Series 6 Mastery Exam Practice
Employee contribution limit on simple IRA
$12,000
401k limits
$17,500
ROTH 401K
$17,500
Catch up contribution limit on simple IRA
$2500 plus regular contribution limit equals $14,500
401k Max contribution
$260000
401k catch up
$5,500
ROTH catch up
$5,500
Catch up contribution limit on 403B
$5500 plus regular elective deferral limit total $23,000
Catch up contribution limit on section 457 plan
$5500 totaling $23,000 with the regular employee elective deferral limit
ROTH IRA contribution limit and catch up contribution limit
$5500, catch up contribution limit is an additional $1000
A client purchasing a variable life insurance policy should expect which of the following? I> Level premiums for the life of the policy II> A possible reduction in premiums if separate account performance exceeds the policy's AIR III> A death benefit that will never be less than the guaranteed minimum amount IV> Cash value that must be available to borrow no later than 24 months after the policy issue date A) II and III B) I and III C) II and IV D) I and IV
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A potential customer does not have a Social Security number, and several of his references can give only very sketchy information about him. His bank cannot confirm that he holds an account there, and when asked for a photo ID, he keeps promising to provide one later and is both evasive and impatient. What action should your firm take? A) Provide a photo ID for him as a customer of your firm B) Open the account but make no investment recommendations C) Refuse to open the account D) Open the account, but insist that the customer apply for a Social Security number as soon as possible
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A registered representative of a FINRA member firm decides to use email to communicate sales ideas to clients and prospects. Which of the following statements correctly describes the treatment of email? A) All emails are subject to the 3-year recordkeeping requirements. B) All email from a broker/dealer is considered advertising. C) A bulk email sent to 100 prospective customers within a 30-day period is considered group correspondence. D) An individualized email sent to 1 existing customer is considered correspondence.
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Which of the following statements about Regulation T payment and regular way settlement are TRUE? I> Regulation T payment is mandated by the Federal Reserve II> Regulation T payment is requested of the customer by the broker/dealer III> Regular way settlement is mandated by the Federal Reserve IV> Regular way settlement is requested of the customer by the broker/dealer A) I and IV B) I and III C) II and IV D) II and III
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Which of the following statements concerning the tax treatment of variable life insurance to the policyholder is NOT correct? A) Upon the death of the insured, the death benefit is exempt from income tax. B) During the life of the policy, the earnings grow tax deferred. C) If the policy is surrendered, any value received in excess of the cost basis will be taxed as capital gains. D) Cash values may be borrowed on a tax-free basis.
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Which of the following statements regarding mutual fund shareholders are TRUE? I> They have the right to vote to fill a vacancy on the board of directors. II> They will be able to redeem as many shares as desired at the next computed NAV. III> They purchase shares in the fund priced by supply and demand. IV> They are the owners of a diversified closed-end investment company. A) I and III B) II and IV C) I and II D) III and IV
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Contribution limits on KEOGH plans
100% of compensation, or $52,000, which ever is less
Total limit on annual additions (combination of all employer contributions and employee elective deferrals)
100% of includable compensation or $52,000 whichever is less
403B employee elective deferral limit
17,005
Section 457 plan employee elective deferral limit
17,500
18 Month Refund (18MO)
18MO = NAV = SC - 15% Gross Contribution
Coverdell ESA contribution limit
2000 per year per beneficiary under age 18
Maximum deductible contribution on KEOGH
25% of eligible compensation
Employer contribution limit on SEP - IRA
25% of the employees earned income, or 52,000 whichever is less
Maximum employee and employer contribution to a solo 401K
52,000 or 100% of compensation
Your client has been saving for retirement by investing in a nonqualified variable annuity. The client, who is now age 65, would like to take a lump-sum distribution. The earnings would be taxed as A) ordinary income B) short-term gain C) long-term gain D) long-term capital gain, except for any portion contributed in the previous 12 months
A
Traditional IRA if you are NOT COVERED by a retirement plan at work, The duction is only limited if your SPOUSE IS COVERED by a retirement plan at work.. Single, head of household, or qualified widow MAGI of any amount
A full deduction up to the amount of your contribution limit
Traditional IRA married filing jointly or qualified widow, MAGI Of $96,000 or less
A full deduction up to the amount of your contribution limit
Traditional IRA married filing jointly or separately with a spouse who is NOT covered by a plan AT work MAGI Of any amount
A full deduction up to the amount of your contribution limit
Traditional IRA and are covered by a retirement plan at work and are single or head of household your MAGI of $60,000 but less than 70,000
A partial deduction
Traditional IRA married filing separately with a MAGI less than $10,000
A partial deduction
A client owns shares of the ABC Mutual Fund with a total current value of $20,000, and ABC has a sales charge of 5% that reduces to 3% at $25,000. If ABC offers a right of accumulation, how much sales charge will be levied on an additional investment of $10,000? A) $400 B) $150 C) $300 D) $500
A) $400 Of $10,000 more: 5,000 x 0.05 = 250 5,000 x 0.03 = 150 Total = $400
A mutual fund has $100 million in total assets. How much of the $100 million may be invested in one issuer and be defined as a diversified fund? A) $5 million B) $25 million C) $10 million D) $30 million
A) $5 million
Which of the following communications must be reviewed and approved by a principal before it can be used? A) A letter to be sent this week to 30 existing customers recommending a new service being offered by the firm B) A letter to be sent to all customers reminding them of a change in the tax laws C) An internal memo to be sent to registered representatives describing a new sales technique D) Promotional material to be sent only to mutual funds and insurance companies
A) A letter to be sent this week to 30 existing customers recommending a new service being offered by the firm
The 55-year-old owner of a traditional IRA would like to move $20,000 from his IRA into a Roth IRA. You advise him of the following. A) He will need to report $20,000 as ordinary income on his tax return. B) This transaction is not a taxable event. C) He will need to report $20,000 as long-term capital gains on his tax return. D) There will be a 10% penalty on the distribution.
A) He will need to report $20,000 as ordinary income on his tax return. [3. 9. 2. 3]
For a fund to charge the maximum sales load permitted under FINRA rules, which of the following features must be among those made available to shareholders? I> Quantity discounts for purchases made by any person II> 10-day free-look provision III> Rights of accumulation IV> Conversion and exchange privilege A) I and IV B) I and III C) II and III D) II and IV
A) I and IV
Which of the following would be considered nonfinancial investment considerations? I> Attitude toward risk II> Net spendable income after expenses III> Total long-term liabilities IV> Customer's acceptable level of return from an income investment A) I and IV B) II and IV C) II and III D) I and III
A) I and IV
84w. A public offering of new securities would be exempt from the antifraud provisions of the Securities Act of 1933 in which of the following cases? A) Under no circumstances B) Commercial paper maturing in 270 days or less C) US Treasury bonds D) Common stock sold on an intrastate basis only
A) Under no circumstances [3. 6]
16. If the economy experiences an increasing GDP, it is said to he in A. an expansion B. a peak C. a decline D. a trough
A. An economic expansion occurs when the GDP (Gross Domestic Product) increases. The high point in an economic cycle is known as the peak. When the GDP falls from one period to the next, the economy is in a state of decline. A trough occurs at the bottom of the decline.
It is recommended that a customer purchase various call options. From this, you would expect that the fund's market outlook is A) bullish B) bearish C) income oriented D) neutral
A) bullish
All of the following statements regarding the Code of Arbitration procedure are correct EXCEPT A) claims involving customers require that the arbitration panel always be divided equally between industry and nonindustry arbitrators B) arbitration is the procedure used to settle disputes between member firms C) a member failing to abide by the arbitrator's decision will be subject to disciplinary action D) arbitration may be used to settle disputes between FINRA member firms and customers
A) claims involving customers require that the arbitration panel always be divided equally between industry and nonindustry arbitrators
The Federal Reserve may alter which of the following in responding to an inflationary trend? I. Broker call loan rate II. Prime rate III. Discount rate IV. Reserve requirement A)III and IV B)I and II C)I and III D)II and IV
A)III and IV III. Discount rate IV. Reserve requirement [1. 4. 2. 1]
An investor purchased 100 shares of the CDL Growth and Income Fund three years ago when the POP was $10 and the NAV was $9.50. During this period, the investor received dividend distributions totaling $1 per share and capital gains distributions totaling $.50 per share, all of which were taken in cash. The investor submits an order to liquidate this account when the current POP is $11 and the NAV is $10.45. The tax consequences of this liquidation would be a A)capital gain of $100 B)capital gain of $45 C)capital loss of $50 D)capital loss of $105
A)capital gain of $100
All of the following information must be obtained from new individual customers EXCEPT A)educational background B)Social Security number C)date of birth D)residence address
A)educational background [5. 1]
10. Which of the following generally provides the right to buy a corporation's stock for the longest period of time? A. Warrant B. Long put C. Long call D. Preemptive right
A. A warrant allows an investor a long- term right to buy an issuer's stock. The expiration period of a warrant is generally 5 years. Long calls are options that give the holder the right to buy stock, but typically expire within 9 months. Preemptive rights are short-term rights to buy stock and usually expire within 30—45 days. Long puts are rights to sell.
15. AlL of the following statements about preferred stock and bonds are true EXCEPT A. they are both debt instruments B. they both have a fixed rate of return C. they are both senior to common stock at the dissolution of a corporation D. the prices of both are directly influenced by interest rates
A. Preferred stock is an equity instrument because it represents an ownership interest in a corporation. However, because of its fixed dividend rate, the price of preferred stock (like the price of bonds) is directly influenced by changes in interest rates. Debt securities and preferred stock are senior to common stock in corporate dissolutions.
Assets (A)
A=L+NW; Assets = Anything of value that is owned. Liabilities = Anything of value that is owed
S EP - I R a strictest eligibility requirements are
Age 21 or older, has worked for the employer for 3 of the last five years, and has received at least $550 in compensation from the employer for the year
Market Cap
All Outstanding Shares * Market Price Per Share
Roth IRA , Single, head of household, or married filing separately and you DID NOT LIVE with your spouse at any time during the year.. MAGI of at least $114,000 but less than $129,000
Amount you can contribute is reduced
Dividend Yield
Annual Dividend / Share Price
Current Yield
Annual interest/Current Market Price
Working Capital (WC)
Assets available for use WC = Current A - Current L
The federal act that regulates securities markets and broker/dealers is the A) Securities Act of 1933 B) Securities Exchange Act of 1934 C) Uniform Securities Act (USA) D) National Securities Markets Improvement Act of 1996 (NSMIA)
B securities exchange act 1934
Individuals with a Series 6 registration, known as a Limited Representative registration, may NOT make sales of which of the following? A) Closed-end investment company shares that are the subject of a primary offering B) Closed-end investment company shares in the secondary market C) Variable annuities D) Open-end investment company shares
B) Closed-end investment company shares in the secondary market
A member has just hired an individual who was formerly registered with another member firm. When requesting a copy of the terminated person's Form U-5, the former registrant must produce a copy within A) 5 business days of the request B) 2 business days of the request C) 30 days of the request D) as soon as he is able to retrieve a copy from the CRD
B) 2 business days of the request
Under the Code of Procedure, the maximum sanction for a minor rule violation (MRV) by a FINRA member is I> a $2,500 fine II> a $5,000 fine III> a letter of censure IV> suspension not to exceed 3 months A) II and III B) I and III C) II and IV D) I and IV
B) I and III
Which of the following companies would generally NOT employ the services of an underwriter to assist them in raising capital? A) Finance company offering an IPO B) No-load mutual fund C) An open-end investment company offering investors a choice of Class A, Class B, or Class C shares D) Closed-end investment company
B) No-load mutual fund [Organizational Structure of a Fund, pp. 101]
Which of the following individuals would NOT be eligible to open a Keogh plan? A) A self-employed unincorporated plumber B) The CEO of a publicly traded corporation C) A CPA who operates as a sole proprietorship D) A physician who earns income from a health column he writes for the local newspaper
B) The CEO of a publicly traded corporation
You would NOT be permitted to open an account where the owner of record is A) the executor of an estate B) a person who the courts have declared to be mentally incompetent C) a court-appointed guardian D) a limited partnership
B) a person who the courts have declared to be mentally incompetent
Your client has a cash balance in his account of $175,000 and securities holdings of $125,000. He asks about SIPC coverage and you explain that his current coverage is for A) $100,000 securities and $100,000 cash for a total coverage of $200,000 B) his cash balances only, up to $250,000 C) $175,000 cash and $125,000 securities for total coverage of $300,000 D) all of the securities and none of the cash for total coverage of $125,000
B) his cash balances only, up to $250,000
A registered representative would not be permitted to open an account in the name of a(n) A) executor of an estate B) minor C) court-appointed guardian D) limited partnership
B) minor [5. 1]
9. Which of the following statements about bid and asked prices are TRUE? I. Market makers huy at the bid and sell at the asked. Il. Market makers huy at the asked and seLl at the bid. III. Customers buy at the bid and sell at the asked. IV. Customers buy at the asked and sell at the hid. A. land III B. IandIV C. II and III D. II and IV
B. Customers buy stock at the asked price, which means that market makers must sell at the asked price. Customers sell to market makers at the hid price, which is the price that a market maker will pay to buy the customer's stock. Remember that customers buy at the ask. Then remember that market makers do the opposite and easily solve questions like this.
7. All of the following types of securities trade in the secondary market EXCEPT A. debentures B. EEbonds C. common stock D. municipal bonds
B. ElE bonds do flot trade on the secondary market.
12. Which of the following would be considered money market instruments I. A Treasury bond with 11 months to maturity II. 10 shares of preferred stock sold within 270 days III. An American depository receipt (ADR) held for less than 1 year IV. A $200,000 negotiable certificate of deposit A. land III B. IandlV C. Iland III D. IIIandIV
B. Money market securities are high grade and liquid debt securities with less than 1 year to maturity. Preferred stock and ADRS are equity securities. The T-bond with less than 1 year to maturity and a negotiable CD are money market instruments.
Which of the following phrases describes contractual plans? A) When the original sale was made, two prospectuses had to be delivered B) May only be sold by banks C) Contain binding agreements that require an investor to complete the plan D) Not subject to any maximum sales charge limit
C) Contain binding agreements that require an investor to complete the plan
The Federal Reserve Board may alter which of the following to curb inflation? I> Discount rate II> Prime rate III> Reserve requirement IV> Broker call loan rate A) I and II B) III and IV C) I and III D) II and IV
C) I and III
A client expresses the desire to invest in income securities that have minimal credit risk. Which two of the following would be appropriate to recommend? I> Treasury bills II> Corporate intermediate term notes III> Subordinated debentures IV> General obligation municipal bonds A) II and III B) I and III C) I and IV D) II and IV
C) I and IV
All of the following statements regarding the Code of Arbitration Procedure are true EXCEPT A) arbitration is the procedure used to settle disputes between member firms B) the decision of the arbitrator or arbitrators is final and binding C) claims involving customers require that the majority of arbitrators be from within the industry D) a FINRA member failing to abide by the arbitrator's decision will be subject to disciplinary action
C) claims involving customers require that the majority of arbitrators be from within the industry [5. 4. 2. 4]
Which of the following practices by a FINRA member firm is a violation of the Conduct Rules? A) Omission of a nonmaterial fact when recommending an investment B) Using discretionary authority only within the customer's investment objectives C) Making unsuitable investment recommendations D) Telling a client that you don't think their planned Section 1035 exchange recommended by their insurance agent is suitable for them
C) Making unsuitable investment recommendations
Which of the following is NOT a method of purchasing annuity contracts? A) Single premium immediate annuity B) Periodic payment deferred annuity C) Periodic payment immediate annuity D) Single premium deferred annuity
C) Periodic payment immediate annuity
The XYZ Fund, an open-end investment company, was founded 9 years ago. If it wishes to show average annual rates of return in an advertisement, it must show returns A) for 12 months only B) for 1, 3, 5, and 9 years C) for 1, 5, and 9 years D) for each year since inception
C) for 1, 5, and 9 years
Under the USA PATRIOT Act of 2001, financial institutions and their personnel are required to take steps to recognize and prevent money laundering. Which of the following activities might lead a registered representative with a member firm to suspect a client might be engaging in illegal practices? A) The customer has a brokerage account with your firm and an IRA account with another broker/dealer. B) There are frequent complaints from the client about high commissions. C) The client refuses to engage in a transaction after learning that a currency transaction report (CTR) must be completed. D) The client seems overly concerned about losses in his account.
C) The client refuses to engage in a transaction after learning that a currency transaction report (CTR) must be completed.
The forward pricing rule applies to A) purchases, but not redemptions, of the shares of open-end investment companies B) purchases and redemptions of the shares of closed-end investment companies C) purchases and redemptions of the shares of open-end investment companies D) securities traded in the fourth market
C) purchases and redemptions of the shares of open-end investment companies [Glossary, pp. 396]
The Jeffers Fund provides higher than average, taxable current income to its shareholders. It appeals to investors who like equity income and are willing to assume business risk. Which of the following might describe the Jeffers Fund? I. A speculative bond fund II. A preferred stock fund III. A common stock income fund IV. A municipal bond fund A)I or IV B)II or IV C)II or III D)I or III
C)II or III II. A preferred stock fund III. A common stock income fund [2. 4. 4. 1. 2]
If an associated person of a broker/dealer owns a vacation home, under which of the following circumstances is he permitted to rent it out? A)Only with prior written approval of the firm B)Under no circumstances C)Without restriction D)Only after notifying the firm
C)Without restriction [5. 3. 2. 2]
11. An investor owns 100 shares of common stock in ABC Corporation. ABC Corporation allows for statutory voting in board of directors elections. If there are 5 positions to be voted on for the board, the investor has A. 500 votes for each of the positions B. a total of 500 votes which may be cast in any manner C. 100 votes for each of the 5 positions D. 20 votes for each of the 5 positions
C. Statutory voting allows investors 1 vote for each share of stock they own per open director position. This investor has 100 votes for each of the 5 voting positions on the board of directors.
Catch up contributions on SEP - IRA
Catch up contributions are not allowed into a S EP - IRA since S EP's are funded by employer contribution's only
Individual retirement arrangement traditional IRA
Contribution limit is 5500, catch-up contribution limit additional $1000
Distribution Cost Base
Current Share Price - Share Purchase Price
ERISA regulations apply to which of the following retirement plans? ABC Corporation, listed on the NYSE DEF Corporation, privately held among nine shareholders City of Detroit employees' retirement benefit plan FBI employees' retirement benefit plan A) II and III B) I and IV C) I and II D) III and IV
D
A married couple opens a new account with a broker/dealer as tenants in common. In explaining the details of the account to the couple, the registered representative would NOT indicate which of the following? A) Orders may be given by either party B) In the event of death, the decedent's interest in the account goes to the decedent's estate C) Mail may be sent to either party with the permission of the other party D) Certificates may be registered in the name of either party
D) Certificates may be registered in the name of either party
A client, age 50, purchases a single-premium variable annuity in the amount of $100,000. Eight years later, when the account is valued at $130,000, the client withdraws $50,000. If the client is in the 25% tax bracket, what is the total tax liability on the withdrawal? A) $7,500 B) $10,500 C) $12,500 D) $17,500
D) $17,500 Early withdrawals from a VA are subject to the 10% tax penalty. While $50,000 of cash are being withdrawn, the additional 10% of tax liability raises the amount from $12,500 to $17,500
What is the highest hypothetical rate of return that may be used when illustrating a variable life contract? A) 9% B) 15% C) 6% D) 12%
D) 12%
Absent an extension, a client failing to make full payment in a cash account within the time period required under Regulation T will have her account frozen for A) 5 business days B) 30 calendar days C) 60 calendar days D) 90 calendar days
D) 90 calendar days
Which of the following plans is a nonqualified plan, funded with before-tax dollars? A) Payroll deduction plan B) 403(b) plan C) 401(k) plan D) Deferred compensation plan
D) Deferred compensation plan
Which of the following statements regarding the Investment Company Act of 1940 are TRUE? I. Investment companies must have a minimum capitalization of $1 million before they may begin offering shares to the public. II. Under most circumstances, selling short or buying on margin is restricted by the act. III. An investment company must clearly state its objectives. IV. Bank borrowing by an open-end investment company is limited to 200% asset coverage. A) I and II B) I and IV C) III and IV D) II and III
D) II and III II. Under most circumstances, selling short or buying on margin is restricted by the act. III. An investment company must clearly state its objectives.
Which of the following practices is in accordance with the Conduct Rules? A) Omitting a material fact of minor importance in making a mutual fund recommendation to a customer. B) Encouraging a customer to purchase a mutual fund just below a stated breakpoint. C) Encouraging an investor to purchase a mutual fund share just before the ex-date in order to receive the dividend. D) Presenting to clients a research report prepared outside the firm with disclosure that it was prepared by a third party.
D) Presenting to clients a research report prepared outside the firm with disclosure that it was prepared by a third party.
Your customer is deeply interested in electronics, in which he has established a successful career. He would like to invest in new companies in this area and has accumulated substantial discretionary funds for the purpose. His objectives for this money include aggressive growth with minimal concern for risk. You might recommend A) a corporate high-yield bond fund concentrating on manufacturing and heavy industrial companies B) a large-cap growth fund that includes substantial holdings in many of the largest electronics and computer companies in the country C) a municipal bond fund with emphasis on industrial development revenue bonds used to provide facilities for startup enterprises D) a sector fund specializing in small-cap companies that include electronics companies
D) a sector fund specializing in small-cap companies that include electronics companies [Suitability table, pp.361]
Traditional IRA phase out ranges for deduction of contribution
Depending on your MAGI your deduction from Texas could change
Employer contributions to S EP - IRA
Employers do not have to make a contribution every year, but when they do they must make contributions to all eligible employees
Simple IRA (savings incentive match plan for employees)
For business with 100 or less employees and no other retirement plan
Tax sheltered annuities (IRC 403b)
For public school employees and nonprofits
KEOGH PLANS (HR-10's)
For self employed
Simplified employee pension plan (SEP-IRA)
For small business with no more than 50 employees. S EP are funded by employer contributions only
Coverdell ESA MAGI limits Single, head of household and married filing separately MAGI Below $95,000
Full contribution
Coverdell ESA MAGI limits.. Married filing jointly MAGI At least $190,000 but less than $220,000
Full contribution
Coverdell ESA MAGI limits.. Married filing jointly MAGI Below $190,000
Full contribution
Traditional IRA, married filing jointly with a SPOUSE who IS covered by a plan at work.. MAGI Up to $181,000
Full deduction up to the amount of your contribution limit
Section 457 plan (Government employees and employees of tax exempt organizations)
Government employees and employees of tax exempt organizations
Strictest eligibility requirements for SIMPLE IRA
Has received at least $5000 in compensation from the employer in the previous year
Solo 401k profit sharing employer contributions
If Business is an S Corp C or LLC text as a corporation cannot exceed 25% of compensation
Catch up contributions on SEP - IRA on the IRA portion of it
If permitted by the SEP-IRA, catch-up contributions can be made for people age 50 or older to the limit of $1000
Contributions on S EP - IRA on the IRA portion of it
If permitted, regular IRA contributions can be made by the participant to his or hers S EP - IRA up to the maximum annual limit of $5500
Solo 401K profit sharing employer contributions
If the business is a sole proprietorship, partnership or LLC taxed as a sole proprietorship 20% of net adjusted business profit.
After-Tax Yield
Investor's return * (100% - Tax Bracket)
Municipal Bond Tax Equivalent Yield
Municipal Yield / 100% - Marginal Tax Bracket
Bid Price (B)
Net Asset Value (NAV) of a fund or Wholesale Price is the current market price. B = AP = $SC B = AP x (1-SC%)
Net Worth (NW)
Net Worth (NW) = Assets (A) - Liabilities (L) Net Worth: The measured financial value of a person
Traditional IRA, covered by a retirement plan at work and single or head of household with MAGI Of $70,000 or more
No action
Coverdell ESA MAGI limits Single, head of household and married filing separately MAGI Of $110,000 or more
No contribution is allowed
Traditional IRA married filing jointly or qualified widow, MAGI Of $160,000 or more
No deduction
Traditional IRA married filing separately with a MAGI of $10,000 or more
No deduction
Traditional IRA, married filing jointly with a SPOUSE who IS covered by a plan at work.. MAGI OF $191,000 or more
No deduction
Traditional IRA married filing jointly or qualified widow, MAGI Of $96,000 but less than $116,000
Partial deduction
Traditional IRA, married filing jointly with a SPOUSE who IS covered by a plan at work.. MAGI More than $181,000. But less than $191,000
Partial deduction
A mutual fund must redeem its tendered shares within how many days after receiving a written request for their redemption? A) Three days. B) Five days. C) Ten days. D) Seven days.
The correct answer was - D: Seven days. Explanation: The seven-day redemption rule is required by the Investment Company Act of 1940. Reference: 4.2.3 in the License Exam Manual.
P/E Ratio
Price per Earnings Ratio = Market Value of Stock / Earnings Per Share
Asked Price (AP)
Public Offering Price, or Retail Offering Price. The lowest price a seller is willing to accept. AP = B + $SC AP = B / (1-SC%)
Contributions for SIMPLE IRA
Salary reduction contributions (made by the employee) and employer contributions, either • matching contribution (of 1% to 3%) • none elective contributions (2%) -this is made regardless of employee salary reduction contributions
Percentage of the Sales Charge
Sales Charge / Offering Price
Solo 401K
Self employed with no employees other than the spouse. Limits $17,500 CATCH UP $5,500
Inflation-Adjusted Return
Stated Return - Inflation Rate
A customer wishes to redeem 1,000 shares of a mutual fund. The NAV and POP are $10, and a redemption fee of 0.5% will be charged. How much will the customer pay in redemption fees? A) $50. B) $500. C) $9,500. D) $9,950.
The correct answer was - A: $50. Explanation: The question did not ask how much he would receive upon redemption, but how much he would pay in redemption fees. Mutual fund shares are redeemed at the NAV (bid): 1,000 shares × $10 each = $10,000. $10,000 × .005 (.5% redemption fee) = $50. Reference: 4.2.3 in the License Exam Manual.
Ross IRA, married filing separately and you lived with your spouse at any time during the year.. MAGI more than zero but less than $10,000
The amount you can contribute is reduced
Rough IRA, married filing jointly or qualifying widow.. MAGI Of at least $181,000 but less then $191,000
The amount you can contribute is reduced
Coverdell ESA MAGI limits Single, head of household and married filing separately MAGI at least $95,000 but less than $110,000
The amount you may contribute is reduce
A shareholder invested in a mutual fund and has signed a letter of intent to invest $25,000. Her original investment was $13,000, and her current account value is $17,000. For her to complete the letter, she must deposit: A) $12,000. B) $13,000. C) $8,000. D) $27,000.
The correct answer was - A: $12,000. Explanation: Under a letter of intent, the full contribution is required for the letter to be completed. Appreciation is not considered. Reference: 4.2.2.2.2 in the License Exam Manual.
A customer owns 200 shares of ABC Growth Fund, which has a POP of $12 and an NAV of $11. She wants to convert these shares to ABC Balanced Fund, which has a POP of $14.77 and an NAV of $13.66. ABC offers a conversion privilege. At what price will the ABC Balance Fund shares be purchased? A) $13.66. B) $11. C) $12. D) $14.77.
The correct answer was - A: $13.66. Explanation: The fund offers conversion privileges so that conversion occurs at the net asset value. Since the customer is exchanging into the ABC Balanced Fund, she will purchase shares at its NAV of $13.66. Reference: 4.2.2.2.5 in the License Exam Manual.
In registering with the SEC, an investment company must provide all of the following information EXCEPT: A) the current professional and trade society memberships of each officer and director. B) any plans the company has for concentrating investments in a single industry. C) any plans the company has for investing in real estate or commodities. D) the business experience of each officer and director during the preceding five years.
The correct answer was: the current professional and trade society memberships of each officer and director. Officer and director memberships in professional societies are not required on the investment company registration documents.
