Practice Test Flashcards
Place the following mutual fund dividend distribution dates in the order in which they occur
Payment Date
Record Date
Declaration Date
Ex-Dividend Date
Declaration Date
Record Date
Ex- Dividend Date
Payment Date
Of the following statements, which is true of an investment advisor and his role within an investment company?
a. Primary compensation is dictated as a percentage of the funds Profits
b. The size of his fee will be affected by the aggressiveness of the funds investment objectives and then also the success with witch they are met.
c. Can be either a company or an individual.
d. May borrow from the fund upon approval of the board of directors
b. The size of his fee will be affected by the aggressiveness of the funds investment objectives and then also the success with witch they are met.
The fees of an investment company adviser are affected by the aggressiveness of the fund’s objectives. Its primary compensation is dictated as a percentage of net assets of the fund. The adviser must be a company, not an individual, and he may not borrow from the fund under any circumstances.
A Breakpoint sales charge letter of intent
a. Can be backdated to include a previous purchase as long as it’s within the prior 90 days
b. Affords the investor ip to 12 months to meet the investment level they are committing to
c. Provides that if the investor fails to reach the subscribed level, the sales charge is simply adjusted upward.
d. Acts a binding contract for the fund.
a. Can be backdated to include a previous purchase as long as it’s within the prior 90 days
&
c. Provides that if the investor fails to reach the subscribed level, the sales charge is simply adjusted upward.
Open-end funds charge a sales charge as a cost of distribution. What is the maximum amount they can charge as a percentage of the public offering price.
a. 5.5%
b. 9%
c. 8.5%
d. 7%
c. 8.5%
An investor would like to invest within a family of funds by moving his money from fund EF to fund DC. Fund EFs shares have a NAV of 9.50 and a POP of 10.25. Fund DCs shares have a NAV of 19.10 and a POP of 19.95. Given that conversion privileges are provided by this fund, at what price will this investor both redeem and purchase the proposed shares?
a. Fund EF at 9.50, Fund DC at 19.10
b. Fund EF at 10.25, Fund DC at 19.95
c. Fund EF at 9.88, Fund DC at 19.52
d. None of the above
a. Fund EF at 9.50, Fund DC at 19.10
Conversion requirements dictate that the redemption and purchase must be at the NAV
A money Market fund will invest in:
a. Debt securities with maturities less than a year
b. Commercial paper
c. Bankers acceptances
d. All of the Above
d. All of the Above
Calculate NAV per share for Mutual fund BC:
Assets: 25,000,000
Liabilities: 2,200,000
Shares Outstanding: 4,500,000
a. $5.07
b. $6.04
c. $10.36
d. $5.56
a. $5.07
Assets- liabilites = NAV
total NAV/total # of shares = NAV per share
25,000,000-2,200,000 = 22,800,00 NAV
22,800,000/4,500,000= 5.07 NAV per share
Which of the following statements describes the primary difference between rights of accumulation and a letter of intent?
a. The sales charge reduction does not apply to previous statements
b. There is no time limit on rights of accumulation
c. Investors can qualify for a reduction in sales charge based on past investments.
d. In calculating whether the investor qualifies, current investments are considered.
b. There is no time limit on rights of accumulation
How can an investor determine her cost base given that she owns a large sum of shares purchased through different transactions?
a. Share identification
b. First in, first out
c. Average cost
d. All of the above
d. All of the above
Which of these statements are accurate requirements for a mutual fund prospectus?
a. Sixteen months after publication the prospectus should be disposed of.
b. The fund is required to update information in the prospectus every 12 months
c. The fund should, but is not required to update the information in the prospectus every 6 months.
d. The funds prospectus can be available for up to 18 months from publication.
a. Sixteen months after publication the prospectus should be disposed of.
**Note:
The fund SHOULD update the prospectus information every 12 months, but is REQUIRED to update the information every 13 months.
What advantage does a Variable Life Annuity have over a WL cash value policy?
Deferred taxes. and hedge against inflation.
An income-seeking investor is concerned with the possibility of rising interest rates over the next few years. Of the choices listed, his best investment selection would be:
A) Treasury bonds.
B) Treasury bills.
C) Collateralized mortgage obligations.
D) municipal bonds.
b.
Treasury bills.
A nonqualified deferred compensation plan:
A) does not guarantee that the employer will fulfill its obligation
B) must be offered to all employees
C) must be approved by the IRS
D) guarantees payment to the employee even if the company becomes insolvent
a. Does not guarantee that the employer will fulfill its obligation
All of the following items require review by a principal of the member firm EXCEPT
A)
independently prepared reprints
B)
form letters mailed to existing customers
C)
a training presentation that is marked for internal use only
D)
form letters mailed to 25 or fewer prospective customers within a 30-day period
a. IPRs
independently prepared reprints
Your customer is interested in income that is as free of default risk as possible. Which of the following funds would you consider suitable to recommend to him?
