Series 6 Unit 3 NEED TO KNOW TERMS

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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.

Each of the following is considered an investment company EXCEPT:

B) bank investment advisory account.

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

B) public offering price.

Which of the following funds would be required to invest at least 80% of its assets in a particular type of security? A) ABC Special Situation Fund B) ABC Technology Fund C) ABC High-Yield Bond Fund D) ABC Go-Go Fund

C) 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 technology fund is a sector fund and must have a minimum of 25% of assets invested in technology companies as defined in the objective of the fund.

Which of the following is guaranteed by a variable life policy? A) No sales charge. B) Cash value. C) Minimum separate account performance. D) Minimum death benefit.

D) 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.

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.

Tax deferred

IRAs and annuities

Blue-Chip or Conservative Growth Funds

Invest in established and more recognized companies to achieve growth with less risk.

When a customer receives payment during the annuity period of a variable annuity, which of the following is TRUE?

Only the amount that represents investment income is subject to tax.

reinvestments will

add to the investor's cost basis in the fund

Agency security funds

bonds issued by gov agencies or government sponsored enterprises

GNMAs

monthy

A customer who wants to speculate (wanting to earn higher than average returns for higher risks)

option contracts, high yield bonds, unlisted or non-nasdaq stocks or bonds, sector funds, precious metals, special situation funds, DDPs, futures, commodities

index funds are

perfect for someone who does not want professional management

large cap funds

portfolio consists of companies with a market capitlization of more than 10 billion

municipal bonds

provide federally tax free income. THEY ARE NOT SUITABLE FOR RETIREMENT ACCOUNTS

A customer who wants capital growth

refers to an increase in an investment's value over time. This can come from increases in the securities value. Growth oriented investments are equity oriented. common stock, common stock mutual funds, blue-chip stocks, defensive stocks, technology stocks, sector funds, micro cap funds

non investment grade

riskier

high yield

risky

investment grade

safer

liquid investments are

securities listed on an exchange, unlisted NASDAQ securities, and mutual funds

Money markets...

come with a check writing privelage

tax free or tax exempt bond funds

muncipal bonds or notes good for investors in a high marginal tax bracket and seeks income

Tax free interest income

municipal bonds

Investment Company Act of 1940

must have at least 40% of the board of directors be non interested persons

Principal Protected Funds

offer investors guaruntee of principal, has a lock up period of 5 to 10 years, and holds both bonds and stocks no new contributions high expense ratios

US Government Funds

seek current income and maximum safety MAXIMUM SAFETY

money market mutual funds

short term investment accounts (cash equilelants) for retail investors, they are designed to have a stable NAV of $1 per share. They are not guranteed, nor are they protected by FDIC insurance

Asset allocation funds

split between stocks for growth, bonds for income, and money market instruments or cash for stablility.

corporate bond funds

still have high credit risk than various gov issues but can still be classified as investment grade or non investment grade

blend core funds

stock funds with a portfolio comprised of a number of different classes of stock allows investors to diversify their investment via management and securities in a single fund

investment company registration

40% or more of the company's assets are invested in securities must have net assets of at least 100,000 and a clearly defined investment objective

One of your clients owns shares in several of the mutual funds offered by the ABC Fund family. Unhappy with their performance, he 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.

A) I and IV. 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 married customers, both 34 years old, have one daughter, age 4. They want to begin accumulating the money required to send their daughter to one of the nation's top universities in 14 years. In addition, they have not yet begun to accumulate money for their retirement. Which of the following mutual funds is the most suitable for these customers? A) NavCo Growth & Income Fund. B) LMN Government Income Fund. C) ATF Capital Appreciation Fund. D) NavCo Cash Reserves Money Market Fund.

ATF Capital Appreciation Fund. These customers require maximum capital appreciation. Their long-term time frame allows them to ride out the stock market fluctuations. The best investment for them is the stock mutual fund that concentrates solely on achieving long-term growth rather than generating current income.