Section 457 plan pre-retirement catch up limit
The pre-retirement catch-up provision of a 457 plan allows an additional contribution to be made this year to make up for years in which the employee did not contribute to the maximum that here she was eligible to contribute under the current employers plan the maximum or limit is $17,500 totaling $35,000 with the elective
Conversion limits from a traditional IRA to a Roth IRA
They are allowed regardless of a AGI although taxes are owed on the amount rolled over that has not yet been taxed ( back door into the ROTH)
Expense Ratio
Total Expense / Total Net Assets
Net Asset Value (NAV) per Share
Total Net Assets / Total of Outstanding Shares
Cumulative Vote
Total Number of Votes = number of shares * number of vacanices
Sales Charge (SC)
Used to pay commissions or fees. $SC = AP - B $SC = %SC x AP %SC = $SC / AP
Withdrawal (WD)
When an investor cancels a plan. 45-day WD = NAV + SC
If a client called a registered representative to ask about a life settlement contract, the discussion would deal with a) the sale of a life insurance policy in the secondary market b) the death benefit feature of a variable annuity c) which settlement option to choose when annuitizing a contract d) methods of minimizing estate taxes
a) the sale of a life insurance policy in the secondary market [2. 8. 11]
Rough IRA, married filing jointly or qualifying widow.. MAGI Is less then $181,000
You can contribute to the limit
Ross IRA, married filing separately and you lived with your spouse at any time during the year.. MAGI IS ZERO
You can contribute up to the limit
Roth IRA , Single, head of household, or married filing separately and you DID NOT LIVE with your spouse at any time during the year.. MAGI less than $114,000
You can contribute up to the limit
Ross IRA, married filing separately and you lived with your spouse at any time during the year.. MAGI $10,000 or more
You cannot contribute to a Roth IRA
Roth IRA , Single, head of household, or married filing separately and you DID NOT LIVE with your spouse at any time during the year.. MAGI of $129,000 or more
You cannot contribute to a Roth IRA
Rough IRA, married filing jointly or qualifying widow.. MAGI Of $191,000 or more
You cannot contribute to a Roth IRA
All of the following are true regarding nonqualified deferred compensation plans EXCEPT: A) income taxes on compensation are not due until constructive receipt. B) IRS approval is not needed for deferred compensation plans. C) the plans need not be offered to all employees. D) employees may use accumulated funds as collateral for a bank loan.
Your answer, employees may use accumulated funds as collateral for a bank loan., was correct!. Deferred compensation is a promise made by an employer to defer a certain amount of an employee's salary (that he or she will receive) upon retirement. The employee has no rights to the money until retirement, death, or disability, and thus cannot use it as collateral.
All of the following are true about deferred compensation plans EXCEPT a) these types of plans are often offered to highly compensated, younger employees b) these plans are not available to company board c) when the benefit is payable at retirement, it is taxable as ordinary income to the employee d) if the business fails, the employee becomes a general creditor of the firm
a) these types of plans are often offered to highly compensated, younger employees [3. 9. 1. 1]
The XYZ Growth Fund charges no sales charge but has 1% redemption fee. An investor phones in a redemption request when the next computed public offering price is $10.50 per share. If 1,000 shares are redeemed, the investor will receive a check in the amount of a) $10,395 b) $10,500 c) $10,605 d) $9,450
a) $10,395 $10.50 x 1,000 = 10,500 10,500 x 0.01 = 105 (fee) total: 10,500- 105= $10,395
ABC broker/dealer must file which of the following with FINRA? I. Website II. email to a prospect reviewing a recommendation for investment III. radio advertisement IV. promotion sent to 50 nonprofit organizations a) I and III b) II and IV c) I and IV d) II and III
a) I and III I. Website III. radio advertisement [4. 1. 7. 1]
Which of the following statements regarding a Section 529 plan TRUE? a) the donor must be related to the student. b) Donors may either invest a lump sum or make periodic payments. c) Contributions may be made only by those who fall within certain earnings limits. d) A beneficiary of a Coverdell Education Savings Account may not also be a beneficiary of a 529
b) Donors may either invest a lump sum or make periodic payments. [3. 9. 2. 5]
If a customer and his spouse own shares in the ABC Mutual Fund as joint tenants with right of survivorship, and the customer dies, what happens to the shares in the account? a) Any surviving children would automatically own his portion b) His spouse would own all the shares c) Fifty percent of the shares would belong to his spouse, and the remaining half would be distributed to his estate d) Ownership of the shares would be determined by probate court
b) His spouse would own all the shares [5. 2. 2. 2]
Which of the following types of risk cannot be significantly reduced through diversification? I. market risk II. business risk III. credit risk IV. systemic risk a) II and IV b) I and IV c) I and III d) II and III
b) I and IV I. market risk IV. systemic risk
A FINRA member broker/ dealer enteres into a selling agreement with a mutual fund distributor. Under the terms of that agreement, the member I. may purchase shares for its own investment account II. will be able to purchase shares of the fund at discount from the net asset value III. may maintain only a limited inventory of funds shares IV. may purchase shares to fill customer orders already received a) II and IV b) I and IV c) I and III d) II and III
b) I and IV I. may purchase shares for its own investment account IV. may purchase shares to fill customer orders already received
Which of the following are TRUE with regard to contractual plans? I. The maximum sales charge over the life of a plan is 9% II. 1940 companies may deduct a 50% sales charge in the first year III. Spread load plans may deduct a 20% sales charge in the first year IV. The maximum average sales charge that may be withdrawn over any four-year period with a spread-load plan is 20% a) I, II, and III b) I only c) I, II, III, and IV d) I and II
b) I only I. The maximum sales charge over the life of a plan is 9% [Glossary, pp.410]
Rank the following variable annuity payout options in order form typically lowest monthly payments I. life only II. life with 10 years certain III. life with 20 years certain IV. joint with last survivor a) III, II I IV b) I, II, III, IV c) I, III, II, IV d) IV, III, II, I
b) I, II, III, IV [2. 7. 4]
An investor who commits a sizable portion of her portfolio to long-term AAA-rated bonds would be exposing herself to a) purchasing power risk b) uncertainty about the ability of the issuer to make timely payments of interest and principal c) liquidity risk d) less market risk than if the portfolio were invested in money instruments
b) uncertainty about the ability of the issuer to make timely payments of interest and principal [6. 2. 2. 8]
Under the Conduct Rules, the principal underwriter of an open-end investment company would be permitted to award the registered representative of a broker/dealer under contract with the highest sales totals in each state a) a vacation trip to the Bahamas b) up to $100 in any one year c) monthly dinner and theater tickets for two for one year d) anything of material value
b) up to $100 in any one year [5. 3. 3. 3]
A FINRA member firm could be fined if a registered representative is terminated and the member firm does not notify FINRA within a) 60 days b) 10 days c) 30 days d) 45 days
c) 30 days [3. 1. 5. 5]
An elderly couple has retired with a moderate accumulation of assets. They have several grown children and a number of grandchildren and are investing with your firm. Keeping in mind that every customer is different, which of the following pairs if investment objectives would you expect them to express? a) Speculation, diversification b) Growth, liquidity c) Preservation of capital, current income d) Tax advantages, aggressive growth
c) Preservation of capital, current income [6. 1. 3]
Eight years ago, your client retired at age 65 from a manufacturing job that he had held since graduating from high school. He is not enjoying retirement and has recently taken a position with a major retail greeting customers as they enter the store. He would like to contribute to a retirement plan to accumulate additional money to leave his grandchildren. You would advise him to open a a) deferred compensation plan b) Keogh plan c) Roth IRA d) traditional IRA
c) Roth IRA [3. 9. 2. 2]
The XYZ Fund, an open-end investment company was founded more than 15 years ago, If it wishes to show average annual rates of return in an advertisement, it must show returns for the past a) 1, 3, 5, and 10 years b) 12 months only c) 1, 5, and 10 years d) 1, 5, and 10 years and since inception
d) 1, 5, and 10 years and since inception [4. 1. 6. 1]
The RAN Corporation has a $100 par 4% preferred stock and is not in arrears on its dividends. What is the current yield on this stock when the RAN common stock is selling for $160 per share and the preferred stock is selling for $80 per share? a) 4% b) 2.5% c) 2% d) 5%
d) 5% [1. 3. 2. 1. 2] CY= (annual interest %)/ current market price
The following information shows the NAV and the ask prices of Investment Company A and Investment Company B on a particular day. Choose the answer that best describes the two companies. Company A: NAV - $ 22.00 ASK - $21.20 Company B: NAV - $9.40 ASK - $10.00 a) Both A and B are closed-end investment companies b) A is a closed-end investment company; B could be either an open-or closed-end investment company c) Both A and B are open-end investment companies d) A is a closed-end and B is an open-end investment company
d) A is a closed-end and B is an open-end investment company [2. 4. 3. 3]
Which of the following terms best describes a corporate debt instrument secured by a pledge by the issuer of property that consist of stocks or bonds of the corporations? a) Equipment trust certificate b) Unit investment trust c) Debenture d) Collateral trust certificate
d) Collateral trust certificate [1. 3. 5. 1. 1]
The declaration of a dividend for holders of common stock in a corporation will result in payment of a dividend to holders of that corporations I. convertible preferred stock II. noncumulative preferred stock III. outstanding warrants IV. debentures a) II and III b) III and IV c) I and IV d) I and II
d) I and II I. convertible preferred stock II. noncumulative preferred stock [1. 2. 3]
A client purchasing a scheduled premium variable life insurance policy should expect I. level premiums for the life of the policy II. a possible reduction in premiums if separate account performance exceeds the policy's AIR III. a death benefit that will never be less than the guaranteed minimum amount IV. cash value that will never be less than the guaranteed minimum amount a) I and II b) III and IV c) II and IV d) I and III
d) I and III I. level premiums for the life of the policy III. a death benefit that will never be less than the guaranteed minimum amount [2. 8. 2]
ERISA regulations apply to which of the following? I. Public pensions plans for government employees II. Private sector retirement plans III. Corporate retirement plan vesting requirements IV. Municipal retirement plans a) II and IV b) I and IV c) I and III d) II and III
d) II and III II. Private sector retirement plans III. Corporate retirement plan vesting requirements [3. 9. 6]
For a fund without an asset-based sales charge to legally charge the maximum load, which of the following features must be made available to shareholders? I. a ten-day, free-look provision II. quantity discounts for purchases made by any person III. Rights of accumulation IV. An exchange privilege within the family funds a) I and III b) I and IV c) II and IV d) II and III
d) II and III II. quantity discounts for purchases made by any person III. Rights of accumulation
Under which of the following circumstances may an agent borrow money from a customer? a) Upon notification to his firm b) Under no circumstances c) With written permission from FINRA d) If the customer is a bank
d) If the customer is a bank [5. 3. 3. 7]
An investor would be subject to the least interest rate risk when purchasing a) T-notes b) long-term corporate bonds c) T-bonds d) T-bills
d) T-bills [1. 3. 5. 3]
Your client wants to increase her purchase of put options. From this, you would expect that the client feels the market outlook is a) bullish b) income-oriented c) neutral d) bearish
d) bearish [put= bear, call= bullish)
All of the following are generally considered speculative investments EXCEPT a) uncovered call options b) B rated debt securities c) short sales d) blue-chip stocks
d) blue-chip stocks [1. 3. 1. 9 and 2. 4. 4. 1. 1]
The preliminary prospectus for a new offering a) includes the final offering price b) is available only after the effective date of the offering c) declares that an offering has been approved by the SEC d) cannot be used when taking orders from customers
d) cannot be used when taking orders from customers [3. 4. 2. 3]
Which of the following constitutes selling dividends? a) encouraging investors to postpone purchases of mutual fund shares until after the ex-date for a dividend distribution b) encouraging customers to sell their mutual fund shares just before the ex-dividend date c) withdrawing dividends, rather than reinvesting them in additional shares d) enticing customers to buy mutual fund shares just before the ex-dividend date
d) enticing customers to buy mutual fund shares just before the ex-dividend date [3. 7. 2. 4. 4]
The death benefit of a variable life policy must be calculated at least: A) weekly. B) monthly. C) semiannually. D) annually.
The correct answer was: annually. The death benefit must be calculated annually.
Which of the following would be eligible to open a Keogh plan? a) a salaried investment company employee b) the CEO of a publicity traded corporation c) a CPA who operated as a sole proprietorship d) a group of physicians who have incorporated their practice together
c) a CPA who operated as a sole proprietorship [3. 9. 3]
A joint life with last survivor annuity: I. covers more than one person. II. continues payments as long as one annuitant is alive. III. continues payments as long as all annuitants are alive. IV. guarantees payments for a certain period of time.
The correct answer was - A: I and II. Explanation: A joint life with last survivor contract covers multiple annuitants and ceases payments at the death of the last surviving annuitant.
If a registered representative wishes to make recommendations to a client, it would be most appropriate to limit those recommendations to A) primarily to those securities that offer breakpoints at or near the investment level contemplated by the investor B) security types with which the client has previous investment experience C) securities that are deemed suitable given the client's profile and risk tolerance D) only those securities paying dividends
*PLEASE send answer updates to [email protected]*
Income from which of the following is likely to have the majority of its income subject to taxation only at the federal level? A) Dividends from a government bond fund B) Interest from a municipal bond C) Interest from a corporate long-term bond D) Dividends from a growth and income fund
*PLEASE send answer updates to [email protected]*
An investor approaching retirement has amassed a fairly large portfolio of growth securities. He is not particularly risk averse and is interested in generating income for his retirement. He definitely wants to protect his principal, as he would like, eventually, to leave a substantial amount to his family. Which of the following investment recommendations would NOT be suitable for this investor? I> The J&M Long-Term Government Bond Fund II> The KEY International Small-Cap Equity Fund III> The LPF Large-Cap Growth and Income fund IV> The Excelsior High-Yield Bond Fund A) III and IV B) II and IV C) I and III D) I and II
*PLEASE send answer updates to [email protected]*
Distributions from net investment income paid to shareholders by an investment company meeting the requirements to be a regulated investment company are A) taxed to the fund but not the individual shareholder B) taxed as long- or short-term capital gains, on the basis of the fund's holding period of the underlying securities C) taxed as long-term capital gains to the shareholder, regardless of how long the investor has owned the shares D) nontaxable to the fund but taxable to the shareholder as dividend income
*PLEASE send answer updates to [email protected]*
If a mutual fund distributes 85% of its net investment income to shareholders and uses the rest to purchase new securities, on how much of its net investment income must the fund pay taxes? A) 15% B) 85% C) Only on that portion not taxable to the shareholders D) 100%
*PLEASE send answer updates to [email protected]*
One of your customers comes to you with a proposal to purchase shares of a municipal bond fund one of his friends has enthusiastically recommended. The minimum initial investment for this fund is $25,000, and he would like to discuss means with you for buying some shares. On reviewing his customer profile you find the following facts. Name: John Wilson Age: 45 Income: $30,000/year Discretionary Income: $5,000/year Liquid Net Worth: $40,000 Investment Objective: Growth Risk Attitude: Extremely nonaverse In discussing this potential investment with Mr. Wilson, which of the following points should you be sure to make? I> The investment seems like a great opportunity, especially because the income resulting from share ownership would be tax-free. II> The fund does not meet his stated objective of growth. III> He should probably consider an investment in this fund to be beyond his means at this time. IV> Because the required initial investment is so high, he should consider liquefying some of his home equity to make this purchase. A) I and III B) II and IV C) I and IV D) II and III
*PLEASE send answer updates to [email protected]*
The MNO Corporation, a growing company, is entering into negotiations with another, larger firm that is interested in acquiring MNO. Analysts feel that the action, if successful, will benefit MNO in several ways, including reducing manufacturing costs and improving distribution of their key products. Which of the following mutual funds might be especially interested in acquiring a block of MNO stock? A) The JM Hall Equity Income Fund B) The Banner Preferred Stock Fund C) The Keystone Special Situation Fund D) ABC Value Fund
*PLEASE send answer updates to [email protected]*
The declaration of a dividend is applicable to which of the following securities? I> Convertible preferred stock II> Short-term municipal notes III> Participating preferred stock IV> Corporate debentures A) I and IV B) II and III C) II and IV D) I and III
*PLEASE send answer updates to [email protected]*
Which of the following are required before a company may offer new stock through a rights offering? I> The additional shares may never increase the outstanding stock beyond the authorized level. II> The rights issued in the offering will generally have a lifetime of one year or more. III> The additional shares may increase the shares outstanding beyond the authorized level only if the shareholders vote their shares to amend the charter. IV> The board of directors must approve the issuance of new shares through a rights offering. A) II and IV B) I and II C) III and IV D) I and III
*PLEASE send answer updates to [email protected]*
Which of the following entities would issue redeemable securities? I> Closed-end management investment companies II> Open-end management investment companies III> REITs IV> Variable annuity separate accounts A) II and III B) I and III C) I and IV D) II and IV
*PLEASE send answer updates to [email protected]*
Which of the following events would have the effect of weakening the US dollar against foreign currencies? I> The FOMC purchases a large number of T-bills II> The federal government takes on new debt III> Inflation heats up IV> The FRB lowers the reserve requirement A) I and III B) II and IV C) II and III D) I and IV
*PLEASE send answer updates to [email protected]*
Which of the following might trigger the filing of a Suspicious Activity Report? I> A customer has entered 3 $4,000 transactions on the same day, all for the same security. II> The customer has purchased stock of an industrial firm that he thinks will hold steady in price and insists on selling out-of-the-money calls on the position. III> A customer became extraordinarily upset when he learned that interest rates had gone up just after he made a large bond purchase. IV> A customer is making a large number of expensive purchases of new issues of stock but does not want to spend any time studying or discussing the prospectuses. A) I and III B) II and III C) II and IV D) I and IV
*PLEASE send answer updates to [email protected]*
Traditional IRA, if you are covered by a retirement plan at work and are single or head of household and your MAGI is $60,000 or less
A full deduction up to the amount of your contribution limit
A registered representative wishes to conduct a transaction outside the regular business of his FINRA member broker/dealer; this type of transaction is defined by the Conduct Rules as a private securities transaction. Which of the following statements regarding this type of transaction are CORRECT? I> If a registered representative is to receive compensation on a private securities transaction, permission must be obtained from the employer member firm. II> The registered representative need not disclose whether compensation will be received for the transaction. III> If a member firm approves a private securities transaction with compensation, it must treat the transaction as its own and supervise the registered representative in the transaction. IV> Private securities transactions do not include those entered into on behalf of a corporation. A) I and III B) II and IV C) I and IV D) II and III
A) I and III
2. Which of the following statements describing current yield is TRUE? A. The terms current yield and total return are identical. B. Current yield is calculated by dividing the annuaL interest or dividend received from an investment by its current market price. C. Current yield compares an investments current price to its price at the end of the previous year. D. Current yield can he used to express the income return on a bond hut not on a stock or a mutual fund.
B. Current yield is calculated by dividing the annual income distribution from an investment (interest for bonds and dividends for stock or mutual funds) by the current market value (price) of the security. The current return calculation does not factor price movement over time or reinvestment of distributions, and thus does not express an investment's total return.
An investor has expressed interest in opening a UTMA account for his oldest son, age 11. He wishes to deposit a sizeable block of income securities into the account because he had heard that there are tax advantages in doing so. He intends to liquidate the securities later and use the money in a business expansion. In discussing these plans, his registered representative must make which of the following points? I> Once the investor has deposited the securities into the UTMA account, they become the irrevocable property of the child and could not be used by the donor for business purposes. II> Setting up this type of account is a complicated process, requiring, among other things, detailed proof of the investor's relationship to the child and a declaration of his purposes in setting up the account. III> If the income is substantial, most of it will be taxed at the investor's own highest tax bracket. IV> This type of account is ideal for high-risk transactions, such as the sale of uncovered calls and speculations in futures, because the orders are executed for an account of which the child, not the investor, is the beneficial owner. A) I and III B) II and IV C) I and IV D) II and III
A) I and III
Which of the following trades would take place in the secondary market? I> A corporate IPO II> The sale of common shares on the floor of the NYSE by a specialist III> The sale of municipal GO bonds through a selling syndicate IV> The sale of corporate bonds from one investor to another in the OTC market A) II and IV B) II and III C) I and IV D) I and III
A) II and IV
Which federal act classifies investment companies as face-amount certificate companies, unit investment trusts, or management companies? A) Investment Company Act of 1940 B) Securities Exchange Act of 1934 C) Securities Act of 1933 D) Investment Advisers Act of 1940
A) Investment Company Act of 1940
Which of the following statements best describes the assumed interest rate of a variable annuity contract? A) It is the rate that the annuity separate account must earn during the payout phase of the contract to keep monthly payments constant. B) It rises and falls with the performance of the separate account. C) The AIR represents a minimum rate of return guaranteed by the insurance company. D) It is the rate earned by the separate account each month.
A) It is the rate that the annuity separate account must earn during the payout phase of the contract to keep monthly payments constant.
During the cooling-off period of a new securities registration, a registered representative would be allowed to A) accept nonbinding indications of interest B) send prospects sales literature relating to the issue C) send prospects a preliminary prospectus with notations attached to call attention to areas of interest to the investor D) take a check for a proposed purchase provided the check is postdated after the effective date
A) accept nonbinding indications of interest
A husband and wife open a new account as tenants in common. All of the following statements regarding this account are true EXCEPT A) if certificates are requested, they must contain the names of both parties B) in the event of death, the decedent's interest in the account goes to the surviving party C) mail may be sent to either party with the permission of the other party D) orders may be given by either party
B) in the event of death, the decedent's interest in the account goes to the surviving party [5. 2. 2. 1]
The preliminary prospectus for a new offering A) may be used to solicit orders from customers B) must carry a legend, printed in red, that declares that a registration statement has been filed with the SEC, but has not yet become effective C) may not omit material facts relating to the issuer D) contains the final offering price
B) must carry a legend, printed in red, that declares that a registration statement has been filed with the SEC, but has not yet become effective
The City of Chicago issued $100 million in GO debt three years ago. The bonds were issued with a 20-year maturity and carry a 5% coupon. Your client who purchased one of these bonds on the initial offering calls you to get a current quote. You respond that the bonds are selling at a slight premium. This means that the A) current yield is higher than the nominal yield B) nominal yield is higher than the yield to maturity C) yield to maturity is equal to the current yield D) yield to maturity is higher than the current yield
B) nominal yield is higher than the yield to maturity [Inverse Bond/Yield Relationship Chart, pp. 41]
You have a client in the 35% income tax bracket who would like to purchase a municipal GO bond being issued at par with a 4% coupon. You think this is a suitable investment for this client and explain that the A) tax-equivalent yield is always equal to the coupon B) tax-equivalent yield on this security would be higher than the coupon C) tax-equivalent yield on this security would be lower than the coupon D) tax-equivalent yield cannot be determined
B) tax-equivalent yield on this security would be higher than the coupon Yield is the coupon rate divided by In this case, the tax rate is 35%. 1-.35 = .66 The coupon rate (.04) is divided by the amount of income NOT paid in taxes. The tax rate is 35%. Net after tax is 1 - .35 = .66 .04 / .66 = .00606 = 6.06% This yield is higher than the 4% coupon.
You have made a sales presentation for the XYZ Growth Fund to a prospect. If the prospect asks if you can furnish any more knowledge before an investment decision is made, you would supply the prospect with A) a current prospectus B) the Statement of Additional Information C) your broker/dealer's most recent balance sheet D) FINRA's mutual fund disclosure form
B) the Statement of Additional Information [2. 3. 6. 3]
Which of the following are provisions of the Securities Exchange Act of 1934? I. Regulates the sale of new issues of securities II. Regulates secondary markets III. Regulates investment advisers IV. Registers broker/dealers A)I and III B)III and IV C)I and II D)II and IV
B)III and IV III. Regulates investment advisers IV. Registers broker/dealers [glossary, pp. 408]
20. If the Swiss franc has depreciated relative to the U.S. dollar, then goods produced in I. Switzerland become less expensive in the United States II. Switzerland become more expensive in the United States III. the United States become less expensive in Switzerland IV. the United States become more expensive in Switzerland A. l andilI B. I andIV C. Il and III D. II andIV
B. If the Swiss franc falls in value relative to the U.S. dollar, goods produced by the United States become more expensive in Switzerland. Goods produced in Switzerland become less expensive in the United States.
3. Where are securities that are NOT listed on an exchange traded? A. Unlisted securities trade on FINRA B. On the overthe-counter market C. On a regional exchange in the same state where the security was issued D. All securities must be listed in order to trade publicly
B. Securities not listed on an exchange are traded on the over-the-counter market. FINRA is the securities industry's regulatory authority. The location of the issue has no bearing on whether the issue is listed on a regional exchange.
6. The Federal Open Market Committee is con cernei with rising inflation. To counteract this concern the FOMC should A. increase the reserve requirement B. sell U.S. Treasury securities in the open market C. increase the federal funds rate D. increase the discount rate
B. The FOMC buys and sells U.S. Treasury securities to impact the money supply. To counteract inflation, the FOMC needs to remove dollars from the money supply. By selling U.S. Treasury securities, the FOMC requires payment which removes money from the economy, causing interest rates to rise. The FOMC does not set the reserve requirement or the discount rate; these are tools of the Federal Reserve Board (FRB). The federal funds rate is determined by market supply and demand of excess reserves between banks.
18. The best time for an investor seeking returns to purchase long-term, ñxed-interest-rate bonds is when A. long-term interest rates are low and beginning to rise B. long-term interest rates are high and beginning to decline C. short-term interest rates are high and beginning to dec line D. short-term interest rates are low and beginning to rise
B. The best time to huy long-term bonds is when interest rates have peaked. In addition to providing a high initial return, as interest rates fall, the bonds will rise in value.
19. Which of the following statements describes the discount rate? A. Charge on loans to brokers on stock exchange collateral. B. Charge on loans to member banks set by the New York Federal Reserve Bank. C. Base rate on corporate loans at large U.S. money center commercial banks. D. Rate charged on reserves traded among commercial banks for overnight use in amounts of $1 million or more.
B. The discount rate is the charge on loans to member banks by the New York Federal Reserve Bank. The prime rate is the base rate on corporate loans at large U.S. money center commercial banks. The federal ftinds rate is the rate charged on reserves traded among commercial banks for overnight use in amounts of $1 million or more. The call rate, or broker call loan rate, is the charge on loans to brokers for margin loans.
1. Which of the securities listed below is issued without a stated rate of return? A. Treasury bond B. Treasury bill C. Preferred stock D. Treasury note
B. Treasury bills are not issued with a stated coupon rate. Instead, they are sold through auctions at a discount to their par value of $1,000. They then mature to their face amount and the discount represents the interest earned. Treasury bonds and Treasury notes are issued with a stated rate of interest, and interest is paid semiannually. Preferred stock has a stated rate oí dividend; however, it is not guaranteed. The stated rate of dividend is oniy paid if declared by the board of directors.
5. The Federal Reserve Board can manage the money supply with all the following tools EXCEPT A. open market operations B. discount rate C. income tax rate D. bank reserve requirements
C. The FederaL Reserve Board uses several tools to manage the money supply, including hank reserve requirements, open market operations (trading government securities), and the discount rate. Income tax rates are set by Congress.
8. Which of the following are characteristics of a corporate zero-coupon bond I. The bond pays interest on a semiannual basis. II. The bond is purchased at a discount from its face value. III. The investor has locked in the rate of return. IV. Income tax is paid oniy at the bond1s maturity. A. I and III B. I andIV C. Il and III D. Il and IV
C. Zero-coupon bonds are bought at a discount from their face value. The investor has locked in a rate of return because the maturity value of the bond is known at the time of purchase. A corporate zero-coupon bond pays no interest each year hut is taxed as if it did.
An investor is making payments to fund a combination annuity. His premiums will be divided among which of the following? The insurance company's guaranteed account The insurance company's general account The distributor's investment account The insurance company's separate account A) I and IV B) I and III C) II and IV D) II and III
C?
