Series 6: QBank Quiz Two

The Windmill Balanced Fund holds a mix of stocks and bonds. In the current year they received $500,000 in dividends from stocks and $600,000 in interest from bonds. Over the year they have had $100,000 in expenses. What is the fund's net investment income?

$1 million The formula for net investment income is dividends + interest - expenses. $500,000 + $600,000 = $1.1 million. $1.1 million - 100,000 = $1 million

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 NAV $9.15, POP $10.00. If liquidated by the firm without charge, what would he receive for his shares?

$1,830 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

The Brandon Equity and Income Fund holds a mix of stocks and bonds. In the current year they received $1,000,000 in dividends from stocks and $600,000 in interest from bonds. Over the year they have had $100,000 in expenses. What is the fund's net investment income?

$1.5 million The formula for net investment income is dividends + interest - expenses. $1,000,000 + $600,000 = $1.6 million. $1.6 million - 100,000 = $1.5 million

Jim's Tech Fund receives $22 million in dividends and pays $2 million in expenses. At the end of the year the fund distributes $18.5 million as dividends to the fund's shareholders. The fund will pay taxes on how much of the net investment income?

$1.5 million The fund meets the requirement to qualify as a conduit because it distributes more than 90% of net investment income (NII) to shareholders. $22 million - $2 million = $20 million in NII. $18.5 million is 92.5% of NII. The fund pays taxes on the undistributed portion of NII ($1.5 million)

The KPF Growth and Income Fund experienced $10 million in net investment income last year. Of this, it distributed $8.9 million to its shareholders. On how much of its net investment income must the fund itself pay income tax?

$10 million If a mutual fund distributes at least 90% of its net investment income to its shareholders, it need pay taxes only on the income it retains. If it distributes less (in this case, it distributed 89%), it must pay income tax on 100% of its net investment income. In either case, the shareholders pay income tax on what they received

An investor purchases $10,000 of the ABC Income fund. Over the course of the year, $500 in dividends are reinvested and $500 of capital gains are received in cash. The fund has a 5% front-end load. What is the investor's cost basis at the end of the year?

$10,500 The investor invested $10,000 into the mutual fund, which included a $500 sales charge. Cost basis includes any sales charge that was paid. Reinvested dividends are taxable and, therefore, increase the investor's cost basis. A capital gains distribution was received in cash and has no effect on the cost basis of the investment

If a mutual fund's net asset value is $9.30 and its sales charge is 7%, its offering price is

$10.00 To determine the selling price of the shares when given the NAV, divide the NAV by 100% minus the sales load: NAV ÷ (100% − SL%) = public offering price. In this case, $9.30 divided by 93% (0.93) = $10

In order to make a public offering, an investment company must have a minimum net worth of

$100,000 No investment company may register an offering with the SEC unless it has a minimum net worth of $100,000

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?

$13.66 The fund offers conversion privileges so that conversion occurs at the net asset value. Because the customer is exchanging into the ABC Balanced Fund, she will purchase shares at its NAV of $13.66

An investor redeems 200 shares of ABC Fund, which has no redemption fee. If the quote is NAV $12.05, POP $13.01 asked, what amount will the investor receive?

$2,410.00 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)

The XYZ Growth Fund has an NAV of $19. Its sales charge, calculated by the usual industry method, is 5%. What is the public offering price of a single share?

$20.00 Public offering price is equal to NAV divided by (1 − sales charge). Thus, $19 ÷ 0.95 = $20.00

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

$21,362 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 has contributed $50,000 to a nonqualified variable annuity over the years. She dies before retirement, when the total value of the annuity is $75,000. On how much must her beneficiary pay income tax?

$25,000 If an annuitant dies during the accumulation period, the annuity goes to the beneficiary, who must pay tax on the growth and accumulation portion of the total. In this case, the annuitant paid $50,000 in after-tax money and experienced growth of $25,000. The beneficiary is taxed on the $25,000

An investor redeems 300 shares in ACE Fund. When the investor bought the shares at $12.00, the NAV was $11.08. If the current POP is $12.50 and the NAV is $11.80, the investor receives

$3,540 Shares are redeemed at NAV. If the investor redeems 300 shares at an NAV of $11.80, he receives $3,540 (300 × $11.80)

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 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

Your father purchased $10,000 of ABC stock 10 years ago and purchased an additional $5,000 on April 1. On September 1, when the current market value of the stock is $25,000, your father passes away and you inherit the ABC stock. On November 1, you sell the stock for $30,000. What do you report on your tax return?

$5,000 long-term capital gain The holding period for stock inherited is always long term, no matter when the stock was purchased. The cost basis of the stock is automatically stepped up to the current (fair) market value at the time of death. Therefore, the cost basis for the stock is $25,000, and when it is sold for $30,000 (two months later), it will result in a $5,000 long-term capital gain

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?

$8.30 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

The XYZ open-end growth fund charges no sales charge or redemption fee. An investor wishes to sell 1,000 shares and phones in a redemption request. The next computed public offering price is $9.50 per share. The investor will receive a check in the amount of

$9,500 With no sales charge or redemption fee, the investor will receive the next computed price of $9.50 per share multiplied by the number of shares redeemed: $9.50 × 1,000 shares = $9,500

The maximum fee that can be charged for distribution and promotion under a 12b-1 plan is

0.75% of average net assets The maximum charged under a 12b-1 plan must be reasonable and bear a relationship to the distribution services offered. The fee on shares offered may not exceed 0.75% of average net assets

How long is the free-look period for a variable life insurance policy? - 10 days after delivery - 10 days after issue - 45 days after delivery - 45 days after application

10 days after delivery 45 days after application The insurer must extend a free-look period to the owner of a variable life policy for 45 days from the execution of the application, or for 10 days from the time the owner receives the policy, whichever is longer. During the free-look period, the policyowner may terminate the policy and receive all payments made

An individual who purchased an SPDA 20 years ago with an investment of $100,000 has passed the age of 59½ and is considering annuitizing his account. At the time of the investment, the account was credited with 10,000 accumulation units. The account is now valued at $400,000. If the annuity is annuitized, how many annuity units will be used to calculate the monthly check?

10,000 units When an annuity is annuitized, the accumulation units are replaced with annuity units. Because this annuity was funded with a single premium that purchased 10,000 units, no additional units have been purchased. Therefore, when annuitized, it will have 10,000 annuity units

Your customer would like to do a 1035 exchange of his variable annuity for a life insurance policy and wants to be sure there will be no adverse tax consequences. You tell him that

1035 exchanges are not allowed from annuities to life insurance IRS Code Section 1035 permits exchanges between annuities and annuities and life insurance and annuities. It does not allow exchanges between annuities and life insurance

If an individual purchases open-end investment company shares without first receiving a prospectus, the registered representative is in violation of the Act of

1933 Under the 1933 Act, a registered representative must sell primary offerings of nonexempt issues by prospectus. The 1934 Act regulates secondary market trading (mutual fund shares do not trade on the secondary market). Under the 1940 act, the mutual fund issuer must register as an investment compan

According to federal law, an insurance company under the provisions of the Investment Company Act of 1940 must allow a variable life policyholder the option to convert the policy into a permanent form of insurance contract for a period of

24 months Although state law may allow for periods longer than 24 months, federal law requires a 2-year conversion privilege

After a mutual fund's 10th year, performance statistics must show results for each of the following periods except

3 years Mutual fund performance statistics must show results for 1, 5, and 10 years, or the life of the fund, whichever is shorter

To avoid the wash sale rules of the IRS, one may not replace a securities position for how many days before or after the sale of a security?

30 dayS The wash sale rules prohibit an investor from declaring a loss if he acquired the security or one equivalent to it (e.g., a convertible) 30 days before and 30 days after the date of sale

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?

37.825 shares The shareholder can purchase 37.825 shares. Mutual fund shares may be sold in full or fractional amounts

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?

4% 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

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

The AIR on a variable annuity is 5%. In March, the separate account earned 5%, which resulted in an April payment of $300. In April, the separate account earned 9%, resulting in a May payment of $325. What must the separate account earn in May to generate a $325 June payment?

5% The annuitant will receive a payment equal to the previous payment if the separate account return for the period equals the AIR

Your client is interested in purchasing the Class A shares of the BACH Investment Company, whose maximum sales charge is 5%. Which of the following choices best describes the sales load she would probably be charged on her purchase of the BACH?

5% on each purchase; 0% deferred sales load Class A shares charge a front-end sales charge, also called a front-end load, and no deferred sales charge

To be in compliance with the Investment Company Act of 1940, every registered investment company must report to shareholders no less frequently than every

6 months Investment companies must report to customers on the state of the company at least twice a year with one audited annual report and one unaudited semiannual report

Mutual fund performance statistics for funds that are 7 years old must show results for each of the following periods except - 5 years - 7 years - 1 year - 6 months

6 months Mutual fund performance statistics must show results for 1, 5, and 10 years, or the life of the fund, whichever is shorter

A mutual fund must send a check for redeemed shares within how many days after receiving a written request for their redemption?

7 days The 7-day redemption rule is required by the Investment Company Act of 1940

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?

75% The minimum that must be available in a VL contract after three years is 75% of cash value

FINRA allows sales charges up to a maximum of

8.5% on mutual funds The maximum allowable sales charge for mutual funds is 8.5%. Contractual plans are 9%. There is no maximum on variable annuities

The Laurel Government Securities Fund would be in violation of Rule 34b-1, the Name Rule, if it did not have at least what percentage of its assets invested in government securities?

80% Rule 34b-1 of the Investment Company Act of 1940 deals with certain misleading statements contained in mutual fund marketing materials. The rule requires that any investment company whose name implies a certain type of portfolio composition must have at least 80% of its assets invested as implied

A 35-year-old client purchases a variable life insurance policy. Under current regulations, the maximum sales charge permitted over the life of the policy is

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

A client owns 100 shares of the RMBN fund. The fund is no load and its next calculated POP turns out to be $10 per share. If the fund has a 0.5% redemption charge and the client liquidated the entire account, proceeds would be

995 Because this is a no-load fund, the POP after the entry of the redemption request and NAV are the same. Therefore, liquidating 100 shares at $10 per share results in a gross of $1,000. However, there is a 0.5% redemption fee that reduces the net proceeds by $5 ($1,000 × 0.005). Redemption fees for no-load funds are designed to offset the cost of fulfilling a redemption order and are limited to a maximum of 2%

Which of the following activities by a mutual fund require approval by a majority vote of outstanding shares? - A change in sales load policy - A change in investment policy - A change in the debt-to-equity ratio of a balanced fund - Liquidating a position in the portfolio

A change in sales load policy A change in investment policy Both a change in investment policy (such as income to growth) and changing the sales load policy involve fundamental policy decisions and require a majority vote of outstanding shares. Merely liquidating a position in the portfolio and changing the ratio of equity-to-debt in a balanced fund are decisions for the fund manager

Under the Investment Company Act of 1940, which of the following describes an investment company?

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

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 contingent deferred sales charge 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

Open-end investment company shares normally go ex-dividend on what date?

A date determined by the investment company board of directors The ex-dividend date is the date the shares are reduced by the amount of dividend distribution. To receive the dividend, purchaser transactions must settle before the ex-dividend date, which is determined by the investment company board of directors

During the accumulation period of a variable annuity contract, an investor will receive which of the following?

A deferral of tax liability on investment income and capital gains earned in the separate account The tax deferral of investment income and capital gains earned by the portfolio during the accumulation period is one of the advantages of a variable annuity. Upon withdrawal, however, both the income and the capital gains will be taxed as ordinary income as they are withdrawn

Which of the following statements describe the conduit theory of taxation?

A fund is not taxed on earnings it distributes provided distributions equal 90% or more of net investment income Under the conduit, or pipeline, theory of taxation, a fund is liable for taxes only on the income retained, provided it distributes at least 90% of its net investment income. The investor benefits because the income is only taxed twice (at the corporate level and at the individual level), and avoids taxation at the fund level. There is no tax-free accumulation for the shareholder

A prospectus must accompany or precede which of the following?

A mutual fund sales presentation held in person at the representative's office Any offer or advertisement of mutual fund shares must be preceded or accompanied by a prospectus. However, generic advertisements, such as those permitted under Rule 482, or purely informational material are exempted from this requirement. A prospectus must be given to all seminar attendees when they arrive, not when the invitations are mailed. The face-to-face meeting between the representative and the prospect is considered an offer and must be accompanied by a prospectus

A registered representative with a Series 6 registration can sell which of the following?

A mutual fund that redeems its own shares The Series 6 is a limited license only allowing the sale of investment companies and variable products where a prospectus is required. This would exclude any secondary trading such as in ETFs and closed-end funds. The REIT is not an investment company, so the Series 6 would not suffice

Which of the following may a registered representative use to solicit an order for open-end investment company shares? - An annual report - A prospectus - A summary prospectus - A preliminary prospectus

A prospectus A summary prospectus 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 can access one online. A preliminary prospectus (red herring) may never be used to solicit anything more than an indication of interest—not an order

Which of the following is accurate with regard to using a summary prospectus for the sale of a mutual fund? - A statutory prospectus must precede or accompany delivery of the summary prospectus - A statutory prospectus may be delivered after the summary prospectus - Electronic delivery of the statutory prospectus is allowed after the sale - A paper prospectus must be delivered within three days of the sale

A statutory prospectus may be delivered after the summary prospectus Electronic delivery of the statutory prospectus is allowed after the sale The summary prospectus may include an application for sale. The statutory or full prospectus must be available online

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

A variable amount determined by the value of the separate account For a variable annuity, the payments will vary with the value of the portfolio in the separate account.

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?

ABC Balanced Fund Balanced funds invest in both common stocks and bonds to preserve capital, generate current income, and provide long-term growth

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? - ABC - XYZ Mutual Fund Company - FINRA - The registered representative

ABC 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

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

Which of the following mutual funds seeks high current yield accompanied by reasonable risk and invests most of its assets in a portfolio of corporate bonds having one of the top-four ratings according to both Moody's and Standard & Poor's?

ABC Investment-Grade Bond Fund Investment-grade bond funds invest in corporate bonds having one of the top-four ratings according to both Moody's and Standard & Poor's

Which of the mutual funds listed below would be likely to have the lowest volatility?

ABC Money Market fund Money market funds are managed specifically to achieve low volatility

A fund seeks to duplicate the price and yield performance of Standard & Poor's composite of 500 stocks. The fund invests in each of the 500 stocks in the same proportion as the composition of the index. The portfolio is not actively traded and, therefore, features a low turnover ratio. This information describes which of the following mutual funds?

ABC Stock Index Fund Index funds seek to duplicate the price and yield performance of a selected index

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

A fund seeks primarily current income, with secondary objectives of capital growth and growth of income. Its portfolio is composed of common stock, preferred stock, and convertible securities of large, well-established companies with histories of paying high dividends. This information describes which of the following mutual funds?

ACE Equity Income Fund Equity income funds invest in common stock, preferred stock, and convertible securities for current income and capital growth

ACE Fund's offering price is $9.00, and its net asset value is $9.40. GEM Fund's offering price is $24.00, and its net asset value is $20.00. From these quotes, you know that - ACE could be an open-end or closed-end fund - ACE is a closed-end fund - GEM could be an open-end or closed-end fund - GEM is a closed-end fund

ACE is a closed-end fund GEM is a closed-end fund ACE Fund is selling below its net asset value, so it must be a closed-end fund. GEM is selling above its NAV by more than the 8.5% sales load allowed for open-end funds, so it also must be a closed-end fund ($4 / $24 = 16.7%)

ACE, an open-end investment company, operates under the conduit, or pipeline, tax theory. Last year, it distributed 91% of all net investment income as a dividend to shareholders. Therefore, which of the following statements is true?

ACE paid taxes on 9% of its net investment income last year ACE pays taxes on any portion of income it does not distribute, as long as it distributes at least 90%; ACE paid taxes on 9%

A fund seeks to achieve maximum growth, with little or no pursuit of current income. The fund invests in stocks of small and medium-size companies that demonstrate significant long-term growth potential. The fund's management believes that despite year-to-year fluctuations, the strategy of investing in companies that show strong earnings growth can result in superior investment returns. This information describes which of the following mutual funds?

ATF Capital Appreciation Fund Capital appreciation funds seek growth, not current income

Your married customers, ages 48 and 50, have a combined annual income of more than $200,000. They are concerned about the effects of rising inflation, and because they are heavily invested in bonds, they seek to invest a portion of their portfolio in a fund that will provide additional diversification. Which of the following mutual funds is the most suitable for these customers?

ATF Overseas Opportunities Fund Investment in an overseas equity fund will provide diversification not subject to U.S. inflation. The tax-free fund will not provide additional diversification or the best hedge against inflation. A high-grade bond fund will not add diversification

When an investor begins to receive the payout on a variable annuity, which of the following statements is true? - The amount of each payment is fixed - Accumulation units are converted to annuity units - Annuity units are converted to accumulation units - The annuity unit's value is fixed

Accumulation units are converted to annuity units To determine the payment amount, accumulation units are converted to annuity units. In a variable annuity, neither the annuity unit's value nor the monthly payment amount can be fixed

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 retail investor, age 40, wants to fund an annuity. She would like to take advantage of the stock market gains she sees in the news but is terrified of losing money. If an annuity is the right recommendation, what kind of annuity would be most appropriate?

An index annuity An index annuity allows the investor to participate in the gains of the stock market but not the losses and would be an appropriate recommendation. Fixed annuities do not have an assumed interest rate

The value of which of the following is used to determine an annuitant's payment amount during the payout period of a variable annuity contract?

