SIE: 5

A fund investing in which securities would be considered an income fund? A Bonds and/or preferred stocks B Common stocks C Foreign securities D Growth stocks

A Income funds invest primarily in bonds and preferred stocks. Common stocks and especially growth stocks are purchased for long-term appreciation. Foreign securities (usually stocks) are purchased for further portfolio diversification.

Hedge Fund

A high-risk private placement offering of pooled investments used to purchase a portfolio of securities that can only be liquidated on specific dates and require a large investment minimum

Real estate investment trust (REIT)

A trust that sells shares of beneficial interest to investors and, if qualified, is considered a Regulated Investment Company which eliminates double taxation

Exchange-Traded Funds

An exchange-listed product investing in a portfolio of stocks that tracks a particular index, is passively managed, and has low ongoing expenses

Contributions made into Section 529 plans are considered: A Tax-deductible contributions B Gifts C Income to the beneficiary D Revocable deposits into a trust

B Contributions made into Section 529 savings plans are considered gifts under the federal tax code.

For a mutual fund to get started, what is the minimum net asset requirement? A $1,000 B $100,000 C $10,000 D $100

B To start and continue doing business, mutual funds must meet certain requirements as outlined by the Investment Company Act of 1940. The required minimum net assets is $100,000.

All the following are types of annuities, except: A Single premium immediate contract B Periodic payment deferred contract C Periodic payment immediate contract D Single premium deferred contract

C A periodic payment immediate contract is not allowed.

What type of fund often offers check-writing privileges? A Common stock funds B Balanced funds C Money market funds D Government bond funds

C Money market funds are no-load funds that strive for an NAV of $1. They provide safety and liquidity and generally offer check-writing privileges. The other funds are for longer-term investment horizons.

Municipal fund securities fall under regulation of the: A NASAA B FINRA C MSRB D SEC

C Municipal fund securities are funds or trusts that are offered by individual states or local governments. These types of investments fall under the regulation of the MSRB as municipal securities. A program disclosure document is used with the sale of municipal fund securities since they are not subject to prospectus requirements. Municipal fund securities include Section 529 plans, ABLE plans, and local government investment pools.

All the following information is true regarding 529 plans, except: A Account balances in 529 plans may be transferred to another relative B 529 plans have no income limits for eligibility C Contributions to 529 plans are nondeductible and limits on contributions are determined by individual plans or the state D 529 plans are securities that are regulated by the SEC

D

Which of the following best describes the frequency of contract renewal for a mutual fund's investment adviser? A After 1 year of operation subject to shareholder or board approval every 2 years thereafter B After 2 years of operation and subject to shareholder or board approval every 2 years thereafter C After 1 year of operation subject to shareholder or board approval every year thereafter D After 2 years of operation and subject to shareholder or board approval every year thereafter

D An investment adviser has a maximum of two years to establish itself as effective at managing a fund with consistent returns. Its initial contract must be approved by the board and by shareholders. Upon completion of the two years, the contract is up for renewal and based upon shareholder vote or board approval. Assuming the contract is renewed, the investment adviser will then be subject to shareholder or board approval every year thereafter.

Local Government Investment Pools

Investment pools that are established by state or local government entities to allow for the investment of public funds

Hedge funds are sold in what type of offering? A Private placement B Rights C Public D Institutional

A A hedge fund is a security structured as a limited partnership and typically only available to sophisticated investors. They are high-risk investments for investors who seek aggressive yield. They do not have to register with the SEC. They are private placement offerings, and they do not trade.

What is not a characteristic of a variable annuity? A Minimum guaranteed rate of interest B Multiple investment options C Regulation by the SEC D Balance held in a separate account

A A variable annuity enjoys tremendous flexibility, the cost being the sacrifice of several guarantees, one of which is a minimum guaranteed rate of interest.

A registered representative has a client that is preparing to buy their first home in about two years. According to the client profile, their main investment goal is aggressive growth. Which of the following investments would be suitable for the majority of the client's savings? A T-bills B Blue-chip equities C A high yield bond fund D NASDAQ equities

A Although the client's profile states that they are looking for aggressive growth, the two-year time frame for the house purchase must take precedence. With such a short time horizon, any equity investment would be too risky for them. In addition, a high-yield bond fund has a portfolio of junk bonds which would also be too risky based on the imminent home purchase. The only choice that protects the client's capital and is short-term enough to allow liquidity, is the T-bills.

What type of investment is an exchange-traded note? A An unsecured debt obligation issued by a third-party B A secured debt obligation C An option D An equity

A An exchange-traded note is issued by a third-party, such as an investment bank. This third-party is solely responsible for payment at the maturity date. There are on-going costs that the issuer charges. There are no interest payments to the investor during the holding period.

