Unit 3 Flashcards
Ex-dividend date for a mutual fund
- set by the fund’s BOD or the fund’s principal underwriter
- commonly falls on first business day after the record date
Speculative investor
Tried to earn higher than average returns by investing in securities that carry higher than average risk
Money market
Marketplace for short-term debt obligations
What type of capital is raised in the capital market?
Long-term
Which investment company’s portfolios are supervised rather than managed?
UITs
Credit risk
- associated with debt securities
- risk that the issuer may suffer financial failure and default on its obligation to an investor
What could cause an increase in NAV?
- dividends and interest received by the fund
- appreciation of the portfolio
NAV of mutual fund class A share
- can never be higher than the POP
- can never be so much lower than the POP that the difference exceeds 8.5% of the POP
What is the federal taxation of municipal bond fund distributions?
- dividend distributions are tax-free
- capital gains distributions are taxable
What is the maximum sales charge allowed for mutual funds?
8.5%
What is the maximum sales charge allowed for contractual plans?
9%
What is the maximum sales charge allowed on variable annuities?
There is no maximum
How often must an investment company report to shareholders?
Semiannually
What is a key advantage of purchasing a variable annuity?
Tax deferral
Who must approve a 12b-1 plan?
- majority vote of the shares
- BOD
- noninterested members of the BOD
-fee must be reapproved annually by the board
Front-end sales load
The difference between the POP and the NAV per share of the fund
Unit refund annuity
- Insurer guarantees at minimum to distribute the amount of money they funded the annuity
- at the annuitant’s death if the guaranteed amount has not been fully distributed, the survivor receives the balance of the account typically in a lump sum payment
When can an investment adviser of a mutual fund liquidate shares held in the fund’s portfolio
- when liquidation is within the guidelines set forth by the fund’s objective
- mutual fund IA is given the authority to select and make investments in the fund portfolio
Equity income funds
-invest in common stock, preferred stock, and convertible securities for current income and capital growth
How are withdrawals from an annuity taxed?
LIFO-last in, first out
When can an open-end investment company borrow money from banks/financial institutions?
Provided an asset-to-debt ratio of 3:1 (300%) is maintained
Open-end investment companies/mutual funds
- only issue common stock
- cannot buy securities on margin
- cannot re-issue shares that have been redeemed
- can borrow money from financial institutions as long as an asset-to-debt ratio of 3:1 (300%) is maintained
Periodic payment deferred variable annuity
- investor makes more than one payment
- number of accumulation units increase
- value of each accumulation unit will vary according to the performance of the separate account
Index funds
Seek to duplicate the price and yield performance of a selected index
What type of investment company is a contractual plan?
UIT
Contractual plan
- UIT that purchases mutual fund shares for its customers on a contractual basis
- no longer sold but there are still many in force
What can an RR with a Series 6 license sell?
- only investment companies and variable products where a prospectus is required
- ex. A closed-end management investment company selling just above its NAV in the secondary market
Which mutual funds have the least correlation with the overall market?
-money market fund
•price doesn’t go up in good markets or down in poor markets-it just stays pegged to $1.00
What are the consequences of Grandpa giving $50,000 of stock to his granddaughter?
- donor (grandpa) is responsible for any gift taxes on the gift
- gift is not taxable to the recipient
- granddaughter maintains the original cost basis as the donor’s cost basis
What is the 12b-1 fee deducted from?
Assets of the fund
Money market securities
High-grade debt securities with 1 year or less to maturity
What could 12b-1 fees be allocated for payment for?
-to offset the costs of distributing a mutual fund
•printing the annual prospectus
•television advertisement about a mutual fund
What does the expense ratio include?
- the expenses of operating the fund compared to other assets
- expenses include management fees, administrative fees, brokerage fees, and taxes
- underwriter may never be an expense to the fund
How are redemptions done for mutual fund shares?
At the next computed NAV
What is the result of dollar cost averaging?
- to obtain a lower average cost per share than average price per share
- accomplished by making regular investments of a fixed amount when prices are fluctuating
Which mutual fund share classes are specially suited to investors that have long-term objectives?