Annuity unit The annuity unit is the accounting measure used to determine each payment amount during the payout period of a variable annuity contract

Which of the following statements is true for an individual calculating taxes on distributions she received from a municipal bond fund for this year? - All of the income distribution she received as a dividend is taxable at federal income tax rates - Any capital gains distributions she received from the fund are taxable at capital gains rates - Part of the income distribution she received as a dividend is taxable at federal income tax rates - All distributions she received from the fund, both income and gains, are exempt from federal income tax

Any capital gains distributions she received from the fund are taxable at capital gains rates Interest in the form of dividends paid from a municipal bond fund would be exempt from federal income tax. Capital gains distributions from the sale of portfolio securities would be subject to capital gains taxes

A straight life annuity will give the annuitant monthly payments for which of the following?

As long as the annuitant lives A straight life annuity will pay monthly for as long as the annuitant lives

From which of the following is the 12b-1 fee deducted?

Assets of the fund A 12b-1 fee is charged quarterly as a percentage of the average annual assets

When an investor receives payments during the annuity period of a nonqualified variable annuity, how will he be taxed?

At ordinary income rates on the growth portion In a nonqualified annuity, the investor invests using after-tax dollars. When he receives payments during the annuity period, he will pay ordinary income taxes on the growth portion only

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 that 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

Your customer, who has concentrated on growth in his investments for many years, has decided he would like to add the characteristics of value investing to his program. He would also like to restrict the number of new investments as much as possible. Which of the following fund types might you recommend as having the characteristics of both growth and value investing?

Blend/core Blend/core funds leverage the virtues of both value and growth investing styles. Blend/core funds hope to benefit from value increases by investing in companies at market prices below an estimate of true worth and hope to be rewarded with higher future prices because of their potential for positive trends in sales and earnings. They also invest for simple capital growth, wherein a successful company continues to be successful and thus grows in size and stock price

Your customer wishes to invest $25,000 using investment company securities as a means of diversification, but she is not comfortable with stock market risk. Which of the following fund types would be the least appropriate recommendation?

Blend/core fund One of the primary risks associated with blend/core funds is stock market risk because their portfolios consist only of equities, typically both value and growth stocks. Given the customer's discomfort with market risk, of those listed, a blend/core fund would be the least appropriate recommendation

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

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

Which of the following statements regarding variable annuities and index annuities are not true? - Both index and variable annuities are securities products - Index annuities provide a guaranteed minimum return, whereas variable annuities do not - Index annuities typically have longer surrender periods than variable annuities do - Variable annuities typically have longer surrender periods than index annuities do

Both index and variable annuities are securities products Variable annuities typically have longer surrender periods than index annuities do Variable annuities are classified as securities; index annuities are not. Index annuities have a guaranteed minimum return and longer surrender periods

Your customer has sold 300 shares of ABC Semiconductor, Inc., common stock for a loss. Fifteen days later they enter a buy order. Which of the following purchases would not trigger a wash sale?

Buy 300 shares of LMN Semiconductor, Inc A wash sale may be triggered by re-establishing a position in the same security (regardless of the account) or a security that may be converted or exercised into the same security

An investor buys a mutual fund over the internet. How does the investor get the required information?

By downloading an electronic copy of the statutory prospectus 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

The primary objective of a particular mutual fund is the payment of dividends, regardless of the market's current state. Capital growth is a secondary objective. Which of the following industry groups would be appropriate for the fund's portfolio?

Public utilities Utilities are defensive industries; they tend to pay dividends consistently

Which of the following are among the objectives of a balanced fund? - Tax advantages - Exploitation of special circumstances - Capital appreciation - Income

Capital appreciation Income Balanced funds, also known as hybrid funds, invest in stocks for appreciation and bonds for income. The relative proportion of each is adjusted by the fund manager

Which of the following types of investment company securities is the most likely to have a NAV that is 90% of its offer price?

Closed-end company share The market determines the offer price of closed-end company shares; the offer price may be either more or less than the NAV. Because the NAV in this situation is 90% of the offer price, this must be a closed-end share. An open-end share's NAV must be at least 91.5% of its offered price because the maximum sales charge on open-end shares is 8.5% of the POP

Which of the following securities may a Series 6 registered representative (RR) sell?

Closed-end funds in the primary market Series 6 RRs have a limited registration and are limited to selling investment company securities with a prospectus (only in the primary market)

Two investors each have an open account in the ATF Mutual Fund, which charges a maximum sales charge of 8.5%. The first investor has decided to receive all distributions in cash, whereas the second investor is automatically reinvesting all distributions. How do their decisions affect their investments? - Cash distributions may reduce the first investor's proportionate interest in the fund - The first investor may delay payment of up-front sales charges on the shares he buys with his distributions - The second investor's reinvestments purchase additional shares at NAV rather than at the offering price - The second investor's reinvested distributions will not be taxed

Cash distributions may reduce the first investor's proportionate interest in the fund The second investor's reinvestments purchase additional shares at NAV rather than at the offering price By electing to receive distributions in cash while others are purchasing shares through reinvestment, the first investor is lowering her proportionate interest in the fund. Cash purchases later would be at the POP, not the NAV, with no delay in payment of sales charges, and reinvested distributions are taxed just as cash distributions are

Your customer has inherited $50,000, with which he would like to make a one-time, long-term investment for growth. Of the funds you recommend to him, he has selected one that offers A-, B-, and C-class shares. Which should he purchase?

Class A Class A shares are appropriate for large investments invested for long periods of time. Class A shares have lower internal fees than B or C shares and (often) breakpoints to reduce their front-end load. The $50,000 should qualify for a breakpoint. Class B shares, with higher internal fees and a contingent deferred sales charge (CDSC) are more appropriate for smaller investments that don't or won't qualify for breakpoints, invested for long periods of time. Class C shares have a 12b-1 fee deducted each year and will result in higher sales charges in the long term, because the fee never discontinues

Which of the following mutual fund share classes has no back-end load, lower operating expenses, and low or no 12b-1 fees?

Class A 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

An investor with a long time horizon and $100,000 to invest would most likely be interested in

Class A shares 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

Which of the following mutual fund share classes are especially suited to investors that have long-term objectives? - Class A shares for investors that have a large amount to invest - Class B shares for investors that have a small amount to invest - Class A shares for investors that have a small amount to invest - Class C shares

Class A shares for investors that have a large amount to invest Class B shares for investors that have a small amount to invest 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 six to eight years, and the shares convert to A shares

Which of the following share classes have a back-end load? - Class B - Class A - No-load shares - Class C

Class B Class C 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

Which of the following share classes typically have a higher expense ratio than Class A shares? - No-load shares - Class B shares - Front-end load shares - Class C shares

Class B shares Class C shares 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 and Class C shares have the highest expense ratios. Class B shares do convert to Class A shares after the CDSC expires

Mutual fund shares that carry a level load are

Class C shares 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

Investors with a short time horizon most likely will invest in which class of mutual fund shares?

Class C shares Class C shares may be less expensive than Class A or B shares for investors with a short time horizon. The front-end load on Class A shares and the back-end load on Class B shares makes them unattractive for short-term investors. A shares do not convert to B shares

Your customer, in his 30s, is extremely optimistic about business, not just in the United States but worldwide. He has received a $50,000 legacy and would like to invest it for long-term growth. Which of the following funds would make the most suitable recommendation?

Clements Global Equity Fund Long-term growth requires an equity rather than a debt investment. This customer expects both foreign and U.S. business to do well in the coming years. An international, or foreign, stock fund would have only foreign stocks in it, no U.S. stocks. A global or worldwide equity fund would include both American and foreign stocks

How do closed-end investment companies differ from open-end investment companies? - Closed-end companies register their shares with the SEC; open-end companies do not - Closed-end companies' shares are sold with prospectus only in IPOs; open-end shares' solicitations must always be accompanied by a prospectus - Closed-end companies issue a fixed number of shares; there is no limit on the number of shares issued by an open-end company - Closed-end companies may only sell shares to institutional investors; open-end companies can sell to any investor

Closed-end companies' shares are sold with prospectus only in IPOs; open-end shares' solicitations must always be accompanied by a prospectus Closed-end companies issue a fixed number of shares; there is no limit on the number of shares issued by an open-end company Closed-end companies issue a fixed number of shares, whereas open-end companies do not specify the number of shares to be issued. Both types of company register issues with the SEC, and any investor may invest in either type of company. Open-end shares must always be sold with a prospectus because each is a newly issued share

An investor wishes to start a dollar cost averaging program by investing $100 per month. Which of the following would be the least appropriate investment vehicles for this plan? - Closed-end investment company - Exchange-traded fund - Open-end investment company - Variable annuity

Closed-end investment company Exchange-traded fund Closed-end investment company shares and exchange-traded funds trade like any other stock. Smaller investment levels involve high commission costs relative to the amount being invested. Also, there are no provisions for rights of accumulation and reinvestment of distributions

When comparing mutual funds and ETFs, the disadvantages of investing in ETFs include which of the following? - Commissions both when purchasing and liquidating shares - A price not set by supply and demand - The ability to avoid tax consequences - The spread between the NAV and POP can be greater than 8.5%

Commissions both when purchasing and liquidating shares The spread between the NAV and POP can be greater than 8.5% Because the shares of ETFs are traded like any other stock, commissions are paid both to buy and to sell, and the price is determined by supply and demand, not NAV

A mutual fund can hold which of the following securities in its investment portfolio? - Common stock - Preferred stock - Corporate bonds - Municipal bonds

Common stock Preferred stock Corporate bonds Municipal bonds Although a mutual fund can only issue one type of security, common stock, it may purchase many different classes of securities for its investment portfolio, including preferred stock, corporate bonds, and municipal bonds

Under rising stock market conditions, which of the following funds would most likely experience the greatest amount of appreciation?

Common stock fund Of the choices given, a common stock fund appreciates the most when the stock market is rising. Funds that invest in bonds, such as income and balanced funds, appreciate more when interest rates fall

Who sets a mutual fund's ex-date?

The fund's board of directors A mutual fund's ex-(dividend) date is established by its board of directors or its principal underwriters. The FINRA rule governs the ex-date for stock and closed-end funds

Which of the following statements regarding taxable investment company distributions to investors is true? - Capital gains are generated when portfolio assets are sold at a profit but not when investor shares are redeemed at a profit - Dividend distributions are reported on IRS Form 1099-DIV - Dividends are distributed quarterly, and capital gains are distributed semiannually - Capital gains are generated from an investment company's net investment income

Dividend distributions are reported on IRS Form 1099-DIV Investment company distributions are reported to shareholders on IRS Form 1099-DIV. Dividends are paid as declared by the board of directors; capital gains are paid annually. Dividends, not capital gains, are paid from the company's net investment income. Capital gains are generated when an investor redeems appreciated shares of the investment company and when portfolio securities are sold

Which of the following statements describing the federal taxation of municipal bond fund distributions is true?

Dividend distributions are tax free; capital gains distributions are taxable. Interest income from municipal bonds is exempt from federal taxation and remains so when a bond fund distributes it as dividends. Capital gains on municipal bonds, however, are taxable. Therefore, capital gains distributions made by the fund to shareholders are taxable distributions. Information on this question is also part of LO 1.a

Which of the following statements describes the pipeline theory of taxation?

Dividends and interest are passed through to the investor without the fund being taxed Under the conduit, or pipeline, theory of taxation, a fund is liable for taxes only on the income retained, provided it distributes at least 90% of its net investment income. The investor benefits because the income is only taxed twice (at the corporate level and at the individual level), and avoids taxation at the fund level. There is no tax-free accumulation for the shareholder

When may a variable annuity account be surrendered?

During the accumulation period A variable annuity may only be surrendered during the accumulation period. If the account is annuitized, the investor has chosen a payout option. Note that before the accumulation period, the annuity is not yet opened

A customer wants to know how he can be sure that he will get the most current price for his mutual fund shares upon redemption. You could tell him which of the following?

Every mutual fund has to calculate its NAV at least once per business day. The price you get is the price next calculated after the fund receives your redemption request Mutual funds use forward pricing. The investor receives the next calculated NAV after the fund receives his redemption request. It would be correct to say that he will always know how many shares he is redeeming; he will not know precisely what the shares will be worth

A shareholder has redeemed some mutual fund shares that were purchased over a period of 10 years. If the shareholder has not indicated the specific dates of purchase and cost of the shares that were redeemed on his tax return, the IRS will follow which of the following methods in determining the cost basis of shares redeemed?

FIFO If another method is not chosen, the IRS will assume the FIFO (first in, first out) method of accounting in determining the cost basis of the shares redeemed. Investors may choose to identify shares redeemed only if the cost of the shares and the date of purchase is recorded on the tax return. The average cost method is an alternative that a taxpayer can use continuously for a given investment

From which of the following might you be able to purchase shares of a closed-end investment company after its initial offering? - From the investment company directly - From other stockholders in the OTC market - From other stockholders on the NYSE - From the investment company in exchange for other securities

From other stockholders in the OTC market From other stockholders on the NYSE Closed-end investment company shares are traded in the secondary marketplace (OTC or exchange). Shares are thus purchased from other shareholders through broker-dealers

Similarities between an open-end investment company and the insurance company separate account used to fund a variable annuity include which of the following? - The issuing company accepts the investment risk - Full-time portfolio management is provided - Both offer a choice between a distribution method that guarantees a monthly income for life or for a certain period - Purchase payments are made in accordance with the forward-pricing rule

Full-time portfolio management is provided Purchase payments are made in accordance with the forward-pricing rule 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

Which of the following would be valid when recommending investments for a client that does not believe in professional money management and is interested in long-term capital appreciation? - Gather financial information from the client - Consider index funds for a portfolio mix that is appropriate for the client based on risk tolerance, time horizon, and investment expectations - Place the client's assets in an asset allocation fund, providing diversification and reduced risk under most economic conditions - Review the portfolio at least once every month to determine whether any changes or modifications are necessary

Gather financial information from the client Consider index funds for a portfolio mix that is appropriate for the client based on risk tolerance, time horizon, and investment expectations Investment recommendations must be both suitable and acceptable to the client; therefore, knowledge of financial (and nonfinancial) information is important before making any recommendations. Index funds are a natural choice when someone does not believe in professional management of investments. Monthly review of a long-term capital growth portfolio, presumably with the intention of performing transactions, is far too frequent and will quickly offset the portfolio's growth unacceptably

Assuming that expense ratios for the funds listed are identical, rank the funds below in order, from lowest to highest expected income yield. - Municipal bond fund - Government bond fund - Corporate bond fund - Growth stock fund

Growth stock fund, Municipal bond fund, Government bond fund, Corporate bond fund Corporate bonds have the greatest amount of credit risk and, therefore, the highest yield. Government bond funds yield more than municipal bond funds because interest paid on government bonds is federally taxable. Growth stock funds are not designed to provide income at all

Your customer originally invested $20,000 into the ACE Growth Fund and has reinvested dividends and gains of $8,000. His shares in ACE are now worth $40,000. He exchanges his investment to the ACE Income Fund. Which of the following statements is true?

He must declare $12,000 as a taxable gain upon exchange into the ACE Income Fund 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). The taxes on $8,000 (dividends and capital gains) were taxed in the years that distribution took place

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 with 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 with the AIR, not to the previous month's return

John owns a nonqualified, tax-deferred annuity. When he retires, what will be the tax consequences of his annuity payments?

His annuity payments are partly taxable and partly tax-free return of capital The key word here is nonqualifed! The investment John made was with after-tax dollars, the money grows tax deferred, and only the earnings are taxed at distribution. A computation will be made at John's retirement called the exclusion ratio, to determine how much of each retirement payment will be treated as a return of cost basis and how much as taxable ordinary income. No annuity payment is treated as a distribution of capital gains

Which of the following mutual funds would be most likely to have the least correlation with the overall market?

Money market fund Money market mutual funds have no correlation to the overall stock market. Their price doesn't go up in good markets or down in poor markets—it just stays pegged to $1.00. If this question had asked for the most correlation, the answer would have been the index fund

Under what circumstances may an open-end investment company act as its own distributor?

If the fund is established under Section 12b-1 Mutual funds may not act as distributors for their own fund shares except under Section 12b-1 of the Investment Company Act

An investor has $250,000 to invest in mutual funds. Which of the following would be appropriate statements to make to him? - Buying a no-load fund will ensure better performance in the long run - If you purchase Class B shares, you will have no load now, but you will probably incur higher operating costs - A purchase of Class A shares from one fund family in this quantity will probably lead to a reduction in sales charge - The initial investment should be spread over several fund families to ensure proper diversification

If you purchase Class B shares, you will have no load now, but you will probably incur higher operating costs A purchase of Class A shares from one fund family in this quantity will probably lead to a reduction in sales charge 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

An investor has $250,000 to invest in mutual funds. Which of the following would be appropriate statements to make to him? - Buying a no-load fund will ensure better performance in the long run - If you purchase Class B shares, you will have no load now, but you will probably incur higher operating costs - A purchase of Class A shares in this quantity will probably lead to a reduction in sales charge

If you purchase Class B shares, you will have no load now, but you will probably incur higher operating costs A purchase of Class A shares in this quantity will probably lead to a reduction in sales charge 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

If an annuity's separate account has a portfolio that contains mostly common stocks, what does this mean? - In a rising market, the value of the account may rise - In a rising market, the value of an accumulation unit may rise - The owner of the annuity is protected from loss - The owner of the annuity is guaranteed a minimum return

In a rising market, the value of the account may rise In a rising market, the value of an accumulation unit may rise The variable annuity owner assumes the investment risk of the contract. If the market rises, the separate account's value increases, reflecting an increase in accumulation unit value and, ultimately, in the account value. If the market falls, the separate account's value decreases

Bob Smith, who is in his 40s, has just been placed into an extremely generous defined benefit plan at his company. He has decided that he no longer needs his variable annuity for retirement purposes and wants to use the money for a trip to Africa. Over the years, he has invested $60,000 in the annuity, and its total value is now $80,000. How much will Bob owe in taxes and penalties if he cashes it in?

