Kaplan Unit 24

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If a client invests the same amount of money into a mutual fund at regular intervals over a long period of time, the result is a lower:
A) return on the cost basis.
B) dollar amount invested.
C) cost per share than the average price per share.
D) price per share than the average cost per share.

The correct answer was - C: cost per share than the average price per share.
Explanation:
By investing a predetermined amount of money periodically for a long period of time, the investor uses the concept of dollar cost averaging. The result is a reduced cost per share compared to the
average market price.
Reference: 2.5.1.1 in the License Exam Manual.

Dollar cost averaging results in a lower average cost per share than the average price per share paid, only if the share price during the investment period:
A) holds constant.
B) starts high and becomes lower.
C) starts low and becomes higher.
D) shows any fluctuation.

The correct answer was - D: shows any fluctuation.
Explanation:
Under dollar cost averaging, any fluctuation in the share price, up, down or both, will result in a lower average cost per share than the average price per share paid.
Reference: 2.5.1.1 in the License Exam Manual.....

The Conklin Fund is international in scope, with over 90% of its assets invested in companies that mine and extract various metals. About 5% of its assets are in investment-grade bonds. The Conklin
Fund is:
A) a blend/core fund.
B) a precious metals fund.
C) a foreign stock fund.
D) a special situation fund.

The correct answer was - B: a precious metals fund.
Explanation:
Though many of the stocks Conklin Fund owns are no doubt foreign, the heavy concentration on mining and extracting metals identifies it as a precious metals fund.
Reference: 2.4.4.1.4 in the License Exam Manual....

A balanced fund invests:
A) a portion of its portfolio in both common stock and government securities.
B) equal amounts of its portfolio in common and preferred stock.
C) a portion of its portfolio in both debt and equity instruments.
D) equal amounts of its portfolio in common stock and corporate bonds.

The correct answer was - C: a portion of its portfolio in both debt and equity instruments.
Explanation:
Balanced funds invest in both equity and debt issues, but not necessarily in equal amounts.
Reference: 2.4.4.2 in the License Exam Manual....

While making an investment decision, a client of yours asks for information on funds of hedge funds. Which of the following characteristics of these funds must be part of your discussion with your client?
A) Potential illiquidity.
B) Protection of principal.
C) Federal government backing.
D) Tax-free withdrawals.

The correct answer was - A: Potential illiquidity.
Explanation:
Funds of hedge funds are mutual funds that invest in hedge funds, thus making hedge funds indirectly available to ordinary investors. The shares of a fund of hedge funds do not trade, nor are they
redeemable unless the company chooses to redeem them. This makes the investment potentially illiquid.
Reference: 2.4.4.5.1 in the License Exam Manual....

Which of the following funds would you recommend to a moderate-risk client seeking long-term capital gains who also values professional stock selection?
A) An international index fund.
B) A small-cap growth fund.
C) A large-cap growth fund.
D) S&P 500 Index fund.

The correct answer was - C: A large-cap growth fund.
Explanation:
A large-cap growth fund is the most appropriate choice for a moderate-risk client because large capitalization stocks are generally less volatile than small-cap stocks and provide long-term capital
growth. This is a more appropriate choice than the index fund because there is no stock selection there, only investing to parallel the index.
Reference: 2.4.4.1.1 in the License Exam Manual....

Your married customers are both 42 years old, have two children ages 14 and 12, and they have spent the last ten years accumulating money to provide for their children's education. Their oldest child
will enter college in four years, and the customers are very cautious investors. If they need a safe investment that provides regular income to help them meet tuition payments, which of the following
mutual funds is the most suitable for these customers?
A) RST Balanced Fund.
B) ATF Overseas Opportunities Fund.
C) ABC Stock Index Fund.
D) LMN Investment-Grade Bond Fund.

The correct answer was - D: LMN Investment-Grade Bond Fund.
Explanation:
These clients cannot afford a downturn in the stock market between now and the time they want to send their children to college. An investment-grade bond fund will provide the income and safety
required for accumulating additional funds for college expenses.
Reference: 2.4.4.4.1 in the License Exam Manual....

Included in the operating expenses of an investment company would be all of the following EXCEPT
A) custodian bank charges.
B) redemption fees.
C) compensation to members of the fund's board of directors.
D) commissions paid on portfolio transactions.

The correct answer was - B: redemption fees.
Explanation:
Redemption fees, typically found with Class B and Class C shares, are not an operating expense of the fund. They are a cost incurred by the investor. The portfolio commissions referred to are not the
fund's sales charges; they are the brokerage charges involved in the buying and selling securities for the fund's portfolio.
Reference: 2.4.5.2.2 in the License Exam Manual....

The noninterested members of a mutual fund's board of directors could include:
A) a director who is also president of the principal underwriter.
B) a director whose only involvement with the company is his role as a member of the board.
C) a director who is the attorney for the investment adviser.
D) a director whose spouse is an officer of the custodian bank.

The correct answer was - B: a director whose only involvement with the company is his role as a member of the board.
Explanation:
For purposes of meeting the required percentage of "outside" directors, a director who holds no other position in the fund or has a personal investment in shares of the fund is exempt from the interested
person definition.
Reference: 2.3.1 in the License Exam Manual....

A client is in the annuitization stage of a variable annuity. If the separate account earned 8% during the current month, which of the following statements is correct?
I. The next check will increase if the AIR is 5%.
II. The next check will increase if the AIR is 10%.
III. The number of annuity units owned will increase.
IV. The number of annuity units owned will remain the same.

The correct answer was - D: I and IV.
Explanation:
During a period in which the separate account's performance exceeds the AIR, the next check will increase. Regardless of performance, once the contract is annuitized the number of annuity units
remains unchanged. It is the value of the units that changes.
Reference: 2.7.4 in the License Exam Manual....

You are considering investments for a new client who informs you that she hopes to purchase a new home in the upcoming year. Which of the following would be most suitable?
I. Long-term corporate bonds.
II. Treasury bills.
III. Growth funds.
IV. Money market fund.

The correct answer was - D: II and IV.
Explanation:
The client has a short-term investment time horizon and wishes to make a substantial purchase in the upcoming year. For this profile, long-term securities would not fit the time frame, and growth funds
are too risky. Of the choices listed, only short-term Treasury bills and money market funds would be suitable.
Reference: 2.4.4.6 in the License Exam Manual....

Your customer, age 60, is retired and living at home with a fully paid-off mortgage. Her portfolio contains growth stocks and high-quality bonds, and she is a long-time investor and comfortable with
moderate risk. Her objective is a moderate level of current income to supplement her corporate pension plan distributions and the earnings from her IRA. Which of the following mutual funds is the most
suitable for this customer?
A) ABC Equity Income Fund.
B) QRS Capital Appreciation Fund.
C) XYZ Biotechnology Fund.
D) LMN Stock Index Fund.

The correct answer was - A: ABC Equity Income Fund.
Explanation:
An equity fund that aims to achieve both current income and growth of income best suits the objectives and investment profile of the client. A stock index fund does not offer the current income that the
client requires. The capital appreciation and biotechnology funds not only fail to provide income; they are too risky for this retired person.
Reference: 2.4.4.1.2 in the License Exam Manual....

During the accumulation period of a variable annuity contract, an investor will receive which of the following?
A) A deferral of tax liability on capital gains earned in the separate account and a current tax liability on investment income.
B) A deferral of tax liability on investment income and capital gains earned in the separate account.
C) A current tax liability on investment income with a deferral of all capital gains in the separate account.
D) A current tax liability on investment income and capital gains earned in the separate account.

