Missed questions

Under FINRA rules, the maximum sales charge that may be imposed on a mutual fund purchase is:

8 1/2% of the Public Offering Price Under FINRA rules, the maximum sales charge that may be imposed by a mutual fund is 8 1/2% of the Public Offering Price. Note that in the real world, competition among funds has forced sales charges well below this maximum permitted level. Note that the maximum is a percentage of all dollars invested; it is not a percentage of Net Asset Value.

ABC Corporation owns 10% of the common stock of Chimney Cricket & Co. a firm specializing in chimney cleaning for residential fireplaces. ABC received $100,000 in dividends from this stock last year. When preparing its tax return: A. ABC may exclude all $100,000 of dividends B. ABC may exclude $50,000 of dividends C. ABC may exclude $65,000 of dividends D. ABC must report all $100,000 with no exclusions

The best answer is B. Corporations receive tax exclusions on 50% of the dividends from stocks they own in other corporations (when they own less than 20% of the stock). In this case, the exclusion is $50,000. ABC would have to own 20% or more of Chimney Cricket to exclude 65%.

Before a management company can register with the SEC, it must meet which requirement?

Before a management company can register with the SEC, it must have a net worth of $100,000; a minimum of 100 shareholders; and it must have at least 40% of assets invested in securities.

Which of the following statements concerning disclosures required by mutual funds is correct?

In the prospectus, the fund must disclose sales charges and redemption charges

A management company includes the investment advisory fees as part of its:

Operating expenses

The last day to buy mutual fund shares and receive a dividend distribution is the:

Record date The mutual fund's board of directors sets both the record date and the ex-dividend date. Any stockholder of record on the record date will receive the fund distribution. On the next day (the ex-date), the fund reduces the share price by the value of the distribution, since any purchasers from that day forward do not receive the distribution. Thus, the last day to buy and receive the distribution is the record date.

Which statement about funds that offer "withdrawal plans" is TRUE? A. The fund distributes the specified withdrawal amount whether or not this would cause a decrease in principal B. The fund distributes the specified withdrawal amount only if there are sufficient earnings for that period C. The fund distributes the specified withdrawal amount only if there is sufficient asset appreciation for that period D. The fund distributes the specified withdrawal amount only upon written authorization of the customer

The best answer is A . In a withdrawal plan, the customer selects a specific payout option, such as a fixed-dollar amount to be received periodically from the fund by redemption of fund shares. The fund distributes this amount, whether or not the distribution causes a decrease in principal. Withdrawal plans can result in the ultimate liquidation of the fund position.

All of the following statements concerning advantages of a mutual fund investment are correct EXCEPT: A. investors receive share certificates to evidence their investment B. an investor can invest any dollar amount above a minimum purchase amount C. minimum purchases are generally in smaller amounts than for other investments D. investors are sent periodic statements of account

The best answer is A. Investors in mutual funds are not sent share certificates - mutual fund share certificates do not exist! All ownership records are kept electronically, and the customer gets account statements showing ownership.

All of the following statements concerning the financial reports sent to shareholders of mutual funds are TRUE EXCEPT: A. a prospectus must accompany the reports B. the annual report must be certified by an independent public accountant C. financial reports must include a list of the amounts and values of securities held by the fund D. the fund must file with the SEC all financial reports sent to shareholders

The best answer is A. Shareholders have a right to receive financial reports, including a list of the securities owned by the fund with the market value, a balance sheet, and an income statement. There is no requirement that a prospectus accompany the reports. An independent public accountant must certify the annual report based on an audit, and the fund must file all financial reports with the SEC.

A registered representative must obtain signed resolution authorizing the opening of a: A. corporate account B. trust account C. partnership account D. guardian account

The best answer is A. In order to open an account for a corporation, a registered representative must obtain a corporate resolution authorizing the opening of the account. A trust agreement is the document that authorizes trading for a trust and a partnership agreement authorizes trading for a partnership. A court order authorizes trading by a guardian.

Which of the following statements concerning policy loans under a variable life insurance policy is TRUE? A. Loans are 100% tax-free, but they reduce the amount invested in the separate accounts B. Up to 100% of the cash value is available for borrowing, and the amount invested in the separate accounts remains unchanged C. Loans reduce the amount invested in the separate accounts, and the full amount of the loan is taxable income D. Up to 90% of the cash value is available for borrowing and loans do not reduce the amount invested in the separate accounts

The best answer is A. Policy loans reduce the amount invested in separate accounts. Policy owners holding variable life contracts can typically borrow up to 75 - 90% of the cash value. They cannot borrow 100% of cash value, since the underlying separate account performance will vary. Loans are not "income," so there is no tax on the loan amount.

