Final Exam 3 Flashcards
Which TWO of the following choices are differences between exchange-traded funds (ETFs) and exchange-traded notes (ETNs)?
ETNs carry credit risk that is tied to the issuer that backs the note and ETFs do not have issuer credit risk
ETFs may be sold short and ETNs may not
ETF returns are based on the performance of an index and ETNs pay a fixed coupon rate
ETNs have a maturity date and ETFs do not
QID: 1506633Mark For Review
A
I and III
B
I and IV
C
II and III
D
II and IV
ETNs are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes because ETN returns are linked to the performance of a commodity, currency, or index, minus applicable fees. ETNs do not usually pay an annual coupon or specified dividend. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. Only ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer’s financial condition deteriorates, it can impact the value of the ETN negatively, regardless of how its underlying index performs.
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Which of the following statements is TRUE concerning taxation of capital gains distributions from a Subchapter S Corporation?
QID: 1506595Mark For Review
A
The gain would be taxed as a capital gain at the corporate level and shareholders would receive a tax-free distribution
B
The gain would be exempt from corporate taxes, but would be taxable to the individual as a capital gain
C
The gain would be exempt from corporate taxes, but would be taxable to the individual as ordinary income
D
The gain would be taxable to both the corporation and individual as a capital gain
The gain would be exempt from corporate taxes, but would be taxable to the individual as a capital gain
A Subchapter S Corporation is treated as a partnership for tax purposes. It avoids corporate taxation and its shareholders are taxed based on the distributions from the corporation. The gain would be taxed only once, at the shareholder’s tax rate. A Subchapter S Corporation would report a proportional amount of the shareholder’s net capital gains on a K-1 tax form. The S Corporation would not pay corporate tax, while the shareholder would pay a capital gains tax based on her individual tax rate. The gain would not be taxable as ordinary income.
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When is the internal rate of return (IRR) be used?
QID: 1506794Mark For Review
A
When determining the rate that makes the net present value of an investment zero
B
When estimating the future cash flows
C
When calculating a bond’s price relative to its yield
D
When measuring the profitability of an investment portfolio relative to the portfolio’s risk
When determining the rate that makes the net present value of an investment zero
The internal rate of return (IRR) is a rate that makes the present value of an investment equal to the market price of the investment. In other words, the IRR is the rate that makes the net present value (NPV) of an investment equal to zero.
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The Dow Jones Industrial Average is considered an index of: QID: 1506665Mark For Review A Value stocks B Growth stocks C Large-capitalized stocks D NYSE stocks only
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For disclosure purposes on Form ADV, a felony (as compared to a misdemeanor) is defined by all of the following choices, EXCEPT:
QID: 1506805Mark For Review
A
An offense that’s punishable by a prison sentence of at least one year
B
An offense that’s punishable by a fine of at least $1,000
C
An offense that’s punishable by a fine of at least $500
D
A general court martial
An offense that’s punishable by a fine of at least $500
All the choices are considered felonies, except an offense that’s punishable by a fine of at least $500. A felony is an offense that’s punishable by a prison sentence of at least one year and/or a fine of at least $1,000. The term also includes a general court martial. A misdemeanor includes a special court martial or an offense that’s punishable by a prison sentence of less than one year and/or a fine of less than $1,000.
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When is a broker-dealer required to deliver a prospectus? QID: 1506565Mark For Review A At the time of sale B By settlement date C No later than 24 hours after the sale D Prior to the sale
By settlement date
Broker-dealers are required to deliver prospectuses to purchasers of a new issue along with the confirmation, which is due by the settlement date.
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Which of the following is TRUE of a Qualified Domestic Relations Order (QDRO)?
QID: 1506609Mark For Review
A
A QDRO is a court order that divides all jointly held property in the event of a divorce
B
A QDRO is a court order that requires one person involved in a divorce to provide for the payment of alimony or child support
C
A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a non-qualified retirement plan
D
A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a qualified retirement plan
A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a qualified retirement plan
A QDRO is a court order that is entered as a part of a property division in a divorce or legal separation that splits a qualified retirement plan or pension plan by recognizing joint marital ownership in the plan. The court may award all or a portion of the plan participant’s benefit to an alternative payee, such as a spouse, child, or other dependent of the plan participant.
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Which of the following statements regarding the differences between an annual rebalancing strategy and a buy-and-hold strategy over a 30-year period is FALSE?
QID: 1506588Mark For Review
A
The tax and transactions costs will be lower with a buy and hold strategy
B
The buy and hold strategy is easier to manage than a rebalancing strategy
C
The risk in a buy and hold strategy portfolio will match the investor’s risk tolerance
D
The equity portion in a buy and hold portfolio could grow in relation to the fixed-income portion, whereas a rebalanced portfolio will remain balanced every year
The risk in a buy and hold strategy portfolio will match the investor’s risk tolerance
The risk levels in a buy and hold portfolio will rise and fall, while a rebalanced portfolio will be adjusted periodically to meet the investor’s risk tolerance. Rebalanced portfolios will also attempt to maintain the percentage of equity and debt in the portfolio, while buy and hold portfolios will allow the percentages to drift. One of the advantages of a buy and hold strategy is that transaction and tax expenses are minimized since there is generally no continuous buying and selling.
