Test 2 Flashcards
A variable annuity contract offers a GMIB. This is a(n):
I standard feature of variable annuity contracts
II optional feature of variable annuity contracts
III floor on the minimum rate that the separate account will earn
IV cap on the maximum rate that the separate account will earn
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is C.
A “GMIB” is a Guaranteed Minimum Income Benefit. It is an optional rider offered by many variable annuity contracts. It guarantees that when the separate account is annuitized, if the account has not grown at the guaranteed minimum rate, then the account will be annuitized as if it grew at that guaranteed minimum rate. So if the separate account grows by only 2% a year; and the GMIB is 5%; then the account will be valued at annuitization based on compounding at the 5% minimum benefit. This is a very popular rider, but it does come at a cost.
Which of the following statements are TRUE about Fill or Kill orders?
I The order can be executed in part or in full
II The order must be executed in its entirety
III If the order cannot be filled, later execution attempts are permitted
IV If the order cannot be filled, later execution attempts are not permitted
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is D.
A “fill or kill” order is to be executed in full or the order is canceled - only one attempt is made to fill the order. An “all or none” order is to be executed in full, but if the trader can’t fill the order, he is free to attempt execution at a later time. These orders cannot be executed in part.
Which Treasury security is NOT sold on a regular auction schedule?
A. CMBs
B. Treasury Bills
C. STRIPS
D. TIPS
The best answer is A.
CMBs are Cash Management Bills. They are sold at auction by the Treasury on an “as needed” basis to meet unexpected cash shortfalls, so they are not part of the regular auction cycle. They are the shortest-term U.S. government security, often with maturities as short as 5 days. They are sold in $100 minimums at a discount to par value, just like Treasury Bills.
In order to solicit competitive bids for a new bond issue, the municipality will:
A. invite selected local investment banks and commercial banks to bid on the issue
B. publish an Official Notice of Sale in the Bond Buyer
C. hire a municipal financial advisor to find an appropriate underwriter
D. publish an Offering Notice in Bloomberg
The best answer is B.
Municipalities publish an “Official Notice of Sale” that gives the details of a new bond issue that the municipality will put up for auction in the near future. This is published in the Bond Buyer, and often in local newspapers as well. Any interested potential bidders can contact the municipality for more detailed information by requesting a copy of the “Preliminary Official Statement” - the disclosure document for municipal new issues.
A customer buys 1 ABC Jan 50 Call @ $4 and buys 1 ABC Jan 50 Put @ $3 when the market price of ABC = $51. The breakeven points are:
A. $46 and $53
B. $47 and $54
C. $43 and $57
D. $45 and $55
The best answer is C.
Long straddles are profitable if the market either moves up or down. To breakeven, the total premium paid must be recovered by the market moving either up or down. To breakeven, the $7 Debit paid for the straddle must be recovered. This happens at 50 + 7 = $57 on the call side of the straddle and 50 - 7 = $43 on the put side of the straddle.
Variable annuity contracts contain which of the following guarantees?
I Mortality Guarantee
II Expense Guarantee
III Interest Rate Guarantee
A. I only
B. II only
C. I and II
D. I, II, III
The best answer is C.
Variable annuity contracts contain a mortality guarantee and an expense guarantee. If one dies later than his or her expected “mortality,” the company still pays; if expenses rise, the company absorbs them above a set percentage. However, no guarantee is given for the rate of return - this is only given for a fixed annuity.
All of the following statements are true about a tender offer for common shares EXCEPT:
A. The offer must remain open for at least 20 business days
B. Each “sweetening” of the offer must extend the offer for an additional 10 business days
C. During the life of the offer, the issuer can buy the stock in the market in addition to buying shares via the offer
D. During the life of the offer, any subscribing investors’ shares that are tendered are held in escrow pending the outcome of the offer
The best answer is C.
When a tender offer is made for the common shares of an issuer, the maker of the offer is attempting to buy a majority stake in the company. To attract shareholders to tender, the maker usually prices the offer at a premium to the current market price. Such offers are typically contingent on a minimum number of shares being tendered. If the minimum number is not met, the maker might “sweeten” the offer by raising the tender price, or could simply cancel the offer and return the tendered shares to the subscribing shareholders. Note that an escrow agent is used to hold the tendered shares, pending the outcome of the offer.
During the life of the offer, the maker of the offer and its agents are treated as “insiders,” since they have information on how the tender offer is progressing that the general public does not know about. This means that, during the offer, they are prohibited from buying the stock in the market.
The initial offer must be held out for a minimum of 20 business days under SEC rules. Each sweetening of the offer must extend the life of the offer by another 10 business days.
The “death benefit” associated with a variable annuity contract means that if the contract holder dies:
A. prior to annuitization, the amount invested in the contract is returned to a beneficiary
B. after annuitization, the amount invested in the contract is returned to a beneficiary
C. prior to annuitization, the insurance company will make a lump sum payment to complete the terms of the contract
D. after annuitization, the insurance company will pay for the insured’s burial expenses
The best answer is A.
The “death benefit” of a variable annuity contract is not really much of one. If the contract holder dies prior to annuitization, the insurance company pays the greater of current NAV or the amount invested to a beneficiary. If the contract holder dies after annuitization, there is no more “death benefit.”
The Chairman of a bank municipal broker-dealer is on the town council involved in a negotiated municipal bond underwriting being performed by that municipal broker-dealer. Under MSRB rules, the Chairman is considered to be a(n):
A. affiliated person
B. insider
C. control person
D. related party
The best answer is C.
