Series 6 Unit 3

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.

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.

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.

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.

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.

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.

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.

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

Assets of the fund.

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.

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.

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 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.

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

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.

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

B) decrease.

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.

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 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

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)

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.

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

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.

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

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.

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.

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.

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.

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.

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.

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.

An investment company must report to shareholders:

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

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.

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.

same account

fixed annuity

mutual fund

is open-ended

Separate account

variable annuity