Unit 6: Suitability and Risk

Question 1

Customer Balance Sheet

Answer 1

snapshot of financial condition at a point in time

net worth = assets - liabilities

Question 2

Customer Income Statment

Answer 2

info about marital status, financial responsibilities, projected inheritances, and pending job changes

Question 3

Alternative Minimum Tax

Answer 3

to insure high income taxpayers do not escape federal income taxes

Industrial Development Revenue Bonds are tax-exempt

Question 4

Preservation of Capital

Answer 4

safety

recommendations may include money market mutual funds or certificates of deposit

Question 5

Current Income

Answer 5

to provide additional income

recommend debt securities of corporate, government, municipal bonds, and agency securities

or equity securities of preferred stocks, utilities, and blue chip stocks that have solid dividend payment history

Question 6

Growth oriented investments

Answer 6

increase an investments value over time

recommend common stock and stock mutual fonds

Question 7

Liquid Investments

Answer 7

customer can sell it quickly at face amount without losing significant principal

• securities listed on an exchange or unlisted Nasdaq securities
• mutual funds
• publicly traded REITs

Question 8

Speculation

Answer 8

customer wants to try to earn much higher than average returns in exchange for higher than average risks

• option contracts
• DPPs
• high-yield bonds
• unlisted or non-Nasdaq stocks or bonds
• sector funds
• precious metals
• commodities
• futures

Question 9

Portfolio Diversification

Answer 9

to spread the risk

Question 10

Nonfinancial investment considerations

Answer 10

one that cannot be expressed as a sum of money or numerical cash-flow

Question 11

Inflation Risk

Answer 11

purchasing power risk or constant dollar risk

effect of continually rising prices on investments resulting in less purchasing power as time goes on

Question 12

Capital Risk

Answer 12

principal risk

potential for an investor to lose all his money (invested capital) under circumstances either related or unrelated to an issuer’s financial strength

Question 13

Timing Risk

Answer 13

risk to an investor of buying or selling at the wrong time and incurring losses or lower gains

Question 14

Interest Rate Risk

Answer 14

sensitivity of an investment’s price or value fluctuations in interest rates (associated with debt)

short-term is more volatile, Federal Funds is most volatile

Question 15

Reinvestment Risk

Answer 15

associated with bonds that mature or when a bond or preferred stock is called by the insurer

when interest rates decline it is hard for bond investors to reinvest the proceeds from investment distributions and maintain the same level of return at the same level of risk

Question 16

Market Risk

Answer 16

systematic risk

risk that investors may lose some of their principal due to price volatility in the overall market

associated w both stocks and bonds

Question 17

Credit Risk

Answer 17

financial risk or default risk

danger of losing all or part of one’s invested principal through an issuer’s falue

Question 18

Liquidity Risk

Answer 18

risk that the client might not be able to sell an investment

Question 19

Legislative Risk

Answer 19

political or social risk

the possibility of unfavorable government action or social change resulting in a loss of value

Question 20

Call Risk

Answer 20

risk that the bond might be called before maturity and investors cannot reinvest their principal at the same or a higher rate of return

Question 21

Currency Risk

Answer 21

changes in the rate of exchange will adversely affect an investment