Practice Test Flashcards
1
Q
Place the following mutual fund dividend distribution dates in the order in which they occur
Payment Date
Record Date
Declaration Date
Ex-Dividend Date
A
Declaration Date
Record Date
Ex- Dividend Date
Payment Date
2
Q
Of the following statements, which is true of an investment advisor and his role within an investment company?
a. Primary compensation is dictated as a percentage of the funds Profits
b. The size of his fee will be affected by the aggressiveness of the funds investment objectives and then also the success with witch they are met.
c. Can be either a company or an individual.
d. May borrow from the fund upon approval of the board of directors
A
b. The size of his fee will be affected by the aggressiveness of the funds investment objectives and then also the success with witch they are met.
The fees of an investment company adviser are affected by the aggressiveness of the fund’s objectives. Its primary compensation is dictated as a percentage of net assets of the fund. The adviser must be a company, not an individual, and he may not borrow from the fund under any circumstances.
3
Q
A Breakpoint sales charge letter of intent
a. Can be backdated to include a previous purchase as long as it’s within the prior 90 days
b. Affords the investor ip to 12 months to meet the investment level they are committing to
c. Provides that if the investor fails to reach the subscribed level, the sales charge is simply adjusted upward.
d. Acts a binding contract for the fund.
A
a. Can be backdated to include a previous purchase as long as it’s within the prior 90 days
&
c. Provides that if the investor fails to reach the subscribed level, the sales charge is simply adjusted upward.
4
Q
Open-end funds charge a sales charge as a cost of distribution. What is the maximum amount they can charge as a percentage of the public offering price.
a. 5.5%
b. 9%
c. 8.5%
d. 7%
A
c. 8.5%
5
Q
An investor would like to invest within a family of funds by moving his money from fund EF to fund DC. Fund EFs shares have a NAV of 9.50 and a POP of 10.25. Fund DCs shares have a NAV of 19.10 and a POP of 19.95. Given that conversion privileges are provided by this fund, at what price will this investor both redeem and purchase the proposed shares?
a. Fund EF at 9.50, Fund DC at 19.10
b. Fund EF at 10.25, Fund DC at 19.95
c. Fund EF at 9.88, Fund DC at 19.52
d. None of the above
A
a. Fund EF at 9.50, Fund DC at 19.10
Conversion requirements dictate that the redemption and purchase must be at the NAV
6
Q
A money Market fund will invest in:
a. Debt securities with maturities less than a year
b. Commercial paper
c. Bankers acceptances
d. All of the Above
A
d. All of the Above
7
Q
Calculate NAV per share for Mutual fund BC:
Assets: 25,000,000
Liabilities: 2,200,000
Shares Outstanding: 4,500,000
a. $5.07
b. $6.04
c. $10.36
d. $5.56
A
a. $5.07
Assets- liabilites = NAV
total NAV/total # of shares = NAV per share
25,000,000-2,200,000 = 22,800,00 NAV
22,800,000/4,500,000= 5.07 NAV per share
8
Q
Which of the following statements describes the primary difference between rights of accumulation and a letter of intent?
a. The sales charge reduction does not apply to previous statements
b. There is no time limit on rights of accumulation
c. Investors can qualify for a reduction in sales charge based on past investments.
d. In calculating whether the investor qualifies, current investments are considered.
A
b. There is no time limit on rights of accumulation
9
Q
How can an investor determine her cost base given that she owns a large sum of shares purchased through different transactions?
a. Share identification
b. First in, first out
c. Average cost
d. All of the above
A
d. All of the above
10
Q
Which of these statements are accurate requirements for a mutual fund prospectus?
a. Sixteen months after publication the prospectus should be disposed of.
b. The fund is required to update information in the prospectus every 12 months
c. The fund should, but is not required to update the information in the prospectus every 6 months.
d. The funds prospectus can be available for up to 18 months from publication.
A
a. Sixteen months after publication the prospectus should be disposed of.
**Note:
The fund SHOULD update the prospectus information every 12 months, but is REQUIRED to update the information every 13 months.
11
Q
What advantage does a Variable Life Annuity have over a WL cash value policy?
A
Deferred taxes. and hedge against inflation.
12
Q
An income-seeking investor is concerned with the possibility of rising interest rates over the next few years. Of the choices listed, his best investment selection would be:
A) Treasury bonds.
B) Treasury bills.
C) Collateralized mortgage obligations.
D) municipal bonds.
A
b.
Treasury bills.
13
Q
A nonqualified deferred compensation plan:
A) does not guarantee that the employer will fulfill its obligation
B) must be offered to all employees
C) must be approved by the IRS
D) guarantees payment to the employee even if the company becomes insolvent
A
a. Does not guarantee that the employer will fulfill its obligation
14
Q
All of the following items require review by a principal of the member firm EXCEPT
A)
independently prepared reprints
B)
form letters mailed to existing customers
C)
a training presentation that is marked for internal use only
D)
form letters mailed to 25 or fewer prospective customers within a 30-day period
A
a. IPRs
independently prepared reprints
15
Q
Your customer is interested in income that is as free of default risk as possible. Which of the following funds would you consider suitable to recommend to him?
A)
A balanced fund that purchases only AA rated bonds or higher.
B)
A fund that specializes in municipal revenue bonds.
C)
The Topley Investment Grade Corporate Bond Fund.
D)
The Ellis Government Bond Fund.
A
D)
The Ellis Government Bond Fund.
16
Q
To which securities market does the Securities Act of 1933 apply?
A)
The OTC market.
B)
Securities traded between accredited investors.
C)
The new issue market.
D)
Listed securities sold on an exchange.
A
C)
The new issue market.
17
Q
Which of the following is a major advantage of a nonqualified variable annuity compared to a mutual fund?
A)
Voting for the board of directors.
B)
Tax deferral.
C)
Diversification.
D)
Receiving dividends.
A
B)
Tax deferral.
A nonqualified variable annuity has the advantage of tax deferral over investing in a mutual fund; the other choices are common to both investments.
18
Q
DMF Company has convertible bonds (convertible at $50) outstanding. The current market value of DMF’s stock is $42. The bond indenture contains an antidilution feature. If DMF declares a 10% stock dividend, the new conversion price will be
A)
higher than $50
B)
$50
C)
the stock’s current market price
D)
lower than $50
A
D)
lower than $50
With an ant dilution feature, the issuer will increase the number of shares available upon conversion if the company declares a stock split or stock dividend. This is done to keep the bondholder whole. Originally, the bond converts to 20 shares ($1,000 ÷ 50), because of the 10% stock dividend, the bond needs to convert to 22 shares, which means the conversion price is reduced to $45.45 ($1,000 ÷ 22 = $45.45).
19
Q
Which of the following is the safest from default risk?
A)
AAA unsecured bond
B)
High-yield bond
C)
Industrial Development Revenue bond
D)
AA secured bond
A
A)
AAA unsecured bond
20
Q
A customer owns 200 shares of ABC Growth Fund, which has a POP of $12 and an NAV of $11. She wants to convert these shares to ABC Balanced Fund, which has a POP of $14.77 and an NAV of $13.66. ABC offers a conversion privilege. At what price will the ABC Balance Fund shares be purchased?
A)
$12.
B)
$11.
C)
$14.77.
D)
$13.66
A
D)
$13.66.