A)
A balanced fund that purchases only AA rated bonds or higher.
B)
A fund that specializes in municipal revenue bonds.
C)
The Topley Investment Grade Corporate Bond Fund.
D)
The Ellis Government Bond Fund.
D)
The Ellis Government Bond Fund.
To which securities market does the Securities Act of 1933 apply?
A)
The OTC market.
B)
Securities traded between accredited investors.
C)
The new issue market.
D)
Listed securities sold on an exchange.
C)
The new issue market.
Which of the following is a major advantage of a nonqualified variable annuity compared to a mutual fund?
A)
Voting for the board of directors.
B)
Tax deferral.
C)
Diversification.
D)
Receiving dividends.
B)
Tax deferral.
A nonqualified variable annuity has the advantage of tax deferral over investing in a mutual fund; the other choices are common to both investments.
DMF Company has convertible bonds (convertible at $50) outstanding. The current market value of DMF’s stock is $42. The bond indenture contains an antidilution feature. If DMF declares a 10% stock dividend, the new conversion price will be
A)
higher than $50
B)
$50
C)
the stock’s current market price
D)
lower than $50
D)
lower than $50
With an ant dilution feature, the issuer will increase the number of shares available upon conversion if the company declares a stock split or stock dividend. This is done to keep the bondholder whole. Originally, the bond converts to 20 shares ($1,000 ÷ 50), because of the 10% stock dividend, the bond needs to convert to 22 shares, which means the conversion price is reduced to $45.45 ($1,000 ÷ 22 = $45.45).
Which of the following is the safest from default risk?
A)
AAA unsecured bond
B)
High-yield bond
C)
Industrial Development Revenue bond
D)
AA secured bond
A)
AAA unsecured bond
A customer owns 200 shares of ABC Growth Fund, which has a POP of $12 and an NAV of $11. She wants to convert these shares to ABC Balanced Fund, which has a POP of $14.77 and an NAV of $13.66. ABC offers a conversion privilege. At what price will the ABC Balance Fund shares be purchased?
A)
$12.
B)
$11.
C)
$14.77.
D)
$13.66
D)
$13.66.
An investor has been investing $100 per month for the past three months. The purchase prices were $20, $25, and $10. What is average cost per share purchased?
A)
$15.79
B)
$18.33
C)
$100
D)
$5.45
A)
$15.79
see how many shares were bought for each $100 spent.
(100/20: 4. 100/25: 5. 100/10: 10. total of 19 shares.
since there’s 3 months…$300 spent.
so…
$300/19: 15.79.
The value of which of the following is used to determine an annuitant’s payment amount during the payout period of a variable annuity contract?
A)
Cost of Living Index.
B)
Accumulation unit.
C)
Dow-Jones Industrial Average.
D)
Annuity unit.
D)
Annuity unit.
once you have annuitized, it is made into annuity units.
What do qualified and Non qualified plans have in common
Both are tax deferred.
What are some SUITABLE investments for Individual Retirement Plans:
stock and bond mutual funds,
UIT’s
Government securities
Where would an investor expect to find closed-end investment company shares traded?
OTC
The exchanges
What is the conversion ratio of a convertible bond purchased at par value and convertible at $50?
20:1
The $1,000 par value divided by the $50 conversion price equals 20 shares per bond.
If interest rates in general are rising, the price of T-bills should:
Fall.
Like the price of other debt instruments, the price of outstanding T-bills decreases as interest rates rise
The Investment Company Act of 1940 requires that a mutual fund do which of the following?
Have 100,000 minimum capitalization.
AND
Provide semiannual reports to shareholders. (every 6 months.)
A customer establishes a nonqualified periodic payment deferred annuity and makes payments for three years. If the customer suddenly dies, which of the following statements correctly identifies the tax consequences to the beneficiary?
The beneficiary must pay ordinary income tax on proceeds exceeding the cost basis.
When an annuitant dies during the accumulation period of a nonqualified annuity, the proceeds exceeding the annuity’s cost basis are taxable as ordinary income to the beneficiary.
Which of the following actions comes under the guidelines concerning COMMUNICATION with the public?
I Posting an internal memo giving sales tips to registered representatives
II Distributing a letter to all clients regarding a new mutual fund family
III Distributing copies of a magazine article about investment opportunities to existing customers only
IV. Calling a client to discuss a new investment strategy
A)
II and III
An internal memo is not a public communication. Under FINRA Rule 2210 communications with the public are defined as written, therefore the phone call is not a form of communication with the public.
Which of the following statements regarding 403(b) plans is NOT true?