Income tax on $20,000 and a $2,000 penalty If an annuity is cashed in, the growth and accumulation portion of its value ($20,000 in this case) is taxable as ordinary income. If the annuitant is under the age of 59½, he must also pay a 10% tax penalty on the growth withdrawn, a penalty of $2,000 in this case

Which of the following characteristics describe the net asset value per share? - Increases if the fund's assets appreciate in value - Decreases if the fund distributes a dividend to shareholders - Decreases when shares are redeemed - Increases if shareholders reinvest dividend and capital gains distributions

Increases if the fund's assets appreciate in value Decreases if the fund distributes a dividend to shareholders Net asset value (NAV) per share increases or decreases when assets in the portfolio increase or decrease in value. NAV decreases when the fund distributes a dividend. Redeeming or purchasing shares and reinvesting dividends or capital gains have no effect on NAV

In order to be considered a long-term gain a position must be held for how long?

More than one year In order to be treated as long-term a position must be held for more than one year. Note that a holding period of exactly one year is still short-term

According to the Investment Company Act of 1940, which of the following are required of investment companies? - Investment company registration statement filed with the SEC - Minimum net worth of $1 million before the offer of shares to the public - Statement of investment policies and diversification status - Asset-to-debt ratio of 2:1

Investment company registration statement filed with the SEC Statement of investment policies and diversification status The Investment Company Act of 1940 requires registration of the company with the SEC, a minimum initial net worth of $100,000, a specifically defined investment objective and whether the company intends to qualify as a diversified or nondiversified investment company. The asset-to-debt ratio must be at least 3:1

Which of the following would cause an increase in NAV? - The fund purchases $10 million in portfolio securities - Investment income is received by the fund - The securities in the portfolio appreciate - Capital gains are distributed by the fund

Investment income is received by the fund The securities in the portfolio appreciate Dividends and interest received by the fund and appreciation of the portfolio cause an increase in NAV. The purchase of securities with cash results in no change of NAV because the outlay of cash is offset by the increased value of portfolio securities. Any dividends or gains distributed by the fund would cause a decrease in NAV

Which of the following is not an advantage of mutual fund investment?

Investor retention of personal control of investments in the fund's portfolio Control over the investments in the fund's portfolio is given to the investment manager. Exchange privileges, the ability to invest any amount at any time, and reduced sales loads are all considered advantages

Which of the following statements regarding unrealized gain in a mutual fund portfolio are true? - It affects the mutual fund's shares' value - It is taxable as of the year it takes place - It is treated as part of the mutual fund's net investment income - It is realized by shareholders when they redeem their shares

It affects the mutual fund's shares' value It is realized by shareholders when they redeem their shares Unrealized gains in portfolio securities result from the assets' appreciation in value and is reflected in an appreciation of the mutual fund shares themselves. A shareholder may cash in on this appreciation only by selling the shares and realizing the gain. Capital gains are never treated as net investment income

Which of the following best describes the purpose of life insurance?

It creates an estate Life insurance provides funds upon death that may be used to continue to sustain the beneficiaries. It therefore "creates" rather than eliminates an estate. It may be used to eliminate (pay off) estate taxes. Although the cash value buildup is tax deferred, that is not the primary purpose of buying a life insurance policy

Which of the following statements regarding an open-end investment company are true? - The price of new shares is determined by supply and demand - It must redeem shares in any quantity within seven days of request - Redeemed shares are sold in the secondary market, but only between member firms - It provides for ownership of an undivided interest in the entire portfolio

It must redeem shares in any quantity within seven days of request It provides for ownership of an undivided interest in the entire portfolio An open-end investment company offers its shares continuously by updating its prospectus. Redemption must be made within seven days, and all shareholders have an undivided interest in the entire portfolio

If an investor has purchased an immediate variable annuity, which of the following statements best describe the investment? - It was a lump-sum purchase - Distribution of dividends occurs during the accumulation period - Distributions to the annuitant will fluctuate during the payout period - The investor purchased accumulation units

It was a lump-sum purchase Distributions to the annuitant will fluctuate during the payout period An immediate annuity has no accumulation period. A single lump-sum investment is made, and payments begin immediately, because the investor has purchased annuity units. During payout, distributions will fluctuate due to performance in the separate account.

Your customer has been considering several investment company quotes and he notices that the Jeffers Fund has an NAV of $11.50 and an ask price of $10.98. On the basis of this information,

Jeffers is closed-end Closed-end investment company shares are sold on a supply-and-demand basis. Therefore, the Jeffers Fund can only be a closed-end investment company; only a closed-end company can have an asking price below the NAV

A fund's objectives are to maintain a stable net asset value and to provide current income. The fund invests in high-quality, short-term obligations, including U.S. Treasury bills, commercial paper, certificates of deposit, and bankers' acceptances. Check-writing privileges are available. This describes which of the following mutual funds?

LMN Cash Reserves Money Market Fund Money market funds invest in high-quality, short-term debt obligations. Money market funds provide stability and income. Check-writing privileges are available to money market fund investors

What investment management style would you recommend to a moderate-risk client seeking long-term capital gains who also values professional stock selection?

Large-cap growth fund manager The keys here are "moderate risk" and professional stock selection. Moderate risk would be large cap. Small caps are for those who can accept higher risk. Stock selection eliminates any index fund

Which of the following is guaranteed by a variable life policy?

Minimum death benefit A variable life policy has a minimum guaranteed death benefit, but there is no minimum guaranteed cash value. There is no performance guarantee on separate accounts

Assuming that expense ratios for the funds listed are identical, rank the funds below in order, from lowest to potentially highest yield. - Municipal bond fund - Government bond fund - Investment-grade corporate bond fund - Speculative income fund

Municipal bond fund, Government bond fund, Investment-grade corporate bond fund, Speculative income fund Municipal bonds provide tax-free income and safety and, therefore, have the lowest yield. Government bonds are taxable at the federal level but are quite safe and have the second-lowest yield. Corporate bonds are riskier and have higher yields. Speculative income funds invest in securities with the highest risk in an effort to provide the highest income

Your customer would like to know what advantages mutual funds enjoy over other types of investments. In addressing the customer's question, you might make which of the following statements?

Mutual funds offer the advantages of diversification and professional management of your investment money Professional management is offered with a mutual fund in the form of the fund's investment adviser. Other than that, investment costs tend to be somewhat higher than with direct purchases. An investor can certainly suffer losses, and mutual funds have fewer tax advantages than, not similar tax advantages to, insurance company products

A fund seeks maximum current income, safety of principal, and capital growth. The fund's portfolio is invested in common stocks, preferred stocks, convertible securities, and high-yielding bonds. This information describes which of the following mutual funds?

NavCo Growth & Income Fund Growth and income funds invest in common stocks, preferred stocks, convertible securities, and high-yielding bonds. The objective is to provide both income and capital growth to their investors

Which of the following occurrences will change the net asset value per share of a mutual fund? - Net appreciation of the assets held in the portfolio of the fund - A net growth in sales of the fund's shares by all distributors resulting in a greater number of shares outstanding - Net depreciation of assets held in the portfolio of the fund - A net redemption by shareholders resulting in fewer shares outstanding

Net appreciation of the assets held in the portfolio of the fund Net depreciation of assets held in the portfolio of the fund Only changes in portfolio values, positive or negative, and receipt or payment of dividends affect the NAV of a mutual fund. Investors buying shares or redeeming shares do not affect the NAV

Which of the following companies would generally sell shares directly to the public?

No-load mutual fund No-load mutual funds sell directly to the public without using an underwriter or a sales force and without assessing a sales charge

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

When may a Series 6 registered representative sell shares of a closed-end fund?

Only when the shares are selling in the primary market Series 6 representatives may sell investment company shares that are sold by prospectus in the primary market

Under the Investment Company Act of 1940, which of the following are considered management companies? - Open-end companies - Closed-end companies - Unit investment trusts - Face-amount certificate companies

Open-end companies Closed-end companies Management companies are subclassified into open-end companies (mutual funds) and closed-end companies. Unit investment trusts are a type of investment company that is not managed, as are face-amount certificate companies

Which of the following statements could legally appear in mutual fund communications with the public?

Our managers are dedicated to giving you the very best service 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

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

Overall responsibility for the fund rests with the board of directors A unit investment trust (UIT) 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

An investor owning which of the following variable annuity contracts would hold accumulation units? - Periodic payment deferred annuity - Single payment deferred annuity - Immediate life annuity - Immediate life annuity with 10-year period certain

Periodic payment deferred annuity Single payment deferred annuity Accumulation units represent units of ownership in a life insurance company's separate account when the contract is in the accumulation stage. Annuity units are units of ownership when the contract is in the payout stage. Immediate annuities purchase annuity units directly

Which of the following types of annuity contracts could your customer not purchase? - Single payment immediate life annuity - Single payment deferred annuity - Periodic payment immediate life annuity - Periodic payment deferred annuity

Periodic payment immediate life annuity Periodic payment annuities may be purchased only on a deferred basis. Annuitization and regular payments into an annuity may not occur simultaneously

Which of the following is a possible advantage of variable life insurance over whole life insurance?

Possible inflation protection for the death benefit Variable life has scheduled, not flexible, premium payments. The distinguishing factor is the variable death benefit. The insured assumes more risk, not less, in exchange for the possibility that the death benefit will provide protection from inflation

A client of yours has chosen to invest in a principal-protected fund. Which of the following disclosures must be made to your client? - Greater potential for loss - Potential 5- to 10-year lockup period - Must be an accredited investor - Additional costs

Potential 5- to 10-year lockup period Additional costs As the old saying goes, "you don't get something for nothing." In exchange for the guarantee that you can't lose principal, there is a cost. In addition, to protect the fund against short-term market corrections, these funds require that your investment be held a minimum of 5 to 10 years

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 The preferred stock mutual fund would provide income based on the fixed dividend provided by the preferred stock in the portfolio, and it best suits the customer's needs

Series 6 representatives may sell mutual fund shares in which of the following?

Primary market Mutual funds do not trade in the secondary market. All purchases of mutual funds are a primary market activity, purchased from the issuer

12b-1 fees may be allocated for payment of which of the following? - Commissions to buy securities for a mutual fund's portfolio - Management fee to a mutual fund's portfolio adviser - Printing the annual prospectus - Television advertisement about a mutual fund

Printing the annual prospectus Television advertisement about a mutual fund 12b-1 asset-based distribution fees may be allocated to offset the costs of distributing a mutual fund. Distribution costs would include advertising, and creating and printing the annual prospectus. Because the portfolio adviser's fee and commissions to acquire securities for the fund's portfolio do not relate to distributing, they may not be paid with 12b-1 fees

Your customer, 62 years old, has unexpectedly received a large inheritance. He would like to generate income from it now, with as little bother on his part as possible. Which of the following might you recommend to him?

Purchase a lump-sum immediate annuity The lump-sum immediate annuity would generate income for him at once, guaranteed as to payment but not guaranteed as to amount. The deferred annuities would have a delay first. The diversified portfolio of stock would only provide dividend income, guaranteed as to neither payment nor amount

Which of the following statements about deferred variable annuities is true? - Holders receive payouts during the accumulation period - Earnings are received tax free during the payout phase - Contract holders are guaranteed a rate of return - Purchase payments can be either lump sum or periodic

Purchase payments can be either lump sum or periodic A deferred annuity can be purchased either with a lump-sum investment or with periodic payments. During the accumulation period, the account value increases and decreases based on the portfolio's performance. Earnings during this period will accumulate in the account tax deferred

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 A may use the cash distributions to purchase shares later at NAV - Customer B's reinvestments purchase additional shares at NAV rather than at the offering price - Due to compounding, Customer B's principal will be at greater risk

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 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

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

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

Your client has a solid financial foundation, has additional discretionary income to invest, is bullish, and is willing to accept the higher risks that come with the potential for higher rewards. Which of the following might you recommend?

Sector funds Sector funds offer higher risk and potential for higher rewards because they concentrate on particular economic sectors or geographic areas. Long puts are bearish, and both value and asset allocation funds are more suited for conservative investors

Mutual funds are subject to which of the following federal securities regulations? - Securities Act of 1933 - The Uniform Securities Act - Investment Company Act of 1940 - The Trust Indenture Act of 1939

Securities Act of 1933 Investment Company Act of 1940 As primary offerings of corporate securities, mutual funds are subject to the registration and prospectus requirements of the Act of 1933. They are also defined as investment companies under the Investment Company Act of 1940. The Uniform Securities Act is not a federal act, and the Trust Indenture Act of 1939 requires most bond issuers to appoint a trustee

Where would an investor find a complete list of holdings for a particular mutual fund?

Semiannual or annual report A statutory prospectus will list investment objectives but not holdings. The SAI contains additional information about the fund and includes further disclosure regarding operations but not a list of holdings. A complete list of holdings will be found as of the date of publication of semiannual and annual reports

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?

Shares will be redeemed at a price equal to the next calculated net asset value The customer will receive the next calculated net asset value (NAV)

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? - Her next payment is guaranteed to be $328 - She made a lump-sum investment - She purchased the variable annuity from a registered representative - She purchased accumulation units

She made a lump-sum investment She purchased the variable annuity from a registered representative 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 single lump-sum investment to the company, and because a variable annuity is a security, the salesperson must be a registered representative (that is insurance licensed). Finally, she purchased annuity, not accumulation, units

Which of the following is the best recommendation for someone extremely averse to risk?

Short-term Treasury fund Of the choices given, the most conservative is the short-term Treasury fund

Which of the following are advantages of a periodic payment deferred annuity over a lump-sum deferred annuity? - Smaller individual payments spread out over time are easier to meet than a single large payment - Tax deferral of growth and accumulation is available only if periodic payments are made - Insurance companies must impose a higher sales charge if payment is made in a lump sum - With periodic payments, the investor's commitment is spread out over years and is easier to reverse, if necessary, than is payment of a lump sum

Smaller individual payments spread out over time are easier to meet than a single large payment With periodic payments, the investor's commitment is spread out over years and is easier to reverse, if necessary, than is payment of a lump sum Tax deferral is available for annuities whether they are bought with a lump sum or by periodic payments. Insurance companies are not required to impose a higher or lower sales charge according to the purchase method

Which of the following types of mutual funds would be most likely to have capital appreciation as its stated objective? - Income - Balanced - Municipal bond - Specialized

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

Upon annuitization of variable annuities, holders receive the largest monthly payments under which of the following payout options?

Straight life A straight life payout provides the investor with the largest payments when the contract is annuitized. Cashing in, of course, cannot be done if the contract is annuitized

Which of the following information must be included in a prospectus describing variable life insurance to customers? - Summary explanation in nontechnical terms of the principal features of the policy - Statement of investment policy of the separate account - Copy of the underwriter's contract - Insurance company's most recent profit and loss statement

Summary explanation in nontechnical terms of the principal features of the policy Statement of investment policy of the separate account The prospectus must simply comprise full and fair disclosure of all material facts relevant to the product being sold

Which of the following is a major advantage of a nonqualified variable annuity, compared with a mutual fund?

Tax deferral A nonqualified variable annuity has the advantage of tax deferral over investing in a mutual fund; the other choices are common to both investments

Which of the following funds might have income as their primary investment objective? - The Ace Capital Appreciation Fund - The Bellner Preferred Equity Fund - The LMN Long-Term Corporate Bond Fund - The Whitfield-Taylor S&P 500 Index Fund

The Bellner Preferred Equity Fund The LMN Long-Term Corporate Bond Fund Funds specializing in debt instruments or preferred stock offer current income as their primary investment objective. Growth funds and other equity funds offer capital gains, and index funds permit the investor to enjoy the same growth and earnings as the market

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 Government securities are 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

Which of the following funds would you expect to have only debt instruments in their portfolios?

The Excelsior High-Yield Fund 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 portfolio

Which of the following statements about mutual funds is not true? - The POP of a mutual fund is the net asset value minus any sales charges - Mutual funds may continually issue new shares - When investors sell mutual fund shares, the shares are redeemed at their net asset value - Mutual funds are also called open-end investment companies

The POP of a mutual fund is the net asset value minus any sales charges Each share's public offering price (POP) is based on the net asset value (NAV) of the share plus sales charges

An investor is in the annuity stage of a variable annuity purchased 15 years ago. During the present month, if the annuitant receives a check for an amount that is less than the previous month's payment, which scenario likely occurred?

The account's performance was less than the assumed interest rate In the annuity stage of a variable annuity, the amount received depends on the account performance compared with the assumed interest rate. If actual performance is less than the AIR, the payout amount declines

The XYZ Insurance company's variable annuity contract specifies an assumed interest rate of 4%. During a particular measurement period, the actual return of the separate account is 5%. Which of the following statements are true? - The accumulation unit's value will increase - The accumulation unit's value will decrease - The annuity unit's value will increase - The annuity unit's value will decrease

The accumulation unit's value will increase The annuity unit's value will increase Any time the actual return is higher than the AIR, the annuity unit value increases. Any time the actual return is positive, regardless of the AIR, the accumulation unit value increases

A mutual fund that qualifies as a conduit under subchapter M of the internal revenue code will pay taxes on which of these amounts?

