

If your customer is participating in a contractual plan, and 50% of the first year's payments are taken as a sales charge, what is the maximum allowable sales charge over the life of the plan?

9%

An investor has been found guilty of making a stock sale on the basis of insider information. What persons could make a claim against him as a contemporaneous trader?

A person who bought the same stock at about the same time

When a customer wants income from an annuity and chooses the option of life with 20-year period certain, how will distributions be taxed?

As ordinary income based on an exclusion ratio

In terms of risk and reward, what is a variable life insurance most nearly analogous?

Combination annuity - both variable life insurance and a combination annuity have part of their premiums invested in a general account and part invested in a separate account

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

An investment company that calls for investors to receive a fixed dollar amount in the future and is redeemed by the issuer is known as a (an)

FACC

A shareholder has redeemed some mutual fund shares that were purchased over a period of ten years. If the shareholder has not indicated the specific dates of purchase and cost of the shares that were redeemed on his tax return, the IRS will follow which of the following methods in determining the cost basis of shares redeemed?

FIFO

Any retail communication that includes a ranking, whether independent or not, must be filed with:

FINRA

A 45-year-old employment counselor has a Keogh plan for himself and three full-time employees who have been working for him for the past four years. If he earns $150,000 this year and contributes the maximum amount allowed to his Keogh plan, how much may he invest in an IRA?

He may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less

Under what circumstances may an open-end investment company act as its own distributor?

If the fund is established under Section 12b-1.

The federal act that requires investment companies to register with the SEC as face amount certificate companies, unit investment trusts, or management companies is the:

Investment Company Act of 1940

Under what circumstances must an employee be given an opportunity to participate in a deferred compensation plan?

It is solely up to the company who may participate in this type of plan

Interest rates and price fluctuations of debt securities have what correlation?

Long term prices and interest rates fluctuate more than short term

Are tombstones required?

No

A unit investment trust has 90% of its portfolio invested in high grade bonds with an average maturity of almost 25 years. If the industry consensus was that long-term interest rates were about to increase sharply, which actions would most likely be taken?

Nothing, once it has been constructed the portfolio is fixed

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?

Taxed as ordinary income

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, how?

The NAV per share was lower at the begining

Under the Uniform Gifts to Minors Act, how may stock subscription rights or warrants be handled in a custodial account?

The custodian may exercise or sell the rights as he deems prudent

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?

The distribution is subject to a withholding tax

An investor has been investing $100 per month for the past three months. The purchase prices were $20, $25, and $10. What is average cost per share purchased?

The first purchase (at $20) acquired 5 shares ($100/$20), subsequent purchases acquired 4, and 10 shares respectively. That is a total of 19 shares with an outlay of $300. The result is an average cost per share of $15.79 ($300/19).

When securities are inherited, what will be the recipient's cost basis?

The market value of the securities at the time of death

To terminate a 12b-1 plan, a vote is needed by the majority of outstanding shares or a majority vote of who?

The noninterested members of the board of directors

John is the annuitant in a variable plan, and Sue is the beneficiary. Upon John's death during the accumulation period, Sue takes a lump-sum payment. What is her total tax liability?

The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate

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

Can you make a IRA contribution past the tax deadline?

You can backdate it it year but you cannot file past the tax deadline regardless of an extension

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

a contingent deferred sales load

An investment company share purchased at its net asset value that can be redeemed later at the then-current net asset value, with a 12b-1 fee no greater than .25%, is a share issued by

a no-load, open-end investment company

In order for an investor to realize a capital gain or loss:

a sale must take place

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 and the annuity unit will fall

Loss of purchasing power would have the most impact on who?

an individual living on a fixed income

NAV changes when:

assets in the portfolio increase or decrease in value

Last year, the bond market was profitable and ABC Fund had 70% of its assets in bonds. Next year, the fund's managers expect the stock market to do well, and will adjust the fund's portfolio so 60% of its assets will be invested in stock. ABC is probably what type of fund?

balanced fund

A promotional brochure for a mutual fund must:

be preceded or accompanied by a prospectus

When a member firm opens an account for a registered representative of another member, the employer-member must be sent written notification:

before executing an order

If an investor has received dividends and capital gains distributions on mutual fund shares she has held for four months, the investor will pay

capital gains rates on capital gains distributions and ordinary income rates on dividends

Client coverage under SIPC is $500,000 for:

cash and securities, with cash coverage not to exceed $250,000

A 12b-1 fee:

charged quarterly as a percentage of the average annual assets

If your customer wants a source of retirement income that is both stable and will offer some protection against purchasing-power risk in times of inflation, you should recommend a:

combination annuity

The monies and securities of a mutual fund company are held by the:

custodian bank

The principal underwriter of an open-end investment company is also known as the

distibutor

When may a variable annuity account be surrendered?

during the accumulation period

Once a variable annuity has been annuitized:

each annuity unit's value varies with time, but the number of annuity units is fixed

