STC Terms Flashcards
1
Q
QIB stands for ___________________________.
A
QIB stands for Qualified Institutional Buyer (QIB).
2
Q
Which market is the decentralized, negotiated market?
A
The over-the-counter market (OTC)
3
Q
Where can quotes be found for stocks that are not listed on an exchange or Nasdaq?
A
The Pink Market
4
Q
A BD that does not hold a customer’s cash or securities is known as a _____________.
A
A BD that does not hold a customer’s cash or securities is known as a non-carrying firm.
5
Q
An RR’s employer is referred to as a ________________.
A
An RR’s employer is referred to as a Broker-Dealer (BD).
6
Q
The new issue market is also known as the __________ market.
A
The new issue market is also known as the primary market.
7
Q
Who can charge a client for securities-related advice?
A
Only registered investment advisers. Remember, BDs charge a commission for executing trades, not for advice.
8
Q
What is the federal law that governs investment advisers?
A
The Investment Advisers Act of 1940
9
Q
Explain the concept of holding securities in street name.
A
This is when client securities are held by and registered in the name of the BD
10
Q
Explain a prime-brokerage arrangement.
A
A situation in which multiple BDs execute a client’s trades and report them to one independent BD for settlement
11
Q
Define the term dealer.
A
A person engaged in the business of buying securities for, and selling securities from, his own account
12
Q
Define the term broker.
A
Any person engaged in the business of effecting transactions in securities for the account of others
13
Q
Define an introducing BD.
A
A BD using another BD to handle cash and securities, trade execution, reporting, clearing, and confirmation
14
Q
What does it mean for a client to use a prime brokerage account?
A
The client trades through multiple BDs, but has its trades cleared and settled with one prime BD
15
Q
In general, what are the two types of securities markets?
A
Primary and secondary
16
Q
List the two main types of secondary markets.
A
Exchange markets (e.g., the NYSE or Nasdaq) and the over-the-counter (OTC) markets (e.g., Pink Market)
17
Q
A Nasdaq-listed stock trades in the __________ market.
A
A Nasdaq-listed stock trades in the secondary market.
18
Q
Where may quotes for non-Nasdaq (OTC) stocks be found?
A
Pink Market
19
Q
What is the price at which a dealer is willing to buy?
A
The bid price
20
Q
What is the price at which a dealer is willing to sell?
A
The ask or offer price
21
Q
Which department of a broker-dealer handles the underwriting and issuance of securities for clients?
A
Investment banking
22
Q
Which department of a broker-dealer executes securities transactions?
A
Trading
23
Q
What is the general definition of a QIB?
A
An entity that owns and invests on a discretionary basis at least $100 million in securities of unaffiliated issuers
24
Q
True or False: Both stocks and bonds represent ownership in a corporation.
A
False. Bonds are debt instruments, while stocks represent ownership interest in a corporation.
25
A ______ is any person that executes ______ transactions in securities for the account of others.
A broker is any person that executes agency transactions in securities for the account of others.
26
To be considered an investment adviser, what are the three parts of the ABC test?
A - Advice, B - Business, C - Compensation
27
True or False: Unlike equities, bonds do not have organized exchanges.
True. Unlike equity securities, corporate, municipal, and U.S. government bonds don’t have organized exchanges.
28
The ____ market refers to direct institution-to-institution trading and doesn't involve public exchanges.
The fourth market refers to direct institution-to-institution trading and doesn't involve public exchanges.
29
In an ____ arrangement, a clearing firm doesn't have information on each individual customer of an introducing firm.
In an omnibus arrangement, a clearing firm doesn't have information on each individual customer of an introducing firm.
30
In a _____ _________ account, information about each customer of the introducing firm is sent to the clearing firm.
In a fully disclosed account, information about each customer of the introducing firm is sent to the clearing firm.
31
Who guarantees and issues all exchange-listed option contracts?
The Options Clearing Corporation (OCC)
32
_________________ protects customers from BD bankruptcy.
Securities Investor Protection Corporation (SIPC) protects customers from BD bankruptcy.
33
Does SIPC protect separate customers or separate accounts?
Separate customers. A customer with both a cash and margin account with a BD would be covered once.
34
Customers become ________________ if their cash or securities positions exceed SIPC coverage.
Customers become general creditors if their cash or securities positions exceed SIPC coverage.
35
If a BD goes bankrupt, what happens to securities registered in the customer’s name?
They are returned to the customer without regard to SIPC limitations.
36
What entity is responsible for the formulation and interpretation of rules for the municipal industry?
The MSRB
37
What U.S. Government agency, created by the '34 Act, enforces securities laws?
The Securities and Exchange Commission (SEC)
38
Name some Self-Regulatory Organizations (SROs).
FINRA, MSRB, CBOE, and other exchanges
39
What is the role of an SRO?
Maintain fair and orderly securities markets and establish rules and regulations for protecting investors
40
True or False: The MSRB has no authority or control over municipal issuers.
True
41
True or False: SIPC provides coverage for market losses.
False. SIPC protects against BD bankruptcy.
42
Which federal law created the SEC?
The Securities Exchange Act of 1934
43
Which federal law governs the registration of new issues?
The Securities Act of 1933
44
Which federal law created the NASD?
The Maloney Act of 1938
45
Identify the acronym: SIPC
Securities Investor Protection Corporation
46
Does SIPC insure client assets?
No. SIPC protects against firm bankruptcy.
47
Identify the acronym: IC Act of '40
Investment Company Act of 1940
48
Under which federal law are firms, RRs, and exchanges registered?
The Securities and Exchange Act of 1934
49
Identify the acronym: COP
Code of Procedure
50
If Mary has a cash account as well as an IRA account, what coverage will SIPC provide?
The cash account is one customer and the IRA (which is a trust) is a second customer. So, $500,000 for each customer.
51
Define wrap account.
A managed account that charges clients an annual fee to cover trading, research, and advisory services
52
What are joint accounts considered by SIPC?
Joint accounts are considered separate from individual accounts.
53
Tim has both a cash and margin account with the same BD. If BD bankruptcy occurs, how are Tim's accounts handled?
Tim's accounts are combined for SIPC coverage purposes.
54
Tom has an individual account and a joint account with the same BD. How much SIPC coverage is provided?
Tom will have $1 million of coverage, since each account is covered separately.
55
Ben's margin account has a market value of $800,000 and a debit balance of $350,000. How much SIPC coverage is provided?
In a margin account, SIPC covers the net equity (market value minus debit). In this example, $450,000.
56
Jim's cash account contains $275,000 of cash and $185,000 of securities. How much SIPC coverage is provided?
SIPC coverage is provided for $250,000 of cash and the full $185,000 of securities.
57
Give some examples of what SIPC does NOT cover.
Fraud, futures contracts, and commodities
58
From what do Self Regulatory Organisations (SROs) derive their power?
The Securities and Exchange Commission (SEC)
59
What is the SRO for municipal securities?
The Municipal Securities Rulemaking Board (MSRB)
60
What is the SRO for corporate securities?
The Financial Industry Regulatory Authority (FINRA)
61
What is the purpose of the Federal Deposit Insurance Corporation?
