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Series 6 > Suitability type ques > Flashcards

Suitability type ques Flashcards

1
Q

During the accumulation phase of a variable annuity, the value of the contract owner’s portion of the separate account is equal to:

A

The # of accumulation units x the value of the S.A.

During the accumulation phase, a variable annuity contract holder owns accumulation units. The value of one accumulation unit multiplied by the number of accumulation units equals the total value of the contract holder’s investment.

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2
Q

How do you get the value of the contract in the accumulation phase?

A

Take the number of accumulation units times the value (of the S.A) per unit.

SO it depends on the value of the S.A.

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3
Q

Branches offices…don’t need a

A

resident principal.

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4
Q

what would you buy if you were to invest in a UIT?

Units
bonds
shares
or participation interests?

A

Units

the acquisition is of trust units

DAH!

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5
Q

IF you were a long term investor, which class of shares are best?

Class A with a lg amt
Class A with a sm amt
Class B with a sm amt
Class C

A

Class A with a lrg amount – and to get breakpoints..
or letter of Intent.

Class B with small amount

Class A shares have a front-end load with breakpoints and very small 12b-1 fees. The investor with a large amount to invest may end up paying very little or even no sales charge. Class B shares sell at NAV with a contingent deferred sales charge and a noticeable 12b-1 fee. The investor with a small amount to invest would pay no front-end load for B shares and only 12b-1 fees, which presently cease. In fact, both the CDSC and the 12b-1 fees typically diminish to nothing after 6 to 8 years, and the shares convert to A shares.

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6
Q

what is a 12b-1 fee?

A

asset based distribution fee

covers marketing and distributing to investors– sales literature; prospectuses, .

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7
Q

what is the max charge for a 12b-1 fee?

A

.75%. 75 basis points.

it is NOT a sales charge.

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8
Q

when is a 12b-1 fee taken out?

A

quarterly.

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9
Q

you can’t mis-use the term “no-load” fund. why?

A

there is still the .25% of average net assets for the 12b-1 fee. You can’t charge more than this. If you do, then you are mis-using the claim that it is a “no-load” fund.

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10
Q

Does FINRA permit an additional 0.25% charge for shareholder services?

A

Yes, and is considered separate from the 12b-1 fee marketing and promotion.

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11
Q

If the fund charges a 12b-1 fee, a simple majority of the board must be made up of…

A

Noninterested persons. Not just 40%.

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12
Q

Are 12b-1 fees also used to compensate representatives for servicing an account (trailer commissions)?

A

Yes! But it’s NOT a sales charge.
This is your passive income…
for taking care of the customer.

This is a fee paid for servicing AFTER selling the security to the client.

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13
Q

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
A

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.

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14
Q

Are annuities (periodic Payment plans_) a good investment for someone looking to retire soon?

A

No…
big surrender charges.

Accumulation plans and other periodic payment plans are specifically designed for the long-term investment of funds. Such plans are not suitable for an investor who will soon retire.

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15
Q 
The primary objective of a particular mutual fund is the payment of dividends, regardless of the market's current state. Capital growth is a secondary objective. Which of the following industry groups would be appropriate for the fund's portfolio?
A)
Aerospace.
B)
Consumer appliances.
C)
Computer technology.
D)
Public utilities.
A

Public utilities— they always withstand market hicups.

they are a DEFENSIVE market.
and pay dividends consistently.

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16
Q

The prospectus of the ABC Fund contains the phrase “will have at least one-quarter of common stock investments in the field of business machines.” The ABC Fund is:

A

A specialized fund.

A fund that, as part of its investment policy, makes a commitment to invest 25% or more of its assets into a particular economic or geographical sector is a specialized fund.

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17
Q

what is a balanced fund?

A

A balanced fund invests in a balance of bonds and common and preferred stocks.

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18
Q

what is a diversified fund?

A

A diversified fund does not invest more than 5% of the fund’s assets in any one issuer.

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19
Q

What does a growth and income fund invest in?