A NASDAQ market maker quotes shares of a NASDAQ-listed closed-end fund at $27 - $28. A customer of a NASDAQ "order entry" firm directs it to sell 500 shares of the fund for his account. On settlement date for the trade, which is 2 business days later, the fund is quoted at $30 - $31. Which statement is true? A. The customer will sell at $27 less a commission B. The customer will sell at $28 less a commission C. The customer will sell at $30 less a commission D. The customer will sell at $31 less a commission

The best answer is A. Closed-end fund shares are listed and trade like any other stock. Do not confuse them with mutual fund shares, which do not trade! A customer buys the shares at the dealer's ask price of $28, plus the customer must pay a commission to the order entry firm for executing the trade. The customer sells the shares at the dealer's bid price of $27, less a commission paid to the order entry firm for executing the trade. The price of the security on trade date is the price of the trade. If the price moves after that date, it has no effect on the price the customer paid to buy or the price the customer will receive for selling.

The maximum permitted annual 12b-1 fee under FINRA rules for a "no-load" fund is: A. 25 basis points B. 50 basis points C. 75 basis points D. 100 basis points

The best answer is A. FINRA rules state that if a fund wishes to call itself a "no load" fund, then the maximum permitted annual 12b-1 fee is only .25% or 25 basis points. FINRA sets a maximum permitted annual 12b-1 fee of .75% of assets annually for "load" funds, which is 75 basis points.

What is the consequence for a mutual fund that fails to meet the "75-5-10" rule required for a diversified investment company? A. The fund cannot advertise itself as a diversified fund B. The fund can issue shares only to wealthy, sophisticated investors C. The fund is subject to additional supervision by the SEC D. The fund is subject to loss of its registration as an investment company

The best answer is A. The only penalty for a fund that does not meet the 75-5-10 rule is that the fund cannot call itself a diversified fund. The 75-5-10 rule requires that for a fund to be "diversified," it must have at least 75% of its assets invested in securities or cash, with no more than 5% of fund assets invested in a single issuer, with that holding representing no more than 10% of the voting (common) stock of that issuer.

Which of the following statements concerning requirements under the Investment Company Act of 1940 for a diversified investment company are correct? I The company must invest at least 75% of its assets in securities of other companies or cash II The company may invest no more than 5% of its total assets in one company III The company may invest no more than 10% of its assets in nonvoting stock A. I and II only B. I and III only C. II and III only D. I, II, and III

The best answer is A. A diversified investment company: •must invest at least 75% of its assets in securities of other companies or cash; and •may not invest more than 5% of its total assets in one company; and •may not acquire more than 10% of the outstanding voting stock of any one company. Any investment company that does not meet all 3 tests is called a "non-diversified" investment company.

A tombstone advertisement for a new stock offering will include all of the following EXCEPT: A. a statement that the ad is a solicitation to sell the security B. a statement identifying the issuer and the security C. a statement explaining that the issue is only offered through a prospectus D. information about the price and size of the offering

The best answer is A. A tombstone ad is NOT an offer to sell the security, nor a solicitation to buy the security, and it must include a disclaimer to this effect. Technically, a non-exempt new issue cannot be offered or advertised without delivery of a prospectus. It must also contain a statement that the issue "is only offered through the prospectus." A tombstone announcement is very limited in its content, because it cannot be promotional. It can include the name of the issuer, type of security being offered, number of shares or bonds being offered (the size of the offering), estimated Public Offering Price and the names of the underwriters.

If the mutual fund issued a share certificate to the customer, which of the following must accompany the customer's written request for redemption? I Endorsement II Signature guarantee III Redemption fee IV Customer's Address A. I and II only B. II and III only C. III and IV only D. I, II, III and IV

The best answer is A. If physical certificates have been issued (which no longer happens since share recordkeeping is now electronic, but "old" certificates can still exist in the hands of customers), the only way to redeem them is for the customer to sign the back of the certificate (like endorsing a check). The transfer agent will not accept that signature unless it is guaranteed. Only a commercial bank, trust company or member of the Medallion Signature Guarantee Program can guarantee a signature. When a signature is guaranteed, the guarantor assumes any loss if the signature is invalid. The signed certificates with the signature guarantee are then sent to the fund transfer agent for redemption. If there are no physical shares, then telephone or electronic redemption orders can be placed. There is no signature or signature guarantee for these requests, nor are there any shares to be delivered to the fund. These types of redemptions can be handled directly with the fund itself; or with the broker-dealer that places orders with the fund. There are no physical certificates to be delivered for a telephone or electronic redemption request. Any redemption fee will be deducted by the fund from the proceeds of the redemption. The transfer agent handling the redemption will have the customer address already, so there is no need to provide it again for a redemption request.