21
Q
An investor has been investing $100 per month for the past three months. The purchase prices were $20, $25, and $10. What is average cost per share purchased?
A)
$15.79
B)
$18.33
C)
$100
D)
$5.45
A
A)
$15.79
see how many shares were bought for each $100 spent.
(100/20: 4. 100/25: 5. 100/10: 10. total of 19 shares.
since there’s 3 months…$300 spent.
so…
$300/19: 15.79.
22
Q
The value of which of the following is used to determine an annuitant’s payment amount during the payout period of a variable annuity contract?
A)
Cost of Living Index.
B)
Accumulation unit.
C)
Dow-Jones Industrial Average.
D)
Annuity unit.
A
D)
Annuity unit.
once you have annuitized, it is made into annuity units.
23
Q
What do qualified and Non qualified plans have in common
A
Both are tax deferred.
24
Q
What are some SUITABLE investments for Individual Retirement Plans:
A
stock and bond mutual funds,
UIT’s
Government securities
25
Where would an investor expect to find closed-end investment company shares traded?
OTC
The exchanges
26
What is the conversion ratio of a convertible bond purchased at par value and convertible at $50?
20:1
The $1,000 par value divided by the $50 conversion price equals 20 shares per bond.
27
If interest rates in general are rising, the price of T-bills should:
Fall.
Like the price of other debt instruments, the price of outstanding T-bills decreases as interest rates rise
28
The Investment Company Act of 1940 requires that a mutual fund do which of the following?
Have 100,000 minimum capitalization.
AND
Provide semiannual reports to shareholders. (every 6 months.)
29
A customer establishes a nonqualified periodic payment deferred annuity and makes payments for three years. If the customer suddenly dies, which of the following statements correctly identifies the tax consequences to the beneficiary?
The beneficiary must pay ordinary income tax on proceeds exceeding the cost basis.
When an annuitant dies during the accumulation period of a nonqualified annuity, the proceeds exceeding the annuity’s cost basis are taxable as ordinary income to the beneficiary.
30
Which of the following actions comes under the guidelines concerning COMMUNICATION with the public?
I Posting an internal memo giving sales tips to registered representatives
II Distributing a letter to all clients regarding a new mutual fund family
III Distributing copies of a magazine article about investment opportunities to existing customers only
IV. Calling a client to discuss a new investment strategy
A)
II and III
An internal memo is not a public communication. Under FINRA Rule 2210 communications with the public are defined as written, therefore the phone call is not a form of communication with the public.
31
Which of the following statements regarding 403(b) plans is NOT true?
A)
An employer can also make contributions to the 403(b) plan on behalf of the nonworking spouse of an employee.
B)
Employee contributions have both a dollar limit and a percentage of salary limit.
C)
If all contributions are qualified, the employee’s cost basis in the account is zero.
D)
Distributions from a 403(b) plan follow the same distribution rules as those for other qualified plans.
A. An employer can also make contributions to the 403(b) plan on behalf of the nonworking spouse of an employee.
Explanation:
Only employees (not spouses) of 403(b) or 501(c)(3) organizations may be covered under 403(b) plans.
32
During the accumulation period, if the S.A. has a positive rate the value of the accumulation unit will….
go up
go down
stay the same
or exceed the value of the annuity units
go up.
During the accumulation phase, the value of an accumulation unit changes as the current market value of the securities in the portfolio of the separate account changes. When the separate account becomes worth more, the value of the accumulation unit is worth more.
33
Your new client is interested in purchasing corporate bonds. When speaking about the different risks associated with this investment, you explain that reinvestment risk is the risk that, between now and when the bond matures or is called, interest rates will:
Fall.
If interest rates decline, it becomes difficult for bond investors to invest the proceeds from the bond and maintain the same level of income and the same general risk level.
34
Which of the following types of annuity contracts could your customer NOT purchase?
A)
Periodic payment deferred annuity.
B)
Single payment deferred annuity.
C)
Periodic payment immediate life annuity.
D)
Single payment immediate life annu
there is no such thing as a….
Periodic payment immediate life annuity
35
Which of the following investment company portfolios is supervised rather than managed?
A)
Unit investment trust.
B)
Regulated open-end fund.
C)
Real estate investment trust (REIT).
D)
Closed-end bond fund.
UIT.
A unit investment trust buys securities and holds them until redemption or until a specified future date. The securities in the portfolio are not traded, so no manager is needed. A REIT is not considered to be an investment company
36
What’s the difference between Traditional and an IRA?
Traditional gives you current tax year tax deduction. If you think you’re going to need to reduce the amount of income to be taxed, this is a smart move. But if not, then Roth IRA is better.
Money going into a Roth has already been taxed. So when you’re ready to retire, you don’t have to pay taxes on that ever. Also the growth not taxed as long as you hold it for more than 5 yrs.
*Traditional is a qualified plan.
*Roth is a non qualified plan.
37
The Presto Capital Appreciation Fund annual report indicates that the NAV of the fund has increased from $15.65 to $17.03, and its asking price as of the date of the report has actually declined.
Presto must be a(n):
A)
open-end fund.
B)
balanced fund.
C)
dual purpose fund.
D)
closed-end fund.
Closed-END. Look at the “ask”— meaning Supply and demand.
The asking price of a closed-end fund is not determined by its NAV because the fund trades based on supply and demand.
An open-end company’s NAV cannot go up while its asking price goes down.
38
One of the most important functions of a banker’s acceptance is its use as a means of:
facilitating trades in foreign goods.
39
One of the most important functions of a banker’s acceptance is its use as a means of:
facilitating trades in foreign goods.
40
FINRA allows sales charges up to a maximum of:
The maximum allowable sales charge for
mutual funds is 8.5%.
Contractual plans are 9%. (set payments into Mutual funds over time.)
variable annuities: no maximum sales charge.
41
If your customer holds ten KLP 6% bonds, how much money will he receive in total at the debenture's maturity?
A)
$10,000.
B)
$10,300.
C)
$10,200.
D)
$10,600.
B)
$10,300
The holder of 10 bonds will receive $10,000 in principal at maturity. Each bond pays 6% annual interest, or $60. Thus, ten bonds pay a total of $600 per year in two semiannual payments of $300. At maturity, the bondholder will receive the $10,000 face amount plus the final semiannual payment ($10,000 + $300 = $10,300).
42
A client has purchased a variable annuity with a death benefit clause. At the time of his death, he had invested $20,000 and owned 12,420 accumulation units worth $1.72 each. Under the death benefit provision, his beneficiary would receive:
if a client dies during the accumulation phase, his heir or estate will receive the amount of money invested or the current value of the account, whichever is greater. In this case, he had invested $20,000, but the value of the account currently was $21,362 (12,420 units × $1.72 each).
SO you get the greater.
43
The Securities Exchange Act of 1934 covers all of the following EXCEPT:
A)
trading on exchanges.
B)
broker dealers and their representatives.
C)
issuance of corporate securities.
D)
trading of corporate securities.
C)
issuance of corporate securities
The Securities Exchange Act of 1934 (the people and places act) regulates the secondary market. The Securities Act of 1933 (the paper act) regulates the primary market.
44
Cash settlement for a trade occurs...
Same day as the trade date.
45
Regular way for common stock settlement occurs...
T+2 business days
46
A financial reporter notices that the offering price of one investment company’s share is at a 22% discount from the NAV. From this information, he can conclude that the company must be a(n):
Closed-end….