Which of the following is considered a passive investment strategy? A Index fund B Money market fund C Asset allocation fund D Balanced fund

A An index fund is said to be passively managed because trading is done only to reflect any possible changes in the index. The greatly reduced need for active portfolio management usually translates into substantially lower operating expenses and management fees.

Which fund alters the percentages of stocks, bonds, and cash based on the investor's investment objective? A Asset allocation funds B Sector funds C Blue-chip funds D Growth funds

A Asset allocation funds divide an investment portfolio among different asset categories, such as stocks, bonds, and cash (including cash equivalents and currencies). The fund will vary the percentages of each asset class based on the investor's objective. A more aggressive, younger investor will usually have a higher percentage of stocks than a more conservative investor. By investing in more than one asset category, the portfolio's overall performance will not normally involve big swings in either direction. Sector funds are mutual funds that focus on investing in specific, concentrated groups of securities in a particular industry, such as utilities, electronics, financial services, and healthcare. Both blue-chip and growth funds will invest in equities.

Which of the following securities would typically trade on either NASDAQ or a traditional stock exchange? A Unit investment trusts B ETFs and ETNs C Open-end funds D Variable annuities

A Both ETNs and ETFs are exchange-traded securities. Variable annuities are purchased through the issuing insurance company and do not trade. Mutual funds are redeemed with the issuer and do not trade. Unit investment trusts are typically redeemable back to the issuer.

All the following statements regarding the taxation of contributions to 529 plans are true, except: A Contributions are federally tax deductible to the donor B Many states offer state income tax deductions or credits for contributions C A lump sum of up to 5 times the gift tax exclusion amount is permitted to be given that will not be subject to gift tax D Contributions are not federally tax deductible to the donor

A Contributions to 529 plans are not federally tax deductible. Although not required, many investors select their home state plan to capture additional state tax advantages as many states offer state income tax deductions or credits for contributions. A tax benefit is offered by 529 plans that allows an individual to give a lump sum into a Section 529 plan that is equal to 5 years' worth of contributions, or $75,000, per donor ($150,000 for those filing jointly) without incurring a gift tax. The donor would not be able to give to the same beneficiary for 5 years without gift tax ramifications.

On January 3, the board of directors for a mutual fund declares a dividend to be paid on Monday, January 15 to the shareholders of record on Monday, January 8. On what date will the shares begin to be sold ex-dividend? A January 9 B January 4 C January 15 D January 3

A January 9 is the only possible answer. A mutual fund's ex-dividend date is always selected by the board of directors and is almost always the day after the record date.

What type of ETF uses a combination of leveraging and shorting techniques to receive a magnified return from the opposite move of an underlying index? A Inverse leveraged ETFs B Inverse ETFs C Standard ETFs D Leveraged ETFs

A Leveraged ETFs use borrowing techniques and attempt to magnify the returns of an underlying index. Inverse ETFs use shorting techniques to receive a return from the opposite, or inverse, move of an underlying index. Inverse leveraged ETFs use a combination of leverage and the inverse fund concept. The different strategies used make these ETFs more expensive and riskier than traditional ETFs and are used for short-term investing.

LGIPs that are offered by broker-dealers are: A Investment pools available to local government entities that permit investment of public funds B Investment pools established by state or local government entities available to the general public that reside in that state C Investment pools available to local government entities that permit borrowing of funds as needed D Investment pools available to local government entities, that are similar to mutual funds and have investment objectives including growth and liquidity to maximize the returns on public funds

A Local Government Investment Pools (LGIPs) are investment pools that are established by state or local government entities to allow for the investment of public funds. The objectives of an LGIP are to provide a safe investment return and daily liquidity, like money market funds.

Which of the following statements is true when describing variable annuity charges and expenses? A A contingent deferred sales charge may be imposed when an investor withdraws money during the accumulation period B The maximum allowable sales charge for a variable annuity is 8.5% C An annual wrap fee is charged to cover the investment management fees D The mortality and expense risk fees are paid upfront, and the percentage charged is based on mortality tables

A Most annuities impose a contingent deferred sales charge (CDSC) when an investor withdraws money during the accumulations period. A CDSC normally declines, and will eventually be eliminated, the longer the contract is held. Variable annuity sales charges, if applicable, are deducted before the premium is invested into the separate account. There is no specific maximum allowable sales charge set by FINRA. Mortality and expense risk are fixed fees the insurance company charges to cover lifetime income and other operating expenses. Management fees are separately charged in each of the subaccounts and are the same as an investment adviser's fee in a mutual fund. These fees will vary depending on the various subaccount options within the annuity.