A mutual fund offers breakpoints with a Letter of Intent (LOI) and Rights of Accumulation (ROA). The breakpoint schedule is: $0 - $10,000 5.75% $10,001 - $25,000 5.25% $25,001 - $100,000 5.00% On 2/1/XX, the customer invested $6,000 in the fund. On 10/1/XX, the account value has increased to $7,000 and the customer wishes to invest another $5,000 in the fund. The sales charge that will be imposed on the 10/1/XX purchase is: A. 5.25% on the $5,000 investment B. 5.75% on $4,000 and 5.25% on $1,000 C. 5.75% on $3,000 and 5.25% on $2,000 D. 5.75% on the $5,000 investment

The best answer is A. Mutual fund rights of accumulation (ROA) give the benefit of a breakpoint based upon the accumulated position held in that fund. The vast majority of funds that offer rights of accumulation base it on the higher of cost or current market value (only a small minority use historical cost). This is the assumption that must be used for this question. This customer has invested $6,000 in the fund, a holding now worth $7,000. To the $7,000 accumulated value, the customer wants to add another $5,000 for a total of $12,000. This places the customer at 5.25% in the breakpoint schedule.

Which of the following is FALSE regarding partial withdrawals from a deferred variable annuity during the accumulation period? A. The 10% penalty does not apply to partial withdrawals taken if the customer is under age 59 1/2 B. Last-In, First-Out (LIFO) accounting must be used when determining the portion of the distribution that is taxable C. If the investment has been held in the separate account for a number of years, then typically the first money withdrawn is 100% taxable D. Earnings in the separate account are subject to taxation at ordinary income rates

The best answer is A. The 10% penalty for withdrawals before age 59½ applies to both full and partial payouts. LIFO accounting rules apply to withdrawals, so the first money withdrawn is usually taxable income because it represents the tax-deferred build-up (the "last in") in the account. All earnings are subject to taxation at ordinary income tax rates.

Which of the following statements about contributions to 403(b) plans are correct? I Employees may contribute by salary reduction II An employee may transfer funds from a savings account to make up for prior years when the employee contributed less than the maximum eligible amounts III An employee may contribute up to $19,000 by means of salary reduction for 2019 IV The employer decides the amount of the contribution to be made on behalf of the employees A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. 403(b) plans are only available to non-profit organization employees, such as school and hospital employees. These are tax qualified annuity plans, where contributions made by employees are made by salary reduction and thus reduce the employee's taxable income for that year - so Choice I is correct. If a smaller contribution is made in one year, it cannot be "made up" with a large contribution the next year, so Choice II is incorrect. The actual percentage contribution is set by the employer, but the tax code limits the maximum annual contribution to $19,000 in 2019 - so Choice III is correct. Finally, Choice IV is incorrect - the employee decides the amount to be contributed for the year, not the employer.

Which of the following CANNOT make contributions to a Keogh plan? A. A shareholder who owns 10 % of a firm's outstanding shares B. Sole proprietor of a dry cleaning firm C. Self-employed gift shop owner D. An employee of a corporation who provides consulting services as a second business

The best answer is A. A shareholder does not qualify as either an employer or employee of a firm - the percentage ownership does not matter. Keogh plans are for owner-employees that are self-employed. This includes sole proprietors and general partners.

Under a Letter of Intent provision, which statement concerning sales charges on purchases is true? A. The fund deducts any sales charge as a front-end load from each payment B. The fund imposes no sales charge until the investor completes the Letter of Intent C. The fund imposes sales charges on a contingent deferred basis after the investor completes the Letter of Intent D. The fund imposes no sales charges since Letters of Intent are no-load

The best answer is A. Under a Letter of Intent, a customer agrees to buy enough shares within a 13-month period to qualify for a breakpoint. Typically, an investor makes monthly payments, and the fund deducts the lower sales charge from each payment. Thus, the load is front-end. The fund customarily holds the extra shares the customer purchases under the Letter in escrow and does not release them until the investor completes the letter. If the customer fails to complete the letter, the fund recalculates the sales charges at the higher level.

