Chapter 2: Investment Vehicle Characteristics

Question 1

What is rule for cash reserves on hand

Answer 1

Dual income earners = 3 mo household expense
Single Income or Primary breadwinner = 6 mo household income

Question 2

What are different annuities and how used

Answer 2

Overall part of “safe money part of retirement”

Fixed = Guaranteed, set rate of return for lifetime based on 1 time or series of periodic payments; lower rates of return, does not hedge inflation risk

Indexed/Equity Indexed = Type of fixed that is tied to underlying index like S&P 500, with a guaranteed minimum rate of return (fixed) and upside based on annuity participate rate and cap

Variable = Varied returns based on underlying investments without guaranteed minimums or caps. Money held in separate sub accounts, away from creditors (as opposed to fixed and indexed in Ins Co general account…subject to investment risk) Offers a 10 day free look period at customer inception

Question 3

Contrast Mortality rate with Mortality risk

Answer 3

Mortality Guarantee from insurance company to pay annuitant for life (along with death benefit) creating Mortality risk for company that annuitant will live very long time

As opposed to traditional life Mortality Risk in that insured will die before enough premiums are paid into policy

Question 4

What are M&E fees

Answer 4

Annual Mortality Risk and Expense risk fees to recoup some of costs, up to 1% - making annuities more expensive than mutual funds for investment purposes

Question 5

Contrast deferred vs immediate annuities

Answer 5

Deferred include a surrender period with associated fees assessed if draw payments before payout period begins

Immediate annuity will pay out right after purchase payments are deposited;

Both are subject to 59 1/2 age to avoid tax penalties and only amount earned above amount paid in (cost basis) are taxed

All payments have sales charges, admin and state premium tax charges levied against them

Question 6

What are 3 methods of purchasing annuities

Answer 6

Single Payment deferred

Periodic Payment deferred

Single payment immediate ( periodic payments must be paid in full to receive “immediate” single payment..hence deferred

Question 7

Describe different annuity payout (annuitized phase) options

Answer 7

Life or Straight Life

Period Certain

Life with Period Certain

Joint with Last Survivor

Question 8

What factors are involved in calculating first payout of variable annuity

Answer 8

Account value
Age of annuitant
Gender of annuitant
Settlement option

Question 9

What is AIR and how used with annuities

Answer 9

Assumed Interest Rate

Used in valuation of annuity unit (which is fixed amount earned by investor).

AIR is base rate chosen by investor that underlying assets must perform against..if return = AIR no change in annuity unit value, but if return above AIR the increase in annuity unit value and opposite for return below AIR

Question 10

What is a combination annuity

Answer 10

Variable annuity that allows investors to invest a portion of purchase payments into general account in exchange for a fixed rate of return; The feature is backed by claims paying ability of insurance co general fund with investments in separate account subject to all risks of stock and bond market

Question 11

Compare and contrast features of Term vs Whole vs Universal Life

Answer 11

Term - temporary insurance with premiums that can adjust over time (or be set at guaranteed fixed level for period of time) with payout at death only if occurs within term. Renewable but at higher premiums; Generally lowest cost option

Whole - permanent insurance as insured for life with fixed premiums at higher rate since additional monies accrue cash value which can be partially surrendered or loaned against (with interest charges) in future without repayment (lowers value of death benefit) . Provides guaranteed min cash value and death benefit

Universal - form of permanent insurance that allows policy holder to adjust death benefits and therefore premiums upwards or downwards as needs arise. Similar to whole life, cash value will grow in the account but benefits are not guaranteed

Question 12

Describe features and differences of Variable Life Insurance policies

Answer 12

Unlike Term and Whole/Universal where payments are held, invested and backed by Insurance company account, who bears the risk of investment, Variable is like variable annuities in that payments are held in a separate subaccount and policy holder bears investment risk

Contract value of cash benefits fluctuate based on performance of investments. The cash value increases based on performance, but the death benefits adjust based on performance vs AIR. (so cash value could increase 4% but death benefits reduced on 5% AIR policy)

A minimum or fixed death benefit is guaranteed, similar to other policies

Similar to variable annuities, additional fees are charged for mortality, expense risk and investment mgmt.

Question 13

Describe unique features of Variable Universal Life

Answer 13

VUL policy death benefit and cash value are tied to the separate account (Variable) with a flexible premium (Universal) feature. The policy is funded with flexible premiums that clients may or may not pay..however enough cash value and death benefit must be maintained to keep VUL in force and some have a minimum guaranteed death benefit tied to sub-account returns

These can not be sold as investment products but rather as insurance policies with investment options/upsides

Question 14

What are the risks associated with the various life insurance options

Answer 14

Term and Whole life are subject to credit, inflation and interest rate risk while Variable policies are primarily subject to market risk

Question 15

What are policy loan limits of Whole vs Variable life

Answer 15

Whole - up to 90% of cash value
Variable - up to 75% of cash value

Question 16

Describe different settlement options

Answer 16

Lump Sum-single payout

Fixed period-set time

Fixed Payment- set payments

Life income - annuity for life

Interest only - guaranteed interest returns with principal amount held by insurance co during life of survivor (tax implications??)

Question 17

What are exchange options under 1035 exchange

Answer 17

Variable can be exchanged for whole life tax free and no health qualifications for 24 months;

Can also exchange for an annuity

Can not exchange annuity for life insurance

Question 18

What are key components of Bonds

Answer 18

Coupon/nominal yield/stated rate = interest rate paid

Redemption/maturity date = date bond matures

Par value - face value of bond, expressed in $1000 lots

Frequency = rate of interest payments: annual, semi, quarter, mo

Default = inability of issuer to pay interest of principal

Question 19

How is Current Yield of Bond determine

Answer 19

Annual interest / Bond Price (same as dividend yield except interest vs dividend payouts)

Question 20

Discount vs Premium bond

Answer 20

Discount is when bond sells for below par because interest rates and yields have risen forcing prices to drop

Premium is when bond sells above par because interest rates and yields have dropped causing prices to rise

Question 21

How do you calculate yield to maturity and yield to call

Answer 21

YTM- Total yield investors receive from coupon payments plus or minus difference between amount paid for bond and par value at maturity: YTM = Ei +/- (Price-Par)

YTC- Total yield investors receive from coupon payments plus or minus difference between amount paid for bond and par value at first call date: YTC = Ei +/- (Call Price-Par)

YTC will always be lower/higher than YTM, and

Discount bonds will have highest YTC with premium bonds having lowest since shorter time frame for investors to recoup gains (higher yields relative to nominal yields) or losses (lower yields relative to nominal yields)

Question 22

Describe bond yield curves

Answer 22

When bonds sell at discount, the Current Yield is lowest, then YTM then YTC because gain on purchase is returned earlier divided by coupon payments

When bonds sell at premium, the Current Yield is highest, then YTM then YTC because loss on purchase is returned earlier divided by coupon payments

Bonds sold at par have equal CY, YTM and YTC

Question 23

Who are different insurance and debt rating agencies? What are levels between investment grade and junk

Answer 23

Insurance = AM Best
Bonds = Standard & Poors. Moodys

Investment: AAA/Aaa - BBB/Baa

Junk: BB/Ba - C

Question 24

What is price of bond at 98 1/4

Answer 24

98= bond points and every point is worth $10 so $980 with fractions also quoted at 1/4 of 10 or 2.50 so total price is $982.50

Corp bonds at 1/2, 1/4, 1/8 ($5, $2.50, $1.25)
Treasuries at 1/32 ($.3125)

Question 25

How are bond yield quoted

Answer 25

Based on basis points so 7.92 = 792 basis points or below 800 basis points on 8% coupon so lower yield equal price at premium to par

Basis points use 4 digits so lowest level of 1% = 0.0100 or 100 basis points and 1/2 of 1% = 0.0050 or 50 basis points

Question 26

What is bond indenture

Answer 26

Terms of the call provision expressed at “callable @XX in date; callable@xx in next date…”

Question 27

What are types of bond maturities

Answer 27

Term - all issued at once and mature on same date

Serial - all issued at once and mature gradually over time (ie…munis)

Balloon - all issued at once with some coming due early but most of principal paid at once on final maturity date

Question 28

Name (5) different types of bonds and features of each

Answer 28

Secured - backed by collateral; paid out first in bankruptcy ; less risky, lower coupons

Debenture - unsecured and become subordinated payoffs in bankruptcy ; more risky, higher coupons (also see income bonds)

Zero Coupon - Bought at discount with face amount at maturity difference = interest income. Interest is taxed annually as if received - “phantom tax exposure”

Convertible - Ability to convert from bonds to certain number of common stock shares at pre-set price; Par/Conversion Price = # shares; Bonds whose price level is above the stock price is trading above parity, and below parity if below stock price. If equal with stock price, then trading at parity. These bonds pay lower nominal yields and makes their market price less sensitive to interest rates. Are considered growth and income investment while others are considered just income investments

Income - Only pay income if the company generates it; often issued by company coming out of bankruptcy so higher coupon but more risk due to fundamentals of underlying company and liquidity only if earning income (so investor with high risk tolerance and little need for liquidity)

Question 29

What are different bankruptcy options ?