Under the Uniform Transfer to Minors Act, a custodian may invest in all of the following EXCEPT A) mutual funds B) blue-chip stocks C) corporate bonds D) commodity futures
D) commodity futures [5. 2. 5. 5]
Your client begins an investment program that has him purchasing $240 of the DCA Balanced Fund each month. This program will result in his average cost per share being lower than the average price per share if A) the price only trends upward with time, never downward B) the client is successful in timing the market with each purchase C) the price holds steady with time D) the client continues to invest regular amounts at regular intervals in a fluctuating market
D) the client continues to invest regular amounts at regular intervals in a fluctuating market
Open-end investment companies are referred to as issuers of redeemable securities because the Investment Company Act of 1940 requires them to send the sales proceeds of redeemable shares A) at an amount equal to the next calculated public offering price B) within 45 days of purchase, refunding the original purchase price in full to the purchaser C) at the higher of cost or market value D) within seven days after the tender of the shares to the company or its designated agent
D) within seven days after the tender of the shares to the company or its designated agent [4. 2. 3]
4. Which of the following types of preferred stock may pay a single dividend that is greater than the dividend stated on the face of the certihcate? I. Straight II. Cumulative III. Convertible IV. Participating A. l and II B. l and III C. II and III D. II andIV
D. Cumulative preferred stockholders have the right to receive skipped dividends of the corporation and can receive a dividend in arrears plus the current yea?s dividend. Participating preferred stockholders have the right to receive a share of the common dividend.
13. Which of the following are characteristics of gen eral obligation (GO) municipal bonds? 1. They are backed by the revenue generated from the facility that was built with the proceeds of the bond issue. II. Interest paid is tax free at the federal level. III. They are issued by agencies of the federal government. IV. They are backed by the taxing power of the issuing municipality. A. landill B. IandIV C. hand III D. IlandIV
D. General obligation bonds are backed by the full faith and credit (and taxing authority) of the issuing municipality. The interest that is paid on municipal bonds is exempt from taxation at the federal level. Municipal revenue bonds are hacked by revenues generated from the use of the facility. Municipal bonds are issued by government levels other than the federal government.
17. Which of the following statements regarding Ginnie Maes are TRUE? I. They are not taxable at the state level. II. They are directly backed by the federal treasury. III. The minimum certificate at issue is $1,000. IV. Investors receive a monthly check representing both interest and a return of principal. A. l and III B. I and IV C. II and III D. Il and IV
D. Government National Mortgage Association (GNMA) pass-through certificates are directly hacked by the federal treasury. Each monthly check is part interest, part principal. The minimum certificate at issue is $25,000 and the interest portion of the check is taxable at both the federal and the state level.
14. A convertible corporate bond that has an 8% coupon yielding 7.1% is available but may be called some time this year. Which feature of this bond would probably he least attractive to your client? A. Convertibility B. Coupon yield C. Current yield D. Near-term call
D. The near-term call wouLd mean that no matter how attractive the bond's other features, the client may not have very Long to enjoy them.
Your customer annuitizes a variable annuity contract, which has an assumed interest rate of 4%. The first check is for $225. In order for the check to remain at $225, what rate of return will the separate account have to earn? A) 4%. B) Greater than 4%. C) Less than 4% but greater than 0%. D) The payment will remain at $225 as long as the assumed interest rate is 4%.
The correct answer was - A: 4%. Explanation: The assumed interest rate is a base for projection. For benefit checks to stay level, the account must earn the AIR. If actual return is greater than the AIR, the check will increase; if it is less, the check will decrease in comparison to the previous month's check only.
The ABC fund offers breakpoints and letters of intent, and one of your customers would like to add some of his past investments in that fund to his current investments to reach a breakpoint. If the date is June 1, which of his past investments may be included? A) April 10 of this year. B) June 1 of last year. C) February 18 of this year. D) December 18 of last year.
The correct answer was - A: April 10 of this year. Explanation: A letter of intent may be backdated by 90 calendar days. Reference: 4.2.2.2.2 in the License Exam Manual.
Mutual fund shares that carry a level load are: A) Class C shares. B) level shares. C) Class A shares. D) Class B shares.
The correct answer was - A: Class C shares. Explanation: Class C shares carry a 12b-1 charge, which is often referred to as a level load. Class A shares carry a front-end load. Class B shares carry a back-end load. Reference: 4.2.2.4 in the License Exam Manual.
Which of the following communications with the public are subject to principal approval before first use? A) Form letter sent to ten prospective retail customers every week. B) Mutual fund summary prospectus. C) Letter to a customer recommending a specific security for her IRA. D) Quarter-page advertisement in your local newspaper announcing the opening of a second local branch office.
The correct answer was - A: Form letter sent to ten prospective retail customers every week. Explanation: Form letters or group emails to 25 or more prospective retail customers within a 30-day period constitutes sales literature and must be preapproved. In this case, ten letters per week (for a total of 40 in 28 days) exceeds 24 in a 30-day period. A mutual fund summary prospectus under SEC Rule 498 is a legal document, and like other legal documents, it is not deemed an advertisement or sales literature. Reference: 4.1.2.1 in the License Exam Manual.
Your customer originally invested $20,000 into the ACE Fund and has reinvested dividends and gains of $8,000. His shares in ACE are now worth $40,000. He converts his investment in ACE to the ATF Fund, which is under the same management as ACE. In this case, which of the following statements is TRUE? A) He must declare $12,000 as a taxable gain upon conversion into the ATF Fund. B) He retains his cost basis of $28,000 in the ATF Fund. C) He retains a $20,000 cost basis in the ATF Fund because of the conversion privilege. D) He is not liable for taxes in the current year because he did not have constructive receipt of the money at conversion.
The correct answer was - A: He must declare $12,000 as a taxable gain upon conversion into the ATF Fund. Explanation: The exchange privilege offers exchange without an additional sales charge, but the exchange is still taxable. The customer is taxed on the gain of $12,000 ($40,000 − $28,000). Reference: 4.2.2.2.5 in the License Exam Manual.
A client invests $2,200 in an open-end investment company and signs a letter of intent for a $10,000 breakpoint. If he deposits $11,000 6 months later, which of the following statements is TRUE? A) He will receive a reduced load on $13,200 worth of the shares. B) He will not receive any reduction in the sales load. C) He will receive a reduced load on $8,800 worth of the shares. D) He will receive a reduced load on $10,000 worth of the shares.
The correct answer was - A: He will receive a reduced load on $13,200 worth of the shares. Explanation: An investor signing a letter of intent has 13 months to contribute funds to reach the reduced load. The sales charge in this case, then, will be based on the total investment of $13,200. If at the end of the 13 months the investor had not invested up to the breakpoint, the fund would liquidate enough shares to pay the difference in sales load. Reference: 4.2.2.2.2 in the License Exam Manual.
Under which of the following circumstances could a member firm make alterations to an article on securities before using it as an independently prepared reprint? I. The member firm could alter the presentation format to make it consistent with regulatory standards. II. The member firm could correct the reported number of shares being offered if the original article stated the number incorrectly. III. The member firm could make alterations, provided the article was commissioned by the issuer, not the member firm itself. IV. The member firm could make alterations of content as long as the publisher of the article was an affiliate of either the issuer or the member firm.
The correct answer was - A: I and II. Explanation: An article may be used as an independent reprint if the publisher is not affiliated with the issuer or the member firm in any way. The member firm may alter the contents of an independently prepared reprint only to correct factual errors or to make the article consistent with regulatory standards. Reference: 4.1.2.4 in the License Exam Manual.
Which of the following mutual fund share classes are specially suited to investors that have long-term objectives? I. Class A shares for investors that have a large amount to invest. II. Class B shares for investors that have a small amount to invest. III. Class A shares for investors that have a small amount to invest. IV. Class C shares.
The correct answer was - A: I and II. Explanation: Class A shares have a front-end load with breakpoints and very small 12b-1 fees. The investor with a large amount to invest may end up paying very little or even no sales charge. Class B shares sell at NAV with a contingent deferred sales charge and a noticeable 12b-1 fee. The investor with a small amount to invest would pay no front-end load for B shares and only 12b-1 fees, which presently cease. In fact, both the CDSC and the 12b-1 fees typically diminish to nothing after 6 to 8 years, and the shares convert to A shares. Reference: 4.2.2.1 in the License Exam Manual.
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 of time.
The correct answer was - A: I and III. Explanation: Class C shares generally have the following features: no front-end sales charge, lower CDSCs than Class B shares for a shorter period of time, and no conversion to Class A shares regardless of how long they are held. Because of these features, Class C shares may be less expensive for investors with shorter investment horizons. They may be more expensive for investors who plan to hold their shares for a long time, since the level load never discontinues. Reference: 4.2.2.4 in the License Exam Manual.
Which of the following services must a mutual-fund sponsor offer to be permitted to charge the maximum allowable sales charge for the fund shares? I. Rights of accumulation. II. Conversion and exchange privileges. III. Price breakpoints offering reduced sales charges for larger purchases. IV. The right to purchase fractional shares.
The correct answer was - A: I and III. Explanation: Unless a mutual fund offers its shareholders rights of accumulation, breakpoints, and automatic reinvestment at NAV, the fund may not charge the 8.5% maximum sales charge. Reference: 4.2.2 in the License Exam Manual.
The rules on communications with the public define which of the following as sales literature? I. A form letter sent to 25 or more prospective retail customers within a 30-day period. II. A form letter sent to 10,000 of the member firm's existing clients reminding them of a change in the tax laws. III. A reprint of an article published in a magazine with a national circulation. IV. A seminar script.
The correct answer was - A: I and IV. Explanation: A form letter sent to 25 or more prospective retail clients within a 30-day period is considered sales literature. A seminar script is also sales literature, whereas reprints of published articles are classified as independently prepared reprints-a separate category of public communication. Reference: 4.1.1.2 in the License Exam Manual.
Which of the following constitute a public appearance? I. Interactive electronic forum. II. Radio advertisement. III. Television advertisement. IV. Television interview.
The correct answer was - A: I and IV. Explanation: A public appearance, which is considered a form of sales literature, involves the personal presence of, or the possibility of interacting electronically with, an officer or other spokesperson of a firm. Reference: 4.1.2.2 in the License Exam Manual.
One of your clients owns shares in several of the mutual funds offered by the ABC Fund family. Unhappy with their performance, he wishes to liquidate the entire account and move the money to shares of the XYZ Growth Fund and the XYZ International fund. In doing this, the client would: I. incur a taxable event. II. be able to make the switch without tax as long as the money was transferred directly from one family to the other. III. be able to acquire the XYZ shares without sales charge. IV. incur the full sales charge appropriate to the purchase of the XYZ shares.
The correct answer was - A: I and IV. Explanation: Liquidation of shares, whether an intrafamily exchange using the conversion privilege, or a sale and new purchase as in this example, is always a taxable event. The only time an exchange may be made at NAV (without sales charge) is when it is done within the same family. Purchasing shares in a different family will incur the full sales charges appropriate for the breakpoint level (if any) reached. Reference: 4.2.2.2.5 in the License Exam Manual.
The cash value of a variable life insurance contract is affected by: I. policy loans. II. state premium taxes. III. sales charges. IV. mortality risk fee.
The correct answer was - A: I and IV. Explanation: Premium taxes and sales charges are deducted from premiums rather than from the separate account.
An investor has $250,000 to invest in mutual funds. Which of the following would be appropriate statements to make to him? I. Buying a no-load fund will ensure better performance in the long run. II. If you purchase Class B shares, you will have no load now, but you will probably incur higher operating costs. III. A purchase of Class A shares from one fund family in this quantity will probably lead to a reduction in sales charge. IV. The initial investment should be spread over several fund families to ensure proper diversification.
The correct answer was - A: II and III. Explanation: The absence of a sales load does not ensure better performance. It is correct that Class B shares are sold without a front-end load, but they usually have a higher expense ratio. Class A shares in a quantity of $250,000 would almost certainly qualify for a substantial reduction in sales charge. Investing in several fund families would reduce the likelihood of breakpoints and yield no advantage because funds are typically already diversified. Reference: 4.2.2.1 in the License Exam Manual.
Which of the following steps must a representative take when making cold calls? I. Strike the names of uninterested prospects off of the call list. II. Inform prospects of the firm's name and telephone number or address. III. Limit calls to between 8:00 am and 10:00 pm of the time zone in which prospects are located. IV. Not call prospects who have made a Do-Not-Call request.
The correct answer was - A: II and IV. Explanation: The Telephone Consumer Protection Act of 1991 requires that, when making cold calls, a representative record the names of prospects who do not wish to be called again and place them on the firm's Do-Not-Call list, rather than remove them from a call list. The representative also must inform prospects of the firm's name and telephone number or address, limit the calls to between 8:00 am and 9:00 pm (not 10:00 pm) in the prospect's time zone, and not call prospects who are on the firm's Do-Not-Call list. Reference: 4.1.8 in the License Exam Manual.
Which of the following share classes typically have a higher expense ratio than Class A shares? I. No-load shares. II. Class B shares. III. Front-end load shares. IV. Class C shares.
The correct answer was - A: II and IV. Explanation: The expense ratio of no-load shares is comparable to that of Class A shares-that is, very low. Front-end load shares are Class A shares under a different name. Class B shares typically have the highest expense ratios until they convert to Class A, and Class C shares typically fall between Class A and Class B. Reference: 4.2.2.1 in the License Exam Manual.
Which of the following methods for marketing mutual fund shares call for the underwriter itself to sell shares at the full public offering price? I. Fund to investor. II. Fund to underwriter to dealer to investor. III. Fund to underwriter to investor. IV. Fund to underwriter to plan company to investor.
The correct answer was - A: III and IV. Explanation: If the underwriter sells directly to the public, it must charge the full public offering price. Contractual plan companies are considered members of the public. Reference: 4.2.1 in the License Exam Manual.
A client invested in the XYZ Bond mutual fund five years ago. If the client took dividend distributions in cash and reinvested capital gains distributions into more shares of XYZ Bond mutual fund, and interest rates have declined over the past five years, which of the following statements is TRUE? A) NAV per share of XYZ Bond mutual fund increased. B) The reinvested capital gains have accumulated tax deferred. C) The dividend distributions were subject to capital gains taxation. D) The client's proportionate interest in the fund has not changed.
The correct answer was - A: NAV per share of XYZ Bond mutual fund increased. Explanation: When interest rates decline, bond prices increase. The increased value of bonds in the portfolio causes an increase in the NAV.
Which of the following describes the price of a Class A mutual fund share paid by a dealer on contract with the fund's underwriter? A) Net asset value plus the underwriter's concession. B) Public offering price minus the sales charge. C) Net asset value plus the dealer's reallowance. D) Public offering price minus the underwriter's concession.
The correct answer was - A: Net asset value plus the underwriter's concession. Explanation: In delivering a Class A share to a member of the public, the fund sells to the underwriter at NAV. The underwriter adds his concession and sells to the dealer. The dealer adds his reallowance to bring the price to the POP and sells to the public. Thus, the dealer pays NAV plus the underwriter's concession, and his profit is the reallowance he adds when selling to the public at the POP. Reference: 4.2.2.2 in the License Exam Manual.
Advertising and sales literature concerning which of the following must be filed with FINRA's advertising department within ten days of first use? A) Open-end investment company securities. B) Equity securities. C) Options. D) Corporate straight-debt securities.
The correct answer was - A: Open-end investment company securities. Explanation: Only certain investment products are subject to the ten-day post-filing requirement. These products include registered investment company securities, variable annuity contracts, and unit investment trusts. Reference: 4.1.4.1 in the License Exam Manual.
Which of the following statements could legally appear in mutual fund advertising or sales literature? A) Our managers are dedicated to giving you the very best service. B) The fund never yielded less than 8% and will continue at that rate in the future. C) Our management is unequaled in the investment industry. D) Our growth fund net asset value will increase faster than the market in general.
The correct answer was - A: Our managers are dedicated to giving you the very best service. Explanation: A statement such as, "Our managers are dedicated to giving you the very best service," makes no promises and is, therefore, not in violation of the Conduct Rules. Exaggerated claims about the management's investment expertise are prohibited, as are predictions of future fund performance or unsubstantiated claims of superiority. Reference: 4.1.5.2.1 in the License Exam Manual.
Which of the following is classified as sales literature, not as advertising? A) Reprint of newspaper advertisement placed by the member firm. B) Telephone directory listing. C) Branch office signage. D) Billboard.
The correct answer was - A: Reprint of newspaper advertisement placed by the member firm. Explanation: A reprint of an advertisement that is distributed to customers is classified as sales literature. All of the other choices are classified as advertising because they use public media. Reference: 4.1.1.2 in the License Exam Manual.
Which of the following is among the rights and privileges a mutual fund sponsor must offer in order to charge the maximum sales charge of 8.5%? A) Rights of accumulation. B) Diversification. C) Forward pricing. D) Reinstatement.
The correct answer was - A: Rights of accumulation. Explanation: A mutual fund must offer rights of accumulation and breakpoints to charge the maximum 8.5% sales load. Reference: 4.2.2 in the License Exam Manual.
A letter of intent for a mutual fund does NOT contain which of the following provisions? A) The fund may halt redemption during the time the letter of intent is in effect. B) The letter may be backdated 90 days to include a previous deposit. C) The time limit is 13 months. D) The fund will keep some of the initially issued shares in an escrow account to ensure payment of the full sales load.
The correct answer was - A: The fund may halt redemption during the time the letter of intent is in effect. Explanation: A letter of intent is a nonbinding contract entered into by an investor for the purpose of obtaining reduced sales charges. If the client were to redeem the entire account before fulfilling the terms of the letter, or if the 13 months elapsed without the full amount being invested, the escrowed shares would be redeemed and the proceeds used to pay the additional sales charge. Reference: 4.2.2.2.2 in the License Exam Manual.
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? A) Three years from August 14, 2010 B) Until December 31, 2013 C) Three years from the date the advertisement was filed with FINRA D) Three years from May 5, 2010
The correct answer was - A: Three years from August 14, 2010 Explanation: This is an advertisement. A separate file containing all advertising, sales literature, 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. Reference: 4.1.4 in the License Exam Manual.
An annuity is purchased with a lump sum when the annuitant is 45. The policyholder will begin to receive payments when he is 65. This is: A) a single payment deferred annuity. B) of a type to be determined when the account annuitizes. C) a single payment immediate annuity. D) a periodic payment deferred annuity.
The correct answer was - A: a single payment deferred annuity. Explanation: A single payment was made and the income is deferred.
A registered representative tells his client, "Because this investment made a 5% return for the last 20 years, it should easily do so again next year." This constitutes: A) a violation of the Conduct Rules. B) a minor rule infraction with no monetary fine. C) a minor rule infraction punishable with a small fine. D) an acceptable statement if the account makes 5% next year.
The correct answer was - A: a violation of the Conduct Rules. Explanation: A misleading statement, such as an attempt to predict the future, is a serious, not a minor, violation of the Conduct Rules. It may be considered fraudulent under the SEC Act of 1934. Reference: 4.1.5.2.1 in the License Exam Manual.
All of the following may receive breakpoint discounts EXCEPT: A) an investment club. B) an investor in an individual retirement account. C) a husband and wife in a joint account. D) a pension plan trustee.
The correct answer was - A: an investment club. Explanation: Breakpoints are not available to investment clubs. Reference: 4.2.2.2.1 in the License Exam Manual.
An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is: A) changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. B) the yield is always higher than mortgage yields. C) the yield is always higher than bond yields. D) the safety of the principal invested.
The correct answer was - A: changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. Explanation: Because common stocks are not fixed dollar investments, they have the opportunity to keep pace with inflation.
Some open-end investment companies offer their investors a conversion privilege, which permits an investor to: A) exchange shares of one mutual fund for those of another within the same fund family, at net asset value. B) exchange general securities for shares in a mutual fund's portfolio. C) purchase additional fund shares from dividends paid by the fund. D) delay payment of taxes on investment company shares that have appreciated in value.
The correct answer was - A: exchange shares of one mutual fund for those of another within the same fund family, at net asset value. Explanation: The exchange, or conversion, privilege allows an investor to exchange shares of one fund for those of another under the same management without paying an additional sales charge (although the exchange is still a taxable event). Reference: 4.2.2.2.5 in the License Exam Manual.
Class A shares of a mutual fund have a: A) front-end load. B) level load. C) asset-based fee. D) back-end load.
The correct answer was - A: front-end load. Explanation: Class A shares have a front-end load. Class B shares have a back-end load. Class C shares have a level load that is an asset-based fee. Reference: 4.2.2.2 in the License Exam Manual.
Communications with the public include all of the following EXCEPT: A) informational material on a new mutual fund intended for use by registered sales personnel only. B) institutional sales material. C) television appearances by an officer of the firm. D) independently prepared reprints.
The correct answer was - A: informational material on a new mutual fund intended for use by registered sales personnel only. Explanation: Material intended for internal use only is not considered a communication with the public. Reference: 4.1.4.1.3 in the License Exam Manual.
A fund of funds is one that: A) invests exclusively in shares of other mutual funds. B) keeps a large portion of its portfolio in money market instruments at all times. C) has a portfolio consisting of large-capitalization securities only. D) keeps at least 50% of its assets in cash at all times.
The correct answer was - A: invests exclusively in shares of other mutual funds. Explanation: As the name implies, a fund of funds is a mutual fund that, instead of investing in individual securities, invests in the shares of other funds.
A breakpoint sale is defined as the sale of mutual fund shares in an amount: A) just below the dollar amount at which the sales charge is reduced. B) just below the public offering price of the fund. C) required as the minimum investment in a fund as specified by the SEC. D) at or above the dollar amount at which the sales charge is reduced.
The correct answer was - A: just below the dollar amount at which the sales charge is reduced. Explanation: The term breakpoint sale refers to the violation that occurs when a sale is made just below the point at which the investor would receive the reduced sales charge. The practice earns a higher commission for the salesperson but is not in the interest of the customer. Reference: 4.2.2.2.1 in the License Exam Manual.
An investor purchased 200 shares of ACE Fund when the POP was $11.60 and the NAV was $10.60. ACE Fund's current POP is $12.50, and current NAV is $11.50. If the investor liquidates his 200 shares now, he will have a: A) loss of $20. B) gain of $200. C) gain of $20. D) loss of $200.
The correct answer was - A: loss of $20. Explanation: The investor's cost basis in the shares is $11.60. If he liquidates, he will receive the net asset value of $11.50, resulting in a loss of $.10 per share. Liquidating 200 shares results in a total loss of $20 (200 × $.10). Reference: 4.2.3 in the License Exam Manual.
Your firm has prepared some institutional sales material on several of the securities it deals in and has provided it to three mutual funds. One of the fund managers calls your firm to ask for some extra copies of the material, because he would like to send it to some of his investor friends. This request: A) may not be complied with if your firm wishes to continue to treat the material as institutional sales literature. B) may not be complied with because there is no guarantee that time-sensitive information will still be valid by the time the fund manager's friends receive it. C) may be complied with as long as the adviser will not profit from any orders that result. D) may be complied with, as long as the copyright notice on the sales material is prominently displayed.
The correct answer was - A: may not be complied with if your firm wishes to continue to treat the material as institutional sales literature. Explanation: Institutional sales material is just that: institutional. A member firm may not distribute such material to anyone who is not an institutional investor and may not treat material as institutional if the firm has reason to believe that it will be, or has been, forwarded to anyone who is not an institutional investor. Reference: 4.1.2.3 in the License Exam Manual.
In past years, XYZ Securities has focused primarily on high-net-worth individuals acquired through word of mouth and has never advertised. Their target market has expanded, and they have decided to begin advertising to the public. Under the rules on communications with the public, filing of advertisements: A) must be done ten business days in advance for a period of one year. B) must be done within ten business days after first use. C) comes under the requirements appropriate to any FINRA member firm that has been in continuous operation for at least one year. D) is not required because this firm has been in business for more than one year.
The correct answer was - A: must be done ten business days in advance for a period of one year. Explanation: Prefiling at least ten business days in advance for the first year is required for any firm that has never advertised. Obviously, the primary target here is new firms, but any firm that has never advertised, such as this one, is covered under the prefiling requirements. Reference: 4.1.4.1.1 in the License Exam Manual.
The price that an investor receives for open-end investment company shares on redemption is the: A) next computed net asset value. B) next computed public offering price. C) price in the financial section of the newspaper. D) next computed net asset value plus the sales load.
The correct answer was - A: next computed net asset value. Explanation: When an investor redeems open-end investment company shares, the investor receives the next computed net asset value (NAV) of those shares. Reference: 4.2.3 in the License Exam Manual.
Under SEC Rule 498, a summary prospectus may be used in a mutual fund sales presentation resulting in a sale: A) only when the statutory prospectus will be mailed within 3 days or made available for download. B) under no circumstances because the summary prospectus is only used to encourage potential investors to request the full prospectus. C) only when the client does not request the statement of additional information. D) only when preceded or accompanied by the fund's full prospectus.
The correct answer was - A: only when the statutory prospectus will be mailed within 3 days or made available for download. Explanation: SEC Rule 498 permits sales to be made using a summary form of the prospectus. The final, or statutory, prospectus must either be available by mail (within 3 days) or by an online download. Reference: 4.1.6.1.5 in the License Exam Manual.
A mutual fund prospectus displays all of the following EXCEPT: A) performance predictions. B) the investment adviser's name. C) a breakpoint schedule. D) the SEC disclaimer.
The correct answer was - A: performance predictions. Explanation: A mutual fund prospectus may not contain performance predictions. Reference: 4.1.5.2.1 in the License Exam Manual.
A customer with no other mutual fund investments wishes to invest $47,000 in the XYZ Technology Fund. If the Class A shares are eligible for a breakpoint sales charge discount at the $50,000 investment level, the action least appropriate for an agent is to: A) place the order as instructed. B) inform the customer that he can reduce his sales charge by investing an additional $3,000. C) inform the customer that he can reduce his sales charge by combining purchases in other funds offered by the XYZ complex of funds. D) inform the customer that he can reduce his sales charge through a letter of intent.
The correct answer was - A: place the order as instructed. Explanation: If a customer intends to invest an amount just below a breakpoint threshold, he should be informed of the breakpoint discount, as well as the various methods by which he can receive it. Reference: 4.2.2.2.1 in the License Exam Manual.
Your customer has invested in a mutual fund with a 12b-1 fee. You explain to him that a charge will be deducted from his account: A) quarterly. B) monthly. C) annually. D) semiannually.
The correct answer was - A: quarterly. Explanation: 12b-1 fees are deducted from fund assets every quarter.
Filing with FINRA is required for mutual fund-related: A) sales literature. B) institutional sales literature. C) correspondence. D) independently prepared reprints.
The correct answer was - A: sales literature. Explanation: Filing with FINRA is required only for mutual fund advertisements and sales literature. The other items are not filed, although they are subject to spot-checking requirements. Reference: 4.1.4.1 in the License Exam Manual.
A customer indicates that she wishes to invest $50,000 in mutual funds. The investments are to be split into three funds, in different fund families, each with its own management company, and all of which are growth-oriented health care funds. The registered representative should advise the customer that: A) she will pay greater sales charges on the investment when the money is split between three fund families than if she put the money into only one fund family. B) she may exchange shares from one fund family to another as conditions change without incurring a new sales charge. C) she should buy individual stocks because mutual funds are for smaller investors only. D) this is an excellent idea because it spreads the risk of investing significantly.
The correct answer was - A: she will pay greater sales charges on the investment when the money is split between three fund families than if she put the money into only one fund family. Explanation: Because the funds are under separate fund families, the load charged on each separate investment will probably be higher than if the customer invests the entire sum within one family of funds. In the latter case, the investor would be more likely to qualify for a breakpoint discount. Reference: 4.2.2 in the License Exam Manual.
Mutual fund tombstone advertisements complying with SEC Rule 482 may include all of the following information EXCEPT: A) the address where a check to purchase shares is to be mailed. B) performance results. C) a description of the fund's investment objectives. D) stars representing a ranking by a recognized entity.
The correct answer was - A: the address where a check to purchase shares is to be mailed. Explanation: SEC Rule 482, the omitting prospectus rule, deals with mutual fund tombstone ads and allows them to contain far more detailed information than a traditional stock or bond tombstone. However, these ads may not be used in place of a prospectus. A customer would have to receive a prospectus before he could order shares. Reference: 4.1.2.7 in the License Exam Manual.
