Series 6 Top-Off

A married couple in their early 50's saving for retirement would most likely have which of the following objectives?

Moderate risk, moderate safety, low liquidity.

How are management fees of a fund paid for?

the operating expenses of the fund (custodial fees are apart of these expenses)

Credit risk

the risk associated with the default of a debt security; issuer may suffer financial failure and default on its obligation to an investor.

Commercial paper

unsecured debt of a corporation in need of short-term financing (money market instrument), max. maturity is 270 days making it exempt from registration under the Securities Act of 1933

An investor might expect to receive the greatest gain on an investment in a corporate bond by purchasing:

Long-term bonds when interest rates are high - a drop in interest rates will increase the price of the bond and there is more risk with long-term maturities, but greater gain.

How long is the conversion privilege period

24 months

How much money may be used annually for k-12 education purposes within a Section 529 Plan?

$10,000/year as of 2018 in addition to secondary education. Qualified expenses include tuition at an elementary or secondary public, private or religious school, for up to $10,000 per year.

What are some key features of the Securities Exchange Act of 1934?

(The People Act) it requires registration of people and exchanges transacting securities business in order to prevent manipulative and deceptive practices. The Act of 1934 also created the SEC and mandated the creation of SROs.

Accumulation plans

(binding on the fund, 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.

Money market vs. Capital market

-Money Market instruments are investments with maturities of 12 months or less v(i..e-T-bills, commercial paper, bankers acceptances) - Capital Market instruments are long term and have maturities of more than 12 Months, or no maturity at all (common stocks)

FINRA allows sales charges up to a maximum of:

8.5% for mutual funds and 9% for contractual plans

A contingent deferred sales charge is best described as:

A back-end sales charge that decreases the longer the investor holds the shares, seen with Class B shares, typically begin at 5% or 6% and decrease at the rate of 1% per year invested. If fund is opened long enough and it is decreased to 0%, the fund converts into a Class A share, which not only have no back-end load but also have a lower expense ratio and lower 12b-1 fees

If the NAV of a fund has increased while it's ask price has decreased, what kind of fund is this?

A closed-end fund because it's asking price is not determined by its NAV, its determined by supply and demand. An open-end company's NAV cannot increase while its ask price has decreased.

An unrealized loss with result in what for distributions to shareholders?

A lower NAV per share and reduced proceeds payable to shareholders who liquidate their shares.

What is a gold fund (or precious metals fund)?

A precious metals fund would own stock in companies involved in the mining and refining of precious metals. The fund would not own the commodity itself. (i.e.-Barrack Gold Corporation common stock)

What is the duration of a zero-coupon bond?

A zero-coupon bond pays nothing until it matures, which makes its duration and maturity of the same length.

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

What does the SAI (Statement of Additional Information) hold?

Additional information not found in the prospectus, not necessarily needed to make an informed decision, like history, policies and the fund's consolidated financial statements. Is available to investors upon request with no charge.

A company has negative operating revenues for the year. It would NOT be required to make interest payments on which of its following issues?

Adjustment bonds, also known as income bonds, because they are only required to pay interest when the company has sufficient income to pay them with (main risk)

Qualified pension plan

May not discriminate between eligible employees. They must have a set vesting schedule, the plans must be in writing, not voice recorded, and an employer must update the status of all employees at least annually.

A client who is a manager of a pension plan has recently liquidated approximately $1 million in securities and now has only cash and cash equivalents in the account. This client's outlook concerning the market is:

Bearish; expect a bear market and is taking this action in an attempt to protect against incurring losses from the anticipated market decline.

To profit from the anticipated upward movement in the stock price, a person could take what position(s) in option contracts:

Buy calls or write puts (bullish strategies)

What is a third market transaction

Listed and trading on the over-the-counter market (OTC)

What are mutual fund shareholders taxed on?

Capital gains distributions, reinvested dividends and interest distributions. They are NOT taxed on unrealized capital gains

What type of fund can issue more than one type of security?

Closed-end funds. They can issue common & preferred stock, and bonds. Open-end can only issue redeemable common stock.

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

Closed-end investment company

What type of sales charge is used to deter frequent trading in mutual fund accounts?

Contingent deferred sales charges (CDSC)

An investment in an international equity fund carries:

Currency and political risk

What is the duration of an interest-bearing bond?

Interest-bearing bonds have a cash flow prior to maturity, which makes their duration shorter than their time to maturity.

Characteristics of Treasury Notes

Intermediate maturity with various maturities (2-10 years), pay semiannual interest, and they sell at par.

When can a variable annuity account be surrendered?

During the accumulation period, If the account is annuitized, the investor has chosen a payout option.

Once a variable annuity has been annuitized:

Each annuity unit's value varies with time (depending on the performance of the second account), but the number of annuity units is fixed.

