Part 3 - Investment Vehicles (CONSOLIDATED)

D) support level

A technical analyst (chartist) with a long position in a particular stock would most likely enter a sell stop order below that stock's A) previous high B) resistance level C) 200-day moving average D) support level

A) Interest payments of $40 A bond with an 8% coupon will make $40 semiannual interest payments.

A bond with a par value of $1,000 and a coupon rate of 8% paid semiannually, is currently selling for $1,150. The bond is callable in 10 years at $1,100. In the computation of the bond's yield to call, which of these would be a factor? A) Interest payments of $40 B) Future value of $1,150 C) 60 payment periods D) Present value of $1,100

D) longer for a 10-year bond with a 5% coupon than it is for a 10-year bond with a 10% coupon

A bond's duration is A) identical to its maturity for an interest-bearing bond B) an indication of a bond's yield that ignores its price volatility C) expressed as a percentage D) longer for a 10-year bond with a 5% coupon than it is for a 10-year bond with a 10% coupon

A) It ceases The M&E charge is for mortality and expenses. Once an annuity contract, fixed or variable, is annuitized, that charge no longer applies to the account.

A client has been contributing to a periodic payment annuity for 20 years. The M&E charge is 1.25% per year. What happens to that charge when the client annuitizes at attained age 68? A) It ceases B) It increases because the client's mortality risk is higher at the older age C) It continues but at a reduced rate D) It continues

D) the Class A shares Breakpoints for quantity purchases are available on shares that carry a front-end load. Those are Class A shares.

A client investing $50,000 into the KAPCO Growth Fund would most likely be eligible for a breakpoint if purchasing A) the Class B shares B) the closed-end shares C) the Class C shares D) the Class A shares

B) fees and expenses

A client is interested in purchasing a REIT and asks you what the differences are between a listed REIT and an unlisted REIT. You could respond that all of the following are differences EXCEPT A) regulatory oversight B) fees and expenses C) suitability requirements D) liquidity

C) Reduce the death benefit when the client dies Unpaid cash value loans reduce the death benefit.

A client needs funds for an unexpected medical emergency. If the client takes out a loan against the cash value of his life insurance policy and does not pay it back, the insurance company can do which of the following? A) Increase the premium amortized over the life of the policy B) Reduce the cash value at the next anniversary C) Reduce the death benefit when the client dies D) Cancel the policy

A) If there is an antidilution clause, her conversion privilege will permit her to acquire 20% more shares than before the stock dividend. Most convertible securities are sold with antidilutive clauses that provide for an adjustment in the number of shares based on stock splits or stock dividends.

A client of yours owns some convertible preferred stock. She notices an article in the business section of her local newspaper that reports the company is going to pay a 20% stock dividend on their common stock. She wants to know how this will affect her? A) If there is an antidilution clause, her conversion privilege will permit her to acquire 20% more shares than before the stock dividend. B) She will also receive 20% more shares because preferred stock has a priority claim ahead of common. C) More than likely, the price of the preferred stock will rise. D) There will be no effect.

D) the right to determine the par value of the stock Par value is an accounting decision made by the company when the stock is first issued and is not something voted on by shareholders.

A common stockholder's rights include all of the following EXCEPT A) preemptive rights B) the receipt of dividends, if declared by the board of directors C) electing the board of directors D) the right to determine the par value of the stock

C) $922.78 When a bond has a yield to maturity that is greater than its coupon rate, the bond must be selling at a discount and that only leaves one possible answer. The only way to get a 10% return on an 8% bond is to buy it at a price below par.

A corporate bond that pays interest semiannually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. What is the value of the bond today if the coupon rate is 8%? A) $1,051.23 B) $1,221.17 C) $922.78 D) $1,144.31

D) Their market price has increased. Because inflation is down and bond yields have declined, the bonds are selling for a premium due to an increase in value.

A customer purchased new issue bonds at par 2 years ago. Since then, the CPI has declined by almost half and the current yield on his bonds has also declined. Which of the following best describes the value of the bonds he purchased? A) Their market price has declined. B) Their market price has remained unchanged. C) This cannot be determined from the information presented. D) Their market price has increased.

D) a long hedge. Just as with options, when we are concerned that the price of something will go up, we go long that item.

A manufacturer of soybean oil is concerned that the price of soybeans will increase over the next 6 months. The best strategy to employ would probably be A) a trimmed hedge. B) a neutral hedge. C) a short hedge. D) a long hedge.