Answer 29

Following payoff of secured debts

Chapter 11 - reorganization of debt; company is debtor in possession. US trustee appoints creditor committee of 7 largest holders of unsecured debt

Chapter 7 - repay/payoff by liquidating assets and paid out according to order of (1) admin expenses, (2) taxes, rents, wages, benefits, (3) unsecured creditors (4) equity investors

Question 30

Name different types of Treasury Securities

Answer 30

T-Bills = Less than 1 yrs with minimum denomination of $; lowest interest rate risk of all securities except TIPS

T-Notes = 2-10 year maturities with semi-annual payments

T-Bonds = Maturities up to 30 yrs with semi annual payments and highest degree of interest rate risk

STRIPS = Zero coupon Treasuries which avoid credit and reinvestment risk. Taxes paid annually as “phantom tax exposure”

TIPS = Inflation protected with periodic adjustments based on changes in inflation - CPI with minimum payout of Par value and max based on inflation rate adjustment

Only risk Treasuries eliminate is credit or default risk

Question 31

What are different Agency Bonds and risk levels

Answer 31

Debt securities issued by either Govt Sponsored Enterprises (GSEs) or Fed Govt agencies; high quality, high security; minimum investment levels; Sold through broker dealer syndicates or by auction for short term

GSE = Federally chartered, privately owned; not direct obligations of US govt so not protected against default risk; Public companies with common stock: Ex: FNMA, FHLMC, Sallie Mae (no longer GSE but public traded as primary student loan maker)

Fed Govt Agencies = Federally chartered, and owned with direct obligations of US govt so are protected against default risk; Ex: GNMA, SBA, FHA

Question 32

What are different types of foreign bonds (6 a/b) and characteristics

Answer 32

Developed market bonds - US, Canada, EU, Aus, NZ and Japan issued, less risky still currency risk

Emerging/Developing market bonds - all others with less mature securities markets and higher costs

Foreign Pay - issued and traded outside US in foreign currency with high currency risk

US Pay Bonds - issued and traded outside US in US currency, eliminating currency risk;
- Eurodollar bonds are issued, traded and registered outside of US with waiting period beyond issue date to start trading
- Yankee Bonds which allows foreign issuers to borrow money in US with US dollars; registered with SEC with immediate trading upon issue

Sovereign Bonds - issued by foreign government and payable in foreign currency- less political risk for Developed market bond countries than Emerging market bond countries

Brady Bonds - Issued by emerging market countries but collateralized by US Treasury Securities (usually for Latin America countries)

Question 33

What is Prepayment vs Extension risk

Answer 33

Prepayment - risk of receiving principal back sooner than expected and need to reinvest in lower /falling interest rates

Extension - risk of receiving principal back later than expected with no ability to reinvest with rising interest rates

Question 34

Describe features of Mortgage Backed Securities

Answer 34

Mortgage Backed (MBS) are pools of loans packaged together and resold in different yield /time securities which may be guaranteed by US Treasury (GNMA) or limited support for GSEs (FNMA, FHLMC)

Question 35

Describe features of Asset Backed Securities

Answer 35

Asset Backed (ABS) are similar to mortgage except backed by other secured assets like auto loans, aircraft leases, credit card receivables and business loans with credit quality based on sources other than originator, since the financial institutions carrying loan securitize these into pools of loans called Special Purpose Vehicle (SPV) which are sold to Trust as interest bearing securities. Are subject to prepayment risk as sold with an average maturity date

Question 36

Describe features of Collateralized Mortgage Obligations

Answer 36

CMOs are investments that uses MBS to create various classes of bonds or tranches with different interest rates, repayment schedules and priority for principal repayment all with same risk class

Question 37

Describe features of Real Estate Mortgage Investment Conduits

Answer 37

REMICs are multi-class securities like CMOs which allow for different classes of securities with different maturities and coupons to be created and unlike CMOs allow for different risk classes

Question 38

Describe features of Collateralized Debt Obligations

Answer 38

CDOs are asset backed securities which pay out in predetermined manor based on amount of cash flow collected from package of owned assets; CDO focuses on repackaging individual fixed income assets into a security that can be divided up and sold in pieces in secondary market (mortgages, corp bonds, corp loans, auto loans, credit card debt). Default claims on prepayments are made first by senior tranches which also have higher claim on interest payments than junior tranches and therefore higher credit rating and pay lower yields. Most junior or “equity” tranches receive only residual cash after all other tranches paid by prescribed formula

Question 39

What are the different types of CMOs: PACs, TACs and Z-Tranches and their impacts on risk

Answer 39

PAC is planned amortization class, which may protect the investor more against pre-payment and extension risk; If interest rates rise and principal is paid more slowly, money is transferred from the support class (created when principal is repaid sooner) to protect PAC owner against extension risk

TAC is target amortization class which protect some against pre-payment but not extension; If interest rates rise and principal is paid more slowly, there is no transfer from the support class to protect TAC owner against extension risk

Z-Tranche is zero coupon bond inside CMO that returns principal only after all other tranches have been paid off

Question 40

Compare and contrast principal only vs interest only securities

Answer 40

Principal only are concerned with rate at which principal is returned - faster the better

Interest only concerned with rate of interest payments and receive a higher yield when prepayments slow down (rising interest rate environment) and lower yield when they speed up (declining interest rate environment)

As principal declines, so does the amount of interest paid by homeowner/received by investor declines..so faster principal declines, the lower interest / yields to investor and longer it takes to pay off prinicpal the higher interest / yields to investor

Question 41

What is difference between General Obligation and Revenue bonds and Double Barrel

Answer 41

GOs are backed by full faith and credit of municipality with repayment from taxes, licenses etc.. GOs require voter approval and if tacked onto property taxes (ad-valorem or as to value) based on assessed value times millage rate up to max - limited tax bonds

If also backed by Revenues generated from investment then are considered double barreled

Revenue Bonds are backed by user fees and other revenue from facility built, and do not require voter approval .

Special Tax or Special Assessment bonds can also be set to cover costs or derive revenue from specific group of beneficiaries of the improvements (ie..gas tax, hotel tax, Kensington MAD property fee) or could be created

Public Housing projects can issue PHA or NHA Section 8 bonds which are covered by housing payments that are subsidized by government..so less risky

Industrial Development Revenue bonds created for govt to lease assets back to corporations - can create moral obligation bonds

Question 42

What are investment implications of Muni bonds

Answer 42

Primarily Tax exempt for Fed and in many cases State (local projects) that pay lower yields if GO vs Rev and than non munis. Appeal to higher tax bracket or those without IRA/Pensions to invest higher yields

Taxable for govts refunding principal (interest tax exempt) or Private Activity / Purpose bonds (ie, leased back to private entity) or special programs, Appeals to pensions, low tax based and those with other tax exempt options (like IRA/Roth)

Question 43

What is a VRDO

Answer 43

Variable Rate Demand Obligation is a long term security sold as a short term investment which pays a floating rate of interest that is regularly reset

Question 44

What are Certificates of Participation

Answer 44

COPs are type of financing in which investors purchase a share of the lease revenues of the project rather than the issued bond secured by the revenues. Not subject to voter approval

Question 45

What are Mutual Fund Securities and common security type

Answer 45

Similar to private mutual fund, a fund of funds issued by governments that is not a fixed income security. Local Government Investment Pools and 529 college savings plans are examples.

Investors are owners of portfolio, not loaners therefore not a fixed income

Question 46

What are key features of 529 Savings Plan

Answer 46

Contributions are non deductible, but qualified withdrawals and any interest/gain are tax exempt from Fed and if state run plan that state taxes.

Asset allocation of investments can only be changed 2x per year

No income limit on contributions. Donor contributions are considered a gift for tax purposes and subject to tax exemptions and limits of $15k/yr (2021) or 1 time 5 yr $75k per single and $30k/$150K MFJ gift

Qualified expenses include tuition, room, board, books, supplies, computer tech at accredited secondary school for degree and for private high and primary school

Beneficiaries dont have to be blood related and can be changed. If original has not used funds, next beneficiary must be related. If new beneficiary other than account owner or blood relative will lead to taxation on gains

Question 47

What are key features of ABLE Accounts

Answer 47

Similar to 529 but for eligible people with disabilities called designated beneficiaries
to pay for qualified disability expenses

Only designated beneficiary can open but if unable, legal guardian can manage

Only 1 account per eligible individual. $ in account do not impact Medicaid and balance below $100K not SSI. Donor contributions by any one up to $15K for gift tax purposes can be given by each donor . Maximum amount contributed overall limited to state 529 plan max (generally $350,00)

Qualified expenses include any expense to maintain or improve the health, independance or quality of life (education, transportation, housing, healthcare)

Beneficiaries must have significant disability before 26th birthday

Limited rollovers from 529 of designated beneficiary to ABLE account is allowed

Question 48

What is an LGIP

Answer 48

Local Government Investment Pool are investment vehicles like mutual funds or short term bond funds created by state to allow munis and state govt entities to invest in short term

Not required to register with SEC and not subject to regulations

Question 49

What is defeasing as related to bond refunding

Answer 49

Defeasing is paying off debt early and can be done by current refunding (use proceeds to pay off existing bond holders within 90 days) or advance funding (to put proceeds in certified escrow account in order to service existing debt or tap into existing revenue stream)

Question 50

What are critical factors in General Obligation bond credit rating analysis

Answer 50

Tax Collection ratio; Amount of direct vs overlapping debt; Inflows and outflows of tax revenue dollars

Question 51

What are critical factors in Revenue bond credit rating analysis

Answer 51

Feasibility study and Debt Service Coverage ratio based on revenue divided by
Net revenue pledge = debt paid after operating expenses or
Gross revenue pledge = debt paid first

Question 52

What is order of key elements for Net Revenue Flow of Funds

Answer 52

Revenue fund
Operations and Mtce fund
Debt Service Fund
Debt Service Reserve fund
Reserve Maintenance fund
Replacement and Renewal fund
Sinking fund
Surplus fund

Question 53

Accrued Interest - what is meant by ‘F & A 15 bond? and how determined for Corp vs Government Securities

Answer 53

Interest paid semiannual in Feb and April of 15th of each month.