To guarantee the safety of cash deposited in FDIC member banks against bank failure
62
What amount of coverage is provided by FDIC?
$250,000 per depositor, per bank
63
True or False: SIPC is backed by the full faith and credit of the U.S. government.
False
64
What is the purpose of the FDIC?
To insure bank deposits and also to examine and supervise financial institutions for safety and soundness
65
How is the FDIC different from SIPC?
SIPC does not insure bank deposits. Instead, it insures BD clients against the loss of securities due to BD bankruptcy.
66
What is a member firm?
A broker-dealer that is a member of FINRA
67
True or False: The Investment Company Act of 1940 requires mutual fund managers to register.
False. The Investment Advisers Act of 1940 is the Act that requires money managers to register.
68
List the four categories of FINRA rules.
1. Conduct Rules 2. Uniform Practice Code 3. Code of Procedure 4. Code of Arbitration
69
Define penny stock.
Non-exchange traded securities that are priced at less than $5 per share
70
The Securities Act of 1933 regulates ____.
New issues.
71
Trading on material, non-public information is considered ____.
Insider trading.
72
What organization is responsible for implementing monetary policy in the United States?
The Federal Reserve Board
73
What is the SRO for exchange-traded options?
The Chicago Board Options Exchange (CBOE)
74
What is the name that's given to a broker-dealer's internal policies and procedures?
Written Supervisory Procedures (WSP)
75
____ of a broker-dealer are responsible for supervising registered employees.
Principals of a broker-dealer are responsible for supervising registered employees.
76
____ stock is stock that was issued and repurchased by the issuing corporation.
Treasury
77
Who are considered the owners of a corporation?
Common and preferred stockholders
78
What voting method permits one vote for each share owned to be voted for each director?
Statutory
79
True or False: Cumulative voting benefits smaller shareholders since they can concentrate votes for a specific director.
True. However, it does not guarantee them representation on the board.
80
What instruments are used to facilitate trading of foreign securities in the U.S.?
American Depositary Receipts (ADRs)
81
What is the longest duration for a warrant?
Perpetual
82
Rights are a ____-term instrument allowing holders to buy additional shares at a discounted price.
Rights are a short-term instrument allowing holders to buy additional shares at a discounted price.
83
$____ is normally the par value for preferred stock.
$100
84
The formula for finding conversion ratio on convertible preferred stock is: ___ ÷ _____
The formula for finding conversion ratio is: Par ÷ Conversion Price (par for preferred is $100)
85
What is a derivative?
A financial product that derives its value from the value of underlying assets such as stocks, bonds, or mortgages
86
If attached to the issuance of a bond, may warrants be traded separately?
Yes. The two may be detached and traded separately.
87
What type of stock may be entitled to extra dividends?
In profitable years, participating preferred stockholders may be paid both prior to, and after, common stockholders.
88
How are voting issues determined, by shares or shareholders?
Voting issues are determined based on a majority of shares.
89
What are the volume limitations on an affiliate or issuer repurchasing its own security?
No more than 25% of the average daily trading volume (ADTV) over a 4-week period in one day
90
What is a stock legend?
A notice on stock certificates stating that selling is restricted unless the shares are SEC-registered or exempt
91
List the securities that are considered equities.
Common and preferred stocks
92
____ and ______ are generally bundled as single investment securities.
Warrants and bonds are generally bundled as single investment securities.
93
Who is a lock-up agreement meant to protect?
Shareholders/investors
94
The __________________ is responsible for overseeing a company and appointing its senior managers.
The board of directors is responsible for overseeing a company and appointing its senior managers.
95
What group of stockholders receives dividends first?
Preferred stockholders
96
___ stock is the amount of stock a corporation is legally permitted to issue.
Authorized stock is the amount of stock a corporation is legally permitted to issue.
97
List some of the rights that shareholders receive.
Voting, inspecting books and records, receiving dividends, evidence of ownership, and transferability
98
How do shareholder's typically inspect their company?
By reviewing the annual and quarterly reports that are distributed by the corporation
99
A ____ period is a length of time during which shareholders and insiders are prohibited from selling their shares.
A lock-up period is a length of time during which shareholders and insiders are prohibited from selling their shares.
100
What is the purpose of a lock-up provision?
To prevent large shareholders from selling immediately after an IPO, since it could cause the share price to fall.
101
List the two types of shares that may be sold under Rule 144.
1) Restricted (unregistered) stock 2) Control stock
102
Define control stock.
Stock that is owned by officers, directors, or greater than 10% owners. It is also referred to as affiliated stock).
103
____ stocks are associated with major companies that have records of high earnings and dividend payments.
Blue-chip stocks are associated with major companies that have records of high earnings and dividend payments.
104
True or False: With approval of the board, preferred dividends can be skipped in some years.
True. Unlike bond interest, preferred dividends are not required to paid each year.
105
Describe callable preferred stock.
A form of preferred stock that the issuer can repurchase at a fixed price; it typically offers a higher dividend.
106
____ preferred stock allows owners to exchange the preferred shares for common shares.
Convertible preferred stock allows owners to exchange the preferred shares for common shares.
107
If an issuer is buying its own securities on an exchange, how many broker-dealers is it allowed to use?
It may only use one broker-dealer per trading session
108
Bondholders are also referred to as ____.
Bondholders are also referred to as creditors.
109
$____ is the par value for bonds.
$1,000 is the par value for bonds.
110
Calculate the price of a corporate bond quoted at 98 ¾.
Convert fraction into a decimal: 3 ÷ 4 = .75 and then multiply $1,000 by 98.75% = $987.50.
111
A bond trading at a price below par is a __________ bond.
discount bond.
112
Bond interest is stated ___________ and paid ________________.
annually and paid semi-annually.
113
Credit risk measures the issuer’s risk of _________________________.
default on debt service.
114
What is the highest credit rating?
AAA for S&P and Fitch, and Aaa for Moody’s
115
Bonds rated ___________ and higher are considered investment grade.
BBB (for S&P and Fitch) or Baa (for Moody's)
116
How does S&P and Moody’s further differentiate their ratings?
S&P uses + or - , while Moody’s uses 1, 2, 3.
117
Bonds rated BB (Ba) or lower are considered ____ bonds.
speculative or junk bonds.
118
A type of maturity where all bonds mature on one specific date is called a ____ bond.
term bond.
119
What is the maturity type where a portion of principal is retired each year?
Serial bond
120
The __________________ represents the amount above par that issuers pay to redeem bonds early.
The call premium
121
Describe call protection.
The number of years after issuance during which bonds may not be called by the issuer
122
What does a put feature on a bond allow?
Bondholders may put (redeem) the bond back to the issuer prior to maturity.
123
True or False: Bonds with call features have higher yields, while bonds with put features have lower yields.
True
124
If a bond is referred to as trading flat, this means it trades ____.
without accrued interest.
125
What is forced conversion?
An issuer calls bonds at a point where the stock is worth more than the bond’s call price.
126
Name some of the advantages of buying convertible bonds.
Consistent interest payments, appreciation if stock rises, downside protection if stock falls (since it’s still a bond).
127
A corporation that issues convertible bonds is borrowing money at a ____ rate.
lower rate (convertibles pay lower interest rates).
