Series 6 MN Chapter 2
After a mutual fund's tenth year, performance statistics must show results for each of the following periods
1, 5, 10 years
FINRA allows sales charges up to a maximum of:
8.5% on mutual funds.
Under the 1940 Investment Company Act, an investment company may take all of the following forms EXCEPT a(n):
An investment company is not a limited partnership. Investment companies are organized as open-end companies (mutual funds), closed-end companies, unit investment trusts, or face-amount certificate companies
Asset Allocation Fund
Asset allocation funds shift assets among stocks, bonds, and short-term fixed-income securities in accordance with projections of future market conditions.
Capital Appreciation Fund
Capital appreciation funds seek growth, not current income
Which of the following statements about mutual funds is NOT true?
Each share's public offering price (POP) is based on the net asset value (NAV) of the share plus sales charges.
Which of the following 'funds' are not redeemable securities?
Hedge funds and exchange-traded funds do not provide for redemption of shares by the fund.
The offering document for a fund states that the minimum initial investment is $500,000. This is most likely what type of fund?
Hedge.
A variable annuity has an AIR of 4%. In January, the separate account earned 9%; in February it earned 6% and in March it earned 5%. Based on this information, how will the April payment compare to the March payment?
Higher. Anytime the actual return exceeds the AIR, the next payment will increase. In March, the actual earnings were 5% and, because that is higher than the AIR of 4%, April's payment will go up. You must remember to only compare the actual to the AIR, not to the previous month's return.
How long is the free-look period for a variable life insurance policy?
I.10 days after delivery IV.45 days after application.
If a registered representative works for ABC Brokerage Firm and sells a customer shares of XYZ Mutual Fund, to whom may the customer make the check payable?
I.ABC. II.XYZ Mutual Fund Company. Depending on the broker-dealer, the check should be made out to either the broker-dealer or the mutual fund. It should never be made payable to the registered representative and certainly not to FINRA.
According to the Investment Company Act of 1940, which of the following are required of investment companies?
I.Investment company registration statement filed with the SEC. III.Statement of investment policies and diversification status.
life settlement contract
I.Premiums will be paid by the contract owner. IV.Proceeds will be paid upon the death of the insured.
Which of the following statements regarding sales charges on variable contracts of insurance companies are TRUE?
II.The Conduct Rules do not impose a specific maximum on sales charges for variable annuities. IV.Variable life insurance contracts are limited to a maximum sales charge of 9% over the life of the contract, but not to exceed 20 years.
Where would an investor find a complete list of holdings for a particular mutual fund?
Semi-annual or annual report
Which of the following statements describe an open-end investment company?
The company may sell new shares in any quantity at any time. The company must redeem shares in any quantity at any time except that it may suspend the redemption of shares with SEC approval.
Which of the following statements regarding variable annuities are TRUE?
The number of accumulation units can rise during the accumulation period. The number of annuity units is fixed at the time of annuitization.
If your firm is underwriting a new mutual fund organized under a 12b-1 plan, which of the following statements is permissible in mailings or phone calls to your clients?
This fund has a 12b-1 sales charge structure-explained in the prospectus-and should be fully understood before investing. Any statement or reference to a mutual fund offered under a 12b-1 plan that implies the fund is no-load, unless the fee is .25% of net assets or less, is considered misleading and is a violation of the Conduct Rules. Unless .25% of net assets is specifically mentioned, assume any 12b-1 fund is a loaded fund.
Guaranteed cash value is a standard feature found in which of the policies listed below?
Whole life.
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?
Yes, the research report is a form of sales literature and must be preceded or accompanied by a prospectus.
The prospectus of the ABC Fund contains the phrase "will have at least one-quarter of common stock investments in the field of business machines." The ABC Fund is:
a specialized fund.
A mutual fund's expense ratio is its expenses divided by:
average net assets.
The open-end investment company share price quoted in the newspaper is the:
bid price.
You have a client who purchased shares of the BERT Fund for $11.22 per share earlier in the year. The investor calls you and comments that even though the net asset value per share is higher today than when he originally made his purchase, the current asking price is only $10.50. The BERT Fund must be
closed-end.