For Corp Bonds pay at end of settlement date (15th) with 30 days per month and 360 per year vs Treasuries settling at T+1 or next settlement date (16th) with actual or calendar days ( ie…Feb = 28 days, April = 30, May = 31)

Question 54

What are Anticipation Notes and how used

Answer 54

TaxANs, BondANs, RevenueANs, Tax&RevenueANs are instruments created by local govts and schools in advance of short term collection of funds from above, that put into a money market fund which provide $ now

Question 55

What is corporate version of short term anticipation note/IOU and max days issued in advance

Answer 55

Commercial paper with maturity of max 270 days

Question 56

What is difference between bank CDs and Negotiable CDs

Answer 56

Bank CDs have fixed rate, are not liquid in a secondary market and interest is forfeited if cashed in early. Also insured by FDIC and min investment of ~$1K

Negotiable or Jumbo CDs are negotiated rates, can be resold in secondary market with no penalties and have min of $250K , not insured by FDIC

Both pay compound interest and while typically short term (under 2 yrs) can be long term

Question 57

What are repurchase agreements / reverse repurchase

Answer 57

Agreements where one institution sells the other govt securities today with agreement to buy at a later date at set price. Difference in value is fixed rate of return. Party that sells is re-purchaser and one agreeing to buy and sell is reverse repurchaser

Question 58

What are BAs

Answer 58

Banker Acceptance notes for foreign trade with loan purchased at discount (fixed interest rate) for set period of time - ~270 days, which is secured by collateral (often goods being imported/exported)

Question 59

Name base form of common equity ownership in securities and key features of each

Answer 59

Common - Limited liability, Pre-emptive rights, Ownership with cumulative or statutory voting rights

Restricted - Higher priority for dividends, unregistered, sale subject to holding period, exiting reporting company of company reports, requires transactions by shareholders to be disclosed via filing Form 144, no short term (< mo) sales by affiliate companies or bypassing registration requirements via red flag transactions with affiliate accounts at broker dealers

Penny - Issued by companies not maintaining exchange requirements and must trade on Non-Nasdaq OTC. that carry higher investment risk due to fundamentals of issuing companies, requires investors to acknowledge risk disclosures

Question 60

What is ADR and how used compared to GDR

Answer 60

American Deposit Receipt allows American investor to trade in foreign company stock with US dollars (rather than foreign currency) and subject to same US market risks in addition to currency risk for dividend payouts

Global Deposit Receipt allows trading of foreign company stock including those issued by US companies, in many foreign markets at once, outside the US via trades in European stock exchanges

Question 61

Different stock analysts and key elements of each

Answer 61

Fundamental - focused on financial health of stock - Net Earnings, Cash Flow, Dividends..etc

Technical - focused on movement of stock over time, as past history repeats. Concerned with charts/patterns of trendlines, support, resistance and break out points, head and shoulders (bearish vs reverse bullish), cup (bearish) /saucer (bullish), advance/decline ratio, volume (low volume/small movment - bearish) and market sentiment (put/call ratio) and option volatility (historical and implied)

Question 62

Describe odd lot vs short interest theories

Answer 62

Odd Lot: Assessing volume of odd lot (< 100 share) orders and doing opposite as these investors assumed less sophisticated to time market - bearish or bullish depending on volumes

Short Interest: Assess volumes of open short sales with high volume suggesting potential for buying frenzy when stock price rises so bullish indicator

Question 63

How does preferred stock differ from common

Answer 63

Preferred is primarily an equity based income investment (except convertible preferred which is income and growth)

Primarily concerned with interest rate and credit worthiness, not profits

Are paid dividends at fixed rate before dividends to common stock but both must be voted on by Board vs bonds which are obligation of company

Prices of preferred can vary with changes in interest rates, like bonds

Different types include
(1) Cumulative - which require make up dividend payouts if skipped,
(2) Adjustable rate- which payout based on rate tied to benchmark, with a cap,
(3) Participating - with minimum fixed rate but also participates in upside if dividends raised higher for common
(4) Convertible Preferred - which allows investor to convert 1 share of preferred for XX of common and if worth this amount on open market is “at parity” (ie..1:10 with stock at $15 = $150)

Question 64

What governs investment companies that pool investments

Answer 64

Investment Company Act of 1940 - which grants SEC authority to require companies to register securities and report out with full disclosure of operations annually. Investment companies primarily invest or trade in securities or have more than 40% of its assets outside government securities

Question 65

Name 3 types of investment companies

Answer 65

Management Companies, Unit Investment Trusts, Face Amount Certificate companies

Question 66

What are differences between open and closed end funds?

Answer 66

Closed End Funds:
- Use leverage by issuing preferred stock and bonds by issuing senior securities (to common stock with lower payout priority)
- Trade shares along other public company stocks throughout the day
- Can be either diversified from at least 75% of fund, no more than 5% in any 1 company and no more than 10% of company ownership or Non diversified (not diversified), with Non Diversified Closed End most risky of 4 types of mgmt company funds

Open End Funds
- Buy only common stock / equity positions
- Do not trade shares with other investors throughout day but rather bought/sold to open end fund and settled at end of day at day end NAV
- Can be either diversified or non diversified with Diversified Open End fund the least risky

Question 67

What are Government vs Prime vs Tax Exempt Money Market funds?

Answer 67

MM Funds that primarily invest 99.5% in:

Government - Treasury securities
Tax Exempt - Munis
Prime - Corporate debt

Question 68

What is difference in fee structure between open ended and closed ended funds?

Answer 68

Open End funds have sales charge and 12-1B (distribution-sales literature, advertising, sales rep compendation) fees while closed end funds involve brokerage commissions similar to other publicly traded stocks on secondary market

Question 69

What is difference in share trading between open ended and closed ended funds?

Answer 69

Open End funds continually issue and redeem shares with unlimited amount of buying or selling in/out of fund, issuing new shares as needed; SO will always sell at NAV or above (based on sales charge involved). Will also likely receive fractional shares due to not knowing until end of day the NAV

Closed End funds are bought and sold on secondary market like public stock as sellers must find buyers and vice-versa based on market price and can therefore sell below NAV, These funds can also be traded on margin or sold short Closed end funds have no distributor as they are traded on an exchange

Question 70

Yield vs total return calculation

Answer 70

Yield is return earned from dividend or interest income an is always positive; Total return captures both yield plus/minus net change in security price

Question 71

What are key characteristics of A, B, C shares and suitability for type of investor (why) ?

Answer 71

A shares charge up front sales charge or front load as % of Net Asset Value (end of day true up of total assets - liabilities and expenses). These charges can be reduced by quantity buys above break points or direct purchase within fund family or LOIs). A shares are good for long term investors with high dollar amounts to invest (more option to reduce charge) and lower long term 12-1B fees

B shares do not charge up front but rather at redemption of sale and are back-end loaded, as % of NAV. They have a contingent deferred sales charge based sliding scale of reduced charges based on time held. Once time has elapsed, these convert to A shares (with lower 12-1b fees.
They typically have higher 12-1b fees than A shares and are more suited to intermediate or long term investors with small amounts to invest, since will incur higher 12-1b fees through redemption period

C shares do not charge any sales charges but carry higher 12b-1 fees and often called level load; Are most suitable to short term investors with healthy (up to $500k) to invest since no front or back end loads and higher fees only for short period of time

Question 72

What is Public Offering Price and how determined and used with comparing sales charges?

Answer 72

POP = NAV + Sales Charge (or POP-NAV = Sales Charge or (POP-NAV) / POP = % Sales Charge of POP (not NAV)

NAV / (100% - sales charge) = POP

Question 73

How is a letter of intent used?

Answer 73

To reduce front end sales charges by committing to purchase set quantity of shares by certain time at lower fee breakpoints. If not reached the amount of extra shares purchased with initial lower fees are pulled from investor account equal to fees that would have been paid

Question 74

What are rights of accumulation and how does this work with combination privilege?

Answer 74

Rights of Accumulation: Based on account value (rather than initial new money) the higher value is used toward next breakpoint when purchasing additional shares, but if value drops then the amount invested (principal/cost basis) is used to figure breakpoint

Combination Privilege allows investor to combine purchases across a family of funds to reach higher breakpoints and if used in conjunction with RofA, then net value increase across all funds in family can further reduce sales charges

Question 75

What is conversion exchange privilege

Answer 75

Allows investors to transact (buy/sell) shares within same family of funds at the NAV not the POP, thereby avoiding sales charge. This is considered a taxable event however from IRS concern

Question 76

What are different share redemption options under a systematic withdrawal plan

Answer 76

Fixed dollar
Fixed shares
Fixed time
Fixed percentage of account value

Question 77

What are different functions of mutual fund and responsibilities

Answer 77

Board of Director
Investment Advisor/Portfolio Manager
Custodian
Transfer Agent
Underwriter/Distributor/Wholesaler

Question 78

What are interval funds

Answer 78

A type of closed end fund that rather than listing/trading on secondary market it regularly offers to repurchase shares based on deadline to tender offer based on NAV at certain date with possible redemption charge up to max 2%;

They may also continue to offer new shares based on NAV prices (unlike traditional closed end)

Question 79

What are advantages of buying ETF vs Open End Fund

Answer 79

While both offer diversification, ETFs/Indexed funds are traded ongoing in market (intraday trading) and allow for immediate diversification across broader asset class with lower investment and since not managed lower fees. Must settle for index returns vs open end fund that might beat market performance

Question 80

Different types of REITs and characteristics

Answer 80

Equity - generate income thru rent collection and sale of properties

Mortgage (mREITs)- provides financing for RE projects

Hybrid - Do both Equity and Mortgage financing functions

Also,
Publicly Traded - Registered with SEC and traded on major exchanges

Public Non Listed (PNLRs) Register with SEC and provide ongoing reports but not traded on major exchanges

Private (placement) Exempt from SEC registration or reporting and not traded on national stock exchanges, so illiquid with limited and varied redemption programs..sold only to institutional and accredited investors

Question 81

Describe key characteristics of hedge fund, private equity and venture capital firms

Answer 81

Hedge fund - Private investment group that focuses on delivering absolute positive performance despite market conditions through options and other trading in private securities

Private Equity - Purchases a company, improves them, then sells to larger investors (via leveraged buyout )

Venture Capital - Invests via early funding of start up companies and instead of leverage (like private equity) buy shares in the company making smaller investments in many companies - minority ownership

Question 82

What are DPPs and key advantages including BDCs

Answer 82

Direct Participation Programs, structured as partnerships with limited and general partners that fund (equity and via debt -loans-LPs) and manage business (GPs), with tax gains and losses passed through to partner investors

DPP have limited life and can be formed for high risk ventures such as oil/gas exploration, natural resource income programs (natural gas), raw land, new construction and equipment leasing programs.

Can also set up as a business development company - closed end fund specializing in equity and debt instruments in early stage small to medium size companies and/or distressed companies thru debt refinancing. High dividend yields as generally higher risk

Question 83

What is crossover point for DPP

Answer 83

Point at which program switches to profitability

Question 84

To participate in DPP what must investment advisor ensure

Answer 84

1) Ensure suitability of investment recommendations such that investor’s situation can realize the benefits described in the prospectus; 2) Reflect the high risk, lack of liquidity and specific tax benefits directed at specific individual 3) investor has enough net worth to absorb total loss of investment 4) Not be a part of the partnership themselves

Question 85

What are 2 structured products and key features

Answer 85

ETN - Exchange Traded Notes - characteristics of bond and ETF with returns based on performance of benchmark minus fees paid out only in full at maturity. Are traded on secondary market but do not own stocks they trade in
ETF - Exchange Traded Funds - index fund (like SPDR, VIPERS) that own stocks they trade in with intraday trading capabilities and can come in form of
- Leveraged ETF: uses derivatives to derive higher returns on percentage basis due to higher risk exposure ( as opposed to leverage: borrowing)., ie 2-3X exposure to 1x movement in index. Good for short term trading
- Inverse ETF (ultra short fund) which bets against index by moving at 2-3x times opposite of index movement (so when market drops, this ETF value increase x fold)

Question 86

What are HOLDRs

Answer 86

Holding Company Depository Receipts - unmanaged, static basket of stocks from particular industry - Direct Index Fund?