When trading common stock, either at an exchange or over-the-counter, the typical size of the trading unit is:

B) 100 shares.

Which of the following statements are TRUE of mutual fund dividend distributions? The fund pays dividends from net investment income. An individual taxpayer may exclude $100 worth of dividend income from taxes annually. An investor is liable for taxes on distributions, whether taken in cash or reinvested in the fund. An investor is not liable for taxes if he automatically reinvests distributions.

B) I and III. Mutual funds pay dividends from net investment income, and shareholders are liable for taxes on all distributions, whether reinvested or taken in cash.

If the RST Corporation has issued several different debt securities, an investor would expect the lowest income stream from RST's: A) ordinary debentures. B) convertible debentures. C) speculative bonds. D) subordinated debentures.

B) convertible debentures. Although convertible debentures have many positive features for the investor, the major negative is that, in exchange for those benefits, the investor accepts a lower rate of interest.

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.

C) I and IV. 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.

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.

C) II and III. 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 since a variable annuity is a security, the salesperson must be a registered representative (that is insurance licensed). Finally, she purchased annuity, not accumulation, units.

During a fact-finding interview with a potential client, your client information sheet is used to list detailed financial information. Which of the following items would be relevant in determining a prospect's net worth?$225,000 annual income.$78,000 current IRA balance.recently paid off a $3,000 credit card balance.just installed a $25,000 home entertainment center. A) I and II. B) III and IV. C) I and III. D) II and IV.

D) II and IV. Net worth is computed by subtracting liabilities from assets. The IRA balance and the home entertainment center are assets. The credit card debt was a liability, but since it has been paid, it no longer appears on the financial statement. Income is important, but it does not figure into net worth until it is deposited into a bank or invested in something.

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

D) 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.

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:

D) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in one year and .75 12b-1 fee

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

Principal protected fund Of the choices given, the most conservative is the principal protected fund. Principal protected mutual funds offer investors a guarantee of principal, adjusted for fund dividends and distributions, on a set future date (maturity). The other choices offer no guarantee for loss of principal.

Which of the following is allowed in a mutual fund sales presentation? A) Informing the customer of the tax status of dividend distributions B) Highlighting charts or graphs in the fund prospectus C) Comparing capital gains distributions between a stock fund and a U.S. government bond fund D) Creating a new chart on a separate sheet of paper to clarify a question raised by the customer

A

Which of the following would not trade in the money market?Newly issued debentures rated Aaa. Treasury notes .Commercial paper .Treasury bonds maturing in six months.

A) I and II. The money market is made up of short-term, high-quality debt issues. Because the Treasury bond is maturing in less than a year, it is considered a money market instrument. The debenture and Treasury note must be considered intermediate or long-term instruments because their maturity is not stated.

Your client is interested in some of the tax ramifications of investing in variable annuities. You could tell her: 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 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.

A) II and IV. 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.

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.

A) II and IV. 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.

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? A) Preferred stock mutual fund. B) Biotechnology fund. C) Global Equity stock fund. D) Small-cap stock mutual fund.

A) 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 best suits the customer's needs.

An investor has a portfolio diversified among many different asset classes. If there was an immediate need for cash, which of the following would probably be the most liquid?

A) QRS Money Market Mutual Fund. Money market funds generally come with a check-writing privilege, offering this investor the opportunity to immediately convert his asset to cash. While all mutual funds are readily redeemable, under the Investment Company Act of 1940, the fund has seven days to redeem. With the insurance company's variable contract, cash value withdrawals or loans may be delayed, by law, for as long as six months (not tested on your exam).

Which of the following would be appropriate recommendations for a customer looking for income?

