Series 7 Ch. 9 & 10
A person who purchases an annuity with an expectation that she may consider exchanging into another better performing annuity after three years, should consider purchasing: A. B shares B. L shares C. A shares D. None of these type of shares since a person should not exchange into another annuity within such a short period
B. L shares Variable annuity L shares, also referred to as short surrender annuities, generally have surrender periods of three to four years, after which no sales charges apply. B shares, the normal annuity shares with contingent deferred sales charges (CDSC) typically have surrender periods of seven to eight years before sales charges disappear. Suitability is the main consideration when deciding whether to purchase or exchange into an annuity. Generally, exchanges that are made within three years are considered unsuitable, especially if deferred sales charges apply. However, L shares offer an opportunity to avoid sales charges after the short surrender period.
An individual annuitizes his variable annuity contract and begins receiving payments using a straight life settlement option; however, she later decides that a joint and last survivor life annuity settlement option is more appropriate. Which of the following is TRUE concerning this situation? A. The individual is permitted to change the settlement option without restriction. B. The individual is not permitted to change the settlement option. C. The individual could change the settlement option with an additional fee. D. The individual is limited to changing to a settlement option with a fixed period payout.
B. The individual is not permitted to change the settlement option. Once an individual has annuitized her contract, no changes can be made to the settlement option. The accumulated value of the contract is converted into a stream of income and no additional withdrawals are permitted from the annuity outside of the chosen the settlement option.
On Monday, a client buys $1,000 of a 2x leveraged equity ETF. At the end of Monday, the index to which it's linked is up 10%, but at the end of Tuesday, the index is down 10%. If the investor sells his leveraged ETF shares at the end of Tuesday, what's the investment's value at the time of sale? A. $990 B. $1,000 C. $960 D. $1,200
C. $960 Since the leverage factor of the ETF is 2, it will provide twice the returns on an index. On Monday, since the index increased 10%, the ETF value will increase by 20% (2 leverage x 10% index return). Therefore, at the end of Monday, the $1,000 investment will be worth $1,200 ($1,000 x 120%). On Tuesday, since the index fell by 10%, the ETF value will fall by 20% (2 x 10%). At the beginning of Tuesday, the investment was worth $1,200, but fell to $960 by the end of the day ($1,200 x 80%).
An investor might take advantage of a Section 1035 exchange if: A. The new contract carries a new or longer surrender period B. The enhanced features do not apply to her C. Her investment objectives have changed and she is unable to obtain new benefits by switching to another subaccount in the same contract D. The total cost of the exchange outweighs the benefits of the exchange
C. Her investment objectives have changed and she is unable to obtain new benefits by switching to another subaccount in the same contract In order for the 1035 exchange to avoid scrutiny, the customer must be able to benefit from at least some of the features received on the new contract. Should the customer lose benefits, incur additional charges, or be subject to a longer surrender period, the 1035 exchange is likely to be viewed as unsuitable.
An investor purchased a fixed annuity twenty years ago from a top-rated insurance company. The investor is now considering whether to annuitize on a straight life basis, or to take a lump-sum settlement and invest it elsewhere. If economists are now forecasting an extended period of significant inflation, which of the following is the greatest risk facing the investor if she chooses to annuitize? A. Credit risk B. Market risk C. Purchasing-power risk D Exchange-rate risk
C. Purchasing-power risk An investor who annuitizes a fixed annuity on a straight life basis will receive the same fixed payment for life. Since, in this case the insurance company is highly rated, there is little credit risk (risk of default). However, the purchasing power of any fixed payment is subject to erosion over time due to inflation. It is this disadvantage of fixed annuities that led to the creation of variable annuities.
If the NAV of the Greenwich Fund is 90% of its offer price, this must be a(n): A. Management company B. Unit investment trust C. Open-end fund D. Closed-end fund
D. Closed-end fund Open- and closed-end funds are types of management companies. The NAV could be below the offer price for both of these funds, but the situation referred to could not occur in an open-end fund. For an open-end fund, the NAV must be at least 91.5% of the offer price, because the maximum sales charge is 8.5%.
When is it appropriate for a registered representative (RR) to recommend the purchase of a non-qualified variable annuity in an IRA? A. If an investor has not yet maximized his contributions in his employer-sponsored retirement plan B. Only after the client turns age 72 C. If the client's income makes him ineligible to contribute to a Roth IRA D. If the client is worried about outliving his retirement savings and providing a death benefit for his beneficiaries
D. If the client is worried about outliving his retirement savings and providing a death benefit for his beneficiaries Generally, non-qualified annuities are not suitable investments in an IRA since the IRA already provides tax-deferral. In most cases, investors should only consider annuities after they have maximized their contributions in employer-sponsored plans. If an investor is interested in lifetime payments or a minimum death benefit, then buying an annuity in an IRA may be suitable. However, registered representatives should ensure that investors are aware of the higher costs associated with variable annuities.