If the ask price of a fund is less than the NAV, the fund must be a closed-end investment compan
47
What is Net Income Investment? NII
(interest received plus dividends received minus expenses).
48
From which of the following is the 12b-1 fee deducted?
asset of the fund; and charged quarterly.
A 12b-1 fee is charged quarterly as a percentage of the average annual assets.
49
What is retail Communication?
any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period
50
If the value of securities held in a fund's portfolio increases, and the amount of liabilities stays the same, the fund's net assets:
A)
stay the same.
B)
decrease.
C)
increase.
D)
are more liquid.
increase.
An appreciation in value of fund assets, without a corresponding increase in liabilities, leads to an increase in the fund’s net asset value (total assets minus liabilities equals net assets).
51
Which of the following communications are subject to principal approval before first use?
A)
Mutual fund summary prospectus
B)
Form letter sent to 10 prospective retail customers every week
C)
Quarter-page advertisement in your local newspaper announcing the opening of a second local branch office
D)
Letter to an insurance company recommending a specific security for investment
B)
Form letter sent to 10 prospective retail customers every week
Form letters or group emails more than 25 retail investors within a 30-day period constitutes retail communication and must be preapproved
*A mutual fund summary prospectus is prepared by the issuer, not the broker-dealer and as such is not subject to approval by the firm.
The announcement of a second location does not promote a product or service of the firm and therefore pre-approval is not required.
52
Where would an investor find a complete list of holdings for a particular mutual fund?
semi annual or annual report
53
What does a statutory prospectus tell?
Investment objectives.
A statutory prospectus will list investment objectives but not holdings.
54
Mr. and Mrs. Smith, both nearing retirement, want to maximize their income. They want to reallocate $100,000 of their $400,000 portfolio of securities for this purpose. Of the possible investment choices below, which would be the LEAST suitable recommendation given their investment objective?
A)
CMOs
B)
Preferred shares of stock
C)
GNMA certificates
D)
AAA convertible corporate bonds
D)
AAA convertible corporate bonds
why?
Convertible bonds offer a lower coupon in exchange for the conversion feature, therefore is not a good choice for maximizing income.
55
The __________________ is the rate of interest banks charge each other on overnight loans.
fed funds rate
56
In proper order, list the four phases of the business cycle.
Expansion
Peak Recession/Contraction
Trough
57
A decline in GDP for two successive quarters is defined as a ____________.
recession
58
What economic theory emphasizes government intervention and the use of fiscal policy to manage the economy?
Keynesian Economic Theory
59
What economic theory emphasizes controlling the money supply to manage the economy?
Monetary Economic Theory
60
A bond convertible at $50 is trading at $1,200. For parity, where should the stock be trading?
Conv. ratio = $1,000 ÷ $50 = 20 sh. The stock needs to trade at $60 to be at parity with the bond ($1,200 ÷ 20 = $60).
61
____________ occurs when the supply of goods exceeds the demand for goods
Deflation
62
Deflationary periods are characterized by __________________ prices.
falling/decreasing
63
___________ is what occurs when there is “too much money chasing too few goods.”
Inflation
64
The _______________________ is often considered the most important measure of inflation.
Consumer Price Index (CPI)
65
True or False: Covered call writing is a conservative option strategy designed to generate income.
True
66
What is a covered call position?
The sale of a call (obligation to sell) against stock that is owned
67
True or False: Both common and preferred stockholders are offered preemptive rights.
False. Preemptive rights are only offered to common stockholders.
68
If a corporation executes a stock split, is there a resulting gain or loss for existing stockholders?
No, the overall position stays the same. Forward = more shares at lower price; Reverse = fewer shares at higher price.
69
ABC sets a record date of Wednesday, Oct. 19. Would a buyer of ABC on Monday, October 17 be entitled to the dividend?
No, the investor must own (trade settles) on or before the record date. This trade would not settle until October 20.
70
XYZ’s record date is Thursday, May 3. With a regular-way trade, when could Emma sell her stock, but keep the dividend?
On Tuesday, May 1 or later. She must remain the owner at least through May 3 to keep the dividend.
71
Mack, in the 35% tax bracket, is earning 5.4% on a tax-free municipal bond. What is his taxable equivalent yield?
The formula is: Tax-Free Yield ÷ (100% - Tax Bracket %). 5.4% ÷ 65% = 8.3%
72
Rank in order, from highest to lowest, the three yields on a bond priced at a discount.
Nominal Yield, Current Yield, YTM
73
A bond has a 12% coupon and is trading for $1,200. What is a realistic YTM for this bond?
YTM must be less than 10% since the current yield ($120 ÷ $1,200) is 10%.
74
What does a normal, positive, ascending, or upward sloping yield curve indicate
inverted (negative/descending)
75
True or False: A flat yield curve reflects both long and short-term yields being the same.
True
76
As it relates to securities law, what does the acronym USA mean?
The Uniform Securities Act, also known as the blue-sky laws
77
Are ADR holders exposed to currency risk?
Yes, since these securities will track the underlying stock.
78
The NAV of a mutual fund is like the _____ price of a stock.
The POP of a mutual fund is like the _____ price of a stock.
NAV----> Bid
POP ---> Ask
79
Issued stock - Treasury Stock= __________
Outstanding Stock
80
Who are considered the owners of a corporation
common and preferred stockholders (holders of equity)
81
Name Two issues on which common stockholders can vote.
Appointments to the Board of directors, stock splits
82
_________ stock pays higher than average dividends.
income (Utility Companies)
83
_____ stock is resistant to recession.
defensive (health care, utilities, et
84
Warrants are a ______-term right to buy a stock at a preset price
Long
85
True or False: Warrants are generally attached to the delivery of another security (stock or bond).
True: they are usually added as sweeteners to bonds
86
Rights are a ______-term instrument allowing holders to buy additional shares at a discounted price.
short
87
What is the advantage of existing stockholders receive through tradings rights offerings?
The ability to maintain their percentage of ownership (to avoid ownership dilution), and buy additional shares at a discount
88
$______is normally the par value for preferred stock.
$100
89
The formula for finding conversion ratio on convertible preferred stock is: ______ ÷ ____________
Par ÷ Conversion Price
(par for preferred is $100)
90
What is the proper order order of liquidation for a corporation at bankruptcy?
Unpaid workers, IRS, secured creditors, unsecured creditors, preferred, and then common.
91
Bondholders are also referred to as ____________.
Creditors
92
$____is the par value for bonds
$1,000
93
Calculate the price of a Corporate bond quoted at 98 and 3/4.
987.50
94
What are two synonymous terms for a bond’s interest rate?
Coupon Rate; Nominal Yield
95
A bond with an 8% coupon rate would pay how much interest a year?
$80, par X rate (1,000 X 8%)
96
Bond interest is stated _______ and paid ________
annually, semi-annually
97
what is the formula for calculating current yield?
Annual Interest + Current Market Price
98
What does yield-to-maturity (YTM) take into account that current yield does not?
Discount/premium made or lost at maturity, reinvestment of interest at YTM, and time value of money
99
When discussing a bond, the YTM may also be referred to as _______.
Basis
100
what is the highest credit rating?
AAA for Standard and Poors, Aaa for Moodys
101
Given a yield change, ____________ bonds move more in price.
long-term
(lower coupon or longer duration are also correct.)
