Series 6 Unit 3
All of the following must be sold with a prospectus EXCEPT
A) closed-end funds in the secondary market
When discussing the benefits of a Section 1035 exchange with a client, it would be appropriate to point out that the main benefit is:
B) tax savings.
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.
D) I or II. 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 45-year-old woman wants the greatest possible monthly income with the preservation and stability of capital as secondary objectives. Which of the following investments would you recommend?
High-grade bond fund A high-grade bond fund is the most appropriate of the choices for a 45-year-old who wants the greatest possible monthly income with preservation of capital and stability. .
One of your clients is interested in purchasing an index annuity. When discussing this product, you should mention the rate cap the participation rate the surrender period is shorter than most other annuities taxation of dividends received
I and II 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.
Municipal bond fund
Tax exempt and not suitable for retirement accounts
AAA rated bonds are suitable for
an income oriented client
Government bonds
are designed for moderate income with safety of principal.
. Options
are not suitable for a growth client.
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.
Separate account
variable annuity
Mutual fund shares that carry a level load are:
A) Class C shares.
Which of the following statements regarding Treasury bills are TRUE? They are sold at auction. They pay a fixed rate of interest semiannually. They mature at par. They mature in ten years or more.
A) I and III. T-bills are sold at a discount by auction and mature at par in less than one year.
Which of the following concerning Section 529 plans are TRUE? Qualified withdrawals are exempt from federal income tax. Contributions are tax qualified. Some states will tax the withdrawals as income. Withdrawals may be used for any expenses incurred by a student.
D) I and III.
What can a mutual fund ONLY issue?
common stock
The KPF Growth Fund charges no redemption fee. An investor brings 200 shares to your firm for redemption. The next quote on the fund is $9.15 bid, $10.00 ask. If liquidated by the firm without charge, he would receive for his shares:
A) $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.
An investor has unexpectedly received $30,000 from an old debt he had written off. This money will come in handy for a business venture planned for three years from now. Meanwhile, he would like to generate some income on the money with as little risk and as little expense as possible. Which of the following recommendations is likely to be the most suitable for this customer?
A) Class C shares of the ABC Investment-Grade Bond Fund. The customer wants income with as little risk as possible, so our answer must be one of the choices that offer an investment-grade bond fund. Of those offered, Class C shares would be best because the customer would pay no front-end sales charge and no CDSC after a short time, probably one year. He will pay somewhat higher 12b-1 fees than with Class A shares, but this will amount to only a fraction of 1% per year, and only for the three years of his investment.
All of the following debt instruments pay interest semiannually EXCEPT:
A) Ginnie Mae pass-through certificates. Ginnie Maes pay interest on a monthly basis, not semiannually.
Which of the following securities trade in the money market? Bankers' acceptances. Common stock. Treasury bills. Highly rated preferred stock.
A) I and III. Money market securities are high-quality debt issues with maturities of one year or less. BAs have a maximum maturity of 270 days, and Treasury bills have a maturity of less than one year. Both common and preferred stock are equity, not debt.
A mutual fund can hold which of the following securities in its investment portfolio? Common stock Preferred stock Corporate bonds Municipal bonds
A) I, II, III, and IV 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.
Which of the following statements describing Section 529 plans is TRUE?
A) The maximum annual contribution varies from state to state. The features of Section 529 plans, including their contribution limits and fees, vary widely from state to state. Section 529 plans have no age limits as to participation; they are open to both children and adults who plan to attend college or graduate school. For college savings plans, there is no state residency requirement for either owners or beneficiaries of Section 529 plans.
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?
A) 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.
Your customer, age 32, makes $48,000 annually and has $15,000 to invest. Although he has never invested before, he wants to invest in something exciting, with investment returns in the 20%+ range. Which of the following should you suggest?
A) Your customer should provide more information before you can make a suitable recommendation. It is necessary to get more information about this customer and his definitions of an exciting investment opportunity before making any recommendations. A suitability and risk-tolerance analysis should be performed before a recommendation is made.
An investor who purchases stock in two technology companies with high projected earnings and growth potential but little performance history is considered a(n):
A) aggressive investor. An investor is taking an aggressive investment posture in investing in a growth company with little history. He is willing to take on high risk for high potential returns.
A popular asset found in the portfolio of money market mutual funds is commercial paper. The most common issuer of commercial paper is:
A) corporations. Commercial paper, a money market instrument, is issued by corporations.
An open-end investment company may do all of the following EXCEPT:
A) 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.