A) $101 per share A mutual fund's net asset value per share (NAV) is the fund's total assets minus total liabilities (net asset) divided by the number of shares outstanding. The major asset is the fund's portfolio. Portfolio securities are carried at their value as of the close of the markets (4PM ET). As a result, unrealized appreciation (and depreciation) are part of the NAV.

A mutual fund's computed NAV on April 24 is $100 per share. On April 25, the portfolio realized gains of $2 per share, and enjoyed $1 per share in unrealized appreciation. What would the NAV be on April 26 assuming an unchanged market? A) $101 per share B) $103 per share C) $100 per share D) $102 per share

C) Variable annuity Longevity risk is the uncertainty that one will outlive his money. The only instrument that guarantees a payout for as long as one lives is an annuity. Because the question asks for a security, only the variable annuity is correct, otherwise the fixed annuity would also offer protection.

A risk faced by many seniors is longevity risk. What security would be most appropriate to protect against that risk? A) REIT B) Common stock C) Variable annuity D) Fixed annuity

B) the demand for a stock to increase substantially.

A support level is the price range at which a technical analyst would expect A) the supply of a stock to decrease substantially. B) the demand for a stock to increase substantially. C) the demand for a stock to decrease substantially. D) the supply of a stock to increase substantially.

C) time to maturity. The relationship between the time to maturity (length) and duration is a linear one. That is, the longer the time until the bond matures, the higher (longer) the duration - it is a direct relationship. Yields, on the other hand, have an inverse relationship with duration. That is, the higher the yield, the lower (shorter) the duration.

All of the following factors have an inverse relationship to a bond's duration except A) current yield. B) yield to maturity. C) time to maturity. D) coupon rate.

D) Short 2 XYZ uncovered puts A put writer will lose money if the stock goes down, but the furthest it can drop is to zero. Therefore, the potential loss is not unlimited. All of the other positions expose the client to unlimited risk because a loss will occur if the stock price rises.

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

D) premiums are fixed for the life of the policy The single most distinguishing characteristic of universal life is the fact that premiums are flexible and not fixed.

All of the following statements regarding universal life insurance are correct EXCEPT A) there are two death benefit options B) offers the policyowner exceptional flexibility in adjusting the premiums, cash value, and death benefit C) may include a minimum guaranteed interest rate D) premiums are fixed for the life of the policy

C) limited partnership offerings do not pay dividends; corporations do.

Among the differences between an investment in a limited partnership offering and in a corporation is that A) only corporations are organized to run a business. B) only corporations issue securities. C) limited partnership offerings do not pay dividends; corporations do. D) limited partners take a more active role in the management of the enterprise than do stockholders of a corporation.

D) 8% Treasury bond maturing in 2036 bonds with the highest coupons have the shortest duration, therefore, are the least subject to interest rate risk.

An investment adviser representative has a client who prefers the safety of securities guaranteed by the U.S. Government, yet is concerned about volatility due to uncertainties in the future direction of interest rates. Which of the following recommendations would best address these concerns? A) 5% Treasury bond, maturing in 2037 B) Treasury STRIPS, maturing in 2036 C) 6% Treasury bond maturing in 2035 D) 8% Treasury bond maturing in 2036

B) universal life. Universal life (not universal variable life) does not invest in the market through a separate account. That is only true of life insurance policies using the word "variable."

If a client wishes to purchase a life insurance policy that doesn't invest in the market, but allows the holder to pay additional premium if desired, the recommendation is A) variable life. B) universal life. C) index annuity. D) term life.

D) the yield to maturity. The yield to maturity is an investor's total return if they purchase the bond at any point and then hold it until maturity, assuming all interim cash flows are reinvested at that same YTM. This, therefore, takes into consideration any capital gain or loss and therefore the yield to maturity will fluctuate with the bond's price.

If investors hold bonds until maturity, their realized rate of return, assuming all interim cash flows are reinvested at that same rate, would be equal to A) the price return. B) the income return. C) the coupon return. D) the yield to maturity.

B) the face amount. The sale price of a life settlement is always more than the cash value and less than the face value.

In a life settlement, the seller receives more than the premiums paid into the policy but less than A) the accumulated dividends. B) the face amount. C) the future premiums payable. D) the cash value.

C) both offer an opportunity for unlimited gain EIAs almost always come with a cap rate, a ceiling beyond which earnings cannot be credited to the investor's account. They are not considered a security.

In general, when describing the characteristics of equity index annuities and variable annuities, each of the following would be a true statement EXCEPT A) only the EIA has a minimum guaranteed return B) only the variable annuity is considered a security C) both offer an opportunity for unlimited gain D) both are issued by life insurance companies

B) leveraged ETFs

Included in the definition of derivative would be all of the following EXCEPT A) options B) leveraged ETFs C) futures D) rights

A) Her annuity payments are all taxable as ordinary income. The key word here is qualified! The investment Juliette made was with pre-tax dollars, the money grows tax-deferred, and everything is taxed at distribution at ordinary income rates. No annuity payment is ever treated as a distribution of capital gains.