A 65-year old individual invested $240,000 into a variable annuity, which has since grown to $400,000. If she wants to withdraw $150,000, what's the tax implication of taking the withdrawal? A. She will be taxed on $60,000 as a capital gain. B. She will be taxed on $60,000 as ordinary income. C. She will be taxed on $150,000 as a capital gain. D. She will be taxed on $150,000 as ordinary income.
D. She will be taxed on $150,000 as ordinary income. Since the individual is taking a withdrawal, not annuitizing, the first money that comes out of the annuity is considered earnings. In this question, the annuity had generated tax-deferred earnings of $160,000 (from $240,000 to $400,000). Therefore, the full $150,000 being withdrawn is taxed as ordinary income. Any amount withdrawn beyond the first $160,000 is considered a return of the individual's basis and not taxed. (17051)
An investor has been making payments into a variable annuity for the last 20 years. The investor decides to annuitize and selects a straight-life payout. Which of the following statements is TRUE? A. The investment risk is assumed by the insurance company. B. The amount of each payment to the investor is guaranteed by the insurance company. C. All of the assets are held in the general account of the insurance company. D. The amount of each payment to the investor is not guaranteed by the insurance company.
D. The amount of each payment to the investor is not guaranteed by the insurance company. Unlike a fixed annuity, the customer assumes the investment risk in a variable annuity and the amount of the payment depends on the performance of the separate account. The payment could increase, decrease, or remain the same since the amount is not guaranteed. (25063)
The Founders Income Fund has declared a dividend that is payable to stockholders of record on Thursday, May 29. This mutual fund's ex-dividend will typically be on: A. Monday, May 26 B. Tuesday, May 27 C. Wednesday, May 28 D. The date that is set by the fund or its principal underwriter (sponsor)
D. The date that is set by the fund or its principal underwriter (sponsor) Mutual fund shares do not trade on exchanges and do not have a fixed settlement date. For this reason, the ex-dividend date for a mutual fund will not automatically be one day before the record date, as it is for common stock. Instead, a mutual fund's ex-dividend date is on a date that is determined by the fund or its principal underwriter (sponsor). In practice, mutual funds will often use the day after the record date as the ex-dividend date.
The determination of when the NAV of a mutual fund is calculated, is stipulated by: A. FINRA B. The SEC C. The board of directors D. The prospectus
D. The prospectus The net asset value of a mutual fund is calculated whenever stipulated in the fund's prospectus. Most funds calculate daily, at the end of the day's trading.
An accumulation unit in a variable annuity contract is: A. An accounting measure that's used to determine the contract owner's interest in the separate account B. An accounting measure that's used to determine payments to the owner of the variable annuity C. The same as a shareholder's ownership interest in a mutual fund D. The same as the insurance company's profit from the separate account
A. An accounting measure that's used to determine the contract owner's interest in the separate account An accumulation unit in a variable annuity contract is an accounting measure that's used to determine the contract owner's interest in the separate account. The separate account is the portfolio in which the customer's contributions are invested. Some separate accounts consist of several subaccounts that each have different objectives and portfolios.
Which of the following statements is NOT TRUE about exchange-traded notes (ETNs)? A. ETNs generally pay a fixed coupon rate B. ETNs may be sold at any time in the secondary markets or held until maturity C. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note D. If the issuer's financial condition deteriorates, it could negatively impact the value of the ETN, regardless of how its underlying index performs
A. ETNs generally pay a fixed coupon rate All of the statements about ETNs are true except ETNs pay a fixed coupon rate. ETNs do not usually pay an annual coupon or specified dividend. They are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes since ETN returns are linked to the performance of a commodity, currency, or index minus applicable fees. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it could negatively impact the value of the ETN, regardless of how its underlying index performs.
Which of the following statements is TRUE regarding dollar cost averaging? A. It is a systematic method of investing B. If employed, the average price will be less than the average cost C. It can only be set up through a payroll deduction plan D. The benefits can be obtained if one invests in a money-market fund
A. It is a systematic method of investing Dollar cost averaging is a systematic method of investing that results in the average cost of the securities purchased being less than the average of the prices paid (not the other way around). The benefits are not obtained with funds that have a stable asset value, such as money-market funds.
Which of the following is a benefit of purchasing variable life insurance? A. The death benefit can exceed the guaranteed minimum based on the value of the subaccount products. B. The minimum death benefit is based on the value of the subaccount products. C. The entire premium paid is invested in subaccount products. D. The premiums paid to purchase a variable life insurance policy are tax deductible.
A. The death benefit can exceed the guaranteed minimum based on the value of the subaccount products. Variable life insurance policies provide a guaranteed minimum death benefit. However, the death benefit may be increased based on the performance of the subaccount products into which the owner directs the excess premiums. When an individual purchases a variable life insurance policy, a portion of the premium is used to pay for the minimum death benefit, with much of the balance directed to purchasing subaccount products. The premiums payments are not tax-deductible.
