Unit 2

The death benefit of a variable life policy must be calculated ____ and the cash value ____.

annually, monthly

closed- end fund shares are purchased at ___, the investor pays ___, and shares are priced based on ___

asking price, commission, supply and demand

represents the maximum return that can be credited to the annuity, regardless of the performance of the index

cap rate

Variable life separate account valuation

unit values- daily cash values- monthly

In a limited partnership, the general partners manage the day-to-day operations and incur unlimited personal liability. Limited partners invest money in the partnership and are liable for the partnership's debts only up to the amount invested.

...

POP = NAV + Sales charge

...

Variable life insurance policies have a minimum guaranteed death benefit

...

A mutual fund has a net asset value (NAV) of $7.80 per share, and the fund pays its underwriter a concession of $0.12 per share. If the fund has a sales load of $0.50 per share and an administrative fee of $0.15 per share, how much does the investor pay per share to purchase a Class A share of this fund? A) $8.30. B) $8.57. C) $7.80. D) $8.42.

A) $8.30. The investor pays the public offering price (POP) when purchasing mutual fund shares. POP = NAV + Sales charge

A mutual fund must redeem its tendered shares within how many days after receiving a written request for their redemption? A) 7 days. B) 3 days. C) 10 days. D) 5 days.

A) 7 days. Remember: Tender 7 day rule

The Investment Company Act of 1940 states that: A) open-end companies may issue common stock only. B) no more than 50% of the board of directors of an investment company may be officers or employees of the company or investment advisers to the company. C) an investment company must have $5 million capital before its securities can be offered to the public. D) it is unnecessary for the prospectus to disclose the management fee.

A) open-end companies may issue common stock only.

All of the following are advantages of universal life insurance EXCEPT: A) the policy is guaranteed never to lapse. B) ability to change death benefit amount. C) when the cash value is sufficient, no premium payment is required. D) ability to adjust the amount of premium payments.

A) the policy is guaranteed never to lapse. False- it may lapse if the accumulation fund drops below a specified level and an additional premium is not paid

75-5-10 test

A. 75% of the assets be invested in securities issued by companies other than the investment company B. so that no more than 5% of total assets are invested in any one company C. no more than 10% of an outside corporation's voting securities are owned by the investment company

If an investment adviser representative encourages a customer to invest $20,000 in each of 3 different families of mutual funds, which of the following is most likely to occur? A) Private transaction violation. B) Breakpoint sale violation. C) Reduced expense. D) Improved diversification.

B) Breakpoint sale violation.

All of the following positions expose a customer to unlimited risk EXCEPT: A) Short 2 XYZ uncovered calls. B) Short 2 XYZ uncovered puts. C) Short 200 shares of XYZ. D) Short 200 shares of XYZ and short 2 XYZ puts.

B) Short 2 XYZ uncovered puts. Potential loss for put writers is NOT unlimited.

Which of the following types of mutual funds would be most likely to have capital appreciation as its stated objective? A) Municipal bond. B) Specialized. C) Balanced. D) Income.

B) Specialized. A specialized fund invests at least 25% of its assets in one particular industry or region. Generally, its main objective is capital or price appreciation.

An investment company whose portfolio contains which of the following does NOT meet the definition of a diversified investment company under the 1940 Investment Company Act? A) 14% of its assets invested in stock of a major publicly held corporation. B) 18% of a given corporation's voting stock. C) 33% of its assets in the common stock of a small-cap technology company. D) 80% of its assets in securities of 50 health care companies.

C) 33% of its assets in the common stock of a small-cap technology company.

The term "derivative" would apply to all of the following EXCEPT A) futures B) options C) CMOs D) forwards

C) CMOs

A 50-year-old client with modest means wants to construct an investment program. He has no investment experience, his major consideration is saving for retirement, and he has limited risk tolerance. Which of the following would you recommend? A) Call options on the S&P 500 Index. B) Aggressive growth mutual funds. C) Growth and income mutual funds. D) High-grade bond fund.

C) Growth and income mutual funds.

The main benefit that variable life insurance has over whole life insurance is: A) an adjustable premium. B) the availability of policy loans. C) the potential for a higher cash value and death benefit. D) a lower sales charge.

C) the potential for a higher cash value and death benefit. (Separate account allows nice returns)

A policy loan provision must be offered by the insurer after three years, allowing the variable life policy contract holder to borrow at least what percentage of cash value? A) 90% B) 100% C) 125% D) 75%

D) 75%

Which of the following would most likely limit the amount of interest earned on an index annuity? A) The CDSC B) The participation rate C) The annuity reset rate D) The cap rate

D) the cap rate

Flexible premium payments are a feature of: A) variable life. B) whole life. C) term life. D) universal variable life.

