FINRA Series 6 > Unit 2 > Flashcards

Unit 2 Flashcards

(53 cards)

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1
Q

The Investment Company Act of 1940 requires the company to have:

A
  • Must have at least 100 investors
  • 40% of the Board of Directors must be outsiders
  • Must have net assets of at least $100,000
  • Must have a clearly defined objective
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2
Q

What are the 2 types of Investment Companies an investor can select from

A

Managed

Unmanaged

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3
Q

What are the 2 types of “Managed” Investment Companies

A
  1. Closed End Investment Co.

2. Open End Investment Co.

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4
Q

Explain a Closed End Investment Co.

A

Works like any other type of company

  • One IPO and then secondary market
  • Can issue senior securities
  • Can be diversified or not
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5
Q

Explain a Open End Investment Co.

A
  • “Mutual Fund”
  • Continuous, ongoing public offering
  • Redeemable and NEVER trades in the secondary market
  • Can ONLY issue junior securities
  • Limited bank borrowing
    • 3:1 Asset to debt ratio
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6
Q

What expenses come with “Managed Investment Companies”

A

Investment Adviser

  • BOD Stipend
  • Portfolio Manager (largest expense)
  • Custodian
  • Transfer Agent
  • 12B-1 fees
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7
Q

What sales charges come with “Managed Investment Companies”

A
  • UW
  • Broker/Dealer
  • Registered Rep
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8
Q

Based on the Investment Company Act of 1940, in order to be classified as a “Diversified Investment Company” the company must follow what investing rule

A

75/5/10 Rule

  • 75% of total assets must be invested in OTHER companies
  • No more than 5% of TOTAL ASSETS may be invested IN any one company
  • The Investment Company may not own more than 10% OF any other company
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9
Q

What are the safest to riskiest securities

A
  1. US Treasury Securities
  2. Gov’t back mortgages
  3. Municipal Bonds
  4. Corporate Bonds
  5. Preferred Stock
  6. Common Stock
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10
Q

What are some characteristics of a Mutual Fund

A
  • Open End Investment Co.
  • Continuous, ongoing public offering
  • NEVER trades in the secondary market
  • Limited bank borrowing
    • 3:1 Asset to debt ratio
  • Can only purchase with cash, never on margin
    • Therefore, always settles SAME DAY
  • No short sales or other speculative activities
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11
Q

What type of securities does mutual funds issue to its sharholders

A

Common Stock

- Distributes quarterly dividends and annual gains

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12
Q

What is the POP

A

An investor buys at the Public Offering Price (POP)

  • POP = NAV + Sales Charge
  • Max allowable sales charge is 8.5% OF POP
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13
Q

Explain the 12b-1 Fee

A
  • May be used ONLY for advertising and distribution. Not an expense of the fund
  • This is an asset based fee. The more you have in assets, the greater the fee
  • Maximum 12b-1 is 0.75%, except for Class A and No Load funds where it is 0.25%
  • 12b-1 is charged quarterly, and may only be changed by the BOD and shareholders
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14
Q

Explain Hedge Funds

A

A private investment fund that markets itself almost exclusively to wealthy investors.
They are aggressive risk-seeking investment funds that typically use leverage to magnify funds.

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15
Q

What is an Index Fund

A
  • The fund is not actively managed
  • Fund is tied to an index such as the S&P 500
  • The fund is on “auto-pilot.” Whichever way the index moves, so moves the fund
  • Significantly less expensive as there is no management charge
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16
Q

What is an Exchange Traded Fund (ETF)

A
  • Works like a traditional index fund

- Trades on the secondary market

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17
Q

Why is Life insurance is purchased

A

To provide a death benefit to protect against the financial loss from an untimely death

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18
Q

Why is an Annuity is purchased

A

To provide a stream of income for as long as an annuitant lives

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19
Q

Explain Fixed Products

A
  • They have a guaranteed return
  • The investor will not make less than the guaranteed amount, but will also not make any more, thus experiencing inflation risk
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20
Q

Explain Variable Products

A
  • They do not have a guaranteed minimum return
    (Variable Life is the exception)
  • Variable products may earn more than fixed products, so can be used to hedge against inflation, but they may also lose money and experience market risk
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21
Q

What are the fees and charges from the General Account

A

Cost of Insurance (GMDB)
Admin Fee
Taxes (State premium tax)
Sales Charges

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22
Q

What are the fees and charges from the Separate Account

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A

Mortality Fee
Investment Management Fee
Cost of variable insurance
Expense Fee

23
Q

Explain the purpose of Variable Annuities

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A
  • Investment vehicles designed to save for retirement
  • They provide tax-deferred growth, meaning that the increase in account value is not taxed until the money is actually taken out
  • Because these are retirement vehicles, there are restrictions on removing the money before age 59 1/2
24
Q