As written in the Investment Company Act of 1940, investment companies must do all of the following EXCEPT:
A) maintain adequate debt/equity diversification in the fund's investments. According to the Investment Company Act of 1940, at least 40% of a company's directors must be noninterested persons (a simple majority if the fund charges a 12b-1 fee), the company must state and follow a clearly defined investment objective, and a company must have a minimum of $100,000 in net assets before it may operate.
Under the Conduct Rules, all of the following actions violate fair and ethical treatment of customers EXCEPT:
A) recommending that a customer set up a scheduled investment program, depositing the same amount each period regardless of market value. Encouraging a customer to invest according to a schedule is perfectly lawful.
From which of the following is the 12b-1 fee deducted?
Assets of the fund.
Mr. and Mrs. Smith, both nearing retirement, want to maximize their income. They want to reallocate $100,000 of their $400,000 portfolio of securities for this purpose. Of the possible investment choices below, which would be the LEAST suitable recommendation given their investment objective?
B) AAA convertible corporate bonds Convertible bonds offer a lower coupon in exchange for the conversion feature, therefore is not a good choice for maximizing income.
A fund seeks maximum capital appreciation by investing in common stocks of companies located outside the United States. The management selects well-established companies that are listed on their national stock exchanges and that have demonstrated high earnings potential. This information describes which of the following mutual funds?
B) ATF Overseas Opportunities Fund.
A complete customer profile includes both financial and nonfinancial investment considerations. Which of the following is considered financial investment information?
B) Discretionary income
Under the conduit theory of taxation, which of the following statements are TRUE? A fund is not taxed on earnings it distributes if it distributes at least 90% of its net investment income. Investors are not taxed on earnings they reinvest. A fund is only taxed on interest income. Investors are taxed on earnings they receive in cash.
B) I and IV. By qualifying as a regulated investment company (the conduit, or pipeline, tax theory), the fund is liable only for taxes on retained income if it distributes at least 90% of its net investment income to shareholders. Investors will pay taxes on distributed income whether received in cash or reinvested.
A convertible bond of the KLP Corporation has a conversion ratio of 20. This means that: the conversion price of the bond is $20 per share. one bond can be exchanged for 50 shares of KLP common stock. one bond can be exchanged for 20 shares of KLP common stock. the conversion price of the bond is $50 per share.
B) III and IV. A conversion ratio of 20 means 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.
If your customer has two bonds, and one has a coupon of 5.1% and the other has a coupon of 5.3%, what is the difference in annual interest payments between the bonds?
C) $2 $1,000 × .053 = $53$1,000 × .051 = $51$53 − $51 = $2
When interest rates are declining, which of the following funds is most directly affected?
C) Corporate bond fund. When interest rates fall, bond prices rise. The other funds listed hold common stock in their portfolios, and common stock is not as directly affected by changes in interest rates as are debt instruments.
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.
C) II and III. 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.
SEC regulations for securities issued by investment companies prohibit which of the following? Closed-end funds from issuing preferred stock. Open-end funds from issuing preferred stock. Closed-end funds from issuing bonds. Open-end funds from issuing bonds.
C) II and IV.
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 lock-up period. Must be an accredited investor. Additional costs.
C) II and IV. As the old saying goes, "you don't get something for nothing." In exchange for the guaranteed that you can't lose principal, there is a cost. In additional, to protect the fund against short-term market corrections, these funds require that your investment be held a minimum of 5 to 10 years.
All of the following are characteristics of convertible bonds EXCEPT: the price of the bond can be affected by the price of the underlying stock. the coupon is invariably lower than similar nonconvertible corporate bonds. the coupon is invariably higher than similar nonconvertible corporate bonds. at issue, the conversion price is set lower than the market value of the underlying stock.
C) III and IV. The coupon on convertible bonds is invariably less than the coupon of similar nonconvertible bonds. This is because investors are willing to accept less interest income for the privilege of being able to convert the bond into stock. When convertible bonds are issued, the conversion price is set higher than the current market value of the stock; otherwise, the bonds would be instantly converted.
A prospect is heavily invested in the common stock of an employer's company, ABC, relative to other investments. The stock has performed well over the last 15 years and the prospect is very happy with the investment. After reviewing financial and nonfinancial criteria, you have determined that
C) selling a portion of ABC and using the proceeds to purchase mutual funds will reduce his nonsystematic risk This prospect is exposed to a significant amount of business (nonsystematic) risk as indicated by the large investment in ABC common stock. Business risk can be reduced by diversifying the portfolio; and therefore, recommending the sale of a portion of the ABC stock and using the proceeds to purchase mutual funds is suitable. There will be tax considerations but the use of FIFO accounting will likely expose the prospect to higher capital gains taxes than other accounting methods and may not be the best approach to liquidation.