A) Utility fund Many securities are purchased for income; these include stocks, bonds and mutual funds that pay consistent dividends such as a utility fund. The other answer choices are not purchased for income purposes: A long call option gives the right to buy stock at a designated price. An income bond is issued by a company coming out of bankruptcy and pays interest only if the corporation has enough income. A warrant is a certificate granting its owner the right to buy securities from the issuer at a specified price, normally higher than the market price when issued.

In a variable life annuity with ten-year period certain, a contract holder receives: A) a minimum of ten years of variable payments, followed by additional variable payments for life. B) fixed payments for ten years, followed by variable payments for life. C) variable payments for ten years, followed by fixed payments for life. D) ten years of variable payments. Explanation

A) a minimum of ten years of variable payments, followed by additional variable payments for life. The owner of a life annuity with ten-year period certain will receive payments for life, subject to a minimum of ten 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 ten-year period certain contract holder died after five years, payments would continue for five more years to the beneficiary and then stop.

At age 65, your customer purchased an immediate variable annuity contract. He made a lump-sum $100,000 initial payment and selected a life income with ten-year period certain payment option. The customer lived until age 88. The insurance company made payments to him: A) for 23 years. B) until his initial payment of $100,000 was exhausted. C) for ten years. D) at a fixed rate for ten years and at a variable rate up until his death.

A) for 23 years. An annuity with life and a ten-year certain will pay for the greater of ten years or the life of the annuitant. The customer lived for 23 more years, which is more than the ten certain.

All of the following statements regarding bonds registered as to principal only are true EXCEPT: A) interest payments are sent directly to the owner twice a year. B) such bonds can be purchased today in the secondary market. C) the registered owner may sell the bonds before maturity. D) coupons are attached.

A) interest payments are sent directly to the owner twice a year. A bond registered as to principal only has a certificate registered in the owner's name and has bearer coupons attached to the bond certificate. Only the person to whom the bond is registered may sell the securities. Interest is not sent directly to the owner but is paid only if the interest coupons are presented to the bond's paying agent.

An investor purchased a corporate bond for 97 3/8. If the bond is sold for 99 3/8, the investor has a profit of: A) $2.00 B) $20.00 C) $0.20. D) $200.

B) $20.00 This investor has a profit of two points, or $20. Remember, one bond point is worth $10.

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? A) 3%. B) 5%. C) 7%. D) 10%.

B) 5%. If the actual rate of return equals the assumed interest rate, the check will stay the same.

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 since a variable annuity is a security, the salesperson must be a registered representative (that is insurance licensed). Finally, she purchased annuity, not accumulation, units.

B) Accumulation units are converted to annuity units.

All of the following statements regarding Government National Mortgage Association (GNMA) pass-through securities are true EXCEPT A) investors receive a monthly check representing both interest and a return of principal. B) GNMAs are considered to be the riskiest of the agency issues. C) interest is taxed at all levels—federal, state, and local. D) investors own an undivided interest in a pool of mortgages.

B) GNMAs are considered to be the riskiest of the agency issues. GNMA securities, which are backed by the full faith and credit of the U.S. government, are considered to be the safest of the agency issues.

If an investor has $20,000 to invest, but requires $500 per month to pay for her mother's nursing home care, which of the following funds should you recommend? A) Aggressive growth. B) Foreign stock. C) Money market. D) Biotechnology.

C) Money market. The client's monthly income requirements suggest that the money market fund, the most liquid and safest of the investments, is the most appropriate.

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

C) Prices increase. When interest rates drop, prices will rise, decreasing effective yield. Thus, there is an inverse relationship between interest rates and bond prices.

If a mutual fund offers a fixed-time withdrawal plan, all of the following statements are true EXCEPT: A) the end date of the plan is fixed. B) the amount the client receives each month may vary. C) a fixed number of shares is liquidated each month. D) this plan is self-exhausting.

C) 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.)

A closed-end investment company may issue each of the following EXCEPT:

C) 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.

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

B) value of the fund's portfolio.

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.

D) I and III. 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.

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.

D) II and III. 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.

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

D) 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.

