Kaplan Random

Question 1

What is the primary feature in Preferred Stock for most investors?

Answer 1

For most investors, the primary feature of Preferred Stock is it’s fixed dividend.
-Consequently, Preferred Stock is usually purchased for income so it is more sensitive to changes in interest rate’s than Common Stock is

Question 2

What is a 2 for 1 stock split?

Answer 2

In a 2 for 1 stock split, the number of outstanding shares is doubled and the price is halved.

The total market value of the issuers stock therefore remains the same.

Question 3

Nominal Yield

Answer 3

The interest stated on a bond.

DOES NOT CHANGE

Question 4

Current Yield

Answer 4

Current Yield value varies.

The current yield equals the annual interest return divided by the CURRENT market price

ANNUAL DIVIDEND divided by the current market price!

Question 5

Look out for statements about current yield when they give you the quarterly dividend…current yield is ANNUAL dividend divided by current value so if the question shows a quarterly dividend or anything but annual be sure to not forget that math before dividing by current value

Answer 5

Look out for statements or questions where they’re asking for current yield but state the quarterly dividend or a dividend less than the annual amount…Current Yield is ANNUAL dividend divided by the CURRENT market price

Question 6

How are Variable Annuity payments during the annuity pay out taxed?

Answer 6

Only the amount that represents investment income is subject to tax

It is taxed at an ordinary income rate

Question 7

Holding a Position in a security

Answer 7

Clients hold positions

They are either LONG
- which means they own it

Or they are SHORT
- which means they’ve borrowed it to sell

Question 8

Statutory Voting

Answer 8

Statutory Voting allows investors one vote per stock share they own for each director position to be filled.

I.E. An investor has 200 shares of common stock.

There are eight candidates running for five vacancies on the board.

The investor has 1,000 votes of which 200 can be cast for each of the five vacanicies vacancies

Question 9

Mutual Funds use what pricing?

Answer 9

Mutual funds use FORWARD PRICING.

This means that you don’t know what the price per share is whether purchasing or redeeming until the next calculated price…

So if the morning price announced at $10 was the last announced price and you decide to sell that afternoon you don’t know what you’ve sold for until the next price is announced after your decision

Question 10

What are GO Bonds?

Answer 10

GO Bonds- General Obligation Bonds
-also known as “full faith and credit bonds”

These are bonds backed by the general taxing power of the issuer

Examples of GO Bonds Include School Bonds, Sewer Bonds, Street Bonds etc

Question 11

What are IDR’s?

Answer 11

IDR’s- Industrial Development Bonds

Proceeds from these bonds are used by state or municipal authorities to finance construction of industrial facilities to be leased or purchased by a private company.

The Bonds are backed by the credit of the private company. Often NOT considered an obligation of the issuing municipality.

The interest received on IDR’s may subject to federal tax depending on the use of monies raised by the leased facility(public or private)

Question 12

Current status of accounts in Qualified plans must be updated to all employees how often?

Answer 12

At least Annually

Question 13

A Round Lot equals?

Answer 13

100 shares of stock

Common stock trades in round lot’s of 100 shares each

Stock is generally sold in Round Lot’s (100shares)

Question 14

Investors purchase stock at the “ask” price

Answer 14

Investors purchase stock at the “ask” price

Question 15

Insider Trading Penalties

Answer 15

Civil Penalties
- up to 1 Million Dollars or three times the profit made or loss avoided whichever is greater

Criminal Penalties
- Can include a jail sentence of up to 20 years

Question 16

Bond Payments

Answer 16

Bonds are paid semi annually..

Example to look for is “last payment” at maturity questions…don’t automatically add the full annual yield because the final payment at maturity would only include the final “semi annual” dividend payment….

Question 17

Call

Answer 17

The right to by a security at a certain price for a certain amount of time.

I might by a call on a stock I’m looking at that I want if it get’s to the right price…

Question 18

Put

Answer 18

The right to sell a security at a certain price for a certain amount of time…

If I own a stock I might put a put on it so if it get’s to a point I like the profit it sells automatically or if it get’s too low I sell automatically…

Question 19

Credit MAY NOT be extended on the purchase of Mutual Fund Shares

Answer 19

Credit MAY NOT be extended on the purchase of mutual fund shares

Question 20

Non-Dilution/Anti-dilution Feature

Answer 20

Anti/Non dilution is a feature that can be offered on Convertible Bonds

Essentially it lowers the conversion price in the even that the company issues a stock dividend or split in order to increase the number of shares to the investor to keep the bond holder whole

Question 21

After 3 years, how much can an insured borrow against the cash value of their Variable Life Insurance?

Answer 21

After 3 years a minimum of 75% must be available for the insured to borrow from

Question 22

MEC- Modified Endowment Contract

Answer 22

Can be the result of over funding a variable life insurance policy

Once Defined an MEC(modified endowment contract) any cash removed from the policy in the form of loans, partial surrenders or withdrawals are subject to ordinary income tax and a 10% penalty

Question 23

Index Annuities

Answer 23

Index Annuities are basically fixed annuities as they provide a guaranteed minimum earning.

Classified as strictly insurance products so you only need an insurance license to sell them.

3 Types

1. Rachet or annual reset method
   - compares the changes in the index from begining of year to the end.
2. The High Watermark method
   Looks at the index periodically. Advantage is it views from the highest to the beginning. Can be a disadvantage if the client Surrenders it early
3. Point to Point Method
   Looks at beginning and end dates. Can be a disadvantage if the client surrenders early

All 3 are long term investments that typically come with early surrender charges as a percentage or the amount of interest credited to the EIA can be reduced

Question 24

Which Securities Market does the Securities Act of 1933 apply?

Answer 24

Primary Market

The Securities Act of 1933 covers the registration and disclosure requirements regarding new issues. The New Issue Market is also referred to as The Primary Market

Question 25

Which Investments are NOT permitted in Keogh Plans?

Answer 25

Investments NOT permitted in Keogh Plans are:
Commodities
Collectibles and Antiques
Precious Metals(other than U.S.Gov Gold and silver coins)
Uncovered Options

Question 26

If an Investor purchases a Treasury Note quoted at 101.24 how much do they pay?

Answer 26

101.24 would equal $1,017.50.

the 01 equals one percent of a bond price(1,000) which would be equal to $10. The .24 would be 24/32 which would equal 3/4 of 1 percent which would be $7.50

Don’t forget about bonds selling in “32’s”