The amount of any net investment income not distributed to shareholders as a dividend Conduits must pay a minimum of 90% of net investment income to qualify and will pay taxes on the amount they retain (do not pay as dividends)

Which of the following statements regarding a fixed-time withdrawal plan offered by a mutual fund are true? - The amount received each month by the client may vary - The amount received each month by the client will be the same - No funds offer this type of withdrawal - This plan is self-exhausting

The amount received each month by the client may vary This plan is self-exhausting A fixed-time withdrawal plan of a mutual fund calls for an unpredictable amount to be paid out each month over a fixed period of time. By contrast, a fixed-dollar plan calls for a fixed amount to be paid out each month over an unpredictable period of time

Who assumes the investment risk in a variable annuity contract?

The annuitant assumes the risk Variable annuity contracts were devised to help investors keep pace with inflation. Because this is not guaranteed, the annuitant bears the investment risk

Mutual funds are like other types of corporations in which of the following ways? - They may issue equity and debt - The board of directors makes policy decisions - Shareholders have ownership rights - Their shares trade in the secondary market

The board of directors makes policy decisions Shareholders have ownership rights Mutual funds may only issue redeemable common stock, not 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

In July, a customer invested $10,000 in the ABC Mutual Fund. In December of the same year, ABC announced a long-term capital gains distribution. 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 tax 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

The capital gain distribution is treated as long term The capital gain from redemption is treated as short term When long-term capital gains are distributed, the length of time an investor has owned the fund is not relevant; it's still a long-term distribution. However, redemption of shares follows the normal holding period rules. Therefore, when this customer sold shares 10 months (July to May) after the purchase, the gain, like any other gain from a holding period that does not exceed 12 months, is short term

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 may never suspend sales of shares to new investors - The company may redeem shares in any quantity at any time but may restrict the redemption of shares at the board of directors' discretion - The company must redeem shares in any quantity at any time, except that it may suspend the redemption of shares with SEC approval

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 Under the Investment Company Act of 1940, an investment company selling mutual funds need not continuously offer new shares for sale. In fact, a fund often suspends sales to new investors when it grows too large to adequately meet its investment objective. The Act of 1940 does require a fund to continuously offer to redeem shares, and this redemption privilege may only be suspended during non-business days or with the SEC's approval

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 after two years, which of the following statements is 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 two years

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

The customer receives the policy cash value only The variable life refund provision returns cash value only if it is surrendered after the second year

In a variable life contract, which of the following has a guaranteed minimum?

The death benefit There is a guaranteed minimum death benefit. The cash value will vary according to the performance of the investments in the separate account

Which of the following is an advantage of purchasing a lump-sum deferred annuity as opposed to a periodic payment deferred annuity? - Periodic payment annuities usually have a lower cost base - The entire amount of the purchase has the maximum amount of time to grow - Most investors find it easier to make a single large payment rather than many small ones spread out over years - Sales charge discounts are lower for a lump-sum deferred annuity than for a periodic payment deferred annuity

The entire amount of the purchase has the maximum amount of time to grow A single purchase would have the possibility of growth from the first moment. Periodic payments do not begin to grow until invested, and thus later payments have less time to generate returns

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?

The exchange is considered a taxable event that must be recognized in the current year 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

For a mutual fund that collects a 12b-1 fee, which of the following statements are true? - The fund may use the money to pay for mailing sales literature - Advertising materials must always state that the fund is no load - The fund may use the money to pay for commissions on portfolio transactions - The fund's prospectus must disclose the fee

The fund may use the money to pay for mailing sales literature The fund's prospectus must disclose the fee 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 0.25% of average net assets.

Typically, no-load mutual funds are sold to the public in which of the following ways?

The fund sells directly to the investor No-load funds sell directly to the investor through their own sales force

On November 10, your customer purchased 1,000 shares of the ABC open-end investment company. On November 22 of the same year, ABC sold 25,000 shares of TCB common stock at a profit. ABC had held the shares for three years. On December 15, ABC distributed the gain from the sale of TCB to shareholders. How will your customer be taxed on this distribution?

The income is taxed as a long-term capital gain The customer owned shares of the mutual fund when it distributed the gain and is liable for taxes on the distribution. This gain is considered long term (over one year) and is taxed at long-term capital gains rates. It does not matter how long the customer had held the shares when the gain was distributed, but how long the fund had held the securities before it sold them

Qualified dividends are taxed at what rate?

The investor's capital gains tax rate A qualified dividend payment is taxed at the investor's capital gain tax rate

A non-qualified dividend will be taxed at what rate?

The investor's ordinary income tax rate Non-qualified dividends are taxed as ordinary income

Under the Investment Company Act of 1940, which of the following statements regarding the investment objective of a mutual fund are true? - Only the board of directors needs to approve changes in the investment objective - The majority of outstanding shares must vote to approve changes in the investment objective - The SEC must approve all changes in the investment objective - The investment adviser does not set, but tries to meet, the investment objective

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 A majority of the outstanding shares must vote to approve any change in investment objective or policy. The investment adviser's job is to try to achieve the investment objective

During a sales presentation on a mutual fund, the investor asks how the expense ratio is calculated. Which of the following statements may the representative make to the customer?

The management fee is included in the computation The expense ratio includes the expenses of operating the fund compared to fund assets; expenses include management fees, administrative fees, brokerage fees, and taxes. The underwriter may never be an expense to the fund

Which of the following would be found in a mutual fund prospectus?

The method of computation of the offering price All mutual fund prospectuses are required to show the method of computing the offering price. The fund is never permitted to show future predictions or guarantees of rates of return. Mutual funds are not traded in the secondary market

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?

The minimum death benefit is guaranteed While variable life insurance presentations 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

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 are correct? - The next check will increase if the AIR is 5% - The next check will increase if the AIR is 10% - The number of annuity units owned will increase - The number of annuity units owned will remain the same

The next check will increase if the AIR is 5% The number of annuity units owned will remain the same 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

Which of the following statements regarding variable annuities are true? - The number of accumulation units is always fixed throughout the accumulation period - The number of accumulation units can rise during the accumulation period - The number of annuity units is fixed at the time of annuitization - The number of annuity units rises once annuitization begins

The number of accumulation units can rise during the accumulation period The number of annuity units is fixed at the time of annuitization The number of variable annuity accumulation units can rise during the accumulation period when additional units are being purchased. When a variable annuity contract is annuitized, the number of annuity units is fixed

Which of the following statements characterize the accumulation phase of a variable annuity? - The number of accumulation units remains constant as investment continues - The value of an accumulation unit increases only if the separate account outperforms AIR - The number of accumulation units increases as investment continues - The value of an individual accumulation unit depends only on the performance of the separate account, regardless of AIR

The number of accumulation units increases as investment continues The value of an individual accumulation unit depends only on the performance of the separate account, regardless of AIR During the accumulation phase of a variable annuity, the investor is purchasing accumulation units. The number of accumulation units increases each time a periodic payment is made, and their value depends only on the performance of the separate account. AIR becomes a factor only if the account is annuitized

Which of the following statements about a straight life variable annuity is true? - The number of accumulation units a client owns never changes - The number of annuity units a client owns never changes - The monthly payout is fixed to the Consumer Price Index - If a client dies during the annuity period, the remaining funds are distributed to the beneficiary

The number of annuity units a client owns never changes Once annuitized, the number of annuity units remains fixed. For straight life, annuitants receive a check for the rest of their life (there is no beneficiary)

Which of the following statements is true regarding the annuity units during the annuitization period of a variable annuity contract? - The number of units changes, but the valuation of each unit remains the same - Both the number and the value of the units remain the same - The number of units remains the same, but the value of each unit changes - Both the number and the value of the units change

The number of units remains the same, but the value of each unit changes During the payout phase of variable annuities, the number of annuity units will remain the same, but the value of each unit will vary. It is important to remember that an annuity unit is not the same as an accumulation unit

For a registered investment company to terminate its 12b-1 plan, it must obtain the approval by majority vote of which of the following? - The outstanding voting shares of the company - The board of directors of the fund - The noninterested members of the board of directors - The fund's investment advisory board

The outstanding voting shares of the company The noninterested members of the board of directors For a registered investment company to terminate a 12b-1 charge, the termination must be approved by a majority of the outstanding shares or a majority of the noninterested members of the board of directors. Approval by the full board of directors is not required.

In which of the following markets would an investor expect to find closed-end investment company shares traded? - A market maintained by the investment company itself - The over-the-counter market - The commodities market - The exchanges

The over-the-counter market The exchanges Closed-end company shares are like ordinary stock. Once issued, they trade on exchanges or in the over-the-counter market

Which of the following would affect the net asset value per share of a mutual fund?

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

John is the annuitant in a variable plan, and Sue is the beneficiary. Upon John's death during the accumulation period, Sue takes a lump-sum payment. What is her total tax liability?

The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate Annuity death benefits are generally paid in a lump sum. The beneficiary is taxed at ordinary income rates during the year the lump sum is received. The amount taxed is the amount of the lump-sum payment minus the deceased's cost basis in the investment

Which of the following transactions may be made on margin?

The purchase of NYSE-listed closed-end fund shares Closed-end company shares may be purchased on margin like other listed securities that trade in the secondary market. Open-end shares (mutual funds) are continuous primary offerings, and new issues of securities are not marginable. Option contracts, like mutual funds, may be purchased in a margin account but may not be purchased on margin (they must be paid for in full). Margin trading is not allowed in a custodial account

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

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

When an agent explains mutual funds to a prospective investor, which of the following statements may be made? - Mutual fund shares are liquid and may be switched from fund to fund without tax liability - Mutual funds must make payment within seven days of a redemption request and guarantee a return of the original investment - The redemption value of mutual fund shares fluctuates according to the fund's portfolio value - A fund always redeems shares at NAV, with little chance of a financial loss

The redemption value of mutual fund shares fluctuates according to the fund's portfolio value 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

The payout of an annuitized variable annuity account changes from month to month in a manner determined by which of the following? - The separate account performance compared with last month's separate account performance - This month's payout compared with the initial payout upon annuitization - The separate account performance compared with an assumed interest rate - This month's payout compared with last month's payout

The separate account performance compared with an assumed interest rate This month's payout compared with last month's payout A variable annuity payout is determined by comparing account performance with AIR, and this month's payout with last month's payout

Which of the following statements regarding a closed-end investment company is true? - The number of outstanding shares is constantly changing - The shares are redeemable - New shares are constantly offered to the public - The shares are sold at a current market price

The shares are sold at a current market price A closed-end company issues a limited number of shares in a single offering to be sold by the underwriter at a set public offering price. Once the shares are sold, they trade on an exchange or OTC, where supply and demand sets the trading price

Your client has asked about the automatic dividend reinvestment plan offered by the ABC Growth and Income Fund. In describing the differences between dividend reinvestment and receiving distributions in cash, which of the following statements are correct? - One benefit of dividend reinvestment is that distributions reinvested are tax deferred, whereas dividends received in cash are taxable in the year of receipt - The taxation of the dividend distribution is not affected by your choice to reinvest or receive the dividend in cash - Reinvestment of dividends tends to have a compounding effect, while taking the distributions in cash inhibits the opportunity for growth of capital - Taking the dividends in cash actually creates more wealth because the reinvested dividends are subject to sales charges

The taxation of the dividend distribution is not affected by your choice to reinvest or receive the dividend in cash. Reinvestment of dividends tends to have a compounding effect, while taking the distributions in cash inhibits the opportunity for growth of capital. Dividends, whether received in cash or reinvested, are subject to current taxation. A major benefit of reinvesting is the compounding effect on your account, if the shares increase in value. Dividends and capital gains distributions are always reinvested at net asset value

Which of the following statements regarding 12b-1 charges are correct? - There is a maximum allowable charge of 0.25% for marketing and promotion - There is a maximum allowable charge of 0.75% for marketing and promotion - An additional 0.25% may be charged as a shareholder servicing fee - Rules allow a fund to market as no-load if its 12b-1 charge exceeds 0.25%

There is a maximum allowable charge of 0.75% for marketing and promotion An additional 0.25% may be charged as a shareholder servicing fee The 0.75% limitation is for marketing and promotion. FINRA also permits an additional 0.25% charge for shareholder servicing and also prohibits funds from advertising that they are no load if their 12b-1 charge exceeds 0.25%

Which of the following statements is correct with regard to an index annuity?

There is a minimum guaranteed rate of return Index annuities are basically fixed annuities and they carry a minimum guaranteed return. Any withdrawals in excess of the cost basis are treated as ordinary income

Which of the following is not true of periodic payment plans? - They are most suitable for investors who plan to retire within the next 12 months - They are regulated under the Investment Company Act of 1940 - An accumulation plan is a type of periodic payment plan - A variable annuity may be a type of periodic payment plan

They are most suitable for investors who plan to retire within the next 12 months Accumulation plans and other periodic payment plans are specifically designed for the long-term investment of funds. Such plans are not suitable for an investor who will soon retire

Which of the following statements regarding UITs is true?

They are redeemable securities UITs are redeemable by the issuer. There is no management, so there is no management fee. Because they are redeemable, there is no need to trade at a discount

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

They are traded on registered stock exchanges Investors pay commissions to purchase and liquidate their positions 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 because they are traded in the secondary market

In the prior year, your customer realized an $8,000 short-term capital loss and a $6,000 long-term capital gain. What are the tax results of these transactions?

They may reduce their income by $2,000 The losses offset the gains, leaving a $2,000 loss that may be used to reduce their taxable income

On February 14, an investor purchases 1,000 shares of ACE Bond Fund, with an objective of providing the highest possible level of income on a monthly basis. On August 15, the investor informs his agent that he has changed his mind and wishes to exchange his bond fund shares for shares of a common stock growth fund with an objective of capital appreciation within the same family of funds. If the investor's bond fund shares increase in value before the exchange, how will they be taxed?

They will be taxed as a short-term gain because the bond fund was held for less than 12 months Because the investor held the bond fund shares for less than 12 months, the gain is short term. An exchange privilege does not exempt the transfer of funds from taxation. The exchange is a taxable event

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 0.25% of net assets or less, is considered misleading, and is a violation of the Conduct Rules. Unless 0.25% of net assets is specifically mentioned, assume any 12b-1 fund is a loaded fund

In promoting a variable life insurance contract to a customer, which of the following statements would be permissible?

This product gives you the possibility of a greater death benefit in exchange for accepting investment risk 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

An individual purchasing a flexible premium variable life contract should know which of the following? - Timing and amount of premiums generally are discretionary - The death benefit will generally be higher than that of a comparable whole life policy - The face amount is fixed at the beginning of the contract - The performance of the separate account directly affects the policy's cash value

Timing and amount of premiums generally are discretionary The performance of the separate account directly affects the policy's cash value A flexible premium policy allows the insured to determine the amount and timing of premium payments, provided minimums are met. Depending on the policy, the face amount (death benefit) is recalculated each year. It is intended that the death benefit receive some inflation protection, but this cannot be guaranteed. If separate account performance causes the cash value to drop below an amount necessary to maintain the policy in force, the policy lapses unless the requisite amount is received within 31 days

The pipeline theory of taxation helps mutual funds reduce the impact of what?

Triple taxation The pipeline (or conduit) theory eliminates one taxation level of the three that impact dividends. The money used to pay a mutual fund dividend is still taxed at the original corporate level and again at the individual taxpayer level (double taxation) but avoids taxation at the fund level, thus avoiding triple taxation

Which of the following are features of Class C mutual fund shares? - Typically charge no front-end load - Typically charge a front-end load - Typically impose lower CDSCs than Class B shares for a shorter period - Typically convert to Class A shares after they are held for a defined period of time

Typically charge no front-end load Typically impose lower CDSCs than Class B shares for a shorter period 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, because the level load never discontinues

A contractual plan company is what type of investment company?

Unit investment trust A contractual plan company is a unit investment trust that purchases mutual fund shares for its customers on a contractual basis. Though contractual plans are no longer sold, there are still many such contracts in force

Which of the following investment company portfolios is supervised rather than managed?

Unit investment trust 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

A 28-year-old investor wishes to start saving for his daughter's college education. Which of the following would be the least appropriate investment vehicle for this plan?

Variable annuity Of the choices, the variable annuity would be a poor recommendation because withdrawals prior to age 59½ would be subject to ordinary income taxes plus a 10% penalty tax

If Joe Smith, a widower raising two small children, has insurance needs that include investment growth potential, which of the following would best suit his needs?

Variable life insuranc Variable life is the most suitable of these choices because it will provide for the children, not have limited contribution limits, and have potential investment growth

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? - With the types of companies in a blue-chip fund, the downside risk is insignificant - KLP has shown some growth in recent years, but this cannot be guaranteed to continue - KLP concentrates on the stock of manufacturing companies with at least $7.5 billion total capitalization - The objective of a growth fund such as KLP is primarily to provide capital gains rather than income.

With the types of companies in a blue-chip fund, the downside risk is insignificant Predicting future performance for a security is not permissible, nor is understating risk. Opinions may be offered, provided they are identified as opinions, not facts.

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 Government income funds invest in U.S. Treasury and agency securities for income and safety of principal

You have supplied a summary prospectus for a mutual fund to a customer rather than the full prospectus. The customer would like to purchase the fund immediately. Under what circumstances could you enter the order?