Government securities
considered essentially free of default risk because the bonds derive their income from federal taxes. The customer should be made aware that government bonds, and the funds that invest in them, are not free of interest-rate risk.
12b-1 fees
cover advertising costs, mailing expenses, and prospectus printing costs.
Characteristics of money market mutual funds include
dividends are earned on a daily basis. the net asset value falls within as narrow a range as possible. shares are offered on a no-load basis.
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 unsuitable because:
her situation exposes her to surrender charges and early withdrawal penalties.
If the value of securities held in a fund's portfolio increases, and the amount of liabilities stays the same, the fund's net assets:
increase
Included in the operating expenses of an investment company would be all of the following
investment management fee. custodian bank charges. compensation to members of the fund's board of directors.
If your clients, spouses both age 50, are interested in long-term growth and are willing to accept a moderate amount of risk, you should recommend a(n):
large-cap stock fund. Large-cap common stock has relatively moderate risk with likely growth potential.
Generally speaking, a mutual fund may do all of the following
lend money, lend securities, borrow money
Variable annuity payout options may include:
life only. joint life with last survivor.
Money market funds
managed specifically to achieve low volatility
A variable annuity contract holder commences the payout period, receiving an initial benefit of $400 based on an assumed interest rate of 4%. In the second month, the contract holder receives $425 on the basis of an annualized rate of return of 10% earned by the separate account. If the separate account experiences an annualized net investment rate of 8% during the third month, the payout to the contract holder will be:
more than $425.
Under SEC Rule 498, a summary prospectus may be used in a mutual fund sales presentation resulting in a sale
only when the investor is able to access a statutory prospectus online
The NAV of a mutual fund is $14.17 per share. The POP is $15.32 per share. To determine the sales charge of the fund:
subtract the NAV from the POP.
A variable annuity characteristic that contractually guarantees payments for life is:
the mortality guarantee.
An investment company may lend money to one of its officers:
under no circumstances.
A nonqualified variable annuity valued at $400,000 is annuitized and the annuitant received $220,000 in payments until his death. At his death, if his wife received a lump sum payment of $180,000, this example illustrates
unit refund annuity.
A diversified open-end investment company owns shares of a company that amount to 5% of the fund's assets. An appreciation in the value of these stocks causes the target company's stock to grow to 12% of the assets of the investment company. The investment company
will maintain its status as a diversified investment company. need not sell any of the stock. When the investment company bought the stock, it was no more than 5% of the investment company's assets. Provided that it buys no more of the stock, the increase in value does not change the investment company's status as diversified
An investor willing to invest in a professionally managed diversified portfolio of foreign and domestic growth companies would invest in the:
ABC Global Equity Fund. This investor seeks a professionally managed portfolio of foreign and domestic growth companies. The portfolio of a global equity fund would include stock of companies in both foreign countries and in the United States. The foreign stock fund doesn't invest in domestic companies.
Which of the following funds may issue more than one type of security?
ACE Closed-End Fund. 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.
After opening an account with a mutual fund, in which of the following minimum amounts may an investor generally make additional periodic investments?
An amount that varies from fund to fund. Minimum investment amounts differ from fund to fund, and a registered representative must refer to the prospectus for each fund.
A client of yours has chosen to invest in a principal-protected fund. Which of the following disclosures must be made to your client?
As the old saying goes, "you don't get something for nothing." In exchange for the guaranteed that you can't lose principal, there is a cost. In additional, to protect the fund against short-term market corrections, these funds require that your investment be held a minimum of 5 to 10 years.
Your client, age 28 has just begun to consider investing outside of her employer's 401(k) plan. She's saved $25,000 to allocate toward some capital appreciation and some income. She prefers an investment with moderate risk and some downside protection if the stock market falls. With investing being new to her, she wants to note that she understands and is comfortable with moderate risk as stated, only. Given what has been conveyed, which of the following would be the most suitable?
Balanced fund A balanced fund which consists of both equities and debt instruments not only aligns with the growth objective, but also because of the debt instruments in the portfolio adds some downside protection against falls in market. An index fund and equity income fund are both subject to market risk should the market turn downward. Sector funds are considerably more aggressive and not suitable for an investor with moderate risk looking for some downside protection.