102
Define real interest rate (real rate of return)
Interest rate minus the inflation rate (e.g., Bond yielding 8% when inflation is 3% has a real interest rate of 5%).
103
What does one basis point represent as a percentage?
.01% (one one-hundredth of one percent.)
104
True or False: Investors may exercise a bond’s call privilege any time after issuance.
False. Only issuers may exercise the call privilege after the call protection period has passed.
105
The __________________ represents the amount above par that issuers pay to redeem bonds early.
Call Premuim
106
____________ refers to a situation where an issuer sells a new bond to pay off the debt of an old bond.
It would most likely occur when interest rates have _________.
refunding
fallen
107
What U.S. Government agency, created by the ‘34 Act, enforces securities laws?
The Securities and Exchange Commission (SEC)
108
The criminal penalties for insider trading by individuals is a maximum of $____________ and/or ____ years in prison.
$5 million and/or 20 years
109
What is the criminal penalty for insider trading by corporations?
$25 million per violation
110
____% of earned income up to $_______ is the maximum contribution to an IRA.
100% of earned income up to $6500 is the maximum contribution to an IRA.
111
What are some of the acceptable investments for IRA contributions?
Stocks, bonds, mutual funds, and CDs
112
Rollovers must be completed within ____ days.
Only one rollover is allowed per rolling ____ months.
60 days
12 months
113
There is a ____% penalty for early withdrawals from an IRA.
10%
114
How is a Roth IRA contribution different from a Traditional IRA contribution?
The Roth IRA contribution is always made on an after-tax basis.
115
How are withdrawals from a Roth IRA treated for tax purposes?
Withdrawals will be tax-free if the account is open for at least 5 years and is not considered an early withdrawal.
116
How are withdrawals from a Traditional IRA treated for tax purposes?
If all contributions were deductible, then the entire withdrawal is taxed as ordinary income.
117
Describe the employees who must be eligible to contribute to an ERISA qualified plan.
Employees who are 21 years or older with one year of full-time service
118
What retirement plans are available to the self-employed?
Keogh Plans and SEPs
119
Contributions to a Keogh plan are solely based on _________________ income.
self-employment
120
529 Plans allow for a 5-year front-end contribution of $85,000, which avoids gift tax.
Individuals may contribute as much as $85,000 to a 529 plan, If they treat the contribution as if it were spread over a 5-year period.
121
A savings plan which funds both elementary and higher education is referred to as the ____________________________.
Coverdell Education Savings Plan.
122
How much may be contributed to a Coverdell each year?
An after-tax contribution of $2,000 is allowed per year.
123
Is it a 529 Plan or Education IRA that imposes income limitation on the contributors?
The Education IRA (Coverdell)
124
Whose Social Security number is listed on a custodial account? (UTGM)
The minor’s
125
Hank is a 71-year-old who has a Roth IRA. What penalty is assessed if Hank has failed to begin taking distributions?
There is no penalty, since Roth IRAs do not have RMDs.
126
What is the maximum annual IRA contribution for a 58-year-old who only has investment income?
$0, since he has no earned income
127
How much may a married couple earning $325,000 contribute to a Roth IRA?
$0, since the couple’s income exceeds the income threshold
128
In an non-qualified annuity, how is a single distribution taxed?
In an non-qualified annuity, how is a single distribution taxed? Earnings first (LIFO
129
What technique can be used to roll assets from one annuity into another without taxation?
A 1035 Exchange
130
Which federal law created the SEC?
The Securities Exchange Act of 1934
131
Which federal law governs the registration of RRs and their firms?
The Securities Exchange Act of 1934
132
Which federal law governs the registration of new issues?
The Securities Act of 1933
133
Is default possible on a municipal offering?
Yes. Only U.S. Government issues are considered free of default risk.
134
What is a specific risk that may be attributed to a GNMA fund?
Prepayment risk. This is the risk that mortgages may be paid off early.
135
The ___________ bears the investment risk in a defined benefit plan
employer
136
The ___________ bears the investment risk in a defined contribution plan.
employee
137
What is the total capital gain or loss for an investor who purchased 2500 shares of a mutual fund at $17 per share and then sold them at $14 per share.
a. 7500 capital gain
b. 7500 capital loss
c. 2500 capital loss
d. 2500 capital gain
b. 7500 capital loss
$14-$17= ($3)
$3 loss per share
($3) X 2500= $7,500
Given 2500 shares, the investor has incurred a total capital loss of $7500
138
How to find Net Investment income of a mutual fund?
dividend income + interest income - expenses = net investment income
*Short and long term capital gains, as well as average bet assets, are NOT used in the calculation of net investment income for a mutual fund.
139
Given the following information on mutual fund BC, calculate its front end sales charge on an investment of $25,000.
NAV: $7.45
Sales Charge: 6.5%
$1625
investment to be made X sales charge % = Front end sales charge
$25,000 X .065 = $1625
140
Which involves the mutual fund selling its shares directly to investors at the NAV price?
Selling Group
No Load mutual fund
Underwriter
None Of the Above
No Load mutual fund
A no load mutual fund does not charge a sales charge and accordingly can then sell its shares directly to investors at the NAV without the aid of an underwriter. The selling group involves a brokerage firm buying shares at a discount from the POP based on a previous established selling agreement and then going on to sell them ti
141
What is true in relation to investors being given conversion privileges within a mutual fund?
a. investors redeem shares at NAV to then utilize the proceeds for buying shares in a second portfolio (within same family) also at the NAV
b. Investors are waived a sales charge when exchanging money between portfolios within the same fund family if done within 30 days
c. No commissions can be paid for this transaction
d. All of the above
d. All of the above
The conversion transaction is done at the shares NAV, the sales charge is waived if done within 30 days, and no commissions are paid.
142
Given Mutual fund BC, which situational occurrence will not affect a change in its NAV
a. Dividends being distributed
b. Securities being purchased or sold within the portfolio
c. Securities prices , and thus values, increasing or decreasing according to market fluctuations.
d. Bond interest payments are infused into the portfolio
b. Securities being purchased or sold within the portfolio
Securities being purchased and sold within the portfolio will not have a changing impact on the mutual funds NAV. However, dividend distributions, security prices rising and falling, and bond interest payments will change the funds NAV
143
A back end load is a charge that an investor pays at the point of redeeming shares and the amount decreases the longer the investor puts off redeeming those shares. What is another name for this Charge?
Contingent deferred sales charge
* A back-end load charge can also be referred to as a contingent deferred sales charge CDSC. A level load sales charge is based on the NAV, and an asset-based fee is charged quarterly.
144
What investment company can be described as investing in either a fixed or non-fixed portfolio of securities, not actively managed, and offering shares to investor that provide for an undivided interest in those securities?
a. Face-amount company
b. Unit investment Trust (UIT)
c. Real Estate Investment Trust
d. Management investment companies (mutual funds)
b. Unit investment Trust (UIT)
UITs are investments in either a fixed or non fixed portfolio, are not actively managed, and offer shares as a representation of investment interest.
A face amount company has an investor contracting to deposit monies in a lump sum or installments so as to receive a fixed amount of money at some specific date in the future.
Real estate investment trusts are not considered to be an investment company under the Act.
Management investment companies may be open or close-end and are actively managed by an adviser.
145
An investor is looking into investing in Mutual fund BC. How can he calculate sales charge % with only NAV & POP?