If a customer is concerned about interest rate risk, which of the following securities is least appropriate?
D) 25-year municipal bonds. Interest rate risk is the danger that interest rates will rise and adversely affect a bond's price. This risk is greatest for long-term bonds; short-term debt securities are affected the least if interest rates change.
Each of the following is a characteristic of money market funds EXCEPT:
D) A beta of 1.00. A beta of 1.00 means that a security (or portfolio) has the same price volatility as the overall market. That is certainly not the case with money market fund shares. Money market mutual funds invest in a portfolio of short-term debt instruments such as T-bills, commercial paper, and bankers acceptances. They are offered without a sales load or charge. The principal objective of the fund is to maintain a stable NAV ($1 per share).
A company has negative operating revenues for the year. It would NOT be required to make interest payments on which of its following issues?
D) Adjustment bonds. Adjustment bonds are sometimes called income bonds because they only pay interest when the company has sufficient income (as determined by the Board of Directors.
Which of the following regarding both index mutual funds and ETFs is TRUE?
D) 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.
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:
D) 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.
An accredited investor, age 39, would like to invest $10,000 and wants an investment that is liquid. You recommend a(an)
D) mutual fund that invests in both stocks and bonds A product is liquid if a customer can sell it quickly at face amount (or very close to it) or at a fair market price without losing significant principal. A mutual fund is the only choice given that is considered liquid.
same account
fixed annuity
mutual fund
is open-ended
During a recession, payments from a variable annuity will most likely:
B) decrease.
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:
A) 995 Since 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 × .005).
A straight life annuity will give the annuitant monthly payments for which of the following?
A) As long as the annuitant lives.
A customer has been investing $150 into an equity growth mutual fund for three years. The customer's daughter is in college and needs money for expenses. What would you recommend she do to provide her daughter with expense money?
A) 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 as 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.
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.
A) I and III. Class C shares generally have the following features: no front-end sales charge, lower CDSCs than Class B shares for a shorter period of time, and no conversion to Class A shares regardless of how long they are held. Because of these features, Class C shares may be less expensive for investors with shorter investment horizons. They may be more expensive for investors who plan to hold their shares for a long time, since the level load never discontinues.
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.
A) I and III. 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 ten 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. Reference: 3.9.6 in the License Exam Manual
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.
A) I and III. 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.
If a customer's chief concern is to shelter as much of his portfolio earnings from tax as possible, which of the following securities would be most suitable?
A) Municipal GOs The interest on municipal GOs is exempt from federal income tax and perhaps state income tax, depending on the investor's residency.
Which of the following mutual funds would be suitable for an investor who requires tax-exempt dividends?
A) 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.
Which of the following is NOT a money market instrument?
A) Newly issued Treasury notes issued to meet a specific government-funding requirement. A newly issued Treasury note would have a maturity of at least two years and would not be considered a money market instrument.
What happens to outstanding fixed-income securities when market interest rates drop?
A) Prices increase. When interest rates drop, the price of outstanding bonds rises to adjust to the lower yields on bonds of comparable quality.
According to the Investment Company Act of 1940, an open-end investment company must compute its NAV
A) 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.
Your client wishes to invest $50,000 into shares of the ACE Mutual Fund. This morning's financial news indicated that the POP for ACE was $10.86 while the NAV was $10 per share. The client's order is placed at 2:00 pm ET. On the basis of this information, you could confirm to the client a purchase of:
A) nothing yet, as you must wait for the POP to be computed based on the day's close. Mutual funds use forward pricing, so we never know what we'll be paying per share (if purchasing) or receiving per share (if redeeming) until the next calculated price.
A customer who seeks to supplement his retirement income and has a high risk tolerance would find which of the following securities most suitable?
B) High-yield bond funds High-yield bonds yield more than investment-grade bonds. Since the client has a high risk tolerance, these bonds are more appropriate than investment-grade bonds that yield less.
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.
B) I and II. 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, since they invest not in securities but in real estate.
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.
B) I and II. 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.
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. fund must pay taxes on 100% of the net investment income. shareholder pays no tax if the income is reinvested. shareholder must pay taxes if the income is received in cash or reinvested.
B) II and IV.
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?
B) 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
Which of the following statements regarding UITs is TRUE?
B) 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.
An investor who owns shares of a mutual fund actually owns:
B) an undivided interest in the fund's portfolio.