The correct answer was - B: A deferral of tax liability on investment income and capital gains earned in the separate account.
Explanation:
The tax deferral of investment income and capital gains earned by the portfolio during the accumulation period is one of the advantages of a variable annuity. Upon withdrawal, however, both the income
and the capital gains will be taxed as ordinary income as they are withdrawn.
Reference: 2.7.1 in the License Exam Manual....

In a variable annuity, the risk of a fluctuating market is borne by:
A) the management company.
B) FINRA.
C) the insurance company.
D) the annuitant.

The correct answer was - D: the annuitant.
Explanation:
As the stock market fluctuates, so will the monthly payments to the annuitant.
Reference: 2.7.1.2 in the License Exam Manual....

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) money market fund.
B) corporate bond fund.
C) aggressive growth fund.
D) municipal bond fund.

The correct answer was - D: municipal bond fund.
Explanation:
Municipal bonds are considered second only to U.S. government securities in terms of safety. Dividends received from a municipal bond fund are exempt from federal income tax. (The bonds pay
interest to the fund, the fund declares and distributes dividends to shareholders.)
Reference: 2.4.4.4.2 in the License Exam Manual....

All of the following are characteristics typical of a money market fund EXCEPT:
A) it is offered as a no-load investment.
B) it is highly volatile in price, and is safest in periods of low market volatility.
C) the underlying portfolio consists of short-term debt instruments.
D) its net asset value normally remains unchanged.

The correct answer was - B: it is highly volatile in price, and is safest in periods of low market volatility.
Explanation:
A money market fund is managed for extremely low volatility. The standard is to maintain a net asset value of $1.00 per share at all times.
Reference: 2.4.4.6 in the License Exam Manual....

Marianne has a fixed premium variable life policy in which the separate account has been performing extremely well, and the face value has been increasing as a result of the investment performance. However, recently the separate account performance has been negative. If this continues, the face value could decrease:
A) to the original face value.
B) to 0.
C) to 50% of the original face value.
D) to 25% of the original face value.

The correct answer was - A: to the original face value.
Explanation:
The face value in an insurance policy is the death benefit. In a variable life policy, the face value will fluctuate with the separate account's performance, but it will never decrease below the original minimum face value.
Reference: 2.8.5 in the License Exam Manual....

All of the following charges are included in the computation of a mutual fund's expense ratio EXCEPT the:
A) transfer agent fee.
B) fee paid to board members.
C) investment adviser fee.
D) sales load paid to the underwriters.

The correct answer was - D: sales load paid to the underwriters.
Explanation:
The expense ratio of a mutual fund is calculated by dividing the expenses of the fund by the fund's average net assets. Fund expenses include the fee paid to board members, the investment adviser's
fee, the custodian's fee, the transfer agent's fee, and related expenses. The sales load paid to the underwriters is not an expense to the fund; it is a cost to the investor.
Reference: 2.4.5.2.2 in the License Exam Manual....

The principal underwriter of an open-end investment company is also known as the:
A) dealer.
B) trustee.
C) registrar.
D) sponsor.

The correct answer was - D: sponsor.
Explanation:
A mutual fund's underwriter is also known as the sponsor or distributor of the fund.
Reference: 2.3.5 in the License Exam Manual....

Your customer, age 45, is single and in search of maximum capital appreciation. She inherited a substantial amount of money a few years ago and has taken an active interest in managing her
investments. Currently, her portfolio is diversified among common stocks, tax-exempt bonds, international investments, and limited partnerships. She has a long-term time frame and is not risk-averse.Which of the following mutual funds is the most suitable for this customer?
A) LMN Asset Allocation Fund.
B) NavCo Cash Reserves Money Market Fund.
C) ATF Biotechnology Fund.
D) ABC Balanced Fund.

The correct answer was - C: ATF Biotechnology Fund.
Explanation:
This customer has a high net worth and substantial investment experience. She is capable of assuming the higher risk and return potential of a speculative investment such as the biotechnology sector
fund.
Reference: 2.4.4.1.4 in the License Exam Manual....

The payout of an annuitized variable annuity account changes from month to month in a manner determined by which of the following?
I. The separate account performance compared to last month's performance.
II. The payout compared to the initial payout upon annuitization.
III. The separate account performance compared to an assumed interest rate.
IV. The payout compared to last month's payout.

The correct answer was - A: III and IV.
Explanation:
A variable annuity payout is determined by comparing account performance with AIR, and this month's payout with last month's payout.
Reference: 2.7.4 in the License Exam Manual....

If a customer is considering an investment in the KPF Fund and desires long-term capital appreciation, which section of the prospectus would help to determine if this fund is appropriate?
A) Costs and Risks of Investing.
B) Tax Treatment of Distributions.
C) How the Funds are Managed.
D) The Investment Objectives.

The correct answer was - D: The Investment Objectives.
Explanation:
Of the prospectus sections listed, the Investment Objectives section defines the fund's goals for trading the portfolio.
Reference: 2.3.6.1 in the License Exam Manual....

Which of the following are functions of an investment company's custodian bank?
A) Safekeeping of portfolio securities and cash.
B) Maintaining books and records for customers.
C) Deciding which securities should be purchased in a portfolio.
D) Providing portfolio advice regarding transactions.

The correct answer was - A: Safekeeping of portfolio securities and cash.
Explanation:
The custodian bank performs bookkeeping and clerical functions for the fund, not for individual customers, and retains the fund's cash and securities for safekeeping. It is the adviser that offers portfolio
advice and management services.
Reference: 2.3.3 in the License Exam Manual....

Your customer, 62 years old, has unexpectedly received a large inheritance. He would like to generate income from it now, with as little bother on his part as possible. Which of the following might you recommend to him?
A) Invest in a diversified portfolio of corporate stocks.
B) Purchase a lump-sum immediate annuity.
C) Purchase a lump-sum deferred annuity.
D) Purchase a periodic payment deferred annuity.

The correct answer was - B: Purchase a lump-sum immediate annuity.
Explanation:
The lump-sum immediate annuity would generate income for him at once, guaranteed as to payment but not guaranteed as to amount. The deferred annuities would have a delay first. The diversified
portfolio of stock would only provide dividend income, guaranteed neither as to payment nor amount.
Reference: 2.7.2 in the License Exam Manual....

Which of the following statements regarding variable annuities are TRUE?
I. The number of accumulation units is always fixed throughout the accumulation period.
II. The number of accumulation units can rise during the accumulation period.
III. The number of annuity units is fixed at the time of annuitization.
IV. The number of annuity units rises once annuitization begins.

The correct answer was - A: II and III.
Explanation:
The number of variable annuity accumulation units can rise during the accumulation period when additional units are being purchased. When a variable annuity contract is annuitized, the number of
annuity units is fixed.
Reference: 2.7.3 in the License Exam Manual....

A defensive investment strategy would be best described as one where the investor builds a portfolio consisting largely of:
A) stock in companies doing business with the U.S. Department of Defense.
B) public utilities, food manufacturers and tobacco companies.
C) technology firms.
D) rights, warrants and options.

The correct answer was - B: public utilities, food manufacturers and tobacco companies.
Explanation:
A defensive strategy is one that concentrates investments into those industries that are less likely to suffer during an economic decline. Regardless of current economic conditions, people still eat, smoke
and use their utilities.
Reference: 2.4.4.8.2 in the License Exam Manual....