All the following are direct expenses of an open-end investment company, except: A Sales charges B Transfer agent fees C Advisory fees D Accounting expenses

A The operating costs include transfer agent fees, advisory fees, accounting fees, and legal fees. Sales charges are not direct charges to the fund.

Mutual fund requirements were established under the: A Investment Company Act of 1940 B Securities Act of 1933 C Securities Exchange Act of 1934 D Trust Indenture Act of 1939

A To start and continue doing business, mutual funds must meet certain requirements as outlined by the Investment Company Act of 1940.

To qualify for a favorable tax treatment of net investment income distributions, REITs must distribute: A At least 90% of net investment income B At least 85% of net investment income C At least 100% of net investment income D At least 95% of net investment income

A Under the IRC, special tax treatment is allowed for qualified REITs. To be considered qualified, the REIT must have at least 75% of its assets invested in real estate, cash, or Treasurys, a minimum of 75% of its gross income from real estate activities, and 90% of the net investment income must be "passed through" (distributed) to holders of the units. If this is done, the REIT is only taxed on the retained amount, and it would be considered a qualified REIT under the IRC Subchapter M.

To qualify for special tax treatment on its gross income, a REIT would have to distribute what percentage of its ordinary income to its investors? A 90% B 25% C 75% D 100%

A Under the IRC, special tax treatment is allowed for qualified REITs. To be considered qualified, the REIT must have at least 75% of its assets invested in real estate, cash, or Treasurys, a minimum of 75% of its gross income from real estate activities, and 90% of the ordinary income must be "passed through" (distributed) to holders of the units. If this is done, the REIT is only taxed on the retained amount, and it would be considered a qualified REIT under the IRC Subchapter M.

Which of the following is not a factor in determining the number of annuity units an investor will receive after annuitizing a variable annuity? A The investor's family history of heart disease B Investor's age C The investor chooses a life with period certain payout D Assumed interest rate

A When an annuitant decides to annuitize and begin receiving payouts, the insurance company will determine the amount of annuity units and the future payouts based on the payout option, assumed interest rate (AIR), annuitant's age, and principal balance of the contract.

ABLE Program

Allows disabled persons to establish an account without losing eligibility for Social Security, Medicaid, and Medicare benefits

529 Savings Plans

Allows plan owners to choose from various investment choices to fund an education savings plan that pays for tuition and other qualified education expenses

529 Prepaid Tuition Plans

Allows plan owners to lock-in today's tuition prices for the future and is based on in-state public tuition averages

Exchange-Traded Note

An unsecured debt obligation of a financial institution issuing the security with a return linked to the performance of an index and a promise the match the return of that index

All the following regarding 529 plans are true, except: A To take advantage of the full benefits of 529 prepaid tuition plans, students need to attend an in-state public college B With 529 savings plans, there is a risk to the principal amount invested C 529 prepaid tuition plans promise to keep pace with the tuition of in-state public colleges by locking in today's tuition prices for the future D With 529 savings plans, the investor chooses the mutual fund type investments that the dollars are invested in

B 529 prepaid tuition plans promise to keep pace with the tuition of in-state public colleges. They allow plan owners to lock-in today's tuition prices for the future. There is no risk to the principal amount invested. They are operated by state governments. The plan returns, however, are based on in-state public tuition averages. To take advantage of the full benefits of these plans, students need to attend an in-state public college. If the student attends an out-of-state college or a private institution, they only receive the average of the in-state colleges' annual tuition. With 529 savings plans, the investor places any chosen amount(s) into the plan. They choose the mutual fund type investments that the dollars are invested in. The investments can be as aggressive or conservative as the investor chooses. The account value will fluctuate based on the performance of the investments chosen.

Which one of the following statements about hedge funds is false? A They are mainly available to accredited investors B They are exempt from the antifraud provisions of SEC rule 10b-5 C They are very expensive to buy and maintain D They are suitable for sophisticated investors seeking aggressive yields Sorry!

B A hedge fund is mainly available to accredited investors. They are high-risk investments for sophisticated investors who seek aggressive yield, and they use advanced investment strategies and tactics to protect against downside market risk. Often very expensive to buy and maintain ownership, they are not offered to the general public and do not have to register with the SEC. Hedge funds are still subject to the antifraud provisions of SEC Rule 10b-5, the catch-all fraud rule.

What is not a characteristic of a variable annuity? A Regulation by the SEC B Minimum guaranteed rate of interest C Balance held in a separate account D Multiple investment options

B A variable annuity enjoys tremendous flexibility, the cost being the sacrifice of several guarantees, one of which is a minimum guaranteed rate of interest.