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Precision Investment Partners is a broker-dealer registered in Tennessee. A recent restructuring at the firm caused a significant portion of the information on the firm’s last application filed with the Administrator to no longer be valid. What action must the firm take to be in compliance under the USA?
QID: 1506663Mark For Review
A
Precision must cease doing business until a new application is filed and approved by the Administrator
B
Precision must file an amendment to its application promptly
C
Precision should call the Administrator, but is not required to update its application until the firm’s annual licensing renewal date
D
Since Precision is already registered in Tennessee, it has a 90-day grace period to amend its application, provided the firm is in compliance with all current state securities laws
Precision must file an amendment to its application promptly
According to the Uniform Securities Act, if the information contained in any document filed with the Administrator becomes materially inaccurate or incomplete, an amendment must be filed by the registrant promptly.
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When determining the risk premium on an investment, an investor would analyze the difference between:
QID: 1506645Mark For Review
A
The total return and the risk-free rate of return
B
The mean return and dollar-weighted return
C
The total return and annualized rate of return
D
The coupon rate of a bond and current interest rates
The total return and the risk-free rate of return
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A group of investors is starting a business to explore and drill for oil. All want to be actively involved in the business, but none wants to be personally liable for the venture's debts. Which of the following business structures would meet their objectives? A limited partnership A general partnership A limited liability company An S Corporation QID: 1506796Mark For Review A I only B I and II only C III and IV only D I, III, and IV only
III and IV only
Since none of the group is willing to be liable personally for the business’s obligations, they cannot form a general partnership or a limited partnership. All general partners have unlimited liability for any obligations that the business incurs. A limited partnership requires at least one general partner. Also, they all want to be involved in management and a limited partner who becomes actively involved in management loses the shield of limited liability. A partnership is not an option for them. Either a limited liability company (LLC) or an S Corporation would allow all of them to take an active role in running the venture without incurring personal liability.
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All of the following statements are TRUE regarding open-end and closed-end investment companies, EXCEPT:
QID: 1506581Mark For Review
A
Open-end fund shares are redeemable, but closed-end fund shares are not redeemable.
B
Open-end funds can issue full or partial shares, but closed-end funds can only issue full shares.
C
Open-end fund shares only trade at their NAV, but closed-end fund shares may trade either above or below their NAV.
D
Both open and closed-end funds have fixed capitalizations.
Both open and closed-end funds have fixed capitalizations.
Open-end investment companies (i.e., mutual funds) are always issuing and redeeming shares in the primary market. This means that their capitalization is always increasing as investors buy new shares, or decreasing as investors redeem old shares. Closed-end investment companies trade on exchange and have a fixed capitalization. Only open-end fund shares trade at their net asset value (NAV). Closed-end fund shares may trade either above or below their NAV depending on the supply and demand on the exchange.
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Under the Uniform Securities Act, which of the following statements is TRUE regarding the posting of a surety bond by a broker-dealer?
QID: 1506564Mark For Review
A
It is used for the same purpose as a fidelity bond that is required by the SEC.
B
It is required of all broker-dealers that are registered in a state.
C
It is used to cover the costs of possible legal actions.
D
An Administrator may accept cash, securities, or real property in lieu of a bond.
It is used to cover the costs of possible legal actions.
A bond may be required by an Administrator to cover possible legal costs that arise from violations of the Uniform Securities Act. The Administrator may accept cash or securities in lieu of a bond; however, property may not be accepted.
A surety bond is not required of all broker-dealers; it is only required for those that have custody of or discretionary authority over client funds and securities and do not meet the minimum financial requirements.
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Under the Uniform Securities Act, which of the following activities of an investment adviser would constitute impersonal advisory services?
QID: 1506653Mark For Review
A
Telling a client to buy municipal bonds in order to reduce her tax liability
B
Providing clients with a recommended list of mutual funds for their retirement accounts
C
Giving a client a list of mutual funds with the lowest expense ratios for the past five years
D
Telling a client that investment XYZ will meet her investment objectives
Giving a client a list of mutual funds with the lowest expense ratios for the past five years
Impersonal advisory services are those activities of an investment adviser that do not meet the specific needs or objectives of a client, or which do not render an opinion of the investment merits of a particular security.
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A corporation has the following financial information: $3 million in cash $5 million in accounts receivable $8 million of inventory $7 million of equipment $2 million in short-term debt $40 million in long-term debt $4 million accounts payable
What’s the corporation’s current ratio?
QID: 1506658Mark For Review A 1:2 B 4:3 C 5:1 D 8:3
The current ratio is found by dividing the current assets by the current liabilities. In this question, current assets include cash, accounts receivables, and inventory, totaling $16 million ($3 million cash + $5 million accounts receivable + $8 million inventory).
Current liabilities include short-term debt and accounts payable, totaling $6 million ($2 million short-term debt + $4 million accounts payable). Therefore, the current ratio is 16:6 ($16 million ÷ $6 million). Since the ratio of 16:6 is not an appropriate ratio, it must be reduced. To reduce the ratio, the common denominator of 2 can be used. In other words, find the number of times 2 goes into 16 and the number of times it goes into 6. In this case 16:6 is reduced to 8:3. If reducing fractions is an uncomfortable exercise, the decimal method may be used. Since the current ratio can also be stated as 2.6 ($16 million ÷ $6 million), simply calculate the decimal version of the answer choices to determine which answer matches this number (e.g., 8 ÷ 3 = 2.6, which is the correct response, while 4 ÷ 3 = 1.33 and is incorrect).