An investor purchased a variable annuity some years ago and has been making regular payments into it. He has encountered financial difficulties and asks his registered representative if he can arrange to delay his next few payments. The registered representative explains that: A) the customer may pay in as much or as little, as frequently or as infrequently, as he pleases, with no penalty. B) if he starts missing payments, there will be penalties. C) the customer should exchange his annuity for a variable life insurance contract under Section 1035 to avoid tax consequences. D) if he cannot meet his commitments, he should not have invested in the first place.
The correct answer was - A: the customer may pay in as much or as little, as frequently or as infrequently, as he pleases, with no penalty. Explanation: A variable annuity does not require scheduled premium payments. The customer may miss as many payments as he wishes with no fear of forfeiting earlier payments.
An investor in a spread-load plan wishes to terminate the plan after investing $150 per month for 8 months. Assuming the maximum sales charge has been levied, the investor is entitled to a refund of: A) the next computed net asset value multiplied by the number of shares in the account. B) the next computed net asset value multiplied by the number of shares in the account plus a sales charge refund of $60. C) the next computed net asset value multiplied by the number of shares in the account plus a sales charge refund of $240. D) the next computed net asset value multiplied by the number of shares in the account plus a sales charge refund of $180.
The correct answer was - A: the next computed net asset value multiplied by the number of shares in the account. Explanation: Once a spread-load contractual plan has been in effect for more than 45 days after the mailing of the plan certificate, there is no refund of sales charges.
The main benefit that variable life insurance has over whole life insurance is: A) the potential for a higher cash value and death benefit. B) a lower sales charge. C) an adjustable premium. D) the availability of policy loans.
The correct answer was - A: the potential for a higher cash value and death benefit. Explanation: Premiums of variable life insurance policyholders are invested in the insurer's separate account. This allows the policyholder the opportunity (though there are no guarantees) to enjoy significant returns and substantially higher cash values than are obtainable through a whole life policy.
Investment recommendations must be fully explained, with special emphasis placed on: A) the risks inherent in the investment. B) the potential profit if the investment works out. C) the diversification it will bring to the customer's portfolio. D) the liquidity of the investment, should it start to diminish in value.
The correct answer was - A: the risks inherent in the investment. Explanation: The primary emphasis on any recommendation must always be the potential risks the client could be exposed to. Reference: 4.1.5.2 in the License Exam Manual.
A breakpoint sale is: A) the sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions to incur the higher sales charge. B) the sale of shares where the client pays the smallest sales charge. C) the sale of investment company shares in anticipation of a distribution soon to be paid. D) the payment of compensation to a registered representative after he ceases to be employed by a member.
The correct answer was - A: the sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions to incur the higher sales charge. Explanation: Breakpoint sales are a violation of the Conduct Rules. A breakpoint sale is the sale of fund shares just below the point where a sales charge is reduced in order to maintain the higher commission. Reference: 4.2.2.2.1 in the License Exam Manual.
A customer requests information on a new mutual fund and asks her registered representative to circle the important information in the prospectus and information he thinks will be of special interest to her. This is permitted: A) under no circumstances. B) if approved by a principal. C) without restriction. D) if accompanied by an unmarked prospectus.
The correct answer was - A: under no circumstances. Explanation: The prospectus is a legal document and may not be altered. Reference: 4.1.6 in the License Exam Manual.
A type of life insurance where the death benefit varies based upon the investments selected by the policyowner is known as: A) variable life. B) exchange life. C) installment life. D) equity life.
The correct answer was - A: variable life. Explanation: Although variable life offers a guaranteed minimum death benefit, because the policyowner can select the separate accounts into which a portion of the premium will be invested, that death benefit will vary with account performance.
All of the following activities would be considered violations under FINRA rules EXCEPT: A) when a broker/dealer places a paid advertisement in a local newspaper publicizing the range of investment banking services the firm has provided for locally based corporations. B) when a featured columnist for a nationally distributed financial newspaper writes a favorable report on a certain company and is invited on an all-expenses-paid vacation sponsored by a market maker in that company's securities. C) when a broker/dealer offers sales incentives in the form of higher commissions to agents, but only on buy orders for a select list of equity securities in which the firm makes markets. D) when a broker/dealer agrees to fund a major portion of the circulation expenses incurred by the publisher of a monthly investment newsletter in exchange for priority placements of news items and research opinions at the direction of the broker/dealer.
The correct answer was - A: when a broker/dealer places a paid advertisement in a local newspaper publicizing the range of investment banking services the firm has provided for locally based corporations. Explanation: Activities designed to manipulate the market in exchange for a direct or indirect payment, or to enhance sales of securities to those for whom they may not be suitable, are prohibited. Merely placing an advertisement publicizing investment banking services is not an attempt to do either of these. Reference: 4.1.5.3 in the License Exam Manual.
The KPF Growth Fund charges no redemption fee. An investor brings 200 shares to your firm for redemption. The next quote on the fund is $9.15 bid, $10.00 ask. If liquidated by the firm without charge, he would receive for his shares: A) $2,000. B) $1,830. C) $1,000. D) $915.
The correct answer was - B: $1,830. Explanation: Investors redeem their mutual fund shares at the next calculated net asset value or bid price. Two hundred shares liquidated at $9.15 = $1,830. If there were a redemption charge, it would be subtracted from the total. Reference: 4.2.3 in the License Exam Manual.
A client has purchased a variable annuity with a death benefit clause. At the time of his death, he had invested $20,000 and owned 12,420 accumulation units worth $1.72 each. Under the death benefit provision, his beneficiary would receive: A) $11,628.00 B) $21,362.00 C) $20,000.00 D) $25,000.00
The correct answer was - B: $21,362.00 Explanation: The death benefit clause of a variable annuity states that if a client dies during the accumulation phase, his heir or estate will receive the amount of money invested or the current value of the account, whichever is greater. In this case, he had invested $20,000, but the value of the account currently was $21,362 (12,420 units × $1.72 each).
An investor executes a letter of intent to invest $15,000 in a fund to qualify for a reduced sales charge. The investor makes an initial purchase of $8,000. If the account grows to $11,000 before another purchase is made, how much will be due to fulfill the letter of intent? A) $11,000. B) $7,000. C) $4,000. D) $15,000.
The correct answer was - B: $7,000. Explanation: Market gains or losses in the underlying value of the fund have no impact on letters of intent. The investor is obligated to make an additional investment of $7,000 to fulfill the letter of intent. Reference: 4.2.2.2.2 in the License Exam Manual.
A mutual fund has a net asset value (NAV) of $7.80 per share, and the fund pays its underwriter a concession of $0.12 per share. If the fund has a sales load of $0.50 per share and an administrative fee of $0.15 per share, how much does the investor pay per share to purchase a Class A share of this fund? A) $8.57. B) $8.30. C) $8.42. D) $7.80.
The correct answer was - B: $8.30. Explanation: The investor pays the public offering price (POP) when purchasing mutual fund shares. For a Class A share upon purchase, the POP is the NAV plus the sales charge. Reference: 4.2.2.2 in the License Exam Manual.
Your customer owns a variable annuity contract, and the AIR stated in the contract is 5%. In January, the realized rate of return in the separate account was 7%, and he received a check based on this return for $200. In February, the rate of return was 10%, and he received a check for $210. To maintain the same payment he received in February, what rate of return would the separate account have to earn in March? A) 7%. B) 5%. C) 3%. D) 10%.
The correct answer was - B: 5%. Explanation: If the actual rate of return equals the assumed interest rate, the check will stay the same.
Your customer has redeemed some of his mutual fund shares, but finds that the price he received is somewhat less than was reported as the NAV of his fund in the newspaper the next day. The most likely reason for this is which of the following? A) A front-end load. B) A contingent deferred sales charge. C) A level load sales charge. D) Churning of the part of his registered representative.
The correct answer was - B: A contingent deferred sales charge. Explanation: A CDSC is levied at the time of redemption, thus reducing the actual amount received to an amount lower than the NAV by that deferred sales charge. Reference: 4.2.2.3 in the License Exam Manual.
Which of the following pieces of sales material is exempt from routine spot-checking by FINRA? A) An independently prepared reprint that has been on file for more than one year. B) A public communication that simply offers a specific security at a specific price. C) A piece of sales literature that has been distributed to fewer than 25 prospective customers. D) Material that has been approved by a principal.
The correct answer was - B: A public communication that simply offers a specific security at a specific price. Explanation: Material that makes no claims for a security, but simply states its price or is not intended for the public, is exempt from spot-checking. Reference: 4.1.4.1.3 in the License Exam Manual.
A registered representative at your firm made a public appearance that was not subject to the rules of conduct regarding public appearances. Which of the following might it have been? A) Presentation at a high school about mutual funds. B) Announcement on television that your firm's offices have moved. C) Participation in an Internet chat room in which securities were discussed. D) Seminar discussing the products your firm offers to the public.
The correct answer was - B: Announcement on television that your firm's offices have moved. Explanation: The television appearance did not involve mention of securities. The others all fit into the definition of public appearance and are required to meet the same standards as other advertisements. Reference: 4.1.2.2 in the License Exam Manual.
A straight life annuity will give the annuitant monthly payments for which of the following? A) For a period determined in the annuity contract. B) As long as the annuitant lives. C) All annuities pay for ten years. D) As long as the annuitant and/or the beneficiary lives.
The correct answer was - B: As long as the annuitant lives. Explanation: A straight life annuity will pay monthly for as long as the annuitant lives.
An investor buys a mutual fund over the Internet. How does the investor get the required information? A) Through an omitting prospectus. B) By downloading an electronic copy of the prospectus. C) By receiving a copy of the prospectus in the mail within 3 days. D) Via a text message.
The correct answer was - B: By downloading an electronic copy of the prospectus. Explanation: Many funds make available the opportunity to purchase shares without ever seeing a registered representative. When done on the Internet, SEC rules require that a copy of the fund's prospectus be available for downloading. Reference: 4.1.6.1.5 in the License Exam Manual.
A securities firm wishes to use a testimonial to attest to the excellent service provided to clients. According to the Conduct Rules, which of the following statements about the use of testimonials is TRUE? A) All testimonials must be approved by FINRA before use. B) Testimonials must include a disclaimer about future returns. C) Testimonials may be used provided no payment is made to the maker. D) The use of testimonials is prohibited.
The correct answer was - B: Testimonials must include a disclaimer about future returns. Explanation: Testimonials may be used by FINRA member firms; however, they must always include a disclaimer about the uncertainty of future returns. Individuals may be paid to give testimonials, but disclosure of that fact must be made. Reference: 4.1.5.3 in the License Exam Manual.
If a registered representative is comparing two mutual funds for a customer, which of the following comparisons would NOT be permissible? A) Comparing two equity funds with slightly different investment objectives, even if the differences and their consequences are carefully explained. B) Comparing an equity growth fund to a money market fund with the intention of convincing an investor to purchase the growth fund. C) Comparing diversified growth funds from two different fund families. D) Comparing a long-term bond fund to a shorter-term bond fund to demonstrate the trade-offs that exist between risk and return.
The correct answer was - B: Comparing an equity growth fund to a money market fund with the intention of convincing an investor to purchase the growth fund. Explanation: A characteristic of money market funds is that they deliberately avoid growth. Thus, for the growth investor, a comparison of a money market fund to a growth fund is an unfair comparison. Reference: 4.1.5.2.1 in the License Exam Manual.
To qualify for the quantity discount, which of the following could NOT be defined as a person? A) Trust officer working on behalf of a single trust account. B) Father and his 35-year-old son investing in separate accounts. C) Husband and wife investing in a joint account. D) Husband and wife investing in separate accounts.
The correct answer was - B: Father and his 35-year-old son investing in separate accounts. Explanation: For the purpose of qualifying for breakpoints, the definition of a person includes family units, but only spouses and minor children, not a relative of legal age. Reference: 4.2.2.2.1 in the License Exam Manual.
Which of the following entities must review sales and advertising material for investment company shares prepared by principal underwriters? I. Principal of the underwriting broker/dealer distributing the shares. II. FINRA. III. SEC. IV. NYSE.
The correct answer was - B: I and II. Explanation: Because investment company shares are a continuous primary offering, sales and advertising literature must be filed with FINRA for review. The principal of the firm must approve sales literature before its use and will hear from FINRA if it determines that the material is misleading. Reference: 4.1.6.3 in the License Exam Manual.
Under the Investment Company Act of 1940, which of the following entities may receive a breakpoint and pay less than the maximum sales charge? I. A qualified retirement plan. II. An insurance company. III. Two friends who have pooled their money to make a large purchase. IV. An investment club.
The correct answer was - B: I and II. Explanation: Investment clubs and otherwise unaffiliated groups may not pool their money to receive a breakpoint. Incorporated or otherwise affiliated entities, such as spouses or a parent and minor child, may do so. Reference: 4.2.2.2.1 in the License Exam Manual.
Which of the following statements about a FINRA member firm's handling of a mutual fund's sale literature are TRUE? I. The material used to solicit the sale of mutual fund shares requires prior approval by a principal of the firm. II. FINRA must review all mutual fund sales literature within three days of its first use. III. If the mutual fund sponsor has had the literature reviewed by FINRA in advance, other firms need not submit it. IV. FINRA must review all mutual fund sales literature within seven days of its first use.
The correct answer was - B: I and III. Explanation: A firm's principal must approve sales literature before use. If FINRA has reviewed the literature, it need not be submitted by every broker/dealer intending to use it. The FINRA review requirement is within ten days of first use. Reference: 4.1.4.1 in the License Exam Manual.
Which of the following statements regarding a mutual fund omitting prospectus are TRUE? I. It does not have certain information contained in a full prospectus. II. It may contain an application to invest. III. It is a form of advertising. IV. It need not contain information on how to obtain a full prospectus.
The correct answer was - B: I and III. Explanation: One of the reasons it is called an omitting prospectus is because the ad omits certain information found in the prospectus. This is your basic mutual fund tombstone ad. 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. Reference: 4.1.2.7 in the License Exam Manual.
To charge an 8.5% sales load, a mutual fund must offer all of the following rights and privileges EXCEPT: I. conversion (exchange) II. breakpoints III. rights of accumulation IV. redemption checks sent within 7 days of request
The correct answer was - B: I and IV Explanation: In order to charge 8.5%, the mutual fund must offer breakpoints and rights of accumulation. Reference: 4.2.2 in the License Exam Manual.
The Telephone Consumer Protection Act (TCPA) does NOT apply to calls made: I. by tax-exempt, nonprofit organizations. II. in an effort to ascertain a noncustomer's interest in securities investments. III. for prospecting purposes, provided the intention is to make no sales pitch unless the customer expresses interest. IV. to established business customers.
The correct answer was - B: I and IV. Explanation: Calls exempted from the Telephone Consumer Protection Act include calls made by and on behalf of tax-exempt, nonprofit organizations and to established business customers. Prospecting calls made to noncustomers come under the act. Reference: 4.1.8 in the License Exam Manual.
When considering the use of instant messaging to communicate with a customer, a registered representative should be aware that this type of communication: I. is considered advertising. II. is considered sales literature or correspondence. III. is subject to principal review or approval. IV. is not subject to principal review or approval.
The correct answer was - B: II and III. Explanation: Instant messaging is categorized as either sales literature or correspondence. Because it is classified as a public communication, it is subject to supervisory requirements and must be approved before use if it qualifies as sales literature. If it is considered correspondence, it is subject to a principal's timely review if sent to existing retail clients and does not contain any product or sales recommendations. Reference: 4.1.2.5 in the License Exam Manual.
Under the TCPA of 1991, calls to prospects may be made: A) no earlier than 9 AM nor later than 8 PM at the location of the prospect. B) no earlier than 8 AM nor later than 9 PM at the location of the prospect. C) no earlier than 8 AM nor later than 9 PM at the location of the caller. D) no earlier than 9 AM nor later than 8 PM at the location of the caller.
The correct answer was - B: no earlier than 8 AM nor later than 9 PM at the location of the prospect. Explanation: The Telephone Consumer Protection Act of 1991 limits the times that cold calls can be made. No call can be made prior to 8 AM or later than 9 PM at the location of the person being called. Reference: 4.1.8 in the License Exam Manual.
Which of the following statements regarding letters of intent used in connection with mutual fund purchases are TRUE? I. The letter can cover a period totaling 16 months. II. The letter may be backdated 90 days. III. Some shares purchased are held in escrow until the letter is completed. IV. During the period covered by the letter, the customer may not redeem his shares.
The correct answer was - B: II and III. Explanation: Letters of intent permit investors to qualify for a reduced sales charge on the purchase of mutual fund shares over time. They are valid for 13-months and may be backdated by up to 90 days to include prior purchases. The investor is not legally obligated to comply with the terms of the letter, so some shares purchased at the reduced sales charge are held in escrow. These shares are liquidated to repay the reduction in sales charge if the letter is not completed. Reference: 4.2.2.2.2 in the License Exam Manual.
In recommending securities to customers, a FINRA member firm must do which of the following? I. Guarantee that future performance will match or exceed past performance. II. Have a suitable basis for recommendations. III. Disclose or offer to disclose supporting documentation. IV. Offer to reimburse execution costs associated with recommendations.
The correct answer was - B: II and III. Explanation: Under the Conduct Rules, a FINRA member firm recommending securities to customers must not make future performance or reimbursement guarantees, must have a suitable basis for its recommendation, and must disclose or offer to disclose supporting documentation. Reference: 4.1.5 in the License Exam Manual.
Similarities between an open-end investment company and the insurance company separate account used to fund a variable annuity include which of the following? I. The issuing company accepts the investment risk. II. Full-time portfolio management is provided. III. Both offer a choice between a distribution method that guarantees a monthly income for life or for a certain period. IV. Purchase payments are made in accordance with the forward pricing rule.
The correct answer was - B: II and IV. Explanation: Both open-end investment companies and the separate accounts of insurance companies offer investors professional portfolio management. When shares or accumulation units are purchased, they are bought at a price based upon the next computed NAV (the forward pricing rule), as are mutual fund shares.
If a registered representative wishes to distribute a copy of a national magazine article about the GAON Mutual Fund, which of the following statements is CORRECT? I. Because this material is already in the public domain, it is excluded from the rules on communication with the public. II. This material meets the definition of an independently prepared reprint. III. The article may be used without prior approval of a principal of the member firm. IV. The article may not be sent without prior or concurrent delivery of the GAON Fund prospectus.
The correct answer was - B: II and IV. Explanation: Copies of published articles, neither paid for nor sponsored by the investment company, are considered independently prepared reprints and must be approved by the appropriate principal before use. As with any directed communication relating to investment companies, delivery of a prospectus is required. Reference: 4.1.2.4 in the License Exam Manual.
In making a sales presentation to a prospective customer, a registered representative selling open-end investment company shares may compare the shares to a savings account at a bank if: I. it is pointed out that mutual funds have the advantage of federal backing. II. the risk of share price fluctuation is discussed. III. it is pointed out that mutual funds have the advantage of higher liquidity. IV. a statement is made concerning variability of dividend returns.
The correct answer was - B: II and IV. Explanation: It would be misleading for a registered representative to compare mutual fund shares with bank savings accounts without indicating that savings accounts are insured by the federal government and mutual funds are not. Sales presentations of mutual fund shares should also include statements indicating that past performance is no guarantee of future results, that an investor's initial investment in mutual fund shares could be lost, and that dividends paid on mutual fund shares are not guaranteed. Reference: 4.1.5.2.1 in the License Exam Manual.
Which of the following forms of written communication must a principal approve before use? A) Interoffice memorandum. B) Letter sent this month to 50 prospective customers offering advice about a stock. C) Letter to a customer confirming an annual account review appointment. D) Preliminary prospectus.
The correct answer was - B: Letter sent this month to 50 prospective customers offering advice about a stock. Explanation: Form letters sent to 25 or more prospective retail customers within any 30-calendar-day period are considered sales literature and must be approved by a principal before use. Form letters sent to fewer than 25 prospective clients within a 30 calendar-day period or any number of existing retail clients are considered group correspondence, which, like other correspondence, does not need prior approval, but it is subject to subsequent review. Reference: 4.1.3 in the License Exam Manual.
If a registered representative uses a prospectus as a sales aid, what must accompany the prospectus in the presentation? A) All sales literature describing the investment. B) No other information is required unless requested. C) Company's balance sheet. D) All advertising describing the investment.
The correct answer was - B: No other information is required unless requested. Explanation: Although the prospectus is required before or during any solicitation for sale, no other literature or documentation is needed unless requested.
According to the Conduct Rules, a FINRA member firm may give certain selling concessions to which of the following? A) The general public. B) Other member firms. C) High net-worth institutions. D) Nonmembers.
The correct answer was - B: Other member firms. Explanation: Members may give other members selling concessions, but sales to the public and to nonmember firms must be made at the public offering price. Reference: 4.2.1.1 in the License Exam Manual.
A customer purchases 1,000 ABC mutual fund Class A shares and wishes to redeem the shares 30 days later. Which of the following will occur? A) The customer will be charged a redemption fee but all sales charges will be returned. B) Shares will be redeemed at a price equal to the public offering price less the sales charge. C) All sales charges will be refunded and no redemption fee will apply. D) The full amount of the investment will be returned to the customer.
The correct answer was - B: Shares will be redeemed at a price equal to the public offering price less the sales charge. Explanation: The customer will receive the current NAV (the POP minus the sales charge). Reference: 4.2.3 in the License Exam Manual.
A customer has a variable life policy and has made two annual premium payments. From the first year's premium, $600 was deducted in sales charges. From the second year's premium $400 was deducted. If the customer terminates the policy before the end of the second year, which of the following statements are TRUE? A) The customer receives the policy cash value only. B) The customer is refunded any cash value and a portion of the sales charges. C) The customer is not entitled to a policy refund but may exchange the policy for a traditional whole life policy. D) The customer is refunded all premiums paid.
The correct answer was - B: The customer is refunded any cash value and a portion of the sales charges. Explanation: The variable life refund provision returns cash value plus a portion of the sales charges deducted if it is made within the first two policy years.
An investor owns $10,000 of shares in ABC bond fund. Due to a change in his financial situation, he wishes to exchange the bond fund shares for shares in ABC's aggressive growth fund. Which of the statements below correctly describes the tax consequences of this action? A) The exchange is taxable and the customer is also subject to a new sales charge on the aggressive growth fund shares. B) The exchange is considered a taxable event that must be recognized in the current year. C) The exchange is not taxable. D) Ordinary income taxes are due on any appreciation realized on the bond fund shares.
The correct answer was - B: The exchange is considered a taxable event that must be recognized in the current year. Explanation: The IRS considers this exchange to be a sale and repurchase. Any gain or loss on the bond fund shares must be recognized in the current year. Any share appreciation is classified as a capital gain and subject to taxation at capital gains rates. Because the exchange is made within the same family of funds, no new sales charge is applicable. Reference: 4.2.2.2.5 in the License Exam Manual.
Which of the following would prevent a mutual fund with a front- end load from charging as much as 8.5% of POP as a sales charge? A) The fund invests only in long-term bonds. B) The fund does not offer breakpoints. C) The fund is not regulated under Subchapter M. D) The fund is not diversified.
The correct answer was - B: The fund does not offer breakpoints. Explanation: To charge as much as 8.5% as a sales charge, a mutual fund must offer breakpoints, rights of accumulation, and automatic reinvestment of dividends and capital gains distributions at NAV. Reference: 4.2.2 in the License Exam Manual.
A registered representative making a sales presentation based on performance statements and charts is permitted to make which of the following observations? A) The fund has consistently outperformed the market and should continue to do so. B) The fund has had a positive performance in the last few years. C) Yield over the last five years has fluctuated between 6% and 8%, indicating the yield will continue at 6% or better. D) The broad diversification in the portfolio will ensure the continuation of the 6% yield.
The correct answer was - B: The fund has had a positive performance in the last few years. Explanation: Predictions are strictly prohibited, and conjecture about future trends or occurrences must be labeled as such. Reference: 4.1.5.2.1 in the License Exam Manual.
Under what circumstances may a member firm use a fictional name or DBA (doing business as) in its communications? A) Fictional names may not be used. B) The name is filed with both FINRA and SEC. C) The name is filed with FINRA. D) The name is filed with the Securities Information Center.
The correct answer was - B: The name is filed with both FINRA and SEC. Explanation: A fictional name or DBA may be used, provided the name is filed with both FINRA and the SEC. Reference: 4.1.5.5.2 in the License Exam Manual.
In determining the suitability of a particular mutual fund for a particular customer, which of the following criteria should a registered representative NOT consider? A) The services offered by the fund. B) The number of shares outstanding. C) The track record of the fund manager. D) The expense ratio of the fund.
The correct answer was - B: The number of shares outstanding. Explanation: The size of the fund, whether in terms of total assets or number of shares outstanding, has little or nothing to do with performance or suitability for a particular customer.
A prospect is interested in a specific mutual fund and has requested information. The registered representative responds by mailing a current research report produced by his firm and scheduling an appointment next week when he will bring an application and prospectus and will answer any additional questions prior to the sale. Is there a violation? A) No, as long as the research report is reviewed by a principal before or after it is sent. B) Yes, the research report is a form of sales literature and must be preceded or accompanied by a prospectus. C) Yes, research reports must be independently produced. D) No, as long as the research report has been approved by a principal.
The correct answer was - B: Yes, the research report is a form of sales literature and must be preceded or accompanied by a prospectus. Explanation: The research report is a type of sales literature. When making sales literature available to a prospect, a prospectus must be delivered prior to or concurrently with delivery. Research reports do require prior principal approval. Reference: 4.1.1.2 in the License Exam Manual.
If a customer is planning for retirement and wants to be assured of a minimum income per month and to have protection from inflation, she should consider a plan with: A) period certain. B) a combination fixed and variable payout. C) installments for a designated amount. D) installments for a designated period.
The correct answer was - B: a combination fixed and variable payout. Explanation: If an investor wants a fixed payment and protection from inflation, a combination annuity is suitable, since it offers both a minimum fixed payout and a variable payout.
Mutual fund Class B shares assess: A) a level load. B) a deferred sales load. C) no load. D) a front-end load.
The correct answer was - B: a deferred sales load. Explanation: Class B shares carry a deferred sales load. This is sometimes referred to as a back-end load. Class A shares carry a front-end load. Class C shares carry a level load. Reference: 4.2.2.3 in the License Exam Manual.
All of the following may be included in mutual fund sales literature EXCEPT: A) total return computations. B) performance predictions. C) charts depicting ten years of performance history. D) graphics that are prepared outside the firm if the source is disclosed.
The correct answer was - B: performance predictions. Explanation: Mutual fund performance predictions are strictly prohibited. Past performance, however, must be shown for a minimum of ten years or since inception of the fund. Total return computations may be shown on sales literature and other marketing materials, including information prepared outside of the firm, provided the preparer's name is disclosed. Reference: 4.1.5.2.1 in the License Exam Manual.
A registered representative is talking with a new customer at his firm, a 60- year-old man who has accounts at several other broker/dealers and a net worth of just over $700,000. The customer considers himself to be extremely skilled at selecting new companies that will perform well, and over the years, through numerous small investments, he has built a portfolio consisting of about 80% equity securities. His company mandates retirement for its personnel at age 65, and he is becoming worried about retirement income. He has selected another new company, one with a speculative bond issue. He would like to invest $250,000 in this issue to augment his projected retirement income and would like the registered representative's opinion. The registered representative should: A) refuse to enter the order. B) agree that it is appropriate to move toward emphasis on income, if that is his retirement objective, but not with such a large investment in one speculative security. C) enter the order as stated, since the customer has shown skill at identifying well-performing companies. D) suggest that the customer diversify the investment by spreading it around several companies and, perhaps, even some bond mutual funds.
The correct answer was - B: agree that it is appropriate to move toward emphasis on income, if that is his retirement objective, but not with such a large investment in one speculative security. Explanation: This investment would amount to over one-third of the customer's net worth and is speculative to boot. The registered representative should urge the customer to begin moving more slowly into income securities.
Sales literature for a mutual fund must: A) contain a warning that SEC supervision of the company does not guarantee protection against a decrease in the shares' market value. B) be preceded or accompanied by a prospectus. C) promise delivery of a prospectus when the shares are delivered to the purchaser. D) contain the statement, "A prospectus relating to these securities is available upon request."