128
Corporate and municipal bonds are quoted in 8ths, while T-Notes and T-Bonds are quoted in ____.
32nds
129
Is the conversion of a bond a taxable event?
No, it is a tax-free exchange. The taxable event would occur when the stock is sold.
130
Jim owns a 5% bond maturing on 6/1/2022. What would Jim receive at maturity if the bond pays interest semi-annually?
$1,025, which represents the $1,000 principal value plus the final coupon payment of $25
131
Issuers of bonds may be referred to as __________.
Debtors.
132
Zero coupon bonds are purchased at a ____ and mature at ______.
discount and mature at par value.
133
Who issues debt?
Corporations, municipalities, the U.S. government and its agencies
134
____ and ______ are the two types of bond redemptions.
Maturity and calls
135
When an issuer performs a partial call, how does it choose which bonds to call?
The Reorganization Department must use an impartial lottery to select bonds.
136
True or False: An issuer will perform a lottery for a full call.
False. Lotteries are only necessary for partial calls.
137
If a AA rated bond is downgraded by two notches, what is its new rating?
A+
138
Define debt service.
The total of all interest and principal payments for a bond offering
139
The formula for finding a bond's semi-annual interest payment is: (___ x ____) ÷ __
(Par x Coupon (Interest) Rate) ÷ 2
140
If a bond matures on June 1, on what two dates will the bond pay interest?
Every June 1 and December 1 (when given the maturity date, the next payment is six months later)
141
If a bond matures on November 15, on what two dates will the bond pay interest?
Every November 15 and May 15 (when given the maturity date, the next payment is six months later)
142
Describe the dated date.
The date on which a newly issued bond's interest begins to accrue
143
If a bond's first coupon payment is more than six months after its issuance, it’s referred to as a ____ coupon.
If a bond's first coupon payment is more than six months after its issuance, it’s referred to as a long coupon.
144
If a bond's first coupon payment is less than six months after its issuance, it’s referred to as a __ coupon.
Short coupon
145
An investor who sells a bond between its coupon payments is entitled to ___ interest for the time he owned the bond.
Accrued
146
If a bond's price has risen from 98 to 108, what has likely happened to interest rates?
Rates have probably fallen, which has caused the increase in the bond's price.
147
What is credit risk?
Credit (default) risk is the risk that a company will be unable to pay interest or principal on it's bonds.
148
What types of debt instruments have the least amount of credit risk?
U.S. Treasuries
149
List the three bond yields.
Nominal, Current, and Yield-to-Maturity
150
For a bond, what does a call feature allow?
It allows the issuer to buy (call) the bond back from the bondholders prior to maturity.
151
What is the advantage for a corporation that issues convertible bonds?
It is able to pay a lower rate of interest (i.e., lower coupon).
152
What is the proper order of liquidation for a corporation at bankruptcy?
Secured creditors, unpaid workers, IRS, unsecured creditors, preferred, and then common.
153
The type of bond where bondholders have a lien on real property is called a __________________.
mortgage bond.
154
What are some examples of rolling stock used to back a bond offering?
Airplanes, trucks, railroad cars
155
A bond backed by machinery or rolling stock is called a(n) ________________.
Equipment Trust Bond.
156
Are debentures considered secured or unsecured?
Unsecured. They are backed only by the issuer’s full faith and credit.
157
What are Eurodollar bonds?
Dollar-denominated bonds issued outside the U.S.
158
May Eurodollar bonds later trade in the U.S.?
Yes
159
T-Bills are issued in maturities of: ____ week, ____ week, ____ week, and ____ week
4 week, 13 week, 26 week, and 52 week
160
The minimum face value of a T-Bill, T-Note or T-Bond is $____.
$100
161
True or False: T-Bills are quoted on a dollar basis.
False. T-Bills are quoted on a discount yield basis.
162
The following would be a quote for what security? Bid 4.26 Asked 4.22
T-Bill
163
How often do GNMA pass-throughs make payments?
GNMA pass-throughs make payments monthly.
164
Each payment from GNMA will represent both ____ and ____.
principal and interest.
165
___ is the mortgage-backed agency that is fully backed by the U.S. Government.
GNMA
166
What risk is primarily associated with mortgage-backed securities?
Prepayment risk
167
What are T-STRIPS?
Any T-Note/T-Bond where a BD has stripped the interest and principal payments to sell separately as zero-coupons
168
What are TIPS?
Treasury Inflation-Protected Securities
169
The principal value of TIPS may be adjusted based on changes to the ____.
Consumer Price Index (CPI)
170
Money-market securities have a maturity of __________________.
one year or less.
171
Name some of the different types of money-market instruments.
T-Bills, Bankers' Acceptances (BAs), Commercial Paper, Negotiable CDs
172
General Obligation (GO) bonds are backed by the issuer’s ____ and their ability to levy _____.
full faith and credit and their ability to levy taxes.
173
By what types of taxes are state general obligation bonds backed?
Income, sales, or gasoline tax, but also licensing fees and fines.
174
Local general obligation bonds are backed by what type of tax?
Property tax (e.g., school district bonds)
175
Revenue bonds are backed by ____ generated by ________.
specific revenue (user fees) generated by a project or facility.
176
What two sources are used to pay debt service on a double-barreled bond?
Revenue dollars and tax dollars
177
A bond backed by a charge to benefiting property owners is called a __________________.
special assessment bond (e.g., water/sewer system).
178
What bond would be issued to build a facility for a private company?
Industrial Development Revenue (IDR) bond
179
What is a Tax Anticipation Note (TAN)?
Municipal note issued in anticipation of future tax receipts (e.g., real estate taxes)
180
What are some examples of tax-free money-market instruments?
Municipal notes and tax-exempt commercial paper
181
How often will VRDOs adjust their interest rate?
At specified intervals such as daily, weekly, or monthly. VRDOs may allow owners to put (sell) back to the issuer.
182
Standard & Poor’s four ratings for municipal notes are ____, ___, ____, ____.
SP-1+, SP-1, SP-2, SP-3.
183
Municipal bond interest is exempt from ____ tax.
federal tax.
184
What system is used for the issuance of Treasury securities?
An auction
185
At a Treasury auction, __________________ bids are awarded first.
non-competitive
186
____ bonds would most likely require voter approval.
General Obligation (GO)
187
How is interest on corporate bonds treated for tax purposes?
Fully taxable (taxed at the federal, state, and local level)
188
How is interest on municipal bonds treated for tax purposes?
Federally tax-exempt, but may be subject to state and local tax
189
How is interest on Treasuries treated for tax purposes?
Exempt at the state and local level, but subject to federal tax
190
What price do non-competitive bidders agree to pay at a Treasury auction?
The lowest price (highest yield) of the accepted competitive bids
191
A competitive bid placed at a Treasury auction will indicate both ___________ and _________.
quantity and price.
192
What are Auction Rate Securities (ARS)?
Long-term bonds (municipal or corporate) with a variable interest rate set periodically through a Dutch Auction
193
How does the Dutch Auction set the interest rate on Auction Rate Securities?
It sets the lowest interest rate at which all the securities being offered will clear the market (net clearing rate).
194
True or False: The interest rate reset periods on Auction Rate Securities range from 7, to 28, or 35 days.
