Investment Company and Variable Contracts Products Representative Qualification Examination (IR) v7.0

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Exam contains 325 questions

Patty Planner has been contributing a sum to a non-qualified variable annuity each month for the last fifteen years in order to reach her ultimate goal of an early retirement. Now that she has turned 60, Patty has decided to retire. Her annuity is now worth $69,000, and her total contributions were $36,000. Patty decides to withdraw $15,000 of her accumulation as a lump sum to fund an extended vacation to Europe that she has always promised herself.
Which of the following statements applies to Pattys situation?

  • A. Her $15,000 withdrawal will be taxed as capital gain income, at a preferential rate, but she will also have to pay a 10% penalty for withdrawing the funds prior to turning 62.
  • B. Her $15,000 withdrawal will be taxed as ordinary income to her at her marginal tax rate.
  • C. Her $15,000 withdrawal is not taxable since it is less than the amount of her total contributions to the plan, but she will be subject to a 10% penalty for early withdrawal.
  • D. Her $15,000 withdrawal will be taxable as ordinary income to her at her marginal tax rate, and she will also be subject to a 10% penalty for early withdrawal.


Answer : B

Explanation:
If 60-year-old Patty has contributed $36,000 to the annuity that is now worth $69,000 and decides to withdraw $15,000 as a lump sum, the $15,000 will be taxed as ordinary income.
She will not be subject to any penalties for early withdrawals since she is over 59 years old, but the IRS uses LIFO-last-in/first-out-accounting in determining whether the income is taxable, so the $15,000 withdrawal will be considered to come from earnings, which have grown tax-free and are, therefore, now taxable.

Tex Payor owns 500 shares of Amazon.com, Inc. that he bought seven years ago when the stock price was $18 a share, at which time he paid a commission of $12.95 to purchase the stock. At the beginning of this year, Amazon was selling for $89 a share. Today, December
31st, Amazons stock closed at $152 a share.
Based on this information, what must Tex include on this years tax return as taxable income from his investment in Amazon?

  • A. only the capital appreciation on the stock this year: $63 a share x 500 shares = $31,500
  • B. the value of the stock on December 31st minus the price he paid for it, which includes the commission he paid, divided by the 7 years he has owned the stock: $152 - ($18 + $12.95) x 500 shares = $60,525 7 = $8,646
  • C. the capital appreciation on the stock this year minus the commission he originally paid to purchase the stock:($63 - $12.95) x 500 = $25,025
  • D. none of the above


Answer : D

Explanation:
None of the selections is the amount that Tex must include as taxable income on this years tax return from his investment in Amazon. Until Tex sells his shares of Amazon.com, he has earned only unrealized capital gains, which are not subject to taxation. When Tex sells his shares, he will then have realized capital gains and must pay tax on those gains.

In mid-September, the stock of Amazon.com, Inc. (AMZN) is selling for $147.A January call option on the stock is selling for $6.10 and has a strike price of $160. This call option is:

  • A. at the money.
  • B. in the money.
  • C. out of the money.
  • D. overpriced. No one should pay $6.10 for the right to buy a share of stock for $160 when its current market price is only $147.


Answer : C

Explanation:
If Amazon.com is selling for $147 and the strike price on the option is $160, the call option is said to be out of the money since, even if an investor were given the option free, he would not benefit from exercising it at this time. If he did so, he would be paying $160 for a stock that is selling for only $147 on the open market. Even so, the option is not necessarily overpriced at $6.10 because the option has what is known as time value on it. The stock of Amazon.com has several months during which it could rise well above the $160 strike price on the option.

The total of a mutual fund’s front-end load, rear-end load, and 12b-1 fees may not exceed:

  • A. 10.0% of the fund’s offer price.
  • B. 10.0% of the fund’s net asset value.
  • C. 8.5% of the fund’s offer price.
  • D. 8.5% of the average annual net assets of the fund.


Answer : C

Explanation:
The total of a mutual funds front-end load, rear-end load, and 12b-1 fees may not exceed
8.5% of the funds offer price.