A

A growth and income fund may invest in many industries, seeking both dividends and capital gains.

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20
Q

Which of the following types of investment company securities is the most likely to have a NAV that is 90% of its offer price?

Closed-End
Open-End

A

Closed-End.

The market determines the offer price of closed-end company shares; the offer price may be either more or less than the NAV. Because the NAV in this situation is 90% of the offer price, this must be a closed-end share. An open-end share’s NAV must be at least 91.5% of its offered price because the maximum sales charge on open-end shares is 8.5% of the POP.

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21
Q

Mutual funds are subject to which federal securities regulations?

A

Sec Act of 1933

Inv Company Act of 1940

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22
Q

What is the Trust Indenture Act of 1939 do?

A

Requires most bond issuers to appoint a trustee.

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23
Q

Three years ago, your client invested $10,000 in the RIF Fund. During this time, the fund has distributed $700 in dividends and $1,100 in capital gains, all of which have been reinvested in additional shares. If the client decides to liquidate his position of 1,173.452 shares when the POP is $12 and the NAV is $11.52, the client’s cost base is:

A

11,800.00

A mutual fund investor’s cost base is the total of all investments including reinvested distributions. In this case, the initial $10,000 is increased by the $1,800 total of distributions.

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24
Q

Which of the following concerning hedge funds are TRUE?
Purchasers of hedge funds are generally required to be accredited investors.
Selling securities short is not allowed.
Ordinary investors may invest in hedge funds indirectly through funds of hedge funds.
Most hedge funds are registered with the SEC.

A

I know…
Purchasers of hedge funds are generally required to be accredited investors.

Put this to memory:
Ordinary investors may invest in hedge funds indirectly through funds of hedge funds.

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25
Q 
Which of the following mutual funds would be most likely to have the least correlation with the overall market?
A)
Money market fund.
B)
Small-cap fund.
C)
S&P Index fund.
D)
International fund.
A

MM

26
Q 
Which of the following mutual funds would be LEAST likely to have the least correlation with the overall market?
A)
Money market fund.
B)
Small-cap fund.
C)
S&P Index fund.
D)
International fund.
A

Index fund.

27
Q

What is the rule of forwarding pricing for NAV?

A

The forward pricing rule requires use of the next calculated NAV, which may be available on the day the redemption request was received.

28
Q

In May, an investor bought 100 shares of ABC for $16 per share. If he decides to give the stock to his nephew in December when the stock is selling for $25 per share, what is his nephew’s cost basis?

A

$16 per share.

Gifting – and the giver is still alive…
then cost basis is the same as when the giver bought it.

Giver’s Cost basis = your Cost basis, too.

thank you!!!

29
Q 
rank the funds below in order, from lowest to highest expected income yield.
Municipal bond fund
Government bond fund
Corporate bond fund
Growth stock fund
A 
Lowest: 
G
M
G
C

Growth Stock fund

Muni bond fund

Gov bond

Corp. Bond Fund.

Remember it
s what you anticipate the income to payout each month.

Corporate bonds have the greatest amount of credit risk and therefore the highest yield.

30
Q

Which has the greatest amount of risk, but also the highest yield?

A

Corporate bonds have the greatest amount of credit risk and therefore the highest yield.

31
Q

What about Gov bond funds vs Municipal bond funds?

A

Government bond funds yield more than municipal bond funds because interest paid on government bonds is federally taxable.

32
Q

Are Growth stock funds are not designed to provide income at all?

A

Nope, they are not. They like to grow CAPITAL.

So be ready to hang on for the long ride!

33
Q

If an open-end investment company wishes to change its investment objective, it may only do so with a:

A

majority vote of the outstanding SHARES.

Not shareholders.

SO… majority votes of the OUTSTANDING SHARES.

Got it? Good.

34
Q

Which of the following statements regarding a corporate bond quoted as QRS Zr 20 is TRUE?

A

ZR…means a zero-coupond bond issued by the QRS Company.

Deep discounts…means you get your $ with big interest at the end of maturity.