The correct answer was - B: be preceded or accompanied by a prospectus. Explanation: All sales literature or advertising used in connection with the solicitation of mutual fund shares must be accompanied or preceded by the prospectus. Reference: 4.1.1.2 in the License Exam Manual.
A mutual fund may not charge the maximum 8.5% sales load, unless it offers: A) rights of accumulation and forward pricing B) breakpoints and rights of accumulation C) automatic reinvestment of distributions at NAV D) breakpoints and conversion privileges
The correct answer was - B: breakpoints and rights of accumulation Explanation: To charge 8.5%, the fund must offer breakpoints and rights of accumulation. All new funds issued today offer the automatic reinvestment of distributions at NAV. Reference: 4.2.2 in the License Exam Manual.
The Presto Capital Appreciation Fund annual report indicates that the NAV of the fund has increased from $15.65 to $17.03, and its asking price as of the date of the report has actually declined. Presto must be a(n): A) balanced fund. B) closed-end fund. C) dual purpose fund. D) open-end fund.
The correct answer was - B: closed-end fund. Explanation: The asking price of a closed-end fund is not determined by its NAV because the fund trades based on supply and demand. An open-end company's NAV cannot go up while its asking price goes down.
Reduced sales charges are allowed under all of the following circumstances EXCEPT: A) a lump-sum purchase that qualifies for a breakpoint. B) combining separate purchases made by a client and his business partner in their respective IRA accounts. C) additional purchases that qualify for breakpoints under rights of accumulation. D) the customer signing a letter of intent.
The correct answer was - B: combining separate purchases made by a client and his business partner in their respective IRA accounts. Explanation: Two unrelated adults may not combine transactions to receive a breakpoint. Reference: 4.2.2 in the License Exam Manual.
Some mutual funds that are in a family of funds managed by the same company offer an exchange privilege. This privilege gives a shareholder the right to: A) convert mutual fund shares to securities listed on the New York Stock Exchange. B) convert shares to a different investment company within the family of funds on a dollar-for-dollar basis. C) switch shares to an investment company within the family of funds and defer the taxes on any capital gains due to the exchange. D) reinvest dividends and capital gains without a sales charge.
The correct answer was - B: convert shares to a different investment company within the family of funds on a dollar-for-dollar basis. Explanation: The exchange privilege allows a shareholder to exchange shares from one fund for shares from another within a family of funds under the same management without paying an additional sales charge (dollar for dollar). The shareholder is liable for any tax on gains as a result of the redemption of his old shares. Reference: 4.2.2.2.5 in the License Exam Manual.
An investor purchases $10,000 of the Class B shares of the KAPCO Growth Fund. Two years later, the client redeems the shares. The redemption charge is a percent of the: A) NAV at time of redemption. B) lesser of the NAV or purchase price. C) greater of the NAV or purchase price. D) purchase price.
The correct answer was - B: lesser of the NAV or purchase price. Explanation: When faced with a CDSC on Class B shares, the charge is levied against the lesser of the current NAV or the original purchase price. Reference: 4.2.2.3 in the License Exam Manual.
An investor reviewing the holdings of a tax-exempt bond fund would expect to see most of the portfolio invested in A) common stock. B) municipal bonds. C) short-term money market instruments. D) corporate bonds.
The correct answer was - B: municipal bonds. Explanation: A tax-exempt bond fund is going to invest the majority of its portfolio in securities that provide income exempt from income tax. That would, of course, be municipal bonds.
Recommendations to a customer: A) must be approved in advance by a principal. B) must reflect the facts disclosed by the customer regarding other holdings and financial situations. C) must include assurances or guarantees regarding investment performance. D) must never involve recommending a speculative security.
The correct answer was - B: must reflect the facts disclosed by the customer regarding other holdings and financial situations. Explanation: Recommendations made to a customer must be suitable for that particular customer. They need not be approved in advance by a principal, but they may include speculative securities if they are in line with the customer's objectives, means, and tax status. Reference: 4.1.5.2 in the License Exam Manual.
The conversion and exchange privilege offered by many mutual fund families permits the exchange of shares in one fund family for: A) shares of another in that family at a reduced sales charge. B) shares of another in that family at net asset value. C) shares of another in that family with any gains being deferred under IRS code section 1035. D) shares of a different family at net asset value.
The correct answer was - B: shares of another in that family at net asset value. Explanation: For conversion and exchange of shares to take place at net asset value, the shares must be within the same fund family. Reference: 4.2.2.2.5 in the License Exam Manual.
In general, the Conduct Rules permit selling concessions and discounts: A) within certain percentage limits. B) to FINRA member firms engaged in the investment banking or securities business. C) to anyone who deals in securities transactions. D) as consideration for services rendered by nonmembers of FINRA in obtaining business.
The correct answer was - B: to FINRA member firms engaged in the investment banking or securities business. Explanation: The Conduct Rules permit FINRA member broker/dealers to allow concessions and discounts only to other members. Reference: 4.2.1.1 in the License Exam Manual.
A shareholder has $800 to invest in the ABC Technology Fund. If the shares are currently priced at $21.15 each, he can purchase how many shares? A) 38 shares. B) 37, with $17.45 in change. C) 37.825 shares. D) None because the minimum trading unit is 100 shares.
The correct answer was - C: 37.825 shares. Explanation: The shareholder can purchase 37.825 shares. Mutual fund shares may be sold in full or fractional amounts.
A customer invests $35,000 in a fund with breakpoints as shown below: $25,000 - $49,000 - 7% $50,000 - $99,000 - 6.25% If she has signed a letter of intent for a total of $50,000, what is her sales charge on the $35,000 initial investment? A) 8.5%. B) 7%. C) 6.25%. D) This cannot be determined until 13 months have elapsed.
The correct answer was - C: 6.25%. Explanation: By signing a letter of intent, the customer qualifies her initial investment for the reduced load of 6.25% based on a total investment of $50,000. This might change if she does not complete her letter of intent within 13 months, but she will receive the breakpoint upon the initial purchase. Reference: 4.2.2.2.2 in the License Exam Manual.
Letters of intent may be backdated up to how many days? A) 120 days. B) 30 days. C) 90 days. D) 60 days.
The correct answer was - C: 90 days. Explanation: The time limit for a letter of intent is 13 months, but the letter may be backdated up to 90 days from the date it was filed. In that case, the investor has ten months to complete the letter. Reference: 4.2.2.2.2 in the License Exam Manual.
Which of the following could be used by a registered representative to sell a mutual fund? A) The semiannual and annual reports. B) The Statement of Additional Information (SAI). C) A Rule 498 summary prospectus. D) A preliminary prospectus.
The correct answer was - C: A Rule 498 summary prospectus. Explanation: A summary prospectus meeting the requirements of SEC Rule 498 may be used to sell a mutual fund. A customer purchasing a fund based on the information in the summary must receive a statutory prospectus either by mail or by download. Reference: 4.1.6.1.5 in the License Exam Manual.
Which of the following is a violation of the Telephone Consumer Protection Act of 1991? A) A registered representative calls his aunt from work to inquire about an upcoming family reunion. B) A registered representative calls several prospective customers during his lunch hour. C) A registered representative in California places several cold calls at 7:00 pm Pacific time to prospective customers in New York. D) A registered representative calls a customer whose name is on the national Do-Not-Call list but who called the firm and asked to be contacted.
The correct answer was - C: A registered representative in California places several cold calls at 7:00 pm Pacific time to prospective customers in New York. Explanation: Calls that are not work-related do not count as cold calls, nor do calls made to people who have asked to be contacted. If cold calls are made, however, they must be made between the hours of 8:00 am and 9:00 pm in the customer's time zone. Reference: 4.1.8 in the License Exam Manual.
Variable annuity retirement payments are based on which of the following? A) A fixed amount determined by the value of the separate account. B) A variable amount based on mortality tables. C) A variable amount determined by the value of the separate account. D) A fixed amount determined by the annuity units held.
The correct answer was - C: A variable amount determined by the value of the separate account. Explanation: From a variable annuity, the payments will vary with the value of the portfolio in the separate account.
Selling which of the following is NOT a violation of the Conduct Rules? A) Government bonds to a client who insists on high returns. B) Options to a client who desires long-term growth. C) AAA bonds to a client who has income as an objective. D) The same securities to all of your clients.
The correct answer was - C: AAA bonds to a client who has income as an objective. Explanation: The Conduct Rules require that client suitability is paramount. AAA rated bonds are suitable for an income oriented client. Government bonds will not provide high returns; they are designed for moderate income with safety of principal. Options are not suitable for a growth client and selling the same security to all clients is known as the prohibited practice of blanket recommendations. Reference: 4.1.5.2 in the License Exam Manual.
A customer transfers the proceeds of a sale from one fund to another within the same family of funds. What are the tax consequences of this transaction? A) No gains or losses will be recognized until the final redemption. B) Gains are taxed at the time of the transfer but losses are deferred until the final redemption. C) All gains and losses are recognized on the date of the transfer. D) Losses are deducted at the time of the transfer but gains are deferred until the final redemption.
The correct answer was - C: All gains and losses are recognized on the date of the transfer. Explanation: Although a transfer within the same fund family may save a customer a sales charge, he is still liable for any taxes due. The IRS considers this transaction both a sale and a purchase. Any losses or gains must be declared on the current year's tax form. Reference: 4.2.2.2.5 in the License Exam Manual.
Which of the following funds would you expect to have only debt instruments in their portfolios? I. The Excelsior High-Yield Fund. II. The Jenner Combination Fund. III. The BCD Balanced Fund. IV. The KPL Money Market Fund.
The correct answer was - C: I and IV. Explanation: A high-yield fund would have a portfolio consisting of corporate debt instruments, and a money market fund would have a portfolio consisting of high-quality, short-term debt. Both combination funds and balanced funds include equity in their portfolios.
Your customer has just inherited $5,000. She wishes to invest it for long- term growth and has asked for your recommendation. Which of the following recommendations would be the least suitable? A) Class B Shares of the MPQ Diversified Growth Fund. B) Class B Shares of the KPF Long-Term Corporate Bond fund. C) Class A shares of the KPF Long-Term Corporate Bond Fund. D) Class A shares of the MPQ Diversified Growth Fund.
The correct answer was - C: Class A shares of the KPF Long-Term Corporate Bond Fund. Explanation: The KPF bond fund does not meet the customer's investment objective of long-term growth so we're going to have to select the least suitable of the two choices given. This customer's investment of $5,000 will qualify for very few, if any, breakpoints. To avoid a front-end load, she should buy Class B shares, which have no breakpoints and which eventually convert to Class A shares after some years, losing even their back-end load. Thus a purchase of Class A shares of a bond fund is the least suitable recommendation. Reference: 4.2.2.1 in the License Exam Manual.
Under the rules on communication with the public, review by a principal of which of the following may take place either before or after distribution? A) Advertising. B) Independently prepared reprints. C) Correspondence to fewer than 25 prospective retail customers within any 30 calendar-day period. D) Sales literature.
The correct answer was - C: Correspondence to fewer than 25 prospective retail customers within any 30 calendar-day period. Explanation: A principal may review correspondence before or after its distribution as long as it is limited to no more than 24 prospective retail customers during any 30 calendar-day period or any number of existing clients as long as it does not promote a product or investment service offered by the firm. The other choices require principal approval before first use. Reference: 4.1.3.2 in the License Exam Manual.
You have a client with $15,000 to invest in a mutual fund whose first breakpoint is at $25,000. Which of the following would be ways to enable the client to obtain the reduced sales charge applicable at that breakpoint? A) Have your broker/dealer lend the client the shortfall retaining the shares as collateral for the loan. B) Find another client with $10,000 to invest and have them open a joint account. C) Encourage the client to sign a letter of intent. D) Suggest a mutual fund with a lower breakpoint.
The correct answer was - C: Encourage the client to sign a letter of intent. Explanation: When a client is unable to invest a lump sum equal to or in excess of a breakpoint, the reduced sales charge may still be obtained through the signing of a letter of intent. A loan of this type would never be permitted and breakpoints are not available for combinations that are not nuclear families. Reference: 4.2.2.2.2 in the License Exam Manual.
Which of the following entities must review sales literature and advertising material to be used by a member firm in connection with the offering of investment company shares? A) FDIC. B) SIPC. C) FINRA. D) SEC.
The correct answer was - C: FINRA. Explanation: All sales literature and advertising used in connection with a new offering must be filed for review with FINRA. A principal of the firm must approve its use and is responsible for corrections that FINRA may require. Reference: 4.1.4.1 in the License Exam Manual.
he following testimonial appears in an advertisement for the ABC International Growth Fund; "The ABC International Growth Fund has been an excellent investment for me and my family and I recommend it to anyone seeking more than 10% average annual returns over the next five to ten years." Walt White, International traveler. Which of the following are TRUE? I. If Walt was compensated for the testimonial, disclosure is required. II. A disclosure that past performance does not indicate future performance is required. III. The ABC International Growth fund is appropriate for any investor seeking more than 10% average annual returns over the next five to ten years IV. Walt's title qualifies him to give advice on international investments because of his extensive experience and knowledge of international travel.
The correct answer was - C: I and II Explanation: If compensation is paid, it must be disclosed. When testimonials are used, a disclosure is required regarding future performance. No one investment is appropriate for all investors; therefore, the testimonial is in violation of a blanket recommendation as well as implying future results (more than 10% average annual returns over the next five to ten years). This testimonial implies Walt is qualified to give advice on international investing based on his title of International traveler, a violation. Reference: 4.1.5.3.1 in the License Exam Manual.
Which of the following must be reviewed and approved by a principal before it may be sent out? I. A communication sent to 36 prospective customers this week, recommending a new mutual fund. II. A communication sent to 36 of the firm's existing customers this week, promoting a service offered by the firm. III. A communication sent to 36 of the firm's registered representatives, recommending a new sales approach. IV. A communication sent only to 36 institutional customers, recommending a security in which the firm makes a market.
The correct answer was - C: I and II. Explanation: Sales literature for individual investors in general must be reviewed before being sent out. Normally, communications sent out to existing customers are simply correspondence and can be reviewed after being sent out. However, if the communication is sent out to 25 or more existing customers in a 30-day period and it contains investment recommendations or promotes a service offered by the firm, it must be reviewed and approved before being sent out. Institutional sales literature may be reviewed after being sent out. Reference: 4.1.3.2 in the License Exam Manual.
Variable annuity payout options may include: I. life only. II. joint life with last survivor. III. assumed interest rate. IV. minimum required distribution.
The correct answer was - C: I and II. Explanation: Variable annuity payout options can include life only and joint life with last survivor.
Which of the following concerning hedge funds are TRUE? I. Purchasers of hedge funds are generally required to be accredited investors. II. Selling securities short is not allowed. III. Ordinary investors may invest in hedge funds indirectly through funds of hedge funds. IV. Most hedge funds are registered with the SEC.
The correct answer was - C: I and III. Explanation: Because hedge funds are generally not registered with the SEC, their purchasers must be accredited. One way to participate without meeting that standard is through a fund of hedge funds.
A FINRA member firm must maintain the public offering price in all the following instances EXCEPT: A) member-to-nonmember. B) member-to-investment club. C) member-to-member. D) member-to-customer.
The correct answer was - C: member-to-member. Explanation: Members may allow sales concessions only to other member firms. In transactions with customers and nonmember firms, members must maintain the full public offering price. Reference: 4.2.1.1 in the License Exam Manual.
Which of the following statements regarding investment companies are TRUE? I. Investment companies may offer breakpoints provided they are offered uniformly. II. Investment companies may tell their customers that the role of the custodian is to supervise the sale and purchase of portfolio securities. III. Investment companies must send all advertisements to FINRA within 30 days of their first use. IV. The Securities Act of 1933 requires that a prospectus be provided in conjunction with the solicitation of orders for mutual fund shares.
The correct answer was - C: I and IV. Explanation: Breakpoints are allowed when they are offered uniformly to all investors. Sales literature or advertisements regarding investment companies must generally be sent to FINRA within ten days of the first use. The Securities Act of 1933 requires that a prospectus be provided with solicitations for mutual funds. Reference: 4.2.2.2.1 in the License Exam Manual.
Which of the following share classes have a back-end load? I. Class B. II. Class A. III. No-load shares. IV. Class C.
The correct answer was - C: I and IV. Explanation: Class B shares have a contingent deferred sales charge, or back-end load, that declines over five to seven years and then expires. Class C shares have a back-end load that typically expires after one year. Reference: 4.2.2.3 in the License Exam Manual.
A client is in the annuitization stage of a variable annuity. If the separate account earned 8% during the current month, which of the following statements is correct? I. The next check will increase if the AIR is 5%. II. The next check will increase if the AIR is 10%. III. The number of annuity units owned will increase. IV. The number of annuity units owned will remain the same.
The correct answer was - C: I and IV. Explanation: During a period in which the separate account's performance exceeds the AIR, the next check will increase. Regardless of performance, once the contract is annuitized the number of annuity units remains unchanged. It is the value of the units that changes.
The rules on communications with the public apply to a registered representative: I. appearing on a TV show to discuss market trends. II. conducting a Bible study class every Wednesday evening. III. sending an email to 17 existing clients regarding their upcoming 25-year college reunion. IV. writing a seminar script to be used by the firm's vice president of sales.
The correct answer was - C: I and IV. Explanation: The rules on communications with the public deal with public appearances, such as a TV program and seminar scripts, as long as the topic is related to the investment business. Making a presentation dealing with religious studies or a school reunion is not covered by public communications rules. Reference: 4.1.1 in the License Exam Manual.
Your customer purchased a variable annuity with an immediate payout plan. In the first month, if she received a payment of $328, which of the following statements about her investment are TRUE? I. Her next payment is guaranteed to be $328. II. She made a lump-sum investment. III. She purchased the variable annuity from a registered representative. IV. She purchased accumulation units.
The correct answer was - C: II and III. Explanation: A variable annuity does not guarantee the amount of monthly payments. Her next monthly payment may be more than, less than, or the same as her initial payment. Because her payments began immediately, she must have made a
An investor has $250,000 to invest in mutual funds. Which of the following would be appropriate statements to make to him? I. Buying a no load fund will insure better performance in the long run. II. If you purchase Class B shares, you will have no load now, but you will probably incur higher operating costs. III. A purchase of Class A shares in this quantity will probably lead to a reduction in sales charge.
The correct answer was - C: II and III. Explanation: Although Class B shares carry no front-end load, their higher expense ratios can negatively impact investor results. A purchase of this size invariably carries a greatly reduced sales charge. Reference: 4.2.2.1 in the License Exam Manual.
Your client owns shares of the RAN Fund, an open-end investment company with an objective of aggressive growth. If the client wished to redeem a portion of her holdings: I. she would be able to redeem certificated shares by signing the reverse of the certificate and having her signature guaranteed by a registered representative of a NYSE member firm. II. she would be able to redeem certificated shares by signing a stock power and having her signature guaranteed by someone acceptable to the transfer agent. III. shares held by the custodian could be liquidated by using telephone redemption with the proceeds being sent to the address on file. IV. she would have to pay a penalty for redeeming less than the entire account.
The correct answer was - C: II and III. Explanation: Certificated shares may be redeemed by signing either the back of the certificate or a stock power. The signature must be guaranteed by a party acceptable to the transfer agent. An NYSE member firm, not the individual registered representative, would be acceptable. The most popular form of redemption is by telephone. In that case, the proceeds are sent to the address of record for the account. Reference: 4.2.3 in the License Exam Manual.
Mutual funds are like other types of corporations in which of the following ways? I. They may issue equity and debt. II. The board of directors makes policy decisions. III. Shareholders have ownership rights. IV. Their shares trade in the secondary market.
The correct answer was - C: II and III. Explanation: Mutual funds may only issue redeemable common stock, no preferred stock or bonds. Like corporate stockholders, mutual fund shareholders have a number of rights, including the right to elect the board of directors, which sets policies for the fund. However, the shares can only be purchased in the primary market and then redeemed with the fund.
Which of the following are TRUE about testimonials used in a public communication? I. The person giving the testimonial must not be paid. II. If the person giving the testimonial was compensated, this must be indicated. III. It must be clearly stated that the listener's experience may be different from that described in the testimonial. IV. The qualifications of the person giving the testimonial need not be given.
The correct answer was - C: II and III. Explanation: The person giving a testimonial may be compensated, but this must be stated in the advertisement. In addition, his qualifications must be given if he is providing technical information or opinions that make it appropriate to do so. Reference: 4.1.5.3.1 in the License Exam Manual.
A closed-end investment company may issue each of the following EXCEPT: A) preferred stock. B) bonds. C) municipal bonds. D) common stock.
The correct answer was - C: municipal bonds. Explanation: Closed-end investment companies may issue both common and preferred shares as well as debt securities for capitalization. Only municipalities issue municipal bonds.
The NAV of a mutual fund Class A share: I. must be calculated at least twice per business day. II. can never be higher than the POP. III. can never be equal to the POP. IV. can never be so much lower than the POP that the difference exceeds 8.5% of the POP.
The correct answer was - C: II and IV. Explanation: The NAV of a mutual fund need be calculated only once per business day. For a Class A share, the investor pays NAV plus a front-end sales charge that may not exceed 8.5% of the POP. Thus, the offering-price range of a Class A mutual fund share is NAV at the lowest (some funds' highest breakpoint eliminates the front-end load entirely) and NAV + 8.5% of the POP at the highest. Reference: 4.2.2.2 in the License Exam Manual.
A registered representative is hosting a seminar to solicit sales of a specific mutual fund. He has highlighted features of the fund in the prospectuses he will hand out and has prepared summary sheets of the prospectus for distribution. Regarding this situation, which of the following statements are TRUE? I. It is acceptable to highlight the key points in the prospectus. II. A prospectus may not be highlighted. III. Distributing summary sheets of a prospectus is acceptable. IV. The representative may not distribute summary sheets of the prospectus.
The correct answer was - C: II and IV. Explanation: The registered representative may neither highlight portions of the prospectus nor distribute a summary sheet. Reference: 4.1.6 in the License Exam Manual.
Which of the following statements regarding the expense ratio of an open-end investment company is TRUE? A) It is computed exclusive of the management fee. B) It is computed taking into account the management fee only. C) It is computed inclusive of the management fee. D) It shows the extent of leverage in the fund.
The correct answer was - C: It is computed inclusive of the management fee. Explanation: The expense ratio includes the expenses of operating the fund compared to fund assets. Expenses included in the ratio are management fees, administrative fees, transaction costs, and taxes.
Your customer is a retired widower, age 72, seeking a moderate level of current income to supplement his Social Security benefits and his company pension plan. He has a very conservative attitude toward investments. An equally important investment goal for him is capital preservation. Which of the following mutual funds is the most suitable for this customer? A) ABC Investment-Grade Bond Fund. B) ABC Balanced Fund. C) LMN Government Income Fund. D) ACE Equity Income Fund.
The correct answer was - C: LMN Government Income Fund. Explanation: This customer requires maximum safety and current income. While all fixed-income funds aim to provide current income, the U.S. government bond fund offers the best combination of safety and a higher yield of the choices offered.
Filing at least ten business days before first use is required for which of the following? A) Any advertisement containing a ranking, published by an independent mutual fund ranking entity. B) Sales literature prepared by the AGH Insurance Company highlighting the performance of its variable annuity separate accounts over the last ten years. C) Mutual fund advertisements placed by a broker/dealer that became a member of FINRA 7 months ago. D) Correspondence.
The correct answer was - C: Mutual fund advertisements placed by a broker/dealer that became a member of FINRA 7 months ago. Explanation: All advertisements and sales literature prepared by members that have never filed before, whether a new firm or an existing one that has never advertised, must be filed ten business days before first use. Advertisements and sales literature dealing with investment companies and variable products are generally required to be filed within ten business days of first use. Reference: 4.1.4.1.1 in the License Exam Manual.
If your 60-year-old customer purchases a nonqualified variable annuity and withdraws some of her funds before the contract is annuitized, what are the consequences of this action? A) 10% penalty plus payment of ordinary income tax on all funds withdrawn. B) Capital gains tax on earnings exceeding basis. C) Ordinary income tax on earnings exceeding cost basis. D) 10% penalty plus payment of ordinary income tax on all funds withdrawn exceeding basis.
The correct answer was - C: Ordinary income tax on earnings exceeding cost basis. Explanation: Distributions from a nonqualified plan represent both a return of the original investment made in the plan with after-tax dollars (a nontaxable return of capital) and the income from that investment. The income was deferred from tax over the plan's life, so it is taxable as ordinary income once distributed. A 10% penalty applies only if distributions begin before age 59½.
While making an investment decision, a client of yours asks for information on funds of hedge funds. Which of the following characteristics of these funds must be part of your discussion with your client? A) Tax-free withdrawals. B) Federal government backing. C) Potential illiquidity. D) Protection of principal.
The correct answer was - C: Potential illiquidity. Explanation: Funds of hedge funds are mutual funds that invest in hedge funds, thus making hedge funds indirectly available to ordinary investors. The shares of a fund of hedge funds do not trade, nor are they redeemable unless the company chooses to redeem them. This makes the investment potentially illiquid.
Which of the following is NOT considered advertising or sales literature? A) Radio advertisement that describes a firm's range of services. B) Market letters sent to a firm's customers. C) Report sent to a firm's customers on recent changes in U.S. economic policy. D) Advertisement for the firm published in the telephone directory.
The correct answer was - C: Report sent to a firm's customers on recent changes in U.S. economic policy. Explanation: Publications of a general nature (i.e., not recommending securities or promoting a firm) are not considered advertising. Reference: 4.1.1 in the License Exam Manual.
A customer signed a letter of intent (LOI) stating that she would purchase $25,000 worth of ACE Fund over the next 13 months. After 13 months, she has invested only $12,000, and she wants to know what effect she can expect. Which of the following may you tell her? A) The entire amount is still due because she signed a binding contract when she signed the letter of intent. B) Her account will be charged a penalty fee. C) She will be charged whatever sales charge she is entitled to for the actual amount invested. D) She will automatically be charged the 8.5% maximum allowable sales charge.
The correct answer was - C: She will be charged whatever sales charge she is entitled to for the actual amount invested. Explanation: An LOI is not a binding contract on the customer, and she is not required to deposit the rest of the money. She will be entitled to the breakpoint for which her $12,000 investment qualifies. Reference: 4.2.2.2.2 in the License Exam Manual.
For a retiring investor, which of the following is the most important factor in determining a variable annuity investment's suitability? A) Whether the investor has concerns about taxes. B) That periodic payments into the contract may increase or decrease. C) That the annuity payout amount may increase or decrease. D) Whether the investor is married.
The correct answer was - C: That the annuity payout amount may increase or decrease. Explanation: The most important consideration in purchasing a variable annuity is that payments fluctuate with the separate account's investment performance.
Under which of the following circumstances may a securities-registered life insurance agent present a prospective applicant with a variable life insurance policy illustration showing a 12% rate of return? A) The life insurance operates as a rider to a variable annuity contract, where the annuity separate account has demonstrated average 12% performance over the preceding 10 years. B) The separate accounts past performance has averaged 12% over the ten years immediately preceding the policy illustration date. C) The prospective customer is also presented with a policy illustration showing a 0% (zero) return. D) The customer is unsophisticated.
The correct answer was - C: The prospective customer is also presented with a policy illustration showing a 0% (zero) return. Explanation: It is permissible for policy illustrations to indicate performance based on a given rate of return, up to a maximum hypothetical rate of 12%. However, to present an illustration based on a specific rate of return, the customer must also be provided with a policy illustration factored at a 0% rate of return. Reference: 4.1.7.6 in the License Exam Manual.
An issuer who sells mutual funds that have been registered under the Securities Act of 1933 is allowed to make which of the following statements? A) The SEC has passed on the accuracy of the information contained in the prospectus. B) The securities have been approved by the SEC. C) The securities offered are registered with the SEC. D) The SEC has passed on the adequacy of the information contained in the prospectus.