One characteristic of a closed-end fund that differs from an open-end fund is that with closed-end funds, the number of shares outstanding:
A) decreases as shareholders redeem shares.
B) increases as purchasers buy shares.
C) remains constant.
D) is directly related to the value of the securities in the portfolio.

The correct answer was - C: remains constant.
Explanation:
Because closed-end funds have a fixed number of shares outstanding, their number remains constant. Neither the buying nor selling of these shares on the open market nor the value of the securities in
the portfolio is relevant to the number of outstanding shares.
Reference: 2.1.2.3.1 in the License Exam Manual....

A variable annuity has an AIR of 4%. In January, the separate account earned 9%; in February it earned 6% and in March it earned 5%. Based on this information, how will the April payment compare to
the March payment?
A) Higher.
B) Not enough information to tell.
C) Lower.
D) Stay the same.

The correct answer was - A: Higher.
Explanation:
Anytime the actual return exceeds the AIR, the next payment will increase. In March, the actual earnings were 5% and, because that is higher than the AIR of 4%, April's payment will go up. You must
remember to only compare the actual to the AIR, not to the previous month's return.
Reference: 2.7.4 in the License Exam Manual....

A diversified open-end investment company owns shares of a company that amount to 5% of the fund's assets. An appreciation in the value of these stocks causes the target company's stock to grow to
12% of the assets of the investment company. The investment company:
I. will maintain its status as a diversified investment company.
II. may no longer call itself diversified.
III. must sell off its stocks in the company so that the stock amounts to no more than 5% of the investment company's assets.
IV. need not sell any of the stock.

The correct answer was - A: I and IV.
Explanation:
When the investment company bought the stock, it was no more than 5% of the investment company's assets. Provided that it buys no more of the stock, the increase in value does not change the
investment company's status as diversified.
Reference: 2.1.2.4.1 in the License Exam Manual....

A policy loan provision must be offered by the insurer after three years, allowing the variable life policy contract holder to borrow at least what percentage of cash value?
A) 90%
B) 75%
C) 125%
D) 100%

The correct answer was - B: 75%
Explanation:
The minimum that must be available in a VLI contract after three years is 75% of cash value.
Reference: 2.8.7 in the License Exam Manual....

All of the following must be sold with a prospectus EXCEPT
A) closed-end funds in the secondary market
B) closed-end funds in the primary market
C) open-end funds in the primary market
D) an IPO of common stock

..The correct answer was - A: closed-end funds in the secondary market
Explanation:
Securities sold in the secondary market do not have a prospectus delivery requirement.
Reference: 2.2.1.1 in the License Exam Manual..

An investor purchased a variable annuity some years ago and has been making regular payments into it. He has encountered financial difficulties and asks his registered representative if he can arrange
to delay his next few payments. The registered representative explains that:
A) the customer may pay in as much or as little, as frequently or as infrequently, as he pleases, with no penalty.
B) if he cannot meet his commitments, he should not have invested in the first place.
C) the customer should exchange his annuity for a variable life insurance contract under Section 1035 to avoid tax consequences.
D) if he starts missing payments, there will be penalties.

The correct answer was - A: the customer may pay in as much or as little, as frequently or as infrequently, as he pleases, with no penalty.
Explanation:
A variable annuity does not require scheduled premium payments. The customer may miss as many payments as he wishes with no fear of forfeiting earlier payments.
Reference: 2.7.2 in the License Exam Manual.

A fund of funds is one that:
A) has a portfolio consisting of large-capitalization securities only.
B) keeps at least 50% of its assets in cash at all times.
C) invests exclusively in other mutual funds.
D) keeps a large portion of its portfolio in money market instruments at all times.

The correct answer was - C: invests exclusively in other mutual funds.
Explanation:
A fund of funds is one that invests exclusively in other mutual funds. Their investment objective and capitalization focus can be as varied as any other fund.
Reference: 2.4.4.5 in the License Exam Manual.

For an insurance company, mortality risk turns out unfavorably if:
I. an annuitant lives longer than expected.
II. an annuitant dies sooner than expected.
III. a life insurance holder lives longer than expected.
IV. a life insurance holder dies sooner than expected.

The correct answer was - A: I and IV.
Explanation:
Mortality assumptions are based on life expectancy or mortality tables prepared by insurance company actuaries. If an annuitant lives longer than expected, the insurance company will have to continue
payments longer than expected. If an insurance holder dies sooner than expected, the insurance company will have to pay the death benefit sooner than expected-that is, before receiving some of the
expected premium payments.
Reference: 2.8.4 in the License Exam Manual.

A couple in their early 30s has been married for four years, their disposable income is relatively high, and they are planning to buy a condominium. If they need a safe place to invest their down payment
for about six months, which of the following mutual funds is the most suitable for these customers?
A) ATF Capital Appreciation Fund.
B) LMN Cash Reserves Money Market Fund.
C) XYZ Investment-Grade Bond Fund.
D) ABC Growth & Income Fund.

The correct answer was - B: LMN Cash Reserves Money Market Fund.
Explanation:
These customers are preparing to make a major purchase within the next few months, so they require a highly liquid investment to keep their money safe for a short amount of time. The money market
fund best matches this objective.
Reference: 2.4.4.6 in the License Exam Manual.

A broker/dealer acting as principal underwriter for a mutual fund may accept orders for the fund from another broker/dealer for all of the following reasons EXCEPT:
A) to fill its own customers' orders.
B) to fill orders for customers of its registered representatives.
C) for its own investment account.
D) to place shares in its inventory for future sales.

The correct answer was - D: to place shares in its inventory for future sales.
Explanation:
Broker/dealers are prohibited from maintaining an inventory of fund shares.
Reference: 2.3.5 in the License Exam Manual.

12b-1 fees may be used to pay all of the following EXCEPT:
A) mailing expenses.
B) commissions on portfolio securities transactions.
C) prospectus printing costs.
D) advertising costs.

The correct answer was - B: commissions on portfolio securities transactions.
Explanation:
12b-1 fees cover advertising costs, mailing expenses, and prospectus printing costs. Portfolio transactions are defrayed from the management fee.
Reference: 2.4.3.2.4 in the License Exam Manual.

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 the IRS.
C) be paid to the issuing company to complete the plan.
D) be paid to a designated beneficiary.

The correct answer was - D: be paid to a designated beneficiary.
Explanation:
The accumulation period of a variable annuity may continue for many years. If the annuitant should die during that time, any death benefit would be paid to a beneficiary designated by the annuitant at
the time the annuity was purchased.
Reference: 2.7.4 in the License Exam Manual.

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) utility income fund.
B) blend/core fund.
C) balanced fund.
D) preferred equity income fund.

The correct answer was - B: blend/core fund.
Explanation:
One of the distinguishing features of blend/core funds is that they contain both growth and value stocks.
Reference: 2.4.4.1.6 in the License Exam Manual.

Each of the following is considered an investment company EXCEPT:
A) face-amount certificate company.
B) unit investment trust.
C) bank investment advisory account.
D) open-end management company.

The correct answer was - C: bank investment advisory account.
Explanation:
A bank advisory account is not found among the definitions of an investment company.
Reference: 2.1.2 in the License Exam Manual.