You may enter the order only if the customer is able to access a statutory prospectus online A customer who has received only a summary prospectus may purchase fund shares but must be able to access the statutory prospectus online

Amy bought 300 shares of Cooper Advanced Research, Inc., at a price of $72 per share. After holding the shares for three months, Amy sold the stock for $73 per share. From this transaction Amy realizes

a $300 short-term capital gain Amy sold the stock for one dollar more than she bought it, so generating a one dollar gain. With a holding period of three months, the gain will be taxed as a short-term gain

A contingent deferred sales charge is best described as

a back-end sales charge that decreases the longer the investor holds the shares 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

A mutual fund with a stated objective of growth and income from a portfolio of stocks and bonds in a particular ratio is known as

a balanced fund A balanced fund offers growth and income from a mixture of common stock (for growth) and fixed-income securities (bonds and/or preferred stock), in some particular ratio

The Bellner Fund has 60% of its assets invested in bonds rated BB or higher and 40% invested in the common stock of blue-chip companies. Last year, the mix was 65% bonds and 35% stock, but the investment adviser felt that market conditions warranted a change for this year. The Bellner fund is

a balanced fund Balanced funds maintain a particular percentage of their assets in debt instruments and a particular percentage in equity. The precise percentage may be adjusted periodically by the investment adviser, but it is specific. An asset allocation fund would also have a portion of its assets in money market instruments or even cash. Combination funds and special situation funds are primarily stock funds

The XYZ mutual fund company is introducing a new fund with an investment objective of appreciation in share price by means of capital gains. The portfolio will consist of a mix of both value stocks and growth stocks. This is most likely

a blend/core fund Blend/core funds use a mix of both value stocks and growth stocks to achieve a return from share appreciation rather than income. Fixed-income securities are not part of a blend/core fund portfolio

The XYZ mutual fund company is introducing a new fund with an investment objective of appreciation in share price by means of capital gains. The portfolio will consist of a mix of both value stocks and growth stocks. This is most likely

a blend/core fund One of the distinguishing features of blend/core funds is that they contain both growth and value stocks

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 closed-end fund 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

If GEM Fund has an NAV of $8.50 and a POP of $8.20, it is

a closed-end investment company GEM Fund must be a closed-end investment company because the offering price is less than the NAV (GEM Fund is selling at a discount from its NAV)

A financial reporter notices that the offering price of one investment company's share is at a 22% discount from the NAV. From this information, he can conclude that the company must be

a closed-end investment company If the ask price of a fund is less than the NAV, the fund must be a closed-end investment company

Customers could pay a commission, rather than a sales charge, for shares of

a closed-end investment company Sales charges could be paid on all types of open-end funds. Commissions are paid on securities traded in the secondary market, such as closed-end investment company shares

An individual with a current Series 6 registration would be permitted to sell

a closed-end investment company on its initial public offering Series 6 registration entitles one to sell open-end investment company shares and variable contracts of insurance companies (variable annuities and variable life), all by prospectus. In addition, this limited representative could sell closed-end investment company shares only during the time of the initial public offering when a prospectus is being delivered

In reviewing investment companies, you notice one that has a net asset value (NAV) greater than its asking price. The investment company must be

a closed-end management company A closed-end management company's asking price is determined by supply and demand and may be above, at, or below the NAV of the company at any given time. A specialized fund could be either an open- or closed-end management company. An open-end management company's (mutual fund's) asking price is based on its NAV. If the NAV rises, the asking price will also rise; therefore, its NAV can never be greater than its asking price, whether it is managed well or poorly

If your customer wants a source of retirement income that offers both stability and some protection against purchasing-power risk in times of inflation, you should recommend

a combination annuity Because the investor wants the advantages provided by both a fixed and variable annuity, a combination annuity would be suitable

As written in the Investment Company Act of 1940, all of the following statements are true except - a fund may not have more than one-third of its assets from borrowed money - a company must have $1 million in net assets before it may begin operations - at least 40% of a board of directors must be noninterested persons - a fund must have a clearly defined investment objective

a company must have $1 million in net assets before it may begin operations A company must have commitments for at least $100,000 in net assets, not $1 million

Mutual fund Class B shares assess

a deferred sales load Class B shares carry a deferred sales load. This is sometimes called a back-end load. Class A shares carry a front-end load. Class C shares carry a level load

If a mutual fund offers a fixed-time withdrawal plan, all of the following statements are true except - a fixed number of shares is liquidated each month - the end date of the plan is fixed - this plan is self-exhausting - the amount the client receives each month may vary

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.)

Class A shares of a mutual fund have

a front-end load 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

A fixed-premium variable life insurance contract offers - a guaranteed maximum death benefit - a guaranteed minimum death benefit - a guaranteed cash value - a cash value that fluctuates according to the contract's performance

a guaranteed minimum death benefit a cash value that fluctuates according to the contract's performance A fixed-premium variable life contract offers a minimum death benefit and a variable death benefit over the minimum. Its cash value fluctuates with the performance of the separate account

Under the 1940 Investment Company Act, an investment company may take all of the following forms except

a limited partnership with partners as passive investors 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

If your customer sells, for a profit, a stock they have held for three years they will have

a long-term gain A position sold for a profit that is held for more than 12 months will generate a long-term capital gain

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 loss of $20 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 $0.10 per share. Liquidating 200 shares results in a total loss of $20 (200 × $0.10)

If an open-end investment company wishes to change its investment objective, it may only do so with

a 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)

In a variable life insurance policy, - a minimum cash value is guaranteed - a minimum death benefit is guaranteed - all sales charges must be addressed in the prospectus - the money must only be invested in investment-grade debt securities

a minimum death benefit is guaranteed all sales charges must be addressed in the prospectus 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

In a variable life annuity with 10-year period certain, a contract holder receives

a minimum of 10 years of variable payments, followed by additional variable payments for life The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. If the contract holder dies before the period expires, the remaining payments are made to the beneficiary. An example would be if a life annuity with 10-year period certain contract holder died after 5 years, payments would continue for 5 more years to the beneficiary and then stop

If ABC Fund pays regular dividends, offers a high degree of safety of principal, and appeals especially to investors seeking tax advantages, ABC is

a municipal bond fund Municipal bonds are considered second only to U.S. government securities in terms of safety. Dividends received from a municipal bond fund are exempt from federal income tax. (The bonds pay interest to the fund, the fund declares and distributes dividends to shareholders.)

All of the following regarding capital gains taxation are true except - a mutual fund sells a security at a profit and reinvests the proceeds; this is a realized capital gain - realized profits on securities held for more than 12 months are taxed as long-term capital gains to the shareholder - if the fund has realized long-term capital gains, they are typically distributed at the end of the year and taxed as long-term capital gains to the shareholder - a mutual fund holds a security after it has appreciated; although it is not sold, the security's appreciation is a taxable event to the shareholder

a mutual fund holds a security after it has appreciated; although it is not sold, the security's appreciation is a taxable event to the shareholder When assets in a portfolio appreciate but are not sold, this is considered an unrealized capital gain. Gains are not taxable unless they are realized

When a mutual fund does not assess a distribution charge, it is called

a no-load fund No-load funds do not assess a fee for sales or distribution of fund shares

An investment company share purchased at its net asset value that can be redeemed later at the then-current net asset value, with a 12b-1 fee no greater than 0.25%, is a share issued by

a no-load, open-end investment company A share purchased at its NAV and sold at its NAV, with a 12b-1 fee no greater than 0.25% of net asset value, is a no-load share

A customer would like to invest with an objective of current income. All of the following are suitable recommendations except - a real estate investment trust - corporate bonds - preferred stock - a periodic payment immediate annuity

a periodic payment immediate annuity There is no such thing as a periodic payment immediate annuity

A balanced fund invests

a portion of its portfolio in both debt and equity instruments Balanced funds invest in both equity and debt issues but not necessarily in equal amounts

The Conklin Fund is international in scope, with a vast majority of its assets concentrated in gold-mining stocks, but it also includes silver, platinum, aluminum, copper, lead, nickel, tin, and zinc mining. About 5% of its assets are in investment-grade bonds. The Conklin Fund is

a precious metals fund Though many of the stocks Conklin Fund owns are no doubt foreign, the heavy concentration on mining and extracting metals identifies it as a precious metals fund

If your customer, age 36, invested $1.2 million dollars with an insurance company to purchase an annuity that would begin payouts to him when he reached the age of 65, he would be purchasing

a single payment, deferred annuity The annuitant paid a lump sum for his annuity to provide for his retirement, which is deferred to sometime in the future. He has thus purchased a single payment, deferred annuity

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 fund that, as part of its investment policy, makes a commitment to invest 25% or more of its assets into a particular economic or geographical sector is a specialized fund. A balanced fund invests in a balance of bonds and common and preferred stocks. A diversified fund does not invest more than 5% of the fund's assets in any one issuer. A growth and income fund may invest in many industries, seeking both dividends and capital gains

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 spouse received a lump-sum payment of $180,000, this example illustrates

a unit refund annuity When the unit refund option is chosen, the insurer guarantees, at minimum, to distribute the amount of money that funded the annuity. At the annuitant's death, if the guaranteed amount has not been fully distributed, the survivor receives the balance of the account—typically, in a lump-sum payment

Your 75-year-old customer has read many articles about variable annuities and would like you to choose one that would be appropriate for his $100,000 investment. Your customer has a well-diversified investment portfolio and is not currently in need of additional income. The most appropriate response to your customer's request in this situation is that

a variable annuity is probably not a suitable investment choice because of your investor's age and the contingent deferred sales charges that apply on withdrawals Although deferred growth is very attractive for many investors, the advanced age of this investor is a red flag. Seniors generally should maintain investment liquidity, which is not accomplished through a variable annuity because of contingent deferred sales charges that often continue for five to seven years

Under the exchange provision, within the first 24 months, a variable life policy may be converted into

a whole life policy The variable life exchange provision allows a policyholder to convert the variable policy into a whole life policy within the first 24 months of variable policy ownership. The insurance company must use the initial contract date and cannot require proof of insurability

A regulated investment company

acts as a conduit for dividend distributions If an investment company distributes at least 90% of its net investment income to shareholders, it is considered to be acting as a pipeline or conduit for the distribution; it will receive special tax treatment and is classified as a regulated investment company under Subchapter M of the Tax Code. Investment companies are registered with, not managed by, the SEC. Open- and closed-end companies may be regulated

All of the following statements regarding variable annuities are true except A) - all account earnings must be reinvested - although investors bear the investment risk, the insurance company provides a minimum return guarantee - when funding a variable annuity, accumulation units are purchased in a separate account - upon annuitization, the investor selects the settlement options

although investors bear the investment risk, the insurance company provides a minimum return guarantee Investors do not receive a return guarantee; in a variable annuity, the investor assumes investment risk

For an insurance company, mortality risk turns out unfavorably if - an annuitant lives longer than expected - an annuitant dies sooner than expected - a life insurance holder lives longer than expected - a life insurance holder dies sooner than expected

an annuitant lives longer than expected a life insurance holder dies sooner than expected Mortality assumptions are based on life expectancy or mortality tables prepared by insurance company actuaries. If an annuitant lives longer than expected, the insurance company will have to continue payments longer than expected. If an insurance holder dies sooner than expected, the insurance company will have to pay the death benefit sooner than expected—that is, before receiving some of the expected premium payments. This question is also drawn from material from LO 2.e

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 money management strategy that switches among asset classes in response to anticipated market moves is asset allocation

An investor who owns shares of a mutual fund actually owns

an undivided interest in the fund's portfolio Each shareholder owns an undivided interest in the mutual fund's portfolio

The death benefit of a variable life policy must be calculated at least

annually The death benefit must be calculated annually

A customer is considering entering into an accumulation plan with his mutual fund. He is worried about committing to sending in so much per month that he may have trouble meeting the obligation, but he doesn't wish to commit to so little per month that his account does not build rapidly enough to meet his investment objectives. The registered representative explains that accumulation plans - are binding on the investor - are binding on the mutual fund - are not binding on the investor - are not binding on the mutual fund

are binding on the mutual fund are not binding on the investor An investor is not obligated to meet the terms of an accumulation plan, even if it is a contractual plan that he has signed. If he cannot send money in for some period, he need not. The plan is, however, binding on the fund. When the fund does receive a payment, it must use it to purchase the appropriate shares

An investment company portfolio manager who switches among investment classes based on anticipated market changes is using a technique known as

asset allocation Changing asset classes in response to market conditions is the technique of allocating one's assets to take advantage of possible opportunities

The manager or adviser of an investment company may liquidate portions of the fund's portfolio

at any time, provided it is within the policies and objectives stated in the fund's prospectus Managers or advisers of investment companies buy and sell securities in accordance with the policies and objectives of the fund as stated in the prospectus

Each of the following is considered an investment company except - unit investment trust - face-amount certificate company - bank investment advisory account - open-end management company

bank investment advisory account A bank advisory account is not found among the definitions of an investment company

If the owner of a variable annuity dies during the accumulation period, any death benefit will

be paid to a designated beneficiary The accumulation period of a variable annuity may continue for many years. If the annuitant should die during that time, any death benefit would be paid to a beneficiary designated by the annuitant at the time the annuity was purchased

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

buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in one year and 0.75 12b-1 fee 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

A no-load fund sells its shares to the public

by a direct sale from the fund to the investor Because there is no sales charge (load), there is no underwriter; the fund sells directly to the public

When discussing the purchase of a scheduled premium variable life insurance policy with a client, it would be correct to state that

by surrendering the policy, its cash value may be obtained Surrender of the contract requires the insurance company to pay out its cash value. The death benefit is adjusted annually

The NAV of a mutual fund Class A share - must be calculated at least twice per business day - can never be higher than the POP - can never be equal to the POP - can never be so much lower than the POP that the difference exceeds 8.5% of the POP

can never be higher than the POP can never be so much lower than the POP that the difference exceeds 8.5% of the POP 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

An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is

changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices Because common stocks are not fixed-dollar investments, they have the opportunity to keep pace with inflation

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 It is clear that the asking price has decreased while the NAV has increased. This is only possible with shares of a closed-end fund because their price is based on supply and demand, not NAV plus sales charge

12b-1 fees may be used to pay all of the following except

commissions on portfolio securities transactions 12b-1 fees cover advertising costs, mailing expenses, and prospectus printing costs. Portfolio transactions are defrayed from the management fee

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

convert shares to a different mutual fund within the family of funds on a dollar-for-dollar basis 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

A client who purchased a variable life insurance policy is not pleased with his decision. Within the first 24 months of issue, the owner has the right to

convert the policy into a whole life policy using the original policy issue date A unique feature of variable life insurance is the ability to convert or exchange the policy into a whole life policy as of the original policy issue date for a period of no less than 24 months (two years) from the date of issue. For those insurance companies that do not offer whole life policies, the prospectus will indicate the available exchange policy, frequently universal life

If a client invests the same amount of money into a mutual fund at regular intervals over a long period of time, the result is a lower

cost per share than the average price per share By investing a predetermined amount of money periodically for a long period of time, the investor uses the concept of dollar cost averaging. The result is a reduced cost per share compared with the average market price

A 12b-1 fee may be used for all of the following except - sales literature costs - promotional expenses - advertising - custodial fees

custodial fees 12b-1 fees are used to facilitate share distributions. Each of the choices listed fits this criterion except custodial fees

Individuals licensed as Series 6 representatives

deal in closed-end funds in the primary market only As with open-end funds, the primary market for closed-end funds involves the initial offering of investment company shares sold with a prospectus. Once the offering is closed to new buyers and the shares trade in the secondary market, limited securities representatives may no longer deal in them

During a recession, payments from a variable annuity will most likely

decrease Variable annuity contracts make annuity payments that vary with the value of securities in the separate account. Most securities held in the separate account are based on the performance of the investments in the stock market. During recessionary periods, stock market values tend to decrease; therefore, payments under a variable annuity contract are likely to decrease

An investor in Class B shares with a seven-year contingent deferred sales charge liquidates shares four years after purchase. The CDSC is

deducted from the next computed NAV when those shares are redeemed If there is a seven-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 seven 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 may be based on the next computed NAV or the original purchase price (per the prospectus), though this point has not been tested recently

The GEM Growth Fund has announced that it will pay a dividend of $0.73 per share to all holders of record as of Monday, October 4. The ex-dividend date is

determined by the fund's board of directors and would probably be Tuesday, October 5 Unlike that of individual stock in the secondary market, the ex-dividend date for a mutual fund is set by the fund's board of directors (or the fund's principal underwriter). It commonly falls on the first business day after the record date. Remember that mutual fund purchases and redemptions are done with the fund itself and not through the secondary markets

If you invest in a front-end load mutual fund and choose automatic reinvestment, you should expect that - dividend distributions will be reinvested at net asset value - dividend distributions will be reinvested at the public offering price - capital gains distributions will be reinvested at net asset value - capital gains distributions will be reinvested at the public offering price

dividend distributions will be reinvested at net asset value capital gains distributions will be reinvested at net asset value Mutual funds that offer automatic reinvestment of dividends and gains distributions must do so at net asset value

When calculating net investment income, an investment company includes

dividends plus interest, minus operating expenses Net investment income equals gross investment income minus operating expenses. Gross investment income is interest and dividends received from securities in the investment company's portfolio

Once a variable annuity has been annuitized,

each annuity unit's value varies with time, but the number of annuity units is fixed During the payout period, payments are based on a fixed number of annuity units established when the contract was annuitized. The value of an annuity unit varies from month to month according to the performance of the separate account in comparison with the assumed interest rate

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 Each mutual fund shareholder owns an undivided interest in the investment company's portfolio. Because each share represents one class of voting stock, the investor's interest in the fund is reflected by the number of shares owned

Some open-end investment companies offer their investors a conversion privilege, which permits an investor to

exchange shares of one mutual fund for those of another within the same fund family, at net asset value 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)