Question 87

What are Death bonds

Answer 87

Use of viatical settlements to create a diversified pool of life insurance policies with profits coming from delta between what is paid+premiums and death benefit

Question 88

What are precious metals and why important

Answer 88

Gold, Silver, Platinum and Palladium often bought as commodities to hedge inflation risk. Can be bought as individual commodities or in funds that own directly or mine products

Question 89

What are 4 types of derivatives and key component of each

Answer 89

Warrants - Similar to call option (right to buy for set price over a longer (up to 10 yr) period , and issued directly by company - so included in diluted EPS along with convertible bonds as often offered to reduce bond interest notes)

Options - Issued by options exchange market with permission of underlying company stock so value derived. Puts/Calls and all combos
Options are zero sum game (equal winner and loser at strike price plus premium)

Futures contracts is a binding agreement that obligates both parties to buy and sell at agreed upon price now (spot) with future delivery in time : Hedge strategies for long (buy-farmer, raw good supplier) and short (seller-producer-manufacturer) ; $ is deposited at 5-15% into margin account which are settled daily (marking to market-like stock and bond margins) and if not enough cash in account to cover position which is moved between buyer /seller based on result each day; If margin account goes below, requires more margin $ deposited. Compared to spot market which is more volatile and settled at current prices vs time of distribution.

Forwards -Specifies a price for an underlying instrument at a future specified date but is not traded on an exchange and are private transactions not standardized or regulated by exchanges so include additional “counter-party risk”

Question 90

What are types, class and series of options

Answer 90

Type = either Call or Put

Class = all calls and puts on a particular security

Series = the security, strike price and exercise date on a class

Question 91

Review and know put/call hedge and speculative strategies relative to intrinsic and time value

Answer 91

see pages 172-184

Question 92

What is VIX and how relate to options

Answer 92

VIX is Volatility Index used to capture investor sentiment; which is calculated by net amount of short to long sells with higher % of short sells indicating bearish investor sentiment

Question 93

What are Treasury Receipts

Answer 93

Tresury receipts are issued by broker-dealers.

(as opposed to Eurobonds which are issued outside the US and payable in a foreign currency and Brady bonds are payable in US dollars issued for Emerging Market companies)

Question 94

G-Tech, Inc. issued 6% convertible non-cumulative preferred stock ($100 par value) several years ago, with a conversion price of $10. G-Tech common stock is now trading @14.50. What is the preferred stock at parity? (what is formula calculation)

Answer 94

$145.00 - $100 par value divided by conversion price of $10/share = 10 shares times $14.50 per share = $145.00

Question 95

Which of the following is an accurate statement of Collateralized Mortgage Obligations (CMOs)?

1) their offer and sale is restricted to institutional investors
2) they trade in a liquid secondary market
3) they are considered equity securities
4) they are complex instruments subject to heightened suitability requirements

Answer 95

CMOs are complex securities that few people understand. They do not trade on an active or liquid secondary market. Some retail investors buy CMOs, but the registered rep needs to be sure they understand what they’re getting into.

Question 96

Which of the following is a true statement concerning commodity futures contracts?

A grain farmer typically hedges his risk by establishing short futures positions

A grain farmer typically hedges his risk by establishing long futures positions

A cereal producer typically hedges its risk by establishing short futures positions

These days, stock options have taken the place of most futures transactions for purposes of hedging

Answer 96

The farmer’s risk is that the price of grain could plummet; the producer’s risk is that the price of grain could rise. So, they bet that way in case the risks materialize.

The farmer sells his grain now for X price-per-bushel so that if the corn or beans (etc.) drop in price, he’ll profit.

Question 97

If a bond is convertible at $40, when common stock is at $50 the bonds trade at $120. What is the position of the bond relative to market price…

Answer 97

Par value of bond is $1000; so convertible at $40/share = 25 shares are convertible. 25 shares X $50 = $1,250 market price.
So Bond should be worth $1250 but bonds trading at $1200, so trading below parity.

Could benefit if sold stock short and buy bond to cover ?

Question 98

What is a contingent deferred sales charge and where used

Answer 98

For mutual fund b shares, sales charge is deducted when shares are redeemed

Question 99

What defines load vs no load funds

Question 100

What does open interest mean relative to options

Question 101

What are features and benefits of variable vs equity indexed annuity.

Answer 101

Guaranteed min rate for Index Annuity, Upside on stock market for Variable Annuity

Question 102

What are key differences in where traded and margin elements of options, futures and forwards

Question 103

All of the following would be considered “management companies” under the Investment Company Act of 1940 except

face-amount certificate

open-end fund

closed-end fund

non-diversified fund

Answer 103

face-amount certificate

there are three types of investment companies as defined by the Investment Company Act of 1940: face amount certificate, UIT, and management company. Management companies are the open- and closed-end funds.

Question 104

What defines a face amount investment company

Question 105

The Rosewood-Halcyon Equity Income Fund holds large positions in 10 common stock issues. This week all of the holdings distributed dividend payments of $10,000 each. Therefore, which of the following statements is accurate?

The NAV remains unchanged due to dividend distributions.

The NAV remains unchanged if proportionally more purchase orders come in versus redemptions.

The NAV will rise unless market values decline by more than the dividends distributed.

Shareholders will be taxed on the dividends whether distributed or not.

Answer 105

The NAV will rise unless market values decline by more than the dividends distributed.

When money comes into the fund from the dividend-paying stocks, the shares of the fund have to rise . . . unless the stocks’ market values decline by more than the dividend.

Question 106

Donald is convinced that ABC Companies will miss their next earnings announcement by a large percentage. Which of the following options positions would be the most appropriate if Donald wants to take on the least amount of risk?

establish a long straddle on ABC

buy ABC puts

buy ABC calls

sell ABC calls

Answer 106

buy ABC puts

A “missed earnings announcement” should drive the stock price down. When anticipating a drop in the stock (bearish) buy puts or sell calls. Buying puts has limited risk. Donald would buy a straddle if he had no idea which way the earnings announcement would go–but was convinced it would make the stock go up or down.

Question 107

Mike Meaney places an order to sell 1,000 shares of ABC @50 stop–limit 50. Therefore, which of the following statements is accurate?

the order will execute only if the price of ABC rises to a price higher than $50

the order will be activated only if the price of ABC drops to $50 or below

the order will be activated only if the price of ABC drops below $50

the order will execute only if the price of ABC rises to $50

Answer 107

The order will be activated only if the price of ABC drops to $50 or below

nothing happens at all unless the stock trades at or below the stop price.

What determines price rises or falls in sell stop-limit???

Question 108

How often is the Net Asset Value calculated for the shares of a closed-end management company?

at the end of the trading session

every 15 minutes during the trading session

continuously, through the trading day

within 7 days of a customer request

Answer 108

At the end of the trading session

NAV is calculated only when the trading session ends for both open- and closed-end funds. The market price for a closed-end fund changes throughout the day, which was the “trick” to this question, WHEREAS market price is confirmed based on end of day NAV for Open End Fund

Question 109

With which money market security below would one accurately associate collateral?

Commercial Paper
Treasury Bills
Negotiable CD
Banker’s Acceptance

Answer 109

Banker’s Acceptance

BA’s are used for importing/exporting and are backed both by a bank’s guarantee and the goods being imported/exported.

Question 110

On February 5 the board of directors for ABC declared a dividend of $1 per share of common stock. The record date is Monday, April 2. The ex-date, therefore, is

Thursday, March 29
Friday, March 30
Tuesday, April 3
Wednesday, March 28

Answer 110

Correct Answer: Friday, March 30

under T + 2 settlement, go back one business day from the Record Date—that’s the Ex-Date or “Ex-Dividend Date” for common stock trading on the secondary market.

Question 111

A securities salesperson recommends the purchase of an investment-grade bond fund to an existing customer on his book of business. The salesperson tells the customer an investment into the fund involves no commissions or sales charges. Turns out, the fund imposes a 12b-1 fee of .24%. According to the NASAA policy statement, “Dishonest or Unethical Business Practices by Broker-Dealers and Agents in Connection with Investment Company Shares,” which of the following best addresses this situation?

The salesperson has performed his job properly, as his statement was correct.

The salesperson has likely engaged in a fraudulent sales practice.

The salesperson’s statement–though, technically, correct–could still be considered misleading and manipulative.

The salesperson’s statement is inherently misleading, as all investments into mutual funds involve either commissions or sales loads.

Answer 111

The salesperson has performed his job properly, as his statement was correct.

a mutual fund is considered “no load” provided the 12b-1 fee is not > .25% of average net assets. A no-load fund also has no upfront or back-end sales charges.

Question 112

In a set of performance data, which of the following is the most frequently represented within the data set?

meme
mean
median
mode

Answer 112

Mode

the median is the half-way point, while the mean is the average of the results.; Definition of Mode is the value that occurs the most frequently in your data set, making it a different type of measure of central tendency than the mean or median.

Question 113

Rollie is an investor struggling to measure the return on a recent investment. Rollie purchased 100 shares of XXZ common stock @40. During the first quarter, the company paid a dividend of 25 cents. With the stock trading @39 at the end of the quarter, what is Rollie’s annualized rate of return?

25%
-7.5%
0
-2.5%

Answer 113

-7.5%

the 25-cent dividend is nice; unfortunately, the market price is down by $1. So, Rollie is down 75 cents outa’ $40. That means he’s down 1.875%. There are four financial quarters per year, so multiply that number by 4, and you’ve got your answer.