An investor has been investing $100 per month for the past five months. The purchase prices were $20, $25, $12.50, $10, and $12.50. What is the difference between her average cost per share and
average price per trade?
A) $0
B) $1.50
C) $0.37
D) $1.71

The correct answer was - D: $1.71
Explanation:
This example shows the benefit of dollar cost averaging. The first purchase (at $20) acquired 5 shares, subsequent purchases acquired 4, 8, 10 and 8 shares respectively. That is a total of 35 shares
with an outlay of $500. This results in an average cost per share of $14.29. The average price per trade is obtained by taking the 5 prices, adding them together (20 + 25 + 12.50 + 10 + 12.50) and
dividing that by 5 (80/5) resulting in an average of $16.00. That is $1.71 more than the average cost per share.
Reference: 2.5.1.1 in the License Exam Manual.

A customer in his 40s, with ample income to meet his needs, has unexpectedly received $250,000 and would like to invest it in mutual funds. He emphasizes that he is interested in long-term growth and is willing to accept moderate risk. He proposes to his registered representative that the investment be split among three funds: the XYZ Balanced Fund, whose portfolio includes stocks and bonds of many old and successful companies; the KPL Growth and Income Fund, which has shown excellent performance over the last several years; and the NYF International SmallCap Stock Fund, which he feels will provide diversification by investing in foreign companies. In discussing the customer's proposal, the registered representative might make which of the following points?
A) The proposal is suitable, since it provides safety nets: if the U.S. economy does not do well, the foreign investments could take up the slack. If the growth objective is not met, there are also
income investments to provide returns. If small companies do not do well, he is also investing in large companies.
B) The proposal does not address the customer's objective: long-term, moderate-risk growth. Also, by splitting the investment among different fund families, he will probably pay higher sales
charges.
C) The proposal appears to be suitable, since it combines safety (old and successful companies) and diversification (debt instruments, foreign stocks, and both small-cap and large-cap
companies).
D) The proposal is unsuitable. Since mutual funds are under the control of a fund manager, the customer cannot respond to market and economic changes in a timely fashion.

The correct answer was - B: The proposal does not address the customer's objective: long-term, moderate-risk growth. Also, by splitting the investment among different fund families, he will probably pay higher sales charges.
Explanation: The customer's proposal involves investing in comparatively high-risk, not moderate-risk, small-cap foreign stocks; in debt instruments, which do not provide growth; and in a balanced fund, whose
objective is quite different from the customer's objective: long-term, moderate-risk growth.
Reference: 2.4.4.7 in the License Exam Manual.

In registering with the SEC, an investment company must provide all of the following information EXCEPT:
A) the current professional and trade society memberships of each officer and director.
B) any plans the company has for investing in real estate or commodities.
C) any plans the company has for concentrating investments in a single industry.
D) the business experience of each officer and director during the preceding five years.

The correct answer was - A: the current professional and trade society memberships of each officer and director.
Explanation:
Officer and director memberships in professional societies are not required on the investment company registration documents.
Reference: 2.2.1 in the License Exam Manual.

Similarities between an open-end investment company and the insurance company separate account used to fund a variable annuity include which of the following?
I. The issuing company accepts the investment risk.
II. Full-time portfolio management is provided.
III. Both offer a choice between a distribution method that guarantees a monthly income for life or for a certain period.
IV. Purchase payments are made in accordance with the forward pricing rule.

The correct answer was - C: II and IV.
Explanation:
Both open-end investment companies and the separate accounts of insurance companies offer investors professional portfolio management. When shares or accumulation units are purchased, they are
bought at a price based upon the next computed NAV (the forward pricing rule), as are mutual fund shares.
Reference: 2.7.1.3 in the License Exam Manual.

A customer is considering entering into an accumulation plan with his mutual fund. He is worried about committing to sending in so much per month that he may have trouble meeting the obligation, but
he doesn't wish to commit to so little per month that his account does not build rapidly enough to meet his investment objectives. The registered representative explains that accumulation plans:
I. are binding on the investor.
II. are binding on the mutual fund.
III. are not binding on the investor.
IV. are not binding on the mutual fund.

The correct answer was - D: II and III.
Explanation:
An investor is not obligated to meet the terms of an accumulation plan, even if it is a contractual plan that he has signed. If he cannot send money in for some period, he need not. The plan is, however,
binding on the fund. When the fund does receive a payment, it must use it to purchase the appropriate shares.
Reference: 2.5.1.1 in the License Exam Manual.

A contractual plan company is what type of investment company?
A) Unit investment trust.
B) Mutual fund.
C) Face amount certificate company.
D) Closed-end company.

The correct answer was - A: Unit investment trust.
Explanation:
A contractual plan company is a unit investment trust that purchases mutual fund shares for its customers on a contractual basis. Though contractual plans are no longer sold, there are still many such
contracts in force.
Reference: 2.5.1.2 in the License Exam Manual.

One of your customers, a married man in his 30s, would like to purchase a retirement plan that will accumulate money for him during his working life and then provide guaranteed monthly income for him and his family, with inflation protection, after he retires. You recommend a variable annuity. To be sure the annuity meets his objectives, you must be sure the customer understands which of the
following?
I. He must annuitize his contract at retirement.
II. He must purchase a deferred annuity
III. He must purchase an immediate annuity.
IV. He must not annuitize his contract at retirement.

The correct answer was - C: I and II.
Explanation:
A deferred annuity will permit investment and accumulation while your customer is still working. At retirement, if he wants monthly income that is guaranteed for life, though not as to amount, he must
annuitize his contract.
Reference: 2.7.4 in the License Exam Manual.

The rate of return on a money market fund would be most similar to the:
A) current Treasury bill rate.
B) passbook savings rate.
C) prime rate of interest.
D) current 30-year Treasury bond rate.

The correct answer was - A: current Treasury bill rate.
Explanation:
Money market funds are invested in short-term debt instruments, including T-bills; the rate of return on money market funds is similar to the current Treasury bill rate.
Reference: 2.4.4.6 in the License Exam Manual.

Your customer owns a variable annuity contract, and the AIR stated in the contract is 5%. In January, the realized rate of return in the separate account was 7%, and he received a check based on this
return for $200. In February, the rate of return was 10%, and he received a check for $210. To maintain the same payment he received in February, what rate of return would the separate account have
to earn in March?
A) 5%.
B) 10%.
C) 3%.
D) 7%.

The correct answer was - A: 5%.
Explanation:
If the actual rate of return equals the assumed interest rate, the check will stay the same.
Reference: 2.7.4 in the License Exam Manual.

Contractual plan companies are:
A) registered as investment advisers.
B) closed-end investment companies.
C) open-end investment companies.
D) unit investment trusts.

The correct answer was - D: unit investment trusts.
Explanation:
Contractual plans are no longer sold, but there are still contracts in effect. Contractual plan companies are registered as unit investment trusts and hold the shares of a mutual fund on behalf of the plan
participants. Plan companies do not provide investment advice.
Reference: 2.5.1.2 in the License Exam Manual.

The role of the transfer agent for a mutual fund would include performing which of the following services?
A) Distribution of dividends and capital gains.
B) Distribution of shares of the fund.
C) Portfolio management.
D) Custody of securities and other assets in the fund's portfolio.

The correct answer was - A: Distribution of dividends and capital gains.
Explanation:
A key role of the transfer agent is the determination of who will receive the dividend and capital gains distributions of the fund. The custodian bank performs custodial functions. Distribution of shares is
the role of the underwriter, and the investment adviser manages the portfolio.
Reference: 2.3.4 in the License Exam Manual.