- class A shares for investors that have a large amount to invest
- class B shares for investors that have a small amount to invest
Negotiable jumbo CDs (certificates of deposit)
- usually have maturities of less than 1 year
- usually issued in denominations of $100,000 to $1 million
- readily marketable
- FDIC insures only up to $250,000; any issue greater than that is an unsecured promissory note of the bank
When must an open-end investment company redeem shares in any quantity?
Within 7 days of request
Capital risk
Potential for an investor to lose all their money (invested capital) under circumstances related or unrelated to an issuer’s financial strength
What securities for growth funds look for?
- high price-to-earnings ratio stocks
- because the investor confidence expressed in the high stock price often indicates that the company and its stock will increase in value with time
What are some similarities between ETFs and closed-end investment companies?
- traded on registered stock exchanges
- investors pay commissions to purchase and liquidate their positions
- may be sold short
- may be purchased on margin
- neither are redeemable with the issuer since they’re traded in the secondary market
Money market mutual funds
- shares purchased at NAV->none with a sales load
- portfolio consists of high-quality short-term debt instruments, but they do not issue debt instruments themselves
- shareholders have check writing privileges which add to the liquidity of the shares
- dividends earned on a daily basis
- shares offered on a no-load basis
- NAV falls within as narrow a range as possible
- managed to have very low volatility, therefore, they have a very low beta coefficient
What is the participation rate for index annuities?
- the degree to which they participate
- can range from 70% - 100%
Index annuities
- designed to give their owners participation in the performance of a specific index
- degree to which they participate is the participation rate and ranges from 70% - 100%
- in most cases there is also a rate cap which is a ceiling on the amount that will be credited
- surrender period is longer than most other annuities
Nonqualified tax-deferred annuity
- investment made with after-tax dollars
- money grows tax-deferred
- only the earnings are taxed at distribution
- computation made at retirement called the exclusion ratio to determine how much of each retirement payment will be treated as a return of cost basis & how much as taxable ordinary income
When a customer wants income from an annuity and chooses the option of life with 20-year period certain, how will distributions be taxed?
As ordinary income based on an exclusion ratio
Exclusion ratio
How ordinary income taxes are paid when an annuity is annuitized
What is the equation for the exclusion ratio?
Cost basis/expected return=how much of the distribution is a return of cost basis and NOT subject to income taxes
Bond registered as to principal
- only has a certificate registered in the owner’s name and has beater coupons attached to the bond certificate
- only the person to whom the bond is registered may sell the securities
- interest is not sent directly to the owner but is paid only if the interest coupons are presented to the bond’s paying agent
How do mutual fund redemption values fluctuate?
According to the value of the securities in the portfolio
What does a mutual fund investor’s cost base include?
Total of all investments including reinvested distributions
How long will a straight life annuity give monthly payments?
As long as the annuitant lives
When will an investor not pay a sales charge?
- fund to investor
- this represents the sale of a no-load fund
ETFs
- trade on an exchange so they’re priced by supply and demand
- designed to track an index
Asset-based distributor fees (12b-1 fees)
- based on the fund’s annual average daily net assets
- must be reviewed at least quarterly by the fund’s BOD
The value of a mutual fund share is its _______.
NAV
If a fund has a POP < NAV, it must be a _________.
Closed-end investment company
Who sets breakpoint schedules for a fund?
The board
Who makes the decisions regarding changes to a fund’s portfolio (within the scope of the fund’s investment policy)?
The portfolio manager
What do separate accounts and mutual funds have in common?
- both may have diversified portfolios of common stock
- both give investors voting rights
Investors with a short time horizon most likely will invest in which class of mutual fund shares?
Class C shares
How are payments made into a nonqualified deferred annuity?
With after-tax money
What do blend/core funds consist of?
Both growth and value stocks
When is the best time to purchase a long-term bond fund?
When long-term interest rates are falling after a period of high interest rates
What is the technique of asset allocation?
Changing investment/asset classes based on anticipated market changes
According to the investment company act of 1940, where are mutual funds required to pay dividends from?
Their net investment income (NII)
Net investment income (NII)
(Interest received + dividends received) - expenses
What must happen in order for an investor to realize a capital gain or loss?
A sale must take place
The duration of an interest-bearing bond is __________ its time to maturity.