True
195
What are the two main types of municipal bonds?
General obligation (GO) and revenue bonds
196
What security helps to finance foreign trade?
A banker's acceptance (BA)
197
Is default possible on a municipal offering?
Yes. Only U.S. Government issues are considered free of default risk.
198
In a corporation, ____ stockholders have the most junior claim to assets.
common
199
Identify the acronym: BA
Banker's Acceptance
200
In a liquidation, place the following in priority: secured creditors, common shareholders, debentures
Secured creditors, debentures (unsecured creditors), then common shareholders
201
Describe an asset backed security.
A security whose value and income are collateralized by group of assets, usually bank receivables (e.g. mortgages).
202
True or False: Agency-backed CMOs have high credit ratings.
True. They are usually highly rated because of the collateral backing them.
203
What is the dollar price of a T-bond with a bid of 98-24 and a par value of $100?
98 and 24/32. Convert fraction into a decimal 24 ÷ 32 = .75. Now multiply $100 by 98.75% = $98.75.
204
What are the two general types of Treasuries?
1) Marketable (negotiable) and 2) Non-marketable (non-negotiable)
205
List some examples of marketable Treasury securities.
T-bills, T-notes, T-bonds, T-STRIPS, TIPS and Cash Management Bills
206
True or False: A T-bill is a form of zero-coupon bond.
True
207
Describe a T-STRIP.
A long-term (greater than one year) zero-coupon bond that's backed by the full faith and credit of the U.S. Treasury.
208
True or False: Agency securities are typically AAA rated.
True
209
List the Government Sponsored Entities (GSEs) that issue securities which are not based exclusively on mortgages.
Federal Farm Credit Banks (FFCBs), Federal Home Loan Banks (FHLB) and Student Loan Marketing Association (SLMA)
210
List the government agencies that issue securities that are based on mortgages.
Government Nat. Mortgage Assoc. (GNMA), Federal Nat. Mortgage Assoc. (FNMA) and Federal Home Loan Mortgage Corp. (FHLMC)
211
The most common security that's issued by government agencies is a mortgage-backed ____ certificate.
Pass-through
212
How often do pass-through certificates make payments?
Monthly
213
Each payment from FHLMC will represent both ____ and ________.
principal and interest.
214
What type of municipal bond is subject to a debt ceiling (limit)?
General obligation (GO) bonds are subject to debt limits since they're paid using tax revenue.
215
What is often required before a revenue bond can be issued?
Conducting a feasibility study
216
In a __________ sale, an issuer selects the lead underwriter or senior manager that will sell the issue to the public.
negotiated
217
In a ___________ sale, an issuer invites underwriters to compete against one another by submitting bids for the issue.
competitive
218
The type of bond that's backed by credit card receivables or home equity loans is considered an ___________.
asset-backed security.
219
True or False: Junk bonds typically offer lower yields.
False. Since the issuer is more likely to default, junk bonds offer a higher rate of return.
220
Corporate bonds that are rated below investment grade are referred to as __________ or ____ bonds.
high-yield or junk bonds.
221
What is a guaranteed bond?
A bond that's secured by another corporation's guarantee that it will pay interest and principal (if necessary).
222
____ is short-term, unsecured corporate debt which typically matures in 270 days or less.
Commercial paper
223
In a ____, a dealer sells bonds to another dealer and agrees to repurchase them at a specific time and price.
repo
224
The interest rate charged on overnight loans on a bank-to-bank basis is referred to as the ____ rate.
fed funds rate.
225
The ___ date is the date by which stock must be owned to receive the dividend.
The Record date
226
What are two synonymous terms for a bond’s interest rate?
Coupon rate and nominal yield
227
A bond with an 8% coupon would pay how much interest per year?
$80.00. Par x Rate ($1,000 x 8%)
228
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
229
When discussing a bond, the YTM may also be referred to as ____.
basis.
230
True or False: When interest rates go up, bonds prices go up, and when interest rates go down, bond prices go down.
False. There is an inverse relationship between interest rates and prices.
231
What does one basis point represent as a percentage?
0.01%
232
What yield would be disclosed for a bond purchased at a discount?
Yield to maturity (YTM)
233
What yield would be disclosed for a bond purchased at a premium and callable at par?
Yield to call (YTC)
234
What yield would be disclosed for a bond purchased at a premium and callable at a premium?
The lower of the YTM or YTC
235
What is the tax consequence for an investor who receives a stock dividend?
Her cost basis must be adjusted.
236
Does the receipt of a stock dividend create a taxable event?
No, not until the stock is actually sold.
237
If an asset was held for one year or less prior to its sale, any gain or loss would be ____.
short-term.
238
For a gain to be considered long-term, the asset must be held for ___________.
more than one year.
239
What generates a capital gain or loss?
The sale of an asset at a price that exceeds its basis (gain) or at a price lower than its basis (loss)
240
Define the term cost basis.
The total cost to acquire an asset.
241
What can be determined if given the following bond information? 7% bond, due 6/1/20XX, yielding 8.7%.
$70 interest ($35 each 6/1 and 12/1), matures on June 1, 20XX, is a discount since YTM (8.7%) is above the nominal (7%)
242
Rank in order, from highest to lowest, the three yields on a bond priced at a discount.
YTM, Current Yield, Nominal Yield
243
Rank in order, from highest to lowest, the three yields on a bond priced at a premium.
Nominal Yield, Current Yield, YTM
244
Of what information must buyers of callable bonds be made aware?
The call date(s) and price(s) that may be found in the bond's indenture
245
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%.
246
A yield has gone from 3.44% to 3.53%. What is the amount of the increase?
9 basis points (BPs). Each full percentage point is equal to 100 BPs.
247
What is the current yield on a 4% coupon bond selling at 50?
$40 ÷ $500 = 8%
248
On a discount bond, which yield is the highest?
YTM. Remember the seesaw on a discount bond - NY, CY, YTM (lowest to highest).
249
On a premium bond, which yield is the highest?
Nominal. Remember the seesaw on a premium bond - NY, CY, YTM (highest to lowest).
250
Describe the inverse relationship between market interest rates and the prices of existing bonds.
As interest rates rise, existing bond prices fall, and as interest rates fall, existing bond prices rise.
251
True or False: For trades involving bonds, confirmations must disclose the yield computation used (i.e., YTM or YTC).
True
252
Assuming regular-way settlement, if a trade occurs before the ex-dividend date, the ____ receives the dividend.
buyer
253
Assuming regular-way settlement, if a trade occurs on or after the ex-dividend date, the __ receives the dividend.
seller
254
By what date must a buyer own stock to be entitled to a dividend or stock split?
The record date
255
For a buyer to be eligible for a stock's cash dividend, the purchase must be made prior to the ___ date.
ex-dividend date.
256
If using cash settlement, what is the last possible date to purchase a security and still be entitled to the dividend?
The record date, since cash settlement indicates same-day settlement
257
If a stock is sold before the ex-dividend date, but not delivered by the record date, what must be attached?
A due bill
258
True or False: The issuing corporation determines the declaration, payment, record, and ex-dividend dates.
False. Exchange rules determine the ex-dividend date based on the corporation's determination of the record date.