If a registered representative works for ABC Brokerage Firm and sells a customer shares of XYZ Mutual Fund, to whom may the customer make the check payable?
I. ABC.
II. XYZ Mutual Fund Company.
III. FINRA.
IV. The registered representative.

The correct answer was - D: I or II.
Explanation:
Depending on the broker/dealer, the check should be made out to either the broker/dealer or the mutual fund. It should never be made payable to the registered representative and certainly not to
FINRA.
Reference: 2.3.5 in the License Exam Manual.

When shares of a closed-end investment company are purchased by an investor, the price paid is the:
A) ask less a sales charge.
B) ask plus a commission.
C) net asset value.
D) net asset value less the sales charge.

The correct answer was - B: ask plus a commission.
Explanation:
Closed-end investment company shares are priced based on supply and demand. The ask is the price that investors will pay for purchasing shares. Investors will also pay a commission as this is what
the broker charges for executing the transaction.
Reference: 2.1.2.3.1 in the License Exam Manual.

Under the 1940 Investment Company Act, an investment company may take all of the following forms EXCEPT a(n):
A) open-end investment company.
B) unit investment trust.
C) closed-end investment company.
D) limited partnership with partners as passive investors.

The correct answer was - D: limited partnership with partners as passive investors.
Explanation:
An investment company is not a limited partnership. Investment companies are organized as open-end companies (mutual funds), closed-end companies, unit investment trusts, or face-amount
certificate companies.
Reference: 2.1.2 in the License Exam Manual.

A thirty-five year-old client purchases a variable life insurance policy. Under current regulations, the maximum sales charge permitted over the life of the policy is:
A) 8.5% per premium payment.
B) 9%.
C) 8.5% of total premiums over the life of the plan.
D) 9% per premium payment.

The correct answer was - B: 9%.
Explanation:
A variable life insurance plan may charge a maximum sales charge of 9% over a period not to exceed 20 years.
Reference: 2.8.9.1 in the License Exam Manual.

The basic characteristic of common stocks that makes them a suitable form of investment for variable annuities is:
A) their yields, which are always higher than mortgage yields.
B) the changes in their price tend to be more related to changes in the cost and standard of living than to changes in bond prices.
C) their yields, which are always higher than bond yields.
D) they do not fluctuate in value during periods of adverse economic conditions.

The correct answer was - B: the changes in their price tend to be more related to changes in the cost and standard of living than to changes in bond prices.
Explanation:
Investments in common stocks have generally produced a rate of total return that exceeds the rate of inflation over the same period. This tendency cannot, however, be guaranteed to a customer.
Reference: 2.7.1.2 in the License Exam Manual.

A client who purchased a variable life insurance policy is not pleased with his decision. He has the right to:
A) convert the policy into any form of term insurance currently offered by the company.
B) cancel the policy and receive a full refund of all premiums paid within the first 24 months of issue.
C) convert the policy into a whole life policy using the original policy issue date.
D) cancel the policy and receive a full refund of all sale charges paid within the first 24 months of issue.

The correct answer was - C: convert the policy into a whole life policy using the original policy issue date.
Explanation:
A unique feature of variable life insurance is the ability to convert or exchange the policy into a whole life policy as of the original policy issue date for a period of no less than 24 months (two years) from
the date of issue. For those insurance companies that do not offer whole life policies, the prospectus will indicate the available exchange policy, frequently universal life.
Reference: 2.8.8 in the License Exam Manual.

Your customer is 24 years old, earning $20,000 a year, and is seeking to invest $1,000. She does not want a fund that undergoes extreme fluctuations in net asset value. Instead, she is looking for
maximum diversification and will accept a moderate amount of risk. Which of the following mutual funds is most suitable for this customer?
A) ATF Biotechnology Fund.
B) ATF Capital Appreciation Fund.
C) ABC Asset Allocation Fund.
D) LMN Cash Reserves Money Market Fund.

The correct answer was - C: ABC Asset Allocation Fund.
Explanation:
This customer is a young investor with a relatively small amount to invest and a goal of maximum diversification. An asset allocation fund allows her small investment to benefit from the return potential of
the stock, bond, and short-term debt markets.
Reference: 2.4.4.3 in the License Exam Manual.

Your customer, who is in his 30s, is single, and has a steady, well-paying job, has just received a large inheritance. He wishes to generate as much extra income with it as possible and does not mind
financial risk. Which of the following investments would you recommend?
A) KLP Government Bond Fund, which concentrates on long-term government debt.
B) STG Corporate Bond Fund, which specializes in speculative bond offerings.
C) Excelsior Growth and Income Fund, which tries to generate growth in value of shares but also provides dividend income.
D) Smith and Jones Money Market Fund.

The correct answer was - B: STG Corporate Bond Fund, which specializes in speculative bond offerings.
Explanation:
All of these funds generate income, but this customer is willing to take risks (and can afford them) to generate as much income as possible. The speculative bond fund, which is designed to generate
high income in exchange for comparatively high risk, best meets his objectives.
Reference: 2.4.4.4 in the License Exam Manual.

An annuitant received payments until his death from a nonqualified variable annuity. At his death, if his wife received a lump sum payment from the annuity, this example illustrates a:
A) straight life annuity.
B) cash balance annuity.
C) unit refund annuity.
D) joint and last survivor annuity.

The correct answer was - C: unit refund annuity.
Explanation:
When the unit refund option is chosen, the insurer pays the annuitant a minimum number of payments. At the annuitant's death, the survivor receives the balance of the account in a lump sum payment.
Reference: 2.7.4 in the License Exam Manual.

Which of the following withdrawal plans offered by the ABC Mutual Fund will pay the customer a fixed monthly payment?
A) Fixed-dollar withdrawal.
B) Fixed-share withdrawal.
C) Fixed-percentage withdrawal.
D) Liquidation over a fixed period of time.

The correct answer was - A: Fixed-dollar withdrawal.
Explanation:
In a withdrawal plan, if one variable is fixed (such as fixed dollar), other aspects of the payment will vary. If a customer is receiving a fixed-dollar payment, the plan must be a fixed-dollar plan.
Reference: 2.5.1.3.1 in the License Exam Manual.

Which of the following insurance instruments do NOT offer inflation protection?
I. Whole life insurance.
II. Variable life insurance.
III. Fixed annuities.
IV. Variable annuities.

The correct answer was - A: I and III.
Explanation:
Whole life insurance has a fixed death benefit whose value declines in real dollars with inflation. Fixed annuities offer fixed monthly retirement payments whose value in real dollars also declines with
inflation. Variable contracts, with both insurance and annuities, are designed to offer inflation protection, in exchange for which the purchaser assumes investment risk.
Reference: 2.8.2 in the License Exam Manual.

When comparing a mutual fund with a growth objective to one that calls itself a value fund, you would explain to your clients that the value fund could be reasonably expected to:
A) only offer Class A shares.
B) generate larger capital gains.
C) sell at a discount to the NAV.
D) have higher dividend yields.

The correct answer was - D: have higher dividend yields.
Explanation:
Value funds focus on companies whose stocks are currently undervalued (earnings potential is not reflected in the stock price). As a result, the dividend yields tend to be higher than growth funds. If one
is looking for capital gains, it is more likely that the growth fund will provide them. The management style has no impact on share classes and no mutual funds ever sell at a discount to the NAV - that is
only true of closed-end funds.
Reference: 2.4.4.1.1 in the License Exam Manual.