All the following are defined as affiliated or interested persons, except: A Spouse of the investment adviser for the fund B Director with no significant business relationship with the fund C Legal counsel for the fund D Individuals employed by the fund

B Affiliated persons are individuals who work for the fund, including officers, certain directors, and professionals hired by the fund. Interested persons include affiliates as well as legal counsel, and immediate family members of affiliates. All affiliates are interested persons, but not all interested persons are affiliates. Directors who have no other relationship with the fund family, other than their board seat, are not interested persons (often referred to as disinterested or nonaffiliated board members).

A client inherits a substantial sum of money and wants to have the money distributed to their heirs over the rest of the client's life. Which product offered by the life insurance industry will allow them to accomplish this? A Systematic installment B An immediate annuity C Flexible pay out arrangement D Deferred distribution arrangement

B An immediate annuity involves payment of a single sum to the annuity with periodic payments commencing within 1 year of deposit of the sum.

All of the following are characteristics of funds of hedge funds, except: A They are regulated under the Investment Company Act of 1940 B They are considered an inexpensive, liquid, aggressive type of an investment C They are available to non-accredited investors D They are SEC registered

B Broker-dealers created funds of hedge funds so smaller investors could participate in these types of investments. These funds must be registered under the Investment Company Act of 1940 and usually have a minimum investment amount of $25,000. They are still considered very aggressive investments since the underlying investments are hedge funds. They are also more expensive than traditional investment company securities since they have two sets of fees. One for the hedge fund managers and one for the investment manager of the fund. The composition of hedge funds also makes them more illiquid than traditional funds and cannot be redeemed any time. They usually have specific time frames where investors can liquidate all or a portion of their holdings.

An investor can expect which of the following benefits when investing in an ETN? I. Tax efficiency II. Tax free earnings III. No credit risk IV. No liquidity risk A II and III B I and IV C I and III D II and IV

B ETNs are an unsecured debt obligation, the principal is backed by the issuer so it is subject to default and/or bankruptcy of the issuer (credit risk). ETNs trade on exchanges so they have no liquidity risk. They are tax efficient as any gain is treated as capital gains and is subject to preferential rates.

If a variable annuity has a front-end sales charge, which of the following statements is true? A The charge will be a maximum of 8.5% B The charge will be deducted before the premium is invested into the separate account C The charge will be on an annual basis D The charge will be applied during the annuity period

B Front-end variable annuity sales charges are deducted before the premium is invested into the separate account. There is no specific maximum allowable sales charge set by FINRA.

What are the penalties on a withdrawal from a 529 plan if the beneficiary can, but chooses not to, attend an institution of higher education? A 10% on the entire account B 10% on the taxable portion of the distribution C Long-term capital gains tax on entire account D Long-term capital gains tax on earnings

B In a 529 plan, traditionally all withdrawals from the plan that are not used for higher education are subject to a 10% penalty on the taxable portion of the withdrawal. However, in the event the beneficiary receives a scholarship, becomes disabled and, therefore, unable to attend college, or is deceased, the penalty is also waived.

A 25-year-old would like to invest in a mutual fund that would afford the ability to invest in the market with the lowest possible cost. Which of the following funds would be the most suitable investment? A Blue-chip fund B Index fund C Income fund D Growth and income fund

B In this question the investor wants to invest in the market and pay little in costs. Index funds traditionally mirror a particular index (for example, the S&P 500). In addition, index funds are passively managed. This means the fund, in most cases, will only change securities in the portfolio when the actual index changes securities. Therefore, the expenses of the fund are lower than actively managed funds.

LGIPs that are offered by broker-dealers are: A Investment pools available to local government entities that permit borrowing of funds as needed B Investment pools available to local government entities that permit investment of public funds C Investment pools established by state or local government entities available to the general public that reside in that state D Investment pools available to local government entities that are like mutual funds and have investment objectives, including growth and liquidity, to maximize the returns on public funds

B Local government investment pools (LGIPs) are investment pools that are established by state or local government entities to allow for the investment of public funds. The objectives of an LGIP are to provide a safe investment return and daily liquidity, like money market funds.

A client has invested $10,000 into a variable annuity. After subtracting any premium charges, the insurance company will place this client's remaining investment amount into: A The insurance company's general account B The separate account C A mutual fund invested in real estate D Any individual security that the client chooses

B Premiums paid by variable annuity purchasers are placed into the insurance company separate account. The assets in the separate account are invested in a wider range of securities than those in a fixed annuity. The separate account is often divided into several subaccounts, each of which may have a different asset mix or risk profile.