The exchange privilege offered by open-end investment companies allows investors to

exchange shares of one open-end fund for another in the same fund family at a net asset value basis 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

Under the definition of a management investment company, all of the following would qualify except - face-amount certificate companies - real estate investment trusts - closed-end investment companies - open-end investment companies

face-amount certificate companies real estate investment trusts As defined in the Act of 1940, closed-end and open-end funds are subclassifications of management companies (actively managed portfolios). Face-amount certificate companies are not managed, and real estate investment trusts are not investment companies at all, because they invest not in securities but in real estate

A variable annuity contract guarantees - a minimum rate of return - fixed mortality expense - capped administrative expense - against investment risk

fixed mortality expense capped administrative expense A variable annuity does not guarantee an earnings rate; it lets the investor take the investment risk. However, it does guarantee payments for life (mortality) and normally guarantees that expenses will not increase above a specified level

A majority vote of the outstanding shares of an open-end investment company is needed to approve a change - in the portfolio - from an open-end company to a closed-end company - in the custodian bank's hiring practices - in the objectives of the fund

from an open-end company to a closed-end company in the objectives of the fund Before any change can be made to an open-end investment company's bylaws or objectives, a majority vote of the outstanding shares is required. Portfolio management is left to the investment adviser, and the custodian bank will be responsible for its own hiring practices

Your client wishes to purchase units in a municipal bond UIT that was issued two years ago. These units would be purchased

from the UIT UITs are redeemable securities that are not traded by retail investors in the secondary market; they are purchased and sold directly through the issuer

An investor will pay a sales charge in all of the following marketing methods except - fund to underwriter to plan company to investor - fund to underwriter to investor - fund to investor - fund to underwriter to dealer to investor

fund to investor Fund to investor represents the sale of a no-load fund

Closed-end investment companies - continuously issue new shares - generally make a one-time public offering of shares - may issue debt securities - may not issue preferred stock

generally make a one-time public offering of shares may issue debt securities Publicly traded, or closed-end, funds generally make a one-time offering of shares, which then trade on the secondary market. Unlike mutual funds, they may issue both bonds and preferred stock

One characteristic of a closed-end fund that differs from an open-end fund is that with closed-end funds, the number of shares outstanding

generally remains constant It is important to remember that closed-end companies do not continuously issue more shares (like open-end companies do), so the number of outstanding shares tends to stay the same

During a particular valuation period of the accumulation phase of an annuity, if the separate account has a positive investment performance rate, the value of the accumulation unit will

go up During the accumulation phase, the value of an accumulation unit changes as the current market value of the securities in the portfolio of the separate account changes. When the separate account becomes worth more, the value of the accumulation unit is worth more

A holder of mutual fund shares - has the right to vote for a vacancy on the board of directors - will be able to redeem as many of those shares as desired at the next computed public offering price - receives regular reports on the fund's expenses no less frequently than semiannually - is the owner of a diversified investment company

has the right to vote for a vacancy on the board of directors receives regular reports on the fund's expenses no less frequently than semiannually Mutual fund portfolios can be diversified or nondiversified. Redemptions are done at the next computed NAV, not at the next computed POP

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

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

Closed-end investment company shares can be purchased and sold

in the secondary market A closed-end company share is bought and sold in the secondary market

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 An appreciation in value of fund assets, without a corresponding increase in liabilities, leads to an increase in the fund's net asset value (total assets minus liabilities equals net assets)

One of your clients owns shares in several of the mutual funds offered by the ABC Fund family. Unhappy with their performance, she 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 - incur a taxable event - be able to make the switch without tax as long as the money was transferred directly from one family to the other - be able to acquire the XYZ shares without sales charge - incur the full sales charge appropriate to the purchase of the XYZ shares

incur a taxable event incur the full sales charge appropriate to the purchase of the XYZ shares 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.

Your customer wishes to increase and diversify his equity holdings as simply as possible. He is not risk averse, and he would like to gain some returns from growth, but he does not want to engage in a large number of transactions. You might suggest that he

invest in a blend/core fund The blend/core fund would allow the investor to diversify his equity holdings and, in exchange for the usual risks of equity securities, make some possible gains from growth while investing in a single mutual fund

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

is also a FINRA member and there is a sales agreement between ALFA and the sponsor This arrangement is possible if both firms are FINRA members and a sales agreement is in effect

An open-end investment company that does not distribute at least 90% of its net income

is liable for federal taxes on its net income Investment companies that do not distribute at least 90% of their net investment income become liable for federal income taxes on all the net investment income. Shareholders would also be responsible for taxes on any distributions received. By distributing 90% of investment income, open-end companies can avoid double taxation

An open-end investment company that does not distribute at least 90% of its net income

is liable for federal taxes on its net investment income Investment companies that do not distribute at least 90% of their net investment income become liable for federal income taxes on all the net investment income. Shareholders would also be responsible for taxes on any distributions received. By distributing 90% of investment income, open-end companies can avoid double taxation

An open-end investment company may do all of the following except - continuously offer shares - borrow money - redeem shares - issue bonds

issue bonds A mutual fund may not issue any senior securities, although it may purchase almost any type of security for its portfolio

One of the ways in which closed-end investment companies differ from open-end investment companies is in their ability to

issue debt securities Closed-end investment companies may issue marketable common stock, preferred stock, and debt. Open-end companies may issue redeemable common stock only. Either may operate as a diversified or nondiversified management company

An open-end investment company may do all of the following except - issue senior securities - purchase call option contracts - borrow money - lend money

issue senior securities Open-end companies (mutual funds) only issue one class of security: common stock. They do not issue senior securities such as bonds or preferred stock. They may borrow and lend money and purchase call contracts

All of the following are characteristics typical of a money market fund except - the underlying portfolio consists of short-term debt instruments - it is highly volatile in price and is safest in periods of low market volatility - it is offered as a no-load investment - its net asset value normally remains unchanged

it is highly volatile in price and is safest in periods of low market volatility A money market fund is managed for extremely low volatility. The standard is to maintain a net asset value of $1.00 per share at all times

Separate accounts are similar to mutual funds in that both - may have diversified portfolios of common stock - offer tax deferral on realized growth - give investors voting rights - require scheduled payments

may have diversified portfolios of common stock give investors voting rights Separate accounts and mutual funds both contain a diversified portfolio of securities and provide voting rights for changes in investment policy and management elections

A closed-end investment company may issue each of the following except - municipal bonds - common stock - preferred stock - bonds

municipal bonds Closed-end investment companies may issue both common and preferred shares, as well as debt securities for capitalization. Only municipalities issue 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 The sale of mutual fund shares requires that the client receive the prospectus before, or during, a sales solicitation

SEC rules require that open-end management companies distribute dividends to their investors from the firm's

net investment income Dividends must be paid from the net investment income

The Investment Company Act of 1940 requires that mutual funds pay dividends from their

net investment income Mutual funds dividends are paid from net investment income (interest received plus dividends received minus expenses)

A couple wishes to start a withdrawal plan from a mutual fund they have owned for 12 years. As a registered representative, you must

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

According to the Investment Company Act of 1940, an open-end investment company must compute its NAV

no less frequently than once per business day 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

A 51-year-old customer of a FINRA member firm has made periodic contributions to a variable annuity with a contingent deferred sales charge for the past two years. A registered representative recommends that the customer do a 1035 exchange and switch to a new annuity that offers more attractive separate account returns and a deferred sales charge. The exchange would - not be taxable - be taxable - probably be considered a suitable recommendation - probably not be considered a suitable recommendation

not be taxable probably not be considered a suitable recommendation The switch from a variable contract with a deferred sales charge in the second year of the contract is most likely unsuitable under the Conduct Rules because the customer would be subject to surrender charges and the back-end load. The 1035 exchange between annuities is not a taxable event

Your open-end investment company customer has decided to make automatic reinvestment of dividend and capital gains distributions. This choice will - defer taxation on these distributions - lower the proportionate ownership in the fund each time a distribution is made - not change the tax status of these distributions - allow your customer to reinvest the distribution without paying a sales charge

not change the tax status of these distributions allow your customer to reinvest the distribution without paying a sales charge Automatic reinvestment does not change the tax status; however, it allows the shareholder to invest his distributions without paying a sales charge

Each of the following are characteristic of a mutual fund voluntary accumulation plan except - minimum initial purchase - declining sales charges on new investment as money accumulates - obligatory purchase goal - minimum but optional additional purchases

obligatory purchase goal A voluntary accumulation plan is just that—voluntary and not binding. The company may require that the initial investment meet a certain minimum dollar amount. It may also specify that any additions meet set minimums (e.g., $50). The plan may qualify for breakpoints based on the accumulated value

A majority vote of the outstanding shares of an open-end investment company is needed in order to approve a change

of objective from diversified to nondiversified Some of the changes that require a majority vote of the shares outstanding include issuing or underwriting other securities, changing subclassification (e.g., from open-end to closed-end or from diversified to nondiversified), and changing investment policy (e.g., from income to growth or from bonds to preferred stock). The selection of vendors (like accountants and attornies) and breakpoint schedules are set by the board. Changes to the portfolio, within the scope of the fund's investment policy, are decisions of the portfolio manager

An application to open an account with an open-end investment company would be found

online if the prospectus can be downloaded from that site An application to open an account with an open-end investment company is considered a sales solicitation. Because they are continuous primary offerings, mutual funds must always be sold with a prospectus. Online sales are permitted if a copy of the prospectus can be downloaded from the fund's website

Under the Investment Company Act of 1940, the term redeemable security could be used when referring to the securities issued by - closed-end investment companies - open-end investment companies - unit investment trusts - broker-dealer firms

open-end investment companies unit investment trusts Open-end investment companies (mutual funds) and unit investment trusts offer securities that are redeemable by the issuer. Closed-end shares are traded in the secondary markets in the same manner as any stock, as are securities issued by broker-dealer firms

The portfolio of a diversified equity fund would most likely consist of

stocks of many companies in many industries A diversified equity fund will have stocks from many companies and many industries

Your client is interested in some of the tax ramifications of investing in variable annuities. You could tell her that - withdrawals before age 59½ are not subject to tax penalty if the investment has been held at least five years - partial withdrawals from nonqualified plans are taxed on a LIFO (last in, first out) basis - choice of settlement option has no effect upon taxation of the distributions - if she is dissatisfied with one company, Section 1035 of the Internal Revenue Code will permit her to liquidate one variable annuity and place the funds into a different one without being taxed

partial withdrawals from nonqualified plans are taxed on a LIFO (last in, first out) basis if she is dissatisfied with one company, Section 1035 of the Internal Revenue Code will permit her to liquidate one variable annuity and place the funds into a different one without being taxed Withdrawal from an annuity is taxed on a LIFO (last in, first out) basis. Section 1035 permits investors to change from one annuity to another without tax, as long as the transfer is not directly to the investor. The customer should also be warned that there may be penalties imposed by the insurance company for early withdrawal

An investment adviser of a mutual fund may liquidate shares held in the fund's portfolio

provided the liquidation is within the guidelines set forth by the fund's objective A mutual fund investment adviser is given authority to select and make investments in the fund portfolio

Your customer has invested in a mutual fund with a 12b-1 fee. You explain to her that a charge will be deducted from his account

quarterly 12b-1 fees are deducted from fund assets every quarter

Included in the operating expenses of an investment company would be all of the following except - investment management fee - redemption fees - custodian bank charges - compensation to members of the fund's board of directors

redemption fees Redemption fees, typically found with Class B and Class C shares, are not an operating expense of the fund. They are a cost incurred by the investor

One characteristic of a closed-end fund that differs from an open-end fund is that with closed-end funds, the number of shares outstanding

remains constant Because closed-end funds have a fixed number of shares outstanding, their number remains constant. Neither the buying nor the selling of these shares on the open market nor the value of the securities in the portfolio is relevant to the number of outstanding share

One of the purposes of the Investment Company Act of 1940 is to

require registration of investment companies with the SEC Under the Investment Company Act of 1940, companies in the business of investing their clients' money in securities are required to register with the SEC as face-amount certificate companies, unit investment trusts, or management companies

ACE Fund experienced an unrealized loss last month. This will - result in a lower NAV per share - result in lower dividend payments to shareholders - reduce the proceeds payable to shareholders who liquidate their shares - force the fund to raise the POP to make up for the loss

result in a lower NAV per share reduce the proceeds payable to shareholders who liquidate their shares An unrealized loss is the same as a depreciation in asset value, which results in a lower NAV per share. A shareholder would receive less at redemption than he would have received if redemption took place before the asset's depreciation

An investment company must report to shareholders

semiannually Shareholders receive two reports a year, one of which must be an audited annual report

All of the following are advantages of investing in mutual fund shares except - dividend distributions may be reinvested at the NAV - shareholders own an undivided interest in the entire mutual fund portfolio - shareholders may switch between funds within the same family with no sales charge - shareholders may exchange their holdings in one fund for another in the same family without tax implications

shareholders may exchange their holdings in one fund for another in the same family without tax implications Although the exchange privilege is available at NAV (no sales charge), it is a taxable event

Dollar cost averaging results in a lower average cost per share than the average price per share paid, only if the share price during the investment period

shows any fluctuation Under dollar cost averaging, any fluctuation in the share price—up, down, or both—will result in a lower average cost per share than the average price per share paid

All of the following are types of annuity plans except - staged - fixed - variable - combination

staged There is no such thing as a staged annuity

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 The POP minus the NAV equals the mutual fund sales charge. Remember that this will normally be expressed as a percentage of the POP

All of the following regarding money market funds are true except - such funds tend to be very volatile reflecting their high beta coefficient - the underlying portfolios are normally made up of short-term debt instruments - they are managed so that their net asset values remain within narrow limits - they are typically offered as no-load investments

such funds tend to be very volatile reflecting their high beta coefficient Money market funds have a very low beta coefficient and are managed so that the price is kept at $1 per share

The price of closed-end investment company shares trading in the secondary market is determined by

supply and demand Closed-end investment company shares trade in the secondary market. Therefore, supply and demand determine price

When discussing the benefits of a Section 1035 exchange with a client, it would be appropriate to point out that the main benefit is

tax savings Section 1035 of the Internal Revenue Code permits the exchange of one annuity for another without incurring any current tax liability. In other words, the earnings continue to be deferred until the money is actually withdrawn

The federal act that requires investment companies to register with the SEC as face-amount certificate companies, unit investment trusts, or management companies is

the Investment Company Act of 1940 The Investment Company Act of 1940 classified investment companies into these three types and required that they be registered with the SEC

The open-end investment company share price quote is

the NAV Newspaper quotes of mutual fund shares always show the net asset value (NAV)

The ABC Government Bond Fund is subject to a requirement of having 80% of the securities in its portfolio in government bonds. This rule of the Investment Company Act of 1940 is also known as

the Name Rule The Name Rule requires that any investment company whose name implies a certain type of security (i.e., government bonds) must have at least 80% of its assets invested as implied. This information is part of the SIE, but questions may appear on the Series 6 exam

As a new securities product, variable life insurance must be registered under

the Securities Act of 1933 Because of the separate account, these contracts must be sold with a prospectus and, therefore, be registered under the Securities Act of 1933

If a variable annuity has an assumed interest rate of 5% and the annualized return of the separate account is 4%, the value of - the accumulation unit will rise - the annuity unit will rise - the accumulation unit will fall - the annuity unit will fall

the accumulation unit will rise the annuity unit will fall The accumulation unit will increase in value because the portfolio earned 4%. However, the annuity unit value will decrease because the actual return of the portfolio (4%) was less than the assumed interest rate of 5% necessary to maintain payment amount

In a variable annuity, the risk of a fluctuating market is borne by

the annuitant As the stock market fluctuates, so will the monthly payments to the annuitant

A customer purchasing an annuity should be aware that all of the following will affect the value of his account during the accumulation stage except - the assumed interest rate - the number of accumulation units in his account - the value of each accumulation unit - the performance of his separate account

the assumed interest rate Assumed interest rate (AIR) does not become important unless and until the account is annuitized. AIR only affects the value of annuity units, not accumulation units

The rate of return on a money market fund would be most similar to

the 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

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

the customer may pay in as much or as little, as frequently or as infrequently, as he pleases, with no penalty 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

Open-end investment company shares normally go ex-dividend

the day after the record date An investor purchasing open-end investment company shares on the record date becomes a shareholder of record on that date and is entitled to the dividend declared. Orders received after the pricing of shares on the record date would be processed the next day and would purchase shares ex-dividend. This is an example of an SIE-type question that appears on the Series 6

A front-end sales load is defined as

the difference between the public offering price and the net asset value of a mutual fund share A sales load is the difference between the public offering price and the net asset value per share of the fund

Under Internal Revenue Code Section 1035, each of the following exchanges may occur on a tax-free basis except - the exchange of a variable annuity for another variable annuity - the exchange of a variable life insurance policy for a whole life insurance policy - the exchange of a variable life insurance policy for a variable annuity - the exchange of a variable life insurance policy for a mutual fund account

the exchange of a variable life insurance policy for a mutual fund account Under Internal Revenue Code Section 1035, a tax-free exchange occurs when a life insurance contract is exchanged for another life insurance or annuity contract. Similarly, an exchange of one annuity contract for another is tax free. The exchange of an insurance company-issued contract (policy or annuity) for a mutual fund account is not a tax-free exchange under IRC Section 1035