All of the following statements about variable annuities are true EXCEPT:
A) such an annuity is designed to combat inflation risk.
B) a minimum rate of return is guaranteed.
C) the number of annuity units becomes fixed when the contract is annuitized.
D) the rate of return is determined by the underlying portfolio's value.

The correct answer was - B: a minimum rate of return is guaranteed.
Explanation:
The return on a variable annuity is not guaranteed; it is determined by the underlying portfolio's value. Variable annuities are designed to combat inflation risk. The number of annuity units becomes fixed
when the contract is annuitized; it is the value of each unit that fluctuates.
Reference: 2.7.1.2 in the License Exam Manual.

A fund seeks to duplicate the price and yield performance of Standard & Poor's composite of 500 stocks. The fund invests in each of the 500 stocks in the same proportion as the composition of the
index. The portfolio is not actively traded and, therefore, features a low turnover ratio. This information describes which of the following mutual funds?
A) ATF Biotechnology Fund.
B) XYZ Asset Allocation Fund.
C) ABC Stock Index Fund.
D) LMN Cash Reserves Money-Market Fund.

The correct answer was - C: ABC Stock Index Fund.
Explanation:
Index funds seek to duplicate the price and yield performance of a selected index.
Reference: 2.4.4.1.7 in the License Exam Manual.

An investor has decided to pursue a speculative investment program. Which of the following securities most closely reflect this investment objective?
I. Growth stocks.
II. Blue-chip stocks.
III. Investment-grade corporate bonds.
IV. High-yield corporate bonds.

The correct answer was - D: I and IV.
Explanation:
A speculative investor tries to earn higher than average returns by investing in securities that carry higher than average risk. Growth stocks and high-yield bonds (also known as speculative bonds) meet
these requirements most closely.
Reference: 2.4.4.8.3 in the License Exam Manual.

Which of the following would be a benefit to a customer investing in a contractual plan?
A) In the event of the planholder's death, plan completion insurance ensures that the designated beneficiary will receive a check for the unpaid balance within seven days after notification to the
custodian.
B) Throughout the life of the plan, sales charges are taken in level amounts.
C) During the first 24 months, the investor has a limited right of refund of sales charge.
D) It is possible to invest relatively small dollar amounts each month.

The correct answer was - D: It is possible to invest relatively small dollar amounts each month.
Explanation:
Contractual plans are no longer sold but, if in effect, are allowed monthly payments as low as $20 or even less. Most voluntary accumulation plans require much higher minimum investments.
Reference: 2.5.1.2 in the License Exam Manual.

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.

The correct answer was - B: closed-end fund.
Explanation:
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.
Reference: 2.1.2.3.1 in the License Exam Manual.

Your customer annuitizes a variable annuity contract, which has an assumed interest rate of 4%. The first check is for $225. In order for the check to remain at $225, what rate of return will the separate
account have to earn?
A) Greater than 4%.
B) 4%.
C) The payment will remain at $225 as long as the assumed interest rate is 4%.
D) Less than 4% but greater than 0%.

The correct answer was - B: 4%.
Explanation:
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.
Reference: 2.7.4 in the License Exam Manual.

Which of the following statements regarding plan completion insurance for a contractual plan is TRUE?
A) It is paid to the spouse if the plan holder dies.
B) It pays off the plan in a single payment if the plan holder dies.
C) It provides tax-deferred payments.
D) It continues the monthly payments in the event of death.

The correct answer was - B: It pays off the plan in a single payment if the plan holder dies.
Explanation:
Plan completion insurance in a mutual fund contractual plan is a life insurance policy. If the plan holder dies, the insurance company will pay a lump-sum amount to the plan custodian to pay off the
remaining contractual plan payments. The fund shares then go to the planholder's beneficiary.
Reference: 2.5.1.2 in the License Exam Manual.

If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are TRUE?
I. She will receive the annuity's entire value in a lump-sum payment.
II. She may choose to receive monthly payments for the rest of her life.
III. The accumulation unit's value is used to calculate the total value of the account.
IV. The annuity unit's value represents a guaranteed return.

The correct answer was - A: II and III.
Explanation:
When a variable contract is annuitized (distributed in regular payments, not as a lump sum), the number of accumulation units is multiplied by the unit value to arrive at the account's current value. An
annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. This factor is used to establish the dollar amount of the first annuity payment. Future annuity
payments will vary according to the separate account's performance.
Reference: 2.7.4 in the License Exam Manual.

The open-end investment company share price quoted in the newspaper is the:
A) underwriter's concession.
B) confirmed price.
C) bid price.
D) dealer's price.

The correct answer was - C: bid price.
Explanation:
Newspaper quotes of mutual fund shares always show the net asset value (NAV), often referred to as the bid price.
Reference: 2.6.1 in the License Exam Manual.

The NAV of a mutual fund is $14.17 per share. The POP is $15.32 per share. To determine the sales charge of the fund:
A) multiply the NAV by the POP.
B) subtract the NAV from the POP.
C) add the NAV to the POP.
D) divide the NAV by the POP.

The correct answer was - B: subtract the NAV from the POP.
Explanation:
The POP minus the NAV equals the mutual fund sales charge.
Reference: 2.4.3.3 in the License Exam Manual.

An investment company offering securities registered under the Act of 1933 may make which of the following statements?
I. "The SEC has passed on the merits of these securities as an investment."
II. "The SEC has released our securities for sale to the public."
III. "The SEC has passed on the accuracy of the information in our prospectus."
IV. "The SEC has declared this prospectus effective."

The correct answer was - A: II and IV.
Explanation:
When a security registers with the SEC, the date sales are allowed is known as the effective date. The SEC neither approves nor disapproves an issue, nor does it pass on the accuracy or adequacy
(completeness) of the information presented in a prospectus.
Reference: 2.2.2.1 in the License Exam Manual.

Which of the following individuals would be considered a noninterested person in a mutual fund?
A) A person who holds a position with the fund's underwriter.
B) A member of the board of directors who is also employed as the investment adviser.
C) A shareholder who owns 10% of the fund's shares.
D) A member of the board of directors who does not hold another position within the investment company.

The correct answer was - D: A member of the board of directors who does not hold another position within the investment company.
Explanation:
An interested person is defined as someone in a control relationship with the fund or someone who owns 5% or more of the outstanding shares. Merely sitting on the board does not make someone an
interested person. Thus, a director with no other relationship with the fund qualifies as a noninterested person.
Reference: 2.3.1 in the License Exam Manual.

A client wishing to invest $10,000 in a tax-exempt unit investment trust would be acquiring:
A) bonds.
B) shares.
C) participation interests.
D) units.

The correct answer was - D: units.
Explanation:
Unlike mutual funds in which the purchaser acquires shares, in a unit investment trust, the acquisition is of trust units.
Reference: 2.1.2.2 in the License Exam Manual.

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 number of accumulation units minus the mortality expense multiplied by the value per unit.
B) the number of annuity units times the value per unit.
C) the number of accumulation units times the value per unit.
D) the annuitant's total investment divided by the number of accumulation units.

The correct answer was - C: the number of accumulation units times the value per unit.
Explanation:
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.
Reference: 2.7.3 in the License Exam Manual.