How are contributions taxed for a SEP IRA?

employers make pretax contributions on behalf of their employees

What withdrawal plan would an investor select if she wanted to receive a fixed monthly payment from the investment company?

fixed-dollar

A variable annuity has an AIR of 4%. In January, the separate account earned 9%; in February it earned 6% and in March it earned 5%. Based on this information, how will the April payment compare to the March payment?

higher

Written notice to the broker-dealer is not required for loans to who?

immediate family members

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

In a period of deflation, corporate bond prices are:

increasing

An open-end investment company that does not distribute at least 90% of its net income:

is liable for federal taxes on its net investment income

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

To have a SIMPLE plan, the employer:

may not have any other qualified plan and must have fewer then 100 employees

ERISA mandates what?

minimum funding standards for plans

The owner of a variable life insurance contract has a death benefit that is subject to fluctuation. However, if a specified death benefit is provided regardless of market performance, this policy feature is called the:

minimum guaranteed death benefit

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

net investment income

403(b) plans are specifically designed for:

non profits

Your open-end investment company customer has decided to take automatic reinvestment of dividends and capital gains distributions. This choice will:

not alter the taxes

Your client wishes to invest $50,000 into shares of the ACE Mutual Fund. This morning's financial news indicated that the POP for ACE was $10.86 while the NAV was $10 per share. The client's order is placed at 2:00 pm ET. On the basis of this information, you could confirm to the client a purchase of:

nothing yet, as you must wait for the POP to be computed based on the day's close

The result of dollar cost averaging is to:

obtain a lower average price per share than average cost per share

Section 1035:

permits the exchange of one annuity for another without incurring any current tax liability - In other words, the earnings continue to be deferred until the money is actually withdrawn

What happens to outstanding fixed-income securities when interest rates decline?

prices increase

The primary purpose for creating ERISA was to:

protect employees from the mishandling of retirement funds by corporations and unions

Your customer has invested in a mutual fund with a 12b-1 fee. You explain to him that a charge will be deducted from his account:

quarterly

For an owner to be paid a dividend, his name should be recorded on the stock record book of the issuer's transfer agent by the:

record date

Dollar cost averaging results in a lower average cost per share than the average price per share paid, only if the share price during the investment period:

shows any fluctuation

Under the Code of Arbitration Procedure, how much time does a client have to submit a claim against a registered representative or member firm?

six years

The main difference between hedge funds and funds of hedge funds is that

smaller investors may invest in funds of hedge funds

Once defined as a MEC, cash value removed from the policy in the form of loans, partial surrenders, or withdrawals, are:

subject to ordinary income tax and a 10% tax penalty

The NAV of a mutual fund is $14.17 per share. The POP is $15.32 per share. To determine the sales charge of the fund:

subtract the NAV from the POP

Who assumes the investment risk in a variable annuity contract?

the annuitant

You explain to your client that a variable annuity you are recommending has a typical surrender charge period schedule, which lasts seven years and decreases by 1% each year. These charges are called:

the contingent deferred sales charge (CDSC)

Open-end investment company shares normally go ex-dividend:

the day after the record date

Typically, no-load mutual funds are sold to the public in what way?

the fund sells directly to the investor

If reassociation occurs within two years, the cycle date remains associated with:

the initial registration date

During the payout phase of variable annuities:

the number of annuity units will remain the same, but the value of each unit will vary

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

the operating expense of the fund

The main benefit that variable life insurance has over whole life insurance is:

the potential for a higher cash value and death benefit

Which rate would be of most direct concern to a business enterprise looking to borrow money for next year's business operations?

the prime rate

Besides releasing new shares, how are closed-end investment companies different than open-end companies?

they may issues bonds and preferred stock

A financially successful married couple is a client of yours. Their current net worth is in excess of $20 million. Their life insurance agent recently sold them a 2nd to die policy. The primary purpose behind this type of policy is:

to have liquid funds available to pay estate taxes

A contractual plan company is what type of investment company?

unit investment trust

Investment companies that have no management fee, have a relatively low percentage sales charge, and invest in a fixed portfolio of debt or equity securities are defined in the Investment Company Act of 1940 as:

unit investment trusts

A nonqualified variable annuity valued at $400,000 is annuitized and the annuitant received $220,000 in payments until his death. At his death, if his wife received a lump sum payment of $180,000, this example illustrates a:

unit refund annuity

Mutual fund shareholders are not taxed on:

unrealized capital gains

Changes in payments on a variable annuity correspond most closely to fluctuations in the:

value of underlying securities held in the separate account

A customer in his twenties, who is not risk averse, is in the market for life insurance. His main worry is that what looks like a generous death benefit today may not be sufficient for a beneficiary 40 or 50 years from now. A registered representative might consider recommending

variable life insurance

Dividend distributions from a bond fund would be taxable:

whether the dividends are received in cash or reinvested