Under the IRC Subchapter M, if WWF fund only distributes 85% of its net investment income to its shareholders, then - the fund must pay taxes on the undistributed 15% of net investment income - the fund must pay taxes on 100% of the net investment income - the shareholder pays no tax if the income is reinvested - the shareholder must pay taxes if the income is received in cash or reinvested

the fund must pay taxes on 100% of the net investment income the shareholder must pay taxes if the income is received in cash or reinvested To avoid triple taxation according to the IRC Subchapter M, an investment company must distribute at least 90% of its net investment income. Because WWF fund only distributed 85% of its net investment income, it must pay taxes on 100% of the net investment income. Shareholders always pay taxes on taxable income, whether received in cash or reinvested

Mutual fund 12b-1 fees are deducted from

the fund's assets Mutual fund 12b-1 fees are deducted quarterly from the assets of the fund

For a registered investment company to implement a 12b-1 plan, the plan must have majority approval from each of the following except - the board of directors - the investment advisory board - noninterested members of the board of directors - outstanding voting shares of the company

the investment advisory board A 12b-1 plan must be approved by a majority vote of the shares, board of directors, and noninterested members of the board of directors. The fee must be reapproved annually by the board

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 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

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 During the accumulation phase, a variable annuity contract holder owns accumulation units. The value of one accumulation unit multiplied by the number of accumulation units equals the total value of the contract holder's investment

The investment policy of a mutual fund can be changed by a majority vote of

the outstanding shares Any changes in a mutual fund's investment policies or objectives must be made by a majority vote of the fund's outstanding shares, not by a majority vote of shareholders

The main benefit that variable life insurance has over whole life insurance is

the potential for a higher cash value and death benefit 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

Before your customer buys shares of XYZ Invest Mutual Fund, shortly before the ex-dividend date, he should understand that

the price of the shares will decline on the ex-dividend date by the amount of the distribution Share prices decline on the ex-dividend date by the amount of the dividend. Dividend distributions also cause a tax liability, so the purchase of shares right before an ex-dividend date is not a good idea

In a mutual fund, the amount of increases and decreases in the NAV over past years can be reviewed in

the prospectus Assuming the fund has existed for that long, changes in NAV for the past 10 years will be found in the prospectus

One of your clients is interested in purchasing an index annuity. When discussing this product, you should mention - the rate cap - the participation rate - that the surrender period is shorter than most other annuities - taxation of dividends received

the rate cap the participation rate Index annuities are designed to give their owners participation in the performance of a specific index. The degree to which they participate is known as the participation rate and can range from 70% to 100%. In most cases, there is also a rate cap, a ceiling on the amount that will be credited. The surrender period is longer than most other annuities

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 - it is pointed out that mutual funds have the advantage of federal backing - the risk of share price fluctuation is discussed - it is pointed out that mutual funds have the advantage of higher liquidity - a statement is made concerning variability of dividend returns

the risk of share price fluctuation is discussed a statement is made concerning variability of dividend returns 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

If an investor wants to buy $1,000 worth of Class B shares in an open-end investment company, she may buy shares through - the sponsor of the fund - a brokerage firm - the custodian of the fund - a bank acting as dealer

the sponsor of the fund a brokerage firm The custodian does not sell the shares but provides safekeeping for fund assets. A bank may not be a member of FINRA and, therefore, may not act as a dealer (although subsidiaries independent of the bank may be set up as broker-dealers)

Investors should consider all of the following when investing in a mutual fund except - the expense ratio - the investment adviser - the time horizon - the underwriter

the underwriter Time horizon, investment policy, track record of the investment adviser, portfolio, expense ratio, and sales load should all be researched when assessing a fund. The identity of the underwriter for the fund does not bear on its performance or suitability

All of the following statements are true of both a growth stock and a growth stock mutual fund except - the value of a share is a market price, determined by supply and demand. - dividends are probably not high - a share is an equity security - a share might grow or diminish in value, depending on the business success of the issuer

the value of a share is a market price, determined by supply and demand Growth stock values are determined by supply and demand on the open market, but the value of a mutual fund share is its net asset value, which is simply calculated

The value of a variable annuity separate account fluctuates in relationship to

the value of the separate account portfolio The value of the separate account fluctuates in relation to the securities held in the account

Changes in payments on a variable annuity correspond most closely to fluctuations in

the value of underlying securities held in the separate account Payments from a variable annuity depend on the securities' value in the separate account's underlying investment portfolio. The assumed interest rate (AIR) does not fluctuate

Characteristics of money market mutual funds include all of the following except - shares are offered on a no-load basis - their beta tends to mirror the overall market - dividends are earned on a daily basis - the net asset value falls within as narrow a range as possible

their beta tends to mirror the overall market Money market funds are managed to have very low volatility. Therefore, they have a very low beta coefficient

In the sale of open-end investment company shares, the prospectus must be delivered

to the client either before or during the sales solicitation Potential mutual fund customers must receive a prospectus before or during the sales solicitation

Marianne has a fixed-premium variable life policy in which the separate account has been performing extremely well, and the face value has been increasing as a result of the investment performance. However, recently the separate account performance has been negative. If this continues, the face value could decrease

to the original face value The face value in an insurance policy is the death benefit. In a variable life policy, the face value will fluctuate with the separate account's performance, but it will never decrease below the original minimum face value

All of the following statements regarding contract exchanges under Internal Revenue Code Section 1035 are true except - under Section 1035, an exchange can occur tax free only if it is made between policies of the same company - a fixed annuity policyholder cannot use a transfer under Section 1035 to exchange it for a life insurance policy - permanent life insurance can be exchanged for an annuity contract without generating any tax consequence - policyholders can exchange a variable life policy for another variable life policy of a different company without generating any tax consequences

under Section 1035, an exchange can occur tax free only if it is made between policies of the same company Under Internal Revenue Code Section 1035, to accomplish a tax-free exchange, the approved policies do not have to be issued by the same company

Investment companies that have no management fee, have a relatively low percentage sales charge, and invest in a fixed portfolio of debt or equity securities are defined in the Investment Company Act of 1940 as

unit investment trusts Unit investment trusts are one of the three classifications of investment companies defined in the Investment Company Act of 1940. They are unmanaged portfolios of debt or equity securities with low percentage sales charges

A client wishing to invest $10,000 in a tax-exempt unit investment trust would be acquiring

units Unlike mutual funds in which the purchaser acquires shares, in a unit investment trust, the acquisition is of trust units

Mutual fund shareholders are not taxed on

unrealized capital gains Interest, dividends, and realized capital gains are all taxed. However, unrealized capital gains are not taxed. Unrealized gains contribute to NAV appreciation and to a shareholder's capital gain upon redemption

A customer purchased a variable annuity from an agent five years ago with an initial investment of $200,000. The annuity's surrender fee will expire in year seven, which coincides with the customer's anticipated need for the funds. In the fifth year of the contract, the value of the annuity increased from $300,000 to $375,000. The agent notices that the general market is on the decline and recommends that the customer enter a 1035 exchange of the variable contract for another, thus increasing her death benefit and locking it in at a higher minimum. This recommendation is

unsuitable because of surrender fees Incurring the surrender fee for the 1035 exchange of one contract and initiating a new long-term contract is inappropriate for a customer in general, and particularly for this customer considering her need to access her funds only two years later

An investor must be provided with a statement of additional information about a mutual fund

upon request An investor must be given the statement of additional information (SAI) within three business 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

The 1035 provision may be used to transfer funds from one policy to another in each of the following instances except - variable life to variable annuity - variable annuity to variable annuity - variable annuity to life insurance policy - fixed annuity to variable annuity

variable annuity to life insurance policy The 1035 exchange provision applies to transfers from fixed policies to variable policies and vice versa, but it may not be used to transfer from an annuity to a life insurance policy

A customer in his 20s, who is not risk averse, is in the market for life insurance. His main worry is that what looks like a generous death benefit today may not be sufficient for a beneficiary 40 or 50 years from now. A registered representative might consider recommending

variable life insurance Variable life insurance has the advantage of offering possible inflation protection for the death benefit. The insured assumes investment risk for this benefit, but pays a fixed scheduled premium for the life of his contract

Dividend distributions from a bond fund would be taxable

whether the dividends are received in cash or reinvested Dividend distributions from a bond fund are taxable at the federal and state levels. In addition, dividend distributions represent a taxable event for the investor, whether received in cash or reinvested

An investor has been investing $100 per month for the past three months. The purchase prices were $20, $25, and $10. What is average cost per share purchased?

$15.79 The first purchase (at $20) acquired 5 shares ($100 ÷ $20), subsequent purchases acquired 4 and 10 shares, respectively. That is a total of 19 shares with an outlay of $300. The result is an average cost per share of $15.79 ($300 ÷ 19)

A customer who sold a bond at a loss must wait how long before he can buy back a substantially identical bond and not have the sale classified as a wash sale?

31 days When a customer sells a security at a loss, he may not buy back the same (or substantially identical) security from 30 days before to 30 days after the sale that established the loss, without having the loss disallowed

In the prior year, your customer realized a $17,000 short-term capital loss and a $6,000 long-term capital gain. What are the tax results of these transactions?

A $3,000 reduction in income and $8,000 in carry forward losses The customer netted $11,000 in losses, of which $3,000 may be used to reduce income and $8,000 may be carried forward into the following years

You have four clients each expressing interest in a variable annuity contract. Which two of the four client profiles would a VA be least suitable for? - A 45-year-old employed individual with no other retirement accounts in place - A 58-year-old individual near retirement who is in good health and anticipates a lengthy retirement - A 32-year-old with a company-sponsored 401(k) plan and will need a lump sum soon to finance graduate school tuition - A 60-year-old individual, nearing retirement, who has both IRAs and a 401(k) in place, is comfortable with market risk associated with the stock market, and has a lump sum in cash available to fund the annuity

A 45-year-old employed individual with no other retirement accounts in place A 32-year-old with a company-sponsored 401(k) plan and will need a lump sum soon to finance graduate school tuition VAs are less suitable for individuals who have not yet made maximum contributions to other retirement accounts such as IRAs and 401(k)s. They are also not considered suitable for anyone who anticipates needing a lump sum within a short time frame to fund other endeavors. They are more suitable for individuals who can fund the annuity with cash, want to supplement existing retirement benefits they have already funded, are comfortable with the market risk associated with a VA separate account portfolio, and anticipate a long retirement

When a customer wants income from an annuity and chooses the option of life with 20-year period certain, how will distributions be taxed?

As ordinary income based on an exclusion ratio Life with 20-year period certain is an annuitization option. When an annuity is annuitized, ordinary income taxes are paid based on an exclusion ratio (cost basis divided by expected return = how much of the distribution is a return of cost basis and not subject to income taxes)

Your client is interested in a variable annuity that offers to add a small percentage of each of his premium payments to the account. You explain that, in return for this enhancement, the annuity has a longer surrender period than the insurance company's standard variable annuity products, meaning that surrender charges are applicable for a longer period of time. What type of annuity is this?

Bonus annuity Bonus or enhancement variable annuities add a small percentage of each premium payment to the account. They are most often associated with longer surrender periods, eight or nine years versus the typical seven years. The annuitant agrees to this in return for the added bonus or enhancement

If a 60-year-old male customer is interested in investing in a variable annuity, which of the following would be the least important in the investment decision?

Customer's gender The customer's investment objective, past performance of the variable annuity, and available fund choices, not the sex of the annuitant, are critical considerations

Where can open-end investment company shares be purchased and sold? - In over-the-counter trades - From the open-end company - In the primary market - In stock-exchange trades

From the open-end company In the primary market Open-end company shares are bought and sold from the investment company. They are a continuous primary offering because only new shares are sold

For individual investors, which of the following is an advantage of investing in mutual funds rather than individual securities?

Professional investment management The investment adviser for a mutual fund provides professional management with both experience and expertise in investing that surpass those of the typical individual investor

The cost basis of inherited shares are based upon which of the following?

The value of the stock on the day of the decedent's death The cost basis of an inherited security is based on the value on the day of death

Guaranteed cash value is a standard feature found in which of the policies listed below?

Whole life Whole life policies offer guaranteed cash values and death benefits. The insurer assumes the investment risk by promising a fixed rate of policy return, regardless of investment performance. Term insurance is pure insurance protection and builds no cash value. Variable life cash value is not guaranteed, though cash value may be available depending on the performance of investments in the separate account

A national financial magazine advertisement for ABC mutual funds is permitted to include all of the following except - the telephone number of the sponsoring brokerage firm to contact for additional information - an application to receive a prospectus - an application to invest - past performance of the mutual fund

an application to invest. Mutual fund advertisements may not include an application to invest, because 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

A joint life with last survivor annuity - covers more than one person - continues payments as long as one annuitant is alive - continues payments as long as all annuitants are alive - guarantees payments for a certain period of time

covers more than one person continues payments as long as one annuitant is alive A joint life with last survivor contract covers multiple annuitants and ceases payments at the death of the last surviving annuitant

A formula timing plan that consists of periodic purchases of a fixed dollar amount of stock regardless of price is known as

dollar cost averaging There is no such thing as share averaging. Constant dollar and constant ratio plans do not involve periodic purchase of securities. They involve buying and selling equity and debt securities to keep either a constant dollar or constant ratio between the two. Dollar cost averaging calls for the investor to make regular purchases over a long period

The AIR (assumed interest rate) for your customer's variable annuity contract is 5%. In February, the separate account earned 7%. In March, the separate account earns 5%. The April annuity payment will be

equal to the March payment When the separate account return is equal to the AIR, the next month's payment amount does not change

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 10-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 10-year certain will pay for the greater of 10 years or the life of the annuitant. The customer lived for 23 more years, which is more than the 10 certain

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 that 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 The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59½

If the net assets of the Windmill Growth Fund (a mutual fund) are $22,300,000 and the fund has 1,115,000 outstanding shares the fund's net asset value (NAV) is

$20 The formula for NAV is net assets divided by outstanding shares. 22,300,000 ÷ 1,115,000 = 20

The Windmill Growth Fund receives $250 million in dividends and pays $10 million in expenses. At the end of the year the fund distributes $220 million as dividends to the fund's shareholders. The fund will pay taxes on how much of the net investment income?

$20 million The fund meets the requirement to qualify as a conduit because it distributes more than 90% of net investment income (NII) to shareholders. $250 million - $10 million = $240 million in NII. $220 million is 91.7% of NII. The fund pays taxes on the undistributed portion of NII ($20 million)

Jessie purchased Seabird Airlines common stock for $22 and held the position for one year before selling it for $25. What did Jessie realize for tax purposes?

$3 per share short-term capital gain Jessie made a $3 per share short-term capital gain. A customer would need to hold a stock for more than a year to receive long-term capital gain treatment

Bob's Big Bond Fund receives $50 million in interest payments from the bonds it holds over the course of a year. Expenses for the year add up to $5 million. How much must the bond pay in dividends to shareholders to qualify as a pipeline and avoid additional taxation?

$40.5 million The fund has a net investment income of $45 million and must pay out a minimum of 90% of that number ($40.5 million) to be treated as a conduit

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?

$50 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 × 0.005 (0.5% redemption fee) = $50

A retired public school teacher, age 65, has deposited a total of $10,000 into a nonqualified variable annuity, and her account's current value is $16,000. If she wishes to take a lump-sum withdrawal of the full amount, how much of this withdrawal is taxed at the ordinary income tax rate?

$6,000 Contributions to a nonqualified annuity represent cost-base dollars. When the contributions are paid out, cost base represents a return of capital and is not subject to tax. The growth in an annuity is tax deferred and is taxable upon receipt. In this case, of the total distribution of $16,000, the return of contributions was $10,000, leaving $6,000 taxable as ordinary income

A customer has invested a total of $10,000 in a nonqualified deferred annuity through a payroll deduction plan offered by the school system where he works. The annuity contract is currently valued at $16,000, and he plans to retire. On what amount will the customer be taxed if he chooses a lump-sum withdrawal?

$6,000 Payments into a nonqualified deferred annuity are made with after-tax money; taxes must only be paid on the earnings of $6,000

Liam has received a gift of 200 shares of Seabird Airlines from his Uncle Mike. Mike purchased the shares 25 years ago for $15 a share. At the time Liam receives the stock, it is valued at $75 a share. He later sells the 200 shares for $85 a share. Liam will have a gain of

$70 a share This is a gift. Liam's cost basis in the stock is based on the grantor's cost basis (the uncle) of $15 a share. Liam realizes a gain of $70 a share

If an investor starts to withdraw from a program that has $9,600 worth of funds, the first monthly payment of a 10-year self-liquidating program will be

$80 The payment for the first month is determined by dividing the current balance by the total number of payments to be made, as follows: $9,600 ÷ 120 payments = $80. Each month, the current balance would have to be recalculated to account for gains or losses in NAV and for payments that have been made. Then, the second month's payment would be determined by dividing the account total by 119, rather than 120

Which of the following statements describe the pipeline theory of taxation?

A fund is not taxed on earnings it distributes provided distributions equal 90% or more of net investment income Under the conduit, or pipeline, theory of taxation, a fund is liable for taxes only on the income retained, provided it distributes at least 90% of its net investment income. The investor benefits because the income is only taxed twice (at the corporate level and at the individual level) and avoids taxation at the fund level. There is no tax-free accumulation for the shareholder

Which of the following funds would be required to invest at least 80% of its assets in a particular type of security?

ABC High-Yield Bond Fund The high-yield bond fund is subject to the Name Rule and must invest at least 80% of its assets in high-yield bonds. The special situation fund is looking for special situations, but it can invest in any type of security to meet its objective

When comparing bonus or enhancement annuities with other annuities, which of the following statements are true? - Bonus variable annuities tend to have lower annual fees. - Bonus variable annuities tend to have higher annual fees. - Bonus variable annuities generally have longer surrender charge periods. - Bonus variable annuities generally have shorter or no surrender charge periods.