Which of the following mutual funds has the lowest default risk? A. Municipal bond fund B. Long-term Treasury fund C. Investment grade bond fund D. High yield bond fund

The best answer is B. A long-term Treasury fund invests in bonds issued by the U.S. Treasury, which are backed by the full faith and credit of the U.S. Government. These government securities have the lowest default risk of any bond. Municipal bonds also have a low risk of default, but the credit quality depends on the municipal issuer. For example, bonds of a "depressed" city such as Detroit will have a low credit rating. Investment grade corporate bonds have a low risk of default, but business conditions can change - so they have a higher level of risk of default than either U.S. Government or municipal bonds. Finally, high yield bond funds will have the highest risk of default of the choices offered. These have bonds of companies that are rated as "speculative" by the ratings agencies.

which of the following statements concerning the taxation of mutual fund earnings and capital gains are correct? I Earnings distributed by a regulated investment company will be taxed twice II A shareholder does not pay tax on capital gain distributions that are reinvested until the shares are sold III A regulated investment company must distribute at least 90% of its capital gains to shareholders IV Undistributed capital gains are taxed to the regulated investment company, but the investor must also report his or her own proportionate share of these gains A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Subchapter M of the Tax Code allows a regulated investment company to serve as a "conduit" of income, so the income received on securities is not taxable to the investment company. The distributed income will be taxed twice (the company that earned it paid tax on the income from which the dividend was paid and the investor who received it had to include the dividend on his or her tax return and pay tax again). Subchapter M allows mutual funds to escape a third round of taxation on the same earnings. A regulated investment company is not required to distribute capital gains - the rule is that is must distribute at least 90% of Net Investment Income to be regulated. (However, a fund must distribute at least 98% of its capital gains to shareholders, otherwise, it will be subject to a 4% excise tax, but this has nothing to do with being a regulated investment company.) Any undistributed capital gains are reported by the fund to the shareholder on Form 2439 and these are taxable to the fund. The investor must report his or her proportionate share of these gains, with any tax paid by the fund being a credit against the shareholder's liability. A shareholder must pay tax on dividend and capital gains distributions - it makes no difference if they are reinvested.

Which of the following investments is appropriate for an equity investor seeking capital appreciation and low risk? A. Growth fund B. Value fund C. Technology fund D. Corporate bond fund

The best answer is B. A value fund will be a lower risk equity investment than a growth fund or technology fund. Growth funds and technology funds will invest in newer unproven companies that can have excellent growth potential, but which also have a much higher risk of failure. A value fund invests in proven companies that have been in business for a long time, but which are currently not in favor. The idea is that at some point in the near future, investors will realize that these stocks are too cheap and will push up the price by buying them. Because these companies have a long track record, they are unlikely to fail, so this is a low risk strategy. A corporate bond fund is an income investment and is a fixed income security. It is not equity investment, making this an incorrect choice.

Which statements are true about NASDAQ? I The NBBO is found on NASDAQ Level I II The NBBO is found on NASDAQ Level II III All quotes from market makers with the quote size is found on NASDAQ Level I IV All quotes from market makers with the quote size is found on NASDAQ Level II A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. NASDAQ Level II is incorporated into the NASDAQ "SingleBook" system which gives a single book of orders for all NASDAQ issues in one place. Every quote placed by a market maker with the quote size (how many shares the quote is good for) is shown on Level II. NASDAQ Level I is now called the "NBBO" - National Best Bid and Offer. It is the best pricing in the market at that moment - the high bid and the low ask.

Which of the following statements concerning the income tax treatment of capital losses are correct? I Net short-term capital losses offset net long-term capital gains II An investor can carry over a maximum of $3,000 of capital losses to another tax year III Investors must hold shares at least 5 years for capital losses to be long-term IV Both short-term and long-term capital losses can offset a taxpayer's earned income A. I & II only B. I & IV only C. II & III only D. III & IV only

The best answer is B. Net short-term capital losses can be used to offset net long-term capital gains. Only $3,000 of net losses (either short term or long term) can be deducted against that year's ordinary income. However, there is no limit on the amount of unused losses can be carried over to the next tax year. Those losses can be used to offset capital gains in that year; if there is still a net capital loss, another $3,000 may be deducted and the unused loss is carried forward to the next year - and so on. A capital gain is long-term when the asset sold has been held for more than 1 year, not 5 years.

