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FINRA Series 6 > Unit 2 > Flashcards

Unit 2 Flashcards

1
Q

The Investment Company Act of 1940 requires the company to have:

A
  • Must have at least 100 investors
  • 40% of the Board of Directors must be outsiders
  • Must have net assets of at least $100,000
  • Must have a clearly defined objective
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2
Q

What are the 2 types of Investment Companies an investor can select from

A

Managed

Unmanaged

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3
Q

What are the 2 types of “Managed” Investment Companies

A
  1. Closed End Investment Co.

2. Open End Investment Co.

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4
Q

Explain a Closed End Investment Co.

A

Works like any other type of company

  • One IPO and then secondary market
  • Can issue senior securities
  • Can be diversified or not
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5
Q

Explain a Open End Investment Co.

A
  • “Mutual Fund”
  • Continuous, ongoing public offering
  • Redeemable and NEVER trades in the secondary market
  • Can ONLY issue junior securities
  • Limited bank borrowing
    • 3:1 Asset to debt ratio
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6
Q

What expenses come with “Managed Investment Companies”

A

Investment Adviser

  • BOD Stipend
  • Portfolio Manager (largest expense)
  • Custodian
  • Transfer Agent
  • 12B-1 fees
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7
Q

What sales charges come with “Managed Investment Companies”

A
  • UW
  • Broker/Dealer
  • Registered Rep
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8
Q

Based on the Investment Company Act of 1940, in order to be classified as a “Diversified Investment Company” the company must follow what investing rule

A

75/5/10 Rule

  • 75% of total assets must be invested in OTHER companies
  • No more than 5% of TOTAL ASSETS may be invested IN any one company
  • The Investment Company may not own more than 10% OF any other company
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9
Q

What are the safest to riskiest securities

A
  1. US Treasury Securities
  2. Gov’t back mortgages
  3. Municipal Bonds
  4. Corporate Bonds
  5. Preferred Stock
  6. Common Stock
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10
Q

What are some characteristics of a Mutual Fund

A
  • Open End Investment Co.
  • Continuous, ongoing public offering
  • NEVER trades in the secondary market
  • Limited bank borrowing
    • 3:1 Asset to debt ratio
  • Can only purchase with cash, never on margin
    • Therefore, always settles SAME DAY
  • No short sales or other speculative activities
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11
Q

What type of securities does mutual funds issue to its sharholders

A

Common Stock

- Distributes quarterly dividends and annual gains

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12
Q

What is the POP

A

An investor buys at the Public Offering Price (POP)

  • POP = NAV + Sales Charge
  • Max allowable sales charge is 8.5% OF POP
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13
Q

Explain the 12b-1 Fee

A
  • May be used ONLY for advertising and distribution. Not an expense of the fund
  • This is an asset based fee. The more you have in assets, the greater the fee
  • Maximum 12b-1 is 0.75%, except for Class A and No Load funds where it is 0.25%
  • 12b-1 is charged quarterly, and may only be changed by the BOD and shareholders
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14
Q

Explain Hedge Funds

A

A private investment fund that markets itself almost exclusively to wealthy investors.
They are aggressive risk-seeking investment funds that typically use leverage to magnify funds.

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15
Q

What is an Index Fund

A
  • The fund is not actively managed
  • Fund is tied to an index such as the S&P 500
  • The fund is on “auto-pilot.” Whichever way the index moves, so moves the fund
  • Significantly less expensive as there is no management charge
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16
Q

What is an Exchange Traded Fund (ETF)

A
  • Works like a traditional index fund

- Trades on the secondary market

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17
Q

Why is Life insurance is purchased

A

To provide a death benefit to protect against the financial loss from an untimely death

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18
Q

Why is an Annuity is purchased

A

To provide a stream of income for as long as an annuitant lives

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19
Q

Explain Fixed Products

A
  • They have a guaranteed return
  • The investor will not make less than the guaranteed amount, but will also not make any more, thus experiencing inflation risk
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20
Q

Explain Variable Products

A
  • They do not have a guaranteed minimum return
    (Variable Life is the exception)
  • Variable products may earn more than fixed products, so can be used to hedge against inflation, but they may also lose money and experience market risk
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21
Q

What are the fees and charges from the General Account

A

Cost of Insurance (GMDB)
Admin Fee
Taxes (State premium tax)
Sales Charges

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22
Q

What are the fees and charges from the Separate Account

A

Mortality Fee
Investment Management Fee
Cost of variable insurance
Expense Fee

23
Q

Explain the purpose of Variable Annuities

A
  • Investment vehicles designed to save for retirement
  • They provide tax-deferred growth, meaning that the increase in account value is not taxed until the money is actually taken out
  • Because these are retirement vehicles, there are restrictions on removing the money before age 59 1/2
24
Q

What are Variable Annuities contributions called

A

The Cost Basis

25
Q

Name the 2 ways an investor can purchase Annuities

A
  1. Immediate Annuity

2. Deferred Annuity

26
Q

What does annuitize the contract mean

A

Moving from the pay-in phase to the pay-out phase.