Question 114

What are key features of DPP - Direct Participation Programs and characteristics of investments in them

Answer 114

A program which provides for flow through tax consequences regardless of structure of legal entity, including oil and gas programs, real estate programs (existing properties: BREIT), agricultural and cattle programs, Subchapter S, non publicly traded Business Development Company - BDC closed end fund, and usually set up as limited partnership,

DPPs are characterized by
limited life,
high income,
are non-correlated or alternative investments,
not liquid,
may be redeemable to issuer,
primary tax advantage from depletion

Purchasing raw land is riskiest type of real estate DPP

Question 115

What are similarities and differences between Equity Indexed and Variable (Indexed) Annuities

Answer 115

Equity Indexed is a fixed payment annuity promising min rate of return (min guarantee) with some upside potential based on equity index it is tied to, and the participation rate as well as market cap each year. Since pay min are more exposed to inflation/purchasing power risk and do NOT receive dividend distributions of underlying index stocks. Not protected against creditors

Variable Annuity is a variable payment annuity based on investor selected subaccounts and overall return, allowing higher returns, without guaranteed minimum to be returned so are a better protected against purchasing power risk, More subaccounts to choose from better oppty for diversification and returns. Sub accounts are put in separate accounts from company , not subject to creditors so Insurance Company rating not as important

Both annuities are tax deferred with life/mortality guarantees post accumulation phase, but amount will vary based on fixed vs variable as well as death benefit based on amount invested

Question 116

What are key characteristics of hedge fund

Answer 116

Limited number of high net worth investors (min $1M) unless non accredited investors buy in fund of hedge funds - mutual fund with similar traits and costs of hedge fund

Very low liquidity since not actively traded, may be redeemable to issuer at set intervals

High management fees (2%)+Capital Gains recovery (20%): 2 & 20

Seek to achieve absolute positive performance regardless of market

Question 117

Which qualified plans allow for employers to contribute on a discretionary basis

Answer 117

Employer Based Defined Contribution plans: SEP-IRA, SIMPLE (yes for matching option, no if 2% contribution; ESOP,

No discretion for Employer Based Defined Benefit Plans or Money Purchase Plan or SEP-IRA if employer contributes

Question 118

Which qualified plans allow for employees to contribute on a discretionary basis

Answer 118

Individual /Sole Proprieter Plans: IRA, Roth, Keogh,
Employer Based Defined Contribution plans: 401K, 403B, 457,/TSA, Profit Sharing, Simple, Money Purchase plan, SEP-IRA

Question 119

Which plans are covered by ERISA rules

Answer 119

Employer based Defined Benefit, Defined Contribution and Keogh;
Simple, SEP and Individual plans are not and just require documentation and forms for business owner record-keeping

Question 120

Name different types of annuity payout products and elements of each

Answer 120

Immediate - Initial lump sum payment with annuitized payments following ; Funds contributed are called purchase payments and sales charge, admin fees, state premium taxes are deducted; For variable annuities mgmt fees are also deducted from sub accounts

Deferred - Ongoing purchase payments during accumulation phase with stated surrender period under which high surrender charges may occur in early yrs until a surrender value is established which can be used to sell out of annuity

Question 121

An Investors Rate of Return would be decreased as measured by the Sharpe Ratio if which of the following were decreased

• Standard Deviation
• Riskless Rate of Return
• Rate on 3 mo T-bill
• Portfolio Return

Answer 121

Portfolio Return

Rp - Rf / Std
10 - 5 / 5 = 1

STD: 10-5/ 2 = 2.5 (increase)
Riskless or 3mo Tbill 10 -3/ 5 = 1.4 (increase)
Portfolio Return: 8 - 5 / 5 = 0.6 (DECREASE)

Question 122

What is another name for excess equity and how determined

Answer 122

SMA - Special Mtce Account, like line of credit created when have more equity in margin than required, and can be used to buy more stock on margin

Question 123

If S&P changes the rating assigned to XYZ Industries’s 5s debentures of ‘25 from BB to BBB, which of the following is accurate?

the bonds’ yield to maturity will rise

the bonds’ yield to maturity will drop

the bonds’ market price will drop

the bonds will be subject to a mandatory catastrophic call

Answer 123

the bonds’ yield to maturity will drop

the credit rating is rising, so the market price of the bonds is also rising, reducing their yield on the secondary market.

Question 124

An investor would like to have a stock sold at a specific price and only if it drops to a certain price or lower. The order that should be placed is called a

sell stop
sell limit
short sale
sell stop-limit

Answer 124

sell stop-limit

a sell-stop order is placed below the current market price. To name a specific price, we have to add the word “limit” to the order.

Other:
A sell limit is a pending order used to sell at the limit price or higher while a sell stop, which is also a pending order, is used to sell at the stop price or lower.

Sell limit is used to guarantee a profit by selling above the market price and sell stop is used to minimize loss by selling at the stop price.

Sell Limit Order = at limit price or above market price; for securing profit

Sell Stop Order = at stop price or below market price; for minimizing loss

A buy limit is used to buy below the current price while
A buy stop is used to buy above the current price.

Buy Limit Order
If the currency or security for trading reaches the limit price, the limit order becomes a market order. It is used to buy below the current price when the value is believed to increase after dropping at the limit price. It sets the maximum or minimum value you are willing to buy a certain stock.

Example: Stock currently trading at $100; limit price at $90.

You wait for the right buying opportunity when the price drops at $90 or lower to buy.

Buy Stop Order
If the currency or security for trading reaches the stop price, the stop order becomes a market order. It is used to buy above the current price when the value is believed to increase continuously. It allows you to limit loss.

Example: Stock currently trading at $100; stop price at $110.

You are waiting for the right buying opportunity but the price increases and does not drop. If the value reaches $110, you buy to control or lessen incurring loss.

Question 125

GDP has declined significantly the past few quarters. New claims for unemployment are rising, as is inventory. Based on the direction of interest rates, bond prices are most likely

about to flatten
about to revert to the standard deviation
about to fall
about to rise

Answer 125

About to rise

interest rates drop when the economy contracts. Rates down/price up.

Question 126

The only security below that leaves the investor with “reinvestment risk” is a

Debenture
Corporate zero coupon bond
Treasury STRIP
Treasury Receipt

Answer 126

Debenture

T-notes pay interest every six months, which would presumably be reinvested into new T-notes. What if rates are down at that point? That’s reinvestment risk, which would be avoided by zero coupons, STRIPS, Treasury receipts and the like. They don’t pay an income stream—investors just get back a higher par value than they paid.

Question 127

Jim represents a state-registered investment adviser in State A. His brother, John, represents a federal covered investment adviser in State A. How does this difference affect their registration requirements in State B?

because both are investment adviser representatives, there is no difference in registration requirements

the difference in registration requirements turns on assets under management (AUM) for their associated client accounts

both are exempt from registration requirements provided their number of clients in State B does exceed 5

provided he has no place of business in State B, John is exempt from registration requirements

Answer 127

Provided he has no place of business in State B, John is exempt from registration requirements

Only IARs representing state-registered firms operate under the de minimis rule. For IARs representing federal covered advisers, the only thing that matters is, “Do they have a place of business in the state?” If so, they must register with that state.

Question 128

Within a money market mutual fund we would least expect to find which of the following investment vehicles?

Commercial Paper
Preferred stock
Treasury Bills
Treasury Notes

Answer 128

Preferred stock

To be in a money market portfolio the security has to be a debt security. So, while T-Notes are, also, not typically in a money market portfolio, they can be when they are within 1 year of maturity.

Question 129

Which of the following is associated with falling interest rates?

Bond prices falling
Coupon rates rising
Yields rising
Bond prices rising

Answer 129

Bond prices rising

Rates and yields are the same thing. Bond prices move in the opposite direction.

Question 130

What is the primary objective of a preferred stock investor?

income
growth
growth & income
capital preservation

Answer 130

income

U.S. Treasury securities are used for capital preservation. For growth or growth & income common stock is available. Preferred stock pays a fixed income stream to the investor. The only type of preferred stock connected with growth is convertible preferred stock, on which investors receive a lower income stream in exchange for potential upside.

Question 131

What is true of mutual fund sales charges and 12b-1 fees?

management fees may not be covered by 12b-1 fees

12b-1 fees are included in the expense ratio

sales charges are not included in the expense ratio

all choices listed

Answer 131

all choices listed - Review page 144

even though sales charges and 12b-1 fees both cover distribution costs, there are differences.

The sales charge is deducted from the investor’s check when she buys (A-shares) or when she sells (B-shares).

A 12b-1 fee is deducted from assets, along with other operating expenses.

Question 132

For which TWO reasons do corporations perform forward stock splits? I. to raise the nominal share price II. to lower the nominal share price III. to increase market liquidity IV. to decrease market liquidity

II, III
I, III
II, IV
I, IV

Answer 132

II, III

the only reason to effect a forward stock split is to lower the nominal share price enough to attract more buyers. If Starbucks at $50 a share scares investors, maybe people will buy more than twice as much at $25.

Question 133

Which of the following investments would be expected to have the lowest volatility?

small cap fund
government bond fund
mid cap fund
money market mutual fund

Answer 133

money market mutual fund

money market mutual funds maintain a share price of $1, so they’re less volatile than a government bond fund, whose NAV fluctuates as interest rates rise and fall.

Question 134

Which statement below accurately explains the significance of the “efficient frontier” in regards to portfolio optimization?

all portfolios lie along the frontier until they are then market-tested

portfolios should be constructed to lie outside/above the efficient frontier

portfolios should be constructed to lie behind/below the efficient frontier

portfolios lying behind/below the efficient frontier are to be avoided

Answer 134

portfolios lying behind/below the efficient frontier are to be avoided

a portfolio can not lie outside/above the efficient frontier–that high of an expected return must be dragged down by the risk/standard deviation. Optimal portfolios lie along the curve called the “efficient frontier.” Portfolios behind/below the curve are less than optimal.

Question 135

ABC trades for $112,000 per share. XYZ trades for $40 per share. Therefore

XYZ is more expensive
Both stocks pay dividends
ABC is more expensive
Not enough information provided

Answer 135

Not enough information provided

unless we can compare the price to the earnings, book value, cash flow, or sales, we have no idea which stock is cheap and which one expensive.

Question 136

Which of the following is an accurate statement concerning Exchange Traded Notes (ETNs)?

they are asset-backed securities issued by financial institutions

no coupon payments are distributed during the investor’s holding period

ETNs are more liquid than typical corporate bonds

ETNs are synonymous with ETFs

Answer 136

No coupon payments are distributed during the investor’s holding period - review pg 167

Unsecured (not asset backed) securities

Less liquid than other securities;

Subject to market, credit and liquidity risk

Do not pay coupon payments but rather pay amount based on performance index and investor fees , per formula; When redeemed after holding period; during which value changes based on performance index and creditworthiness of issuer

ETN are like ETF tied to Index but a type of bond unlike ETF - equity

Question 137

What is the name for a financial product created by Merrill Lynch and traded daily on the American Stock Exchange that allows investors to buy and sell a basket of stocks in a particular sector, industry or other classification in a single transaction?