Total Return takes into account all of the following EXCEPT: A. Asset appreciation B. CDSCs C. Dividends D. Share appreciation

The best answer is B. Total Return is the measure of year-to year growth in fund NAV per share. It assumes that all dividends and interest are reinvested. It includes the effect of NAV increase or decrease due to asset appreciation or depreciation. Because it assumes that all dividends and interest are reinvested, and this almost all of the Net Investment Income of the fund, any increase in fund gross income will increase NAV per share; while any increase in fund expenses will decrease NAV per share. Fund sales charges, either front-end or back-end (a CDSC is a back-end sales charge), have no effect on Total Return. Front-end sales charges are deducted from investment funds and are never invested in the fund shares. If there is a back-end charge, such as a contingent deferred sales charge, the shares are redeemed at NAV and then the sales charge is deducted, so, again, the effect never hits NAV.

Which statement concerning preferred stock is correct? A. Preferred stock is a debt instrument like a bond or debenture B. Preferred shareholders may receive no dividend unless the board of directors votes to declare a dividend on the preferred stock C. If the corporation pays a dividend on common stock, it must also pay the same amount to preferred shareholders D. Dividends on preferred stock are a legal obligation of the corporation and must be paid to avoid default

The best answer is B. The board of directors must declare a dividend on preferred stock each year. If the board does not declare the dividend on preferred stock for a given year, the corporation may not pay it. The board of directors must declare a preferred dividend in full before it can declare a common dividend for that year. The corporation generally does not pay the same amount to preferred and common stockholders - the preferred dividend rate is higher because preferred stockholders do not have a chance to share in earnings growth of the company, as do the common shareholders. Dividends on preferred stock are not a legal obligation because preferred stock is not a bond.

To prevent institutions from redeeming their money market funds all at the same time, the Board of Directors of the fund impose: A. penalties and taxes B. fees and gates C. ceilings and floors D. discounts and premiums

The best answer is B. The rules for Institutional Prime Money Market funds require a floating which allows the daily share prices to fluctuate along with changes in the value of fund's assets. It also provides money market fund boards new tools to address runs on these funds - fees and gates. With these new tools it gives the money market fund boards of directors the ability to impose liquidity fees or to suspend redemptions temporarily (known as "gate") if the fund's level of weekly liquid assets falls below certain thresholds.

Which of the following transactions CAN be tax-free? A. Exchange a variable annuity for a mutual fund B. Exchange a variable annuity for a fixed annuity C. Exchange a variable annuity for a universal life insurance policy D. Exchange a variable annuity for a variable life insurance policy

The best answer is B. Under Section 1035 of the tax code, tax-free exchanges are permitted between a(n): •annuity exchanged for another annuity (either variable or fixed); or •life insurance policy exchanged for another life insurance policy; or •life insurance policy exchanged for an annuity (either variable or fixed). Note, however, that a Section 1035 tax-free exchange is NOT permitted if a variable annuity is exchanged for an insurance policy; nor is it permitted if a variable annuity is exchanged for a mutual fund.

Investors may purchase which of the following securities on margin? I Mutual funds II Initial offering of municipal bonds III Initial offering of corporate stocks IV Closed-end funds A. I and II only B. II and III only C. II and IV only D. III and IV only

The best answer is C. Regulation T defines which securities are marginable. The marginable securities are those that are exchange listed or NASDAQ listed. In addition, all debt issues, whether a new issue or an outstanding issue, are marginable. Therefore, a closed-end fund will be marginable because these are listed securities; and municipal bonds are marginable as a debt security. Note that new equity issues sold with a prospectus are not marginable - they must be paid in full. This rule applies to mutual funds (since every share is newly issued and sold with a prospectus) and to IPOs of corporate equity securities.

Money market funds offer investors which of the following advantages? I These funds have no investment management fees II Checks can be written on the account III NAV per share generally increases with the inflation rate IV Shares can be purchased without a sales charge A. I and II only B. II and III only C. II and IV only D. III and IV only

The best answer is C. Money market funds allow shareholders to write checks on their accounts. Shares can be purchased without a sales charge - these are no-load funds. There is no "growth" in share price because of the constant $1 NAV that these funds use to account for purchases and earnings. There is a manager of the fund portfolio, who earns a management fee (though this is typically low for a money market mutual fund).