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Which of the following is addressed in behavioral finance?
QID: 1506575Mark For Review
A
The efficient distribution of information in stock prices
B
An aversion to losses
C
Predicating market trends using historical pricing patterns
D
An investor making large and sudden withdrawals
An aversion to losses
Behavioral finance, which is a sub-category of behavioral economics, uses psychological biases to explain the behavior of individuals and markets. Unlike traditional financial theory, behavioral finance doesn’t assume that all investors are rational. Some of the topics behavioral finance addresses include loss avoidance, confirmation bias, disposition bias, recency bias, and self-attribution. The Efficient Market Hypothesis (EMH) assumes that stock prices reflect all information and assumes that investors behave rationally. Predicting market trends on historical data is referred to as “technical analysis.” While an investor making large withdrawals is not rational, it doesn’t reflect a specific psychological bias that’s covered in behavioral finance.
According to the Investment Advisers Act of 1940, an IAR's personal securities transactions involving which of the following securities are subject to the reporting requirement? QID: 1506634Mark For Review A Corporate stocks and bonds B Shares of a unit investment trust (UIT) C Shares of money-market mutual funds D U.S. government securities
Corporate stocks and bonds
Personal securities transactions involving the following securities are excluded from the reporting requirements:
- Direct obligations of the U.S. government
- Money-market instruments
- Shares of money-market mutual funds
- Shares of unit investment trusts
- Shares of other types of mutual funds provided the adviser is not the underwriter or adviser to the fund
There is no exclusion provided for transactions involving corporate bonds.
An advisory client is discussing the purchase of AA-rated, 15-year municipal bonds with his adviser. The bonds offer a coupon rate of 3.2% and can be purchased at a small premium to par. The adviser is not certain if the bonds are trading at an advantageous price. Which calculation would provide the BEST method of determining whether the bonds should be purchased? QID: 1506615Mark For Review A Discounted cash flow B Yield to maturity C Real interest rate D Weighted average cost of capital
Discounted cash flow
Discounted cash flow evaluates each coupon payment and the repayment of a bond’s principal at a present value, based on a rate of return. This makes it possible to evaluate a bond’s value against the investor’s desired rate of return. The sum of each of the discounted cash flows, plus the present value of the bond’s principal, determine the total value of the bond. By comparing this value to the current price of the bond, the adviser will be able to determine if the bond is an attractive investment for her client.
According to the Uniform Securities Act, investment advisers are required to maintain their books and records for:
QID: 1506643Mark For Review
A
Three years with the most recent two years in an appropriate office
B
Three years with the most recent two years easily accessible
C
Five years with the most recent three years in an appropriate office
D
Five years with the most recent two years in an appropriate office
Five years with the most recent two years in an appropriate office
Are Section 457 plans required to follow ERISA guidelines?
QID: 1506644Mark For Review
A
Yes, because they’re qualified plans.
B
Yes, despite the fact that they’re a type of non-qualified plan.
C
No, because they’re non-qualified plans.
D
No, despite the fact that they’re a type of qualified plan.
No, because they’re non-qualified plans.
Section 457 plans are retirement accounts for municipal government workers and certain non-profits. Unlike 401(k) plans, 457 plans are non-qualified and are not required to meet guidelines that were established by the Employee Retirement Income Security Act of 1974 (ERISA).
A married couple just received a small inheritance and want to use a portion of it to pay off their mortgage in the future. They ask their investment adviser representative how much of the inheritance they need to invest based on an estimated rate of return of 7% annually to be able to pay off their mortgage balance in 15 years. The adviser tells them $18,122. This amount is referred to as the payoff amount's: QID: 1506602Mark For Review A Present value B Future value C Internal rate of return D Expected return
The amount of money that must be invested at an expected rate over a specified number of periods to produce a sum of money is referred to as the present value. In this question, if the married couple invests $18,122 today with a 7% annual return, they will have $50,000 in 15 years. Obviously, the setup of the question did not provide the future mortgage payoff amount, but based on a present value of $18,122 and a 7% return, it’s $50,000. The formula for calculating present value from a known future value is:
P0 = Pn / (1 + r)n
In this example,
P0 = Pn / (1 + r)n = $50,000 / (1 + .07)15 = $50,000 / 2.759 = $18,122
Which of the following choices is guaranteed in an equity-indexed annuity? QID: 1506641Mark For Review A A minimum rate of return B A rate of return adjusted for inflation C The participation rate D 100% of the owner's premium payments
A minimum rate of return
In an equity-indexed annuity, the insurance company guarantees a minimum rate of return (typically 87.5% of the premium payments plus 3%).
An investment adviser (IA) is dually registered as a broker-dealer in State A. The IA is also registered in State B, but it’s not registered as a broker-dealer there. If the investment adviser only has advisory clients in State B, is it required to register as a broker-dealer in State B?
QID: 1506632Mark For Review
A
Yes, if the firm has a place of business in State B.
B
Yes, since broker-dealers must register in every state.
C
No, since the firm does not have any brokerage clients in State B.