259
True or False: The ex-dividend date is one day before the record date.
False. The ex-date and record date are the same day.
260
What is the formula for calculating a bond's current yield?
Annual Interest ÷ Current Market Price
261
What is the formula for calculating current yield?
Annual Interest ÷ Current Market Price
262
True or False: The ex-dividend date is on the same date as the record date.
True
263
When is the ex-dividend date?
The ex-dividend date is on the same day as the record date.
264
ABC sets a record date of Wednesday, Oct. 19. Would a buyer of ABC on Wednesday, Oct. 19 be entitled to the dividend?
No, the investor must own (trade settles) on or before the record date. This trade doesn't settle until Thursday, October 20.
265
XYZ's record date is Tuesday, May 3. With a regular-way trade, when could a person sell her stock and keep the dividend?
On Tuesday, May 3 or later. She must be the owner of record at least through May 3 to keep the dividend.
266
The ___________ date is the date on which a dividend is authorized by the company.
The declaration date
267
When is a due bill required?
A due bill is required if a trade occurs before the ex-dividend date, but the seller delivers after the record date.
268
An investor buys 100 shares at $10. If the company declares a 10% stock dividend, what is her new basis per share?
Her new basis is $9.09. $1,000 total original basis ($10 x 100 shares) ÷ 110 shares (100 shares x 10% dividend).
269
What is the formula for calculating a stock's current yield?
Annual Dividend ÷ Current Market Price
270
If a stock is trading at $50 and pays a $0.25 quarterly dividend, what is its current yield?
The current yield is 2%. $1.00 annual dividend ($0.25 quarterly dividend x 4 quarters) ÷ $50 stock price
271
If a bond is trading at $1,200 and has a 6% coupon, how much interest will it pay per year?
The annual interest is $60.00 ($1,000 x 6%). Remember, the coupon rate is stated as a percentage of par.
272
If a bond is trading at $900 and has a 5% coupon, how much interest will it pay per year?
The annual interest is $50.00 ($1,000 x 5%). Remember, the coupon rate is stated as a percentage of par.
273
If interest rates are rising, bond prices are ____.
falling.
274
If interest rates are falling, bond prices are ____.
rising.
275
True or False: The nominal yield includes the premium or discount on a bond purchase.
False. The nominal yield only includes the annual interest payment.
276
What is the current yield on a 10% coupon bond selling at 90?
$100 ÷ $900 = 11.11%
277
What is the current yield for a 10% coupon bond that's selling at 100?
$100 ÷ $1,000 = 10%
278
What is the current yield for a 10% coupon bond that's selling at 110?
$100 ÷ $1,100 = 9.09%
279
As a bond's price rises, its current yield will ____.
fall.
280
As a bond's price falls, its current yield will ____.
rise.
281
If a bond has a basis of 5.68%, what is its yield-to-maturity (YTM)?
Basis and yield-to-maturity are synonymous; therefore, the bond's YTM is also 5.68%.
282
What is the maximum tax rate for long-term capital gains tax?
20%
283
At what rate are short-term capital gains taxed?
Ordinary income rate (tax bracket)
284
What is the formula for calculating total return?
[(Sale Price - Purchase Price) + Dividend or Interest] ÷ Purchase price
285
An investor buys 100 shares at $25 and receives an $0.80 dividend. If the shares are sold at $23, what is the total return?
-4.8% = [($23 - $25) + $.80] ÷ $25
286
An investor buys 100 shares at $10 and gets a $0.50 dividend. If the shares are sold at $12, what is the total return?
25% = [($12 - $10) + $.50] ÷ $10
287
What is the formula for calculating inflation-adjusted return?
Actual Rate of Return - Inflation Rate
288
If a bond has an 8% coupon and inflation is 3%, what is the bond’s inflation-adjusted rate of return?
The inflation-adjusted rate of return is 5% (8% – 3%).
289
A bond has a 4% coupon and inflation is 1%. What is this bond’s inflation-adjusted rate of return?
The inflation-adjusted rate of return is 3% (4% – 1%).
290
The rate of return on a U.S. Treasury ____ is most often used to represent the risk-free return rate.
bill
291
True or False: U.S. Treasury bonds are often used to represent the risk-free rate.
False. Since T-bills have less interest-rate risk than T-bonds, they are more often used as the risk-free rate.
292
____ return measures how much an investment returns in relation to the risk that was assumed to attain it.
Risk-adjusted return
293
What are three distinct advantages to investing in an open-end investment company?
1) Diversification 2) Professional Management 3) Liquidity
294
What amount of an investment company's Board of Directors must be independent/unaffiliated?
A majority
295
What are the three different types of investment companies?
1) Face Amount Certificate Companies 2) Unit Investment Trusts (UITs) 3) Management Companies
296
True or False: Mutual fund shares may be purchased and sold in the secondary market.
False. Mutual funds are always considered new issues and are bought and sold through the fund.
297
Since mutual funds are considered primary market issues, they must be sold by ____.
prospectus.
298
According to industry rules, ___% is the maximum sales charge on mutual funds.
8.5%
299
What price is paid for mutual fund shares?
The Public Offering Price (POP). POP = NAV + Sales Charge (if applicable).
300
What does the following quote indicate about the fund? NAV: $9.20 POP: $9.20
It's a no-load fund.
301
After the initial offering, where are shares of a closed-end management company purchased?
In the secondary market (like shares of stock)
302
What price is paid for closed-end management company shares?
Market price plus a commission
303
True or False: The market price of closed-end shares could be higher, lower, or equal to the NAV.
True. Shares can trade at a premium or discount to NAV based on supply and demand forces.
304
May closed-end funds issue more than one type of security?
Yes. Closed-end funds may issue common stock, preferred stock, or bonds.
305
Sales charge is always expressed as a percentage of the ____.
POP (public offering price).
306
To calculate the POP for a mutual fund, the formula is: ____ ÷ (______ - ____)
NAV ÷ (100% - Sales Charge %)
307
Define breakpoint.
Dollar levels of investment purchases that qualify for a reduced sales charge
308
What is the formula for determining the number of shares able to be purchased when reaching a breakpoint?
Dollars invested ÷ newly calculated offering price (based on the reduced sales charge)
309
Letters of Intent are valid for ____ months.
13 months
310
Letters of Intent may be back-dated for ____ days.
90 days.
311
Is a letter of intent binding on the investor?
No. However, the letter is binding on the investment company.
312
True or False: If a mutual fund investor chooses to reinvest dividends, taxes will be deferred.
False
313
Funds offer ____ to allow buyers to add all purchases made from a fund family to reduce sales charge.
Rights of Accumulation
314
True or False: To lower sales charges, investors add mutual fund purchases in all accounts using Rights of Accumulation.
True. However, the purchases must all be from the same fund family.
315
A ____ fund is one that invests in a specific industry or geographic region.
A Sector or Specialized fund
316
Into what does a growth fund invest?
Common stock
317
If a client's goal is preservation of principal, what fund would be most appropriate?
Money-market fund
318
A fund whose portfolio is created to mirror the composition of a particular index is referred to as an ___ fund.
Index fund.
319
Describe a typical index fund's expenses and management style.
The expenses are generally low and it is passively managed.
