Full Length Test Review Notes (94% First Test)

From first to last, in what order would claimants receive payment in the event of bankruptcy? Holders of secured debt. Holders of subordinated debentures. General creditors. Preferred stockholders.

A The liquidation order is as follows: wages, taxes, secured debt holders, unsecured debt holders (including general creditors), holders of subordinated bonds, preferred stockholders, and common stockholders

Each of the following is a characteristic of money market funds EXCEPT:

A beta of 1.00. NOT Offered without a sales load. BECAUSE price volatility of money market funds does NOT mirror that of the market's perfectly A beta of 1.00 means that a security (or portfolio) has the same price volatility as the overall market. That is certainly not the case with money market fund shares. Money market mutual funds invest in a portfolio of short-term debt instruments such as T-bills, commercial paper, and bankers acceptances. They are offered without a sales load or charge. The principal objective of the fund is to maintain a stable NAV ($1 per share). SO MONEY MARKET INSTRUMENTS DO NOT CHARGE A SALES LOAD

Your customer would like to make provision for his retirement. He has a number of expenses that will persist for many years and would like to be assured that there will always be enough income to meet them. He would also like protection from inflation. Which of the following contracts should you recommend?

A combination annuity. Upon annuitization, a combination annuity has the advantage of providing BOTH a fixed monthly payout (which would apply to the investor's fixed expenses) and a variable payout (which would provide inflation protection).

Which of the following best defines credit risk?

A risk associated with default of a debt security.

Variable annuity retirement payments are based on which of the following?

A variable amount determined by the value of the separate account

The cost of which of the following may NOT be deducted as an expense from an open-end investment company's investment income?

Advertising expenses of an underwriter NOT custodial charges Advertising expenses of an underwriter are paid from the sales charge collected on the sale or redemption of shares and, as such, are not an expense of the fund. Note that if advertising is paid for from 12b-1 fees, 12b-1 fees are an expense of the fund.

Which of the following regarding both index mutual funds and ETFs is TRUE?

Both are designed to track a particular index. Index mutual funds, which are designed to track an index, are priced, usually just once, at the end of the trading day. ETFs also track an index but trade at market value during the day and are suitable for arbitrage, short-selling, and purchases on margin, all of which are not available for mutual funds.

A registered representative with a FINRA member firm must complete the regulatory elements of CE within how many days of his registration anniversary date?

CE = Continuing Education 120 days The regulatory elements must be completed within 120 days of a person's second registration anniversary date and every three years thereafter.

Which of the following statements are NOT true concerning revenue bonds? They are secured by a specific pledge of property. They are a type of general obligation bond. Generally, their interest is tax-exempt at the federal level. They are analyzed primarily on the project's ability to generate earnings.

I and II Revenue bonds are not secured by a specific pledge of property and are not a type of general obligation bond. They are secured by user fees, such as tolls.

Which of the following entities must review retail communications for investment company shares prepared by principal underwriters? Principal of the underwriting broker-dealer distributing the shares FINRA SEC NYSE

I and II Retail communications must be filed with FINRA for review. The principal of the firm must approve the communication before its use and will hear from FINRA if it determines that the material is misleading.

You are reviewing an investor's balance sheet. Which of the following items would be found on a balance sheet and help you determine the client's net worth? 401(k) balance Credit card balance Monthly income Electric bill

I and II The balance sheet reflects a person's net worth by comparing assets and liabilities. 401(k) balance is an asset and credit card debt is a liability. Income and monthly bills such as the electric bill are found on the income statement. Important to not that income and monthly bills are found on the INCOME STATEMENT NOT THE BALANCE SHEET

Asset-based distribution fees, also known as 12(b)-1 fees: are based on the fund's annual average daily net assets. are based on the fund's annual sales of shares. must be reviewed at least quarterly by the fund's board of directors. must be reviewed at least annually by the fund's board of directors.

I and III Fees charged under Section 12(b)-1 are assessed against the fund's annual average daily net assets and must be reviewed at least quarterly by the investment company's board of directors. SO 12b-1 fees ARE NOT based on the fund's annual sales of shares.

Bob's Series 6 registration with FINRA was placed in a specifically designated inactive status while in military service for three years. Upon his release from service Bob would like to resume his career with a different broker-dealer than the one he was with prior to his service. Which of the following events are necessary in order for Bob to work for another broker-dealer? Notify FINRA that military service has ended Retake the Series 6 exam Fill out a new U-4 Take a current Regulatory Element Exam

I and III INTERESTING here that even though Bob served for THREE years according to the question, he technically was still exempted like normal (which last for 27 months normally so this might be an error) If returning from military service to work for a different broker-dealer, notification to FINRA is required in order to become active and a new U-4 must be completed. The two-year license expiration period will be placed on hold beginning on the date the person enters active military service and will end 90 days after that person's completion of active service.

Which of the following statements regarding a mutual fund omitting prospectus are TRUE? It does not have certain information contained in a full prospectus. It may contain an application to invest. It is a form of advertising. It need not contain information on how to obtain a full prospectus.

I and III SO you knew already that tombstone ad omitts certain info (It does not contain an application to invest, but directs the prospect to a phone number, website, or other location where a prospectus containing the application may be obtained.) that said you were CONFUSED about whether it counts as advertising and yes, tombstone ads DO

A retiree, widowed and in his early 70's has adequate savings to meet large unexpected expenses. However, he has no pension or IRA, and in some months social security payments leave him short requiring him to dip into his savings and investments for recurring expenses such as his mortgage payment and utilities. With an already diversified portfolio he wishes there could be a way to add to his monthly income on a regular basis. He's willing to liquidate and allocate up to $100,000 of his current portfolio or cash out a life insurance policy if need be to meet this objective. Which of the following recommendations would be better?