D
No, because the firm is already registered as an IA in State B.
No, since the firm does not have any brokerage clients in State B.
If an investment adviser is providing advisory service in State B, and is not effecting securities transactions, it’s only required to register as an IA in State B. However, if the firm decided to begin effecting securities transactions with individual residents of State B, it would need to become dually registered as an IA and B/D in State B.
The owner of a sole proprietorship is responsible for which of the following activities?
QID: 1506642Mark For Review
A
Filing K-1 Forms with the SEC
B
Reporting quarterly performance to stockholders
C
The hiring of a chief financial officer
D
Accurately maintaining all of the necessary business records
Accurately maintaining all of the necessary business records
A sole proprietorship does not have stockholders, federal reporting requirements, or a chief financial officer. Partnerships and S Corporations file Form K-1, not sole proprietorships. The owner is required to maintain all necessary books and records in the event of an audit by the IRS or State Department of Revenue.
“` Which investment company’s shares are transacted at the current bid or asking price on an SEC-registered securities market? QID: 1506568Mark For Review A An open-end management company B Variable contracts C A closed-end management company D Unit investment trusts “`
A closed-end management company Shares of closed-end funds are exchange-traded and will be bought and sold at their current market prices. The market price of a security is made up of a bid and offer. The bid represents an order to buy on the exchange, while the ask (i.e., offer) represents an order to sell a security. Variable annuities, unit investment trusts (UITs), and open-end funds (i.e., mutual funds) are not exchange-traded.
From what is an exchange-traded note (ETN) derived? QID: 1506592Mark For Review A The creditworthiness of the issuer B The credit rating of the stocks in the index that’s being tracked C A portfolio of securities that’s held by a custodian D The value of guarantees made by SIPC
The creditworthiness of the issuer Exchange-traded notes (ETNs) are unsecured bonds that promise to pay a rate of return that mirrors the return of a portfolio of securities. This means that ETNs are created based on the creditworthiness of the issuer.
One of the main differences between futures contracts and forward contracts is that: QID: 1506639Mark For Review A Forward contracts do not involve commodities B Forward contracts may not be offset without permission C Futures contracts are always used to speculate D An investor may not be short a futures contract
Forward contracts may not be offset without permission One of the main differences between futures contracts and forward contracts is that future contracts may be offset (bought or sold). Indeed, most buyers and sellers of future contracts never actually take delivery of the underlying commodity or financial instrument. In a forward contract, however, both parties involved in the contract must agree before the contract may be bought or sold.
An investor is negotiating a contract with an investment adviser. The adviser wants to charge the investor a 2% management fee plus 20% of any appreciation that is realized in any given quarter. Although the investor is not opposed to the idea, in order to comply with the law, the investor must: QID: 1506803Mark For Review A Be an accredited investor B Have assets under management of at least $1.1 million or a net worth of more than $2.2 million C Have an existing brokerage account with an affiliated firm D Be identified as an institutional investor
Have assets under management of at least $1.1 million or a net worth of more than $2.2 million Investment advisers may only charge performance-based fees to persons who are categorized as qualified clients. A qualified client is defined as a person that has $1.1 million of assets under management with the adviser or a net worth of more than $2.2 million. It’s important to recognize that being considered an accredited investor does NOT satisfy the levels necessary to be considered a qualified client. Under Regulation D of the Securities Act of 1933, an accredited investor is a person with annual income of at least $200,000 or a net worth of at least $1 million. For qualified clients, the $1.1 million is the assets under management requirement; however, for accredited investors, the $1 million is the net worth requirement. Also note, the net worth does NOT include the person’s primary residence or any associated mortgage.
Which of the following statements is TRUE regarding the grantor of a trust? QID: 1506656Mark For Review A The grantor may not be the trustee of a trust B The grantor may not be the beneficiary of a trust C The grantor may not be both the trustee and the beneficiary of a trust D The grantor may be the trustee and/or the beneficiary of a trust if desired
The grantor may be the trustee and/or the beneficiary of a trust if desired
“` An IAR’s client has inherited $10 million and wants to give it to a charity. The client wants to retain complete control of the money and be able to make all decisions regarding how the money is spent. What should the client establish? QID: 1506600Mark For Review A Testamentary trust B Revocable trust C Inter vivos or living trust D Charitable trust “`
Charitable trust As implied by their name, charitable trusts are established for charitable purposes. This is unlike a typical trust which is established for a specific beneficiary. In most cases, the person that creates the charitable trust can maintain control over the investments of the trust and make decisions regarding how the money is spent. As with other types of trusts, charitable trusts provide certain tax breaks.
“` According to modern portfolio theory, a diversified portfolio should be comprised of assets that are: QID: 1506573Mark For Review A Highly liquid B Optimally efficient C Largely uncorrelated D Alternative investments “`
Largely uncorrelated Ideally, a diversified portfolio should be composed of assets that are largely uncorrelated–i.e., do not move in the same direction.