320
True or False: Custodian banks provide investment management service to a fund.
False. Custodian banks provide safekeeping for a fund's cash and securities.
321
A ____ is a type of investment company which has a fixed portfolio of securities and is supervised, not managed.
UIT (Unit Investment Trust)
322
Is a mutual fund's redemption fee considered a sales charge?
No, since it does not go to selling brokers, but rather stays within the fund.
323
What restrictions exist in describing a fund as no load?
It may have no front-end or deferred sales charge, and a 12b-1 fee cannot exceed .25%.
324
What do the differences in mutual fund share classes represent?
The different methods by which the sales charge is collected
325
If the Hi-Tech Fund has a NAV of $4.25 and a POP of $4.50, what is its sales charge percentage?
The formula is (POP - NAV) divided by POP ($4.50 - $4.25 = $.25 ÷ $4.50 = 5.5%).
326
If the Green Fund has a NAV of $12.70 and a sales charge of 5.5%, what is the POP?
The formula is NAV ÷ (100% - Sales Charge %). $12.70 ÷ 94.5% = $13.44.
327
True or False: A breakpoint sale is a prohibited action of selling shares at just under where breakpoints are available.
True
328
True or False: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable.
False. Selling dividends is prohibited. Since the dividend is imbedded in the share price, there is no monetary benefit.
329
The NAV of a mutual fund is like the ___ price of a stock.
bid
330
What portion of a fund's assets must be invested in a prescribed manner for the fund to be diversified?
At least 75%
331
What are some of the alternative names for a fund's underwriter?
The sponsor, distributor or wholesaler
332
The ____ is synonymous with the ask for a mutual fund.
The public offering price (POP)
333
On Monday at 11:00 a.m., a customer places a call to sell (redeem) her mutual fund shares. What price will she receive?
Monday's NAV since she placed the order before 4:00 p.m.
334
On Monday at 5:00 p.m., a customer places a call to sell (redeem) her mutual fund shares. What price will she receive?
Tuesday's NAV. Since the client missed the 4:00 p.m. close, she will receive the next calculated NAV.
335
On Monday at 2:00 p.m., a customer places a call to sell her closed-end fund shares. What price will she receive?
The current bid price. Closed-end funds are traded throughout the day.
336
The purchase of a mutual fund is also known as a share ___________.
issuance.
337
The sale of a mutual fund is also known as a share ____.
redemption.
338
What share class carries a front-end load?
Class A
339
What share class carries a level load?
Class C
340
What share class carries a back-end load?
Class B
341
May a Class B share be referred to as a "no-load" share?
No. This is a violation of FINRA rules.
342
True or False: Class B shares are eligible for breakpoints.
False. Only Class A shares are eligible for breakpoints.
343
A mutual fund family is also referred to as a mutual fund __________.
complex.
344
Breakpoints are calculated based on all purchases made within a single ______.
fund family.
345
May an RR create her own breakpoint schedule?
No. RRs must follow the schedule found in the fund's prospectus.
346
What is the main concern when an RR recommends that a client diversify among several fund families?
The client may lose out on the opportunity to receive a breakpoint.
347
Is a UIT actively managed?
No. These products are supervised and have a fixed portfolio.
348
May a money-market fund charge a 12b-1 fee?
Yes, up to .25% (25 basis points)
349
An investor has been purchasing mutual fund shares using dollar cost averaging. Is she guaranteed against loss?
No. The market may never recover.
350
What type of mutual fund is often used as a safe harbor?
Money-market funds
351
Clients redeeming mutual fund shares must be paid within ___ calendar days.
7 calendar days
352
Who disburses checks for capital gains distributions to mutual fund shareholders?
The transfer agent, who is typically the paying agent as well
353
Which share class typically has the lowest expense ratio?
Class A
354
Which share class is typically appropriate for an investor with an uncertain time horizon?
Class C
355
What happens to Class B shares after a prescribed period?
The shares will automatically convert to Class A shares.
356
What is not included in a mutual fund's expense ratio?
The sales charge, since only fees are included.
357
If an investor wants exposure to a particular industry, a ____ fund is the best type of investment.
sector fund
358
What type of investment company is priced once per business day?
Open-end investment companies (mutual funds)
359
What is the name of the fee paid to the fund's investment adviser?
Management fee
360
The ___ fee is assessed against the fund's assets to pay for marketing and distribution costs.
The 12b-1 fee
361
What happens to the CDSC holding period when a client switches to a new fund family?
The clock is reset to day one whenever the client switches to a new fund family.
362
Will new purchases affect a fund's NAV?
No. The assets and number of shares increase proportionally.
363
Will liquidating a fund position at a loss affect a fund's NAV?
No. The position has already been marked to market.
364
Who holds the securities and cash for a mutual fund?
The custodian bank
365
Does a mutual fund's board of directors make individual stock selections?
No. The board sets the fund's objectives, while the IA makes the portfolio selections.
366
Do some mutual funds issue fractional shares?
Yes. This is a common practice.
367
How may a closed-end fund be capitalized?
Closed-end funds may issue bonds, common stock, or preferred stock to raise capital.
368
How may a mutual fund be capitalized?
Mutual (open-end) funds may only issue common stock to raise capital.
369
Is a redemption fee the same as a CDSC?
No. The CDSC is a sales charge, not a fee.
370
A client invested $21,000 which has grown to $25,000. On what amount is his breakpoint based?
$21,000. Breakpoints are based on the amount contributed.
371
Where is the best place to find information regarding share classes?
The comparison table found in the fund's prospectus
372
Identify the acronym: UIT
Unit Investment Trust
373
Identify the acronym: LOI
Letter of Intent
374
Identify the acronym: SAI
Statement of Additional Information
375
Identify the acronym: CDSC
Contingent Deferred Sales Charge
376
When must the Statement of Additional Information (SAI) be distributed to clients?
Upon request
377
What is the compensation paid to an investment adviser?
The management fee
378
With what should a client be concerned if an RR recommends a Class B share switch between fund families?
The holding period will be reset to zero in the new fund family and/or a CDSC may apply on the redemption.
379
What is not included in the expense ratio of a mutual fund?
Sales charges are not included in the expense ratio.
380
What happens to Class B shares after a prescribed number of years?
They convert to Class A shares.
381
Who must approve a change to mutual fund's objective?
The majority of voting shares (not shareholders)
382
A mutual fund shareholder's tax liability is reported on Form ____.
Form 1099.
383
What is the typical voting criteria for a mutual fund?
One vote allowed per one share owned
384
Identify the acronym: SBI
Shares of Beneficial Interest (This represents a client's UIT holdings.)
385
Who records the names of mutual fund shareholders?
The fund's transfer agent
386
To which clients is an RR required to disclose breakpoints?
All clients, regardless of the size of the proposed investment.
387
Does a unit investment trust (UIT) have a board of directors?
No. These entities are supervised by a board of trustees.
388
For a mutual fund to issue shares publicly, what is the minimum net worth requirement?
$100,000
389
What would cause a bond fund's assets to rise?
Either new purchasers bringing in funds or a decrease in rates causing an increase to the portfolio's value
390
What would cause a bond fund's assets to fall?