Your customer wishes to invest $25,000 using investment company securities as a means of diversification, but she states that she is not comfortable with stock market risk. Which of the following fund types would be the least appropriate recommendation?
Blend/core fund. Stock market risk is reduced by owning shares of bond funds, particularly those containing government or municipal bonds. Of the equity funds, the balanced fund is generally considered to offer the greatest protection of principal. Blend/core funds which own value and growth stocks and even some blue-chip stocks, carry a higher degree of market risk than these others.
One of your customers purchased a variable life insurance contract through your firm. After 14 years, he had deposited $15,000 in premiums, and his death benefit had grown to $80,000. Shortly after taking out a loan against cash value of $10,000, he was killed in an automobile accident. What will be the consequences of this situation to the death benefit?
II.His beneficiary will receive the death benefit minus the value of the loan. III.His beneficiary need not pay taxes on the death benefit.
You are considering investments for a new client who informs you that she hopes to purchase a new home in the upcoming year. Which of the following would be most suitable?
II.Treasury bills. IV.Money market fund.
variable life insurance policy:
In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. All important information concerning the insurance policy must be addressed in the prospectus. This would, of course, include all sales charges. Money invested in a variable life policy may be invested selectively by the policyholder and may be invested in a wide variety of securities depending on the investor's objectives
Which of the following would cause an increase in NAV?
Investment income is received by the fund The securities in the portfolio appreciate.
Which of the following mutual funds would be most likely to have the least correlation with the overall market?
Money market fund.
All of the following purchases are permitted in a mutual fund's portfolio EXCEPT:
Mutual funds may not purchase securities on margin. A fund is not prohibited from buying options, low quality bonds, or other mutual funds, if the purchase is in line with the fund's objectives.
According to the Investment Company Act of 1940, an open-end investment company must compute its NAV
Mutual funds must calculate the value of fund shares at least once per business day; funds may calculate the value more often and will disclose this fact in the prospectus.
Under the Investment Company Act of 1940, which of the following are considered management companies?
Open-end companies. Closed-end companies.
Which of the following funds would be most suitable for a customer with moderate experience and risk tolerance seeking a portfolio to provide current income?
Preferred stock mutual fund.
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?
Receiving cash distributions may reduce Customer A's proportional interest in the fund. Customer B's reinvestments purchase additional shares at NAV rather than at the offering price.
Which of the following types of mutual funds would be most likely to have capital appreciation as its stated objective?
Specialized. A specialized fund invests at least 25% of its assets in one particular industry or region. Generally, its main objective is capital or price appreciation. Income funds are looking for income, municipal bond funds for tax-free income, and balanced funds for capital preservation.
Your customer is interested in income that is as free of default risk as possible. Which of the following funds would you consider suitable to recommend to him?
The Ellis Government Bond Fund.
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):
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.
A customer has a variable life policy and has made 2 annual premium payments. From the 1st year's premium, $600 was deducted in sales charges. From the 2nd year's premium, $400 was deducted. If the customer terminates the policy after 2 years, which of the following statements are TRUE?
The customer receives the policy cash value only. The variable life refund provision allows for a return of cash value only if termination occurs after the policy has been in force for more than 2 years.
Which of the following would affect the net asset value per share of a mutual fund?
The fund pays a dividend. The portfolio changes in value. Net asset value (NAV) per share equals net assets divided by number of shares outstanding. A dividend, if paid, would be subtracted from the value of each share, and a change in market value would directly affect NAV. Purchases or redemptions of shares affect net assets and number of shares to the same degree and thus would have no net effect on NAV.
You are using beta as an analytical tool to compare several diversified mutual funds to help a client choose one for his portfolio. If your client's risk tolerance regarding principal is relatively low, you would probably recommend the fund with a beta of:
The lower the beta, the less volatility. Because the question tells us that the client's risk tolerance is relatively low, we can take some volatility making a fund that has half the volatility of the overall market a good recommendation.
When interest rates are declining, which of the following funds is most directly affected?