The correct answer was - C: The securities offered are registered with the SEC. Explanation: The SEC only clears or releases a security for sale. It neither approves nor disapproves the offering, nor does it pass on the accuracy or adequacy of the information contained in the prospectus. A disclaimer regarding this fact must be on the front page of the prospectus.
The KLP Fund is a blue-chip growth mutual fund that concentrates on the stock of manufacturing companies that have total capitalization of at least $7.5 billion. Bid prices on KLP shares have shown mild to moderate growth in recent years. In addressing a client for whom the fund appears to be a suitable investment, which of the following statements would NOT be permissible? A) KLP concentrates on the stock of manufacturing companies with at least $7.5 billion total capitalization. B) KLP has shown some growth in recent years, but this cannot be guaranteed to continue. C) With the size of the companies in KLP's portfolio, you can be sure that your fund shares will at least hold steady in value. D) The objective of a growth fund such as KLP is primarily to provide capital gains rather than income.
The correct answer was - C: With the size of the companies in KLP's portfolio, you can be sure that your fund shares will at least hold steady in value. Explanation: Actually predicting future performance for a nonexempt security is not permissible. Opinions may be offered, provided they are identified as opinions, not facts. Reference: 4.1.5.2.1 in the License Exam Manual.
You are recommending to your client a fund whose portfolio manager purchases stocks with a high price-to-earnings ratio. Which of the following best describes your customer? A) Very risk averse and looking for safety of principal. B) Retiring engineer interested in income. C) Young couple with reasonable income needing long-term growth. D) Well-to-do, well diversified in his investments, and interested in tax advantages.
The correct answer was - C: Young couple with reasonable income needing long-term growth. Explanation: Growth funds look for high price-to-earnings ratio stocks because the investor confidence expressed in the high stock price often indicates that the company, and its stock, will increase in value with time. The customer described is clearly the young couple, because they are willing to take risks in the hope that their money will grow in this fashion.
You are preparing a sales presentation for a customer whose portfolio you think would best be served by variable life insurance. You are considering several statements you might wish to make. Which of the following would be permitted? A) The performance of the investment portion of your account will be higher than the performance of our general account. B) You can plan on avoiding any negative return on the investment portion of your account. C) Your guaranteed minimum death benefit is backed by our AM Best A+ rating. D) Our AM Best A+ rating ensures that the principal value of the separate account is secure.
The correct answer was - C: Your guaranteed minimum death benefit is backed by our AM Best A+ rating. Explanation: While variable life insurance advertisements are required to include a 0% rate of return as one of the models in any hypothetical projection, that inclusion is not to be taken as a minimum guarantee. Separate account cash values are not guaranteed. Reference: 4.1.7.3 in the License Exam Manual.
A contingent deferred sales charge is best described as: A) a front-end load limited to 8.5% of the asking price of the shares. B) a service charge intended to offset the cost of providing communication between funds and shareholders. C) a back-end sales charge that decreases the longer the investor holds the shares. D) the charge made by the underwriter when an investor fails to meet the terms of a letter of intent.
The correct answer was - C: a back-end sales charge that decreases the longer the investor holds the shares. Explanation: A contingent deferred sales charge, assessed with Class B shares, is a back-end load that decreases over time. Typically, CDSCs begin at 5% or 6% and decrease at the rate of 1% per year invested. If an investor remains in a fund long enough, the charge decreases to 0%. Once the CDSC has dropped to 0%, the shares are typically converted to Class A shares, which not only have no back-end load but also have a lower expense ratio and lower 12b-1 fees. Reference: 4.2.2.3 in the License Exam Manual.
Written recommendations prepared by a research department need the prior approval of: A) the appropriate SRO. B) the SEC. C) a principal of the firm. D) the DOE.
The correct answer was - C: a principal of the firm. Explanation: Written recommendations prepared by the research department of a firm are classified as sales literature; a principal must review and approve the communication before use. Reference: 4.1.3 in the License Exam Manual.
If a registered representative wishes to place an advertisement in a local newspaper offering her services as a mutual fund representative for XYZ Funds, the advertisement must be approved by: A) FINRA. B) the SEC. C) a registered principal. D) her branch office manager.
The correct answer was - C: a registered principal. Explanation: All advertisements are subject to approval by a registered principal before use. A branch office manager is not necessarily a principal. Reference: 4.1.3 in the License Exam Manual.
All of the following items require review by a principal of the member firm EXCEPT: A) form letters mailed to existing customers. B) independently prepared reprints. C) a sales script that is marked for internal use only. D) form letters mailed to 25 or fewer prospective customers within a 30-day period.
The correct answer was - C: a sales script that is marked for internal use only. Explanation: The requirements for principal review do not apply to materials to be used internally. Reference: 4.1.4.1.3 in the License Exam Manual.
A mutual fund may temporarily suspend the redemption provision under all of the following circumstances EXCEPT: A) if an emergency condition exists and with SEC approval. B) if a suspension of the service is applied for and granted by the SEC. C) at the discretion of the investment company management. D) if the New York Stock Exchange is closed on a day other than a weekend or holiday.
The correct answer was - C: at the discretion of the investment company management. Explanation: The 7-day redemption guideline is law and may be suspended only with SEC permission, which generally requires an emergency condition of some sort, or if the NYSE is closed on a day other than customary holidays and weekends. Reference: 4.2.3 in the License Exam Manual.
ACE Fund has prepared a piece of sales literature to be distributed to individuals who respond to ACE's tombstone advertisement. If the fund sends the literature to a prospect, it must: A) contain instructions for obtaining a prospectus. B) contain the SEC disclaimer. C) be accompanied by a prospectus. D) include the good points contained in the prospectus.
The correct answer was - C: be accompanied by a prospectus. Explanation: Any solicitation requires a prospectus to be delivered before or during the solicitation. (Sales literature is solicitation.) Reference: 4.1.1.2 in the License Exam Manual.
Your firm is doing interviews of the top candidates from among those who responded to a recruiting advertisement. Advertising rules require that: A) the successful candidate be promised that she will hold the position for at least one year after being hired. B) rules do not cover recruitment advertisements or interviews. C) both the job opportunity and the industry itself be represented honestly. D) at least two positions be offered to successful candidates, so that they may make a choice.
The correct answer was - C: both the job opportunity and the industry itself be represented honestly. Explanation: In recruitment interviews, as in advertising, false or extravagant claims may not be made. Both the job opportunity and the industry must be represented honestly. Reference: 4.1.5.6 in the License Exam Manual.
Regarding investment companies, filing with FINRA is NOT required for: A) research reports. B) advertising. C) correspondence. D) market letters.
The correct answer was - C: correspondence. Explanation: All investment company advertising and sales literature must be approved by a principal and filed with FINRA. Correspondence must be reviewed or approved by a principal in a timely fashion, but there are no FINRA filing requirements. Reference: 4.1.3.2 in the License Exam Manual.
An investor in Class B shares with a 7 year contingent deferred sales charge liquidates shares four years after purchase. The CDSC is: A) deducted from the higher of the original cost or the NAV when those shares are redeemed. B) deducted from the lower of the original cost or the POP when those shares are redeemed. C) deducted from the lower of the original cost or the NAV when those shares are redeemed. D) ignored because the investor held those shares more than 50% of the 7-year period.
The correct answer was - C: deducted from the lower of the original cost or the NAV when those shares are redeemed. Explanation: If there is a 7-year CDSC, a redemption after four years will incur a charge. the sales charge is deferred until you sell, and the amount is contingent upon when you sell. When you sell, you receive the NAV minus the back-end load. It might start at 5% and drop to zero after 7 years. A mutual fund prospectus for a fund with B-shares will show you the declining back-end load. The actual amount of the back-end charge is based upon the lower of the next computed NAV or the original purchase price. Reference: 4.2.2.3 in the License Exam Manual.
The exchange privilege offered by open-end investment companies allows investors to: A) delay the payment of taxes on shares. B) purchase new fund shares from dividends. C) exchange shares of one open-end fund for another in the same fund family at a net asset value basis. D) exchange personally owned securities for shares of the investment company.
The correct answer was - C: exchange shares of one open-end fund for another in the same fund family at a net asset value basis. Explanation: Exchange privileges allow an investor to convert the value of shares held in one fund for those of an equal value in the same family. Remember that conversion is a taxable event; if the shares converted have increased in value, capital gains taxes will be due. Reference: 4.2.2.2.5 in the License Exam Manual.
A fund of funds is one that: A) has a portfolio consisting of large-capitalization securities only. B) keeps a large portion of its portfolio in money market instruments at all times. C) invests exclusively in other mutual funds. D) keeps at least 50% of its assets in cash at all times.
The correct answer was - C: invests exclusively in other mutual funds. Explanation: A fund of funds is one that invests exclusively in other mutual funds. Their investment objective and capitalization focus can be as varied as any other fund.
Although a mutual fund issuer has alternatives regarding the details of redemption procedures, by law the issuer must: A) redeem shares at the public offering price. B) redeem shares at the net asset value minus the sales charge. C) make payment for shares within seven days of tender. D) inform the investor of his loss or profit.
The correct answer was - C: make payment for shares within seven days of tender. Explanation: The Investment Company Act of 1940 requires an open-end investment company to redeem shares on request within seven days of receiving the request. Reference: 4.2.3 in the License Exam Manual.
A generic advertisement: A) is not required to be filed with FINRA. B) must mention the name of the investment being advertised. C) must include the name of the broker/dealer placing the advertisement. D) may describe performance as long as it is made clear that past results are no assurance of the future.
The correct answer was - C: must include the name of the broker/dealer placing the advertisement. Explanation: Why place an ad if potential buyers don't know who you are and how to reach you? So, the name of the firm placing the ad must be disclosed. A generic (no-name) ad can never mention the name of the specific security being advertised. That is why it is called a generic ad. Since no name can be mentioned, how can you show performance? Depending on the type of security being advertised, it may or may not have to be filed with FINRA. Reference: 4.1.2.6 in the License Exam Manual.
According to the Conduct Rules, a member firm may give certain selling concessions to: A) the general public. B) nonmember broker/dealers. C) other FINRA member firms. D) member firms of other exchanges who are not FINRA members.
The correct answer was - C: other FINRA member firms. Explanation: Members of FINRA may give other member firms concessions but must deal with the public and nonmembers at the public offering price. Reference: 4.2.1.1 in the License Exam Manual.
A broker/dealer member firm of FINRA would like to conduct business under another name. The use of a DBA is: A) permitted as long as some part of firm's actual name is included in the DBA. B) permitted as long as there is nothing misleading about the name. C) permitted if the name is filed with both FINRA and the SEC. D) never permitted.
The correct answer was - C: permitted if the name is filed with both FINRA and the SEC. Explanation: A fictional name, DBA (doing business as), or AKA (also known as) designation is permitted if the name is filed with FINRA and the SEC. Reference: 4.1.5.5.2 in the License Exam Manual.
When comparing investment alternatives, all of the following must be considered EXCEPT: A) relative after-tax returns, when appropriate. B) relative time period of returns on investment. C) state of incorporation of the companies. D) differences in risk exposure between the two companies.
The correct answer was - C: state of incorporation of the companies. Explanation: The state of incorporation is generally not a relevant factor when comparing investments. Reference: 4.1.5.2.1 in the License Exam Manual.
The total return of a mutual fund is equal to: A) the reinvestment of all unrealized dividend and capital gain income. B) annualized fund dividends divided by the current POP. C) the return attained by reinvestment of all dividend and capital gains distributions. D) all realized and unrealized capital appreciation.
The correct answer was - C: the return attained by reinvestment of all dividend and capital gains distributions. Explanation: The total return assumes reinvestment of all dividend and capital gains distributions. Reference: 4.1.6.1.1 in the License Exam Manual.
When evaluating the purchase of an immediate variable annuity for a retiree, the most important factor in determining suitability is: A) marital status of the annuitant. B) the time horizon over which the annuitant will be seeking payments. C) the uncertainty of the amount of the monthly check. D) tax status of the annuitant.
The correct answer was - C: the uncertainty of the amount of the monthly check. Explanation: The most important factor to consider in purchasing an immediate variable annuity is that monthly payments are subject to fluctuation based on the performance of the separate account.
Changes in payments on a variable annuity correspond most closely to fluctuations in the: A) prime rate. B) Dow Jones Industrial Average. C) value of underlying securities held in the separate account. D) cost of living.
The correct answer was - C: value of underlying securities held in the separate account. Explanation: Payments from a variable annuity depend on the securities' value in the separate account's underlying investment portfolio.
A broker/dealer with a sales agreement with a mutual fund must return all concessions to the underwriter if a customer redeems his shares: A) within ten business days of the initial purchase. B) within five business days of the initial purchase. C) within seven business days of the initial purchase. D) under no circumstances.
The correct answer was - C: within seven business days of the initial purchase. Explanation: If any security issued by a mutual fund is tendered for redemption within seven business days after the date of an initial transaction, the broker/dealer must refund to the underwriter the full concession allowed to the broker/dealer on the original sale. Reference: 4.2.3.1.1 in the License Exam Manual.
An investor redeems 200 shares of ABC Fund, which has no redemption fee. If the quote is $12.05 bid $13.01 asked, what amount will the investor receive? A) $2,275.50. B) $1,098. C) $2,602. D) $2,410.
The correct answer was - D: $2,410. Explanation: If a mutual fund has no redemption fee, the investor will receive the bid price per share (net asset value) multiplied by the number of shares being redeemed. In this case, the investor would receive $2,410 ($12.05 × 200 shares). Reference: 4.2.3 in the License Exam Manual.
An investor redeems 300 shares in ACE Fund. When the investor bought the shares at $12, the NAV was $11.08. If the current POP is $12.50 and the NAV is $11.80, the investor receives: A) $3,600. B) $3,750. C) $3,324. D) $3,540.
The correct answer was - D: $3,540. Explanation: Shares are redeemed at NAV. If the investor redeems 300 shares at an NAV of $11.80, he receives $3,540 (300 × $11.80). Reference: 4.2.3 in the License Exam Manual.
The GEM Fund Group offers a combination privilege and has breakpoints for its Class A shares as follows: $10,000 - $24,999 4% $25,000 - $49,999 3% $50,000 - $99,999 2% $100,000 - $249,999 1.5% $250,000 - $499,999 1.0% $500,000 and over 0.0% If your client signs a letter of intent for $100,000 and makes an initial deposit of $25,000, the amount of sales charge on that purchase would be: A) $1,000. B) $750. C) $500. D) $375.
The correct answer was - D: $375. Explanation: When one signs a letter of intent, the sales charge is applicable to the dollar amount designated in the letter. In this case, the amount of $100,000 has a 1.5% sales load; 1.5% × $25,000 invested equals a $375 sales charge on the initial purchase. Reference: 4.2.2.2.2 in the License Exam Manual.
Under SEC rules, a mutual fund that receives a request to provide a statement of additional information (SAI) must respond within how many business days? A) seven days. B) five days. C) four days. D) three days.
The correct answer was - D: three days. Explanation: If a customer requests semi-annual or annual reports or a statement of additional information (SAI), the fund must comply within three business days of the request. Reference: 4.1.6.1.5 in the License Exam Manual.
XYZ Technology Fund permits rights of accumulation. A shareholder has invested $9,000 and signed a letter of intent for a $15,000 investment. If his reinvested dividends during the 13 months total $720, how much money must he contribute to fulfill the letter of intent? A) $5,280. B) $9,000. C) $15,000. D) $6,000.
The correct answer was - D: $6,000. Explanation: The shareholder must contribute the full $15,000, so he owes an additional $6,000. Reinvested dividends and changes in the NAV do not count toward a breakpoint during the period of a letter of intent. Reference: 4.2.2.2.3 in the License Exam Manual.
There are retention requirements for certain records of a broker/dealer. One of those is the firm's advertising files. Under FINRA rules, copies of advertising must be retained for: A) 6 years after last use. B) 3 years after first use. C) 6 years after first use. D) 3 years after last use.
The correct answer was - D: 3 years after last use. Explanation: Although the file must be started from the date of first use, the 3 years record retention requirement begins from the date of final use of the advertising piece. Reference: 4.1.4 in the License Exam Manual.
A policy loan provision must be offered by the insurer after three years, allowing the variable life policy contract holder to borrow at least what percentage of cash value? A) 100% B) 125% C) 90% D) 75%
The correct answer was - D: 75% Explanation: The minimum that must be available in a VLI contract after three years is 75% of cash value.
Which of the following funds may issue more than one type of security? A) ATF Open-End Bond Fund. B) NavCo Unit Investment Trust. C) ABC Open-End Growth Fund. D) ACE Closed-End Fund.
The correct answer was - D: ACE Closed-End Fund. Explanation: Closed-end investment companies may raise capital through the issuance of common stock, preferred stock, and bonds. Open-end companies may issue only redeemable common stock.
In which of the following ways is advertising different from sales literature? A) Advertising must be kept on file for three years; sales literature has no such requirement. B) Advertising is promotional; sales literature is not. C) Advertising is a communication with the public; sales literature is not. D) Advertising is not targeted to a specific audience; sales literature is.
The correct answer was - D: Advertising is not targeted to a specific audience; sales literature is. Explanation: Advertising is aimed at the general public through such media as radio, television, newspapers, magazines, Websites, and billboards. Sales literature is given or mailed to a specific set of recipients. Reference: 4.1.1 in the License Exam Manual.
After opening an account with a mutual fund, in which of the following minimum amounts may an investor generally make additional periodic investments? A) $500.00 B) $100.00 C) $50.00 D) An amount that varies from fund to fund.
The correct answer was - D: An amount that varies from fund to fund. Explanation: Minimum investment amounts differ from fund to fund, and a registered representative must refer to the prospectus for each fund. Reference: 4.1.6.2.1 in the License Exam Manual.
Which of the following is classified as advertising, not sales literature? A) Market letter. B) Research report. C) Telemarketing script. D) Broadcast of a radio commercial.
The correct answer was - D: Broadcast of a radio commercial. Explanation: Of the choices listed, only the radio commercial uses public media and is considered advertising. The other choices describe communications that do not use public media and are therefore classified as sales literature. Reference: 4.1.1.1 in the License Exam Manual.
Investors with a short time horizon most likely will invest in which class of mutual fund shares? A) A, then convert to B. B) A. C) B. D) C.
The correct answer was - D: C. Explanation: Class C shares may be less expensive than Class A or B shares for investors with a short time horizon. A shares do not convert to B shares. Reference: 4.2.2.4 in the License Exam Manual.
An investor with a long time horizon and $100,000 to invest would most likely be interested in: A) Class B shares. B) Class C shares. C) B shares that convert to A shares. D) Class A shares.
The correct answer was - D: Class A shares. Explanation: Class A shares would be most attractive because of their lower expense ratio and 12b-1 fees, as well as the reduced sales charges to be expected from breakpoints to be expected by the investor's large purchase. Reference: 4.2.2.2 in the License Exam Manual.
Which of the following mutual fund share classes has no back-end load, lower operating expenses, and low or no 12b-1 fees? A) Class C upon conversion to Class B. B) Class B. C) Class C. D) Class A.
The correct answer was - D: Class A. Explanation: Class A shares, also known as front-end load shares, have an up-front sales charge that is usually subject to breakpoints. They have no back-end load and are sold with low or no 12b-1 fee and lower operating expenses. Reference: 4.2.2.2 in the License Exam Manual.
Mutual fund shares that have a high 12b-1 fee and are back-end loaded are: A) Class C shares. B) Class A shares. C) No-load funds. D) Class B shares.
The correct answer was - D: Class B shares. Explanation: Class B shares charge a contingent deferred sales charge or back-end load. This is paid when shares are redeemed. The shares also have a 12b-1 fee that is typically higher than Class A shares. Reference: 4.2.2.3 in the License Exam Manual.
Your customer has inherited $25,000, with which he would like to make a onetime, long-term investment for growth. Of the funds you recommend to him, he has selected one that offers A-, B-, and Cclass shares. Which should he purchase? A) Class A to begin with, then redeem and reinvest in Class C. B) Class C. C) Class A. D) Class B.
The correct answer was - D: Class B. Explanation: B shares are purchased at NAV and have a contingent back-end load, which decreases as the money is left in the fund. Because this investment is long term, your customer will probably pay the minimum sales charge upon redemption. Class A shares have breakpoints to reduce their front-end load, but $25,000 probably will not qualify for much reduction. Class C shares have a 12b-1 fee deducted each year and will probably result in higher sales charges in the long term, since the fee never discontinues. Reference: 4.2.2.3 in the License Exam Manual.
Shares of which of the following classes may eventually convert to another share class? A) No-load shares. B) Class A. C) Class C. D) Class B.
The correct answer was - D: Class B. Explanation: Class B shares often convert to Class A shares after the contingent deferred sales charge has expired. Reference: 4.2.2.3 in the License Exam Manual.
A 45-year-old woman wants the greatest possible monthly income with the preservation and stability of capital as secondary objectives. Which of the following investments would you recommend? A) Money market mutual fund. B) Growth and income fund. C) Growth mutual fund. D) High-grade bond fund.
The correct answer was - D: High-grade bond fund. Explanation: A high-grade bond fund is the most appropriate of the choices for a 45-year-old who wants the greatest possible monthly income with preservation of capital and stability.
A prospect receives a telephone solicitation from a registered representative at KPF Brokerage Firm. Under which of the following conditions is this solicitation exempt from the Telephone Consumer Protection Act of 1991? I. The individual, who is not a customer, asked the representative to call him. II. The individual is an active trader with an account at KPF. III. The individual is an active trader with an account at another firm. IV. The representative received permission to make the call from a principal of the firm.
The correct answer was - D: I and II. Explanation: The Telephone Consumer Protection Act of 1991 exempts calls made to established customers and calls made at the invitation of prospective customers. A registered principal does not have the authority to exempt calls from the act's provisions. Reference: 4.1.8 in the License Exam Manual.
Customer A and Customer B each have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments? I. Receiving cash distributions may reduce Customer A's proportional interest in the fund. II. Customer A may use the cash distributions to purchase shares later at NAV. III. Customer B's reinvestments purchase additional shares at NAV rather than at the offering price. IV. Due to compounding, Customer B's principal will be at greater risk.
The correct answer was - D: I and III. Explanation: If the customer elects to receive distributions in cash while other investors purchase shares through reinvestment, his proportional interest in the fund will decline. Automatic reinvestment is always at NAV.
When the annual report of a mutual fund is used as sales literature, which of the following statements are TRUE? I. The principal of the firm must approve its use for that purpose. II. A prospectus need not accompany the report, provided it includes instructions for obtaining a prospectus. III. The figures contained in the report must be as of a specific date. IV. The report must contain a list of the industries in which the fund invests.
The correct answer was - D: I and III. Explanation: The principal of the firm must approve the use of the annual report as sales literature, and the figures contained must be current and complete. A prospectus is always required, as is a complete portfolio list, not merely a list of industries in which the fund invests. Reference: 4.1.1.2 in the License Exam Manual.
For a mutual fund that collects a 12b-1 fee, which of the following statements are TRUE? I. The fund may use the money to pay for mailing sales literature. II. Advertising materials must always state that the fund is no-load. III. The fund may use the money to pay for commissions on portfolio transactions. IV. The fund's prospectus must disclose the fee.
The correct answer was - D: I and IV. Explanation: 12b-1 fees may be used only to cover promotional and other distribution expenses for funds that are distributors of their own shares; fee amounts must be disclosed in the prospectus. The fund may not use the term no-load in any communications with the public if the 12b-1 fee and other service fees exceed .25% of average net assets.
Which of the following is accurate with regard to using a summary prospectus for the sale of a mutual fund? I. A statutory prospectus must precede or accompany delivery of the summary prospectus II. A statutory prospectus may be delivered after the summary prospectus III. Electronic delivery of the statutory prospectus is allowed after the sale IV. A paper prospectus must be delivered within three days of the sale
The correct answer was - D: II and III Explanation: The summary prospectus may include an application for sale. The statutory or full prospectus may be delivered after the sale as long as the summary prospectus discloses the availability of obtaining it either online or via a toll-free number. If a paper copy is requested, it must be sent within three business days. Reference: 4.1.1.2 in the License Exam Manual.
Which of the following would be characteristic of money market mutual funds? I. High volatility. II. Low volatility. III. A portfolio consisting of short-term securities. IV. A portfolio consisting of long-term securities.
The correct answer was - D: II and III. Explanation: A money market mutual fund portfolio consists of high-quality, short-term debt securities. The volatility of money market shares is managed to be very low and is reflected in the fund's very low beta coefficient.
Which of the following are characteristics of exchange-traded funds (ETFs)? I. They are redeemable securities. II. They are priced by supply and demand. III. They are designed to track an index. IV. They try to diversify within a particular industry.
The correct answer was - D: II and III. Explanation: Exchange-traded funds have many similarities to closed-end investment companies. They are traded rather than redeemed and are typically designed to track a particular index, such as the S&P 500.
If an investment representative hosts an investment seminar and intends to discuss general investment concepts and a specific mutual fund for which he has performance charts, which of the following are TRUE? I. He may discuss the investment returns of the mutual fund in general, provided he does not use a specific time frame. II. He may discuss the investment returns of the mutual fund using a specific time frame. III. He must disclose all material facts regarding the mutual fund to the audience. IV. He may emphasize the positive aspects of the mutual fund and refer prospective investors to the prospectus for further details.
The correct answer was - D: II and III. Explanation: He may discuss the investment returns of the mutual fund as long as he uses a specific time frame. When discussing an investment, he must disclose all material facts pertaining to the investment, both negative and positive. Reference: 4.1.5.2.1 in the License Exam Manual.
Which of the following actions comes under the guidelines concerning communication with the public? I. Posting an internal memo giving sales tips to registered representatives. II. Distributing a letter to all clients regarding a new mutual fund family. III. Distributing copies of a magazine article about investment opportunities. IV. Sending a written note to a noncustomer inviting him to a birthday party.
The correct answer was - D: II and III. Explanation: Sales literature is any public solicitation concerning securities issued by a FINRA member firm. Internal memos and non-securities-related material are not included. Reference: 4.1.1 in the License Exam Manual.
Which of the following statements regarding the Cold-Calling Rule are TRUE? I. The rule imposes a time limit on the length of a call to a customer. II. Cold calls may not be made before 8:00 am or after 9:00 pm in the contact's time zone. III. Upon request, contact names must be placed on a Do-Not-Call list and the request must be honored. IV. Faxes may be sent at any time of the day on an unsolicited basis.
The correct answer was - D: II and III. Explanation: The Cold-Calling Rule restricts the time during which cold callers may telephone prospects but does not restrict conversations with customers. Faxes may not be sent to the homes or offices of noncustomers unless requested. Firms must maintain Do-Not-Call lists and train their representatives in their use. Reference: 4.1.8 in the License Exam Manual.
Which of the following may a registered representative use to solicit an order for open-end investment company shares? I. An annual report. II. A prospectus. III. A summary prospectus. IV. A preliminary prospectus.
The correct answer was - D: II and III. Explanation: The prospectus, sometimes referred to as the statutory or final prospectus, is the most complete one and may always be used. A summary prospectus, sometimes called a Rule 498 summary, may also be used as long as the client will be mailed a final prospectus within 3 business days or given access to a downloadable one online. A preliminary prospectus (red herring) may NEVER be used to solicit anything more than an indication of interest - not an order. Reference: 4.1.6.1.5 in the License Exam Manual.
Which of the following types of annuity contracts could your customer NOT purchase? A) Single payment deferred annuity. B) Periodic payment deferred annuity. C) Single payment immediate life annuity. D) Periodic payment immediate life annuity.
The correct answer was - D: Periodic payment immediate life annuity. Explanation: Periodic payment annuities may be purchased only on a deferred basis. Annuitization and regular payments into an annuity may not occur simultaneously.