Either redemptions causing the loss of funds or an increase in rates causing a decrease to the portfolio's value
391
What must be included in a mutual fund confirmation?
Potential redemption fees or CDSCs that may apply
392
How often must a client receive reports from her mutual fund?
Semi-annually (2 a year)
393
What is the formula for determining a mutual fund's net assets?
Total assets (e.g., stocks, bonds, and cash) - total liabilities (e.g., expenses)
394
What is the formula for computing a mutual fund's net asset value (NAV)?
Net assets ÷ total shares outstanding
395
True or False: Rights of Accumulation benefits may be combined with Letter of Intent benefits.
False
396
List some of the investors eligible for sales charge reduction in a mutual fund.
An individual and the members of her immediate family (spouses/dependent children), trustees, and pension plans
397
What is a mutual fund's largest expense?
The management fee paid to its investment adviser
398
List the three types of investment companies.
Face-Amount Certificate, Unit Investment Trust (UIT), and Management Companies
399
Identify the acronym: FAC
Face-Amount Certificate
400
What are the two types of management companies?
Open-end and closed-end
401
Are open-end investment companies considered managed or unmanaged?
Open-end funds (mutual funds) are managed by an investment adviser.
402
Is a UIT considered managed or unmanaged?
Unmanaged, since the holdings are supervised as opposed to actively managed
403
Define breakpoint sales.
Illegally inducing the purchase of mutual fund shares at dollar levels below where a breakpoint is available
404
When must a mutual fund prospectus be delivered?
At or prior to the time of solicitation or when marketing materials are sent.
405
True or False: Engaging in breakpoint sales is allowed when dealing with larger investors.
False. Selling shares at amounts just below where a breakpoint is available is prohibited with all types of clients.
406
Define selling dividends.
The prohibited practice of inducing purchases due to an impending dividend payment
407
What is the annual fee levied against a fund's assets and used to pay expenses of commissions and retail communications?
12b-1 fee
408
Open-end management companies are more commonly referred to as ____.
mutual funds.
409
What are some of the advantages of investing in open-end investment companies (i.e., mutual funds)?
Diversification, professional management, liquidity, and ability to reduce sales charges
410
What are the three requirements for a mutual fund to qualify as diversified?
75% of assets must be invested; maximum of 5% can be in one stock; maximum of 10% of a firm's voting stock may be owned
411
True or False: All mutual funds must meet the SEC's definition of diversified.
False. Some funds are classified as non-diversified and can invest in any manner.
412
What is a mutual fund exchange?
When shares of one fund are sold and shares of another fund are bought from within the same family for no sales charge.
413
An investor exchanging mutual fund shares will pay the ____.
net asset value (NAV).
414
True or False: Investors can exchange mutual fund shares for shares of any other funds for no sales charge.
False. Investors can only exchange fund shares from within the same family of funds.
415
Every investment company that has more than ___ shareholders must register with the SEC.
100 shareholders
416
A mutual fund must have a minimum net worth of $___ in order to offer its shares to the public.
$100,000
417
List some of the disclosures that are made in a mutual fund's prospectus.
Investment objectives, risks, investment adviser, sales charges, operating expenses, and how the NAV is calculated
418
Where can investors find information regarding how to buy, redeem, or exchange their mutual fund shares?
All of this information can be found in the prospectus.
419
A mutual fund's sales charge is also referred to as the ____.
sales load.
420
A mutual fund's POP = ___ + ______.
A mutual fund's POP = NAV + Sales Charge.
421
When do most mutual funds calculate their net asset value (NAV)?
4:00 p.m. ET, which is when the stock markets close.
422
Typically, a mutual fund’s ex-dividend date is the business day ____ the record date.
following the record date.
423
True or False: Mutual fund share purchases and redemptions settle in one business day.
False. Unlike stocks and bonds, mutual funds don't have a fixed settlement date. Many funds settle on the same day.
424
What is the maximum permissible 12b-1 fee?
1%. However, for no-load funds, the maximum 12b-1 fee is capped at .25%.
425
The formula for calculating a mutual fund's Expense Ratio is: ____ ÷ ______
Expenses ÷ Average Net Assets
426
What's the advantage to reinvesting dividends back into a mutual fund?
In addition to compounding, most mutual funds will allow investors to reinvest at the NAV (i.e., with no sales charge).
427
Describe dollar cost averaging (DCA).
DCA involves investing a fixed-dollar amount at regular intervals, regardless of the price of the asset.
428
What's the purpose of a redemption fee?
The redemption fee is designed to discourage investors from redeeming shares too quickly.
429
With mutual fund shares, what's the difference between switching and exchanging?
Switching is done outside of a fund family, while exchanging is done within a fund family.
430
True or False: Exchanging mutual fund shares avoids taxes, while switching is taxable.
False. Both exchanging and switching mutual fund shares are taxable events.
431
____ Plans are college savings plans with high contribution limits set by the state sponsor.
529 Plans
432
Describe the tax treatment of contributions made to a 529 Plan.
They are after-tax contributions that may possibly grow tax-free.
433
If not needed for a child's education, may the funds in a 529 Plan be transferred to a relative's 529 Plan?
Yes
434
The annuity with growth dependent on the performance of securities in a separate account is called a ___ annuity.
variable annuity.
435
Which type of annuity is considered a security, fixed or variable?
Variable
436
Which annuity allows for a pre-tax contribution - Qualified or Non-Qualified?
Qualified
437
Which annuity is funded with after-tax dollars - Qualified or Non-Qualified?
Non-Qualified
438
At annuitization (payout), accumulation units are exchanged for ____ units.
annuity units.
439
____ is the payout option that provides payments for the annuitant's whole life and will cease at death.
Straight-Life
440
What is the benefit of the Straight-Life payout option to the annuitant?
This option provides the highest monthly income.
441
What modification is made to the Straight-Life payout option to guarantee payments for a minimum number of years?
Straight-Life with Period Certain
442
What payout option requires the insurance company to provide payments for as long as one of two people remain alive?
Joint and Last Survivor
443
Is a fixed annuity a security?
No, but variable contracts (e.g., variable annuities or variable life insurance) are considered securities.
444
What technique can be used to roll assets from one annuity into another without taxation?
A 1035 Exchange
445
Is switching between annuity sub-accounts taxable?
No
446
Variable contract assets are placed in the insurance company's ____ account.
separate account.
447
May an aunt set up a 529 plan for her niece?
Yes. The donor is not required to be a parent.
448
May a person contribute to her own 529 plan?
Yes
449
What fee does a variable annuity company charge to cover its cost of operations?
An administrative fee
450
What is the maximum sales charge that may be levied on a variable annuity sale?
There is no statutory maximum. FINRA rules require the charge be fair and reasonable.
451
Which annuity payout option provides for the greatest monthly payment?
Straight-life
452
How often are assets valued in a variable contract?
Similar to mutual funds, assets are typically valued based on a daily NAV.
453
Identify the acronym: EIA
Equity-Indexed Annuity (also known as an Equity-Indexed Contract or EIC)
454
All variable contract premiums are placed in the insurance company's ____account.
separate account.
455
What is the tax implication of the death benefit on a variable annuity?
Any amount above the contract's basis is taxable to the beneficiary.
456
Who receives the benefit from a 529 plan?