Juliette, a math teacher in the local high school, owns a qualified, tax-deferred annuity. When she retires, what will be the tax consequences of her annuity payments? A) Her annuity payments are all taxable as ordinary income. B) Her annuity payments are partly taxable and partly tax-free return of capital. C) Her annuity payments are tax free. D) Her annuity payments are partly taxable as capital gain and partly taxable as ordinary income.

C) Aa-rated corporate debenture A bond's rating takes into consideration all factors, including collateral and tax base. The higher the rating, the lower the credit risk.

Many fixed-income investors are looking to avoid loss of principal. Which of the following would likely have the lowest degree of exposure to credit risk? A) Ba-rated corporate mortgage bond B) Baa-rated municipal revenue bond C) Aa-rated corporate debenture D) A-rated general obligation municipal bond

C) Redeeming them from the issuer for cash

Mr. Brown has received preemptive rights from one of the stocks held in his portfolio. Which of the following is NOT an alternative regarding these stock rights? A) Selling at the market B) Giving the rights to his son C) Redeeming them from the issuer for cash D) Exercising

C) the fund has made dividend distributions to shareholders If dividends are distributed to shareholders, the fund's assets will decrease and value per share will fall accordingly. Appreciation of the portfolio and dividends paid to the portfolio will increase the value. If issuers have made distributions to the portfolio, the net asset value will increase. Net redemptions have no effect on the net asset value, because the money paid out is offset by a reduced number of shares outstanding.

Net asset value per share for a mutual fund can be expected to decrease if A) the securities in the portfolio have appreciated in value B) the issuers of securities in the portfolio have made dividend distributions C) the fund has made dividend distributions to shareholders D) the fund has experienced net redemptions of shares

D) Zero-coupon bond with 15 years to maturity The longer the duration of a bond, the greater the volatility will be of its market price when interest rates change. Because zero-coupon bonds do not make interest payments but are priced at a deep discount to par value, they are more volatile than coupon-bearing bonds.

Of the following bonds, which has the greatest price volatility? A) AA corporate bond with 7 years to maturity B) Zero-coupon bond with 5 years to maturity C) Corporate bond fund D) Zero-coupon bond with 15 years to maturity

A) a reduction in the market price of the bond. If the rating agencies downgrade the quality of a bond, potential investors will look to compensate for the increased risk by demanding a greater yield on the issuer's bonds. This will inevitably result in a lower bond price. The issuer wouldn't call a bond if the market price is down.. the bond is probably trading at a discount giving the issuer the opp to retire the debt in the market at a discount.

One of the likely consequences of a rating downgrade on a bond is A) a reduction in the market price of the bond. B) the current yield will be reduced. C) the call feature will be employed. D) an increase to the coupon by the issuer.

C) outstanding will vary in number at any point in time. Open-end investment companies are capitalized with a continuous offering of new shares. As a result, the number of shares outstanding is constantly changing. It is the closed-end company, traded in the secondary markets, whose share prices are based on supply and demand which causes them to be bought or sold at a premium or discount to the NAV.

One way in which open-end investment companies differ from closed-end investment companies is that an open-end investment company's shares A) are purchased and redeemed based on supply and demand. B) may be priced at a premium or discount relative to its net asset value. C) outstanding will vary in number at any point in time. D) are traded in the secondary markets rather than on an exchange.

B) giving those shareholders an opportunity to participate in the future success of the company The benefit of any convertible security, bond or preferred stock, is that the ability to convert into the issuer's common stock allows those investors to participate in the potential future growth of the company.

Reasons why a corporation might issue a convertible preferred stock would include A) tax savings to the issuer B) giving those shareholders an opportunity to participate in the future success of the company C) giving those shareholders the ability to convert into the issuer's bonds D) a lower cost to the issuer than would be incurred by the issuance of convertible bonds

B) 8.19% No calculation is necessary here. Why not? Because anytime a bond is purchased at a premium over par (103½% is a premium), the YTM must be less than the nominal (coupon) rate. There is only one choice lower than 8.5%. It isn't about your computational skills; it is about your understanding the relationship between prices and yields.