Customers could pay a commission, rather than a sales charge, for shares of a(n):
B) 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.
12b-1 fees may be used to pay all of the following EXCEPT:
B) 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.
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:
B) 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.
A nonqualified variable annuity valued at $400,000 is annuitized and the annuitant received $220,000 in payments until his death. At his death, if his wife received a lump sum payment of $180,000, this example illustrates a:
B) unit refund annuity.
Your customer has heard about precious metals funds. He asks about the types and amounts of various precious metals these funds might own. You tell him he has mistaken the focus of these funds. A gold fund, for example, might own:
Barrack Gold Corporation common stock. Investment companies invest in securities. 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.
Three years ago, your client invested $10,000 in the RIF Fund. During this time, the fund has distributed $700 in dividends and $1,100 in capital gains, all of which have been reinvested in additional shares. If the client decides to liquidate his position of 1,173.452 shares when the POP is $12 and the NAV is $11.52, the client's cost base is:
C) $11,800.00 A mutual fund investor's cost base is the total of all investments including reinvested distributions. In this case, the initial $10,000 is increased by the $1,800 total of distributions.
Corporate debt securities (such as commercial paper) are exempt from registration under the Securities Act of 1933 if their maturities do not exceed how many days?
C) 270 days. Corporate debt securities (such as commercial paper) with maturities of 270 days or less are exempt from registration.
Selling which of the following is NOT a violation of the Conduct Rules? A) Government bonds to a client who insists on high returns. B) Selling the same mutual fund to all of your clients. C) AAA bonds to a client who has income as an objective. D) Options to a client who desires long-term growth.
C) AAA bonds to a client who has income as an objective.
An investor who desires minimal credit risk and monthly interest income should consider an investment in which of the following?
C) Ginnie Maes. Because Government National Mortgage Association (GNMA) pass-through certificates are guaranteed by the U.S. government, investors who purchase them face no credit risk. Income from GNMA is paid to the investor on a monthly basis.
One of your customers had a rich uncle who died and left him $20,000 worth of mutual fund shares. The customer, who is in the 20% tax bracket, notices after a few months that the shares have gone down in value to $18,000. He would like to liquidate them before they depreciate further. What tax consequences can he expect?
C) He can declare a $2,000 loss. Inherited shares carry a cost base equal to their market value as of the date of, in this case, the uncle's death. They have declined $2,000 in value since then, so if the beneficiary sells the shares, he can declare a loss of $2,000. (You can claim up to 3,000 in losses for tax purposes)
You are reviewing an investor's balance sheet. Which of the following items would be found on a balance sheet and help you determine the client's net worth? 401(k) balance Credit card balance Monthly income Electric bill
C) I and II. The balance sheet reflects a person's net worth by comparing assets and liabilities. 401(k) balance is an asset and credit card debt is a liability. Income and monthly bills such as the electric bill are found on the income statement.
A busy customer has just opened a new account at your firm. She has given her lawyer limited power of attorney over the account to pursue a trading strategy for her while she makes an extended business trip. Which of the following statements regarding this customer's communications are TRUE? Confirmations of trades may be sent to the lawyer with power of attorney over the account only if the customer requests it in writing and if duplicates are also sent to the customer. The firm must always send confirmations to the person who holds power of attorney over an account. The firm may hold mail for the customer while she is traveling, but only for specific periods of time. The firm must hold mail for the customer without restriction for as long as she requires the service.
C) I and III The customer is ultimately responsible for her own account. Confirmations of trades will be sent to a third party only upon written request, with the customer receiving duplicates. A firm may hold mail for a customer for up to three months.
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?
C) 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 neither as to payment nor amount.
Which of the following would be obligated to purchase stock should the option be exercised?
C) Put writer. Remember that buyers have rights and sellers have obligations. Writing is selling, therefore the answer is either put or call writer. If the buyer of a put has the right to sell the stock (put down), then if the contract is exercised the seller (writer) of the put is obligated to buy the stock
An income-seeking investor is concerned with the possibility of rising interest rates over the next few years. Of the choices listed, his best investment selection would be:
C) Treasury bills. Long-term maturities have a high degree of interest rate risk. An investor who is looking for income but is concerned with rising rates should invest in short-term instruments such as Treasury bills.
The exchange privilege offered by open-end investment companies allows investors to:
C) exchange shares of one open-end fund for another in the same fund family at a net asset value basis.
Your open-end investment company customer has decided to take automatic reinvestment of dividends and capital gains distributions. This choice will:
C) not alter the tax due on the distributions. Automatic reinvestment of dividends and gains does not increase, decrease, or defer tax liability.