Foresight Advisers does not have an office in New Mexico. Under the Uniform Securities Act, in which of the following situations would the firm be required to register as an investment adviser in that state? Foresight limits its practice to wealthy individual investors with $1 million or more in net assets who are domiciled in New Mexico. Foresight only advises government entities. Foresight solicits its services to eight retail customers in New Mexico. Foresight has assets of $103.4 million under management. QID: 1506789Mark For Review A I and II only B I and III only C III and IV only D I, III, and IV only
I and III only Firms with no office in a state would not be required to register as an investment adviser in the state provided the firm deals exclusively with institutions such as broker-dealers or government entities, but not individual investors. Another exemption exists for firms that send communications to a maximum of five noninstitutional customers in a 12-month period and have no office in the state. Any firm with assets under management (AUM) of $100 million up to $110 million is given the choice to register with the state or the SEC. Firms with AUM of $110 million or more are categorized as federal covered advisers and are, therefore, exempt from state level registration.
“` Under the Uniform Securities Act, which TWO of the following transactions would be considered a sale? The exercise of an option A gift of assessable stock A stock dividend Lending stock to short sellers QID: 1506570Mark For Review A I only B I and II only C I and III only D II and IV only “`
I and II only Gifts are generally not considered sales. However, since assessable stock may require the person who receives the gift to provide additional money or capital, it is considered a sale. Loans and pledges of securities as well as stock dividends do not constitute a sale if nothing of value is given by the shareholder for the dividend. If an option is exercised, one party to the contract is selling the underlying securities.
“` An investor purchased 50,000 worth of a 6% bond that was issued by a Brazilian company. If the bond is held to maturity, what will the investor receive at the maturity date? QID: 1506589Mark For Review A 53,000 U.S. dollars B 51,500 Brazilian reals C 50,000 U.S. dollars D 50,000 Brazilian reals “`
51,500 Brazilian reals Bonds that are issued by foreign (e.g., Brazilian) companies pay interest and principal in the issuer’s currency (e.g., Brazilian reals). At maturity, the bondholder will receive both the $50,000 principal amount plus the final $1,500 semiannual interest payment (i.e., $50,000 x 6% ÷ 2). Therefore, the total payment at maturity is 51,500 Brazilian reals.
What are the elements of a trust? QID: 1506582Mark For Review A An analysis of the beneficiaries needs and a trustee to act as a fiduciary B A beneficiary’s intention to create the trust, specific real estate, a trustee, and approval from the Administrator C A trustee’s intention to create the trust, financial assets, and a settlor D A settlor’s intention to create the trust, a specific subject matter, a trustee, and a beneficiary
A settlor’s intention to create the trust, a specific subject matter, a trustee, and a beneficiary
“` A client has a traditional IRA and she just turned 75. She must take the required minimum distribution (RMD) no later than: QID: 1506563Mark For Review A April 1 of the following year B December 31 of the current year C The end of five years D The end of 10 years “`
December 31 of the current year The first Required Minimum Distribution (RMD) must be taken by April 1 after the IRA owner turns 72. Subsequent RMDs must be withdrawn by December 31 each year. Since the client is 75, she has already taken the initial RMD, so her deadline for the current year is December 31st.
An agent would like to leave his firm, create his own broker-dealer, and do business as a sole proprietor. This would be allowed: QID: 1506804Mark For Review A Without registering as a broker-dealer as long as the agent hires a qualified custodian to hold client assets B Without registering as a broker-dealer as long as he limits his clients to qualified institutional investors or family members C If the agent registers with the SEC as a broker-dealer, passes a principal’s exam, and posts a $100,000 surety bond with his state Administrator D If the agent registers with the Administrator as a broker-dealer and fulfills any additional requirements imposed by the USA
If the agent registers with the Administrator as a broker-dealer and fulfills any additional requirements imposed by the USA Individuals are not allowed to simply leave their firm and begin transacting business independently as a broker-dealer. They must be affiliated with a broker-dealer or issuer. In this case, the agent must first create and register as a broker-dealer and fulfill whatever conditions are required in his state. The firm may also be required to register with the SEC and join FINRA. The agent would also need to become a registered principal. However, a surety bond might not be required.
“` Investors who subscribe to the Efficient Market theory, may invest in various indices. Which of the following indices is a small-cap benchmark? QID: 1506597Mark For Review A Nifty 50 B NASDAQ 1000 C DJIA D Russell 2000 “`
Russell 2000
What’s an exchange-traded note (ETN)? QID: 1506603Mark For Review A An unsecured bond that’s issued by a financial institution and offers a rate of return which is based on a basket of securities. B A portfolio of securities that’s registered as an investment company and can be bought and sold on an exchange. C A registered investment company that invests in a fixed portfolio of securities. D By adding up the total assets in the portfolio, then subtracting the liabilities, and then dividing by the number of shares outstanding.
An unsecured bond that’s issued by a financial institution and offers a rate of return which is based on a basket of securities. Exchange-traded notes are actually unsecured bonds that pay a rate of return which is linked to an index. Unlike exchange traded funds (ETFs) and mutual funds, ETNs don’t actually own the securities that exist in an index. Instead, they’re simply a promise by a broker-dealer to pay investors the rate of return on the index. This means that ETNs present investors with both credit risk and market risk.
Product
All of the following are compensated from the expenses of a mutual fund EXCEPT:
A) transfer agent.
B) investment adviser.
C) custodian.
D) sponsor.
C) custodian
The XYZ mutual fund company is introducing a new fund with an investment objective of appreciation in share price by means of capital gains. The portfolio will consist of a mix of both value stocks and growth stocks. This is most likely a:
A) preferred equity income fund
B) blend/core fund.