27
Q

How is money taken out of an Annuity

A
  • Partial Cash Withdrawal
  • Death
  • Annuitization
28
Q

What are the Annuitization options

A
  • Straight Life (Largest payment)
  • Life Annuity with Period Certain
  • Joint Life with Last Survivor
  • Unit Refund Option
29
Q

What is the monthly payment on a variable annuity based on

A

The Assumed Interest Rate (AIR)

30
Q

When is the Assumed Interest Rate (AIR) set

A

The AIR is not set until the contract is annuitized. Once set, the AIR never changes

31
Q

Explain the purchasing power risk

A

Inflation risk
This a significant risk associated with fixed annuities. The fixed payments that the annuitant receives loses buying power over time due to inflation.

32
Q

Mutual Funds ISSUES then DISTRIBUTES what to its shareholders

A
  • ISSUES common stock to its shareholders

- DISTRIBUTES quarterly dividends and annual capital gains distributions

33
Q

If a Mutual Funds objective is growth, it will invest in:

A

A growth fund would invest in common stocks

34
Q

If a Mutual Funds objective is income it will invest in:

A

An income fund would invest in preferred stock and bonds

35
Q

Securities Investor Protection Corporation (SIPC) provides what type of protection to investors

A

SIPC protects investors in the case of Broker/Dealer bankruptcy.

  • Protection is up to a maximum of $500,000 per customer, with no more than $250,000 in cash
  • Securities are always covered first
36
Q

What type of security is normally found in the portfolio of any mutual fund tat has growth as a primary or secondary objective?

A

Common Stock

37
Q

What happens to the share and price in a two-for-one stock split?

A

The number of outstanding shares is doubled and the price is halved. The total market value of the issuer’s stock therefore remains the same.

38
Q

If an investor purchases a U.S. Treasury note quoted at 101.24, the investor must pay how much?

A

101 x $10 = $1,010

24/32 reduces to ¾ of a point or $7.50, added together, the answer is $1,017.50 ($1,010 + $7.50 = $1,017.50).

39
Q

An investor who owns shares of a mutual fund actually owns:

A

an undivided interest in the fund’s portfolio.

40
Q

A mutual fund’s expense ratio is its expenses divided by:

A

average net assets.

41
Q

Under what circumstances may an open-end investment company act as its own distributor?

A

If the fund is established under Section 12b-1.

42
Q

A Mutual Funds performance, fund quotations of average annual total returns must be how long?

A

1, 5, 10 year periods or as long as the fund has operated.

43
Q

Mutual funds charge a maximum of what % of the money invested?

A

8.5%

44
Q

How do you calculate a funds expense ratio?

A

Funds expenses / average net assets = expense ratio

45
Q

What is the largest part of the expense ratio?

A

The Investment Advisory fee (Investment Manager)

46
Q

Explain Dollar Cost Averaging

A

When the investor invests identical amounts at regular intervals.

47
Q

What is an insurance contract designed to provide retirement income?

A

An Annuity

48
Q

Explain Mortality Guarantee

A

An Annuity can provide an income for the rest of someone’s life. This product takes away the fear.

49
Q

An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract.

A

A Fixed Annuity

50
Q

Put sellers are paid the premium, in exchange for which they take on the obligation to buy stock at a fixed price, called the strike price. Whenever buying something (obligation to buy), the investor is

A

is bullish, they hope the underlying stock holds steady or goes up in value.

51
Q

A customer purchases $50,000 worth of 10% corporate bonds at par. At the end of the day, the bonds close down a half point. The customer has a loss of:

A

$250.
The customer holds 50, $1,000 bonds. One bond point equals $10. Therefore, if each bond decreases by a half-point, the loss is $5 per bond; multiplied by 50 bonds, this equals $250.

52
Q

An investor’s portfolio includes an ABC 6% bond maturing in 2020 and 100 Shares of XYZ common stock. At market close, if the stock closed at $45.45 compared to yesterday’s $44.95, and the bond moved from 95 to 95½ , the portfolio increased in value by:

A

$55
The gain would be $5 for the bonds, (½ point for one bond is $5), and $50 for the stock, ($.50 × 100 shares) for a total of $55

53
Q

If an investor purchases a U.S. Treasury note quoted at 101.24, the investor must pay:an investor purchases a U.S. Treasury note quoted at 101.24, the investor must pay:

A

$1017.50

101 x $10 = $1010
24/32 = 0.75 x $10 = 7.50
1010 + 7.50 = 1,017.50

FINRA Series 6 (6 decks)

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