NAV $8
POP: $8.50
5.9%
POP-NAV
___________ = Sales Charge %
POP
8.50 - 8.00
____________ = 5.9%
8.50
146
The type of prospectus that details information such as a balance sheet and income statement is:
a. Advertising prospectus
b. Summary prospectus
c. Statement of additional information
d. None of the above
c. Statement of additional information
A statement of additional information such as balance sheet and income statement.
The advertising prospectus is the summary prospectus with additional info regarding past performance.
The most common prospectus given to the majority of investors is known as the summary prospectus
147
The mutual fund underwriting process includes all EXCEPT:
a. the underwriter buys shares from the fund at the NAV
b. The POP is = to the NAV + underwriter sales charge
c. The board of director appoints the underwriter
d. The underwriter buys shares to fill customer orders as well as to hold inventory
d. The underwriter buys shares to fill customer orders as well as to hold inventory
Underwriters only purchase shares with the intent to fill current orders & may not purchase to fill inventory.
Underwriters do buy shares at NAV (The POP is the NAV + underwriters service charge)
The board of directors are responsible for appointing the funds underwriter
148
According to the Securities Act of 1933’s regulations, a broker-dealer may do which of the following during the cooling-off period?
A
Send clients sales literature
B
Accept client orders
C
Give clients a prospectus
D
Give clients a red herring
D
Give clients a red herring
During the cooling-off period, broker-dealers may not accept orders, solicit orders, provide sales literature or prospectuses. The prospectus is only available once the security’s registration has gone effective. The broker-dealer can give interested parties a red herring, preliminary prospectus, and accept indications of interest during the cooling-off period.
149
A customer wishes to open a joint account with their spouse. The spouse could not attend the meeting with the registered representative due to a work commitment. Which of the following statements concerning who must sign the new account form is correct?
A
A principal must sign the form
B
The introducing registered rep must sign the form
C
Both spouses must sign the form
D
Either spouse can sign the form
A
A principal must sign the form
According to FINRA rules, the only signature required on a new account application is that of the approving principal. Industry rules do not require the customer's signature, nor the signature of the registered representative on the new account application.
150
Regarding new issues, which behavior would be prohibited?
A
Using a final prospectus to solicit orders after the registration is effective
B
Sending notices to customers after the registration has been filed but before it is effective, giving the basic facts of the new issue
C
Sending a preliminary prospectus to solicit interest from customers after the registration has been filed but before it is effective
D
Contacting potential customers regarding a new issue before the registration statement has been filed
D
Contacting potential customers regarding a new issue before the registration statement has been filed
No communications with the public are allowed before the registration has been filed.
151
Which of the following is not true regarding a withdrawal from a variable annuity during the accumulation phase?
A
Withdrawals prior to age 59½ may be subject to a 10% penalty
B
All earnings withdrawn are taxed as ordinary income
C
Withdrawals are taxed as capital gains
D
Withdrawals are taxed on a LIFO basis
C
Withdrawals are taxed as capital gains
Withdrawals from a variable annuity during the accumulation phase are taxed on a LIFO basis. That means all withdrawals are withdrawals of earnings first. Those earnings are taxed as ordinary income, never as capital gains. Withdrawals prior to age 59½ could be subject to a 10% penalty.
152
2 individuals wish to open a joint account to purchase securities, with a provision that should 1 of them die, their interest would automatically be transferred to the other. What is this account known as?
A
Tenants in common
B
Tenants with no rights of survivorship
C
Joint tenants with right of survivorship
D
Transfer on death
C
Joint tenants with right of survivorship
With joint tenants with rights of survivorship, if 1 party dies the account will transfer to the surviving owner or owners. With tenants in common, each tenant has a fixed percentage ownership, which goes to the deceased tenant's estate.
153
Which of the following statements is true regarding the prospectus requirement?
A
A prospectus will state the contract's guaranteed minimum rate of return
B
Variable life and annuity contracts are not regulated by securities laws and do not need to be sold with a prospectus
C
The prospectus of a variable life or annuity contract details the fees and risks associated with the product
D
The prospectus of a variable life or annuity contract must be furnished to the customer at any time after the time of sale
C
The prospectus of a variable life or annuity contract details the fees and risks associated with the product
Because of their variable component, variable life and annuity contracts are securities. They are regulated by securities laws and must be sold with a prospectus. A customer must be furnished with a copy of the prospectus prior to or at the time of the sale and it cannot be altered in any way. The prospectus will detail all fees and risks associated with the product and explain the various investment choices available.
154
The risk that an investment's value will change inversely to changes in the interest rates in the general economy is what type of risk?
A
Legislative
B
Reinvestment
C
Interest rate
D
Credit
C
Interest rate
The risk that an investment's value will change inversely to changes in the interest rates in the general economy (as interest rates rise, bond prices fall, and vice versa) is interest-rate risk. Interest-rate risk affects the value of bonds more directly than stocks, and it is a major risk to all bondholders.
155
Under FINRA’s reasonable basis standard of suitability, registered representatives must have a reasonable belief that a recommendation of an investment in a variable annuity contract meets all the following standards, except:
A
Any riders purchased are suitable and the benefits of the riders outweigh their costs
B
Disclosures include all fees, penalties, and surrender charges
C
The customer will benefit from the features of the contract
D
At least some of the contract is suitable based on the client’s objectives, risk tolerance, age, and tax situation
D
At least some of the contract is suitable based on the client’s objectives, risk tolerance, age, and tax situation
FINRA rules require salespersons to have a reasonable basis to believe that: o All information has been disclosed, and the customer understands all the features of the annuity, including fees, surrender charges, tax penalties for withdrawals prior to age 59½, and the features associated with any available riders o The customer will benefit from the VAs features, and those benefits outweigh the associated costs o The entire contract, including subaccounts and riders, is suitable based on the client’s objectives, risk tolerance, age, and tax situation Note that the entire contract must be suitable and not just some of it.
156
An investor purchased 1,000 shares of QPR stock at $35 per share 10 years ago. The investor died 18 months ago, when the stock was worth $50 per share. In their will, the securities were left to the investor's niece, who sold the stock for $52 per share one month ago. Which of the following are true regarding the tax consequences of the transaction?
A
There is a short-term capital gain of $2 per share
B
There is a long-term capital gain of $17 per share
C
There is a short-term capital gain of $17 per share
D
There is a long-term capital gain of $2 per share
D
There is a long-term capital gain of $2 per share
Securities that are inherited have a basis equal to the value of the shares at the time of the decedent's death. The holding period for the securities is long-term regardless of how long either the decedent or the recipient holds the shares. At death, the stock was worth $50 per share and was later sold for $52. This generated a long-term capital gain of $2 per share.
157
Which of the following best describes the term beta?
A
The volatility of an investment versus its peer group
B
A description of a fund that has not yet been tested in the marketplace
C
A measure of a particular security's volatility in the market
D
How much the market's movement accounts for the return of a portfolio
C
A measure of a particular security's volatility in the market
Beta is a measurement that is used to provide a gauge of the volatility of a particular security. It is generally used to determine how extreme the ups and downs are likely to be in an investment. The higher the beta is on a security, the higher the volatility as measured by its returns.
158
What is the primary reason that a prospectus must be delivered to investors?