C) utility income fund.
D) balanced fund.
C) utility income fund
Which of the following activities by a mutual fund require approval by a majority vote of outstanding shares?
I.A change in sales load policy
II. Purchase of real estate.
III.A change in the debt-to-equity ratio of a balanced fund
IV. Liquidating a position in the portfolio
A) I and II
Assuming that expense ratios for the funds listed are identical, rank the funds below in order, from lowest to potentially highest yield.
I Municipal bond fund
II Government bond fund
III Investment-grade corporate bond fund
IVSpeculative income fund
A) I, II, III, and IV
An investment in an International Fund is primarily subject to which risk that would NOT impact a domestic fund?
A) Currency.
B) Interest rate.
C) Market.
D) Purchasing power.
A) Currency
Which of the following statements concerning hedge funds are TRUE?
I Purchasers of hedge funds are required to be accredited investors
II Short sales by the fund are not allowed
IIIOrdinary investors may invest in hedge funds indirectly through funds of hedge funds
IVHedge funds invest actively only when securities prices are moving up
C) I and III
Which of the following types of annuity contracts could your customer NOT purchase?
A) Single payment deferred annuity.
B) Periodic payment deferred annuity.
C) Single payment immediate life annuity.
D) Periodic payment immediate life annuity.
D) Periodic payment immediate life annuity
SEC regulations for securities issued by investment companies prohibit which of the following?
I Closed-end funds from issuing preferred stock
II Open-end funds from issuing preferred stock.
IIIClosed-end funds from issuing bonds.
IVOpen-end funds from issuing bonds
B) I and IV
A customer purchasing an annuity should be aware that all of the following will affect the value of his account during the accumulation stage EXCEPT:
A) the performance of his separate account.
B) the assumed interest rate.
C) the number of accumulation units in his account.
D) the value of each accumulation unit.
B) the assumed interest rate
A type of life insurance where the death benefit varies based upon the investments selected by the policyowner is known as:
A) variable life.
B) exchange life.
C) equity life.
D) installment life.
A) variable life
If an investor has requested a withdrawal plan from his mutual fund and currently receives $600 per month, this is an example of what type of plan?
A) Contractual.
B) Fixed-dollar periodic withdrawal.
C) Fixed-share periodic withdrawal.
D) Fixed-percentage withdrawal.
B) Fixed-dollar periodic withdrawal
If the value of securities held in a fund’s portfolio increases, and the amount of liabilities stays the same, the fund’s net assets:
A) stay the same.
B) increase.
C) decrease.
D) are more liquid.
B) increase.
If your customer wants a source of retirement income that is both stable and will offer some protection against purchasing-power risk in times of inflation, you should recommend a:
A) combination annuity.
B) fixed annuity.
C) variable annuity.
D) portfolio of common stocks and municipal bonds.
A) combination annuity
A 12b-1 plan must be approved by a majority of the outstanding shares, a majority of the board of directors, and a majority of the:
A) outstanding shareholders.
B) investment advisory board.
C) interested members of the board of directors.
D) noninterested members of the board of directors.
D) noninterested members of the board of directors
Which of the following are characteristics of exchange-traded funds (ETFs)?
I They are redeemable securities.
II They are priced by supply and demandIII
III They are designed to track an index.
IVThey try to diversify within a particular industry
B) II and III
The Bellner Fund has 60% of its assets invested in bonds rated BB or higher and 40% invested in the common stock of blue-chip companies. Last year, the mix was 65% bonds and 35% stock, but the investment adviser felt that market conditions warranted a change for this year. The Bellner fund is a(n):
A) combination fund.
B) special situation fund.
C) balanced fund.
D) asset allocation fund.
C) balanced fund.
Which of the following funds might have income as their primary investment objective?
I The Ace Capital Appreciation Fund
II The Bellner Preferred Equity Fund
III The LMN Long-Term Corporate Bond Fund
IV The Whitfield-Taylor S&P 500 Index Fund.
C) II and III
A fund’s objectives are to maintain a stable net asset value and to provide current income. The fund invests in high-quality short-term obligations, including U.S. Treasury bills, commercial paper, certificates of deposit, and bankers’ acceptances. Check-writing privileges are available. This describes which of the following mutual funds?
A) ABC Balanced Fund.
B) LMN Cash Reserves Money Market Fund.
C) XYZ Government Income Fund.
D) LMN Tax-Free Municipal Bond Fund.
B) LMN Cash Reserves Money Market Fund
The maximum fee that can be charged under a 12b-1 plan is:
A) an amount equal to the shares’ net asset value.
B) 0.75% of average net assets.
C) the difference between the shares’ POP and NAV.
D) 9% over the life of the plan.
B) 0.75% of average net assets.
Upon annuitization of variable annuities, holders receive the largest monthly payments under which of the following payout options?
A) Joint and last survivor annuity.
B) Cashing in the annuity.
C) Life with period certain.
D) Straight life.
D) Straight life.
Mutual funds must do all of the following EXCEPT:
A) redeem their shares on request.
B) publish their management fees.
C) issue shares with voting privileges.
D) maintain fully diversified portfolios.