ETNs
UITs
ETFs
HOLDRs

Answer 137

HOLDRs

a HOLDR is a financial product created by Merrill Lynch and traded daily on the American Stock Exchange that allows investors to buy and sell a basket of stocks in a particular sector, industry or other classification in a single transaction. Unike ETFs, the composition of a HOLDR does not change over time and does not track a particular index.

Question 138

Which of the following types of financial reports would have received the highest level of scrutiny by a reporting company’s independent auditor?

compiled
unaudited
compiled/audited
audited/certified

Answer 138

audited/certified

some reports–like the 10Q–are more about timeliness than accuracy, so they are only compiled/unaudited. Audited/certified reports provide investors with the most accuracy.

Question 139

What is another name for unaudited

Answer 139

Compiled; no opinion as to quality of financial statements is given by accounting firm; The statements are much less than that given by certified/audited financials

Question 140

Using CAPM, calculate the expected return for ABC common stock: Riskless Rate: 1% Expected Market Return: 10% Beta: 1.5

8.2%
13.5%
14.5%
5.0%

Answer 140

14.5%

Investors assume/expect to receive the riskless rate plus a risk premium:

1% plus, first, 1.5 times 10%, then, minus 1.5 times 1%.
Equals: 1% plus (15% - 1.5%). 1% + 13.5% = 14.5%

Question 141

ABC Companies just reported a large increase in sales and profits. However, their stock price has dropped recently as equity investors have engaged in a “flight to quality.” This scenario illustrates which investment risk?

business risk
market risk
liquidity risk
purchasing power risk

Answer 141

market risk

The company is doing well, but the stock market is hurting those who hold the stock. Market risk.

The flight to quality is the dynamic that unfolds in the markets when investors are more concerned about protecting themselves from risk than they are with making money. During times of turbulence, market participants often will gravitate to investments where they are least likely to experience a loss of principal.

Question 142

Which of the following would NOT cause a drop in an open-end fund’s Net Asset Value?

the fund pays a dividend distribution

a bond fund experiences a rise in interest rates

redemptions increase dramatically

securities held in the portfolio decrease in value

Answer 142

redemptions increase dramatically

when there are more sellers than buyers, the amount of assets decreases. But, so does the number of shares, leaving everything proportional. Remember that NAV is calculated based on net of held shares/assets in fund minus operating expenses including sales charges; Then shares are redeemed at the NAV or purchased at the NAV plus maybe a sales charge.

Paying a dividend will reduce cash on hand - asset = lower NAV
Bond fund with rise in interest - lower bond price = lower NAV
Securities decrease in value - lower security price = lower NAV

Question 143

Which of the following shares are included when a company announces its Earnings Per Share (EPS)?

authorized shares
issued shares
treasury shares
outstanding shares

Answer 143

outstanding shares

net income available to common stock divided by the shares outstanding = EPS

Question 144

What is difference between issued, authorized and outstanding shares?

Answer 144

Authorized - number shares allowed per charter
Issued - number of share created/issued for trading, usually lower than authorized
Outstanding - number of shares in market, used to calc eps, where diluted eps would also include issued not actively traded like convertible bonds, participating preferred and warrants

Question 145

What is the ex-dividend and record date for dividends

Answer 145

Ex div = excludes dividend, meaning that on this date stock trades without benefit of owning declared dividend

in a regular way settlement the dividend belongs to the seller if stock bought on the ex-date. The ex-date determines the date buyer is not entitled to the declared dividend since on the ex-date it’s too late for the buyer. He doesn’t pay for the dividend and doesn’t receive it.

The ex dividend date occurs just before record date, which is date investor must be holder of record to receive declared dividend; Settlement must occur by the record date for buyer to receive dividend

Typically, the ex-dividend date for a stock is one business day before the record date, meaning that an investor who buys the stock on its ex-dividend date or later will not be eligible to receive the declared dividend. Rather, the dividend payment is made to whoever owned the stock the day before the ex-dividend date.

Question 146

One of your clients feels that ABC common stock is likely to rise significantly over the next several weeks. In order to take advantage of this, your client, who wants to minimize risk, should, and why:

sell a put
buy a put
buy a call
sell a call

Answer 146

Buy a call

buying an option is less risky than selling one. If you think something is about to rise, buy a call on it. Selling puts is another possibility, but that is much riskier than buying a call, since could lose value of strike price if stock went to zero

Question 147

For an open-end management company, which of the following would distribute dividends and capital gains to shareholders?

custodian
board of directors
investment manager
transfer agent

Answer 147

Transfer agent

The custodian would receive dividends and interest payments from portfolio securities. When it comes time to distribute $ to shareholders, the transfer agent handles that function.

Question 148

Technical analysts refer to the point where buying pressure overcomes selling pressure as

support
resistance
channeling
advance/decline ratio

Answer 148

support: buying wont allow sell off to drop below this level

on the other hand, resistance is where selling pressure overcomes buying pressure; Selling wont allow buyer frenzy to break through

Channeling is a chart pattern that graphically depicts the peaks and troughs of a security’s price over a period of time. If there is an observable symmetry in the oscillation, then it is considered to be a valid price channel that can be used as a tool for stock analysis.

Question 149

A subsequent primary distribution of a company’s equity securities is associated with which of the following and why?

secondary offering
secondary distribution
subscription rights
dilution of equity

Answer 149

subscription rights

subscription rights must be made available to prevent the current shareholders from having their equity diluted. Primary and secondary are terms with quite different meanings.

SO eliminate both secondary options (since still a primary offering) AND eliminate dilutions of equity since subscription rights allow for stockholders to prevent dilution

Question 150

What are key features of GNMAs?

Answer 150

GNMAs are not high-yield investments due to their US Government guarantee.
They pay interest and principal monthly, and that can end up being reinvested at lower rates going forward for the investor.
They are not exempt from Fed, State or Local taxes

Question 151

According to NASAA’s Policy Statement “Dishonest or Unethical Business Practices of Broker-Dealers and Agents, “ when must a final prospectus be delivered to a client purchasing an
IPO?
Mutual Fund?

Answer 151

For a mutual fund, the prospectus would be delivered at or before the solicitation.
For an IPO, it is delivered “no later than the due date for confirmation.”

Question 152

An investor bought an 8% bond at a basis of 9.10. Three years later, he sells the bond at a 6.95 basis. In this example he realizes a:

long-term gain
short-term gain
long-term loss
short-term loss

Answer 152

long-term gain

Basis = Yield; So a Basis Quote is the price at which a debt security can be bought or sold based on the yield. A bond purchased as “5.50 basis” is trading at a price that makes the yield 5.5%

if the yield dropped from 9.1% to 6.95%, that’s just another way of saying he bought low and sold high. Yield down—price up. Means the same thing.

Question 153

Which of the following is an accurate statement of commodity futures and why/why not

An Iowa farmer raising corn would typically take a long futures position on corn

A cereal maker producing corn flakes would typically take a long futures position on corn

Like a long options position, a long futures position is paid-in-full at the time the contract is opened

Like a long options position, a long futures position subjects the investor to limited loss

Answer 153

A cereal maker producing corn flakes would typically take a long (buy) futures position on corn

An Iowa farmer raising corn would typically take a short (sell) futures position on corn

Futures contracts involve daily margin settlement,

Investors can lose much more than they initially put down as “margin.”

Question 154

ABC Industries has issued $50 million par value of bonds. The first two interest payments are at 3%, with the nominal yield rising by 1/2 of 1% each year going forward. What type of bond did ABC Industries issue?

a balloon maturity bond
a capital appreciation bond
a step-up bond
a serial maturity bond

Answer 154

a step-up bond

balloon and serial maturities have nothing to do with the nominal yield of the bond; rather, they refer to how the issuer repays the principal.

A capital appreciation bond is another name for a zero coupon bond.

Question 155

The FOMC is buying Treasury securities. What effect will this have on the bond market as a whole?

no effect whatsoever
prices on outstanding bonds will fall
coupon rates on new issues will rise
yields on outstanding bonds will fall

Answer 155

yields on outstanding bonds will fall

when the FOMC buys Treasury securities, based on buying behavior, they push up their price, which pushes down their yield.
Also will buy to ease economic conditions which will reduce interest rates and thereby yields

Question 156

An investor purchased shares of ABC @11 several months ago. Currently, ABC is trading for $17. The investor wrote down a target price of $20 for this stock. Therefore, which of the following orders would she enter at this point?

short sale
sell-stop @20
sell limit @20
sell-stop @20, limit 20

Answer 156

sell limit @20

to sell a stock for more than it’s trading–or for a certain amount–enter a sell limit order.

Question 157

In a variable life insurance policy, the policy owner should know that I. death benefit is calculated annually II. death benefit is tied to AIR vs. actual performance of the separate account III. minimum cash value is guaranteed by the insurance company’s general account IV. cash value is calculated daily

II, IV
I, II, III, IV
I, II, IV
II

Answer 157

Correct Answer: I, II, IV

Death benefit is calculated annually.

The minimum death benefit is guaranteed but any increased death benefit is dependent on performance of sub accounts, therefore tied to AIR (actual performance of the separate account

Minimum death benefit NOT cash value is guaranteed by the insurance company’s general account

Cash value is calculated daily based on performance of sub-accounts

Question 158

Which of the following equates the present value of a bond’s future cash flows to the current market price of the bond?

current yield

yield to maturity

effective yield

after-tax yield

Answer 158

yield to maturity

the simple definition of YTM is that it is the yield to the investor if the bond is held to maturity. The fancier definition is to say that YTM is the rate that makes the present value of the bond’s future cash flows equal to its current market price.

The effective yield is a measure of the coupon rate, which is the interest rate stated on a bond and expressed as a percentage of the face value.

Question 159

Which type of security is associated with a Form F-6 filing under the Securities Act of 1933?

Answer 159

when ADRs are created, a Form F-6 is filed with the SEC electronically through EDGAR, as required under the Securities Act of 1933.

Question 160

Which of the following pay interest semiannually to the investor?

equity mutual funds
United States Treasury Bills
United States Treasury Notes
tax-exempt municipal notes

Answer 160

United States Treasury Notes

T-Bills are bought at a discount to face value.
T-Notes and T-Bonds pay semiannual interest.
Municipal bonds pay at specified intervals

Question 161

Which of the following could accurately be described as a “secured” money market instrument and why?