If a security's registration is effective, this means that the: A. SEC endorses the sale of the issue B. SEC approves the sale of the issue C. issue can be sold to the public D. issue cannot be recommended to potential purchasers

The best answer is C. Once a security's registration is "effective," the issue can be sold to the public. As of the effective date, the issue can be offered, recommended and sold. The only condition is that any offer, recommendation, or sale, must be accompanied with, or preceded by, delivery of the final prospectus to the potential purchaser.

A corporation that has adopted a qualified retirement plan for all of its employees: A. is prohibited from adopting a non-qualified retirement plan B. is prohibited from adopting a non-qualified plan unless all employees are included C. may adopt a non-qualified plan to provide additional benefits to its high-earning executives D. may adopt a non-qualified plan to provide additional benefits to its existing retirees

The best answer is C. ERISA rules limit retirement benefits provided by a qualified plan to a maximum amount of about $200,000 per year. While this provides ample retirement income to the vast majority of employees, the high-earning top executives of a company often find this to be inadequate. To retain these executives, the company will often create a separate non-qualified retirement plan only available to key executives These are so-called "deferred compensation plans" that provide additional benefits on top of those offered by the company's qualified retirement plan. These plans do not comply with ERISA's non-discrimination, funding and vesting rules. The contributions made by the employer are non-deductible to the employer ("after-tax" dollars). The earnings build-up is taxable each year to the employer (again, "after-tax" dollars). The employee has no ownership rights in plan assets (no "vesting"). When distributions are made, the amount paid is a deductible expense to the employer and is taxable income to the employee. Note that the tax-treatment for this type of non-qualified plan differs from the tax treatment given to variable annuities purchased by an individual for his or her own benefit. If the employer establishes the non-qualified plan, contributions are not deductible and annual earnings are taxable to the employer. If an individual buys a variable annuity (not a corporation buying for its employees), the contribution is not deductible, but the earnings build tax-deferred.

Which of the following expenses may be charged to shareholders under a 12b-1 plan? I Advertising II Sales literature III Underwriter's fees IV Sales loads A. I only B. II and III only C. I, II, and III only D. I, II, III, and IV

The best answer is C. SEC Rule 12b-1 permits a mutual to charge the cost of soliciting new investment into a fund to that fund's existing shareholders. The distribution expenses that the fund can charge to shareholders under a 12b-1 plan are: advertising; compensation of underwriters, dealers, and sales personnel; printing and mailing of prospectuses to anyone other than current shareholders; and the printing and mailing of sales literature. The fund deducts these from the net asset value once per year as an ongoing expense of soliciting new shareholders to the fund. Sales loads are an up-front deduction, taken out before money is invested into the fund. These are not part of annual 12b-1 charges.

Which of the following statements concerning an open account with a mutual fund is TRUE? A. The first purchase must be for at least 100 shares B. The investor may make the first purchase with a loan from the broker C. The first purchase must be in a minimum dollar amount D. The investor may not make the first purchase with a loan from family members

The best answer is C. When establishing an open account, an investor must buy a minimum dollar amount (typically $2,000 - $3,000). The minimum dollar amount can be any number of shares, depending upon the share price. The initial purchase does not need to be 100 shares. Once the account is open, the investor can buy more shares, and the minimum requirement for additional share purchases is usually much lower (typically $50). Investors cannot buy mutual funds on margin, so they may not get a loan from the broker to purchase them. There is no rule stopping a person from borrowing from family members to make a mutual fund purchase. Note that the broker cannot arrange such a loan, however.

A mutual fund advertisement may quote all of the following performance data EXCEPT: A. Average annual total return B. Tax-equivalent yield C. Annual share appreciation D. Current yield

The best answer is C. A fund may only advertise average annual total return (covering 1-, 5-, and 10-year periods, or the life of the fund if shorter), current yield (covering at least 30 days), and, if applicable, the taxable-equivalent yield (for municipal securities). Annual share appreciation is not permitted to be shown in mutual fund advertising.

The Assumed Interest Rate (AIR) associated with variable annuities is the: A. rate at which the annuity payments are scheduled to increase each year B. interest rate paid to the annuitant C. estimated future earnings rate needed to maintain level payments to the annuitant D. average of past and assumed future rates of return earned by the annuity

The best answer is C. AIR stands for Assumed Interest Rate. It is a conservative estimate of annual return needed for the insurance company to maintain a constant annuity payment amount. The AIR is chosen by the customer at the beginning of the payout period, based on an interest rate range set by the State. It is an estimated interest rate that the separate account investments must earn to maintain payment amounts. Once the first annuity payment is made based on the chosen AIR, if the earnings in the separate account are greater than the AIR, the next payment increases. If the earnings in the separate account are less than the AIR, the next payment decreases. Variable annuities do not provide scheduled increases in payment amounts. The insurance company bases payouts on the value of annuity units when it pays them out.