Richard purchased a 30-year bond for 103½ with a stated coupon rate of 8.5%. What is the approximate yield to maturity for this investment if Richard receives semiannual coupon payments and expects to hold the bond to maturity? A) 9.36% B) 8.19% C) 8.68% D) 8.50%

A) less than 4.6%. Bond is trading at a premium When called in advance of maturity, the loss is recognized sooner than later. YTC < YTM Let's take things in order. A bond with a 6% coupon is showing a YTM below 6%, the bond must be selling at a premium. When bonds selling at a premium are called in advance of the maturity date, the "loss" (the difference between the premium and the par value") is recognized sooner than expected. This results in a yield to call (YTC) that is less than the YTM.

Several years ago, an investor purchased an investment-grade bond with a 6% coupon. Today that bond is priced to yield 4.6% to maturity in 5 years. If the bond is called at par in one year, the bond's yield would be A) less than 4.6%. B) more than 4.6%. C) 4.6%. D) the coupon rate of 6% because it is called at par value.

D) the death benefit of a variable life insurance policy Surrender charges never apply in the case of a death benefit. There may be a surrender charge in the case of early surrender of a variable annuity, taking out the cash value of a variable life policy, or redemption of Class B (back-end load) mutual fund shares.

Surrender charges may cause a reduction to all of the following EXCEPT A) the redemption value of Class B mutual fund shares B) the cash value of a variable life insurance policy C) the liquidation value of a variable annuity D) the death benefit of a variable life insurance policy

D) $36 per share 1000 / 40 = 25 900 / 25 = 36

The XYZ Corporation's A-rated convertible debenture is currently selling for 90. If the bond's conversion price is $40, what is the parity price of the stock? A) $40 per share B) $22.50 per share C) $44 per share D) $36 per share

A) increase substantially. Resistance represents and oversupply of of the stuck which results in downward pressure on price

To a technical analyst, the resistance level signifies the price at which a stock's supply would be expected to A) increase substantially. B) decrease substantially. C) cause the stock price to "break out". D) remain constant.

B) I and III other associations acting collectively, such as the members of an investment club, do not qualify as a single person for such a purpose. Discounts may also be made to directors, officers, partners, employees, or sales representatives of the fund, its investment adviser, or its principal underwriter.

Under the Investment Company Act of 1940, which of the following qualify for a discount in a mutual fund's sales charge? I. Mr. and Mrs. Jones each purchase $5,000 worth of shares; the fund offers a volume discount for a single purchase of $10,000. II. Neighbors Jan, Mickey, and Lee form an investment club; Jan places an order for $10,000 worth of shares to be held in their 3 names. The fund offers a volume discount for a $10,000 purchase. III. Allen is the vice president of a firm under contract to provide investment advice to a mutual fund. He buys shares of that fund. A) I and II B) I and III C) I, II, and III D) II and III

D) decreases.increases.

What happens to bond durations when coupon rates increase and maturities increase? As coupon rates increase, duration: and As maturities increase, duration: A) decreases.decreases. B) increases.increases. C) increases.decreases. D) decreases.increases.

A) rights have intrinsic and time value while warrants only have time value. Rights offer the stock at a price LOWER than market = intrinsic Warrants are issued with an exercise price ABOVE market = no intrinsic value Both have time value

When contrasting preemptive rights and warrants, it would be correct to state that, at issuance, A) rights have intrinsic and time value while warrants only have time value. B) rights have intrinsic and time value while warrants only have intrinsic value. C) rights have time value while warrants have intrinsic and time value. D) rights have intrinsic value while warrants have intrinsic and time value.

B) 8% coupon bond with 12 years to maturity As the duration increases, so does the price volatility. When comparing bonds, generally, a low coupon bond is more susceptible to price fluctuations than a high coupon bond and a long-term bond is more susceptible to price fluctuations than a short-term bond.

When the market interest rate is 8%, which of the following equally-rated bonds will have the potential for the greatest relative price volatility to changes in interest rates? A) 12% coupon bond with 12 years to maturity B) 8% coupon bond with 12 years to maturity C) 8% coupon bond with 6 years to maturity D) 12% coupon bond with 6 years to maturity

D) I and III

Which of the following are features of Class C mutual fund shares? I. Typically charge no front-end load II. Typically charge a front-end load III. Typically impose lower CDSCs than Class B shares for a shorter period IV. Typically convert to Class A shares after they are held for a defined period A) II and III B) II and IV C) I and IV D) I and III

C) II and III The Securities Exchange Act of 1934 was designed to regulate securities transactions, securities markets, and the securities firms who do the trading. While the Securities Act of 1933 covers requirements relating to new issues, the Securities Exchange Act of 1934 covers almost everything else in the securities industry.