Shorter than
When may a variable annuity account be surrendered?
During the accumulation period
UITs
Investment companies that have no management fee, have a relatively low percentage sales charge, and invest in a fixed portfolio of debt or equity securities
To receive a dividend, the buyer must be on the issuer market books as the owner by the __________.
Record date
Warrant
Certificate granting its owner the right to buy securities from the issuer at a specified price, normally higher than the market price when issued
Individuals licensed as series 6 representatives can deal in ____________ in the _____________ only.
Closed-end funds, primary market
The holding period for stock inherited is always ___________, no matter when the stock was purchased
Long-term
12b-1 fees are deducted from _____________ , _____________.
Fund assets, quarterly
Who sets the maximum limit of 0.75% for 12b-1 fees?
FINRA
When a fund offers conversion privileges, what does the conversion occur at?
NAV
Accumulation plans with mutual funds are binding on the ________ and not binding on the _________.
Mutual fund, investor
Regarding variable annuities, the number of accumulation units _________ and the number of annuity units _________ at annuitization.
Varies, is fixed
Where would an investor find a complete list of holdings for a particular mutual fund?
Semi-annual or annual report
POP - NAV = _________
Mutual fund sales charge
How do you calculate the mutual fund sales charge?
POP - NAV
What is a CDSC?
A back-end sales charge that decreases the longer the investor holds the shares
What does the death benefit clause of a variable annuity state?
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
Customers could pay a commission rather than a sales charge for shares of a(n) __________.
Closed-end investment company
A manager of an index fund would use a ____________ style.
Buy-and-hold
How are money market mutual funds liquid?
They usually come with a check-writing privilege which allows the investor the opportunity to immediately convert his assets to cash
How do you determine the selling price/POP of the shares when given the NAV?
Divide NAV by 100% minus the sales load
What is the FIFO method for determining capital gains?
The first shares purchased are the first shares redeemed
Dividend distributions are reported on IRS Form _______.
1099-DIV
What are dividends paid from?
The company’s NII
When are capital gains generated?
When an investor redeems appreciated shares of the investment company and when portfolio securities are sold.
Which companies generally sell shares directly to the public?
No-load mutual funds
Investors redeem their mutual fund shares at the _____________ or ______.
Next calculated NAV, bid price
How often must investment companies report to shareholders?
At least every 6 months
When securities are inherited, what will be the recipient’s cost basis?
The market value of the securities at the time of death
The price of closed-end investment company shares trading in the secondary market is determined by _________.
Supply and demand
Blend/core funds contain _________.
Both growth and value stocks
Beta (of a stock or portfolio)
A measure of its volatility in relation to the overall market (systematic risk)
Security with beta = 1.0
Moved in line with the market
Security with beta > 1.0
More volatile than the market
Security with beta < 1.0
Less volatile than the market
Municipal bonds pay interest __________.
Semiannually
How much is 1 point for 1 bond?
$10
How much is 1/2 point for 1 bond?
$5
1035 exchange
-tax-free exchange of one like contract for another like contract
Examples of 1035 exchanges
- annuity to annuity
- life to life
- life to annuity
- *NOT annuity to life
What is the default method of the IRS for determining which shares to sell?
FIFO
What is the most common way for mutual funds to determine which shares to sell?
Average cost
Selling FIFO
The first ones we sell are the first ones we bought
A single premium deferred annuity’s premium buys __________ units.
Accumulation
A single premium immediate annuity’s premium buys ________ units.
Annuity
A periodic payment deferred annuity’s premiums buy __________ units.
Accumulation
How are dividends from NII taxed?
As ordinary income
NII equation
D + I - E (dividends + interest - expenses)
How are mutual fund dividends typically paid?
From the NII, usually quarterly
How are qualified dividends taxed?
At the long-term capital gains rate
How are nonqualified dividends taxed?
Distributed as short-term capital gains and taxed as ordinary income
What are some advantages of buying listed call options compared with buying the underlying stock?
- buying a call allows greater leverage than buying he underlying stock
- buying a call would require a smaller capital commitment
How do you calculate the alpha?
Subtract the required return from the expected return for each share
What would a positive alpha indicate?