Which statement concerning conversion of convertible bonds to common stock is correct? A. Conversion requires a shareholder vote B. Conversion tends to decrease the number of shareholders owning common stock C. Conversion can cause a dilution of shareholder equity D. Conversion tends to cause the market price of the common stock to rise

The best answer is C. Conversion of the convertible bond will cause a dilution of each shareholder's equity because there will be additional shares issued from the conversion. The company's earnings are spread over more shares, reducing earnings per share and thus the stock's market price. Issuance of new convertible bonds requires shareholder approval because of this potentially dilutive effect, but no shareholder vote is required to convert the bonds to common stock.

Which of the following statements concerning a fund of funds are correct? I Investors can tailor the fund of funds to select the funds that they want in their portfolio II A fund of funds cannot make use of index funds III A fund of funds can have an investment objective of capital appreciation and income like a balanced fund IV A fund of funds can be comprised entirely of growth funds and have an investment objective of capital appreciation A. I and II only B. I and III only C. II and IV only D. III and IV only

The best answer is D. A fund of funds can have any selection of other mutual funds, so that it can have any investment objective such as growth, income, or growth and income. The fund manager selects the funds that will be included in the portfolio, not the investor. A fund of funds can include an index fund as one of its funds.

Which of the following statements concerning the computation of net asset value (NAV) are correct? I Funds must determine NAV at least once each business day, generally at the close of the New York Stock Exchange II NAV is the closing market price for each security in the fund's investment portfolio plus current assets less liabilities III NAV per share is the same as the bid price A. I only B. II only C. I & II only D. I, II & III

The best answer is D. Funds must determine NAV at least once each business day. They usually do this at the close of business of the New York Stock Exchange. The fund uses closing prices to value the securities in the investment portfolio. NAV is the value of these securities, and the value of the fund's current assets (e.g., cash and receivables) less its liabilities (e.g., accrued expenses). NAV is the bid price - the price at which an investor can redeem shares.

An investor in the 28% tax bracket has $100,000 to invest. She wishes to minimize any tax liability. The best recommendation would be to purchase a(n): A. corporate bond fund B. equity income fund C. balanced fund D. capital appreciation fund

The best answer is D. The choice we would like to see is not here - which would be to purchase a tax-free municipal bond fund. Choice D is the best offered - if a capital appreciation fund is purchased, it only distributes capital gains when appreciated securities are sold. If the fund holds the securities that have appreciated, there is no tax due. Choices A and B are income funds, which will distribute dividends to shareholders based on the income received and this will be taxable as the distributions are made. Choice C - a balanced fund - holds a balance of corporate stocks and bonds. The bonds held in the fund's portfolio will produce interest income, which the fund will distribute as a dividend. These will also be taxable as distributed.

Variable annuity sales charges are: I set by FINRA II not set by FINRA III cannot exceed 8 1/2% of investment dollars IV must be fair and reasonable A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. FINRA does not set sales charges for variable annuities. FINRA only sets maximum sales charges for mutual fund purchases (which are set at a maximum of 8 1/2% of the amount invested). However, FINRA does state that all charges must be "fair and reasonable."

Index funds: I are actively managed II are passively managed III charge no management fees IV charge low management fees A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Generally, an index fund will have the lowest expenses because an index fund pursues a passive investment strategy where the manager's objective is to match the portfolio composition to a known index such as the S&P 500 Index. For this, the manager earns a much lower fee than if the portfolio were actively managed. Index funds do not try to outperform other funds; rather, they seek to match the performance of an index. Such a fund is passively managed, since the portfolio composition is changed only when the index composition changes. The fund does not actively buy and sell securities or research companies as do active managers.

An investor purchased a stock put option with an exercise price of $40. The stock is selling at $42. If the option is going to expire, should she exercise the put? A. Yes, because she could buy the stock in the open market for $42 and by exercising the option she could sell the stock to the writer at $40. B. Yes, because she could buy the stock at $40 and sell at $42 in the open market C. No, because if she exercises the option, she must buy the stock at $42 and sell at $40 in the open market D. No, because she could buy the stock at $42 in the open market and would have to sell the stock to the writer at $40 if she exercised the option

The best answer is D. With a put, the holder of the option can sell the stock at the exercise price ($40 in this example). Since the stock is at $42, she would not exercise the contract and sell that stock for $40; rather, it is more profitable to sell it in the market at the current price of $42.