Which of the following are regulated under the Securities Exchange Act of 1934? I. New issues II. Broker-dealers III. Transfer agents A) II only B) I, II, and III C) II and III D) I and III

B) Yield to maturity Yield to maturity has an inverse relationship to duration. That is, the higher the YTM, the lower (shorter) the duration. The longer the time to maturity, the higher (longer) the duration; it is a direct relationship. The bond's rating and par value are irrelevant.

Which of the following factors has an inverse relationship to a bond's duration? A) Par value B) Yield to maturity C) Rating D) Time to maturity

C) Closed-end management investment companies Only the closed-end company is legally permitted to issue senior securities (preferred stock and bonds).

Which of the following investment companies registered under the Investment Company Act of 1940 can include senior securities in its capital structure? A) Open-end management investment companies B) Face-amount certificate companies C) Closed-end management investment companies D) Unit investment trusts

B) Variable annuity policy

Which of the following is not a type of life insurance policy? A) Endowment policy B) Variable annuity policy C) Term to 65 policy D) Universal life policy

B) Overall responsibility for the fund rests with the board of directors. A unit investment trust has no board of directors; rather, it has a board of trustees. A UIT must follow a stated investment objective (as must any investment company) and does not charge a management fee because it is not a managed portfolio.

Which of the following statements regarding a unit investment trust is not true? A) It charges no management fee. B) Overall responsibility for the fund rests with the board of directors. C) It is considered an investment company. D) It invests according to stated objectives.

C) It is possible to receive distributions from an annuity before age 59½ without incurring tax penalties. Withdrawals are permitted tax-free because the contributions were made with after-tax dollars

Which of the following statements regarding nonqualified annuities is CORRECT? A) Because taxes on earnings are deferred, all money withdrawn will be subject to income tax when received. B) Because only insurance companies issue variable annuities, they are not considered securities. C) It is possible to receive distributions from an annuity before age 59½ without incurring tax penalties. D) The exclusion ratio applies to accumulation units only.

C) Preferred stockholders do not have the right to subscribe to a rights offering. Preferred stockholders have a preference as to liquidation and distribution of dividends, but the right to maintain a proportionate interest in the company only applies to common stock.

Which of the following statements regarding preemptive rights is TRUE? A) Common stockholders do not have the right to subscribe to a rights offering. B) Neither common nor preferred stockholders have the right to subscribe to a rights offering. C) Preferred stockholders do not have the right to subscribe to a rights offering. D) Both common and preferred stockholders have the right to subscribe to a rights offering.

D) Duration measures the holding period return on a bond. Duration does not measure the holding period return on a bond; it measures the effect of an interest rate change on the price of a bond or bond portfolio. Duration measures a bond's price volatility by weighting the length of time it takes for a bond to pay for itself. Duration is also a weighted-average term to maturity of a bond's cash flows.

Which of the following statements regarding the properties of duration is NOT true? A) Duration measures a bond's price volatility by weighting the length of time it takes for a bond to pay for itself. B) Duration is a weighted-average term to maturity of a bond's cash flows. C) Duration measures the effect of an interest rate change on the price of a bond or bond portfolio. D) Duration measures the holding period return on a bond.

B) $100,000 market value of corporate bonds selling at a premium and yielding 6% to maturity Bonds selling at a premium have higher coupons than those selling at par.

Your client with $100,000 to invest is looking for maximum current income. Which of the following would offer the highest current return? A) $100,000 AA-rated corporate bonds trading at par with a 6% coupon rate B) $100,000 market value of corporate bonds selling at a premium and yielding 6% to maturity C) $100,000 of zero-coupon bonds with a yield to maturity of 6% D) $200,000 of utility common stock paying a current dividend of 3.5%

D) 9% A variable life insurance plan may charge a maximum sales charge of 9% over a period not to exceed 20 years.

A 35-year-old client purchases a variable life insurance policy. Under current regulations, the maximum sales charge permitted over the life of the policy is A) 8.5% per premium payment B) 8.5% of total premiums over the life of the plan C) 9% per premium payment D) 9%

UIT

A UIT typically issues redeemable securities (or "units"), like a mutual fund, which means that the UIT will buy back an investor's "units," at the investor's request, at their approximate net asset value.

A) Interest payments of $30 The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price.

A bond with a par value of $1,000 and a coupon rate of 6%, paid semiannually, is currently selling for $1,200. The bond is callable in 6 years at 103. In the computation of the bond's yield to call, which of the following would be a factor? A) Interest payments of $30 B) Future value of $1,200 C) Present value of $1,030 D) 20 payment periods

D) above $22 per share par value / conversion price = 3 shares of common stock preferred stock (66) / common stock (3) = 22 = parity price With a conversion price of $20 and a par value of $60, this preferred stock is convertible into 3 shares of the company's common stock. We divide the current price of the preferred ($66) by the 3 shares to arrive at the parity price of $22. If the common stock is selling for more than the parity price, the investor can benefit by converting and selling the stock in the marketplace.