A 40-year-old client with an annual income of $25,000 has been investing $100 per month in XYZ mutual fund through a dollar-cost-averaging strategy for the last 10 years. After winning the lottery, the client asks for investment recommendations for his $1 million winnings. The representative should recommend
C) reevaluating the customer's goals and objectives in light of his new financial situation
All of the following regarding money market funds are true EXCEPT:
C) 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.
Characteristics of money market mutual funds include all of the following EXCEPT:
C) 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.
If the newspaper indicates that T-bill yields have gone down, this means that T-bill prices are:
C) up. If the yields have gone down, the discount has been reduced. Therefore, the dollar cost of T-bills has gone up.
Which of the following is a major advantage of a nonqualified variable annuity compared to a mutual fund?
D) 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.
An electric company issued mortgage senior lien bonds, with an 8-7/8 coupon, priced at 96. Each bond pays annual interest of:
D) $88.75. A coupon of 8-7/8 represents an annual interest payment of 8-7/8% of $1,000, or $88.75. Because the interest rate always applies to par, which is $1,000, the issue price does not have an effect
Which of the following bond prices would fluctuate the most if the interest rates fell? A) 15-year unsecured bond with duration of 12. B) 30-year corporate bond with duration of 14. C) 10-year zero coupon with duration of 10. D) 20-year mortgage bond with duration of 16.
D) 20-year mortgage bond with duration of 16 .Generally speaking the rule of thumb is that bonds with long-term maturities will have greater fluctuations in price than will short-term maturities, given the same move in interest rates. What we need to pay attention to here is not the original maturity of the bond but how much time is left. The truest measure of sensitivity (volatility) is the bonds duration and the greater the duration, the greater the fluctuation in price when interest rates move.
An investor willing to invest in a professionally managed diversified portfolio of foreign and domestic growth companies would invest in the:
D) 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.
Investors with a short time horizon most likely will invest in which class of mutual fund shares?
D) 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.
A majority vote of the outstanding shares of an open-end investment company is needed in order to approve a change from a diversified company to a nondiversified company. from an open-end company to a closed-end company. in the fund's breakpoints. in the portfolio of the fund.
D) I and II 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). Breakpoint schedules are set by the board, and changes to the portfolio, within the scope of the funds' investment policy, are decisions of the portfolio manager.
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.
D) I and II. 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 SRO.
Which of the following must be registered as investment companies under the Investment Company Act of 1940? Closed-end investment companies. Separate accounts of insurance companies offering variable products. Variable annuity contracts. Variable life insurance policies.
D) I and II. Under the Investment Company Act of 1940, face-amount certificate companies, unit investment trusts, open- and closed-end management companies, and separate accounts of insurance companies used to fund variable annuity and variable life contracts must register with the SEC as investment companies. Note that the separate account is registered as an investment company, not the variable contract.
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.
D) I and III. 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.
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.
D) I and III. 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 ten 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.
An investor is in a low tax bracket and wishes to invest a moderate sum in an investment that will provide some protection from inflation. Which of the following should you recommend?
D) Mid-cap common stock mutual fund. Mid-cap stocks have historically provided good hedges against inflation making them appropriate for an investor seeking long-term growth and inflation protection.
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 were that long-term interest rates were about to increase sharply, which of the following actions would most likely be taken by the UIT?
D) No action would be taken. One of the key distinctions of a UIT is its lack of management. Once the portfolio has been created, it is fixed until maturity, in the case of debt securities, or until some predetermined liquidation point, in the case of an equity trust.
Which of the following is NOT an advantage of mutual fund investment? A) The ability to invest almost any amount at any time. B) The ability to qualify for reduced sales loads based on accumulation of investment within the fund. C) Exchange privileges within a family of funds managed by the same management company. D) The investor retains personal control of investments in the fund's portfolio.
D) The investor retains 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 securities listed below is issued without a stated rate of return?
D) Treasury bill. Treasury bills are not issued with a stated coupon rate. Instead, they are sold through auctions at a discount to their par value of $1,000. They mature at their face amount, and the discount represents the interest earned.
A railroad company pledges its railroad cars as collateral for a bond offering. This bond would be issued as
D) an equipment trust certificate As the name implies, equipment trust certificates are collateralized by the issuer's equipment. In most cases, this is rolling stock or some other transportation item.
An investment company must report to shareholders:
D) semiannually. Shareholders receive two reports a year, one of which must be an audited annual report.
The greater the maturity on a bond
the greater the sensitivity to interest rate risk