D) universal variable life (THINK: universal = flexible)

A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. How is the distribution taxed? I. The entire amount is taxed as ordinary income. II. The growth portion is taxed as ordinary income. III. The growth portion is taxed as a capital gain. IV. The growth portion is subject to a 10% penalty.

II & IV (Under 45, 10% penalty, and growth portion is taxed as ordinary income)

Investment co. with no management fees and a portfolio consisting of muni/ corporate bonds

UIT

Federal law requires the insurance company to allow the insured to exchange the VLI policy for a permanent form of life insurance policy, issued by the same company, for two years, with no additional evidence of insurability.

...

A customer has contributed $1,000 a year for 10 years to his tax-deferred nonqualified variable annuity. The value of the separate account is now $30,000. If the customer takes a withdrawal of $10,000, what are the tax consequences? A) Any tax due is deferred. B) There is no tax as the withdrawal is considered return of capital. C) The entire $10,000 is taxable as ordinary income. D) Two-thirds of the withdrawal is taxable as ordinary income.

C) The entire $10,000 is taxable as ordinary income. When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or LIFO).

When shares of a closed-end investment company are purchased by an investor, the price paid is based upon the: A) net asset value. B) net asset value plus commission. C) current asking price. D) current bid price.

C) current asking price.

Why are "country" funds organized as closed-end funds? A) So that additional capital may easily be raised B) The United Nations Investment Act of 1952 requires that they all be closed-end C) Because redemption at net asset value within 7 days is assured D) Because it is often difficult to liquidate the foreign securities to get their value into the U.S.

D) Because it is often difficult to liquidate the foreign securities to get their value into the U.S.

Portfolio of a UIT is fixed, income will

not change

2 major benefits of mutual funds:

professional management and diversification

Letters of intent are valid for ___ months and may be backdated up to ___ days.

13 months, 90 days

Your client is 75 years old and has $100,000 to invest. He enjoys a relatively high income and is not concerned with immediate liquidity, although he is risk averse. The most suitable asset allocation strategies listed below would be a: A) 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund. B) 50% municipal bond fund, 40% money market fund, 10% large-cap common stock fund. C) 50% municipal bond fund, 50% large-cap common stock fund. D) 50% municipal bond fund, 40% government bond fund, 10% money market fund.

A) 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund.(10% stock will protect against inflation)

For which of the following is there no active secondary market? A) Futures contracts. B) Options. C) ETFs. D) Forward contracts.

A) Futures contracts.

A customer invests $18,000 in a mutual fund and signs a letter of intent for $25,000 to qualify for a breakpoint. One year later, the shares are valued at $25,100 even though the customer has made no new investments. Which of the following statements is TRUE? A) The agent should remind the customer of the letter of intent that was signed 12 months ago. B) The investment no longer qualifies for a breakpoint. C) Shares held in escrow will be liquidated at the appreciated value. D) The letter of intent is considered fulfilled.

A) The agent should remind the customer of the letter of intent that was signed 12 months ago. Remember, the LOI is valid for 13 months.

Which of the following is likely to be characterized by no management fees and a portfolio consisting of municipal or corporate bonds? A) Unit investment trusts. B) Open-end investment companies. C) Face amount certificate companies. D) Closed-end investment companies.

A) UITs

The death benefit of a variable life policy must be calculated at least: A) annually. B) weekly. C) semiannually. D) monthly.

A) annually

Under the exchange provision, within the first 24 months, a variable life policy may be converted into a A) permanent form of life insurance policy B) mutual fund shares C) term insurance policy D) variable annuity

A) permanent form of life insurance policy

If general interest rates increase, the interest income of a bond unit investment trust will probably: A) remain the same. B) increase. C) decrease. D) change as soon as the portfolio manager can take advantage of the higher rates now available in the marketplace.

A) remain the same. Since the portfolio of a UIT is fixed, the income generated by that portfolio will not change. Remember, a UIT does not have a portfolio manager.

You have a client who wishes to invest $100 per month into something that will give him the opportunity to share in the long-term growth prospects of the overall economy. Which of the following would probably be the most cost efficient investment vehicle? A) A fund of hedge funds. B) A no-load index mutual fund that mimics the S&P 500. C) An exchange traded fund (ETF) that mimics the S&P 500. D) Class A shares of a large-cap growth fund.

B) A no-load index mutual fund that mimics the S&P 500. (Cheaper than the ETF- no fees)

An investor is long stock in a cash account and does not expect the price to change in the immediate future. His best strategy to generate income may be to: A) buy a call. B) sell a call. C) sell a put. D) buy a put.

B) sell a call. Selling calls create additional income. Selling puts increases income, but also might require increasing a long position if the put is exercised.

The price of closed-end investment company shares is determined by: A) the Financial Industry Regulatory Authority. B) supply and demand. C) the board of directors. D) the net asset value plus the sales charge.