The beneficiary
457
What annuity does not protect an investor against inflation?
Fixed (guaranteed) contracts are not a good hedge against inflation.
458
What type of insurance and annuity contracts require the delivery of a prospectus?
All contracts containing the word "variable" in their title
459
What written documentation is required when recommending a 1035 exchange of a variable annuity?
Whether the client has completed a 1035 exchange in the past 36 months
460
What are some of the specific product disclosures that are required for variable contracts?
They are not mutual funds, a client's goals should be long-term, and surrender charges apply due to early redemption
461
True or False: If client suitability for a variable annuity is determined, an RR signs and documents the recommendation.
True
462
What are the general characteristics of a 529 account?
It is a tax-advantaged college savings plan sponsored by a state or educational institution.
463
Is a person who invests in a variable annuity more susceptible to legislative risk or investment risk?
Investment risk, since the separate account of a variable annuity fluctuates with the overall performance of the market
464
Does an equity-indexed annuity transaction require the delivery of a prospectus?
No, these contracts are not considered securities by the SEC.
465
In a 529 Plan, what happens if the funds are withdrawn, but not used for qualified education expenses?
The earnings would be subject to ordinary income tax plus a 10% penalty.
466
Is there an income threshold for 529 College Savings Plan contributors?
No. There are no income limits imposed for these plans.
467
In a qualified annuity, how is the payout taxed?
The entire payout is taxed as ordinary income, since the annuity was funded with pre-tax dollars.
468
What percentage of the benefit received from a qualified annuity is subject to taxation?
100%, since the annuity is funded with pre-tax dollars.
469
A qualified annuity allows for ____ contributions and the annuity value grows on a _____ basis.
pre-tax, tax-derred basis.
470
Distributions from a qualified plan are taxed at _________________ rates.
ordinary income rates
471
All variable contract assets are placed in the insurance company's ____ account.
separate account.
472
In a Non-Qualified Annuity, how is the payout taxed?
Only the earnings portion is subject to tax as ordinary income
473
What account is used for the placement of an insurance company's variable contract assets?
A separate account
474
Which annuity provides a fixed, guaranteed minimum rate of return?
A fixed annuity
475
Which annuity provides a guaranteed return--fixed or variable?
Fixed annuities
476
Who assumes the investment risk in a variable annuity contract?
The client or contract owner
477
What is a 1035 Exchange?
A tax-free exchange of one annuity for another. These exchanges are allowed under Section 1035 of the Tax Code.
478
A variable annuity is most suitable for a client who is seeking ____ _____ over a long period.
capital appreciation over a long period.
479
The money invested in a variable annuity is used to buy ____.
accumulation units (similar to mutual fund shares).
480
In a _____ annuity, the owner invests on an after-tax basis with earnings accumulating on a tax-deferred basis.
In a non-qualified annuity
481
What is an annuity's death benefit?
The greater of 1) the contributions into the annuity, or 2) the annuity's value on the day of the annuitant’s death
482
What factors are used to determine annuity payouts during the annuitization phase?
Age and gender of the annuitant, payout option selected, and the assumed interest rate (AIR)
483
What type of annuity guarantees that an amount equal to the value of the annuity is paid to a designated beneficiary?
Unit Refund Annuity
484
What is the expense risk charge on an annuity?
The expense risk charge pays the issuer if the expenses for administering the annuity are more than estimated.
485
Which fee helps an insurance company continue to pay annuities when annuitants live longer than expected?
Mortality Risk Charges
486
Who can contribute to a qualified annuity?
Individuals who work for non-profit organizations and public schools
487
What type of annuity has a minimum rate of return and tracks an index?
An Equity Indexed Annuity (EIA)
488
Principals have ___ business days from receiving an application to approve an annuity sale for suitability standards.
7 Business Days
489
What is the purpose of 529 ABLE (or 529A) plans?
They are savings plans to assist individuals with disabilities to supplement Social Security benefits.
490
What amount of net income must a REIT distribute?
90%
491
Is a REIT a form of direct participation program (DPP)?
No. Unlike DPPs, REITs do not pass through losses.
492
A REIT could derive income from what different sources?
Interest (mortgage REIT), rent from both residential and commercial property, and capital gains (equity REIT)
493
Name some of the different types of Direct Participation Programs (DPPs).
General partnerships, limited partnerships, joint ventures, Subchapter S corporations
494
What are the two types of partners in a limited partnership?
General Partner and Limited Partner
495
Describe the liability of the two partners in a limited partnership.
General partners have unlimited liability, while limited partners have limited liability.
496
The ____ partner is in charge of management and decision-making for the partnership.
The General Partner
497
What are some of the acceptable actions for the limited partner?
Inspecting partnership books, suing the general partner, voting on major issues affecting the partnership, competing
498
___% of the gross proceeds represents the maximum allowable underwriting compensation for a limited partnership.
10%
499
A major advantage to investing in Government Assisted Housing Programs is the availability of ____.
Tax Credits.
500
What type of oil and gas program drills for new oil reserves in unproven areas?
Exploratory (wildcatting)
501
____ Drilling Programs drill in proven areas.
Developmental
502
____ Drilling Programs drill in proven areas and also look for new oil.
Balanced
503
What is the order of liquidation for a limited partnership?
1) Secured Creditor 2) General Creditor 3) Limited Partner 4) General Partner
504
True or False: DPPs are pass-through investments.
True
505
General Partners must contribute at least ____% of the capital.
1%
506
What are the important numbers associated with REITs?
90% income distributed, 5 or less may not own more than 50%, 100+ shareholders, 75% of assets invested in real estate
507
Is a limited partnership a security?
Yes
508
In a limited partnership, which partner has unlimited personal liability and which has limited liability?
General partners (GPs) have unlimited liability, while the limited partners (LPs) have limited liability.
509
Is a hedge fund investment considered liquid?
No
510
May hedge funds sell stocks short and use margin?
Yes
511
A non-qualified annuity contract is typically funded with ____-tax funds.
After-tax funds.
512
The risk that an investment cannot easily be converted into cash is known as ____ risk.
Liquidity risk.
513
Define Alternative Investment.
An investment that does not fit into one of the three traditional asset types (i.e. stocks, bonds, and cash)
514
What is a hedge fund?
An investment pool that typically has a complex investment strategy, is leveraged, and employs long and short strategies
515
What is a private equity fund?
A private partnership or company that buys businesses with the intent to later sell them at a profit
516
____ Partners are the primary contributors of capital to a limited partnership.
Limited Partners
517
Exploratory drilling is also referred to as ____.
Wildcatting.
518
Who typically buys hedge funds?
Accredited (sophisticated) investors through Reg. D offerings
519
____ management involves simply attempting to match the market by tracking an index.
Passive Management
520
What types of investments do private equity and venture capital funds buy?
Privately held and start-up companies
521
For income that's passed through a partnership, __% of it is deductible (excluded from tax).
20%
522
True or False: Limited partners may be forced to invest more money into a partnership.
True. One of the risks of owning a partnership is a possible additional capital call (demand).
523
For tax purposes, what can passive losses be used against?
They can only be used against passive income. They cannot be taken against capital gains, ordinary income, or dividends.