A buy recommendation
What is the purpose of life insurance?
It creates an estate
12b-1 fees are charged by ________.
Open-end investment companies
How long to CDSCs of variable annuities often continue for?
5-7 years
How does the income level of the contributor to a 529 plan affect their annual contribution amount?
It has NO affect
How are conversion prices of a convertible bond set?
They are set higher than the current market price of a company’s stock
What happens to the annuity units during the annuitization period of a variable annuity contract?
The number of annuity units remains the same, but the value of each unit varies
Why are money market funds liquid?
They generally come with a check-writing privilege, which offers the investor the opportunity to immediately convert their asset to cash
When a customer receives payment during the annuity period of a variable annuity, what is subject to tax?
Only the amount that represents investment income
The portfolio of a UIT is _________.
•fixed, once it has been constructed
-therefore, it does not change in reaction to market conditions
What are the management fees paid by an investment company part of?
The operating expense of the fund
What are custodial fees part of?
The operating expenses of the fund
What is a sales load part of?
The underwriting agreement
What is the most important factor in determining suitability when evaluating the purchase of an immediate variable annuity for a retiree?
The uncertainty of the amount of the monthly check
Where is long-term capital raised?
Capital market
How much is one bond point?
$10
Flexible premium variable contract
- timing and amount of premiums generally are discretionary
- performance of the separate account directly affects the policy’s cash value
- allows the insured to determine the amount and timing of premium payments, provided minimums are met
- depending on the policy, the face amount (death benefit) is recalculated each year
- it is intended that the death benefit receive some inflation protection, but this CANNOT be guaranteed
- if separate account performance causes the cash value to drop below an amount necessary to maintain the policy in force, the policy lapses until the requisite amount is received within 31 days
Within the first 24 months of issue, the owner of a variable life insurance policy has the right to ___________.
Convert the policy into a whole life policy using the original policy issue date
The surrender period for index annuities is _________ most other annuities.
Longer than
What does the participation rate for index annuities usually range?
70% - 100%
What should you mention when discussing an index annuity?
- rate cap
* participation rate
How is the interest on Treasury STRIPS taxed?
As income over the life of the bond
Immediate annuities do not purchase _________; they purchase _________ directly.
Accumulation units, annuity units
When are investors vested in their IRAs?
Immediately
What can affect the NAV of a mutual fund?
- changes in portfolio values, both positive and negative (appreciation and depreciation)
- dividends and interest received by the fund can increase NAV
- dividends or gains distributed by the fund can decrease NAV
What are portfolio transactions covered by?
The management fee
TIPS
- helps protect investors against purchasing power risk
- issued with a fixed interest rate, but the principal amount is adjusted semiannually by an amount equal to the change in the consumer price index (CPI), the standard measure of inflation
- sold at lower interest rates than conventional fixed-rare treasury securities because of their adjustable nature
After a variable life insurance policy has been in effect for 2 years, what is the surrender value?
The cash value
Which mutual fund share classes have no back-end load, lower operating expenses, and low or no 12b-1 fees?
Class A shares
Class A shares
- have no back-end load
- have lower operating expenses
- have low or no 12b-1 fees
Expense ratio
Includes the [expenses of operating the fund] compared to [fund assets].
What expenses are included in the expense ratio?
- management fees
- administrative fees
- brokerage fees
- taxes
**NOT the underwriter
What is one of the most important functions of a BA?
Facilitating trades in foreign foods
Investors with a short time horizon will most likely invest in what class of mutual fund shares?
Class C shares
Bond registered as to principal
- can be purchased in the secondary market
- coupons are attached
- registered owner may sell the bonds before maturity
- only has a certificate registered in the owner’s name and has bearer coupons attached to the bond certificate
- only the person to whom the bond is registered may sell the securities
- interest is NOT sent directly to the owner, but is paid only if the interest coupons are presented to the bond’s paying agent
A balanced fund invests in _________.
Both debt and equity instruments
Blend/core funds invest in _________.
- both value & growth stocks
* want to achieve appreciation rather than income
What does the investor pay when purchasing mutual fund shares?
POP
What is the POP for a class A share upon purchase?
NAV + sales charge = POP