D) maintain fully diversified portfolios
The Presto Capital Appreciation Fund annual report indicates that the NAV of the fund has increased from $15.65 to $17.03, and its asking price as of the date of the report has actually declined. Presto must be a(n):
A) open-end fund.
B) closed-end fund.
C) balanced fund.
D) dual purpose fund.
B) closed-end fund
If the owner of a variable annuity dies during the accumulation period, any death benefit will:
A) be returned to the separate account.
B) be paid to a designated beneficiary.
C) be paid to the IRS.
D) be paid to the issuing company to complete the plan.
B) be paid to a designated beneficiary.
Which of the following describe premiums for a scheduled-payment variable life policy?
I Fixed as to the premium amount.
II Variable as to the premium amount, depending on the cash value in the account
III Fixed as to time of payment
IVVariable as to time of payment
A) I and III
The cost of which of the following may not be deducted as an expense from an open-end investment company’s investment income?
A) Custodial charges.
B) Advertising.
C) Accounting.
D) Advisory fees.
B) Advertising
If ABC Fund pays regular dividends, offers a high degree of safety of principal, and appeals especially to investors seeking tax advantages, ABC is a(n):
A) municipal bond fund.
B) corporate bond fund.
C) aggressive growth fund.
D) money market fund.
A) municipal bond fund
Which of the following statements regarding an open-end investment company is TRUE?
I The price of new shares is determined by supply and demand
II It must redeem shares in any quantity within seven days of request
III Redeemed shares are sold in the secondary market, but only between member firms.
IVIt provides for ownership of an undivided interest in the entire portfolio
B) II and IV.
During a particular valuation period of the accumulation phase of an annuity, if the separate account has a positive investment performance rate, the value of the accumulation unit will:
A) go down.
B) be unaffected.
C) exceed the value of the annuity units.
D) go up.
If an investor is in a low tax bracket and wishes to invest a moderate sum to gain some protection from inflation, which of the following would you recommend?
A) Growth mutual fund.
B) Municipal unit investment trust.
C) Money market mutual fund.
D) GNMA fund.
C) Money market mutual fund
In a variable life insurance policy
I a minimum cash value is guaranteed
II a minimum death benefit is guaranteed
III all sales charges must be addressed in the prospectus
IVthe money must only be invested in investment grade debt securities
C) II and III.
One characteristic of a closed-end fund that differs from an open-end fund is that with closed-end funds their equity capitalization:
A) decreases as shareholders redeem shares.
B) is directly related to the value of the securities in the portfolio.
C) increases as purchasers buy shares.
D) generally remains constant.
D) generally remains constant
If a registered representative uses a prospectus as a sales aid, what must accompany the prospectus in the presentation?
A) Company’s balance sheet.
B) All advertising describing the investment.
C) No other information is required unless requested.
D) All sales literature describing the investment.
C) No other information is required unless requested
When a mutual fund does not assess a distribution charge, it is called a:
A) Level-load fund
B) Back-end load fund.
C) No-load fund.
D) 12b-1 fund.
C) No-load fund
All of the following statements are true of both a growth stock and a growth stock mutual fund EXCEPT:
A) a share is an equity security.
B) the value of a share is a market price, determined by supply and demand.
C) dividends are probably not high.
D) a share might grow or diminish in value, depending on the business success of the issuer.
B) the value of a share is a market price, determined by supply and demand
The prospectus for a fund states that the minimum initial investment is $500,000. This is most likely what type of fund?
A) Specialized.
B) Hedge.
C) Balanced.
D) Small-cap growth.
A fixed-premium variable life insurance contract offers a:
I guaranteed maximum death benefit.
II guaranteed minimum death benefit.
III guaranteed cash value
IVcash value that fluctuates according to the contract’s performance
A) II and IV
Your customer has been considering several investment company quotes and he notices that the Jeffers Fund has an NAV of $11.50 and an ask price of $10.98. On the basis of this information:
A) Jeffers is an open-end investment company.
B) Jeffers is closed end.
C) Jeffers can be either open or closed end.
D) Jeffers is a unit investment trust.
B) Jeffers is closed end
An open-end investment company may do all of the following EXCEPT:
A) issue senior securities.
B) borrow money.
C) lend money.
D) purchase call option contracts.
A) issue senior securities.
Which of the following may be done only with the approval of the shareholders of an investment company?
I A change from diversified to nondiversified status
II The purchase of particular bonds on the open market
III Personnel changes in the transfer agent’s organization
IVA change in the fund’s objectives
D) I and IV
Which of the following regarding both index mutual funds and ETFs is TRUE?
A) Both are redeemable at NAV.
B) Both can be sold long or sold short, allowing for profit regardless of market direction.
C) Both are designed to track a particular index.
D) Both are bought and sold throughout the trading day, allowing for intraday trading.
C) Both are designed to track a particular index.
An investor wishes to start a dollar cost averaging program by investing $100 per month. Which of the following would be the least appropriate investment vehicles for this plan?
I Closed-end investment company
II Exchange-traded fund
III Open-end investment company
IVVariable annuity
B) I and II
Which of the following occurrences will change the net asset value per share of a mutual fund?
I Net appreciation of the assets held in the portfolio of the fund
II A net growth in sales of the fund’s shares by all distributors resulting in a greater number of shares outstanding.