A corporation has issued a 4% $60 par convertible stock with a conversion price of $20. With the preferred stock selling at $66 per share, an investor holding 100 shares of this stock would benefit by converting if the price of the common stock was A) above $20 per share B) above $18.20 per share C) below $22 per share D) above $22 per share

C) a decrease in the company's interest costs warrant = lower interest rate = lower cost of capital = higher earnings

A corporation may benefit by attaching warrants to a new issue of debt securities from A) a decrease in the earnings per share B) a decrease in the bond's rating C) a decrease in the company's interest costs D) a decrease in the company's amount of debt service coverage

B) YTC is the same as YTM. If a bond is trading at par, the nominal yield (coupon rate) = current yield = yield to maturity = yield to call (unless the call price is at a premium in which case the YTC would be higher).

A customer buys a 5% bond at par. The bond is callable in 5 years at par and matures in 10 years. Which of the following statements is TRUE? A) YTC is lower than YTM. B) YTC is the same as YTM. C) YTC is higher than YTM. D) Nominal yield is higher than either YTM or YTC.

D) taking out a policy loan One of the benefits of whole life insurance is the ability to borrow against the guaranteed cash value in the policy.

A terminally ill client wishing to access a portion of the cash value in his whole life insurance policy while still providing a death benefit for his beneficiaries could do so by A) converting it into a term policy B) surrendering the policy for its cash value C) selling the policy in a viatical settlement D) taking out a policy loan

D) Preferred stock Preferred stockholders do not have preemptive rights. Preemptive rights allow common stockholders to subscribe to additional issues of shares before they are offered to the public, to maintain their percentage ownership.

An investor holding which of the following equity securities would NOT expect to have preemptive rights? A) Control stock B) Common stock acquired in a private placement C) Common stock D) Preferred stock

C) less reinvestment risk and more interest rate risk. The strip is a zero-coupon security so it has no cash flows to reinvest and therefore no reinvestment risk. However, it has more interest rate risk (longer duration) than the Treasury note. Remember, the duration of a zero-coupon bond is its maturity date while any debt security paying periodic interest (Treasury notes pay semiannually) will always have a duration shorter than its length to maturity.

An investor is considering a 10-year stripped U.S. Treasury and a 10-year U.S. Treasury note, both with a yield to maturity of 4.8%. Compared to the note, the strip has A) more reinvestment risk and less interest rate risk. B) more interest rate risk and less liquidity risk. C) less reinvestment risk and more interest rate risk. D) more liquidity risk and less interest rate risk.

D) interest rate risk Treasury STRIPS are zero-coupon bonds and, as such, have a longer duration than those paying semiannual interest. The longer the duration, the greater the interest rate risk. Because both are guaranteed by the U.S. government, there is no credit risk.

An investor is considering the purchase of some bonds to diversify his portfolio. If he should decide to purchase Treasury STRIPS instead of Treasury Bonds, his major risk would be A) reinvestment risk B) purchasing power risk C) credit risk D) interest rate risk

A) $1,026.56. 21/32= .656 * 10 = 6.56 6.56 + 1020 = 1026.56

An investor purchases a Treasury note and the confirmation shows a price of $102.21. Rounded to the nearest cent, the investor's cost, excluding commissions, is A) $1,026.56. B) $102.21. C) $1,022.10. D) $1,022.21.

C) $1,027.81. 102 = 1020 25/32 = 7.81

An investor purchases a Treasury note and the confirmation shows a price of $102.25. Rounded to the nearest cent, the investor's cost, excluding commissions, is A) $102.25. B) $1,020.25. C) $1,027.81. D) $1,022.50.

A) this is a bonus annuity. It is not uncommon to find index annuities offering a bonus added to the premium.

An investor purchases a single premium deferred index annuity with an initial premium of $200,000. Soon after the purchase, the investor receives a statement from the insurance company showing an initial balance of $210,000. The most likely reason for the $10,000 increase is A) this is a bonus annuity. B) the underlying index has had outstanding performance. C) the insurance company paid a dividend. D) the insurance agent's commission was added to the account.

D) selling at a premium. A bond's NPV is most likely to be zero when its IRR is equal to the current market interest rate. In this case, that would be 6%. The only way for a bond with an 8% coupon to have a yield to maturity of 6% is if the bond is selling at a premium.