Bonus variable annuities tend to have higher annual fees Bonus variable annuities generally have longer surrender charge periods As the old saying goes, "you don't get something for nothing." In exchange for the up-front bonus, there is generally a longer surrender charge period, as well as somewhat higher fees

When comparing bonus or enhancement annuities with other annuities, which of the following statements are true? - Bonus variable annuities tend to have lower annual fees - Bonus variable annuities tend to have higher annual fees - Bonus variable annuities generally have longer surrender charge periods - Bonus variable annuities generally have shorter or no surrender charge periods

Bonus variable annuities tend to have higher annual fees Bonus variable annuities generally have longer surrender charge periods Bonus variable annuities add a percentage of each premium payment to the account. They tend to have higher annual fees to help offset the cost of the bonus or enhancement and are generally associated with longer surrender charge periods

An open-end investment company may engage in which of the following activities?

Borrowing of money from banks An open-end investment company is permitted to borrow money from financial institutions, provided an asset-to-debt ratio of 3:1 (300%) is maintained. Open-end companies only issue one class of security (common stock) and, therefore, are not permitted to issue senior securities (preferred stock or bonds), buy securities on margin, or reissue shares that have been redeemed. Redeemed shares must be canceled

Shares of which of the following classes may eventually convert to another share class?

Class B Class B shares often convert to Class A shares after the contingent deferred sales charge has expired

Your client has $50,000 to invest. His objective is monthly income that he can receive after he retires. Part of his customer profile stresses that he has had uncomfortable experiences in the past with the stock market and is not inclined to invest in anything that is based on stock market performance and would opt for principal protection instead. Based on the client's profile, which of the following would be the best recommendation?

Fixed annuity Though its stated return might not be as high as the potential returns of the other choices, only a fixed annuity fits the objective and risk-averse traits of this client. VAs, blue-chip mutual fund portfolios, and ETFs are all tied to market performance in some way and have risk characteristics that would not align in terms of suitability for this client

A customer has been investing $150 into an equity growth mutual fund for three years. The customer's daughter is in college and needs $100 a month for expenses. What would you recommend she do to provide her daughter with expense money?

Give the daughter $100 per month and invest $50 per month instead of $150 per month into the mutual fund The best choice is to reduce the mutual fund investment to $50 per month and give the daughter $100 per month. By doing so, the mutual fund remains intact. Liquidating a growth fund after just three years is not advised because this is a long-term investment. Most mutual funds require a customer account to be worth a minimum amount of money before a withdrawal plan may begin. Additionally, most funds discourage continued investment once withdrawals start

The Investment Company Act of 1940 requires that a mutual fund do which of the following? - Provide a monthly balance sheet to investors - Have $100,000 minimum capitalization - Provide semiannual reports to shareholders - Redeem shares at the net asset value per share calculated as of the close of the next business day following the redemption request

Have $100,000 minimum capitalization Provide semiannual reports to shareholders The Investment Company Act of 1940 requires that an investment company's assets amount to at least $100,000 and that it furnish shareholders with at least semiannual reports. The forward-pricing rule requires use of the next calculated NAV, which may be available on the day the redemption request was received

A fund aims for consistent total returns. The management is empowered to shift assets among stocks, bonds, and short-term, fixed-income securities in accordance with its projections of future market conditions. Because of its ability to diversify among many investment instruments, the fund has the potential to provide maximum returns while reducing volatility. This information describes which of the following mutual funds?

KPL 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

Which of the following statements regarding variable annuities are true? - Number of accumulation units is fixed - Number of accumulation units varies - Number of annuity units is fixed at annuitization - Number of annuity units varies throughout the distribution phase

Number of accumulation units varies Number of annuity units is fixed at annuitization The number of accumulation units an investor owns may vary as additional units are purchased or as units are redeemed. The number of annuity units is fixed at annuitization

When a customer receives payment during the annuity period of a variable annuity, which of the following is true? - The entire amount is subject to tax - All withdrawals are tax free - Only the amount that represents investment income is subject to tax - The investment income is taxed at the capital gains rate.

Only the amount that represents investment income is subject to tax The payment is divided into investment income and the client's original investment. Tax is owed on the investment income only, which is taxed at an ordinary income rate

What is the greatest risk to an investor in an asset allocation portfolio?

Poor portfolio management In an asset allocation portfolio, the investor is dependent on the fund manager's ability to allocate assets based on market performance. The manager has the authority to choose the percentage of assets that should be directed into stock, bonds, and/or cash, for the purpose of avoiding the other risks listed

Which of the following describes a wash sale?

Re-establishing a position in a security that has been sold for a loss within a period of 30 days of the date of the loss A wash sale occurs when an investor re-establishes the position in the same or a substantially identical security within 30 days of the date of the loss. Note that this can occur in the same day as the sale and up to 30 days before or 30 days after the date of the loss, a period of 61 days

Your customer, who is in his 30s, is single, and has a steady, well-paying job, has just received a large inheritance. He wishes to generate as much extra income with it as possible and does not mind financial risk. Which of the following investments would you recommend?

STG Corporate Bond Fund, which specializes in speculative bond offerings All of these funds generate income, but this customer is willing to take risks (and can afford them) to generate as much income as possible. The speculative bond fund, which is designed to generate high income in exchange for comparatively high risk, best meets his objectives

Which of the following funds would provide high appreciation potential together with high risk?

Sector A sector, or specialized, fund offers a higher appreciation potential, coupled with higher risk than an income-oriented fund or a diversified growth fund

Which of the following statements regarding an open-end investment company that operates pursuant to a 12b-1 plan are true? - Shareholders are charged for sales expenses involved in the distribution of new fund shares - The 12b-1 charges may not exceed 0.25% - The plan can be terminated by a majority vote of the shareholders only - Fees are deducted quarterly from a mutual fund's assets

Shareholders are charged for sales expenses involved in the distribution of new fund shares Fees are deducted quarterly from a mutual fund's assets Mutual funds may not act as distributors for their own fund shares except under Section 12b-1 of the Investment Company Act of 1940. A 12b-1 fee may not exceed 0.75% and is deducted each quarter from a mutual fund's assets to cover the costs of marketing and distributing the fund to investors. The 12b-1 plan may be terminated at any time by a majority vote of the noninterested directors or a majority vote of outstanding shares

Which of the following statements regarding money market mutual funds is true? - Shares are purchased at net asset value - They issue high-quality, short-term debt instruments - As interest rates rise, the net asset value declines - Shareholders may not have check-writing privileges

Shares are purchased at net asset value Money market mutual fund shares are always purchased at NAV—there are none with a sales load. While their portfolio consists of high-quality, short-term debt instruments, they do not issue debt instruments themselves. Check-writing privileges are a primary feature adding to the liquidity of these shares

If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are true? - She will receive the annuity's entire value in a lump-sum payment - She may choose to receive monthly payments for the rest of her life - The accumulation unit's value is used to calculate the total value of the account - The annuity unit's value represents a guaranteed return

She may choose to receive monthly payments for the rest of her life The accumulation unit's value is used to calculate the total value of the account When a variable contract is annuitized (distributed in regular payments, not as a lump sum), the number of accumulation units is multiplied by the unit value to arrive at the account's current value. An annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. This factor is used to establish the dollar amount of the first annuity payment. Future annuity payments will vary according to the separate account's performance

Which of the following is a key advantage of purchasing a variable annuity?

Tax deferral Tax deferral is a key advantage of purchasing a variable annuity. The separate account of a variable annuity is subject to market risk. Early withdrawals from a variable annuity are subject to a 10% penalty, along with ordinary income taxes on the growth portion above the cost basis

Which of the following statements regarding sales charges on variable contracts of insurance companies are true? - The Conduct Rules call for a maximum sales charge on variable annuities of 8.5% of the purchase payment - The Conduct Rules do not impose a specific maximum on sales charges for variable annuities - Variable life insurance contracts are limited to a maximum sales charge of 9% over the life of the contract - 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

The Conduct Rules do not impose a specific maximum on sales charges for variable annuities 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 Variable annuities' sales charges are held only to a standard of reasonableness. The Investment Company Act of 1940 sets the limits for variable life insurance

A customer establishes a nonqualified periodic payment deferred annuity and makes payments for three years. If the customer suddenly dies, which of the following statements correctly identifies the tax consequences to the beneficiary?

The beneficiary must pay ordinary income tax on proceeds exceeding the cost basis When an annuitant dies during the accumulation period of a nonqualified annuity, the proceeds exceeding the annuity's cost basis are taxable as ordinary income to the beneficiary

Your customer uses the FIFO method to determine his capital gains. What does this mean?

The first shares purchased are the first shares redeemed. FIFO means first in, first out. This is also what the IRS assumes if the method of redemption is not specified

Which of the following might bring about a change in the NAV of a mutual fund? - There are a large number of redemptions - The fund pays a dividend - The portfolio increases in market value - A large number of shares are purchased

The fund pays a dividend The portfolio increases in market value When a mutual fund pays a dividend, cash (an asset) is no longer held by the fund. This would reduce the amount of assets when computing net asset value. On the other hand, if there is an increase in the value of the holdings of the fund, assets increase, causing a corresponding increase to the NAV. Because purchases and redemptions are made at NAV, the fact that investors may be buying or redeeming has no impact on the fund's NAV

Which of the following statements is true of mutual fund dividend distributions?

The fund pays dividends from net investment income Mutual funds pay dividends from net investment income, and shareholders are liable for taxes on all distributions, whether reinvested or taken in cash

Which of the following are characteristics of exchange-traded funds (ETFs)? - They are redeemable securities - They are priced by supply and demand - They are designed to track an index - They try to diversify within a particular industry

They are priced by supply and demand They are designed to track an index ETFs trade on an exchange and, like all securities traded there, are priced based on supply and demand. Virtually all ETFs track a specified index

Which of the following statements regarding 12b-1 charges is correct? - They may be charged by open-end management companies - The SEC sets a maximum limit of 0.75% - They may be charged by closed-end management companies - FINRA permits members to charge 0.75% as a shareholder servicing fee, which is not included in the 12b-1 limits

They may be charged by open-end management companies Because 12b-1 charges are to cover distribution costs, it would be inappropriate (and illegal) for a closed-end fund to assess the charge. The 0.75% maximum is set by FINRA, not the SEC, and FINRA does permit the additional 0.25% (not 0.75%) for shareholder servicing

When must a mutual fund investor receive a statement of additional information (SAI)?

Upon request 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

An investor who purchases a fixed-premium variable life contract on July 1 and cancels the policy four days after receiving notification of his free-look right would receive

a full refund of all money paid to date According to the Act of 1940, if the investor cancels his variable contract plan within the free-look period (45 days from the execution of the contract or 10 days from delivery of the policy, whichever comes later), he will receive all money paid

An investment company that is not classified as either a unit investment trust or a face-amount certificate company would be classified as

a management investment company Management investment companies are one of the three classifications of investment companies under the Investment Company Act of 1940. The other two are face-amount certificate companies and unit investment trusts, the latter of which can have a fixed or non-fixed portfolio

A mutual fund that takes special steps to shield its investors from loss of capital is

a principal-protected fund One of the clever things done in this industry is to give products a name that describes what they do. A principal-protected fund is designed to guarantee the investor that at a specified date in the future, he will be able to redeem for no less than the original investment

In order for an investor to realize a capital gain or loss,

a sale must take place In order for a capital gain or loss to be realized, a sale must occur. The holding period will define the gain or loss as long or short-term

As written in the Investment Company Act of 1940, all of the following statements are true except - open-end investment companies must redeem securities within seven days after a redemption request - an investment company must have at least $100,000 capitalization to be offered to the public - an investment company's board of directors may be composed of up to 70% of the company's interested persons - shareholders have the right to vote on a company's change from a closed-end to an open-end investment company

an investment company's board of directors may be composed of up to 70% of the company's interested persons At least 40% of the board of directors must be noninterested persons. No more than 60% may be interested persons of the investment company

According to investment company rules, open-end investment companies may not distribute long-term capital gains to their shareholders more frequently than

annually Under the Act of 1940, investment companies may not distribute long-term capital gains more frequently than once per year

The conversion and exchange privilege offered by many mutual fund families permits the exchange of shares in one fund family for shares of

another in that family at net asset value For conversion and exchange of shares to take place at net asset value, the shares must be within the same fund family

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

are based on the fund's annual average daily net assets must be reviewed at least quarterly by the fund's board of directors Fees charged under Section 12(b)-1 are assessed against the fund's annual average daily net assets and must be reviewed at least quarterly by the investment company's board of directors.

During the accumulation period of a periodic payment deferred variable annuity, the number of accumulation units

increases and the value per unit varies A periodic payment deferred variable annuity is one in which the investor makes more than one payment. Thus, the number of accumulation units increases. The value of each unit will vary according to the performance of the separate account

Variable annuity payout options may include - life only - joint life with last survivor - assumed interest rate - minimum required distribution

life only joint life with last survivor Variable annuity payout options can include life only and joint life with last survivor

A FINRA member firm must maintain the public offering price in all the following instances except - member to investment club - member to nonmember - member to member - member to customer

member to member Members may allow sales concessions only to other (FINRA) member firms. In transactions with customers and nonmember firms, members must maintain the full public offering price

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 The assumed interest rate (in this case, 4%) serves as a base of projection for calculating periodic payments. If the actual return is greater than the AIR, the next month's benefit check will increase in value. Because the account actually earned 8%, which is higher than the AIR, the value of the check would increase again (greater than $425). Always compare the actual return to the AIR, not to the previous month's performance

An investor reviewing the holdings of a tax-exempt bond fund would expect to see most of the portfolio invested in

municipal bonds 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

Your open-end investment company customer has decided to take automatic reinvestment of dividends and capital gains distributions. This choice will

not alter the tax due on the distributions Automatic reinvestment of dividends and gains does not increase, decrease, or defer tax liability

The result of dollar cost averaging is to

obtain a lower average cost per share than average price per share The result of dollar cost averaging is to obtain a lower average cost per share than the average price per share. This is accomplished by making regular investments of a fixed amount when prices are fluctuating

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 SEC Rule 498 permits sales to be made using a summary form of the prospectus. An investor who purchases fund shares on the basis of the summary prospectus must be able to access a statutory prospectus online

12b-1 fees may be used to cover all of the following charges except

portfolio management fee 12b-1 fees may be used to cover the costs associated with soliciting new investment into the fund. This would include costs associated with advertising, sales literature, and the mailing of prospectuses to new investors

To register new securities, an investment company must - supply detailed information about itself to the SEC - supply detailed information about the new securities to the SEC - obtain the SEC's approval of the issue - obtain FINRA's approval of the issue

supply detailed information about itself to the SEC supply detailed information about the new securities to the SEC The registration statement and prospectus filed with the SEC must disclose all material facts of the issuer and the security being issued. The SEC does not approve new issues, nor does any SR

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

A variable annuity characteristic that contractually guarantees payments for life is

the mortality guarantee The company assumes the mortality risk by guaranteeing payments for life, though the payments are not guaranteed as to amount

The management fees paid by an investment company are part of

the operating expense of the fund The management fees paid by an investment company are part of the operating expenses of the fund. Custodial fees are also part of the operating expenses. A sales load is a selling cost contained within the underwriting agreement

When comparing stock market and mutual fund definitions, the bid price is similar to the NAV, and the ask price is similar to

the public offering price Bid, or NAV, represents the price at which the customer redeems (sells) shares. The ask price is similar to the public offering price (POP) because this is the price the customer pays for the purchase of shares

An insurance company offering a variable annuity makes payments to annuitants on the 1st of each month. The contract has an assumed interest rate of 3%. In July of this year, the contract earned 4%. In August, the account earned 6%. If the contract earns 3% in September, the payments to annuitants in October will be

the same as the payments in September When actual separate account earnings are equal to the assumed interest rate, the payment to the annuitant is the same as the previous month. Taking these in sequence, the July earnings of 4% were above the 3% AIR, so the August payment increased. The August earnings of 6% were above the 3% AIR, so the September payment went up. However, the September earnings were equal to the AIR, so the next month's payment (October) remained the same

When evaluating the purchase of an immediate variable annuity for a retiree, the most important factor in determining suitability is

the uncertainty of the amount of the monthly check 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. There is no guaranteed minimum amount

The net asset value per share of a mutual fund will fluctuate in value relative to

the value of the fund's portfolio Share prices fluctuate in relation to the value of the assets held in the fund's portfolio

The conduit theory of taxation helps mutual funds reduce the impact of

triple taxation The conduit (or pipeline) theory eliminates one level of the three that impact dividends. The money used to pay a mutual fund dividend is still taxed at the original corporate level and again at the individual taxpayer level (double taxation) but provides a break at the fund level, thus avoiding triple taxation

A widowed customer with no children has a portfolio invested in mutual funds valued at $250,000. The portfolio generates a monthly income of $1,600, an amount that exceeds her living expenses by $300. The investment portfolio is her sole source of income. Her agent recommends she sell $30,000 worth of her mutual funds and purchase a variable life insurance policy to take advantage of the tax deferral and death benefit features. This recommendation is

unsuitable, because she has no need of the death benefit. The customer has no need for the death benefit (she has no immediate survivors) or tax-deferral features (with $19,200 in annual income, there are virtually no income taxes due) of a variable life insurance policy, so this transaction is unsuitable. Finally, she would be replacing income-generating assets with one that does not offer immediate income and that could reduce her income cushion to an uncomfortable margin of safety

A type of life insurance where the death benefit varies based on the investments selected by the policyowner is known as

variable life 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