Which of the following statements are characteristics of a contractual plan holder?
I. Receives a plan certificate.
II. Owns units in a trust.
III. Owns specific shares in the underlying portfolio.
IV. Must complete the contractual plan.

The correct answer was - A: I and II.
Explanation:
A contractual planholder receives a certificate evidencing ownership of shares held in trust by the plan company. The plan participant holds units in the trust, rather than specific mutual fund shares.
Contractual plans are no longer sold, but many plans are still in effect.
Reference: 2.5.1.2 in the License Exam Manual.

In reviewing investment companies, you notice one that has a net asset value (NAV) greater than its asking price. The investment company must be:
A) an open-end management company.
B) a specialized fund.
C) a poorly managed mutual fund.
D) a closed-end management company.

The correct answer was - D: a closed-end management company.
Explanation:
A closed-end management company's asking price is determined by supply and demand and may be above, at, or below the NAV of the company at any given time. A specialized fund could be either an
open- or closed-end management company. An open-end management company's (mutual fund's) asking price is based on its NAV. If the NAV rises, the asking price will also rise; therefore, its NAV can
never be greater than its asking price whether it is managed well or poorly.
Reference: 2.1.2.3.1 in the License Exam Manual.

Which of the following would be characteristic of money market mutual funds?
I. High volatility.
II. Low volatility.
III. A portfolio consisting of short-term securities.
IV. A portfolio consisting of long-term securities.

The correct answer was - A: II and III.
Explanation:
A money market mutual fund portfolio consists of high-quality, short-term debt securities. The volatility of money market shares is managed to be very low and is reflected in the fund's very low beta
coefficient.
Reference: 2.4.4.6 in the License Exam Manual.

Which of the following funds would you expect to have only debt instruments in their portfolios?
I. The Excelsior High-Yield Fund.
II. The Jenner Combination Fund.
III. The BCD Balanced Fund.
IV. The KPL Money Market Fund.

The correct answer was - A: I and IV.
Explanation:
A high-yield fund would have a portfolio consisting of corporate debt instruments, and a money market fund would have a portfolio consisting of high-quality, short-term debt. Both combination funds and
balanced funds include equity in their portfolios.
Reference: 2.4.4.4 in the License Exam Manual.

Under the exchange provision, within the first 24 months, a variable life policy may be converted into a:
A) variable annuity.
B) mutual fund shares.
C) whole life policy.
D) term insurance policy.

The correct answer was - C: whole life policy.
Explanation:
The variable life exchange provision allows a policyholder to convert the variable policy into a whole life policy within the first 24 months of variable policy ownership. The insurance company must use
the initial contract date and can not require proof of insurability.
Reference: 2.8.8 in the License Exam Manual.

The maximum sales charge over the life of a contractual plan using mutual funds for its underlying investment is:
A) 9%.
B) 8.5%.
C) no more than 20%.
D) no maximum sales charge; rule only states it must be reasonable.

The correct answer was - A: 9%.
Explanation:
The maximum sales load permissible under either type of contractual plan (front-end load or spread-load) is 9% over the life of the plan. It should be noted that new contractual plans are no longer sold,
though there are still such plans in force.
Reference: 2.5.1.2 in the License Exam Manual.

The transfer agent of a mutual fund:
I. redeems shares.
II. sells shares of stock in the fund's portfolio.
III. holds custody of fund securities.
IV. handles name changes of mutual fund share ownership.

The correct answer was - A: I and IV.
Explanation:
The transfer agent redeems shares of a mutual fund at the price next calculated after receiving a request for redemption. The transfer agent also handles transfers of account ownership for such transactions as an inheritance or gift. The fund custodian holds custody of fund securities.
Reference: 2.3.4 in the License Exam Manual.

ACE Fund's offering price is $9.00, and its net asset value is $9.40. GEM Fund's offering price is $24.00, and its net asset value is $20.00. From these quotes you know that:
I. ACE could be an open-end or closed-end fund.
II. ACE is a closed-end fund.
III. GEM could be an open-end or closed-end fund.
IV. GEM is a closed-end fund.

The correct answer was - D: II and IV.
Explanation:
ACE Fund is selling below its net asset value, so it must be a closed-end fund. GEM is selling above its NAV by more than the 8.5% sales load allowed, so it also must be a closed-end fund.
Reference: 2.4.3 in the License Exam Manual.

If your 60-year-old customer purchases a nonqualified variable annuity and withdraws some of her funds before the contract is annuitized, what are the consequences of this action?
A) Ordinary income tax on earnings exceeding cost basis.
B) 10% penalty plus payment of ordinary income tax on all funds withdrawn.
C) 10% penalty plus payment of ordinary income tax on all funds withdrawn exceeding basis.
D) Capital gains tax on earnings exceeding basis.

The correct answer was - A: Ordinary income tax on earnings exceeding cost basis.
Explanation:
Distributions from a nonqualified plan represent both a return of the original investment made in the plan with after-tax dollars (a nontaxable return of capital) and the income from that investment. The
income was deferred from tax over the plan's life, so it is taxable as ordinary income once distributed. A 10% penalty applies only if distributions begin before age 59½.
Reference: 2.7.4 in the License Exam Manual.

The death benefit of a variable life policy must be calculated at least:
A) semiannually.
B) monthly.
C) weekly.
D) annually.

The correct answer was - D: annually.
Explanation:
The death benefit must be calculated annually.
Reference: 2.8.5 in the License Exam Manual.

Which of the following statements is TRUE regarding the annuity units during the annuitization period of a variable annuity contract?
A) Both the number and the value of the units remain the same.
B) Both the number and the value of the units change.
C) The number of units changes, but the valuation of each unit remains the same.
D) The number of units remains the same, but the value of each unit changes.

The correct answer was - D: The number of units remains the same, but the value of each unit changes.
Explanation:
During the payout phase of variable annuities, the number of annuity units will remain the same, but the value of each unit will vary. It is important to remember that an annuity unit is not the same as an
accumulation unit.
Reference: 2.7.4 in the License Exam Manual.

To which of the following instruments, in terms of risk and reward, is variable life insurance most nearly analogous?
A) Combination annuity.
B) Variable annuity.
C) Fixed annuity.
D) Mutual fund investment.

The correct answer was - A: Combination annuity.
Explanation:
Both variable life insurance and a combination annuity have part of their premiums invested in a general account and part invested in a separate account. Thus both have a minimum guarantee (a fixed monthly payout for the combination annuity and a minimum guaranteed death benefit for variable life insurance) and a variable component designed to provide inflation protection (the variable payout of the combination annuity and the variable death benefit of variable life insurance).
Reference: 2.7.1.2 in the License Exam Manual.

The cash value of a variable life insurance contract is affected by:
I. policy loans.
II. state premium taxes.
III. sales charges.
IV. mortality risk fee.

The correct answer was - C: I and IV.
Explanation:
Premium taxes and sales charges are deducted from premiums rather than from the separate account.
Reference: 2.8.6 in the License Exam Manual.

An investment company would compute its expense ratio by dividing the:
A) management fee by the average net assets.
B) operating costs minus management fee by average net assets.
C) annual operating expenses by the average net assets.
D) average monthly operating expenses by the average net assets.

The correct answer was - C: annual operating expenses by the average net assets.
Explanation:
The expense ratio is computed on an annual basis by totaling the annual operating expenses and then dividing those expenses by the average net assets for the year.
Reference: 2.4.5.2.2 in the License Exam Manual.

