Series 66 final #4
what bonds have the greatest sensitivity to interest rate changes
- long duration - low coupon bonds
advantages of a variable annuity compared to a fixed annuity includes
- protection against inflation - the ability to vote regarding changes in investment policy
open- end securities
- redeemable and do not trade in the secondary market
According to the NASAA Recordkeeping Requirements for Investment Adviser Model Rule, an IA is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is:
10 or fewer
what is true regarding the cash value in a variable universal life policy
- it can fluctuate with the performance of the separate account - any loans taken will reduce the cash value.
the spread is
the amount that will be deducted
Which of the following is NOT TRUE regarding the characteristics of a real estate investment trust (REIT)? 1. At least 90% of the income from a REIT must be derived from investing in real property 2. At least 75% of the income from a REIT must be distributed to investors each year 3. Any investment losses from a REIT are not passed through to investors 4.If sold to the public, the shares of a REIT must be registered with the SEC
Answer is 1 and 2. REITs are required to generate at least 75% of their income from investing in real property—not 90%. Also, REITs are required to distribute at least 90% of their income to its shareholders each year—not 75%. For those REITs that are sold to the public, they must be registered with the SEC under the Securities Act of 1933. If a REIT incurs a loss, it is retained by the REIT and not passed through to the shareholders.
The "Blue Sky" laws provide for: 1. State registration of broker-dealers and agents 2. State registration of investment advisers and investment adviser representatives 3. Federal registration of broker-dealers and agents 4. Federal registration of investment advisers and investment adviser representatives
Answer is 1 and 2. The "Blue Sky" laws are state securities laws which provide for the registration of broker-dealers, agents, investment advisers, and investment adviser representatives. These laws also provide for the registration of securities that are to be issued in a state
An investment company has entered into a contract with an investment adviser. The investment adviser seeks to have an exculpatory provision included in the contract. According to the Investment Advisers Act of 1940, which of the following statements is TRUE? A) Exculpatory provisions are prohibited in any contract B) The contract is valid only when exculpatory provisions are included C) A majority of shareholders would need to approve the exculpatory provisions of the contract D) In order for an exculpatory provision to be allowed, the SEC would need to approve the contract
Answer is A. An exculpatory provision is prohibited in any contract entered into by an investment adviser and its clients. This is true even if the client is an investment company. An exculpatory provision protects officers and directors from liability from acts of willful misfeasance, bad faith, gross negligence, or reckless disregard of their duties. Any contract that includes such a provision would be void.
All of the following are characteristics of forward contracts, EXCEPT: A) Delivery and settlement of the contracts occurs immediately B) The contracts are negotiated off of an exchange C) The contracts cannot be offset D) The amount and type of the delivered commodity are negotiable
Answer is A. A forward contract is an agreement to buy and sell commodities at a future time and place. Forwards are over-the-counter contracts that will be negotiated off of a futures exchange. All aspects of the contract are negotiated between the buyer and seller, including the price, type of commodity, and amount, as well as the time and place of delivery.
Mr. Smith holds a portfolio of blue-chip stocks that have appreciated in value. To generate additional current income from his holdings, Mr. Smith would: A) Write covered puts B) Write covered calls C)Buy puts D)Buy calls
Answer is B.
Paul and Todd are starting their own business. They are trying to decide whether to organize this new business as a partnership or an S Corporation. What are some of the advantages of an S Corporation compared to a partnership? A) Favorable tax treatment B) Limited liability C) More transparency D) Fewer start-up costs
Answer is B. In a partnership, the general partners are liable for the partnership's debts. (Limited partners are not liable; however, there's no indication in the question stem that either Paul or Todd is a limited partner.) In an S Corporation, the owners are not liable for any of the company's debts. Instead, they have only limited liability. Both the S Corporation and LP are pass-through entities and receive favorable federal tax treatment. For these entities, all losses and profits are passed through to the owners.
All of the following statements are TRUE regarding forward contracts, EXCEPT: A) They have counter-party risk B) They are standardized and traded on an exchange C) They are often used to hedge against currency or exchange-rate risk D) The buyer is obligated to accept delivery of the underlying commodity at a specified time and price
Answer is B. Unlike futures contracts, forwards are not standardized agreements and they are not exchange-traded. Since forwards are not exchange-traded, the exchange does not guarantee against counter-party failure. Forward contracts are not readily transferable. In other words, to assign the contract to a third party, both the buyer and seller would need to agree on the assignment.