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

D) 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.

Value funds

Funds specializing in stocks that are fundamentally sound whose prices appear to be low (low P/E ratios) based on the logic that such stocks are currently out of favor and undervalued by the market. They are expected to perform better than reports indicate thus have opportunity for profit. They have dividend yields that are higher than growth stocks. They are more conservative, and perfect for someone who wants to take moderate risk

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 upon 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.

I and II. 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.

An investor who is seeking high potential returns with the understanding that there can also be significant losses and is wiilling to invest for 10-15 years may be interested in

an aggressive growth fund that focuses on small or mid cap companies

funds that comply with subchapter M (conduit theory where 90% of income must go to the shareholders or you will be taxed)

are RICS

un-qualified dividends

are distributed as short term capital gains and taxed as ordinary income.

UITs

are fixed!!!! they are defined under the investment company act of 1940 they are not traded on secondary market on an exchange they are not activley managed since they do not have a board of directors or investment advisor

qualified dividends

are taxed as long term captial gains rate

Aggressive growth funds (performance funds)

are willing to take greater risk to maximize capital appreciation sometimes they invest in small cap funds (which are newer companies with relativley small capitalization, less than 2 billion

net worth

computed by subtracting liabilities from assets.

Government securities are

considered essentially free of default risk because the bonds derive their income from federal taxes.

target date funds (life cycle funds)

designede to help manage investment risk. Has a target date in mind

Form 1099-DIV

details ttax information related to dividend distributions for the year

What is considered free of default risk?

government securities

net investment income

gross invevstment income miinus operating expenses

bond funds

have income as their main investment objective they pay interest, bonds pay dividends if declared by the fund's board of directors dividends are typically paid on a quarterly or semiannual basis but there are income funds that pay monthly dividends when interest rates rise, prices of the bonds fall

institutional money market mutual funds

have stable NAV ($1 per share) which are 99.5% government securities

speculative

high risk

balanced funds

hybrid funds invest in stocks for appreciation and bonds for income conservative balance between stocks and bonds

balanced funds

invest in a combination of stocks and bonds

bond funds

invest in bonds

sector funds (specialized )

invest in funds that are specialized they must have a minimum of 25% of their assets invested in their specialities they offer high appreciation potential but also high risks

Stock funds

invest in stocks great against inflation

growth funds

invest in stocks of companies whose businesses are growing rapidly tend to reinvest all or most of their profits for research. focused on generating capital gains rather than income

mid cap funds

less aggressive and invest in companies that are worth between 2 and 10 billion

An investor who is willing to take moderate risk and is willing to invest for a minimum of five to seven years

may be interested in a blue chip or large cap growth fund

index funds

mirror a market index such as the S&P 500 lower management

A customer who wants preservation of capital (fixed)

money market funds, certificates of deposit (CDs), and government treasuries. fixed annuities, government securities and funds, agency issues, investment grade corporate bonds, corporate bond funds Principal protected fund may be appropriate for long term investment

Income fund (equity fund)

stresses current income over growth may invest in bluechip stocks, utility stocks, and preferred stocks managed for value not growth

A high yield bond fund is

subject to the Name Rule and must invest at least 80% of its assets in high-yield bonds.

variable means

that an insurance or annuity product may contain equity as investment choices. All variable product assets must be invested in a separate account

A customer who wants to generate current income

traditional debt securities such as corporate, government, muncipal bond, and agency securities, bonds, REITS, CMOs, muncipal bond funds, roth IRAs, below investment grade corporate bonds, corporate bond funds, preferred stocks, utlity stocks, bluechip stocks (for dividends) preferred stocks, utilities, and blue chip stocks

What is considered an investment company

unit investment trust face amount certificate company open-end managment company

Illiquid investments are

unlisted non-NASDAQ stocks or bonds, annuities when intially purchased and/or before the annuitant is 59 1/2, real estate, hedge funds


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