Series 6 Random Part 2
The best time to purchase shares in a long-term bond fund is
when long-term interest rates are falling after a period of high interest rates. The best time to purchase shares in a long-term bond fund is when interest rates are falling after a period of high rates. The bonds already in the fund will continue to pay a high rate of return, and if rates continue to fall, the market value of the fund's portfolio will rise. LO 1.a
Which of the following would cause an increase in NAV?
-Investment income is received by the fund. -The securities in the portfolio appreciate. Dividends and interest received by the fund and appreciation of the portfolio cause an increase in NAV. The purchase of securities with cash results in no change of NAV because the outlay of cash is offset by the increased value of portfolio securities. Any dividends or gains distributed by the fund would cause a decrease in NAV. LO 2.b
Your established firm wishes to promote a mutual fund it markets to the public. What approval and filing requirements apply to this communication?
-It must be filed with FINRA within 10 days of first use. -It must be approved by a registered principal If the firm were a new firm, it would have to file all retail communications at least 10 days before first use. Your firm is well established. This will be approved by a registered principal, and because it is for an investment company, the communication will be filed with FINRA within 10 days of first use. LO 5.b
Which of the following statements regarding a fixed-time withdrawal plan offered by a mutual fund are true?
-The amount received each month by the client may vary. -This plan is self-exhausting. A fixed-time withdrawal plan of a mutual fund calls for an unpredictable amount to be paid out each month over a fixed period of time. By contrast, a fixed-dollar plan calls for a fixed amount to be paid out each month over an unpredictable period of time. LO 2.c
Under the Code of Arbitration Procedure, how much time does a client have to submit a claim against a registered representative or member firm?
6 years Explanation Under the Code of Arbitration Procedure, a dispute or claim is eligible for submission to arbitration up to 6 years after the date of the dispute's occurrence. LO 5.d
Which of the following securities is exempt from registration based solely on the issuer of the security?
A) Six-month T-bill NO B) Six-month commercial paper C) Two-year T-note D) Six-month banker's acceptance The two-year T-note is exempt because it is issued by the federal government, not solely because of the type of issue. Commercial paper and banker's acceptances are exempt based on the type of security (exempt issues). The T-bill is both too short (six months) and issued by the government. LO 1.e
The primary objective of a particular mutual fund is the payment of dividends, regardless of the market's current state. Capital growth is a secondary objective. Which of the following industry groups would be appropriate for the fund's portfolio?
A) Computer technology B) Consumer appliances C) Public utilities D) Aerospace Explanation Utilities are defensive industries; they tend to pay dividends consistently. LO 2.a
A national financial magazine advertisement for ABC mutual funds is permitted to include all of the following except
A) the telephone number of the sponsoring brokerage firm to contact for additional information. B) an application to invest. C) past performance of the mutual fund. NO D) an application to receive a prospectus. Explanation Mutual fund advertisements may not include an application to invest, because all applications to invest must be accompanied by a prospectus. Mutual fund advertising may include past performance (but no future projections) and a firm's telephone number for obtaining additional information and a prospectus. LO 2.a
All of the following statements relating to a deferred compensation plan are correct except
A) these plans may discriminate in favor of highly paid employees. B) it will be of greatest benefit if the employee's tax bracket is at a reduced level when the benefits are paid. C) the covered employee must receive reports on the status of the plan no less frequently than annually. D) corporate financial difficulties could lead to no benefits being paid. Explanation Deferred compensation plans are not qualified plans. They may discriminate among employees, and no reporting is necessary. The benefits of the deferral will be best realized if the employee's tax rates are lower upon receipt of the money. Because the benefits are scheduled to be paid out of the corporation's cash flow at the time of the employee's retirement, corporate financial difficulties may preclude any payout. LO 3.e Previous Next Question
A young, recently married couple, would like to purchase a home within five years. They have $2,000 in savings and $400 a month to invest. In addition, they owe $35,000 on student loans to be repaid over the next 10 years. What type of mutual fund investment would likely be the best recommendation?
Build up cash reserves and then save for a down payment on the new home. Investing must wait. Under these circumstances, the investors should be encouraged to postpone the investing until they have a sufficient emergency reserve of ready cash and money set aside for their goal of purchasing a home in five years. LO 4.g
A customer has been investing $150 into an equity growth mutual fund for three years. The customer's daughter is in college and needs $100 a month for expenses. What would you recommend she do to provide her daughter with expense money?