An investor places an order to buy shares of a mutual fund after that investment company has determined its net asset value for the day. The RR instructs the fund company to purchase the shares at that day's NAV for the investor. Which of the following statements concerning this potential trade is TRUE? A. This is a sales practice violation known as late trading B. This is an acceptable practice known as market timing C. The RR would need to have prior written approval by a principal of the firm to execute this order D. The investor may only purchase Class B shares in this case, since Class A shares are not available under this arrangement
A. This is a sales practice violation known as late trading This activity would constitute a sales practice known as late trading, which is prohibited under federal securities laws. According to securities law, orders placed after the close of trading for the day (and after the determination of the closing NAV) must be filled at the next calculated NAV, which is usually the price at the end of the next business day. Investors placing orders after the close of the market (based on information that they have learned after the close), and seeking to purchase shares at prices determined before the close, are engaging in late trading, which clearly places other investors in that mutual fund at a clear disadvantage. The investor must receive the price as calculated by the fund company at the NAV on the following day.
When comparing variable annuities to fixed annuities, investment risk is assumed by the: A. The selling broker-dealer in a variable annuity B. Annuity company in a fixed annuity C. Investor in a fixed annuity D. Annuity company in a variable annuity
B. Annuity company in a fixed annuity In a fixed annuity, the annuity company guarantees a fixed monthly payment. Therefore, the company must invest the funds and assume the investment risk. In a variable annuity, the annuity company makes no payment guarantee. The company will invest the investor's money and the investor's annuity benefits will depend on the value of the investments in the separate account. As a result, the investor assumes the investment risk. (25028)
A mutual fund shareholder is NOT required to report which of the following events for tax purposes? A. Receiving a dividend that is subsequently reinvested in the fund at the net asset value B. Appreciation in the value of the shares C. Exchanging shares of one fund for another fund within the same family of funds D. Receiving a capital gains distribution that was not reinvested in the fund
B. Appreciation in the value of the shares Dividends and capital gains distributions are taxable to the investor regardless of whether they are reinvested in the fund. Exchanging shares for another fund within the same family of funds must also be reported on the investor's tax return since shares of one fund are being sold to buy shares in another fund. Appreciation in the value of fund shares is not taxable until the shares are sold to establish a capital gain.
Which of the following statements is NOT TRUE regarding a variable annuity accumulation unit? A. It's an accounting measure used to determine an owner's interest during the pay-in phase. B. It's an accounting measure used to determine an owner's interest during the payout phase. C. The value of the units will fluctuate. D. The value is tied to performance of the separate account.
B. It's an accounting measure used to determine an owner's interest during the payout phase. Accumulation units are an accounting measure used to determine an owner's interest in the separate account during the accumulation or pay-in phase of a variable annuity. When an annuity has been annuitized, accumulation units are converted into annuity units, which are used to determine the annuitant's payments. The value of both accumulation and annuity units will vary based on the performance of the separate account. (25075)
An investment contract that offers life insurance benefits plus participation in a portfolio of securities is called a: A. Variable annuity contract plan B. Insurance sector based index fund C. Spread load contractual plan D. Variable life insurance contract
D. Variable life insurance contract A variable life insurance contract offers life insurance benefits and participation in a separate portfolio of securities. A variable annuity offers a death benefit, but a death benefit is not considered life insurance.
Which of the following funds would typically have the LEAST amount of stability in NAV? A. money-market mutual fund B. A short-term bond fund C. An S&P 500 Index fund D. A sector fund
D. A sector fund Sector funds focus their investments in specific areas of industry or geography. As a result the funds tend to have more risk and volatility (less stability), than money-market mutual funds, short-term bond funds or index funds that track the broad market indices such as the Standard & Poor's 500.
The spouse of a customer of a registered representative has $90,000 invested in shares of the XAM fund family at another broker-dealer. The RR's customer wants to invest an additional $60,000 in the XAM fund family with the RR's firm. The RR should explain to his customer that: A. Breakpoints are only permitted for investments in the same fund B. Breakpoints are only allowed if both accounts are held at the same broker-dealer C. Breakpoints are only allowed for investments made by the same customer D. Breakpoints are allowed for investments in the same fund family, even if invested in different specific funds and at different broker-dealers
D. Breakpoints are allowed for investments in the same fund family, even if invested in different specific funds and at different broker-dealers Breakpoints are permitted for investments in the same fund family even if the shares are purchased at a different broker-dealer. The fund shares can be the same or any other mutual fund within the family of funds. Breakpoints are available for any investments that are made by a customer's immediate family (e.g., spouse, children). Before mutual fund shares are purchased by a customer, a RR must ask whether the client owns other mutual fund shares within the same fund family or in a relative's account, even if the account is held by another broker-dealer.
