Practice Questions Flashcards
- Who establishes fiscal policy?a. The Senate
b. The Ways and Means Committee
c. The Federal Reserve Board
d. Congress and the President
d. Congress and the President
Congress and the President determine where tax revenue will be spent. This is called fiscal policy. (6-21)
v Which of the following statements regarding mutual fund IA compensation is CORRECT?
a. Mutual fund managers earn a portion of the profits generated by the portfolio.
b. Mutual fund managers earn a portion of the 12b-1 fee.
c. Mutual fund managers are paid based on assets under management.
d. Mutual fund managers are paid a percentage of the sales charge not to exceed 25 basis points.
c. Mutual fund managers are paid based on assets under management.
Mutual fund managers are compensated based on a percentage of assets under management (the management or investment advisory fee). Fund managers are not compensated by a sales charge or 12b-1 fee. (3-11, 3-12)
v Jake and Louise are purchasing shares of a mutual fund through a contractual plan and have chosen the joint tenants with right of survivorship form of ownership. They also elect to purchase plan completion insurance. Should Jake die prior to the completion of the plan, which two of the following would occur?
I. Louise would inherit the shares. II. The custodian would inherit the shares. III. Louise would receive the proceeds of the plan completion insurance. IV. The custodian would receive the proceeds of the plan completion insurance.
b. I and IV
I. Louise would inherit the shares
IV. The custodian would receive the proceeds of the plan completion insurance.
When a contractual plan has plan completion insurance, proceeds from the insurance would be paid to the plan’s custodian. The beneficiary would then inherit the shares in the paid-up plan. (4-34, 4-35)
PLAN COMPLETION INSURANCE
A declining-term insurance policy purchased by the owner of a contractual plan. Should the owner die, the insurance policy will pay the policy’s amount to the custodian bank for the purpose of completing the contractual payments
v Rank the following investments in their order of safety from highest to lowest.
I. Common stock of Henco Industries
II. A Henco Industries 5% senior debt instrument that is currently in default
III. Preferred stock of Henco Industries
IV. A Henco industries subordinated debenture that is current on all debt service payments
a. I, II, III, IV
b. I, III, IV, II
c. II, IV, III, I
d. IV, III, II, I
c. II, IV, III, I
II. A Henco Industries 5% senior debt instrument that is currently in default
IV. A Henco industries subordinated debenture that is current on all debt service payments
III. Preferred stock of Henco Industries
I. Common stock of Henco Industries
This question is asking you to rank the investments from most senior (most safe) to most junior (least safe). Common stock is the most junior so that ranks fourth. Preferred stock is also equity so that ranks third. Subordinated debt is junior to senior debt, so those investments rank second. The senior debt is considered the safest, due to its payment priority status (even though the 5% senior bond is currently in default in this question) and it ranks first. If the company eventually goes out of business, the senior bondholders are paid off first, making this the safest investment choice. (1-8)
v Bedrock Insurance Company offers life and health insurance, as well as investment products, through its broker-dealer subsidiary. Bedrock Insurance is currently bankrupt. Who would be least affected by this situation?
a. Term policyholders b. Universal policyholders c. Variable annuity participants d. General creditors
c. Variable annuity participants
Variable annuity assets are held in a separate account, which are segregated from the other assets of the insurance company. This leaves insurance policyholders and general creditors facing the financial risk. (8-7)
VARIABLE ANNUITY:
A contract issued by an insurance company where the annuity premium (a set amount of dollars) is immediately turned into units of a portfolio of investments. Upon retirement, the policyholder is paid according to accumulated units whose dollar value varies according to the performance of the investments in the separate account. Its objective is to preserve, through stock investment, the purchasing value of the annuity which otherwise is subject to erosion through inflation.
v The purchaser of a variable life insurance policy bears which of the following risks?
a. The death benefit may fall to zero due to poor market performance. b. The policy may have no cash value if the separate account performance is negative. c. The insurance company may increase the premiums if the investment performance of the separate account is poor. d. The increasing cost of doing business may force the insurance company to raise expense charges against the separate account.
b. The policy may have no cash value if the separate account performance is negative.
The cash value of a variable life insurance policy increases or decreases in relation to the performance of the separate account. Poor performance could cause the cash value to decline to zero. Although the death benefit can also increase or decrease, it may never fall below a set minimum. The premiums for variable life policies are fixed, unlike those for variable universal life (flexible premium variable life) which can be adjusted by the purchaser. An expense guarantee clause in life insurance contracts prevents the insurance company from raising expense charges for the administration of the policy. (7-13)
VARIABLE LIFE INSURANCE
A type of permanent life insurance that attracts individuals who want the potential for greater death benefits and higher cash value than are available through traditional insurance products. This is possible because the death benefit and cash value will vary based on the performance of the separate account. See also: Separate Account
VARIABLE UNIVERSAL LIFE INSURANCE
An insurance policy that combines the flexibility of universal life insurance with the investment aspect of variable life insurance. See: Universal Life Insurance and Variable Life Insurance.
v A registered representative at Benchley Partners has, through an incoming fax, become privy to inside information. He passed the information on to a friend who was skeptical of its validity. The friend did not trade based on the information. Is the RR guilty of insider trading?
a. Yes, any transfer of material, nonpublic information is insider trading. b. Yes, unless he passes the information on to all of his clients. c. No, because there must be a transaction for there to be an insider trading violation. d. No, because insider trading only covers passing information to immediate family.
c. No, because there must be a transaction for there to be an insider trading violation.
According to SEC regulations, a transaction must be completed for insider trading to occur. In this case, the friend is a tippee and must treat the information as inside information. (10-24)
- The investment adviser of ABC fund usually invests a high percentage of the fund’s assets in growth stocks. The adviser now expects growth stocks to perform poorly in the market because of a recession. Which two of the following strategies could the manager employ to react to this situation?I. Sell growth stocks short
II. Buy more growth stocks on margin
III. Buy defensive stocks
IV. Sell some growth stocks and invest in money-market instrumentsa. I and IV
b. II and III
c. II and IV
d. III and IV
d. III and IV
III. Buy defensive stocks
IV. Sell some growth stocks and invest in money-market instruments
Mutual funds are not generally permitted to sell short or buy on margin. If the fund manager bought more equities, the manager would probably select stocks in the defensive category such as tobacco, beverage, candy, and supermarket issues. Some proceeds could also be placed in money-market instruments until a buying opportunity arose in growth stocks. (3-11)
MONEY MARKET
The market for short-term debt instruments maturing in one year or less. Money market instruments include T-bills, Commercial Paper, Bankers’ Acceptances, CDs, Repos, and Federal Funds.
v When sent to a client, which of the following must be preceded or accompanied by a prospectus?
a. A brochure describing how mutual funds in general work b. A tombstone ad for a new mutual fund being offered by the XYZ fund complex c. An omitting prospectus advertisement for the Cerebral Growth Fund d. Supplemental sales literature for the bond mutual funds in the Flyer Group family of funds
d. Supplemental sales literature for the bond mutual funds in the Flyer Group family of funds
Supplemental sales literature may only be used in the post-effective period and must be preceded or accompanied by a prospectus. These requirements do not apply to generic advertising, tombstone ads, or omitting prospectus ads. The latter two types of ads are often published in newspapers. (10-17, 10-19)