All the following pay dividends that are considered qualified and taxable at preferential rates, except: A Equity mutual funds B Units of a real estate investment trust C Shares of preferred stock D Shares of common stock

B Qualified dividends are those that qualify for taxation at a preferential rate, which is 15% for nearly all investors, 20% for very high-income investors, or 0% for very low-income investors. Dividends paid from common stock, preferred stock, and dividend distributions from equity (stock) mutual funds qualify for the lower preferential tax rate. Non-qualified dividends, such as those paid from real estate investment trusts, are taxed as ordinary income as they pass-through income directly to unit holders, rather than paying a true dividend.

An investor is only interested in buying securities that are backed by the U.S. government. Which one of the following products does not carry a U.S. government guarantee of principal? A Ginnie Mae pass-through certificate B GNMA fund C U.S. T-bill D Treasury STRIPS

B P70 Of the choices provided, only a GNMA fund is not backed by the U.S. government. Ginnie Mae (Government National Mortgage Association) pass-through certificates and all securities directly issued by the Treasury, are considered to be backed by the full faith and credit of the federal government. Remember, the U.S. government does not guarantee any mutual fund, regardless of its holdings.

A registered representative is meeting with a client who has expressed a desire to save for college education for their children. Which of the following statements can the registered representative make in describing a 529 Prepaid Tuition Plan? A b. Prepaid tuition plans will allow you to lock-in today's tuition prices for the future and are based on average tuition prices in the United States B d. Prepaid tuition plans are operated by the federal government locking in future tuition prices based on the average cost of tuition prices in United States C a. Prepaid tuition plans will allow you to lock-in today's tuition prices for the future and are based on in-state public tuition averages D c. Prepaid tuition plans will allow you to lock-in todays' tuition prices for the future and are based on in-state private tuition averages

C 529 Prepaid Tuition Plans promise to keep pace with the tuition of in-state public colleges. They allow plan owners to lock-in today's tuition prices for the future. There is no risk to the principal amount invested. The plan returns, however, are based on in-state public tuition averages. To take advantage of the full benefits of these plans, students need to attend an in-state public college. If the student attends an out-of-state college or a private institution, they only receive the average of the in-state colleges' annual tuition.

Which of the following statements about hedge funds is false? A The maximum number of investors is limited to 99 B They can only be liquidated on specific dates C They are structured like mutual funds and are regulated by the Investment Company Act of 1940 D They are private placement offerings and do not trade

C A hedge fund lacks transparency. Hedge funds are not registered investment companies and are not regulated by the Investment Company Act of 1940. They are private placement offerings, and they do not trade. The maximum number of investors is limited to 99, with a maximum of 35 investors being non-accredited or all investors being qualified purchasers. Hedge funds are structured like mutual funds because they pool investments to purchase a portfolio of securities, but they can only be liquidated on specific dates.

Why would an investor want to invest in a REIT? A For tax deferral purposes B For maximum capital appreciation C To add another asset class to their portfolio for diversification purposes D To use real estate depreciation expense pass throughs to offset ordinary income

C A real estate investment trust (REIT) invests in real estate (property), mortgages on real property, and/or shares of other REITs. With mortgage REITs, investors are paid out of the spread between the borrowing rates and income rates. Income REITs are purchased for their dividend payouts. Income to the REIT is usually in the form of rental income from the tenants of the properties held, which is passed on to investors in the form of dividends. REITs can provide diversification benefits to an investor's portfolio.

Why would an investor want to invest in a REIT? A To use real estate depreciation expense pass throughs to offset ordinary income B For maximum capital appreciation C To add another asset class to their portfolio for diversification purposes D For tax deferral purposes

C A real estate investment trust (REIT) invests in real estate (property), mortgages on real property, and/or shares of other REITs. With mortgage REITs, investors are paid out of the spread between the borrowing rates and income rates. Income REITs are purchased for their dividend payouts. Income to the REIT is usually in the form of rental income from the tenants of the properties held, which is passed on to investors in the form of dividends. REITs can provide diversification benefits to an investor's portfolio.

What is an exchange-traded fund? A It is a mutual fund that only invests in publicly traded exchanges B It is a mutual fund that only invests in exchange-listed securities C It is an exchange-traded security that often tracks an index, much like an indexed mutual fund D It is a mutual fund that, in addition to offering redemptions, can be sold on an exchange

C An ETF is an exchange-listed security that usually tracks an index, such as the S&P 500. They are like an indexed mutual fund. Most ETFs are not actively managed and have lower ongoing expenses compared to actively managed portfolios. ETFs represent a "basket" of securities that have been pledged as the asset base for the fund, but the ETF itself trades as a single security on an exchange. These can be traded during the day, unlike mutual fund shares, which are bought and redeemed based on the forward-pricing rule at the end of each business day.