Current market interest rates are 6%. A bond with an 8% coupon would be most likely to have a net present value of zero when the bond is A) called for redemption. B) selling at a discount. C) selling at par. D) selling at a premium.

B) improve market completeness. Primary motivation for financial structuring is to increase market completeness. What does that mean? As stated in the LEM, structured products are created to meet a specific need for which there is nothing available in the current market. Creating this structured product is said to be "completing the market."

Which of the following is a motivation for creating structured products? Structured products A) reduce costs to issuers. B) improve market completeness. C) improve profits for broker-dealers. D) are less expensive for investors to buy and trade.

B) Accrued sales charges Sales charges have nothing to do with a mutual fund's net asset value. Sales charges have nothing to do with a mutual fund's net asset value. The NAV is computed by subtracting all liabilities (it is the investor who pays the sales charge, not the fund) from the fund's assets. The principal asset is the portfolio and that is valued as of the close of the markets, generally 4PM Eastern time.

Which of the following is not included in the calculation of a mutual fund's NAV per share? A) Accrued management fees B) Accrued sales charges C) Closing values of portfolio assets D) Accrued custodian bank fees

D) somewhat below $48 per share 1000 / 40 = 25 1200 / 25 = 48 = parity because convertible securities trade at a slight premium to parity, the stock should be trading at slightly under 48

DERP Corporation's 5% convertible debentures maturing in 2030 are currently selling for 120. The conversion price is $40. One would expect the DERP common stock to be selling A) somewhat below $30 per share B) somewhat above $48 per share C) somewhat above $30 per share D) somewhat below $48 per share

D) II and IV The 2 most common forms of DCF used in the valuation of common stock are the dividend discount and dividend growth models.

Discounted cash flow is commonly thought of as applying solely to fixed-income securities. However, forms of DCF used for the valuation of common stock also include I. the price-to-earnings ratio II. the dividend discount model III. the discounted book value model IV. the dividend growth model A) II and III B) I and II C) I and IV D) II and IV

B) higher than the nominal yield An investor who buys a $1,000 bond at a discount (for less than $1,000) will receive the interest payments on the bond at the nominal rate and will still receive $1,000 for the bond when it matures. As a result, the total return will be higher than the nominal yield. When a bond is selling at a discount the YTC will always be higher than the YTM.

For a bond selling at a discount, the yield to maturity will be A) higher than the yield to call B) higher than the nominal yield C) equal to the nominal yield D) lower than the nominal yield

B) BB

High-yield bonds are frequently called junk bonds. Which of the following expresses the highest rating that would apply to a junk bond? A) BBB B) BB C) CC D) CCC

B) Treasury bond issued at par carrying a 7% coupon All other factors being equal, bonds of higher quality experience less price volatility than do bonds of lower quality.

Market interest rates rise by 50 basis points. If each of these bonds has about the same maturity date, which of the following would decline the least? A) AAA corporate bond carrying a 6% coupon B) Treasury bond issued at par carrying a 7% coupon C) AA corporate bond carrying a 7% coupon D) Treasury bond issued at par carrying a 6% coupon

A) I and II - Iiquidity and creditworthiness delivery price and location always agreed upon Because there is no standardization for forward contracts, they are considered to be illiquid. Because there is no entity backing up the contract (as the OCC does with listed options), a seller must always be concerned about the ability of the buyer to pay. Although the market price probably will change, the delivery price is always agreed upon at the time of the contract, as is the method, location, and time of delivery.

One of your advisory clients indicates that he would like to sell forward contracts in soybeans. It would be wise to warn the client that he will be facing the following risks: I. Liquidity II. Creditworthiness of the buyer III. Lack of assurance that the delivery price will remain stable IV. The location for the delivery may change A) I and II B) I and IV C) II and III D) III and IV

B) A fee charged by some mutual funds to cover sales and distribution expenses A 12b-1 fee may be charged by mutual funds that do not charge the maximum permissible sales load. SEC Rule 12b-1 allows a mutual fund to serve as distributor of its own shares and charge a percentage of the average net assets for distribution and sales-related expenses.

Which of the following best describes a 12b-1 fee? A) A fee charged to all mutual funds to cover the expense of FINRA regulation B) A fee charged by some mutual funds to cover sales and distribution expenses C) A fee imposed against a mutual fund company for violating SEC rules D) A fee charged by some mutual funds to redeem shares that have been held less than one year

D) The principal amount at death is the greater of the total of premium payments or the current market value. The death benefit insures that the investor will never receive back less than the original amount contributed to the account. Unlike life insurance proceeds, with annuities, anything above the cost basis is taxed as ordinary income. Receiving the benefit as a lump sum is only one of the options available to a beneficiary of a variable annuity death benefit. There are others, such as annuitizing the benefit.