35
Q

The over-the-counter market could be characterized as what type of market?

A

Dealer Market.
The OTC market is an inter-dealer market.

Dealer to Dealer.
OTC.

“D2D” OTC

36
Q

D2D

A

Dealer to Dealer

37
Q 
Your customer is a retired widower, age 72, seeking a moderate level of current income to supplement his Social Security benefits and his company pension plan. He has a very conservative attitude toward investments. An equally important investment goal for him is capital preservation. Which of the following mutual funds is the most suitable for this customer?
A)
LMN Government Income Fund.
B)
ABC Balanced Fund.
C)
ABC Investment-Grade Bond Fund.
D)
ACE Equity Income Fund.
A

LMN Government Income Fund.

This customer requires maximum safety and current income. While all fixed-income funds aim to provide current income, the U.S. government bond fund offers the best combination of safety and a higher yield of the choices offered.

38
Q

How does AIR affect the monthly payout in an annuity?

A

The assumed interest rate is a base for projection. For benefit checks to stay level, the account must earn the AIR. If actual return is greater than the AIR, the check will increase; if it is less, the check will decrease in comparison to the previous month’s check only.

39
Q

A contingent deferred sales charge is best described as:

A

Back-end sales charge that decreases the longer the investor holds the shares.

40
Q

In July, a customer invested $10,000 in the ABC Mutual Fund. In December of the same year, ABC announced a long-term capital gains distribution. In May of the next year, the customer decided to redeem his shares for a capital gain. How are both of the capital gains treated for tax purposes:

A

So look at what the fund said on the type of cap gains distribution: “LONG TERM” of time the investor it…
Besides the length of time holding the fund doesn’t matter.
What does matter is the redemption period.

Redemtion, the investor held it was less than 12 months… so the cap gain from redemption is SHORT TERM. Cuz it was held for less than 12 months.

41
Q

What do you look at to determine if cap gains– long term or short term???

A

upon receiving the cap gains– its always going to be LONG TERM.

If you hold it longer than 12 months after having it… or less— that tells you if Long or short term cap gains upon redeeming it.

Got it? Make sense?

42
Q 
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)
Municipal unit investment trust.
B)
GNMA fund.
C)
Growth mutual fund.
D)
Money market mutual fund.
A

Really? you choose MM? No!

Start thinking…
GROWTH FUNDS. cuz they chiefly invest in common stock.

Historically, common stock provides greater protection from inflation than debt securities do.

43
Q

What doesn’t matter when considering inv decision for an annuity?

A

Customer’s Sex.

Yes– you care about the other important stuff…
Like:
The customer’s investment objective,
past performance of the variable annuity,
and available fund choices,

BUT! not the sex of the annuitant,

44
Q

Really? You want to make sure you still have 50K in 10 yrs for your daughter’s college education? Ok…

A

You better invest in a ZERO_coupon bond maturing in 10 years.

At least you know you won’t lose any money.

You can buy it at a deep discount, like for 35,000; and at the end of 10 yrs– you get 50K!

Keep in mind that during the 10 yrs; you’re not paid a single cent.
These are government securities and are very safe.

45
Q

What kind of securities can a mutual fund hold in its investment portfolio?

A

Common
Preferred Stock
Corporate bonds
Municipal bonds.

Yep! all of these!

Don’t get tricked…
Although a mutual fund can only issue one type of security, common stock, it may purchase many different CLASSES of securities for its investment portfolio, including preferred stock, corporate bonds, and municipal bonds.

46
Q

What type of new issues do mutual funds make?

A

a mutual fund can only issue one type of security, common stock.

47
Q

What could you find in a mutual funds’ portfolio?

A

A DIVERSE array of types of funds it bought…so you, the investor can have a diversification, and not buy individual mutual funds all day! And then pay extra trade commisions and management fees on top of that!

48
Q

Ha! What’s in the pipeline— if you paid out 91% of your income to your shareholders? How much do you pay in taxes then?

