Exam #1 Missed Questions Flashcards

Question

A variable annuity prospectus includes an AIR illustration using a 5% rate. This means that the: A purchaser is guaranteed a minimum 5% annual return B annuity payment is guaranteed to grow at a minimum of 5% per year C return could be less than 5% D sales charge will be no higher than 5%

Answer 1

The best answer is C. The AIR in a variable annuity prospectus is the "Assumed Interest Rate." It is a conservative illustration of how much the contract holder will receive in payments if the separate account grows at the AIR. If the account grows faster than the AIR, the payments increase. If the account grows slower than the AIR, the payments will decrease.

Answer 2

The best answer is D. Consider this to be a learning question. All of the statements are true. In order to recommend a variable annuity to a customer, the representative must have a reasonable basis to believe that the: customer has been informed, in general terms, of the material features of the product; customer would benefit from one or more of the product's features; and particular variable product as a whole, the underlying separate accounts to which funds are allocated, and riders to the policy, are suitable. The representative must sign a statement that all required representations and determinations were completed.

Answer 3

The best answer is D. Distributions from Coverdell Education Savings Accounts must stop when the beneficiary reaches age 30. Any unexpended funds can be transferred to another related beneficiary (under age 18) for his or her qualified education expenses.

Answer 4

The best answer is C. Leverage is the use of debt to finance a purchase. Corporation A needs an additional $200 million to buy the stock of Corporation B. To do so, it would borrow the money from a large bank. Note that the loan from the bank might be collateralized, or it might not, so Choices A and B could be correct answers, but Choice C is clearly the best of the choices offered.

Answer 5

The best answer is D. The Bond Buyer 11 Bond index contains 11 G.O. bonds rated AA or better. The other indexes contain lower rated (A) issues.

Answer 6

The best answer is B. When a municipal syndicate member sells to the public, he earns the "total takedown," which is the total of the selling concession plus the additional takedown. In this case, the syndicate member does not earn the total takedown because the bonds were sold through a selling group member. Out of the total takedown of $35, a selling concession of $20 is given up to the selling group member, leaving the syndicate with the additional takedown of $15.

Answer 7

The best answer is A. A "wrap" account is not defined as a brokerage product. Any flat annual fee account is defined as an "advisory product" and the firm must be a registered investment adviser to sell them. The representative that sells them, in addition to being registered as an agent of the broker-dealer, must also register as an agent of the investment adviser firm. There is no Federal registration of investment adviser representatives. Only the investment adviser firm may be required to register with the SEC (and only if its assets under management exceed $100 million). Any investment adviser representative is State-registered and must pass either the Series 65 or Series 66 exam.

Answer 8

The best answer is B. The FINRA IPO rule lists "restricted purchasers" that cannot buy common stock IPOs from underwriters. These are basically industry insiders, including member firms, their officers and employees, fiduciaries to member firms such as outside attorneys retained by broker-dealers, and institutional portfolio managers that are buying for their personal accounts. Investment clubs are not on the restricted list - they can buy common stock IPOs. One could argue that an "investment club" could be formed by industry insiders to get around the rule, but FINRA addresses this by stating that any account in which an industry insider has a greater than 10% ownership interest is restricted.

Answer 9

The best answer is D. Under the FINRA 5% Policy, commissions and mark-ups in exchange and over-the-counter transactions must be fair and reasonable, with 5% being a guide, not a rule. Among the things considered in determining the amount to charge are the difficulty of the trade; the level of service provided to the customer; and the dollar amount of the transaction. All commissions or mark-ups are based on the current market value of the security; not the cost of the security to the dealer.

Answer 10

The best answer is C. Under MSRB rules, a municipal firm is permitted to offer a security that it does not own as long as the firm is prepared to sell that security at the quoted price (the MSRB states that the dealer must know that the bond can be acquired - this is the equivalent of a car dealer selling you a new car that the dealer does not have on the lot. As long as the car dealer knows where the car can be purchased, say from another dealer, then it can be sold to you). Any yield quoted must state whether the yield is the coupon rate, yield to maturity, or yield to call date. Current yield is thought by the MSRB to be somewhat misleading and may not be shown unless the yield to maturity is also shown.

Answer 11

The best answer is C. This question is trying to confuse the MSRB gift limit with the MSRB Political Contribution Rule - and neither one applies in this scenario! The Political Contribution rule prohibits MFPs (Municipal Finance Professionals) from making a contribution of more than $250 to an elected official's campaign in which the MFP is entitled to vote. If this occurs, the municipal firm is banned from doing municipal securities business with that municipal issuer for 2 years. This situation is not a campaign contribution. The MSRB gift limit of $100 does not apply to business entertainment - which is what this is. The requirement here is that the registered representative be with the client during the period of entertainment (which is the case here) and the entertainment can not be too excessive nor too frequent. Finally, the entertainment must comply with the firm's policies and procedures - which is the case here because the firm is hosting the event.