A
To limit the potential of insider trading
B
To prevent fraud and manipulation in the secondary market
C
To disclose to investors that the SEC has reviewed and approved the registration of the mutual fund
D
To provide full disclosure in the sale of new issues, including mutual funds
D
To provide full disclosure in the sale of new issues, including mutual funds
The prospectus requirement under the Securities Act of 1933 is to ensure investors receive full and fair disclosure of all new issues.
159
An employee earned $85,000 working for NOP, Inc. this year. The company does not offer any kind of retirement plan for its employees. If this employee decided to contribute funds into an IRA, which of the following is true?
A
They can deduct a portion of the contribution
B
They cannot deduct any of the contribution
C
They can deduct the entire contribution
D
They cannot contribute due to their income level
C
They can deduct the entire contribution
All individuals with earned income can contribute to a traditional IRA. For individuals who are not active participants in a qualified retirement plan, all IRA contributions into a traditional IRA are tax deductible. For persons who are participating in a qualified plan, deductibility depends on their income level. The specific levels of income that would qualify for a deduction change each tax year. Note: Contributions into a Roth IRA are never deductible regardless of status in a work-sponsored plan.
160
Which of the following is made available to investors only upon request?
A
Prospectus
B
SAI
C
Financial statements
D
Breakpoint schedule
B
SAI
The statement of additional information (SAI) contains supplementary information on many of the items found in the prospectus, including fund holdings, transactions, and fees. Although there is no requirement for periodical mailing of the SAI to shareholders, this document must be furnished upon request. The prospectus must be provided to investors at, or prior to, confirmation of sale. The prospectus will contain all relevant information for investors to make an informed investment decision, including financial statements and the breakpoint schedule.
161
A client has invested $10,000 into a variable annuity. After subtracting any premium charges, the insurance company will place this client’s remaining investment amount into:
A
The separate account
B
Any individual security that the client chooses
C
The insurance company's general account
D
A mutual fund invested in real estate
A
The separate account
Premiums paid by variable annuity purchasers are placed into a separate account. The assets in the separate account are invested in a wider range of securities than those in a fixed annuity. The separate account is often divided into several subaccounts, each of which may have a different asset mix or risk profile.
162
A client has invested $25,000 into a variable annuity. This client is ready to retire, and the annuity is worth $250,000. If they take a distribution of $150,000, how will the withdrawal be treated for tax purposes?
A
10% will be tax-free, while 90% will be taxed as a capital gain
B
The entire $150,000 is reported as ordinary income
C
10% will be tax-free, while 90% will be taxed as ordinary income
D
The entire $150,000 is reported as a capital gain
B
The entire $150,000 is reported as ordinary income
Since this is a single distribution, the IRS uses last-in, first-out tax treatment (LIFO). Therefore, the entire initial distribution would be taxable as ordinary income. If the client were to continue to take out single distributions, they would be forced to pay taxes until all the $225,000 in earnings have been removed from the account. Eventually, the final $25,000 would come out tax-free.
163
A couple has been preparing for retirement. They have been aggressive investors and are happy with the nest egg they have been able to amass. Most of their income needs will be covered by the two pension checks they receive each month. Primarily, they would like their investment to provide additional income while also growing to stay ahead of inflation. Which of the following recommendations might help them meet their goals?
A
An asset allocation fund with 40% equities, 60% bonds
B
A high-grade corporate bond fund
C
An asset allocation fund with 90% equities, 10% bonds
D
A GNMA fund
A
An asset allocation fund with 40% equities, 60% bond
While at first glance it may seem that they would like to have their cake and eat it too, there are several ways to draw income while also looking to keep pace with rising prices. A corporate bond fund or a GNMA fund would give them income but not provide a sufficient hedge against inflation. When considering an asset allocation model, their primary concern is income with growth as a secondary consideration. The 40/60 equity/debt asset allocation would more appropriately meet this goal
164
An investor is seeking the highest current income possible with the lowest default risk on the portfolio. This investor has specifically expressed concern regarding loss of capital. Which of the following recommendations is suitable for this specific investor?
A
T-STRIPS
B
U.S. government bond fund
C
High-yield corporate bond fund
D
Money market fund
B
U.S. government bond fund
The bonds held in the U.S. government bond fund would have no default risk and would provide income. The high-yield corporate bond fund would offer a higher yield but would have a relatively high default risk. T-STRIPS are government issues, so they would have no default risk, but these are zero-coupon bonds, which pay no interest and, therefore, no current income for the investor. Money market funds are appropriate for capital preservation but, again, offer no or little current income for this investor.
165
Two individuals wish to establish a joint account that will provide an equal undivided interest in the account. What type of account registration is most suitable?
A
TOD or POD
B
Community property
C
JTWROS
D
TIC
C
JTWROS
JTWROS, joint tenants with rights of survivorship, is a joint account opened in which each person owns an equal interest in the entire account, regardless of who makes the investment decisions. An account registered as tenants in common (TIC) may create an unequal interest in the account based on a specific allocation, or percentage, of ownership. A transfer on death (TOD) or payable on death (POD) registration is an individual account that allows the investor to direct where the assets will go upon death. A community property account is similar to a JTWROS but can only be held by a married couple. The question did not specify that the two individuals were married, and these accounts are only established in certain states that follow community property law, so this answer is not the best choice.
166
A bond that is backed by a corporation's credit and not by its assets is:
A
A mortgage bond
B
A collateral trust certificate
C
A debenture
D
An equipment trust certificate
C
A debenture
An equipment trust certificate is a bond secured by a corporation's equipment, such as railroad cars, airplanes, etc. A collateral trust certificate is a bond secured by stocks and bonds of other corporations. A debenture is an unsecured loan. It is only backed by the corporation's credit, not its assets. A mortgage bond is backed by real estate of the issuer.
167
Which portfolio manager had the best portfolio for their client based on Modern Portfolio Theory, given the choices below?
A
Highest return and the highest risk
B
Lowest risk with the highest return
C
Lowest return with the lowest risk
D
Highest risk with the lowest return
B
Lowest risk with the highest return
If 2 portfolio managers have achieved an 8% return on their respective portfolios, but the second manager took on much more risk to achieve that return, then the first manager has achieved the better result. While both achieved the same return, the first manager did so with much less risk to the portfolio.
168
If an investor foresees a period of rising inflation, they might readjust their portfolio to include:
A
Fixed annuities
B
Common stock
C
Government bonds
D
Long-term CDs
B
Common stock
Common stock is a hedge against inflation. Rates on fixed-income instruments, such as government bonds, fixed annuities, and long-term CDs will increase with inflation, causing the value of these securities, already held at lower interest rates, to decline. Other securities that tend to perform well despite inflation include TIPS, REITs, and gold.
169
Which of the following bonds will have the highest duration?
A
Bond with 5-year maturity and 5% coupon
B
Bond with 5-year maturity and 8% coupon
C
Bond with 10-year maturity and 5% coupon
D
Bond with 10-year maturity and 8% coupon
Duration is a measurement of a bond’s price sensitivity to changes in interest rates. Bonds with a higher duration will have a higher interest-rate risk compared to bonds with a lower duration number. Bonds with a longer maturity and/or a lower coupon rate carry a higher interest-rate risk and will have a higher duration. The bond with a 10-year maturity and 5% coupon will have the highest duration of these choices.