The Chairman of the municipal broker-dealer is considered to be a “control person,” since he is on the town council and the town has selected his firm to perform a negotiated bond underwriting. The existence of the control relationships must be disclosed verbally to customers when the security is recommended; and in writing either at or prior to confirmation of sale.
In a competitive municipal underwriting, the first step taken by the syndicate when determining the bid is to:
A. determine the spread
B. write the scale
C. determine the cover
D. set the coupon rates
The best answer is B.
The first step in determining a municipal bid is determining the scale. Once the underwriters have an idea of the yields at which the bonds can be sold, the total takedown is netted out to arrive at a bid price.
When recommending a contractual plan variable annuity, the registered representative should consider which of the following?
I The ability of the customer to make periodic payments into the plan
II The penalties imposed for early withdrawal from the plan
III The front end load that will be earned
IV Whether the customer can handle declining benefit payments in retirement
A. I and II only
B. III and IV only
C. I, II and IV
D. I, II, III, IV
The best answer is C.
The motivation in selling a product should not be the sales charge or commission to be earned; one must recommend what is suitable for the customer. When selling variable annuities, consideration should be given to the customer’s ability to meet the pay-in schedule and to the customer’s ability to survive on smaller annuity payments if the separate account doesn’t perform as expected. If the insurance company imposes penalties for early termination, this is another important consideration.
Also note that the sale of contractual plans was banned by Congress in 2006, but existing contractual plans from that point in time remain in force - and some of these plans go on for 20 years. So these still exist as investments that customers might own, but you cannot sell new contractual plans.
Under the provisions of Regulation T, monies must be collected for securities purchases:
A. promptly
B. on the business day after trade date
C. on the second business day after trade date
D. on the seventh business day after trade date
The best answer is A.
Regulation T requires that payments for securities purchases be collected “promptly,” but no later than “S + 2” - or no later than industry “regular way settlement” of 3 business days + 2 additional “grace” days; for a maximum time period to collect of 5 business days.
A registered representative solicits an order from a customer to buy 200 shares of XYZZ at $50. The customer agrees and the registered representative completes the order ticket and enters the order for execution. Once the member firm processes the order, the order ticket record must contain which of the following information?
I Time of order receipt
II Time of order entry
III Time of order execution
IV Time of order confirmation
A. I and IV only
B. II and III only
C. I, II, III
D. I, II, III, IV
The best answer is C.
The required time stamps on an order ticket are time of order receipt; order entry; and order execution. There is no requirement for the time of order confirmation to be on the order ticket.
An issuer making a tender offer for its non-convertible bonds and later increases the price being offered by 10%. Which statement is TRUE?
A. The increase in the tender price has no effect on the life of the offer
B. The increase in the tender price increases the life of the offer by another 5 business days
C. The increase in the tender price increases the life of the offer by another 10 business days
D. The increase in the tender price increases the life of the offer by another 20 business days
The best answer is B.
An issuer would consider tendering for its outstanding bonds when it has debt outstanding that is not callable, but it has excess funds that it believes would be best used to reduce the amount of debt outstanding.
A tender offer is made to the bondholders, who have the choice of tendering or not. Unlike stock tender offers, where the initial offer must be held out for 20 business days, here the initial life of the offer is only 5 business days. (The life is shorter because this tender offer is being made by the issuer, not an outsider.) Unlike stock tender offers, where there is typically a contingency that a minimum number of shares be tendered, these are “any and all offers” - so if a bondholder tenders, he or she will receive the tender price for the bonds.
If the issuer does not get enough bonds tendered, the issuer can “sweeten” the offer. This extends the offer by another 5 business days, and the sweetened price is given to all bonds tendered. (While the initial offer specifies a price to be paid, or a price based on a spread to a benchmark debt security, the actual price paid on the tendered bonds is not set until that last business day of the offer).
A customer brings $50,000 of cash to the brokerage firm office and gives it to the registered representative to pay for a securities purchase. The registered representative should:
A. reject the cash payment, since cash payments over $10,000 cannot be accepted
B. accompany the customer to the cashier, so that the customer can be given a receipt for the payment
C. accept the payment on the firm’s behalf
D. deposit the cash to his personal account and issue a check in the same amount to the firm for crediting to the customer’s account
The best answer is B.
Cash can only be accepted from a customer if it is to be deposited to the customer’s account. A registered representative cannot personally accept cash from a customer.
A customer buys $100,000 par value of 10 year municipal bonds in the secondary market at 110. The bonds are sold after 4 years for 108. The customer has:
A. a $2,000 capital loss
B. a $2,000 capital gain
C. a $4,000 capital gain
D. no capital gain or loss
The best answer is B.
The premium on both original issue and trading market municipal bonds must be amortized on a straight line basis over the life of the bond. The bonds were bought at 110, with 10 years left to maturity. Therefore, the 10 point premium is amortized over 10 years, and so 1 point a year is amortized (with no tax deduction allowed for the annual amortization amount). After 4 years, 4 points will be amortized and the adjusted basis is 106. if the bonds are sold for 108, the capital gain is 2 points or $2,000 on $100,000 face amount of bonds.
Payment for U.S. Government securities that are sold through auction is made on:
A. Auction Date
B. Auction Date + 1
C. Issue Date
D. Issue Date + 1
The best answer is C.
Payment for U.S. Government securities that are won at auction must be made on issue date (Thursday of the auction week for T-Bills and the 15th of the month for STRIPS, TIPS, Treasury Notes, and Treasury Bonds). Payment is to be made in cash, Federal Funds, or in similar maturing Government securities (effecting a direct “rollover” of that debt).