Under the advertising and sales literature rules, a money market mutual fund with a portfolio composed primarily of U.S. government short-term obligations and an NAV that has never varied from $1 per share, may state which of the following? A) The fund's portfolio is invested principally in U.S. government short-term debt instruments. Because these investments are guaranteed by the full faith and credit of the U.S. government, the fund provides guaranteed protection from default and loss of principal for its investors. B) The portfolio of the fund is principally invested in U.S. government short-term debt instruments, and an NAV of $1 will be maintained. C) Money market mutual funds invested primarily in U.S. Treasury bills will maintain a stability of NAV at $1 per share, because T-bills are guaranteed to mature at face amount and are backed by the full faith and credit of the U.S. government. D) The fund has a portfolio invested primarily in short-term U.S. government debt instruments for stability of principal and regular interest. Since the inception of the fund, the NAV has never varied from $1. The fund will make every effort to maintain the NAV at $1; however, past performance is not an indicator of future results.
The correct answer was - D: The fund has a portfolio invested primarily in short-term U.S. government debt instruments for stability of principal and regular interest. Since the inception of the fund, the NAV has never varied from $1. The fund will make every effort to maintain the NAV at $1; however, past performance is not an indicator of future results. Explanation: Even when fully invested in U.S. government securities, money market mutual funds are specifically prohibited from implying a government guarantee or insurance on their portfolios. The principal value of these instruments is continually subject to market value fluctuation. Mutual funds may state their past performance history with the caveat that past performance is not an indicator of future results. Reference: 4.1.5.2.1 in the License Exam Manual.
When an agent explains mutual funds to a prospective investor, which of the following statements may be made? A) A fund always redeems shares at NAV, with little chance of a financial loss. B) Mutual fund shares are liquid and may be switched from fund to fund without tax liability. C) Mutual funds must make payment within seven days of a redemption request and guarantee a return of the original investment. D) The redemption value of mutual fund shares fluctuates according to the fund's portfolio value.
The correct answer was - D: The redemption value of mutual fund shares fluctuates according to the fund's portfolio value. Explanation: Mutual fund redemption values fluctuate according to the value of the securities in the portfolio. The tax liabilities associated with mutual fund switching may not be glossed over. While the redemption rules of the Investment Company Act of 1940 do make mutual funds easily redeemable, investors are not guaranteed to receive an amount equal to the original investment. Reference: 4.1.5.2.1 in the License Exam Manual.
In promoting a variable life insurance contract to a customer, which of the following statements would be permissible? A) Variable life insurance gets you a higher death benefit for less money. B) If you already have a variable annuity, you can exchange it for this type of insurance with no adverse tax consequences. C) This product is a good investment for anyone wishing to provide for retirement. D) This product gives you the possibility of a greater death benefit in exchange for accepting investment risk.
The correct answer was - D: This product gives you the possibility of a greater death benefit in exchange for accepting investment risk. Explanation: Variable life insurance may be sold only as an insurance device, not as a retirement device. Under Section 1035, insurance may be exchanged for an annuity without adverse tax consequences, but not the reverse. Reference: 4.1.7.1 in the License Exam Manual.
When must a mutual fund investor receive a statement of additional information (SAI)? A) Quarterly. B) With the audited annual report. C) With the semiannual financial report. D) Upon request.
The correct answer was - D: Upon request. Explanation: The statement of additional information (SAI) must be available to all investors upon request; there is no required distribution. The cover page of a prospectus states that an investor is entitled to such additional information. Reference: 4.1.6.1.5 in the License Exam Manual.
All of the following would be subject to the Conduct Rules regarding public appearances EXCEPT: A) a seminar discussing the products your firm has available for sale. B) an Internet chat room. C) a presentation at a high school about mutual funds. D) an advertisement on the radio saying that your offices have moved.
The correct answer was - D: an advertisement on the radio saying that your offices have moved. Explanation: A radio ad is not a public appearance, because it is not interactive. The other choices fit into the definition of public appearance and are required to meet the standards for public communications. Reference: 4.1.2.2 in the License Exam Manual.
A national financial magazine advertisement for ABC mutual funds is permitted to include all of the following EXCEPT: A) the telephone number of the sponsoring brokerage firm to contact for additional information. B) an application to receive a prospectus. C) past performance of the mutual fund. D) an application to invest.
The correct answer was - D: an application to invest. Explanation: Mutual fund advertisements may not include an application to invest, since all applications to invest must be accompanied by a prospectus. Mutual fund advertising may include past performance (but no future projections) and a firm's telephone number for obtaining additional information and a prospectus. Reference: 4.1.6.1.4 in the License Exam Manual.
As written in the Investment Company Act of 1940, all of the following statements are true EXCEPT: A) an investment company must have at least $100,000 capitalization to be offered to the public. B) shareholders have the right to vote on a company's change from a closed-end to an open-end investment company. C) open-end investment companies must redeem securities within seven days after a redemption request. D) an investment company's board of directors may be composed of up to 70% of the company's interested persons.
The correct answer was - D: an investment company's board of directors may be composed of up to 70% of the company's interested persons. Explanation: At least 40% of the board of directors must be noninterested persons. No more than 60% may be interested persons of the investment company.
The rules on communications with the public permit a member firm to exclude mention of its name in an advertisement that: A) appears on a television program sponsored by the firm. B) announces the promotion of three individuals to vice president. C) offers a research report prepared by a firm other than the member sending the report. D) attempts to recruit registered representatives for the local branch office.
The correct answer was - D: attempts to recruit registered representatives for the local branch office. Explanation: Recruitment advertising is the only form of communication with the public that is not required to include the name of the member firm. Reference: 4.1.5.6 in the License Exam Manual.
A client who is a manager of a pension plan has recently liquidated approximately $1 million in securities and now has only cash and cash equivalents in the account. This client's outlook concerning the market is: A) bullish. B) neutral. C) unknown. D) bearish.
The correct answer was - D: bearish. Explanation: Since the investor has moved all assets into cash or cash equivalents, the investor must expect a bear market and is taking this action in an attempt to protect against incurring losses from the anticipated market decline.
A customer with an aggressive growth investment objective and short-term (6- to 12-month) time horizon wants to invest $50,000 in a mutual fund. He has a substantial net worth, but none of it is invested in mutual funds. You inform him that mutual fund investments are intended to be long-term investments, but he expresses his intention to make the short-term investment anyway. If the XYZ fund family (one you have dealt with in the past) offers an aggressive growth fund that has a respectable track record, your recommendation should be to: A) buy the XYZ Aggressive Growth Class A shares with a 4% load and 0.25% 12b-1 fee. B) buy the XYZ Aggressive Growth Class B shares with a declining CDSC and 0.75% 12b-1 fee. C) decline the transaction because short-term trading of funds is not allowed. D) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in one year and .75 12b-1 fee.
The correct answer was - D: buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in one year and .75 12b-1 fee. Explanation: If the client insists on making this type of investment, then the Class C shares are most appropriate for this customer's objectives; the sales load would be lower than that of either Class A or Class B shares. Reference: 4.2.2.4 in the License Exam Manual.
Some open-end investment companies offer their investors combination privileges which permit an investor to: A) combine capital gains and dividend income to calculate the combined yield. B) receive capital gains distributions in cash combined with reinvesting dividend distributions and avoid taxes on both. C) combine dividends from a growth fund with dividends of an income fund to calculate the current yield of the income fund. D) combine the investments of one fund with another in the same fund family to reach a breakpoint.
The correct answer was - D: combine the investments of one fund with another in the same fund family to reach a breakpoint. Explanation: Combination privileges allow mutual fund shareholders to combine separate investments in two or more funds with the same family to reach a breakpoint. Reference: 4.2.2.2.4 in the License Exam Manual.
An XYZ open-ended bond fund advertising its returns must show all of the following EXCEPT: A) total returns quotations based on the most recent calendar quarter. B) share prices based on the highest possible sales charge. C) average annual total returns for one-, five-, and ten-year periods. D) current yield based on annual dividends and capital gains divided by POP.
The correct answer was - D: current yield based on annual dividends and capital gains divided by POP. Explanation: Current yield is calculated by dividing annual dividends by the POP; capital gains may not be included. Reference: 4.1.6.1.2 in the License Exam Manual.
You would like to support a recommendation to a customer by discussing some of your past recommendations. If you do this, you must be sure to do all of the following EXCEPT: A) give the market's general direction at the time of a recommendation that worked out favorably. B) give the general price range of the recommended security at the time you made the recommendation. C) discuss both your successful and your unsuccessful recommendations. D) discuss recommendations you made in the type of securities you are most experienced with, not necessarily those now under discussion.
The correct answer was - D: discuss recommendations you made in the type of securities you are most experienced with, not necessarily those now under discussion. Explanation: When showing recommendations, you must show ALL of them, you can't "cherry-pick" the ones you wish. Reference: 4.1.5.2.1 in the License Exam Manual.
All of the following are included under the terms advertising and sales literature EXCEPT: A) research reports. B) market letters. C) billboards. D) internal memos.
The correct answer was - D: internal memos. Explanation: The terms advertising and sales literature refer only to materials prepared for publication or broadcast to a mass audience (advertising) or specific audience (sales literature). Materials intended for internal use within a broker/dealer's organization are not included. Reference: 4.1.1 in the License Exam Manual.
ALFA Securities, a FINRA member firm, wants to buy shares in ATF Mutual Fund from the fund's sponsor at a discount. This arrangement is possible if ATF's sponsor: A) is not a FINRA member. B) although not a FINRA member, has a sales agreement with ALFA Securities. C) agrees to pay out the full sales charge as concession. D) is also a FINRA member and there is a sales agreement between ALFA and the sponsor.
The correct answer was - D: is also a FINRA member and there is a sales agreement between ALFA and the sponsor. Explanation: This arrangement is possible if both firms are FINRA members and a sales agreement is in effect. Reference: 4.2.1.4 in the License Exam Manual.
An investment company must register with the SEC and, in doing so, must provide all of the following information EXCEPT: A) its intention to borrow money. B) its present or future plans to issue senior securities. C) its intention to concentrate its investments in a single industry. D) its past performance.
The correct answer was - D: its past performance. Explanation: A registration statement or disclosure must describe any intent to borrow money or issue senior securities. A company's concentration of investments is part of its required investment policy description. There is no requirement to describe past performance to the SEC.
In the sale of open-end investment company shares, the prospectus: A) must be delivered before the sales solicitation. B) may be delivered within 5 business days after the sale. C) is not necessary. D) must be delivered to the client either before or during the sales solicitation.
The correct answer was - D: must be delivered to the client either before or during the sales solicitation. Explanation: The sale of mutual fund shares requires that the client receive the prospectus before, or during, a sales solicitation.
One risk of a withdrawal plan is that the: A) cost basis of the shares is high. B) plan is illegal in many states. C) sales charge for the service is high. D) principal value fluctuates.
The correct answer was - D: principal value fluctuates. Explanation: Withdrawal plans have no guarantee of payment; the investor's account value is subject to market fluctuations. Thus, there is uncertainty as to the amount available or the time required to withdraw it.
All of the following are considered advertising or sales literature EXCEPT: A) research reports. B) market letters. C) telephone directory advertisements. D) prospectuses.
The correct answer was - D: prospectuses. Explanation: Prospectuses are not considered advertising or sales literature, as they are prepared by issuers and not broker/dealers. Reference: 4.1.1 in the License Exam Manual.
The definition of sales literature includes: A) reprints of published news articles. B) seminar appearances. C) billboards. D) research reports.
The correct answer was - D: research reports. Explanation: Research reports are considered sales literature under the rules dealing with communications with the public. Billboards are advertising; reprints of published articles are independently prepared reprints; seminar appearances are public appearances. Reference: 4.1.1.2 in the License Exam Manual.
All of the following charges are included in the computation of a mutual fund's expense ratio EXCEPT the: A) fee paid to board members. B) investment adviser fee. C) transfer agent fee. D) sales load paid to the underwriters.
The correct answer was - D: sales load paid to the underwriters. Explanation: The expense ratio of a mutual fund is calculated by dividing the expenses of the fund by the fund's average net assets. Fund expenses include the fee paid to board members, the investment adviser's fee, the custodian's fee, the transfer agent's fee, and related expenses. The sales load paid to the underwriters is not an expense to the fund; it is a cost to the investor.
All of the following actions are potential violations EXCEPT: A) avoiding mention of recent negative publicity regarding an investment being offered to customers. B) comparing a bond fund to an equity fund, for a customer whose objective is growth. C) assuring customers that an investment will outperform a market index over the next year. D) sending a copy of a newspaper article (with supervisory approval) about a company whose stock is being solicited.
The correct answer was - D: sending a copy of a newspaper article (with supervisory approval) about a company whose stock is being solicited. Explanation: Sending a copy of a newspaper article with supervisory approval is permissible. The other choices are potential violations. Reference: 4.1 in the License Exam Manual.
All of the following regarding money market funds are true EXCEPT: A) they are managed so that their net asset values remain within narrow limits. B) the underlying portfolios are normally made up of short-term debt instruments. C) they are typically offered as no-load investments. D) such funds tend to be very volatile reflecting their high beta coefficient.
The correct answer was - D: such funds tend to be very volatile reflecting their high beta coefficient. Explanation: Money market funds have a very low beta coefficient and are managed so that the price is kept at $1 per share.
As a new securities product, variable life insurance must be registered under: A) the Securities Exchange Act of 1934. B) the Trust Indenture Act of 1939. C) the Investment Advisers Act of 1940. D) the Securities Act of 1933.
The correct answer was - D: the Securities Act of 1933. Explanation: Because of the separate account, these contracts must be sold with a prospectus, and therefore be registered under the Securities Act of 1933.
Performance charts of a particular mutual fund must be based on an assumption that the investor paid: A) no sales charge. B) the lowest sales charge. C) the average sales charge. D) the highest sales charge.
The correct answer was - D: the highest sales charge. Explanation: It would be misleading to base performance charts on anything other than the highest sales charge. Reference: 4.1.6.2 in the License Exam Manual.
A generic ad for an investment company placed by a broker/dealer would contain: A) both the name of the investment company and the broker/dealer. B) neither the name of the investment company nor the broker/dealer. C) the name of the investment company, but not the name of the broker/dealer. D) the name of the broker/dealer placing the ad, but not the name of the investment company.
The correct answer was - D: the name of the broker/dealer placing the ad, but not the name of the investment company. Explanation: Generic advertising of investment companies presents a nonspecific introduction to investment company shares. A specific fund or investment company is not mentioned in generic advertising, but the broker/dealer who is placing the ad must be named. Reference: 4.1.2.6 in the License Exam Manual.
Mutual fund advertising material may predict a rise in share prices: A) if it is directed to experienced investors. B) if the customer signs a letter acknowledging that there are no guarantees on price performance. C) if the preparer is assured the price will rise on the basis of past performance. D) under no circumstances.
The correct answer was - D: under no circumstances. Explanation: Predictions in mutual fund advertising material, sales literature, and correspondence are a violation of the Conduct Rules. Reference: 4.1.5.2.1 in the License Exam Manual.
Contractual plan companies are: A) closed-end investment companies. B) registered as investment advisers. C) open-end investment companies. D) unit investment trusts.
The correct answer was - D: unit investment trusts. Explanation: Contractual plans are no longer sold, but there are still contracts in effect. Contractual plan companies are registered as unit investment trusts and hold the shares of a mutual fund on behalf of the plan participants. Plan companies do not provide investment advice.
An 18-year-old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. Her intent was to use the funds for the down payment on a house after graduation. Her agent recommended she choose a variable annuity as a safe haven for the funds. This recommendation is: A) suitable due to the relative safety of the investment. B) suitable due to the death benefit features of a variable annuity. C) unsuitable because the return on something as conservative as a variable annuity tends to be low. D) unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits.
The correct answer was - D: unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. Explanation: This customer has no spouse or dependents, which negates the value of the death benefit. The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59½.
An investor must be provided with a statement of additional information about a mutual fund: A) at the same time she receives the prospectus. B) any time after she receives the prospectus. C) annually. D) upon request.
The correct answer was - D: upon request. Explanation: An investor must be given the statement of additional information (SAI) within three days of receipt of a request for one. The SAI typically contains the fund's consolidated financial statements, including the balance sheet, statement of operations, income statement, and portfolio list at the time the statement was compiled. Reference: 4.1.6.1.5 in the License Exam Manual.
A 7% bond is quoted with a yield-to-maturity of 4.5%. The next time interest is paid, an investor who owns $1,000 face amount of the bonds will receive A) $45 B) $70 C) $35 D) $22.50
The correct answer was: $35 The bond is a 7% bond. When the yield-to maturity is less than the coupon of 7%, which indicates the bond is selling at a premium (but has no bearing on the amount of interest paid). The total amount paid each year on 1 bond is $70. The amount of semi-annual interest is $35.
Under the Investment Company Act of 1940, which of the following describes an investment company? A) A company that offers investment advice to new companies. B) A company formed to underwrite the issuance of new securities. C) A group of individuals formed for mutual interest and benefits. D) A company whose primary business is investing its owners' money in securities issued by other companies.
The correct answer was: A company whose primary business is investing its owners' money in securities issued by other companies. An investment company is a corporation or trust whose only business is investing its owners' money in the securities of other companies instead of manufacturing goods or providing services. The company must have a clearly defined investment objective.
With regard to Regulation S-P, all of the following are true EXCEPT: A) A financial institution may not disclose nonpublic personal information to a nonaffiliated third party unless the customer has given permission to do so. B) the consumer must be given the opportunity, before any information is initially disclosed, to direct that information not be disclosed to a third party. C) Disclosure of a firm's policies and procedures regarding customer privacy must be made no later than when the customer relationship is established. D) Examples of nonpublic personal information include a social security number and drivers license number.
The correct answer was: A financial institution may not disclose nonpublic personal information to a nonaffiliated third party unless the customer has given permission to do so. A financial institution may not disclose nonpublic personal information to a nonaffiliated third party unless proper disclosures are made and the consumer is given an explanation of how to opt out of the sharing of information.
Robert obtained the designation of "Retirement Specialist" by paying a $300 membership fee and maintains it via a $100 annual renewal fee. His use of this designation when promoting himself may be viewed by FINRA in which of the following ways? A) A possible violation of several FINRA rules and antifraud provisions of the SEC B) Only permissible if the cost of membership is disclosed C) Allowed if pre-approved by a principal of the firm D) Permitted for oral communications but not written communications
The correct answer was: A possible violation of several FINRA rules and antifraud provisions of the SEC Writing a check to obtain a designation is not a legitimate designation. Firms that allow the use of any title or designation that conveys an expertise in senior investments or retirement planning where such expertise does not exist may violate several SRO rules and possibly antifraud provisions of the SEC.
All of the following securities would be suitable investments for a traditional IRA EXCEPT: A) AAA municipal bonds. B) Blue chip common stocks. C) AAA U.S. government agency bonds. D) A corporate bonds.
The correct answer was: AAA municipal bonds. Municipal bonds, which generate tax-free interest income, are unsuitable for retirement plans. One loses the federally tax-free income at distribution.
If all other factors are equal, an investor would expect which type of preferred stock to pay the highest stated dividend rate? A) Callable. B) Straight. C) Convertible. D) Cumulative.
The correct answer was: Callable. When the stock is called, dividend payments are no longer made. With callable preferred stock, to compensate for that possibility, the issuer pays a higher dividend than with straight preferred. Cumulative and convertible preferred have positive characteristics that would justify a lower fixed dividend than straight.
Your customer has just inherited $5,000. She wishes to invest it for long- term growth and has asked for your recommendation. Which of the following recommendations would be the least suitable? A) Class A shares of the KPF Long-Term Corporate Bond Fund. B) Class A shares of the MPQ Diversified Growth Fund. C) Class B Shares of the MPQ Diversified Growth Fund. D) Class B Shares of the KPF Long-Term Corporate Bond fund.
The correct answer was: Class A shares of the KPF Long-Term Corporate Bond Fund. The KPF bond fund does not meet the customer's investment objective of long-term growth so we're going to have to select the least suitable of the two choices given. This customer's investment of $5,000 will qualify for very few, if any, breakpoints. To avoid a front-end load, she should buy Class B shares, which have no breakpoints and which eventually convert to Class A shares after some years, losing even their back-end load. Thus a purchase of Class A shares of a bond fund is the least suitable recommendation.
If a customer has securities worth $250,000 in a cash account, $150,000 worth of fully-paid-for securities in a margin account, and $195,000 worth of securities in a joint account with his wife, what is the total SIPC coverage? A) Combined $400,000 in the cash and margin account and $195,000 in the joint account. B) $100,000 in the cash account and a combined $345,000 in the margin and joint account. C) Combined $500,000. D) $250,000 in the cash account and $195,000 in the joint account; margin accounts aren't covered.
The correct answer was: Combined $400,000 in the cash and margin account and $195,000 in the joint account. The cash and margin account are combined for SIPC purposes. Since the combined balances do not exceed the maximum coverage limits, both balances are covered. The joint account is covered separately under SIPC. The balance in the joint account is also below the SIPC coverage limits and would be covered in full.
All of the following debt instruments pay interest semiannually EXCEPT: A) municipal revenue bonds. B) Ginnie Mae pass-through certificates. C) industrial development bonds. D) municipal General Obligation bonds.
The correct answer was: Ginnie Mae pass-through certificates. Ginnie Maes pay interest on a monthly basis, not semiannually.
The expense ratio of a unit investment trust is generally lower than the expense ratio of an open-end investment company with a similar objective, because UITs have: no management fee. a buy and hold investment strategy. superior diversification opportunities, compared with mutual funds. a net asset value redemption requirement, unlike mutual funds. A) III and IV. B) II and III. C) I and IV. D) I and II.
The correct answer was: I and II. UITs are not management companies and, therefore, save on the portfolio management cost. In addition, since the portfolio is basically fixed, brokerage commissions are reduced. Both mutual funds and UITs offer diversification and NAV redemption.
Which of the following are NOT considered money market instruments? American depositary receipts. Commercial paper. Corporate bonds. Jumbo certificates of deposit. A) III and IV. B) I and II. C) I and III. D) II and IV.
The correct answer was: I and III. A money market instrument is a high-quality, short-term debt security with maturity of less than one year. American Depositary Receipts (ADRs) are equity, and corporate bonds are long-term debt instruments.
When the annual report of a mutual fund is used as sales literature, which of the following statements are TRUE? The principal of the firm must approve its use for that purpose. A prospectus need not accompany the report, provided it includes instructions for obtaining a prospectus. The figures contained in the report must be as of a specific date. The report must contain a list of the industries in which the fund invests. A) II and IV. B) I and III. C) II and III. D) I and IV.
The correct answer was: I and III. Sales literature is going to be defined as a retail communication. The principal of the firm must approve the use of the annual report as sales literature, and the figures contained must be current and complete. A prospectus is always required, as is a complete portfolio list, not merely a list of industries in which the fund invests.
In July, a customer invested $10,000 in the ABC Mutual Fund. In December of the same year, ABC distributed a capital gain on securities it had held for five years. In May of the next year, the customer decided to redeem his shares for a capital gain. How are both of the capital gains treated for taxation purposes? The capital gain distribution is treated as long term. The capital gain from redemption is treated as long term. The capital gain from redemption is treated as short term. The capital gain distribution is treated as short term. A) I and II. B) II and IV. C) III and IV. D) I and III.
The correct answer was: I and III. The tax payable on capital gains depends on the holding period of the security sold or redeemed. The mutual fund had held the securities for five years prior to sale, making the capital gain long term. The capital gain from redemption took place after the mutual fund shares had been held for less than a year, making that capital gain short term.
Which of the following statements concerning hedge funds are TRUE? Purchasers of hedge funds are required to be accredited investors. Short sales by the fund are not allowed. Ordinary investors may invest in hedge funds indirectly through funds of hedge funds. Hedge funds invest actively only when securities prices are moving up. A) II and IV. B) II and III. C) I and IV. D) I and III.
The correct answer was: I and III. Though purchasers of hedge funds are required to be accredited investors, an ordinary investor may invest in hedge funds indirectly through a fund of hedge funds, which is a mutual fund whose portfolio consists of various hedge funds. An advantage of hedge funds is their ability to sell securities short during bear markets, adopt risky arbitrage strategies, and otherwise take direct steps to maximize returns in both up and down markets.
Which of these is TRUE regarding a life settlement contract? Premiums will be paid by the contract owner. Premiums will be paid by the insured. Proceeds will be paid upon the death of the contract owner. Proceeds will be paid upon the death of the insured. A) I and IV. B) II and IV. C) II and III. D) I and III.
The correct answer was: I and IV. A life settlement is the secondary sale of a life insurance policy. The buyer (the new owner) is responsible for paying the premiums and, upon the death of the insured, will receive the death benefit.
Under FINRA rules, carrying firms must advise their customers of the BrokerCheck phone number or Web address A) quarterly B) monthly C) annually D) semiannually
The correct answer was: annually Under FINRA rules on investor education and protection, carrying firms must advise their customers of the phone number or web address for BrokerCheck. This disclosure must be made at least once every calendar year. BrokerCheck allows customers to access licensing information as well as check on customer complaints and the disciplinary history of registered persons
A customer is examining two mutual funds, the ABC Fund and the XYZ Fund. He is puzzled to note that ABC has an expense ratio of 0.3%, whereas XYZ has an expense ratio of 2%, more than a six-fold difference. Which of the following, if true, might help explain the difference? ABC is an index fund; XYZ is an aggressive growth fund. ABC has a 300% portfolio turnover rate; XYZ has a 10% portfolio turnover rate. The ABC investment adviser engages in many purchases and sales each day; the XYZ adviser engages in very few. A) I, II and III B) I and II C) II only D) I only
The correct answer was: I only An index fund tends to have a very low turnover rate and would thus be expected to have a lower expense ratio than an aggressive growth fund. A high turnover rate indicates a lot of trading, and therefore, higher expense.
Which of the following statements correctly describe similarities between exchange-traded funds and closed-end investment companies? They may not be sold short. They are traded on registered stock exchanges. They are redeemable securities. Investors pay commissions to purchase and liquidate their positions. A) I and IV. B) II and III. C) I and III. D) II and IV.
The correct answer was: II and IV. Both exchange-traded funds and closed-end investment companies are traded on exchanges; therefore, investors pay a commission when purchasing and liquidating shares. Both may be sold short (and purchased on margin). Neither is redeemable with the issuer as they are traded in the secondary market.
Which of the following retirement plans would allow insurance to be purchased within the plan? A) Keogh Plans. B) Section 529 Plans. C) Roth IRAs. D) Traditional IRAs.
The correct answer was: Keogh Plans. Keogh plans, among others, do not allow insurance to be deposited in the plan, but once money has been contributed, it may be used, within the plan, to purchase insurance.
Which of the following statements regarding a unit investment trust is NOT true? A) It invests according to stated objectives. B) It is considered an investment company. C) It charges no management fee. D) Overall responsibility for the fund rests with the board of directors
The correct answer was: 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 securities has a dividend expressed either as a fixed percentage of par or as a fixed dollar amount? A) Preferred stock. B) Corporate bonds. C) Common stock. D) Municipal bonds.
The correct answer was: Preferred stock. Preferred stock pays dividends that are stated either as a percentage of par or as a fixed dollar amount. Municipal bonds and corporate bonds pay interest, not dividends. Common stock does not guarantee dividends and its par value is an arbitrary figure.
Your customer is 61 years old. He would like to take a lump-sum distribution from his Keogh plan. What is the tax treatment of this distribution? A) Taxed as ordinary income. B) Taxed at long-term capital gains rates. C) 10% penalty. D) 50% penalty.
The correct answer was: Taxed as ordinary income. The distribution is taxed as ordinary income. A 10% penalty would apply if the customer were younger than age 59½.
If Jorge, age 49, earns $400,000 per year in his salaried position and he participates in his company's 401(k) plan, how much may he contribute to his traditional IRA? A) Nothing, since he is already covered by his company's 401(k) plan. B) The current maximum minus an indexed amount, since his income is so high. C) He can match the contributions to his 401(k). D) The current maximum contribution.
The correct answer was: The current maximum contribution. Even though Jorge participates in his company's 401(k) plan, he is still eligible to participate in a traditional IRA. However, because of his income level, he may not deduct the contributions on his tax return.
Which type of marketable security pays semiannual interest? A) Series HH bond. B) Series EE bond. C) Treasury bill. D) Treasury bond.
The correct answer was: Treasury bond. Marketable securities are traded in the secondary market. T-bonds are marketable debt and pay interest semiannually. Series HH and EE bonds are not marketable. Treasury bills issue at a discount and mature at par.