170
All the following must be included in the summary prospectus for a mutual fund, except:
A
Investment strategies, risks, and performance
B
Investment objectives
C
Fees and expenses
D
List of all holdings whose value exceeds 3% of the total assets of the fund
D
List of all holdings whose value exceeds 3% of the total assets of the fund
Mutual fund prospectuses must list the following information: investment objectives, fees and expenses, investment risks and performance information, information on the investment adviser and portfolio manager(s) of the fund, information on buying and redeeming shares, tax information, and details on financial intermediary compensation. A list of holdings is not required and can be found in the statement of additional information (SAI).
171
All the following would be taxed upon distribution, except:
A
Contributions to a 403(b) plan
B
Contributions to a 401(k) plan
C
Contributions to a Roth IRA
D
Tax-deductible contributions to a traditional IRA
C
Contributions to a Roth IRA
Pretax contributions into a retirement savings vehicle have never been taxed and would typically be subject to taxation at ordinary income rates upon distribution. 401(k)s and 403(b)s are funded with pretax dollars. Traditional IRAs can be funded with pretax (tax deductible) and/or after-tax dollars. Pretax contributions are taxed upon distribution. Roth IRAs are always funded with after-tax contributions. These monies have already been taxed by the federal government before being contributed into the retirement plan. Therefore, they will not be taxed when withdrawn.
172
A few years following the purchase of a common stock fund for $1,000, the investor redeems their shares for $1,500. The investor had elected to reinvest dividends, which totaled $125 over the life of the investment. What is the cost basis?
A
$1,000
B
Less than $1,000
C
$1,500
D
$1,125
D
$1,125
Cash dividends are taxable in the year received. When a distribution is reinvested back into the fund, it becomes part of the cost basis.
173
An investor is 75 and has not taken any withdrawals from their IRA. What percentage penalty will the IRS assess on the amount of the insufficient distribution?
A
10%
B
6%
C
20%
D
25%
D
25%
By April 1st of the year following the year they attain age 73, IRA holders must begin withdrawing from their accounts and report the withdrawals as income. Failure to do so will result in the taxpayer being assessed a 25% IRS penalty on the amount that should have been withdrawn.
174
What are debentures backed by?
A
The Pension Benefit Guaranty Corporation (PBGC)
B
The Federal Deposit Insurance Corporation (FDIC)
C
The issuer's full faith, credit, and promise to pay
D
The U.S. Treasury
The issuer's full faith, credit, and promise to pay
A debenture is an unsecured debt instrument. It is backed solely by the issuer's full faith and credit, along with its promise to pay.
175
A married couple has a joint account where either party can make investment decisions. If 1 of them dies, the account reverts to the other party. What kind of arrangement is this?
A
Joint tenants with rights of survivorship
B
Tenants in common
C
Tenants by common law
D
TOD
A
Joint tenants with rights of survivorship
In joint tenants with rights of survivorship, both parties can direct the monies in the account. In addition, if 1 of the owners dies, the account will be reregistered to the surviving owner without having to go through the decedent's estate. In a tenants in common arrangement, the decedent's portion of the account goes to their estate, not to the other owner of the account. Transfer on death (TOD) is a designation found on certain individual accounts.
176
Delivery of a prospectus with the sale of mutual funds is required under which Act?
A
Securities Act of 1933
B
Investment Adviser Act of 1940
C
National Securities Markets Improvement Act of 1996
D
Securities Exchange Act of 1934
A
Securities Act of 1933
The prospectus is a summary document that contains much of the same information contained in the company’s registration statement. These documents are created to satisfy the requirements of the Securities Act of 1933, and must be filed with the SEC. The Investment Adviser Act of 1940 regulates investment advisers at the federal level. The National Securities Markets Improvement Act was passed to reduce the overlap of federal and state securities regulation. The Securities Exchange Act of 1934 was passed to regulate the secondary market and its participant
177
All the following are true when a person associated with a broker-dealer opens an account at another broker-dealer, except:
A
The firm opening the account has 30 days in which to notify the employing broker-dealer
B
Transactions in UITs and mutual funds are exempt from this regulation
C
The firm opening the account must supply the employing broker-dealer with duplicate account information upon request
D
The broker-dealer employee must have written consent from their employing firm before opening an account at another broker-dealer
A
The firm opening the account has 30 days in which to notify the employing broker-dealer
When a broker-dealer employee wants to open an account at another firm, the associated person (employee) must obtain written consent from their employer before opening an account at another firm. Duplicate account information must be sent to the employing broker-dealer if the firm requests it. Certain transactions are exempt from this FINRA regulation including transactions in UITs and mutual funds.
178
The current quote of a fund shows an NAV of $15 and an offering price of $20. What type of fund is this likely to be?
A
Open-end fund
B
No-load fund
C
Load fund
D
Closed-end fund
D
Closed-end fund
Once a closed-end fund has been offered to the public, it trades in the secondary market, where it is subject to volatility in price based on investor supply and demand. Closed-end funds must still calculate their net asset value daily even though an investor has little chance of getting that price, except by coincidence.
179
A registered representative is meeting with a new client and in completing the client profile, has determined the client is very conservative. The client has stressed that they are not comfortable with taking risks and is much more concerned with preservation of capital. All the following investments can be recommended to this client, except:
A
Money market fund
B
GNMA pass-through certificates
C
U.S. government debt
D
Value fund
D
Value fund
The investor’s primary goal is to prevent loss of an investment’s total value, money market funds have virtually no market risk and would be appropriate for this client. Government securities are suitable for investors willing to accept a minimal amount of risk. GNMA pass-through certificates are also directly backed by the U.S. government so both the U.S. government debt and GNMA will be considered to have no default risk and are suitable for this client. Value funds are equity funds which are typically suitable for an investor that is seeking capital appreciation, not capital preservation.
180
An investor in a low tax bracket is seeking current income with the least amount of risk should consider which of the following mutual funds?
A
Government bond fund
B
Municipal bond fund
C
Equity income fund
D
High-grade corporate bond fund
A
Government bond fund
The government bond fund provides the highest level of safety by investing in U.S. government bonds, notes, and bills. U.S. government bond funds are NOT considered to be direct obligations of the government, and the principal amount is not guaranteed by the government. While a municipal bond fund also has a lower level of risk, these are most appropriate for an investor in a high tax bracket.
181
Which of the following is not used by a technical analyst when analyzing the value of a security?
A
Price movement
B
Historical prices
C
Credit rating
D
Trading volume
C
Credit rating
Technical analysis is a method of analyzing the value of securities by studying historical prices, price movement, and the trading volume of a specific security. The tools used by technical analysts involve various charts where price data and volume are plotted on a graph over time. Historical price data that has been plotted, recorded, and charted begins to form patterns and trends. These specific patterns and trends are used to predict short-term price levels for stocks, usually no more than 6 weeks in the future.
182
What is a corporate retirement plan that will provide a specific monthly payout when the employee retires?
A
Profit-sharing plan
B
Employee savings plan
C
Defined benefit plan
D
Deferred contribution plan
C
Defined benefit plan
A plan that details the exact retirement income an employee will receive is a defined benefit plan. In a defined contribution plan, the contribution is known, but the future benefit depends on investment performance. In a profit-sharing plan, the employer makes contributions based on corporate profits, but annual contributions are not required.