A

Only 9% on the NII for last year. Super!

ACE pays taxes on any portion of income it does not distribute, as long as it distributes at least 90%; ACE paid taxes on 9%.

49
Q

If ZB Invest Fund seeks capital appreciation, has a low dividend yield, and invests chiefly in the stock of large, well-performing companies that have earnings momentum; it is probably a:

A

Growth fund. They like capital appreciation– mula and don’t give their earnings away– they reinvest into their own company to build capital.

50
Q

The Securities Exchange Act of 1934 regulates or mandates

A

Creation of teh SEC
Manipulation of the secondary market.
Extension of credit to customers.

(Not full and fair…that’s 1933 Act)

51
Q

What does the exchange privilage do?

A

You can move between family funds WITHOUT a a sales charge.

YES– it is still a taxable event. So careful o that one.

Let’s say…
The customer is taxed on the gain of $12,000 ($40,000 − $28,000). The taxes on $8,000 (dividends and capital gains) were taxed in the years distribution took place.

52
Q

How do you help your client have a tax relief?

A

Select a ABC Municipal Bond Fund with her and advise her of the tax treatment of the distributions –

Dividends are federally tax exempt, but capital gains are subject to taxation.

in other words…s

Dividends from municipal bond funds are tax exempt because they represent tax-exempt interest paid to the portfolio; capital gains distributions are taxable.

53
Q 
An investment company that is not classified as either a unit investment trust or a face-amount certificate company would be classified as a(n):
A)
ETF.
B)
fixed portfolio trust.
C)
management investment company.
D)
non-fixed portfolio trust.
A

Management investment companies are one of the three classifications of investment companies under the Investment Company Act of 1940.

The other two are face amount certificate companies and unit investment trusts, the latter of which can have a fixed or non-fixed portfolio.
Reference: 3.9.3 in the License Exam Manual

54
Q

Separate accounts are similar to mutual funds in that both:

A

may have diversified portfolios of common stock.

AND

Give investors voting rights.

Cool.
;-)

55
Q

what type of company is “SUPERVISED” rather than “Managed”

A

Unit investment Trust
A trust more or less just holds a secuity until redemption or an agreed speicif date–

They don’t even trade their portfolio! So no manager is needed.

56
Q

As much as you’d like to put a client into some money making markets…so you can look good…. you won’t do them any good if the market goes to hell in a handbasket.

So if your client is going to retire soon,
or buy a sizeable investment like needing money to buy a house…

recommend… what?

A

Treasury bills
or
Money Market Fund.

It’s safe.
It grows just a little, if any.
but at least they have it when they need it most.

NOW you look good.

57
Q

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

Balanced fund.

You were right the first time.

Here’s why:

Balanced funds maintain a particular percentage of their assets in debt instruments and a particular percentage in equity. The precise percentage may be adjusted periodically by the investment adviser, but it is specific.

An asset allocation fund would also have a portion of its assets in money market instruments or even cash.

Combination funds and special situation funds are primarily stock funds.

58
Q

What are the objectives of a balanced fund?

A

Capital appreciation and Income.

59
Q

If an investor has received dividends and capital gains distributions on mutual fund shares she has held for four months, the investor will pay

A

capital gains rates on capital gains distributions and ordinary income rates on dividends.

CapGanRate on CapGanDis
OrdIncRate on DIVS

60
Q

CapGanRate on…

A

CapGanDis

Capital Gain Distribution

61
Q

OdincRate on…

A

DIVS

Dividends

62
Q

A retired man has $100,000 to invest for growth. He also owes a $10,000 note due in 6 months, a $20,000 note due in one year and a $25,000 note due in two years. How much of the $100,000 should he allocate to growth investments?

A

So pay attention to the fact that he OWES….

So…The man will pay a total of $55,000 over two years. This period is too short to invest in stocks for growth. The man can invest the remaining $45,000 because he will not need it to pay the notes.
Reference: 3.2 in the License Exam Manual

Series 6 (8 decks)

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