A)
An employer can also make contributions to the 403(b) plan on behalf of the nonworking spouse of an employee.
B)
Employee contributions have both a dollar limit and a percentage of salary limit.
C)
If all contributions are qualified, the employee’s cost basis in the account is zero.
D)
Distributions from a 403(b) plan follow the same distribution rules as those for other qualified plans.
A. An employer can also make contributions to the 403(b) plan on behalf of the nonworking spouse of an employee.
Explanation:
Only employees (not spouses) of 403(b) or 501(c)(3) organizations may be covered under 403(b) plans.
During the accumulation period, if the S.A. has a positive rate the value of the accumulation unit will….
go up
go down
stay the same
or exceed the value of the annuity units
go up.
During the accumulation phase, the value of an accumulation unit changes as the current market value of the securities in the portfolio of the separate account changes. When the separate account becomes worth more, the value of the accumulation unit is worth more.
Your new client is interested in purchasing corporate bonds. When speaking about the different risks associated with this investment, you explain that reinvestment risk is the risk that, between now and when the bond matures or is called, interest rates will:
Fall.
If interest rates decline, it becomes difficult for bond investors to invest the proceeds from the bond and maintain the same level of income and the same general risk level.
Which of the following types of annuity contracts could your customer NOT purchase?
A)
Periodic payment deferred annuity.
B)
Single payment deferred annuity.
C)
Periodic payment immediate life annuity.
D)
Single payment immediate life annu
there is no such thing as a….
Periodic payment immediate life annuity
Which of the following investment company portfolios is supervised rather than managed?
A)
Unit investment trust.
B)
Regulated open-end fund.
C)
Real estate investment trust (REIT).
D)
Closed-end bond fund.
UIT.
A unit investment trust buys securities and holds them until redemption or until a specified future date. The securities in the portfolio are not traded, so no manager is needed. A REIT is not considered to be an investment company
What’s the difference between Traditional and an IRA?
Traditional gives you current tax year tax deduction. If you think you’re going to need to reduce the amount of income to be taxed, this is a smart move. But if not, then Roth IRA is better.
Money going into a Roth has already been taxed. So when you’re ready to retire, you don’t have to pay taxes on that ever. Also the growth not taxed as long as you hold it for more than 5 yrs.
*Traditional is a qualified plan.
*Roth is a non qualified plan.
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)
balanced fund.
C)
dual purpose fund.
D)
closed-end fund.
Closed-END. Look at the “ask”— meaning Supply and demand.
The asking price of a closed-end fund is not determined by its NAV because the fund trades based on supply and demand.
An open-end company’s NAV cannot go up while its asking price goes down.
One of the most important functions of a banker’s acceptance is its use as a means of:
facilitating trades in foreign goods.
One of the most important functions of a banker’s acceptance is its use as a means of:
facilitating trades in foreign goods.
FINRA allows sales charges up to a maximum of:
The maximum allowable sales charge for
mutual funds is 8.5%.
Contractual plans are 9%. (set payments into Mutual funds over time.)
variable annuities: no maximum sales charge.
If your customer holds ten KLP 6% bonds, how much money will he receive in total at the debenture’s maturity?
A)
$10,000.
B)
$10,300.
C)
$10,200.
D)
$10,600.
B)
$10,300
The holder of 10 bonds will receive $10,000 in principal at maturity. Each bond pays 6% annual interest, or $60. Thus, ten bonds pay a total of $600 per year in two semiannual payments of $300. At maturity, the bondholder will receive the $10,000 face amount plus the final semiannual payment ($10,000 + $300 = $10,300).
A client has purchased a variable annuity with a death benefit clause. At the time of his death, he had invested $20,000 and owned 12,420 accumulation units worth $1.72 each. Under the death benefit provision, his beneficiary would receive:
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. In this case, he had invested $20,000, but the value of the account currently was $21,362 (12,420 units × $1.72 each).
SO you get the greater.
The Securities Exchange Act of 1934 covers all of the following EXCEPT:
A)
trading on exchanges.
B)
broker dealers and their representatives.
C)
issuance of corporate securities.
D)
trading of corporate securities.
C)
issuance of corporate securities
The Securities Exchange Act of 1934 (the people and places act) regulates the secondary market. The Securities Act of 1933 (the paper act) regulates the primary market.
Cash settlement for a trade occurs…
Same day as the trade date.
Regular way for common stock settlement occurs…
T+2 business days
A financial reporter notices that the offering price of one investment company’s share is at a 22% discount from the NAV. From this information, he can conclude that the company must be a(n):
Closed-end….
If the ask price of a fund is less than the NAV, the fund must be a closed-end investment compan
What is Net Income Investment? NII
(interest received plus dividends received minus expenses).