James Ball bought 15,625 shares of Daisy Mae Mutual Fund. Which of the following statements concerning this investment are correct? I Each share has the right to receive a dividend II Mr. Ball owns a proportional interest in all of the securities in the investment portfolio of Daisy Mae Fund III Mr. Ball owns an undivided interest in the fund's investment portfolio IV Each share has the right to vote A. I and II only B. III and IV only C. I, II and IV D. I, II, III, IV

The best answer is D. Each common share of a mutual fund has the right to receive a dividend and has the right to vote. By virtue of his share ownership, Mr. Ball owns an undivided interest in the fund's portfolio, which is the same as a proportional interest in the securities the fund owns.

What is the debt coverage requirement for open-end and closed-end companies? I For open-end companies, the net assets to debt ratio must be at least 200%. II For open-end companies the net assets to debt ratio must be at least 300%. III For closed-end companies the net assets to debt ratio must be at least 200%. IV For closed-end companies, the net assets to debt ratio must be at least 300%. A. I and III only B. I and IV only C. II and III only D. II and IV only

The best answer is D. Open-end management companies can borrow up to 1/3 of Total Net Assets from a bank. After doing so, the "asset coverage ratio" must be at least 300% (Total Net Assets/Bank Borrowings). Closed-end management companies can issue bonds as long as the "asset coverage ratio" is at least 300% - the same as for open-end funds. Note that closed-end management companies can also issue preferred stock, in which case the asset coverage ratio must be at least 200%.

Which of the following statements concerning a management company is correct? I The portfolio is fixed until maturity II The portfolio is managed based on the fund's objective III It is structured as a trust IV It is structured as a corporation A. I and III only B. I and IV only C. II and III only D. II and IV only

The best answer is D. A management company is set up as a corporation that only issues common stock. Open-end management companies are mutual funds; closed-end management companies are exchange traded funds. Both hire an investment adviser (the fund manager) to manage the investment portfolio in accordance with the fund's investment objective. For this, a management fee is charged.

What is the period of time over which a mutual fund will make payments under a withdrawal plan that pays the customer a fixed amount annually? A. For the life of the plan owner B. For a selected number of years C. For the customer's life or a guaranteed term, whichever is longer D. Until the account balance is exhausted

The best answer is D. A withdrawal plan that makes payments of a fixed amount annually will continue until the account balance is exhausted.

A customer who places an order to buy mutual fund shares at 5:00 PM on a Friday will receive a purchase price based on the net asset value computed as of: A. that Friday at 4:00 PM ET B. the Saturday following at 4:00 PM ET C. the Monday following at 9:30 AM ET D. the Monday following at 4:00 PM ET

The best answer is D. Mutual fund shares are "forward priced." The customer does not know the exact purchase price. That price is computed as of the market close (4:00 PM ET) that business day, if the order was received before that time. Orders received after 4:00 PM ET are filled based on the next business day's closing NAV. Since this order was received at 5:00 PM on a Friday, it cannot be filled until Monday (the next business day) at 4:00 PM ET.

Which of the following statements concerning FINRA simplified arbitration procedures are correct? I A single public arbitrator decides the controversy II The matter may be decided without a hearing on the basis of the complaint, answer, and documentary evidence III The amount in dispute can be no more than $50,000 IV The decision is binding and non-appealable A. I and II only B. III and IV only C. I, II and III only D. I, II, III, IV

The best answer is D. Simplified arbitration is used to settle customer disputes with either a member firm or an associated person, where the amount in dispute is no more than $50,000. Written arguments from each side are given to a single public arbitrator, who makes a binding decision (no appeal) based on the evidence presented. Note that the single arbitrator has the discretion to demand further documentary evidence; and can also demand that the matter be presented in front of a full 3-person arbitration panel.

A customer owns shares of ACE Mutual Fund. He wishes to use its "repurchase feature" when redeeming fund shares. This means that the customer:

makes a request for redemption, which the fund underwriter completes by making a wire transfer within 1 business day The "repurchase feature" means that the fund underwriter will repurchase shares from customers at that day's closing NAV and will wire the proceeds to the customer within 1 business day. This accelerates the redemption process. In a regular redemption process, the investor sends shares to the fund, which must send payment within 7 calendar days.