Annuitization of a variable annuity occurs when an investor: A Transfers ownership of the annuity to a spouse B Invests and purchases accumulation units C Begins receiving a monthly income stream, usually as a lifetime benefit D Receives a lump sum payment at retirement

C Annuitization takes place when the annuitant is ready to receive monthly income of the principal balance and earnings from the insurance company, usually for life.

Generally, one would expect the highest price volatility with a: A U.S. Treasury bill B Corporate subordinated debenture C Small cap emerging company stock D Blue-chip stock

C Blue-chip stocks are seasoned, large-size companies with a good track record. They are generally more stable. Fluctuations in interest rates could change the price of a debenture, but it would not change as often as the value of small cap emerging company stock. These stocks in younger, relatively smaller companies generally have more risk. A slight change in management, products, or sales could make a substantial difference in the price movement of the stock. Fluctuations in interest rates could change the price of a U.S. Treasury bill, but it would not change as often and to the same degree as the value of a small-cap stock.

Which of the following statements concerning money market mutual funds is the most accurate? A These funds are typically sold with a 1% sales charge B No prospectus is required when soliciting the sale of these funds C These funds are often used by investors seeking capital preservation D All money market funds must have a stable NAV of $1.00

C Due to the conservative nature of their portfolios, money market funds are suitable for investors that have capital preservation as their primary investment objective, also described as a defensive investment posture. While most funds do maintain a $1.00 NAV, this is not guaranteed. The prospectus delivery rule applies to the sale of money market mutual funds as it would for any other type of mutual fund sale. Most money market funds are offered on a no-load basis.

Which of the following mutual funds will hold junk bonds in the fund's portfolio? A GNMA bond fund B Equity income fund C High-yield bond fund D High-grade bond fund

C High-yield bond funds own a larger proportion of lower rated bonds, including the lowest-rated "junk bonds," which have a higher level of default risk. The higher risk may translate into higher interest income.

All the following regarding institutional money market funds are true, except: A Floating NAV B Typically owned by large corporations and pension plans C They have higher fees compared to retail money market funds D Higher minimum initial investments

C Institutional funds have a floating NAV that will fluctuate and are typically owned by large corporations and pension plans. They have extremely high minimum initial investments. Institutional money market funds have lower fees than their retail counterpart.

What is a target date (life-cycle) fund? A Concentrated portfolios designed to achieve a certain value at a certain date B Diversified portfolio designed to generate guaranteed cash flows when needed C Asset allocation funds which adjust the portfolio holdings and asset mix over time based on the customer's target date D Asset allocation funds which adjust the portfolio holdings and asset mix over time based on the customer's intended college graduation date

C Target date funds, sometimes called life-cycle funds, are asset allocation funds which will adjust the holdings and asset mix of the portfolio over time based on the customer's target date.

The period of time over which a single sum or periodic deposits grow within an annuity is referred to as the: A Growth period B Benefit period C Accumulation period D Savings period

C The accumulation period is the time over which a single sum or periodic deposits grow within an annuity. Just as cash values within a life insurance policy, annuity balances grow on a tax-deferred basis, which shelters the income within the contract from taxation while it is accumulating.

In a variable annuity, the investment management fee is deducted from the: A Sales charge B Premium C Subaccount D Monthly payment upon annuitization

C The investment management fees are separately charged in each of the subaccounts and are the same as an investment adviser's fee in a mutual fund.

A client currently has $275,000 in a variable annuity. This client is planning on retiring in 3 years and will start receiving monthly income at that time. The client's current holdings are described as: A Annuity units B Annuity shares C Accumulation units D Accumulation shares

C The period of time during which a purchaser is making investments into a variable annuity is called the accumulation period. During this time, premiums paid into a variable annuity are used to purchase shares in the separate account called accumulation units.

A variable contract must be sold by: A An illustration B Direct mail C A prospectus D A person in the business at least 5 years

C The securities held in the separate account must be registered with the SEC and each offering is considered a new issue, requiring a sale by prospectus only.

An investor, age 28, has $7,500 and is seeking to invest this amount and begin making systematic deposits into the account. This individual is willing to take some risk but is uncomfortable with the thought of losing money. The investor expresses that they would prefer moderate overall returns rather than high returns and high volatility. Which of the following mutual funds would be most suitable for this investor? A XYZ International Opportunities Fund B XYZ Biotechnology Fund C XYZ Balanced Fund D XYZ Money Market Fund

C This client has clearly expressed they are risk averse, so investing in the XYZ International Opportunities Fund or Biotechnology Fund would not be appropriate. The XYZ Money Market Fund is certainly safe, but the most appropriate choice, given the risk tolerance and objectives of this client, is the XYZ Balanced Fund.