Give the daughter $100 per month and invest $50 per month instead of $150 per month into the mutual fund. The best choice is to reduce the mutual fund investment to $50 per month and give the daughter $100 per month. By doing so, the mutual fund remains intact. Liquidating a growth fund after just three years is not advised because this is a long-term investment. Most mutual funds require a customer account to be worth a minimum amount of money before a withdrawal plan may begin. Additionally, most funds discourage continued investment once withdrawals start.
John owns a nonqualified, tax-deferred annuity. When he retires, what will be the tax consequences of his annuity payments?
His annuity payments are partly taxable and partly tax-free return of capital. The key word here is nonqualifed! The investment John made was with after-tax dollars, the money grows tax deferred, and only the earnings are taxed at distribution. A computation will be made at John's retirement called the exclusion ratio, to determine how much of each retirement payment will be treated as a return of cost basis and how much as taxable ordinary income. No annuity payment is treated as a distribution of capital gains. LO 2.d
Which of the following best describes the purpose of life insurance?
It creates an estate. Life insurance provides funds upon death that may be used to continue to sustain the beneficiaries. It therefore "creates" rather than eliminates an estate. It may be used to eliminate (pay off) estate taxes. Although the cash value buildup is tax deferred, that is not the primary purpose of buying a life insurance policy. LO 2.e
ERISA regulations apply to which of the following?
Private sector retirement plans B) Armed forces retirement plans C) Public sector retirement plans D) Federal government employee retirement plans ERISA rules protect private sector retirement plans from mismanagement. Federal government and other public sector retirement plans are covered by other regulations. LO 3.f
Which of the following mutual funds is likely to carry the greatest credit risk in its portfolio?
he Gamma Corporate Investment-Grade Bond Fund B) The Smith and Jackson Small-Cap Growth Fund NO C) The KPF Government Bond Fund D) The Keppel High-Yield Bond Fund Explanation High-yield bonds are the riskiest of the debt securities given and carry the most credit risk. The small-cap growth fund, though risky, does not carry credit risk but does carry business risk. LO 4.d
A money market mutual fund portfolio might contain
negotiable, unsecured bank certificates of deposit. T-bills NOT common stock issued less than one year ago. T-bonds maturing in two years. The portfolio of a money market mutual fund would contain money market securities. Those are defined as high-quality debt issues with one year or less to maturity. T-bills and negotiable bank CDs (jumbo CDs) meet that definition. Common stock, regardless of when issued, is equity, not debt. T-bonds would be included only if they were due to mature in one year or less. LO 1.a
A convertible bond of the KLP Corporation has a conversion ratio of 20. This means that
one bond can be exchanged for 20 shares of KLP common stock. the conversion price of the bond is $50 per share. A conversion ratio of 20 means that one bond can be exchanged for 20 shares of common stock. Because the par value of the bond is $1,000, this corresponds to a conversion price of $50 per share. LO 1.a
A broker-dealer pledging a portion of a customer's stock as collateral for a loan from a bank to provide funds for margin borrowing is an activity known as
rehypothecation. Explanation Hypothecation is the term for pledging an asset as collateral for a loan. Encumbering is not a term used in margin borrowing. Rehypothecation is between a BD and a bank. Leverage is the use of borrowed money to make an investment. LO 3.b
A securities firm that holds rather than sells stock is
taking a position A firm that acts as principal by holding stock is taking or holding a long position. The firm purchases the stock, hoping to sell at a later date at a higher price. LO 1.f
The securities market investment theory that attempts to derive the expected return on an asset on the basis of the asset's systematic risk is known as
the capital asset pricing model. Explanation The CAPM is a securities market investment theory that attempts to derive the expected return on an asset on the basis of the asset's systematic risk. The basic premise is that every investment carries two distinct risks: systematic (think market) risk, which cannot be diversified away, and unsystematic (think business) risk, which can be mitigated through appropriate diversification. LO 4.b
All of the following are true of negotiable, jumbo certificates of deposit except
they are fully insured in any denomination by the FDIC. they are: -they are readily marketable. -they are usually issued in denominations of $100,000 to $1 million. -they usually have maturities of less than one year The FDIC insures only up to $250,000; any issue greater than that amount is an unsecured promissory note of the bank. LO 1.a