B) supply and demand

A 45-year-old woman wants the greatest possible monthly income with the preservation and stability of capital as secondary objectives. Which of the following investments would you recommend? A) Growth mutual fund. B) Growth and income fund. C) High-grade bond fund. D) Money market mutual fund.

C) High-grade bond fund.

As defined in the Investment Company Act, investment companies include: A) mutual funds, closed-end companies, and unit investment trusts. B) open-end companies, closed-end companies, and unit investment trusts. C) face-amount certificate companies, management companies, and unit investment trusts. D) diversified companies, nondiversified companies, and face-amount certificate companies.

C) face-amount certificate companies, management companies, and unit investment trusts.

The type of derivative that gives the holder the right, but not the obligation, to buy an asset at a specified price during a specified period is: A) a real estate investment trust (REIT). B) a futures contract. C) a variable contract. D) a call option.

D) a call option.

Which of the following statements about options are TRUE? I. An option is in-the-money if, disregarding the premium paid, exercising the option would be profitable. II. If the owner of an option does not exercise the option, the option will eventually expire. III. If an option expires, the holder loses only the premium the holder paid for the option.

I, II, & III

Which of the following statements regarding letters of intent used in connection with mutual fund purchases are TRUE? I. The letter can cover a period totaling 16 months. II. The letter may be backdated 90 days. III. Some shares purchased are held in escrow until the letter is completed. IV. During the period covered by the letter, the customer may not redeem his shares.

II. and III. The investor is not legally obligated to comply with the terms of the letter, so some shares purchased at the reduced sales charge are held in escrow.

In a variable life contract, which of the following has a guaranteed minimum? A) The death benefit. B) The maturity value. C) The cash value. D) There are no guarantees.

A) The death benefit.

A REIT and a direct participation program are similar because they both: A) are operated by a centralized management. B) can be described as a limited partnership. C) pass through losses to investors. D) are traded actively in the secondary market.

A) are operated by a centralized management.

Which of the following would be the most important reason for an investor interested in adding foreign stocks to his portfolio to do so by purchasing an international mutual fund? A) Purchasing foreign stocks through a mutual fund saves on foreign taxation. B) He would have the benefit of the portfolio managers picking the stocks instead of having to rely on his own efforts. C) He could select a fund whose portfolio had the proper mix of foreign and domestic stocks to maximize his diversification. D) The voting rights granted to a mutual fund shareholder are much stronger than those to the holder of an ADR.

B) He would have the benefit of the portfolio managers picking the stocks instead of having to rely on his own efforts.

An investor is in a low tax bracket and wishes to invest a moderate sum in an investment that will provide some protection from inflation. Which of the following should you recommend? A) Ginnie Mae fund. B) Mid-cap common stock mutual fund. C) Money market mutual fund. D) Municipal unit investment trust.

B) mid-cap common stock mutual fund. Mid cap stocks offer good hedges against inflation.

Which of the following is NOT an investment objective that must be stated in an investment company's prospectus? A) Income. B) Growth. C) Retirement. D) Tax-advantaged income.

C) Retirement. This is an objective of an investor, not the company

All of the following statements regarding scheduled premium variable life insurance are correct EXCEPT: A) the policy owner has the right to change the selection of sub-accounts. B) premiums are determined based upon age and sex of the insured. C) better than anticipated results in the separate account could lead to a reduction in annual premium. D) once selected, the policy owner may change payment modes.

C) better than anticipated results in the separate account could lead to a reduction in annual premium. Premiums in scheduled premium variable life insurance are fixed. Universal life insurance has flexible.

A popular vehicle for saving for retirement is the variable annuity. An agent explaining the benefits of this product would probably be in violation of the NASAA Statement of Policy on Dishonest and Unethical Business Practices of Broker/Dealers and Agents by claiming that variable annuities offer: A) the ability to transfer funds between sub-accounts without incurring a tax liability under IRS Code section 1035. B) the choice of a large number different sub-accounts with varying objectives. C) lower overall expenses than a mutual fund with similar investment objectives. D) tax deferral on earnings until withdrawn from the account.

C) lower overall expenses than a mutual fund with similar investment objectives.

Mutual funds must do all of the following EXCEPT: A) redeem their shares on request. B) issue shares with voting privileges. C) maintain fully diversified portfolios. D) publish their management fees.

C) maintain fully diversified portfolios

Many sophisticated investors have added alternative investments to their portfolios. Benefits in doing so would include: A) lower expenses than traditional stock and bond investments. B) returns that generally exceed those of traditional stock and bond investments. C) portfolio diversification. D) greater regulation than traditional investments such as stocks and bonds.

C) portfolio diversification.

Which of the following statements is TRUE concerning variable life separate account valuation? A) Unit values are computed monthly and cash values are computed daily. B) Unit values are computed monthly and cash values are computed weekly. C) Unit values are computed weekly and cash values are computed monthly. D) Unit values are computed daily and cash values are computed monthly.