When interest rates fall, bond prices rise. The other funds listed hold common stock in their portfolios, and common stock is not as directly affected by changes in interest rates as are debt instruments.
Your client is interested in an investment program that is sensitive and responsive to anticipated market moves. You might recommend:
an asset allocation fund.
A no-load fund sells its shares to the public:
by a direct sale from the fund to the investor.
ACE Fund, a diversified management investment company, has net assets of $500 million. Currently, $25 million of ACE's portfolio is invested in the common stock of DEF Corporation. Due to favorable news, DEF stock increases to the point where it now represents over 15% of ACE's assets. To remain a diversified company, ACE would have to
do nothing. Under the Investment Company Act of 1940, should an asset in a diversified management company's portfolio exceed the maximum permitted because of market appreciation rather than additional purchases, no action needs to be taken.
Once a variable annuity has been annuitized:
each annuity unit's value varies with time, but the number of annuity units is fixed.
Mutual fund shares represent an undivided interest in the fund, which means that:
each investor owns a proportional part of every security in the portfolio.
At age 65, your customer purchased an immediate variable annuity contract. He made a lump-sum $100,000 initial payment and selected a life income with ten-year period certain payment option. The customer lived until age 88. The insurance company made payments to him:
for 23 years.An annuity with life and a ten-year certain will pay for the greater of ten years or the life of the annuitant. The customer lived for 23 more years, which is more than the ten certain.
Separate accounts are similar to mutual funds in that both:
may have diversified portfolios of common stock. give investors voting rights.
An investor reviewing the holdings of a tax-exempt bond fund would expect to see most of the portfolio invested in
municipal bonds.
In the sale of open-end investment company shares, the prospectus:
must be delivered to the client either before or during the sales solicitation.
A unit investment trust has 90% of its portfolio invested in high grade bonds with an average maturity of almost 25 years. If the industry consensus was that long-term interest rates were about to increase sharply, which of the following actions would most likely be taken?
nothing The portfolio of a unit investment trust is fixed once it has been constructed. Therefore, it does not change in reaction to market conditions.
A mutual fund that takes special steps to shield its investors from loss of capital is a(n):
principal-protected fund.
During the accumulation phase of a variable annuity, the value of the contract owner's portion of the separate account is equal to:
the number of accumulation units times the value per unit.
The management fees paid by an investment company are part of
the operating expense of the fund.
In a variable annuity contract, the assumed interest rate (AIR) refers to:
the rate of return needed to maintain the annuity payments at a constant level.
Jeremy has been investing in a variable annuity for the past six months and has paid $800 in sales charges. If he owns 1,000 accumulation units valued at $5 each, the value of his interest in the separate account is:
$5,000.00 To determine the value of Jeremy's interest in the separate account, multiply the number of accumulation units by the value of each unit; sales charges are not a factor when calculating this value.
Over the first four years, the average sales charge on a spread-load contractual plan can be no more than:
16% per year. The Investment Company Amendments Act of 1970 state that a spread-load plan cannot take more than 20% of any plan payment as a sales charge and that the charges may not exceed an average of more than 16% during the first 4 years of the plan's investment. Contractual plans are no longer sold, but there are still plans in effect.
What assets-to-debt ratio must an open-end investment company maintain?
3 to 1.
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?
5% If the actual rate of return equals the assumed interest rate, the check will stay the same.
Regarding the Investment Company Amendments Act of 1970, what is the maximum sales charge that may be deducted over the life of a contractual plan?
9%
Question ID: 613221 Which of the following investment company portfolios is supervised rather than managed?
A unit investment trust buys securities and holds them until redemption or until a specified future date. The securities in the portfolio are not traded, so no manager is needed. A REIT is not considered to be an investment company
The portfolio of a diversified equity fund would most likely consist of
A diversified equity fund will have stocks from many companies and many industries.
A fund seeks maximum capital appreciation through investment in stocks of companies providing innovative products in the medical sector, including pharmaceutical developers and medical equipment suppliers. This information describes which of the following mutual funds?
ABC Biotechnology Fund. Sector funds invest in stocks of companies operating in specific industries or specific geographic sectors; a biotechnology fund is one example of sector funds.