III Net depreciation of assets held in the portfolio of the fund.
IVA net redemption by shareholders resulting in fewer shares outstanding.
A) I and III
Under the Investment Company Act of 1940, which of the following are considered management companies?
I Open-end companies.
II Closed-end companies
III Unit investment trusts
IVFace-amount certificate companies
A) I and II.
GEM Metals Fund, a diversified open-end investment company, invested 5% of its total assets in ABC Minerals and Mining, Inc. The market soared, and because of ABC’s phenomenal appreciation, ABC securities now make up 8% of GEM Fund’s total assets. In this case, which of the following statements is TRUE?
A) GEM fund is no longer a diversified investment company.
B) GEM Fund does not have to sell ABC shares but may not buy more ABC shares and still advertise itself as a diversified company.
C) GEM Fund must sell out its holdings in ABC completely.
D) GEM Fund must sell enough ABC securities to reduce its holdings in ABC to 5% of its total assets.
B) GEM Fund does not have to sell ABC shares but may not buy more ABC shares and still advertise itself as a diversified company.
Asset-based distribution fees, also known as 12(b)-1 fees:
I are based on the fund’s annual average daily net assets
II are based on the fund’s annual sales of shares.
III must be reviewed at least quarterly by the fund’s board of directors.
IVmust be reviewed at least annually by the fund’s board of directors
A) I and III.
Your client is interested in a variable annuity that offers to add a small percentage of each of his premium payments to the account. You explain that, in return for this enhancement, the annuity has a longer surrender period than the insurance company’s standard variable annuity products, meaning that surrender charges are applicable for a longer period of time. What type of annuity is this?
A) No-surrender annuity.
B) Bonus annuity.
C) Guaranteed annuity.
D) Indexed annuity.
B) Bonus annuity.
All of the following statements regarding mutual fund withdrawal plans are true EXCEPT:
A) monthly payments are not guaranteed for life.
B) they allow for reduced depletion of principal through periodic payments.
C) payments may be made to a beneficiary.
D) while in effect, such plans allow for small monthly purchases of additional shares.
D) while in effect, such plans allow for small monthly purchases of additional shares.
Mutual fund performance statistics for funds that are seven years old must show results for each of the following periods EXCEPT:
A) six months.
B) one year.
C) five years.
D) seven years.
A) six months
The maximum sales charge over the life of a contractual plan using mutual funds for its underlying investment is:
A) no maximum sales charge; rule only states it must be reasonable.
B) 8.5%.
C) 9%.
D) no more than 20%.
Who assumes the investment risk in a variable annuity contract?
A) The insurance company.
B) The annuitant.
C) There is no risk in a variable annuity.
D) The investment risk is shared between the insurance company and the annuitant.
B) The annuitant.
In a variable annuity, the risk of a fluctuating market is borne by:
A) the management company.
B) the insurance company.
C) FINRA.
D) the annuitant.
D) the annuitant.
A joint life with last survivor annuity:
I covers more than one person
II continues payments as long as one annuitant is alive.
III continues payments as long as all annuitants are alive.
IVguarantees payments for a certain period of time
D) I and II.
Your customer is interested in a fund that follows a buy-and-hold style of investing. He also insists on the lowest fees and expenses possible. Which of these funds might you recommend?
A) Asset allocation.
B) Option income.
C) Aggressive growth.
D) Index.
Which of the following mutual funds would be suitable for an investor who requires tax-exempt dividends?
A) Municipal bond fund.
B) Small-cap bond fund.
C) Mid-cap bond fund.
D) U.S. Government bond fund.
A) Municipal bond fund.
Provided that it has shareholder approval, an open-end investment company may:
A) underwrite the securities of another issuer.
B) issue senior securities.
C) make margin purchases.
D) engage in short sales of securities.
A) underwrite the securities of another issuer.
The role of the transfer agent for a mutual fund would include performing which of the following services?
A) Distribution of shares of the fund.
B) Custody of securities and other assets in the fund’s portfolio.
C) Portfolio management.
D) Distribution of dividends and capital gains.
D) Distribution of dividends and capital gains.
What are the three classifications used to identify investment companies?
A) Unit investment trusts, closed-end companies, and open-end companies.
B) Face-amount certificate companies, management companies, and closed-end companies.
C) Face-amount certificate companies, management companies, and open-end companies.
D) Face-amount certificate companies, unit investment trusts, and management companies.
D) Face-amount certificate companies, unit investment trusts, and management companies.
Under the Investment Company Act of 1940, which of the following statements regarding the investment objective of a mutual fund are TRUE?
I Only the board of directors needs to approve changes in the investment objective
II The majority of outstanding shares must vote to approve changes in the investment objective.
III The SEC must approve all changes in the investment objective.
IVhe investment adviser does not set, but tries to meet, the investment objective.
C) II and IV
An investment company share purchased at its net asset value that can be redeemed later at the then-current net asset value, with a 12b-1 fee no greater than .25%, is a share issued by
A) a front-end load company.
B) any type of open-end investment company.
C) a no-load, open-end investment company.
D) a closed-end investment company.
C) a no-load, open-end investment company
Separate accounts are similar to mutual funds in that both:
I may have diversified portfolios of common stock
II offer tax deferral on realized growth
III give investors voting rights
IVrequire scheduled payments
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