Which of the following best describes the death benefit provision of a variable annuity? A) Upon death, the proceeds pass to the beneficiary free of federal income tax. B) If death should occur before age 59½, the 10% early withdrawal penalty does not apply. C) Upon death, the beneficiary will receive the benefit as a lump sum. D) The principal amount at death is the greater of the total of premium payments or the current market value.

C) ABC 5s of 2040 The bond with the longest duration is generally going to have the greatest exposure to interest rate risk. Because there is very little difference between maturity dates of 2040 through 2042, the bond with the lowest coupon will have the longest duration. The 4s of 2020 have a relatively short duration, even though their coupon is low.

Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A) DEF 6s of 2041 B) JKL 4s of 2020 C) ABC 5s of 2040 D) GHI 7s of 2042

B) A member of the board of directors who does not hold another position within the investment company Merely sitting on the board does not make someone an interested person.

Which of the following individuals would be considered a noninterested person in a mutual fund? A) A shareholder who owns 10% of the fund's shares B) A member of the board of directors who does not hold another position within the investment company C) A person who holds a position with the fund's underwriter D) A member of the board of directors who is also employed as the investment adviser

B) Unit investment trust (UIT) A UIT typically issues redeemable securities (or "units"), like a mutual fund, which means that the UIT will buy back an investor's "units," at the investor's request, at their approximate net asset value. ETFs and CEFs are traded in the secondary markets and investors sell their shares in the marketplace rather than redeeming them through the issuer. Face amount certificates are not redeemable - the investor's funds are returned when the debt is paid off.

Which of the following investment vehicles provides for redemption by the issuer? A) Closed-end fund (CEF) B) Unit investment trust (UIT) C) Face amount certificate (FAC) D) Exchange-traded fund (ETF)

C) Forwards Forwards are NEVER traded on an exchange.

Which of the following investments would NOT be considered an exchange-traded derivative? A) Futures B) Options C) Forwards D) Warrants

B) offer managers high fixed fees. Performance fees are variable...

Which of the following is NOT a characteristic of hedge funds? Hedge funds A) invest in private securities, real assets, derivatives, and structured products. B) offer managers high fixed fees. C) are privately organized and generally unlisted. D) use leverage, short positions, and concentrated positions.

D) Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence

Which of the following is the least suitable mutual fund transaction? A) Encouraging a retired 65-year-old investor to invest a small percentage of his savings in a large-cap growth fund B) Encouraging an investor in his early 30s to invest in an emerging markets mutual fund C) Encouraging an investor in a high tax bracket with an income objective to invest in a municipal bond fund D) Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence

D) Moving averages

Which of the following is used in technical analysis in an attempt to modify fluctuations of stock prices over the long term into a smoothed trend? A) Consolidation B) Support and resistance C) Trend lines D) Moving averages

C) The dividend discount model The simplest model for valuing equity is the dividend discount model—the value of a stock is the present value of expected divi¬dends on it. Although fundamental analysts will examine a company's book value per share, it generally has little or no bearing on the current market price of the stock.

Which of the following might be used by an analyst to approximate a reasonable price for a common stock? A) Yield to maturity B) Par value C) The dividend discount model D) Book value per share

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

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

B) Alternative investments The leveraged ETF is a registered investment company, but the ETN is not.

Which of the following terms best describes ETNs and leveraged ETFs? A) Forms of hedge funds B) Alternative investments C) Speculative investments D) Registered investment companies

C) Term A term policy provides life insurance only with no savings element. Upon renewal, the rates are higher as you age.

Which of the following types of life insurance has premiums that increase each time the policy is renewed, and no cash value buildup? A) Universal life B) Ordinary whole life C) Term D) Variable life

D) I and IV

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. A) II and III B) I and II C) III and IV D) I and IV

A) I and II Options and warrants only have one party obligated to act.

Which type of contract obligates both parties to act? I. Forward contract II. Futures contract III. Option contract IV. Warrant A) I and II B) II and III C) I, II, and III D) I and IV

D) Annual renewable term At any given age, term insurance always carries the lowest premium and, of the term policies available, annual renewable term always has the lowest initial premium.

You have a 37-year-old client whose wife has just given birth to triplets. Because of the added responsibilities, he wants to maximize the amount of life insurance he can acquire. Which of the following types of insurance will give him the greatest amount of coverage for the lowest initial premium? A) Whole life B) Variable life C) Universal life D) Annual renewable term