An investor who has purchased a variable product wishes to vote for the members of the board of managers. How many votes will the investor have? A The number of votes is determined by account value at the time the contract was purchased B The investor will have only one vote per contract owned C The number of votes is determined by account value as of the record date for the meeting D The investor will have 100 votes for every matter that is subject to vote

C Voting rights are described in the prospectus for the contract. Typically, one vote is obtained for every $100 of contract value. The number of votes is determined by account value as of the record date for the meeting, which can be 90 days or more before the meeting.

If a variable annuity charges a CDSC, when is the investor subject to the charge? A When the investor withdraws money during the annuity phase B When they deposit money into the variable annuity C When the investor withdraws money during the accumulation phase D On an annual basis the CDSC will be deducted from the separate account

C While many variable annuities do not charge a front-end sales charge, most impose a contingent deferred sales charge (CDSC) when an investor withdraws money during the accumulation period. A CDSC normally declines, and will eventually be eliminated, the longer the contract is held.

Which of the following funds will hold stocks of mature companies with a long history of paying dividends? A Special situation fund B Aggressive growth fund C Value fund D Sector fund

C With value funds, fund managers seek stocks of established large-cap companies that currently are thought to be undervalued in price. These stocks typically have a long history of paying dividends or increasing their dividends. Sector funds are mutual funds that focus on investing in specific, concentrated groups of securities in a particular industry, such as utilities, electronics, financial service, and healthcare. Special situation funds look to make investments in companies that are undergoing a major change or that have a specific event coming up that could dramatically affect their fortunes. Aggressive growth funds seek capital appreciation with the objective to achieve rapid growth in the shortest time possible. This type of fund concentrates its investments in small-cap emerging companies with stocks that have high growth potential and are expected to provide substantial capital gains over a shorter period.

All the following are functions performed by the board of directors, except: A Determine investment policy B Protect shareholders' interests C Oversee all professionals hired by the fund D Management of fund portfolio

D Each fund has a board of directors (BOD) to oversee the way the business operates, to ensure that corporate policies are followed, and to protect shareholders' interests. The BOD will establish investment policy, select and oversee all professionals hired by the fund, establish dividend and capital gains policy, and approve 12b-1 fees. Management of the fund portfolio is a function of the investment adviser.

A fund investing in which securities would be considered an income fund? A Foreign securities B Common stocks C Growth stocks D Bonds and/or preferred stocks

D Income funds invest primarily in bonds and preferred stocks. Common stocks and especially growth stocks are purchased for long-term appreciation. Foreign securities (usually stocks) are purchased for further portfolio diversification.

Index funds typically possess which of the following characteristics? A Lower than average expense ratios and high portfolio turnover B Higher than average expense ratios and low portfolio turnover C Higher than average expense ratios and high portfolio turnover D Lower than average expense ratios and low portfolio turnover

D Index funds are passively managed portfolios designed to replicate the performance of an index like the S & P 500 stock index. Index funds, due to their low trading activity and lower personnel costs, usually have lower cost structures and management fees as compared to actively managed funds. Index fund managers are usually required to stay fully invested and do not attempt to "time" the market.

What type of ETF attempts to produce returns that move opposite of an underlying index? A Leveraged ETFs B Standard ETFs C Opposite ETFs D Inverse ETFs

D Inverse ETFs use shorting techniques to receive a return from the opposite, or inverse, move of an underlying index. For example, the S&P 500 Inverse Fund will make money when the S&P 500 Index loses value. This strategy is used instead of shorting stock in a margin account. They are often referred to as "short" funds. These funds are more expensive and riskier than traditional ETFs and are more suitable for short-term investing.

Why would an investor choose a leveraged ETF? A To reduce investment risk B To increase returns over a long time period C To reduce the overall cost of investing D To increase returns on a short-term basis

D Leveraged ETFs use derivatives and bonds to magnify the returns of an underlying index. Leveraged funds can be used as an alternative to margin which also takes advantage of borrowed money to increase returns. These funds have higher costs and risk. Leveraged funds are used for short-term investing.

The period of time over which single sum deposits and periodic deposits grow within annuities is referred to as the: A Benefit period B Surrender period C Annuity period D Accumulation period

D The accumulation period is the time over which lump sum deposits or periodic deposits grow within annuities. Annuities grow on a tax-deferred basis, which shelters the income within the contract from taxation while it is accumulating.