The Investment Company Act of 1940 places a number of restrictions upon the portfolio composition of a money market mutual fund. Included in those restrictions is the requirement that, other than
securities issued or guaranteed by the U.S. government, the maximum percentage of the fund's assets that may be invested in the securities of any single issuer is:
A) 25%
B) 5%
C) 10%
D) 2%

The correct answer was - B: 5%
Explanation:
Although it is unnecessary to know the rule number, you may need to know that no more than 5% of a money market mutual fund's assets may be invested in the securities of any one issuer (not
including the U.S. government).
Reference: 2.4.4.6.1 in the License Exam Manual.

A registered representative is talking with a new customer at his firm, a 60- year-old man who has accounts at several other broker/dealers and a net worth of just over $700,000. The customer considers himself to be extremely skilled at selecting new companies that will perform well, and over the years, through numerous small investments, he has built a portfolio consisting of about 80% equity
securities. His company mandates retirement for its personnel at age 65, and he is becoming worried about retirement income. He has selected another new company, one with a speculative bond issue.
He would like to invest $250,000 in this issue to augment his projected retirement income and would like the registered representative's opinion. The registered representative should:
A) refuse to enter the order.
B) enter the order as stated, since the customer has shown skill at identifying well-performing companies.
C) agree that it is appropriate to move toward emphasis on income, if that is his retirement objective, but not with such a large investment in one speculative security.
D) suggest that the customer diversify the investment by spreading it around several companies and, perhaps, even some bond mutual funds.

The correct answer was - C: agree that it is appropriate to move toward emphasis on income, if that is his retirement objective, but not with such a large investment in one speculative security.
Explanation:
This investment would amount to over one-third of the customer's net worth and is speculative to boot. The registered representative should urge the customer to begin moving more slowly into income
securities.
Reference: 2.4.4.8 in the License Exam Manual.

A customer has expressed interest in exchange-traded funds (ETFs) and wishes to discuss them with you. You could tell him all of the following EXCEPT:
A) Real time quotes are available for ETFs.
B) Selling short and trading on margin are available transactions with ETFs.
C) A share of an ETF represents an entire portfolio, or a specific selection, of securities.
D) ETFs have a NAV, calculated at the end of the trading day, that serves as the trading price until the next NAV is calculated.

The correct answer was - D: ETFs have a NAV, calculated at the end of the trading day, that serves as the trading price until the next NAV is calculated.
Explanation:
While a NAV can be calculated for an exchange-traded fund, the price is set by the market and changes throughout the trading day.
Reference: 2.1.3.2 in the License Exam Manual.

According to federal law, an insurance company under the provisions of the Investment Company Act of 1940 must allow a variable life policyholder the option to convert the policy into a permanent form
of insurance contract for a period of:
A) 45 days.
B) 24 months.
C) 18 months.
D) 12 months.

The correct answer was - B: 24 months.
Explanation:
Although state law may allow for periods longer than 24 months, federal law requires a two-year conversion privilege.
Reference: 2.8.8 in the License Exam Manual.

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 assumed interest rate.
B) the number of accumulation units in his account.
C) the value of each accumulation unit.
D) the performance of his separate account.

The correct answer was - A: the assumed interest rate.
Explanation:
Assumed interest rate (AIR) does not become important unless and until the account is annuitized. AIR only affects the value of annuity units, not accumulation units.
Reference: 2.7.3 in the License Exam Manual.

The value of a variable annuity separate account fluctuates in relationship to the:
A) value of the separate account portfolio.
B) general account maintained by the insurance company.
C) Consumer Price Index.
D) S & P 500 market index.

The correct answer was - A: value of the separate account portfolio.
Explanation:
The value of the separate account fluctuates in relation to the securities held in the account.
Reference: 2.7.3 in the License Exam Manual.

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.
IV. guarantees payments for a certain period of time.

The correct answer was - C: I and II.
Explanation:
A joint life with last survivor contract covers multiple annuitants and ceases payments at the death of the last surviving annuitant.
Reference: 2.7.4 in the License Exam Manual.

A fund of funds is one that:
A) invests exclusively in shares of other mutual funds.
B) keeps at least 50% of its assets in cash at all times.
C) keeps a large portion of its portfolio in money market instruments at all times.
D) has a portfolio consisting of large-capitalization securities only.

The correct answer was - A: invests exclusively in shares of other mutual funds.
Explanation:
As the name implies, a fund of funds is a mutual fund that, instead of investing in individual securities, invests in the shares of other funds.
Reference: 2.4.4.5 in the License Exam Manual.

An investment company that is not classified as either a unit investment trust or a face amount certificate company would be classified as:
A) a direct participation program.
B) a fixed annuity company.
C) a limited partnership.
D) a management investment company.

The correct answer was - D: a management investment company.
Explanation:
Management investment companies are the third classification of investment companies under the Investment Company Act of 1940. Open-end funds (mutual funds) and closed-end funds are
subclassifications of management investment companies. The other choices are not investment companies.
Reference: 2.1.2.3 in the License Exam Manual.

Which of the following statements about a straight-life variable annuity is TRUE?
A) The monthly payout is fixed to the Consumer Price Index.
B) The number of annuity units a client owns never changes.
C) The number of accumulation units a client owns never changes.
D) If a client dies during the annuity period, the remaining funds are distributed to the beneficiary.

The correct answer was - B: The number of annuity units a client owns never changes.
Explanation:
Annuity units are fixed in number; their current value each month determines the payout amount.
Reference: 2.7.4 in the License Exam Manual.

A shareholder has $800 to invest in the ABC Technology Fund. If the shares are currently priced at $21.15 each, he can purchase how many shares?
A) 37.825 shares.
B) 38 shares.
C) 37, with $17.45 in change.
D) None because the minimum trading unit is 100 shares.

The correct answer was - A: 37.825 shares.
Explanation:
The shareholder can purchase 37.825 shares. Mutual fund shares may be sold in full or fractional amounts.
Reference: 2.4.2 in the License Exam Manual.

The maximum sales charge on a variable annuity contract is:
A) 8.5% of the total amount invested.
B) 9% of the total amount invested.
C) not specified.
D) 8.5% of the net amount invested.

The correct answer was - C: not specified.
Explanation:
The only requirement regarding sales charges on a variable annuity is that they must be reasonable.
Reference: 2.7.2.2 in the License Exam Manual.

An investment company must register with the SEC and, in doing so, must provide all of the following information EXCEPT:
A) its past performance.
B) its intention to concentrate its investments in a single industry.
C) its intention to borrow money.
D) its present or future plans to issue senior securities.

The correct answer was - A: its past performance.
Explanation:
A registration statement or disclosure must describe any intent to borrow money or issue senior securities. A company's concentration of investments is part of its required investment policy description.
There is no requirement to describe past performance to the SEC.
Reference: 2.2.1 in the License Exam Manual.

Under the Investment Company Act of 1940, which of the following would be considered interested persons?
I. An officer of an investment company.
II. The cousin of an officer of an investment company.
III. A shareholder who owns 5% or more of the investment company's shares.
IV. A public corporation of which the investment company owns 3% of the voting shares.

The correct answer was - D: I and III.
Explanation:
The interested persons of an investment company include all of its affiliated persons and their immediate family members (not cousins). A company in which the investment company owns stock is not
an interested person. A director with no other job with the fund than just sitting on the board is not an interested person.
Reference: 2.3.1 in the License Exam Manual.

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