Answer 12

The best answer is A. Straight line amortization is an equal annual "write-off" of the bond premium over the life of the bond. The annual amortization amount reduces taxable interest income on corporate bonds and non-taxable interest income on municipal bonds. Each year, the amortization amount reduces the cost basis of the bond; so that at maturity, the bond is valued at cost and no tax deductible capital loss results. For bonds with a fixed coupon rate, since the annual amortization amount is the same, the annual reported interest income is the same each year.

Answer 13

The best answer is A. The accrued interest is added to the amount that the buyer must pay on the confirm; accrued interest is added to the amount that the seller will receive on the confirm. Accrued interest is not included in the cost basis or sale proceeds for tax purposes. It is an offset to the buyer's interest income received for that year; it is an addition to the seller's interest income received for that year for tax purposes.

Answer 14

The best answer is B. Pension plans are "tax qualified" retirement plans. Earnings on securities held are tax deferred; so there is no benefit to investing in municipals, which have lower rates because their interest income is exempt from Federal income tax. Investments would be made in corporate and government bonds, both of which have higher rates because their interest income is taxable by the Federal government.

Answer 15

The best answer is B. The premium on municipal premium bonds must be amortized over the bond's life, but is not deductible for tax purposes. The yield on this bond consists of 2 components: the annual 6.50% coupon rate and the annual 1% loss of the premium (20 point premium amortized over 20 years = 1 point loss per year). Since there is no tax deduction for the annual loss, the net return each year, after tax, is 5.50% (6.50% coupon - 1.00% annual loss = $55 per year). The bond's average value over its life is $1,100 ($1,200 purchase price + $1,000 redemption price / 2). The after-tax yield to maturity is: $55 / $1,100 = 5.00%. Thus, after considering all taxes, the basis quoted for a municipal premium bond will be the return received by the investor. In contrast, for a municipal discount bond, after considering all taxes, the return received by the investor will be lower than the stated basis because the portion of the investment return attributable to the market discount is taxable.

Answer 16

The best answer is D. When a put is purchased on a stock on the same day that the stock is bought, the put is said to be "married" to the stock position. The only reason the option was purchased was to protect the customer against loss if the market for the stock fell. It was not purchased to speculate in the market. The IRS treats a "married" put as part of the cost basis of the stock. Notice that, therefore, the put premium cannot be deducted as a capital loss if the put expires worthless; instead, it has increased the stock's cost basis and will reduce any potential capital gain, when, and if, the stock is sold. As one would expect, this is the tax treatment that is most beneficial to the IRS and least beneficial to the investor. The cost of the stock is $36 + $6 premium = $42 per share. When the stock is sold the customer reports a capital gain or loss based on the sale price of the stock.

Answer 17

The best answer is A. The interest earned by holders of foreign government securities who reside in the United States; and any capital gains on these holdings; are subject to both Federal Income tax and to state and local income tax.

Answer 18

The best answer is A. The interest earned by holders of foreign government securities who reside in the United States; and any capital gains on these holdings; are subject to both Federal Income tax and to state and local income tax.

Answer 19

The best answer is C. Diversification of a portfolio reduces market risk; and also reduces the variability of investment returns. It does not affect marketability risk - that is, how difficult is it to liquidate given position in the portfolio.

Answer 20

The best answer is C. The Value Line Investment Survey rates 1,700 stock issues that it follows. Standard and Poor's rates both bonds and individual stock issues. Member firm research departments produce reports that rate individual stock issues. Morningstar is a ratings service that rates mutual fund performance. As a minor part of its business, it rates some individual stocks, but does not cover nearly as many as the other choices listed.

Answer 21

The best answer is B. When prices are rapidly falling, "first-in, first-out" accounting for inventory will result in the lowest reported profit. This occurs because the "older" more expensive inventory is the first to be taken out of inventory and matched to sales revenue when a sale occurs, while the "newer" less expensive inventory stays in inventory and is taken out and matched to revenue after the older (more expensive) items are depleted. (For those of you with a sense of humor, FISH stands for "First In, Still Here" - a jokey term for inventory that is slow to move.)

Answer 22

The best answer is C. In inflationary periods, interest rates rise. As interest rates rise, issuers are less likely to sell fixed income securities - it costs them more to finance. If issues are sold, issuers are likely to sell callable issues. Callable issues are generally sold in periods of high interest rates, so the issuer can call in the securities if interest rates fall subsequently.

Answer 23

The best answer is D. The Advance / Decline Theory measures the relative strength of the market by comparing the number of issues advanced to the number of issues declined and is a technical indicator. The Price / Earnings ratio measures how many times the market price of a stock is relative to its earnings. This is a fundamental factor. The "Efficient Market" Theory holds that prices of securities in the market fully reflect all publicly available information, so that undervalued or overvalued securities should not exist. Thus, securities selection based on any type of analytical method is irrelevant. The Confidence Index is not a technical indicator - rather it is a fundamental indicator of consumer sentiment.