What security pays monthly interest and principal payments?

GNMAs (Ginnie Mae pass-through certificates)

An investor who desires minimal credit risk and monthly interest income should consider an investment in which of the following?

Ginnie Mae's - full faith guaranteed by the Government, investors receive monthly interest and principal payments from the certificates of pooled mortgages, virtually no default risk, just interest rate risk (when they fall, homeowners pay off mortgages, speeding up certificates maturity)

Mid-cap stocks

Good for someone in low tax bracket, wishing to invest moderate sum of money and have some protection from inflation. These historically provide good hedges against inflation making them appropriate for an investor seeking long-term growth and inflation protection.

What debt instruments pay semiannual interest?

IDRs (Industrial Development Revenue Bonds), Municipal General Obligation (GO) bonds, and Municipal Revenue Bonds

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

In the semiannual or annual report.

Your customer is interested in a fund that follows a buy-and-hold style of investing. He also insists on the lowest fees and expenses possible. Which of these funds might you recommend?

Index fund

Which of the following mutual funds would be suitable for an investor who requires tax-exempt dividends?

Municipal bond fund - Municipal bonds pay tax-exempt interest. When the portfolio of the mutual fund is comprised of municipal bonds, the fund's dividend is also tax-exempt.

Selling price/offering price of shares when given the NAV

NAV / (100% − SL%) = public offering price $9.30 divided by 93% (.93) = $10.

Negotiable CDs

Negotiable jumbo CDs are issued for $100,000 to $1 million or more and trade in the secondary market. Most jumbo CDs are issued with maturities of less than a year (money market instruments). The FDIC insures only up to $250,000.

How often can open-end investment companies issue long-term securities?

No more than once per year (annually)

Treasury Bill

No stated rate of return since they are issued at a discount of par. They mature at face amount and the discount represents the interest earned

What should be done when interest rates in the market where a long-term unit investment trust is increases?

Nothing - UITs interest rates are fixed so they would not react to market changes.

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

Sector Fund

Blend/core funds

Portfolios consisting of equities, both growth and value. Sole purpose is to allow diversification through management and securities in a single fund. Biggest risk is stock market risk

What happens to outstanding fixed-income securities when interest rates decline?

Prices increase, decreasing effective yield - has to do with inverse relationship of bond prices and interest rates

A mutual fund that takes special steps to shield its investors from loss of capital is a(n):

Principal-protected fund - 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.

What is a 403(b) plan, or a tax-sheltered annuity (TSA)

Public schools-403(b) organizations-and for private schools, research foundations, religious organizations, and other nonprofits.

What are the benefits of automatic reinvestment of dividends vs. taking the distribution in cash?

Since both are taxed in the current year, there is no tax benefit, but reinvesting has a compounding effect on your account if the shares increase in value. Taking cash in distributions inhibits your growth in capital. Reinvestments of dividends and capital gains are always at NAV.

What does a conversion ratio of 20 for a bond mean

That one bond can be exchanged for 20 shares of common stock. Since the par value of the bond is $1000, this corresponds to a conversion price of $50 per share.

The distinguishing factor for Growth & Income funds is...

That they 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.

What charges do 12b-1 fees cover?

The charges associated with soliciting new investments into the fund, like sales literature, advertising and mailing prospectuses to new investors

A customer of yours owns a corporate bond fund with a long duration. Mortgage rates are going up. What impact will this have on the investment?

The current yield will increase since the price of the shares can be expected to fall - Since interest rates are going up, bond prices can be expected to decrease. A given bond, then, will experience a decrease in price and a corresponding increase in the calculated current yield. The same can be expected of mutual funds that invest in bonds.

Open-end investment company shares normally go ex-dividend:

The day after the record date (not like typical DERP) 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.

What is the biggest advantage of variable life over whole life?

The death benefit protection from inflation - Variable life has scheduled, not flexible, premium payments, aka 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.

What is a front-end sales load

The difference between the public offering price and the net asset value per share of the fund

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.)

When securities are inherited, what will be the recipient's cost basis?

The market value of the securities at the time of death.

After the annuitant dies in a variable life plan, how is the beneficiary taxed on the proceeds?

The proceeds minus annuitant's cost basis taxed as ordinary income at beneficiary's tax rate.

Rule 34b-1 of the Investment Company Act of 1940

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.

What disclosures have to be made to a client who wants to invest in a principal-protected fund?

There will be additional costs for the guarantee that you don't lose principal and to protect the fund against short-term market corrections, these funds require that your investment be held a minimum of 5 to 10 years.

How are municipal bonds taxed?

They are exempt from federal income taxes, but taxed on capital gains

Characteristics of index annuities

They have a guaranteed minimum return and longer surrender periods, and are not considered securities

What does the investor receive when they redeem shares with no redemption fee?