Interesting in that this case a ginnie maes (rather than annuities) were more suitable for a retiree) With monthly income being the objective, GNMAs would be deemed more suitable and should become a part of his existing portfolio. Each month GNMA certificates pass through a portion of ones principal and interest lending themselves to monthly income. While an annuity also makes monthly payments to annuitants, they are generally not deemed suitable unless all other retirement vehicle investments have been utilized first. Additionally, liquidating assets to purchase a VA or cashing out life insurance policies to do so, is almost always deemed unsuitable.

If a customer's chief concern is to shelter as much of his portfolio earnings from tax as possible, which of the following securities would be most suitable?

Municipal GOs

The IRS permits an employer sponsored retirement plan known as a TSA to be established by certain entities. One of those is known as a 403(b) institution and would include which of the following?

Public elementary school NOT research foundation SO public elementary schools are eligible as TSA 403b organizations Public schools, those schools supported by the state, are 403(b) organizations. Parochial schools, museums, research foundations, and private hospitals are 501(c)(3) organizations. All may participate in what are known as 403(b) plans (tax-sheltered annuities, TSAs))

The KPF Corporate Bond Fund received $10 million in interest last year and no dividends from the securities that make up its portfolio. It had $500,000 in expenses and distributed $9 million of income directly to shareholders. Which of the following words applies to this fund?

Regulated The KPF Fund distributed 90% or more of its net investment income to shareholders and thus did not have to pay tax on what it distributed. This makes it a regulated investment company under Subchapter M of the Internal Revenue Code.

A customer has a variable life insurance policy and has made two annual premium payments. If the customer terminates the policy after the end of the second year, which of the following statements are TRUE?

The customer receives the policy cash value only. NOT the premiums paid into the policy The variable life refund provision returns cash value only if it is surrendered after the second year.

An investor who works for the city is ready to retire. The city has operated a Section 457 plan for its employees, in which he has participated. What portion of his withdrawals will be taxable?

The entire amount Although nonqualified, a 457 plan is a type of deferred compensation plan for state and local governments and tax-exempt employers for their employees. As such, the money in the plan has never been taxed, therefore all of the distributions will be taxed as ordinary income.

Which of the following statements describing Section 529 plans is TRUE?

The maximum annual contribution varies from state to state. NOT They can only be opened for children under the age of 18. The features of Section 529 plans, including their contribution limits and fees, vary widely from state to state. Section 529 plans have no age limits as to participation; they are open to both children and adults who plan to attend college or graduate school. For college savings plans, there is no state residency requirement for either owners or beneficiaries of Section 529 plans. SO section 529 plans have NO AGE LIMIT FOR PARTICIPATION. YOU CONFUSED A 529 WITH A COVERDELL ACCOUNT

An investor sells EGH common stock that she has owned for six months at a loss of $2,500 on February 16. Two weeks later, she purchases preemptive rights to EGH common stock at a price of $1.50, exercisable at a price of $35. Which of the following best describes the tax treatment of this transaction?

The purchase of the rights, according to IRS rules, represents the reestablishment of the investor's position in substantially identical securities, and any potential losses will be disallowed under wash sale rules. IRS rules do not allow an investor to claim a tax loss from the sale of securities if the investor effectively reestablishes his position within 30 days before or after the sale. Because rights allow the purchase of the same stock, the investor has created a wash sale and any loss is disallowed.

If a 40-year-old customer earns $65,000 a year and his 38-year-old spouse earns $40,000 a year, how much may they contribute to IRAs?

They may each contribute 100% of earned income or the maximum annual allowable dollar limit, whichever is less, to an IRA.

A first year broker-dealer posts an ad in the newspaper to recruit series 6 registered representatives on May 5, 2010 and again on August 14, 2010. How long must the broker-dealer maintain records of this?

Three years from August 14, 2010 An advertisement is a form of retail communication. A separate file containing all retail communications and independently prepared reprints (IPRs), including the names of the persons preparing and approving their use, must be maintained starting from the date of first use and kept until three years after last use.

How long must the confirmation of a money transfer be retained for under the Bank Secrecy Act?

Wire transfers of amounts of $3,000 or more must be retained for 5 years.

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

distributor

Your client, working for a local municipality, tells you that he has the opportunity to participate in a Section 457 plan. Explaining some of the characteristics and features of this type of plan, you could tell him all of the following EXCEPT:

earnings on plan assets are taxable on an annual basis. Even though technically 457 plans are nonqualified, all earnings within the plan are tax-deferred like any other retirement plan.

Your client works full time for XYZ Company, where he is covered by a qualified pension plan. To make a few extra dollars, he also works part time for the local hardware store, which offers no retirement plan. Your client:

may start his own IRA. NOT may deposit a percentage of his income from the hardware store into his own Keogh plan. This client could start his own IRA (which his company cannot do for him). He should be aware that, since he is covered under another qualified plan, he may not be able to take a tax deduction for his IRA contributions.

All of the following actions are potential violations EXCEPT:

sending a copy of a newspaper article (with supervisory approval) about a company whose stock is being solicited. NOT comparing a bond fund to an equity fund, for a customer whose objective is growth.

A dispute arises between two FINRA member firms over unpaid commissions in the amount of $35,000. This dispute would be handled by:

simplified industry arbitration.

Which of these interest rates is the most volatile?

the federal funds rate BECAUSE Short-term interest rates are more volatile than longer-term rates. The federal funds rate, which changes at least daily, is the most volatile of the rates given.

An announcement of a new issue of a security that gives the name of the issuer, the price and the name of the underwriter is called a(n):

tombstone NOT prospectus A tombstone is an announcement of a new issue that includes the name of the issuer, the price of the security, and the name of the underwriter from whom it can be purchased. SO the PRICE IS INCLUDED IN THE TOMBSTONE AD