Which of the following functions is not performed by the investment adviser for a mutual fund? A Research and analysis of economic trends B Ensuring federal securities and tax laws are being met C Providing tax information of fund distributions to shareholders D Protecting investors' interests

D The investment adviser is the firm responsible for managing the fund's investment portfolio, providing investment advice to the fund, maintaining appropriate diversification in the portfolio, and conforming to the investment objective of the fund. The IA will manage the trading within the portfolio, making buy/sell decisions and will also conduct research and analysis to determine the general economic and market trends. The adviser also ensures conformity with federal securities and tax laws and must provide tax information of the fund distributions to the shareholders. It is the BOD that is responsible for protecting shareholder interests.

A client currently has $275,000 in a variable annuity. This client is planning on retiring in 3 years and will start receiving monthly income at that time. The client's current holdings are described as: A Annuity shares B Accumulation shares C Annuity units D Accumulation units

D The period of time during which a purchaser is making investments into a variable annuity is called the accumulation period. During this time, premiums paid into a variable annuity are used to purchase shares in the separate account called accumulation units.

An individual has invested $50,000 into an annuity that will provide a fluctuating stream of income as well as an inflation hedge. The insurance company will place the investment amount into: A The insurance company's general account B Any individual security that they choose C A mutual fund invested in real estate D A separate account

D This individual has purchased a variable annuity. Premiums paid by variable annuity purchasers are placed into an insurance company separate account. The assets in a separate account are invested in a wider range of securities than those in a fixed annuity. The separate account is often divided into a variety of subaccounts, each of which may have a different asset mix or risk profile. When a customer initiates the purchase of a variable annuity, they may allocate their money among the subaccounts in a way that reflects their investment goals.

To receive favorable tax treatment, a REIT must: A Be diversified as defined under the Investment Company Act of 1940 B Have no fewer than 35 non-accredited investors C Not invest in other REITs D Have at least 75% of its assets invested in real estate, cash, or Treasurys

D Under the IRS code, special tax treatment is allowed for qualified REITs. To be considered qualified, the REIT must have at least 75% of its assets invested in real estate, cash, or Treasurys, a minimum of 75% of its gross income from real estate activities, and 90% of the ordinary income must be "passed through" (distributed) to holders of the units. If this is done, the REIT is only taxed on the retained amount and would be considered a qualified REIT under the IRC Subchapter M.

A registered representative is meeting with a client who had questions regarding variable products. Which of the following statements is appropriate for the registered representative to make? A c. Variable life insurance policies and variable annuities are both securities which are guaranteed by the issuing insurance company B a. Variable life insurance policies accumulate cash value which can be used as an income stream, and variable annuities are typically used to supplement retirement income C b. Variable life insurance policies and variable annuities are both considered securities which have the intended purpose of generating income, but only variable life would have a named beneficiary D d. Variable life insurance policies are permanent life insurance products that accumulate cash value and pay a death benefit to the named beneficiary upon death of the insured; variable annuities are intended to generate an income stream

D Variable life insurance policies are permanent life products that accumulate cash value and pays a death benefit to the named beneficiary upon the death of the insured. On the other hand, variable annuities are intended to generate an income stream, typically to supplement retirement income. They are both considered securities that require a FINRA Series 6 or 7 license in addition to a state insurance license to sell.

A client in their mid-50s wants to invest in a security that will provide high current income, while being somewhat secure. What type of fund should their registered representative recommend? A High-yield fund B Growth and income fund C Blue-chip fund D High-grade bond fund

D When determining suitability, the RR should consider the investor's age, income level, risk tolerance, and what the client has asked for. Since the client requested high current income along with stability, high-grade bond fund would be the most appropriate choice for the investor. A blue-chip fund and a growth and income fund both invest in common stock and would be too aggressive for the investor. Also, since a high-yield fund would invest in speculative bonds (junk), it also would not comply with the investor's request.

A parent has invested $100,000 into a 529 plan for their child. If the money is withdrawn and not used for higher education, what are the tax consequences? A A 10% penalty on the taxable portion plus capital gains on amounts exceeding the cost basis B There is no penalty, but the entire amount is taxable as ordinary income C No taxes are due if the child receives a scholarship D All earnings are taxed as ordinary income plus a 10% penalty on the taxable portion

D Withdrawals from a 529 plan that are not used for qualified education expenses are subject to ordinary income tax on the earnings, as well as a 10% penalty on those earnings. The child receiving a scholarship would be an exception to the 10% penalty, but earnings are still subject to ordinary income taxes.

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