From which of the following is the 12b-1 fee deducted?
asset of the fund; and charged quarterly.
A 12b-1 fee is charged quarterly as a percentage of the average annual assets.
What is retail Communication?
any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period
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)
decrease.
C)
increase.
D)
are more liquid.
increase.
An appreciation in value of fund assets, without a corresponding increase in liabilities, leads to an increase in the fund’s net asset value (total assets minus liabilities equals net assets).
Which of the following communications are subject to principal approval before first use?
A)
Mutual fund summary prospectus
B)
Form letter sent to 10 prospective retail customers every week
C)
Quarter-page advertisement in your local newspaper announcing the opening of a second local branch office
D)
Letter to an insurance company recommending a specific security for investment
B)
Form letter sent to 10 prospective retail customers every week
Form letters or group emails more than 25 retail investors within a 30-day period constitutes retail communication and must be preapproved
*A mutual fund summary prospectus is prepared by the issuer, not the broker-dealer and as such is not subject to approval by the firm.
The announcement of a second location does not promote a product or service of the firm and therefore pre-approval is not required.
Where would an investor find a complete list of holdings for a particular mutual fund?
semi annual or annual report
What does a statutory prospectus tell?
Investment objectives.
A statutory prospectus will list investment objectives but not holdings.
Mr. and Mrs. Smith, both nearing retirement, want to maximize their income. They want to reallocate $100,000 of their $400,000 portfolio of securities for this purpose. Of the possible investment choices below, which would be the LEAST suitable recommendation given their investment objective?
A)
CMOs
B)
Preferred shares of stock
C)
GNMA certificates
D)
AAA convertible corporate bonds
D)
AAA convertible corporate bonds
why?
Convertible bonds offer a lower coupon in exchange for the conversion feature, therefore is not a good choice for maximizing income.
The __________________ is the rate of interest banks charge each other on overnight loans.
fed funds rate
In proper order, list the four phases of the business cycle.
Expansion
Peak Recession/Contraction
Trough
A decline in GDP for two successive quarters is defined as a ____________.
recession
What economic theory emphasizes government intervention and the use of fiscal policy to manage the economy?
Keynesian Economic Theory
What economic theory emphasizes controlling the money supply to manage the economy?
Monetary Economic Theory
A bond convertible at $50 is trading at $1,200. For parity, where should the stock be trading?
Conv. ratio = $1,000 ÷ $50 = 20 sh. The stock needs to trade at $60 to be at parity with the bond ($1,200 ÷ 20 = $60).
____________ occurs when the supply of goods exceeds the demand for goods
Deflation
Deflationary periods are characterized by __________________ prices.
falling/decreasing
___________ is what occurs when there is “too much money chasing too few goods.”
Inflation
The _______________________ is often considered the most important measure of inflation.
Consumer Price Index (CPI)
True or False: Covered call writing is a conservative option strategy designed to generate income.
True
What is a covered call position?
The sale of a call (obligation to sell) against stock that is owned
True or False: Both common and preferred stockholders are offered preemptive rights.
False. Preemptive rights are only offered to common stockholders.
If a corporation executes a stock split, is there a resulting gain or loss for existing stockholders?
No, the overall position stays the same. Forward = more shares at lower price; Reverse = fewer shares at higher price.
ABC sets a record date of Wednesday, Oct. 19. Would a buyer of ABC on Monday, October 17 be entitled to the dividend?
No, the investor must own (trade settles) on or before the record date. This trade would not settle until October 20.
XYZ’s record date is Thursday, May 3. With a regular-way trade, when could Emma sell her stock, but keep the dividend?
On Tuesday, May 1 or later. She must remain the owner at least through May 3 to keep the dividend.
Mack, in the 35% tax bracket, is earning 5.4% on a tax-free municipal bond. What is his taxable equivalent yield?
The formula is: Tax-Free Yield ÷ (100% - Tax Bracket %). 5.4% ÷ 65% = 8.3%
Rank in order, from highest to lowest, the three yields on a bond priced at a discount.
Nominal Yield, Current Yield, YTM
A bond has a 12% coupon and is trading for $1,200. What is a realistic YTM for this bond?
YTM must be less than 10% since the current yield ($120 ÷ $1,200) is 10%.
What does a normal, positive, ascending, or upward sloping yield curve indicate
inverted (negative/descending)
True or False: A flat yield curve reflects both long and short-term yields being the same.
True
As it relates to securities law, what does the acronym USA mean?
The Uniform Securities Act, also known as the blue-sky laws
Are ADR holders exposed to currency risk?
Yes, since these securities will track the underlying stock.
The NAV of a mutual fund is like the _____ price of a stock.
The POP of a mutual fund is like the _____ price of a stock.
NAV—-> Bid
POP —> Ask
