Chapter 10: Packaged Securities

Question 1

DCA average cost per share formula

Answer 1

Total amount invested / # shares purchased

Question 2

POP of mutual fund formula

Answer 2

NAV / (100% - sales charge %)

Question 3

Accumulation units vs annuity units

Answer 3

• Accumulation units
  
  • purchased during pay-in phase. Similar to shares on a mutual fund
• Annuity units
  
  • during payout phase, accumulation units are converted into a fixed number of annuity units.
  • Investors receive a fixed number of annuity units periodically (usually monthly) with a variable value, depending on the performance of the securities in the separate account

Question 4

Assumed interest rate (AIR)

Answer 4

• A projection of the performance of the securities in the separate account over the life of a variable annuity contract.
• If the asumed rate matches the actual performance, investor will receive expected payouts.
• If does better, payout increases. If does worse, payout decreases

Question 5

REITS can avoid being taxed like a corporation if (3 requirements):

Answer 5

1. At least 75% of the income comes from real estate related activities
2. At least 75% of the REIT’s assets are in real estate, govt. securities, and/or cash
3. At least 90% of the net income received is distributed to shareholders (who pay taxes on their income)

Question 6

ABC aggressive growth fund has a net asset value of $9.20 and a public offering price of $10.00. What is the sales charge percent?

• A. 6.8%
• B. 7.5%
• C. 8%
• D. 8.7%

Answer 6

C. 8%

• Sales charge % = POP - NAV / POP
• Sales charge % = $10.00 - $9.20 / $10.00
• Sales charge % = $0.80 / $10.00
• Sales charge % = 8%

Question 7

ABC aggressive growth fund has a NAV of $9.12 and a POP of $9.91. If there is a 5% sales charge for investments of $30,000 and up, how many shares can an investor who is depositing $50,000 purchase?

• A. 5,045.409 shares
• B. 5,208.333 shares
• C. 5,219.207 shares
• D. 5,482.456 shares

Answer 7

B. 5,208.333

• Step 1:
  
  • POP = NAV / (100% - sales charge %)
  • POP =$9.12 / (100% - 5%)
  • POP = $9.12 / 95%
  • POP = $9.60 per share
• Step 2:
  
  • $50,000 / $9.60 = 5,208.333 shares

Question 8

An investor who purchases a variable life insurance policy faces which of the following risks?

• A. the insurance company may have to increase the premium if the securities held in the separate account underperform the market
• B. the insurance company may decrease the premium if the securities outperform the market
• C. the policy may have no cash value if the securities held in the separate account underperform
• D. the death benefit may fall below the minimum in the event that the securities held in the separate account underperform

Answer 8

C. the policy may have no cash value if the securities held in the separate account underperform

Question 9

________ are closed end index funds that are traded on an exchange. They provide investors with diversification along with the ability to sell short and purchase shares on margin.

Answer 9

ETFs

Question 10

________ are exchange traded funds that are designed using many derivative products, such as options to attempt to profit from a decline in the value of the underlying securities (like the S&P 500). They can be used to profit from a decline in a broad market index or in a specific sector, such as energy or financials.

Answer 10

Inverse ETFs

Question 11

________ is a type of packaged security that is similar to a zero coupon bond. Investors make either a lump sum payment or periodic payments in turn for a larger future payment. Very few around today.

Answer 11

Face amount certificate

Question 12

________ allows shareholders to receive a reduced sales charge when the amount of the funds held plus the amount purchased is enough to reach a breakpoint. There is no time limit.

Answer 12

Rights of accumulation

Question 13

A ________ signed by an investor allows him to receive a breakpoint (quantity discount) right away after the initial purchase, even if the investor hasnt yet deposited enough money to acheive the breakpoint.

Answer 13

Letter of intent

• This document states that as long as the investor deposits enough withing a 13 month period he will receive the discounted sales charge right away.
• Can be backdated up to 90 days, meaning it may apply to a previous purchase