Jill has created a revocable trust to provide for the support of her adult child. The trust has generated $20,000 in income during the year and is invested in a wide variety of stocks and bonds. Which of the following statements concerning this trust is NOT TRUE? A) Jill controls the assets in the trust. B)The trust must be structured as a living trust. C) The trust will become irrevocable upon Jill's death. D) Jill reduces her potential estate tax liability by the amount of the gains in the trust.
Answer is D. A revocable trust must be established as a living trust since the donor retains control over the assets. This type of trust does not reduce the donor's potential estate tax liability. With an irrevocable trust, the donor loses control of the assets, but the assets will not be included as part of the donor's estate. This is the trade-off between the two types—retain control and potentially pay more taxes (revocable trust) or lose control and potentially pay less in taxes (irrevocable trust)
Which of the following is NOT included in the adjusted gross income (AGI) of a customer? A) Salary, tips, and bonus B) Alimony support payments that are received from an ex-spouse C) Dividends received from stock D) Interest received from a municipal bond investment
Answer is D. A client's federal adjusted gross income (AGI) consists of her taxable income. Examples of taxable income include a client's salary, tips, bonuses, alimony received, and dividends. Since municipal bond interest is tax-free, it is not a part of the AGI
An equity-indexed annuity is a type of: A) Variable annuity that tracks the S&P 500 Index B) Variable annuity that tracks the DJIA C) Fixed annuity that tracks the performance of a designated mutual fund D) Fixed annuity that offers the potential for greater returns
Answer is D. An equity-indexed annuity is a type of fixed (non-variable) annuity; therefore, SEC registration is not required for these contracts. The owner receives a guaranteed minimum rate of return, but has significant upside potential since the annuity's return is tied to a benchmark index (e.g., the S&P 500 Index. If the index underperforms, the investor will simply receive the minimum rate. On the other hand, if the index performs well, the investor will receive the indexed return based on contractual provisions.
A broker-dealer that acts as a market maker will: A) Add a commission to the transaction value B) Charge less than 10% in fees C)Add a sales charge to the Net Asset Value D) Charge a markup when selling or a markdown when buying
Answer is D. When a broker-dealer acts as a market maker, the firm does not charge a commission. Instead, a market maker either buys for or sells from its own inventory and charges a markup or a markdown. The market maker will mark up from the offer price (asked) when it sells the securities and it will mark down from the bid price when it buys the securities.
In order to determine the suitability of a potential investor for a limited partnership, which of the following forms would the client complete? A) The partnership agreement B) The subscription agreement C) A private placement memorandum D) The certificate of limited partnership
Answer is b. Many states require potential partners to complete a subscription agreement, in order to determine their suitability as it relates to income, net worth, investment experience, and an understanding of investment risk. A certificate of limited partnership is filed by the general partner when setting up the partnership. The partnership agreement discloses the rights and duties of the partners. A private placement memorandum is given to investors in a private placement, in lieu of a prospectus
Your clients have a sizable estate, which they wish to leave to their children upon their death. Which of the following trusts would remove assets from their estate and potentially reduce their estate tax?
Irrevocable trust An irrevocable trust must be established by the grantors in order to remove their assets from the estate thus avoiding estate taxes
major advantage of a S corp vs. a C corp
S corp may elect to be treated like a partnership for federal tax purposes
Capital needs analysis
Used to determine the amount of insurance a client needs to purchase today in order to fund future financial goals.
private placement vs. reg d private placement
private placement offers are not to be made to more than 10 retail investors. - reg. d private placement can be made for up to 35 retail investors
when annuitization begins
accumulation units are exchanged for annuity units
All of the following are characteristics of futures contracts, EXCEPT: 1. Most of the contract's terms are set by the buyer and the seller 2. The amount of the commodity being traded is standardized 3. Prices are negotiated between the buyer and the seller 4.The buyer of a futures contract cannot be forced to take delivery
answer is 1 and 4. A futures contract is an agreement to buy or sell a specific amount of a commodity or financial instrument. Most of the contract's terms, such as the size of the contract, the point of delivery, the delivery month, and the grade of the underlying security or commodity are set by the exchange on which it trades. Although futures contracts may be offset, they differ from options because the buyer of futures contract may be forced to take delivery
Which of the following forms would a publicly traded corporation typically file with the SEC during its lifetime? 1. SEC Form 1092 2. Form 10-K 3. Form 8-K 4. Form 10-Q
answer is 2, 3, and 4. Publicly traded companies disclose their annual financial reports on Form 10-K and quarterly reports on Form 10-Q. Public companies must also report certain material corporate events on a more current basis. Form 8-K is the current report companies must file with the SEC to announce major events that shareholders should be informed about. SEC Release 1092 was published by the SEC to provide guidance to investment advisers.