D) Unit values are computed daily and cash values are computed monthly.

Among the benefits of purchasing derivatives would be: I. leverage. II. increased income. III. unlimited potential gain. IV. protection against loss.

I, III, IV. In order to generate income using derivatives, you must sell them, not buy.

Nonsecurities derivatives would include: I. Forward contracts. II. Futures contracts. III. Hedge funds. IV. REITs

I. & II.

Which of the following statements regarding a closed-end investment company is TRUE? A) The shares are sold at a current market price. B) The shares are redeemable. C) The number of outstanding shares is constantly changing. D) New shares are constantly offered to the public.

A) The shares are sold at a current market price.

Which of the following would be a difference between a universal life insurance policy and a scheduled premium variable life insurance policy? A) There is a minimum guaranteed death benefit in the variable life while no such minimum applies to a universal life policy. B) There is a greater choice of separate account sub-accounts in the variable life policy. C) There is a minimum guaranteed return on the universal life while there is no guaranteed return on the variable. D) The universal life policy will generally outperform the variable life policy during a period of falling interest rates and rising stock prices.

A) There is a minimum guaranteed death benefit in the variable life while no such minimum applies to a universal life policy.

In a limited partnership program, which partners manage the partnership's day-to-day operations and incur unlimited personal liability for the partnership's debts? A) Neither the general partners nor the limited partners. B) The limited partners. C) The general partners. D) Both the general partners and the limited partners.

C) the general partners

Which of the following describe differences between variable and universal variable life insurance? I. Variable life insurance has a minimum guaranteed death benefit, whereas universal variable life insurance does not. II. Universal variable life insurance typically provides a higher death benefit than variable life insurance. III. Variable life insurance provides no inflation protection for the death benefit, whereas universal variable life insurance does. IV. Variable life insurance requires scheduled premium payments, whereas universal variable life insurance permits flexible premium payments.

I. and IV.

Your married customers, ages 48 and 50, have a combined annual income of more than $200,000. They are concerned about the effects of rising inflation, and since they are heavily invested in bonds, they seek to invest a portion of their portfolio in a fund that will provide additional diversification. Which of the following mutual funds is the most suitable for these customers? A) ATF Overseas Opportunities Fund. B) XYZ Government Income Fund. C) NavCo Tax-Free Municipal Bond Fund. D) ABC Investment-Grade Bond Fund.

A) ATF Overseas Opportunities Fund. Investing overseas will diversify the risk of US inflation.

Which of the following statements best describes a hedge fund? A) A private and unregistered investment pool that accepts investor's money and employs sophisticated hedging and arbitrage techniques using long and short positions, leverage and derivatives, and investments in many markets B) An investment company, registered under the Investment Company Act of 1940, that charges higher than usual management fees and employs sophisticated investment techniques in an attempt to provide level returns during periods of market uncertainty C) An investment pool, generally unregistered, that, through the use of sophisticated market tools, offers investors returns that generally exceed those available elsewhere D) A closed-end investment company employing leverage through the use of debt and preferred stock financing

A) A private and unregistered investment pool that accepts investor's money and employs sophisticated hedging and arbitrage techniques using long and short positions, leverage and derivatives, and investments in many markets

Which of these features are common to both variable annuities and scheduled premium variable life insurance? I. Income earned in the separate account is tax deferred. II. Separate account performance below the AIR causes a reduction in cash value. III. Fixed contributions are required. IV. Contract owners have voting rights.

I. & IV.

Your married customers are both 42 years old, have 2 children ages 14 and 12, and they have spent the last 10 years accumulating money to provide for their children's education. Their oldest child will enter college in 4 years, and the customers are very cautious investors. If they need a safe investment that provides regular income to help them meet tuition payments, which of the following mutual funds is the most suitable for these customers? A) ATF Overseas Opportunities Fund. B) LMN Investment-Grade Bond Fund. C) RST Balanced Fund. D) ABC Stock Index Fund.

B) LMN Investment-Grade Bond Fund. Client cannot afford the risk of a market downturn.

Larry purchased a deferred annuity and, at age 65, annuitized the product under a life with 15-year certain option. His wife, Linda, is the beneficiary. Which of the following statements is CORRECT? A) Payments would be made to Larry until his death, then to his wife for another 15 years. B) Payments would be made to Larry as long as he lives. C) Payments would be made to Larry until he is 80, then cease. D) Payments would be made to Larry until he is 80, then to his wife for the remainder of her life.

B) Payments would be made to Larry as long as he lives.

A retired person seeking to maximize income with reasonable safety and liquidity should most likely consider investing in: A) an intermediate-term, high-grade corporate bond fund. B) a long-term government bond fund. C) an intermediate-term government bond fund. D) a large-cap growth fund.

C) an intermediate-term gov bond fund (more return than gov funds)