They receive the bid (or NAV) times the number of shares

What happens if an investor cancels a variable life contract 4 days after the execution of the contract?

They would be refunded the full amount paid because they are still within the 45-day free-look period- 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.

What are open-end investment companies permitted to do?

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 re-issue shares that have been redeemed. Redeemed shares must be canceled.

Which of the following income investments would be most suitable if interest rates were expected to increase sharply within the next two years?

Treasury bills for their short-term maturity, which would make interest rates have the least effect on price

Unrealized gain vs. realized gain

Unrealized- think paper profit, realized- think actual profit made.

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

Variable insurance

1035 exchange allows transfers from one policy to another. These exchanges include...

Variable life to variable annuity, variable annuity to variable annuity, & fixed annuity to variable annuity. NOT variable annuity to life insurance

When must a company that is in the business of investing securities register with the SEC as an investment company?

When at least 40% of their assets are invested in securities (excluding government securities and of majority-owned subsidiaries), and must have a minimum net worth of $100,000.00

The best time to purchase shares in a long-term bond fund is:

When interest rates are falling after a period of high interest rates. The bonds already in the fund will continue to pay a high rate of return, and if rates continue to fall, the market value of the fund's portfolio will rise.

When should a customer purchase a combination annuity?

When they want a source of retirement income that is both stable and will offer some protection against purchasing-power risk in times of inflation, advantages of both a fixed & variable annuity

When a brokerage firm sells stock from its own inventory, it is acting in the capacity of

a principal and is charging a markup

What does a corporate bond quoted as QRS Zr 20 mean

a zero-coupon bond issued by the QRS Company maturing in 2020, paying no interest until maturity, bought at a discount and mature at face value

Nonqualified retirement plans

after-tax contributions, tax-free distributions

How often is the death benefit calculated for a variable life policy?

annually

Straight life variable annuity

annuitant receives a check for the rest of their life. After they die, the money stops and there is no beneficiary that will receive any leftovers, which is the reason why these checks are the largest out of any of the options

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

asset allocation

Dividend distributions from a bond fund would be taxable:

at the state and federal level, and whether they are received in cash or reinvested.

The open-end investment company share price quoted in the newspaper is the:

bid price

A warrant

certificate granting its owner the right to buy securities from the issuer at a specified price, normally higher than the market price when issued.

If you invest in a front-end load mutual fund and choose automatic reinvestment, you should expect that:

dividend distributions are automatically reinvested at NAV and capital gains distributions are automatically reinvested at NAV

One of the most important functions of a banker's acceptance is its use as a means of:

facilitating trades in foreign goods; It is guaranteed by a bank on behalf of a corporation in payment for goods or services.

reinvestment risk is the risk that, between now and when the bond matures or is called, interest rates will:

fall; it becomes difficult for bond investors to invest the proceeds from the bond and maintain the same level of income and the same general risk level.

What does a variable annuity guarantee?

fixed mortality expense (payments for life) and capped administrative expenses

Mutual fund 12b-1 fees are deducted from the

fund's assets, deducted quarterly

If ZB Invest Fund seeks capital appreciation, has a low dividend yield, and invests chiefly in the stock of large, well-performing companies that have earnings momentum; it is probably a:

growth fund

Equity income funds

invest in common stock, preferred stock and convertible securities for the purpose of generating current income and capital growth

Income bond

issued by a company coming out of bankruptcy and pays interest only if the corporation has enough income.

Class A (front-end) shares are recommended for...

large investments for long-term. They have lower internal fees than B and C, and breakpoints to reduce their front-end load (something like $50,000 to invest would qualify for a breakpoint)

An investor purchased shares of a mutual fund. Three months later, the fund has a long-term capital gains distribution. This is taxed to the investor as...

long-term capital gain, because the holding period of the funds is irrelevant when a distribution of the fund's long-term gains is being passed through to the investor.

DMF Company has convertible bonds (convertible at $50) outstanding. The current market value of DMF's stock is $42. The bond indenture contains an antidilution feature. If DMF declares a 10% stock dividend, the new conversion price will be

lower than $50 - With an antidilution feature, the issuer will increase the number of shares available upon conversion if the company declares a stock split or stock dividend. This is done to keep the bondholder whole.

Separate accounts are similar to mutual funds in that both:

may have diversified portfolios of common stock and give investors voting rights

Qualified retirement plans

pre-tax contributions, charged ordinary income at distribution

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.

Class C (level-load) shares are recommended for...

short-term investments. Class C shares have a one-year, 1% contingent deferred sales charge, a .075% 12b-1 fee, and .025% shareholder's fee. Result in higher sales charges in the long term since the fee never discontinues

Class B (back-end) shares are recommended for...

smaller investments for long-term, that won't or don't qualify for breakpoints. Have higher internal fees and a contingent deferred sales charge.