A top-down approach to investing would generally include all the following, EXCEPT : A)An analysis of economic trends B) An analysis of a specific company's past stock price C)An analysis of various industry sectors D) An analysis of specific companies within an industry sector
answer is B. Analyzing the past stock price of a specific company is typical with doing technical analysis. However, when doing a top-down analysis, the first step is to identify economic trends, then identify specific sectors or industries that may benefit from that trend. Lastly, identify specific companies within a sector that may be affected by a specific economic trend.
Which feature of a deferred compensation plan is generally considered to be a disadvantage? A) The plan must be made available to all employees regardless of tenure B) The plan has a short vesting period C) Unless the plan is funded by the end of the year, the employer will be subject to harsh penalties for breaching its fiduciary duty D) The plan is not tax-deductible
answer is D. Deferred compensation plans are nonqualified and funded with after-tax dollars. These plans are not available to all employees and do not require immediate funding.
Which of the following choices is not considered a security? A) variable annuity set up as a retirement plan B) Call options on a gold futures contract C) American Depositary Receipts D) A Treasury bond futures contract
answer is D. Under the Uniform Securitiess Act, futures contracts are not securities. However, options on commodity futures contracts are considered securities. Variable products (annuities and life insurance policies) and ADRs are also defined as securities
All of the following statements are NOT TRUE, EXCEPT: A) Variable life, as with universal life, gives the policyholder the flexibility to change the death benefit and the premium payments B) Universal life, as with variable life, gives the policyholder flexibility in changing how the cash value is invested C) Variable life, as with whole life, has fixed premiums and a fixed death benefit D) Variable life, as with whole life, has fixed premiums paid at fixed intervals
answer is D. While universal life allows the policy owner to change the premiums and/or the death benefit, variable life has fixed premiums and a fixed minimum death benefit. The actual death benefit on a variable life policy is not changed by a decision of the policyholder but, instead, as a result of growth in the subaccounts. Universal life has a minimum interest rate and an actual rate that could be higher, but it is determined by the insurance company, not the policyholder. Variable life and whole life are the same in having fixed premiums paid at fixed intervals
A limited partnership sells an asset for a capital gain in the current year; however, the gain is distributed to the partners in the following year. What is the tax consequence of the gain? A) As ordinary income in the year it is distributed to the partners B) As a capital gain in the year it is realized by the partnership C) As ordinary income in the year it is distributed to the partnership D) As passive income the year realized by the partnership
answer is b. The key to this question is to recognize that there is only one answer that recognizes the result as a capital gain. Any capital gains that are realized by the partnership are taxed to the partners in the year in which the gain is incurred, not when the distribution is made to the partners. When a partnership generates income, a tax liability is created for the partners in the year in which it is generated. All sources of partnership income are reported to the partners on Schedule K-1. Capital gains can be classified as either short-term or long-term
A common investment strategy is dollar cost averaging. The objective of using this method of investment is the: A) Average price of securities purchased is less than the average cost of the securities over a long period B) Average cost of securities purchased is more than the average price of the securities purchased over a short period C) Average price of the securities purchased will be more than the average cost of the securities over a long period D) Average cost of the securities will be equal to the average price of the securities over a long period
answer is c. Dollar cost averaging involves investing the same amount of money, in the same securities, over a long period. The objective is that the average cost of the securities purchased should be less than the average price of the securities over that period, though a profit is not a guarantee.
Under CAPM risk is defined as
deviation. CAPM measures risk using beta to measure systematic risk and alpha to measure non-systematic risk. Risk is the variance in expected return, not the loss of client funds or failure to meet an objective.
an investment adviser is evaluating several bonds on behalf of a client. One measure of a bonds price sensitivity is:
duration
MPT (Modern Portfolio Theory)
expected return of an investment is the possible returns on the investment weighted by the likelihood that return will occur
the return that a mortgage company may earn over the life of a loan to a customer is:
holding period rate of return
limited partnerships treatment of income and losses
limited partnerships are allowed to pass through both income and losses to investors (this includes real estate limited partners)
long calls and long puts
long calls are a hedge for short positions and long puts are a hedge for long stock positions
deferred compensation plans are:
non-qualified and funded with after-tax dollars
capital gains from a Subchapter S
the gain would be exempt from corporate taxes, but would be taxable to the individual as a capital gain. ** subchapter S avoids corporate taxation and shareholders are taxed based on distributions from the corporation**