Treasury Bill
Commercial Paper
Banker’s Acceptance
Negotiable CD

Answer 161

Banker’s Acceptance

BA is a money market certificate supporting imports and exports backed by collateral.

Commercial paper is a short term unsecured loan

T- Bill is backed by US Treasury but not secured

Negotiable CD is a bank cd traded on secondary market but not secured by any collateral

Question 162

Which of the following best reflects the effects of compounding?

total return
yield
dollar cost averaging
annualized return

Answer 162

total return

total return on a mutual fund shows the growth or loss of value in NAV plus the dividends and capital gains distributed. If an investor reinvests those distributions, he gets the full effect of compounding.

Yield is function of payout to price
dollar cost averaging is function of timing
annualized returns is function of determining yearly returns

Question 163

What is difference between cumulative and statutory voting by shareholders

Answer 163

cumulative voting is the method favored by minority shareholders who can abstain on voting for some and give unused votes all to just one

statutory allows shareholders to cast no more votes than for number of shares owned and must vote for each

Question 164

If an investor opens a new margin account and purchases 200 shares of ABC, an NYSE-listed security, on margin for $18 a share, he must deposit

$4,000
$1,800
$2,000
$18 per share

Answer 164

$2,000

for an initial margin transaction the customer puts down half, or at least $2,000. Half the purchase price is $1,800, which is below the $2,000 minimum.

Question 165

An ABC April 50 call is trading @2.50 with the underlying instrument trading at $51. What is not true of this option?

It is in the money
It has intrinsic value
It represents a bearish position
It has time value

Answer 165

It represents a bearish position

“intrinsic value” is the amount that an option is in-the-money. This option is in-the-money by $1, because the right to buy @50 is worth $1 when the stock is really worth $1 more. Why is the premium more than $1? Time value, which equals the other $1.50 in the premium. There IS no ‘position’ here, just a contract. The buyer would be bullish; the seller bearish.

Question 166

If an investor purchased shares of ABC that have risen $12, how might the investor increase his yield and provide a partial hedge if he feels the stock is likely to trade sideways?

write straddles
write covered calls
purchase straddles
purchase puts

Answer 166

write covered calls

covered calls will provide income/yield and will do well if the stock trades in a narrow range. Buying puts would be ideal if he were looking for protection and were nervous about a big drop in price.

Straddles are buying or selling a call and put on same stock with same strike price and expiration. This would be used when expect stock to move - heavy volatility but not sure which way

Question 167

An investor owns 200 shares of common stock. If the corporation effects a 10% stock dividend, she will receive

20 additional shares
20 additional shares, with cost basis rising
10% of her original cost
no additional shares

Answer 167

20 additional shares

she will receive 10% of 200 shares.= as if received cash which were used to purchase stock at then price. Cost basis of original stock is not impacted

Question 168

An investor purchased an 8% corporate bond at par last year. If the bond is now trading @98, the investor’s total return is

7%
6%
-2%
8%

Answer 168

6%

he made $80 in interest but lost $20 in market value. If he makes $60 in total from a $1,000 investment, his total return is 6%.

Question 169

38) What is true of gross margin and net margin?

one is calculated pre-tax, the other after-tax
both are of interest primarily to technical analysts
both are found on a corporation’s balance sheet
none of the choices given

Answer 169

one is calculated pre-tax, the other after-tax

profits and profit margins are found by reviewing the income statement. Net income after tax divided by revenue = net profit margin.

Question 170

ERISA prohibits certain transactions between the plan and parties-in-interest. Parties-in-interest include:

the union

the employer

immediate family members of parties-in-interest

all choices listed

Answer 170

all choices listed

these parties-in-interest are not allowed to borrow from the plan or lease office space to or from the plan, etc., except under some very strict exemptions.

A party-in-interest is defined by the Employee Retirement Income Security Act of 1974 (ERISA) to include the following:

-Any person who provides services to the plan,
-Fiduciaries and employees of the plan,
-An employer whose employees are covered by the plan,
-A person who owns 50 percent or more of such an employer or -employee association (union), and
- Relatives of any of the aforementioned individuals.

Certain plan transactions with parties-in-interest are prohibited under ERISA. These transactions are:

A sale, exchange, or lease of property;
A loan or other extension of credit (including late deposits of employee deferrals to the trust);
The furnishing of goods, services or facilities;
A transfer of the plan’s assets to a party-in-interest for the use or benefit of a party-in-interest;
An acquisition of employer securities or real property in violation of the 10 percent limitation.

Question 171

Which of the following are direct obligations of the U.S. Treasury?

CMOs
GNMA securities
FNMA securities
Treasury Receipts

Answer 171

GNMA securities and Treasury Securities, except

Treasury Receipts are backed up by Treasury securities, which is why they’re not a direct obligation of the US Treasury.

Question 172

ABC common stock trades at $50 per share. The earnings per share are $1.00. The company pays no dividends. The “float” is 10,000,000 shares. Which of the following terms best describes this stock?

blue chip stock
large cap value stock
small cap growth stock
large cap growth stock

Answer 172

small cap growth stock

a stock trading at a high P/E ratio (50) is a growth stock. That was all you needed to conclude to answer this question. Note that a market cap of $500 million is far short of a large-cap stock., defined as between $300M and $2B

Question 173

Interest earned on most municipal bonds is

tax-free at the local level
tax-free at the state level
tax-free at the federal level
all of the choices given

Answer 173

Tax-free at the federal level

the states and local governments can tax their residents on municipal bond interest if the bond is issued by another state or local government. The federal government usually provides the tax break on the interest. What about capital gains? Those are still taxable.

Question 174

If the XYZ 6s of ‘19 are rated BB+, what can be concluded?

the bonds are investment grade

the bonds are in the second credit tier

the bonds would typically be found in a high-yield portfolio

the bonds are of low investment grade quality

Answer 174

the bonds would typically be found in a high-yield portfolio

BBB is the cutoff on investment-grade for S&P. It’s Baa for Moody’s.

Ba1/BB+ is a rating in the middle of that range, reflecting an issuer that has some risk of default, but is still a safer investment than others; it is considered to be just below investment grade.

Question 175

Under the Uniform Securities Act which of the following constitutes an offer and a sale of securities?

publishing a tombstone advertisement
making a gift of non-assessable stock to a good friend
offering stock in a failed enterprise to satisfy the claims of creditors through a bankruptcy proceeding
selling a variable life insurance policy

Answer 175

Selling a variable life insurance policy

VLI = A SECURITY, and all securities that are sold were also offered.

Question 176

Which of the following would be an inappropriate recommendation for a 51-year-old client primarily seeking tax-exempt income?

purchasing municipal bond funds within a taxable account

purchasing a closed-end municipal bond fund within a taxable account

purchasing municipal bond funds within a 401(k)

purchasing municipal bonds within a taxable account

Answer 176

Purchasing municipal bond funds within a 401(k) would be INAPPROPRIATE

Question 177

What is true concerning the tax implications of disributions from holding a publicly traded Real Estate Investment Trust (REIT)?

Answer 177

Most REIT dividends are ordinary income. Sometimes, dividends are allocated to capital gains distributions or return of capital and as such can be subject to shareholder capital gain rates.

Also REITs do not pass losses, only RE Partnerships

Question 178

Commercial paper is used by companies for all of the following reasons EXCEPT:

financing receivables
working capital
bridge financing
financing large construction projects

Answer 178

Financing large construction projects

Commercial paper is short term unsecured loan, used for: financing receivables, providing working capital and short-term (bridge) loans in anticipation of receiving money in the near future. For long-term projects, bonds would be issued. Some companies issue commercial paper in order to then purchase higher-yielding securities

Is considered a money market security and issued as discount to loan value

Question 179

Jones and Barker, a registered investment adviser, buys securities for the advisory omnibus trading account before allocating shares to the various client accounts. Which of the following is a true statement of this practice?

Jones and Barker may allocate those stocks with subsequent favorable price movements to accounts that pay performance fees and allocate those stocks with subsequent unfavorable price movements to accounts that pay a % of assets-only

both choices listed

neither choice listed

Jones and Barker must take great pains not to allocate the shares based on subsequent market movements

Answer 179

Jones and Barker must take great pains not to allocate the shares based on subsequent market movements

the adviser must allocate the trades in a manner that is fair to clients rather than self-serving. ???????

Situation involves buying shares for both house and client accounts…must be treated consistently

Question 180

All of the following would lead to a higher dividend yield except

rising dividend, stable market price
stable dividend, rising market price
stable dividend, falling market price
rising dividend, falling market price

Answer 180

Stable dividend, rising market price would lead to a LOWER (not higher) dividend yield

if the dividend stays the same while the market price rises, yield decreases.

Div = 50 50 60 60
Price = 100 120 100 120
Y =0.5 0.41??? 0.6 0.5

Question 181

What can SMA be used on margin accounts to obtain more stock

Answer 181

excess equity (SMA) can not be used if using it brings the customer below minimum maintenance or $2,000, otherwise can be used

Question 182

Which of the following orders would be reduced on the ex-dividend date for ABC common stock?

market order
buy-stop order
sell limit order
sell-stop order

Answer 182

sell-stop order (review section)

only sell-stop and buy-limit orders are reduced by the amount of the dividend on the ex-date . . . unless also marked DNR (Do Not Reduce). Only these two orders would be triggered due to the lowering of the stock’s market price.

Question 183

When determining suitability for a bond investor, which is of most importance?

bond denominations
yield to maturity
nominal yield
current yield

Answer 183

Incorrect
Correct Answer: yield to maturity
Rationale
yield to maturity is what matters most to a bond investor. How much yield can she receive based on her risk tolerance and time horizon?

Question 184

HOW IS PRICE TO BOOK DETERMINED

Answer 184

MARKET PRICE DIVIDED BY BOOK VALUE = ??

Question 185

For purposes of calculating AMT, which of the following are tax preference items? I. interest on private purpose municipal bonds II. interest on general obligation bonds III. accelerated depreciation IV. capital appreciation on preferred stock

IV
I, III, IV
I, III
III

Answer 185

I, III
Rationale
private purpose municipal bonds are a common AMT-related concern for investors, which is why the official statement indicates whether the bonds are subject to AMT.