If your customer owns $24,000 worth of Acme Invest Fund shares and chooses to have the money forwarded to her using a ten-year fixed-time withdrawal, she will receive which of the following? A) Variable number of dollars for a fixed amount of time. B) Fixed number of dollars for a fixed amount of time. C) Fixed number of dollars for a variable amount of time. D) Variable number of dollars for a variable amount of time.
The correct answer was: Variable number of dollars for a fixed amount of time. Under a fixed-time withdrawal plan, only the distribution's time period is fixed. The amount of money received varies each month.
A client purchasing a single premium deferred variable annuity would expect to see that the contract called for: A) no load. B) a front-end load. C) a level load. D) a contingent deferred sales charge.
The correct answer was: a contingent deferred sales charge. In almost all cases, single premium deferred variable annuities are sold with a contingent deferred sales charge. This is sometimes referred to as a Conditional Deferred Sales Load.
If a mutual fund offers a fixed-time withdrawal plan, all of the following statements are true EXCEPT: A) the end date of the plan is fixed. B) this plan is self-exhausting. C) a fixed number of shares is liquidated each month. D) the amount the client receives each month may vary.
The correct answer was: a fixed number of shares is liquidated each month. In a fixed-time withdrawal plan, the end date of the plan is fixed, but the individual payment amount is uncertain. An unspecified number of shares is liquidated each month based on the number of months left to distribute and the NAV of the investment. ($10,000 /120 months =.$83.33.)
If an elderly widower wants his investments to provide high current income, the representative should recommend: A) the ABC Widow Fund. B) a zero-coupon bond. C) a growth fund. D) a mutual fund that matches the investor's stated objective.
The correct answer was: a mutual fund that matches the investor's stated objective. Investors should be careful not to be misled by a mutual fund's name. Although the name of a fund should bear a resemblance to its objective, the investor and the representative should read the fund's prospectus carefully to be sure that the fund's objective matches the investor's objective. Growth funds and zero-coupon bonds are not designed to meet the requirement of providing maximum current income.
All of the following statements about joint tenants with rights of survivorship are true EXCEPT: A) in the event of death, the remaining tenant has full ownership of the account. B) mail can be sent to either of the parties to the account. C) trades may be made by either party. D) checks can be made out to either party.
The correct answer was: checks can be made out to either party. In a joint account, checks must be made out to all parties to the account; either party may make trades or receive mail regarding the account.
The rate of return on a money market fund would be most similar to the: A) passbook savings rate. B) current 30-year Treasury bond rate. C) prime rate of interest. D) current Treasury bill rate.
The correct answer was: current Treasury bill rate. Money market funds are invested in short-term debt instruments, including T-bills; the rate of return on money market funds is similar to the current Treasury bill rate.
Your client wishes to purchase units in a municipal bond UIT that was issued two years ago. These units would be purchased: A) in the over-the-counter market. B) directly from another investor. C) from the UIT's sponsor. D) on an exchange.
The correct answer was: from the UIT's sponsor. Although only a limited number of units are sold in the IPO, UIT sponsors maintain a secondary market where units that have been redeemed from the original investors are resold to new ones.
A registered representative assists his old college roommate in raising $250,000 for a business venture by distributing offering circulars to people he knows who might be interested but says nothing about this to his employer firm. The representative receives a thank-you note from his friend, but no compensation. Under the Conduct Rules, the representative: A) has violated the rule dealing with suitability. B) has violated the rule dealing with outside business interests. C) has violated the rule dealing with selling away. D) is not in violation of any rule.
The correct answer was: has violated the rule dealing with selling away. Any securities-related business performed away from the member firm, without prior notice to the firm, is a violation. If compensation had been earned, the activity would have required firm approval and the firm would have had to run the trades through its books.
When comparing a mutual fund with a growth objective to one that calls itself a value fund, you would explain to your clients that the value fund could be reasonably expected to: A) have higher dividend yields. B) generate larger capital gains. C) only offer Class A shares. D) sell at a discount to the NAV.
The correct answer was: have higher dividend yields. Value funds focus on companies whose stocks are currently undervalued (earnings potential is not reflected in the stock price). As a result, the dividend yields tend to be higher than growth funds. If one is looking for capital gains, it is more likely that the growth fund will provide them. The management style has no impact on share classes and no mutual funds ever sell at a discount to the NAV - that is only true of closed-end funds.
To encourage business activity, the FOMC should: A) increase the federal funds rate. B) increase the discount rate. C) increase their purchases of U.S. Treasury securities in the open market. D) increase the reserve requirement .
The correct answer was: increase their purchases of U.S. Treasury securities in the open market. The FOMC buys and sells U.S. Treasury securities to influence the money supply. By purchasing securities, the FOMC increases the amount of money available to banks to lend out. This lowers interest rates and encourages business activity.
The record date: A) is fixed by the SEC to determine which investors own stock. B) is set by the issuing corporation as the mailing date for distribution of cash dividends. C) indicates when the public offering of new issues can be made legally. D) is set by the issuing corporation to determine which stockholders will receive a declared dividend
The correct answer was: is set by the issuing corporation to determine which stockholders will receive a declared dividend. The record date is set by the corporation, at which time a list of stockholders who will receive a dividend is compiled.
All of the following are true regarding institutional communications EXCEPT A) it must have prior principal approval B) it may never be used with a retail investor C) supervisory procedures regarding institutional communications must be readily available to FINRA D) it includes communication to any entity with $50 million or more of total assets
The correct answer was: it must have prior principal approval Institutional sales material is not required to have prior principal approval, however each member shall establish written procedures for the review of institutional communications used by the member and its associated persons by an appropriately qualified, registered principal.
If an open-end investment company wishes to change its investment objective, it may only do so with a: A) two-thirds vote of the outstanding shareholders. B) majority vote of the outstanding shareholders. C) majority vote of the outstanding shares. D) unanimous vote of the board of directors.
The correct answer was: majority vote of the outstanding shares. The Investment Company Act of 1940 requires the fund to have a clearly defined investment objective. The only action that can be taken to change the investment objective is a majority vote of the outstanding shares (shares vote, not shareholders).
Recommendations to a customer: A) must be approved in advance by a principal. B) must include assurances or guarantees regarding investment performance. C) must never involve recommending a speculative security. D) must reflect the facts disclosed by the customer regarding other holdings and financial situations.
The correct answer was: must reflect the facts disclosed by the customer regarding other holdings and financial situations. Recommendations made to a customer must be suitable for that particular customer. They need not be approved in advance by a principal, but they may include speculative securities if they are in line with the customer's objectives, means, and tax status.
A couple wishes to start a withdrawal plan from a mutual fund they have owned for 12 years. As a registered representative, you must A) stress to the investor that it is possible to exhaust the account later than expected B) inform the customer that a fixed-time plan will provide the most consistent check C) provide the investor a minimum rate of return D) never use charts or tables unless the SEC specifically clears their use
The correct answer was: never use charts or tables unless the SEC specifically clears their use Required disclosures include only using charts or tables the SEC specifically clears, never promising a guaranteed minimum rate of return, and stressing to the investor that it is possible to exhaust the account earlier than expected. A fixed-dollar plan will provide the most consistent check
It is prohibited for an investment adviser to purchase securities for a mutual fund portfolio: A) on margin. B) that are municipal bonds. C) according to the stated objective. D) that are rated below investment grade.
The correct answer was: on margin. Mutual funds may not purchase securities on margin because, in the event of a margin call, they have no recourse to investors' funds. However, a fund is not prohibited from buying securities that meet the investment objective of the fund, which could include low-rated corporate bonds and municipal bonds.
The ex-dividend date for mutual fund shares is normally: A) two business days before the record date. B) the business day following the record date. C) the same day as the record date. D) seven days before the record date.
The correct answer was: the business day following the record date. A mutual fund's board of directors sets the ex-dividend date, which is normally the business day following the record date. This is different from the ex-dividend date for corporate stocks in the secondary market, which is two business days before the record date.
In a variable annuity contract, the assumed interest rate (AIR) refers to: A) the rate at which purchases are required in the separate account to qualify for special tax treatment. B) the rate used in the prospectus to show the potential growth of the contract. C) the amount of payments required by the investor to maintain the contract. D) the rate of return needed to maintain the annuity payments at a constant level.
The correct answer was: the rate of return needed to maintain the annuity payments at a constant level. If the earnings on an annuity exceed the assumed interest rate, the next payment will be higher; if the earnings are lower, the next payment will be lower. This holds for as long as payments are made.
The most comprehensive measure for comparison of bond yields is the: A) current yield. B) yield-to-maturity. C) coupon yield. D) nominal yield.
The correct answer was: yield-to-maturity. Bond yields are most accurately compared by their yield-to-maturity. The yield-to-maturity reflects annualized gains and losses based on both interest and the average price of the bond from time of purchase until maturity.
Your client has been saving for retirement by investing in a nonqualified variable annuity. The total of her investments is $50,000, and the value of her account is $125,000. Now that she is 65, she wishes to take a lump sum distribution. This distribution would be taxed as a) $75,000 ordinary income b) $ 125,000 ordinary income c) long-term capital gain, except for any portion of her contribution that was made in the previous 12 months d) $75,000 long-term gain
a) $75,000 ordinary income [3. 9]
Series 6 registration is known as a limited representative registration because individuals possessing that registration are limited to sales of variable contracts as well as interests in I. face- amount certificate companies II.closed -end investment company shares in a primary offering III. bonds only of investment grade IV. only blue-chip corporate stocks a) I and II b) III and IV c) I and III d) II and IV
a) I and II I. face- amount certificate companies II.closed -end investment company shares in a primary offering [3. 2. 1. 1]
You have an extremely high-bracket customer who is interested in generating some income from his investments. He is risk averse and deeply resents the amounts he must pay in federal taxes every year. He would like you to provide a list of mutual funds for his consideration for possible investment. Which of the following might be on the list your provide? I. The ABC Municipal GO Fund II. The JJK Long-Term Government Bond Fund III. The Smith and Kline Municipal Money Market Fund IV. The Simplex Municipal IDR Fund a) I and III b) II and IV c) III and IV d) I and II
a) I and III I. The ABC Municipal GO Fund III. The Smith and Kline Municipal Money Market Fund [suitability tables]
The RIF Corporation has determined that a new issue of best method for them to raise the additional capital needed for expansion of their facilities. To lower RIF´s interest cost, the could add which of the following features to this security? I. Convertibility II. Preemptive rights III. Voting power IV. Warrants a) I and IV b) II and III c) I and III d) II and IV
a) I and IV I. Convertibility IV. Warrants [1. 2. 5. 2. 1 and 1. 3. 5. 2. 1]
If an open-end investment company has 12b-1 fee, which of the following are TRUE? I. These fees are commonly referred to as asset-based distribution fees. II. The fund may advertise as no-load if the 12b-1 charges are kept under .75% III. The plan may be terminated by vote of the shareholders, the board of directors, or the non interested members of the board IV. To terminate 12b-1 fees, a majority of the non interested board members or a majority vote of outstanding shares is needed a) I and IV b) II and III c) I and III d) II and IV
a) I and IV I. These fees are commonly referred to as asset-based distribution fees. IV. To terminate 12b-1 fees, a majority of the non interested board members or a majority vote of outstanding shares is needed [2. 4. 3. 2. 4]
Requirements of the Telephone Consumer Protection Act of 1991 include I. maintaining a do-not-call list II. using a copy of the national do-not-call list that is no more than 60 days old III identifying the security that is the purpose of the call IV. supplying the prospect with contact information a) I and IV b) I and III c) II and III d) II and IV
a) I and IV I. maintaining a do-not-call list IV. supplying the prospect with contact information [4. 1. 9]
Which of the following statements about FINRA's position on the use of electronic communication are CORRECT? I. A broker/dealers website is exempt from filing requirements with FINRA II. An individualized email message sent to a single customer si considered correspondence III. A group email sent to 100 prospective customers within a 30-day period is considered institutional communication IV. A group email sent to more than 25 retail investor over 30-day period is considered retail communication a) II and IV b) III and IV c) I and III d) I and II
a) II and IV II. An individualized email message sent to a single customer si considered correspondence IV. A group email sent to more than 25 retail investor over 30-day period is considered retail communication [4. 1]
Which of the following activities might lead a registered representative with a member firm to suspect a client might be engaging in illegal practices? a) The client seems unduly concerned about losses in his account b) The client complains frequently about what he feels are over large commissions c) The client wires money to unrelated accounts d) The client still chooses to engage in a transaction once he learns that a currency transaction report will have to be completed
a) The client seems unduly concerned about losses in his account [5. 5. 2]
All of the following statements regarding a traditional IRA are true EXCEPT a) contributions made by individuals under age 50 are limited to the greater of the 100% of earned income or a dollar amount that is determined by the IRS b) withdrawals before age 59 1/2 because of death or disability are not subject to the 10% tax penalty c) contributions may be made on behalf of a spouse without earned income d) contributions may or may not be tax deductible, but all earnings are tax deferred
a) contributions made by individuals under age 50 are limited to the greater of the 100% of earned income or a dollar amount that is determined by the IRS [3. 9. 2]
An application to open an account with an open-end investment company would be found a) in the funds summary prospectus b) with the Statement of Additional Information (SAI) c) in a Rule 482 omitting prospectus d) in an advertisement in a financial periodical
a) in the funds summary prospectus [2. 3. 6. 2]
A breakpoint sale is defined as the sale of mutual fund shares in an amount a) just below the dollar amount at which the sales charge is reduced b) just below the public offering price of the fund c) at or above the dollar amount at which the sales charge is reduced d) required as the minimum investment in a fund as specified by the SEC
a) just below the dollar amount at which the sales charge is reduced [4. 2. 2. 2. 1]
The provisions of Regulation T a) require that payment be made two business day after settlement date b) prohibit the purchase of closed-end funds on margin c) regulate the extension of credit for securities purchases by banks to customers d) require most corporate bond issues to make provision for a trustee
a) require that payment be made two business day after settlement date [3. 5. 3. 1. 2]
Which of the following are general characteristics of municipal revenue bonds? I. they are backed by the taxing power of the issuer II. they rank somewhat below US Treasury issues in safe but rank higher than GO municipal bonds III. in many instances, the federal government does not tax revenue bond interest IV. they are backed by the revenue generated from the facility that was built with the proceeds of the bond issue a) I and II b) III and IV c) I and III d) II and IV
b) III and IV III. in many instances, the federal government does not tax revenue bond interest IV. they are backed by the revenue generated from the facility that was built with the proceeds of the bond issue [1. 3. 4. 3]
In constructing a profile for your customer, you wish to assemble information on both financial and nonfinancial investment considerations that affect your customer. Which of the following qualify as financial investment considerations? I. your customer's tolerance of various forms of risk II. your customer's tax status III. your customer's liquid net worth IV. your customers monthly credit card payments a) II and IV b) III and IV c) I and III d) I and II
b) III and IV III. your customer's liquid net worth IV. your customers monthly credit card payments [6. 1. 1. and 6. 1. 2]
Which of the following is an advantage of dollar cost averaging? a) In a down market , financial loss is prevented b) In a fluctuating market, the investor experience a lower cost per share than the average price per share c) In fluctuating market, gains are ensured d) The investor experience a lower price per share than the average cost per share
b) In a fluctuating market, the investor experience a lower cost per share than the average price per share [2. 5. 1. 1]
Which of the following has the smallest amount of business risk? a) Income bonds b) US Treasury bonds c) Corporate bonds d) Common stock
b) US Treasury bonds
All of the following are correct concerning the tax treatment of variable life insurance to the policyholder EXCEPT a) on death of the insured, the policy proceeds are income tax exempt b) a minimum of 100% of the cash value may be borrowed without tax consequences after policy has been in force for three years c) during the life of the policy, the earnings grow tax deferred d) if the policy is surrendered, any value received in excess of the cost basis will be taxed as ordinary income
b) a minimum of 100% of the cash value may be borrowed without tax consequences after policy has been in force for three years [2. 8. 7]
One common characteristic of all securities products that may be sold by Series 6 licensed registered representative is a) always secondary market trades b) always sold by prospectus in the primary market c) redeemable securities d) limited in the amount of sales charge by the 5% mark-up policy
b) always sold by prospectus in the primary market [2. 1. 2. 3]
An open-end investment company with a primary stated objetive of conservation of principal using both equity and debt a) hedge fund b) balanced fund c) growth fund d) specialized fund
b) balanced fund [2. 4. 4. 2]
You are recommending the purchase of the XYZ Growth Fund to one of your clients and you explain that the fund operates pursuant to a 12b-1 plan. Under the terms described in the prospectus, the fee is a) a part of the fee paid to the fund's investment manager b) charged against the assets of the fund c) included in the sales charge when shares are purchased d) reduced on purchases that reach or exceed specified breakpoints
b) charged against the assets of the fund [2. 4. 3. 2. 4]
You have a client who is in the 35% income tex bracket. When looking at a financial periodical, you notice a new State of Vermont GO bond being issued at par with a 4% coupon. You think this is a suitable investment for this client and call her to explain that a) she should consider funding her IRA with these bonds b) her tax-equivalent yield on this security would exceed 4% c) this investment is fully backed by the US government d) she would received quarterly interest payments if she purchased the bonds
b) her tax-equivalent yield on this security would exceed 4% [1. 3. 4. 1. 1] 4% coupon/ (100-35% tax bracket) = 6% tax equivalent
A person who, for compensation, engages in the business of advising others about the value of securities or the advisability of investing in or selling securities is known as a(n) a) investment banker b) investment adviser c) registered representative d) investment company
b) investment adviser
One of the ways in which closed-end investment companies differ from open-end investment companies is in their ability to a) lend money b) issue preferred stock c) issue commons stock d) operate as nondiversified management companies
b) issue preferred stock [2. 1. 2. 3. 2]
Which of the following statements best describes the assumed interest rate (AIR) of a variable annuity contract? a) it is the rate that the annuity separate account must earn during the accumulation phase of the contract for monthly payments to remain level b) it is the rate that the annuity separate account must earn during the payout phase of the contract to keep monthly payments level c) while benefits are largely dependent on separate account performance, the AIR represents a minimum rate of return offered by the insurance company d) if is used by the IRS to determine the taxability of annuity distributions
b) it is the rate that the annuity separate account must earn during the payout phase of the contract to keep monthly payments level [glossary p. 386]
Under the pipeline or conduit theory, taxes payable on dividends are interest collected and distributed by regulated investment company on the securities in its portfolio are paid a) by the investment company b) only by the shareholder c) by both the investment company and the shareholder d) only when the dividends are taken in cash rather than reinvested
b) only by the shareholder [3. 7. 2. 2]
During the cooling-off period a new securities registration, you would be allowed to a) send prospect sales literature relating to the issue if it accompanied by or preceded by a red herring b) send prospects a preliminary prospectus c) take a check for a proposed purchase provided the check is postdated after effective date d) accept binding indications of interest
b) send prospects a preliminary prospectus [3. 4. 2. 3]
An advantage of a nonqualified variable annuity compared to a mutual fund is a) receiving dividends b) tax deferral c) voting for the board of directors d) diversification
b) tax deferral [2. 7. 1. 3]
All of the following actions could potentially be violations of the Conduct Rules EXCEPT a) making unsuitable investment recommendations b) using discretionary to make a purchase in a client's account without discussing the transaction with the client first c) omitting a material fact in recommending an investment d) urging a client to take advantage of IRS Code Section 1035 without discussing suitability
b) using discretionary to make a purchase in a client's account without discussing the transaction with the client first [5. 3. 3]
A 50-year-old widow uses the proceeds of her late husband's life insurance policy to purchase a single premium variable annuity in the amount of $100,000. Five years later, when the account is valued at $130,000, she withdraws $50,000. If she is the 25% tax bracket, what is the total tax due on the withdrawal? a) $7,500 b) $12,500 c) $17,500 d) $10,500
c) $17,500 50,000 x 0.25 = $12,500 (tax bracket) plus 50,000 x 0.10 = $5,000 (penalty) total: $17,500
Which of the following securities transactions would most likely be accomplished through the use of an ADR? a) 1,000 shares of General Electric Common stock on the New York Stock Exchange b) 1,000 shares of Sony Corporation common stock on the Tokyo Stock Exchange c) 1,000 shares of Sony Corporation common stock on the New York Stock Exchange d) 1,000 shares of General Electric common stock on the Tokio Stock Exchange
c) 1,000 shares of Sony Corporation common stock on the New York Stock Exchange [1. 2. 4]
An investor reviewing the annual report for the GHI Investment Company notices that the net asset value increased by $1.21, yet the asking price of the shares dropped during that period. What type of investment company must GHI be? a) Balanced fund b) Open-end fund c) Closed-end fund d) Bond fund during a period of rising interest rates
c) Closed-end fund [2. 4. 3. 3]
Which of the following statements would probably reflect characteristics of the XYZ S&P 500 Index Fund? I. Relatively low portfolio turnover rate II. Relatively low operating expense ratio III. Relatively low correlation to the performance of the S&P 500 Index IV. Relatively low market risk a) II and IV b) I and III c) I and II d) III and IV
c) I and II I. Relatively low portfolio turnover rate II. Relatively low operating expense ratio [2. 4. 4. 1. 7]
Which of the following statements are characteristics of GNMA securities? I. The minimum issue amount is $25,000 II. Distributions are made semiannually III. These securities are backed by the full faith and credit of the US government IV. Interest income received on GNMAs is taxable only at the federal level a) II and II b) I and IV c) I and III d) II and IV
c) I and III I. The minimum issue amount is $25,000 III. These securities are backed by the full faith and credit of the US government [1. 3. 3. 3. 1]
Regarding the anti-money laundering rules, which of the following would be considered a suspicious activity? I. Moving large sums of money between account with the same last names II. Moving large sums of money between nonrelated accounts III. A client not expressing concern about the losses in the client's account IV. A client expressing undue concern about substancial commission being charged to the account a) I and III b) I and IV c) II and III d) II and IV
c) II and III II. Moving large sums of money between nonrelated accounts III. A client not expressing concern about the losses in the client's account [5. 5. 2]
A client expresses the desire to invest in securities that have minimal credit risk. To meet those wishes, which of the following would be appropriate to recommend? I. Over-the-counter common stock II. Noncumulative preferred stock III. B rated debentures IV. B rated mortgage bonds a) I and II b) I and III c) III and IV d) II and IV
c) III and IV III. B rated debentures IV. B rated mortgage bonds [6. 2. 2. 8]
An open-end investment company seeks to achieve maximum income, with little or no pursuit of appreciation. The fund invests in preferred stocks of small- and medium-sized companies that are just below investment grade as well as bonds rated from B to BBB. The funds management believes that, despite the risk involved with the individual securities, adequate diversification can result in superior investment returns. The information would most likely be describing the a) ATF Capital Appreciation Fund b) NAVCO Tax-Free Municipal Bond Fund c) NAVCO High Yield Fund d) ACE Balanced Fund
c) NAVCO High Yield Fund [suitability table, pp. 361]
Under the Code of Procedure, the maximum penalty under a minor rule violation is a) suspension not to exceed five business days b) a fine of any amount deemed appropriate to the violation c) a $2,500 fine, censure, or both d) a $1,000 fine and the requirement to requalify by examination
c) a $2,500 fine, censure, or both [5. 4. 1. 3]
One of your clients is concerned about market volatility and decides to convert a substantial portion of his holdings into cash. Following this liquidation, he has a cash balance in his account of $275,000 and has reduced his securities holdings to $225,000. As his registered representative, you are concerned about his SIPC coverage and should warn him that a) cash in excess of $250,000 is subject to market risk b) he should reinvest the money a soon as possible c) although his securities are fully covered by SIPC, only $250,000 of his cash is covered d) only $100,000 of this securities is covered by SIPC
c) although his securities are fully covered by SIPC, only $250,000 of his cash is covered [3. 10. 1. 1]
If a customer wishes to open a cash account in his name only and allow a third party to make trading decisions, but not withdraw cash, and securities, he must instruct his broker/ dealer to open a a) cash account b) margin account c) cash account with limited power of attorney d) cash account with full power of attorney
c) cash account with limited power of attorney [5. 2. 3]
An investor in long-term US Treasury bonds would be most concerned with a) legislative risk b) liquidity risk c) interest rate risk d) default risk
c) interest rate risk [1. 3. 5. 3]
John purchased stock of a company in the business of manufacturing yachts. Two years ago his securities had lost most of their value as a result of a congressionally imposed luxury tax on purchases of more than $30,000. John's investment in the yacht-building business suffered a loss due to a) business risk b) interest rate risk c) legislative risk d) volatility
c) legislative risk [6. 2. 2. 10]
Distributions from net investment income paid to shareholders by an investment company meeting the requirements to be a regulated investment company are a) taxed as long - or short -term capital gains based on the fund's holding period of the underlying securities b) taxed to the fund, but not to the individual shareholder as dividend income c) nontaxable to the fund, but taxable to the shareholders as dividend income d) taxed as long - term capital gains to the shareholder, regardless of how long the investor has owned the shares
c) nontaxable to the fund, but taxable to the shareholders as dividend income [3. 7. 2. 2]
The Conduct Rules prohibit all of the following practices EXCEPT a) encouraging an investor to purchase to purchase a mutual fund share just before the ex-date b) borrowing from a customer's account without the customer's knowledge but with the intent of paying the loan back in a timely fashion c) presenting third-party research reports to clients with disclosure that were prepared by others d) failing to state a material fact in making a mutual fund recommendation to a customer
c) presenting third-party research reports to clients with disclosure that were prepared by others [5. 3. 3]
If a registered representative wished to make recommendations to a client, it would be most appropriate to limit those recommendations to a) those securities that the registered representative has reasonable grounds to expect appreciation in market value b) securities in which the firm was a market maker because the mark-ups would generally be lower than commissions c) those securities that are deemed suitable for the client d) securities found on the states legal list
c) those securities that are deemed suitable for the client [6. 2. 1]
Your client retired from his job three years ago and placed all of the proceeds of his 401k distribution into a rollover IRA at his local bank. He is unhappy with his return and wishes to transfer the funds to an IRA at your broker/dealer. Which of the following statements regarding this situation is TRUE? a) your firm may not do a transfer in these circumstances; he is limited to a rollover b) once the transfer is complete, he may not make another transfer for at least one year c) trustee-to-trustee transfers do not incur any tax consequences d) the transfer must be completed within 60 days of opening the account at your firm.
c) trustee-to-trustee transfers do not incur any tax consequences [3. 9. 2. 1]
Your client begins an investment program that has him purchasing $240 of the DCA Balanced Fund each month. The purchase prices for the first four months of this program are $6, $5, $4, and $3 per share. This program will likely be effective as a dollar cost averaging program a) if the client is successful in timing the market with each purchase b) if the client tailors his investment to achieve a lower average price per share than the average cost per share c) only if the market continues to trend downward over time d) if the client continues to invest regular amounts at regular intervals in fluctuating market
d) if the client continues to invest regular amounts at regular intervals in fluctuating market [2. 5. 1. 1]
Your customer is receiving payments during the annuity period of a variable annuity. For tax purposes, which of the following is TRUE? a) the investment income is taxed at the capital gains rate b) the entire amount is subject to tax c) all withdrawals are tax free d) only the amount that represents investment growth and income is subject to tax
d) only the amount that represents investment growth and income is subject to tax [2. 7. 1]
A major difference between an open-end management investment company and close-end company is that the open-end investment company a) has a fixed number of shares outstanding b) has a share price determined by supply and demand c) offers shares that are not redeemable by the issuer d) sells shares through a continuous primary offering
d) sells shares through a continuous primary offering [2. 1. 2. 3. 2]
Holders of a common stock listed on the NYSE have all of the following rights EXCEPT a) the right to stock dividends, if declared by the board of directors b) the right to vote on an upcoming merger involving the parent company c) the right to receive an annual audited report describing the corporation's operations over the previous year d) the right to share in residual assets with the same priority as participating preferred stockholders in the event of a corporate dissolution
d) the right to share in residual assets with the same priority as participating preferred stockholders in the event of a corporate dissolution [Glossary, pp. 404]