183
A Series 6 Registered Representative may only sell investment company securities by:
A
Prospectus only
B
Solicitors brochure
C
Investment brochure
D
Statement of additional information
A
Prospectus only
A Series 6 registered representative may only sell investment company securities in the primary market. A prospectus is only required in the primary market. Therefore, a Series 6 RR can sell investment company securities by prospectus only. The prospectus must precede or accompany any sales. All shares offered and sold are primary issues.
184
Why do technical analysts chart price data and volume over time?
A
It helps to determine if the market overall is undervalued
B
It helps to predict long-term price levels for securities
C
Because it begins to form patterns and identifies trends
D
To confirm fundamental analysis
C
Because it begins to form patterns and identifies trend
The tools used by technical analysts involve various charts where price data and volume are plotted on a graph over time. Historical price data that has been plotted, recorded, and charted begins to form patterns and trends. These specific patterns and trends are used to predict short-term price levels for stocks, usually no more than 6 weeks in the future.
185
Each owner has an equal undivided ownership interest and if any party dies, the decedent's share of the account passes to their estate
B
Each owner has an equal undivided ownership interest and if any party dies, the survivors control the account
C
Each owner has a fractional, but not necessarily equal, undivided ownership interest and if any party dies, the survivors take over the whole account
D
Each owner has a fractional, but not necessarily equal, undivided ownership interest and if any party dies, the decedent's share of the account passes to their estate
B
Each owner has an equal undivided ownership interest and if any party dies, the survivors control the account
In JTWROS ownership, owners have equal interests and rights of survivorship. Fractional ownership and passing to the decedent’s estate are characteristics of tenants in common.
186
An investor paid the market price plus a commission for management company shares. What type of shares did they purchase?
A
Front-end load fund shares
B
Class B mutual fund shares
C
Closed-end management company shares
D
Open-end management company shares
C
Closed-end management company shares
Like stock, closed-end fund shares trade according to secondary market supply and demand, and the transaction cost is called a commission. Open-end fund shares are purchased at the POP and redeemed at NAV, and the transaction cost is called a sales charge or load.
187
What is a footnote used for?
A
To list the items contained within the corporation’s financial report
B
To give credit to the authors of the corporation’s financial report
C
To qualify for SEC exemptions for any errors or omissions in a corporation’s financial report
D
To inform the public how the corporation is defining and valuing various items contained in the financial report
D
To inform the public how the corporation is defining and valuing various items contained in the financial report
All financial statements include the footnotes. This is where the company can fill in the blanks. It will tell about how the company defines and values things. It is also the place that contains information on when debts mature, or payments begin and cease.
188
A married couple owns mutual fund shares as joint tenants with right of survivorship. If 1 spouse dies, what will happen to their shares?
A
The shares will pass to the estate of the deceased spouse
B
The surviving spouse will own the shares
C
The surviving spouse will own one-half
D
The shares will be probated
B
The surviving spouse will own the shares
The surviving spouse receives 100% of the shares. A tenants in common registration will have assets of the decedent passing to their estate.
189
All the following are found in an income statement, except:
A
Cost of goods sold
B
Net income before taxes
C
Liabilities
D
Gross sales
C
Liabilities
An income statement, also called a profit and loss statement, shows the incoming revenues and outgoing expenses over a specified period, such as the fiscal quarter or year. This is used to determine the profitability of a company. Items listed on an income statement include gross sales, operating expenses, interest expense, tax expense, and net income. The 3 main components of the income statement are gross sales, cost of goods sold, and net income before taxes. Liabilities would be found on the balance sheet.
190
A customer purchases a security in a cash account and does not pay for the purchase within the required time. What will the broker-dealer likely do?
A
Liquidate the position and freeze the account under Regulation T
B
Transfer the position to a margin account
C
Issue an arrest warrant
D
Loan the delinquent amount to the customer
A
Liquidate the position and freeze the account under Regulation
In the event the customer cannot pay for their trade within the T+4 time period, the broker-dealer can obtain approval to extend additional time to the customer from FINRA, but this is rare. The customer's account will likely be frozen for 90 days, and the broker-dealer will liquidate the security in question. FINRA does not have the authority to issue arrest warrants
191
Municipal fund securities include all the following, except:
A
LGIPs
B
Section 529 plans
C
Coverdell ESAs
D
ABLE programs
C
Coverdell ESAs
Municipal fund securities are funds or trusts that are offered by individual states or local governments. Municipal fund securities include Section 529 plans, ABLE programs, and local government investment pools (LGIPs). Coverdell ESAs are established to help fund a child’s education and are not municipal fund securities.
192
FINRA allows firms to place a temporary hold of up to how many days on an account if fraud is suspected?
A
10
B
7
C
5
D
15
D 15
Firms are required to make reasonable efforts to obtain the contact information of a trusted contact person for a customer’s account. Financial abuse can take many forms, and senior citizens are often seen as easy prey. Firms need to be alert for investment scams, forgery, intimidation, retitling accounts, and theft. FINRA allows firms to place a temporary hold of up to 15 days on an account if fraud is suspected. The hold may be extended an additional 10 days if the firm believes the customer is being financially exploited. During the time when the hold is in place, the firm will document the reason for the hold and must notify the trusted contact person.
193
What is a major concern of securities regulators when it comes to ETFs and investors?
A
Investors do not lose too much of their money
B
Investors do not make too much on their investments
C
Investors can afford the taxes on profits from these investments
D
Investors are well informed, and that the investment is suitable
D
Investors are well informed, and that the investment is suitable
In the case of all ETFs, and especially leveraged, it is vital that the proper customer disclosures are made. The customer must be made aware of all costs, risks, and tax consequences associated with these types of investments. As always, an investment in ETFs must meet all suitability standards.
194
In certain cases, a broker-dealer employee may wish to open an account at another brokerage firm. According to FINRA rules, which of the following statements concerning this practice is correct?
A
Associated persons have 15 days after employment begins to notify their employer of already existing accounts with other firms
B
The executing firm is not required to notify the employing member
C
RRs are required to receive written permission from their firms before opening an outside account
D
Outside account rules only apply to registered persons
C
RRs are required to receive written permission from their firms before opening an outside account
FINRA rules require that before opening an account for an employee of a broker-dealer at another firm, the associated person (employee) must obtain written consent from their employing broker-dealer. The executing firm IS required to notify the employing firm, and duplicate account information must be sent to the employing broker-dealer upon request. For associated persons having accounts prior to being hired, the employer must be notified within 30 days of becoming an employee of any already existing outside brokerage accounts.
195
ll the following are considered current assets, except:
A
Accounts receivable
B
Equipment
C
Cash
D
Inventory
B
Equipment
Assets are defined as what is owned by the company and are listed in order of liquidity. Assets are separated into 3 categories: current, fixed, and intangible assets. Current assets include cash and accounts receivable, marketable securities and inventory. Inventory is the least liquid of the current assets.
196
If a large-cap mutual fund returned 8% and its benchmark returned 11%, what is the alpha?
A
-3
B
3
C
8
D
11
A -3
Alpha is a measure of return performance against its expected return as measured by beta. A beta of 1 represents the expected return of an index. Therefore, returns above a benchmark index are directly correlated to alpha. Alpha is often used to gauge the results of a mutual fund manager. For example, a large-cap mutual fund manager’s year-end performance for the fund will be matched up against a large-cap index and how it performed. If the index had an 11% return and the manager had an 8% return, the manager had a negative alpha of 3 points below the index. A manager could provide a positive alpha also. This would take place when the manager’s return is above the relative index.