Question 186

Which of the following securities has the highest claim on a corporation’s net income?

debentures
secured bonds
preferred stock
common stock

Answer 186

preferred stock

Not speaking of bankruptcy claims, but normal operations net profits:

bonds represent a debt that is owed, period. Preferred stock and common stock owners have a claim on net income/earnings, with preferred stock having a higher claim than common.

Question 187

A bond is quoted at 97 3/8. What is the market price?

$973.80
$9,735.50
$973.08
$973.75

Answer 187

$973.75
Rationale
“97” means $970. 3/8 of $10 = $3.75. $973.75.

Question 188

What are rights of accumulation, letter of intent and
breakpoints as related to mutual fund share class (A)

Answer 188

a mutual fund prospectus has a section called something like “Sales Charge Reductions” that lays out features such as
breakpoints - qty discount
rights of accumulation - accumulate shares over time
letters of intent - based on dollar cost averaging into break pts
and combination privileges- combining multiple related accounts to meet breakpoints

all of which help to reduce sales charges on A shares.

Question 189

Your customer sold short 100 XYZ @55. With the stock currently @49, you would recommend that he protect his position by entering a:

Buy-limit @50
Buy-stop @50, limit
Buy-stop @50
Buy-limit @49

Answer 189

REVIEW

Buy-stop @50

the buy-stop order would lead to an automatic purchase if the stock went up against the investor. Keep the word “limit” off, though, if you want protection. Limit is for selling high or buying low to obtain favorable position….

Question 190

Which TWO of the following statements concerning REITS are true? I. may trade on the first or second market II. are exempt under the Securities Act of 1933 III. may not be held within a 401K or Keogh plan IV. may pass through income but not losses to investors

I, IV
II, III
I, II
I, III

Answer 190

I, IV
Rationale
real estate partnerships pass through losses, but REITS do not. REITS have no exemption from registration under the Securities Act of 1933. There is no reason that a REIT can not be held in a 401(k) or Keogh account.

Question 191

Dilution of shareholder equity does not occur via the issuance of

convertible debentures
warrants
convertible non-cumulative preferred stock
subscription rights

Answer 191

subscription rights (REVIEW RATIONALE)

securities that convert to common stock cause eventual dilution of shareholder equity because when the debentures, preferred stock, or warrants are converted, those investors suddenly get their share of the earnings, without bringing anything to the table. Rights are issued in order to avoid diluting shareholder equity. Existing shareholders get to maintain their current % ownership by exercising subscription rights.

Question 192

Which of the following best describes interest rate risk to a holder of preferred stock?

as interest rates rise, prices fall
bond interest must be paid first
as interest rates fall, prices rise
interest rates are unpredictable

Answer 192

as interest rates rise, prices fall
Rationale
QUESTION NOT ASKING ABOUT INTEREST RATE RISK, BUT WHAT ARE NEGATIVE CONSEQUENCE OF INTEREST RATE MOVEMENTS SO, PRICES WOULD FALL IF THE INTEREST RATE RISES

AND if you thought “as rates fall, prices rise” is somehow a bad thing, slow down….would be positive for bonds and preferred stock

Question 193

A client participated in a 401(k) plan over 20 years of service. If she and her employer contributed $50,000 to her account, with the account valued at $92,500 at retirement, the client’s cost base is

$42,500
$50,000
$0
$92,500

Answer 193

$0
Rationale
The contributions go in pre-tax, so there is no cost basis as there would be in, say, a non-qualified variable annuity. A “cost basis” would imply that this amount has already been taxed.

Question 194

For downside protection over the long-term, an individual would most likely choose which of the following?

deferred variable annuity
blue chip mutual fund
equity indexed annuity
immediate variable annuity

Answer 194

equity indexed annuity
Rationale
indexed annuities offer downside protection through a guaranteed minimum rate.

Question 195

Investment advisers earn management fees, typically a percentage of the assets managed for pension and mutual funds. Such management fees are NOT associated with:

closed-end funds
unit investment trusts
open-end funds
face-amount certificates

Answer 195

unit investment trusts
Rationale
the UIT is a non-managed portfolio, without an investment adviser.

Question 196

A true statement of wedge patterns followed by chartists is that

a rising wedge pattern is considered a bullish indicator
a rising wedge pattern is considered a bearish indicator
a short-term anomaly is called a “pitching wedge”
a falling wedge pattern is considered a neutral indicator

Answer 196

a rising wedge pattern is considered a bearish indicator
Rationale
a wedge pattern is represented by parallel lines connecting support and resistance, where the lines start out wide and then become narrow. A rising wedge = bearish. A falling wedge = bullish.

Question 197

Tax implications of insurance contracts are accurately described by which of the following statements?

all surrenders of cash value are taxable

death benefits are taxable to the beneficiary at ordinary income rates

death benefits are includable in the decedent’s estate

the policyholder must either surrender the amount of cash value equal to the net premiums paid or the entire cash value

Answer 197

Death benefits are includable in the decedent’s estate
Rationale
death benefits are not taxable to the beneficiary. Partial surrenders of cash value are allowed, or the policyholder can take a loan against cash value.

REVISIT Life Insurance: death benefits (viatical settlements, trusts that exclude proceeds? and surrender of cash (meaning)

Question 198

What is the primary investment objective of an investor holding preferred stock?

purchasing power protection
income
tax advantages
growth & income

Answer 198

income

preferred stock pays a stated rate of income; that income also is tax-advantaged if held in a taxable account. ONLY CONVERTIBLE preferred stock offers growth in addition to income.

Question 199

Which of the following securities are backed by the full faith and credit of the United States Treasury?

Collaterized Mortgage Obligations
Treasury Receipts
FNMA securities
GNMA securities

Answer 199

GNMA securities

Treasury receipts are created by broker-dealers and other financial institutions. They are backed up by Treasuries held in escrow, but that’s a big step down from being a direct obligation of the US Treasury. GNMA is the “Government National Mortgage Association” backed up by the full faith and credit of the US Government.

Question 200

What are the different classifications of Preferred Stock

Answer 200

Straight: is an equity income security that pays a fixed dividend amount based on stated interest rate and only after BoD declares (unlike bond which mush have interest paid); Is primarily a fixed income security

Cumulative: If dividend payout is skipped for quarter it must be made up for in subsequent dividend issue before common stock can be paid out

Participating: When common stock declares dividend increase, preferred stock rate also increases - therefore the dividend rate is fixed as to minimum but not at maximum

Adjustable/Floating or Variable Rate preferred: Rate of dividend payout tied to a benchmark with a cap and because interest payment rate varies the market price for the stock remains stable, unlike other where dividend interest rate is fixed

Convertible: Allows for preferred stock to be exchanged for common stock at a stated price or number of shares..and if equal to value of market price for stock are trading at parity. When out of parity can be source of growth by converting to common. Growth and Income strategy for investor

Primary concerns/risks of preferred stockholder is interest rate and credit risk as move in same was as bonds..with par value unchanged. Can have an expiration date on Preferred Stock and therefore companies may deposit to sinking fund to pay off interests and prinicipal

Question 201

In which way are options and futures in common?

Answer 201

are derivatives
standardized contracts
Bought within a margin account
BUT NOT
margin requirements
futures trading involves lots of margin. Options are bought in full, even if done so within a margin account.

Question 202

In this account, when one owner dies, the assets pass to the owners estate, not the other account owners. This type of account is known as

Answer 202

Joint tenants in common

For a “tenants in common” account, the assets of the deceased go to his/her estate. For a “joint tenants with rights” account, the assets of the deceased go to the other account owner(s).

Question 203

Which of the following can help fixed-income investors manage call or prepayment risk?

GNMA securities guaranteed by the US Treasury
corporate bonds
CMOs

Answer 203

buying CMOs

bonds that are callable, and mortgage securities, present call or prepayment risk. When rates drop, investors end up doing worse than they hoped.

CMOs have tranches designed to reduce prepayment and extension risk.

Question 204

A growth & income fund distributed $1.10 in dividends and 90 cents in capital gains this year. If the bid price is $13.50 and the offer price $14.00, the yield is

Answer 204

7.85%

Capital gains are not part of yield (only total return). Take the dividend of $1.10 and divide it by the offer price of $14.

Question 205

Which EFM assumes that current stock prices adjust rapidly to the release of all new public information, and that security prices have factored in available market and non-market public information?

Answer 205

Semi-Strong Form Efficient Market Hypotheses

The semi-strong form assumes that current stock prices adjust rapidly to the release of all new public information. It contends that security prices have factored in available market and non-market PUBLIC information. Private insider information may still be leveraged to achieve gains according to Semi-Form

Question 206

Under the Uniform Securities Act, the Administrator has all of the following authorities EXCEPT

• summarily suspending a registration before an opportunity for a hearing has been given
• issuing an order of disgorgement
• issuing a cease and desist even before anybody violates the rules
• seek an order of injunction

Answer 206

Issuing an order of disgorgement

The Administrator can issue a cease & desist even before anybody violates the rules, and they can summarily suspend a registration due to apparent violations AS LONG AS they promptly grant a hearing to the respondent. The Administrator can seek a court injunction and ask the court to order disgorgement (repayment of ill-gotten gains that is imposed on wrongdoers by the courts) to harmed investors, but the Administrator can NOT ISSUE court orders or injunctions.

Question 207

Which of the following statements concerning open-end mutual funds is NOT accurate?
1) they may close off purchases to new investors when assets reach a specified amount
2) shares trade either over-the-counter or on the NYSE
3) management fees are never covered by sales charges and 12b-1 fees

Answer 207

shares trade either over-the-counter or on the NYSE

Investors of an open-end fund redeem their shares for NAV; they do not have to trade them with other investors as in NYSE.

Management fees are a separate line item under operating expenses. Sales charges and 12b-1 fees cover the cost of marketing/selling the shares to investors.

Open end funds can sell unlimited number of shares but for management purposes may choose to

Closed end funds on other hand trade in daily market on NYSE at auctioned prices and are leveraged with Preferred stock and bonds

Question 208

Use the following information to determine the market price for XYZ common stock:

Dividend: $2.00 Dividend Payout: 33.3% P/E ratio: 20:1

Answer 208

$120.00

first, find the earnings-per-share for XYZ. If $2.00 is a payout of 33.3%, the earnings must be $6. The P/E of 20 means the stock trades for 20 times more than the earnings of $6 per share. 20 times $6 = $120 per share.