What are Variable Annuities contributions called

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A

The Cost Basis

25
Name the 2 ways an investor can purchase Annuities
1. Immediate Annuity | 2. Deferred Annuity
26
What does annuitize the contract mean
Moving from the pay-in phase to the pay-out phase.
27
How is money taken out of an Annuity
- Partial Cash Withdrawal - Death - Annuitization
28
What are the Annuitization options
- Straight Life (Largest payment) - Life Annuity with Period Certain - Joint Life with Last Survivor - Unit Refund Option
29
What is the monthly payment on a variable annuity based on
The Assumed Interest Rate (AIR)
30
When is the Assumed Interest Rate (AIR) set
The AIR is not set until the contract is annuitized. Once set, the AIR never changes
31
Explain the purchasing power risk
Inflation risk This a significant risk associated with fixed annuities. The fixed payments that the annuitant receives loses buying power over time due to inflation.
32
Mutual Funds ISSUES then DISTRIBUTES what to its shareholders
- ISSUES common stock to its shareholders | - DISTRIBUTES quarterly dividends and annual capital gains distributions
33
If a Mutual Funds objective is growth, it will invest in:
A growth fund would invest in common stocks
34
If a Mutual Funds objective is income it will invest in:
An income fund would invest in preferred stock and bonds
35
Securities Investor Protection Corporation (SIPC) provides what type of protection to investors
SIPC protects investors in the case of Broker/Dealer bankruptcy. - Protection is up to a maximum of $500,000 per customer, with no more than $250,000 in cash - Securities are always covered first
36
What type of security is normally found in the portfolio of any mutual fund tat has growth as a primary or secondary objective?
Common Stock
37
What happens to the share and price in a two-for-one stock split?
The number of outstanding shares is doubled and the price is halved. The total market value of the issuer's stock therefore remains the same.
38
If an investor purchases a U.S. Treasury note quoted at 101.24, the investor must pay how much?
101 x $10 = $1,010 | 24/32 reduces to ¾ of a point or $7.50, added together, the answer is $1,017.50 ($1,010 + $7.50 = $1,017.50).
39
An investor who owns shares of a mutual fund actually owns:
an undivided interest in the fund's portfolio.
40
A mutual fund's expense ratio is its expenses divided by:
average net assets.
41
Under what circumstances may an open-end investment company act as its own distributor?
If the fund is established under Section 12b-1.
42
A Mutual Funds performance, fund quotations of average annual total returns must be how long?
1, 5, 10 year periods or as long as the fund has operated.
43
Mutual funds charge a maximum of what % of the money invested?
8.5%
44
How do you calculate a funds expense ratio?
Funds expenses / average net assets = expense ratio
45
What is the largest part of the expense ratio?
The Investment Advisory fee (Investment Manager)
46
Explain Dollar Cost Averaging
When the investor invests identical amounts at regular intervals.
47
What is an insurance contract designed to provide retirement income?
An Annuity
48
Explain Mortality Guarantee
An Annuity can provide an income for the rest of someone's life. This product takes away the fear.
49
An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract.
A Fixed Annuity
50
Put sellers are paid the premium, in exchange for which they take on the obligation to buy stock at a fixed price, called the strike price. Whenever buying something (obligation to buy), the investor is
is bullish, they hope the underlying stock holds steady or goes up in value.
51
A customer purchases $50,000 worth of 10% corporate bonds at par. At the end of the day, the bonds close down a half point. The customer has a loss of:
$250. The customer holds 50, $1,000 bonds. One bond point equals $10. Therefore, if each bond decreases by a half-point, the loss is $5 per bond; multiplied by 50 bonds, this equals $250.
52
An investor's portfolio includes an ABC 6% bond maturing in 2020 and 100 Shares of XYZ common stock. At market close, if the stock closed at $45.45 compared to yesterday's $44.95, and the bond moved from 95 to 95½ , the portfolio increased in value by:
$55 The gain would be $5 for the bonds, (½ point for one bond is $5), and $50 for the stock, ($.50 × 100 shares) for a total of $55
53
If an investor purchases a U.S. Treasury note quoted at 101.24, the investor must pay:an investor purchases a U.S. Treasury note quoted at 101.24, the investor must pay:
$1017.50 101 x $10 = $1010 24/32 = 0.75 x $10 = 7.50 1010 + 7.50 = 1,017.50
FINRA Series 6
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