A fund seeks to preserve capital, generate current income, and provide long-term growth. Its current strategy is to invest 60% of its portfolio in common stocks and 40% in bonds and fixed-income securities. Through diversification, the fund intends to provide protection against downturns in the market. This information best describes which of the following mutual funds?
Balanced funds invest in both common stocks and bonds to preserve capital, generate current income, and provide long-term growth
Your customer seeks capital growth but is concerned about execution costs. Which of the following funds would be most suitable for him?
Execution costs will be lower for index funds because their portfolio transactions are limited to maintaining positions reflecting the composition of the index.
What are the three classifications used to identify investment companies?
Face-amount certificate companies, unit investment trusts, and management companies.
retiree, widowed and in his early 70's has adequate savings to meet large unexpected expenses. However, he has no pension or IRA, and in some months social security payments leave him short requiring him to dip into his savings and investments for recurring expenses such as his mortgage payment and utilities. With an already diversified portfolio he wishes there could be a way to add to his monthly income on a regular basis. He's willing to liquidate and allocate up to $100,000 of his current portfolio or cash out a life insurance policy if need be to meet this objective. Which of the following recommendations would be better?
Ginnie Mae's (GNMA) mutual fund
A 65-year-old man called the branch manager to complain about a recent exchange of a deferred variable annuity proposed and performed by a new representative. The customer said he was unaware that there would be charges associated with the transaction and was shocked that the account value diminished substantially during a recent downturn in the market. The manager should do which of the following?
Interview the representative to ascertain whether firm procedures were adhered to with regards to suitability and disclosure of charges and risks associated with exchanges.
A couple in their early 30s has been married for four years, their disposable income is relatively high, and they are planning to buy a condominium. If they need a safe place to invest their down payment for about six months, which of the following mutual funds is the most suitable for these customers?
LMN Cash Reserves Money Market Fund. These customers are preparing to make a major purchase within the next few months, so they require a highly liquid investment to keep their money safe for a short amount of time. The money market fund best matches this objective
An investor has unexpectedly received $30,000 from an old debt he had written off. This money will come in handy for a business venture planned for three years from now. Meanwhile, he would like to generate some income on the money with as little risk and as little expense as possible. Which of the following recommendations is likely to be the most suitable for this customer?
The customer wants income with as little risk as possible, so our answer must be one of the choices that offer an investment-grade bond fund. Of those offered, Class C shares would be best because the customer would pay no front-end sales charge and no CDSC after a short time, probably one year. He will pay somewhat higher 12b-1 fees than with Class A shares, but this will amount to only a fraction of 1% per year, and only for the three years of his investment.
A fund seeks to maximize safety of invested principal while providing current income. By investing in a broad range of debt securities issued by the U.S. Treasury and government agencies (e.g., Government National Mortgage Association), the fund provides reduced risk. This statement describes which of the following mutual funds?
XYZ Government Income Fund.
A fixed-premium variable life insurance contract offers a:
guaranteed minimum death benefit. cash value that fluctuates according to the contract's performance.
Which of the following is an advantage of purchasing a lump-sum deferred annuity as opposed to a periodic payment deferred annuity?
The entire amount of the purchase has the maximum amount of time to grow.
Under the Investment Company Act of 1940, which of the following statements regarding the investment objective of a mutual fund are TRUE?
The majority of outstanding shares must vote to approve changes in the investment objective The investment adviser does not set, but tries to meet, the investment objective.
The maximum sales charge over the life of a contractual plan using mutual funds for its underlying investment is:
The maximum sales load permissible under either type of contractual plan (front-end load or spread-load) is 9% over the life of the plan. It should be noted that new contractual plans are no longer sold, though there are still such plans in force
fund of funds
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.
Last year, the bond market was profitable and ABC Fund had 70% of its assets in bonds. Next year, the fund's managers expect the stock market to do well, and will adjust the fund's portfolio so 60% of its assets will be invested in stock. ABC is probably what type of fund?
Balanced. This fund is invested in both stock and bonds; it is a balanced fund. The percentage invested in the two types of securities is adjusted to maximize the yield obtained; percentages are seldom fixed and are usually at the discretion of the investment adviser.