NASDAQ is:

  • A. an acronym for Norway’s major stock exchange.
  • B. the government organization that insures accounts at U.S. brokerage firms.
  • C. a computerized system that links together the U.S. regional exchanges.
  • D. a computerized quotation system used in the over-the-counter market.


Answer : D

Explanation:
NASDAQ is a computerized quotation system that is used in the over-the-counter market. It allows NASDAQ market makers to enter bid and ask quotes and allows subscribers at lower levels to view the bid and ask quotes available.

HiTop Investments main office is located in the state of Colorado. A registered representative of the firm sent out an e-mail to his clients, some of whom reside in other states, promoting the firms Colorado Municipal Bond Fund, which invests exclusively in bonds offered by the state and local governments of Colorado. In the e-mail, the representative states, These bonds provide income that is free from both federal and state taxes and may also be free from local taxation, if any exists.
Is this e-mail in violation of any securities laws?

  • A. No. Since the fund invests exclusively in bonds offered by the state and local governments of Colorado, the representatives statement contains no misstatement of fact.
  • B. Yes. Advertisements referring to a specific fund may not be distributed by electronic means.
  • C. Yes. A fund that invests only in bonds offered by state and local governments of one state may not be sold to investors who reside in other states.
  • D. Yes. The representatives statement that the bonds provide income that is free from both federal and state taxes and may also be free from local taxation, if any exists, is untrue.


Answer : D

Explanation:
Yes, the e-mail is in violation of the Securities Act of 1933 because the representatives statement that the bonds provide income that is free from both federal and state taxes and may also be free from local taxation, if any exists, is an untrue statement of a material fact.
Although the income will be free from federal taxation, residents of states other than
Colorado will likely be required to pay state and local income taxes on the interest earned.
It is not illegal to sell municipal bonds to investors in other states or to distribute advertisements by electronic means.

Brian is single and 32 years old. He is employed as a buyer for a large sporting goods retail chain and participates in an employer-matched 401(k) plan. He remembers hearing about the benefits of passively managed portfolios in a college investments course he took.
Therefore, he is directing 100% of his 401(k) monies into an S&P 500 Index fund. He has also been investing all of his discretionary income into a regular account with the same
S&P 500 Index fund. Brians goal is to retire no later than his 55th birthday.
Is this the best investment strategy for him?

  • A. Yes. He is investing in a diversified portfolio of stocks that is passively managed, so he isnt having to pay big management fees.
  • B. Yes. Because index funds are passively managed, they dont have as high a turnover rate, and lower turnover rates result in lower tax bills for the investor. Brian gets diversification and a lower tax bill.
  • C. No. The S&P 500 Index consists only of large, domestic stocks, so Brian isnt as diversified as he could be, and his investments may not grow fast enough for him to retire on his 55th birthday.
  • D. Both A and B are reasons that Brian’s strategy is the best strategy for him.


Answer : C

Explanation:
No, investing all of his retirement savings and all his discretionary income into the same
S&P 500 Index fund is not the best strategy for Brian because the S&P 500 Index consists only of large domestic stocks, so Brian isnt as diversified as he could be, and his investments may not grow fast enough for him to retire on his 55th birthday. Although the
S&P 500 Index fund is passively managed, which results in lower management fees and lower tax bills, Brian could spread his money among other index funds that offer these same benefits as well. For example, he could invest in a small cap index fund, a mid-cap index fund, and even a foreign stock index fund, such as an EAFE Index fund. This would give him even more diversification potential, and since the stocks in which these funds invest are a bit riskier, the funds offer a higher expected return, which should advance him toward his retirement goal more quickly. Brians investment horizon is sufficiently long for him to be able to handle the risk. Furthermore, investing all of ones money in a single fund- even a single S&P 500 Index fund-isnt the best strategy, especially if one has a lot of money to invest as Brian does. Not all S&P 500 Index funds perform equally well.

A FINRA member who is a principal underwriter under the definition provided in the
Investment Company Act of 1940 is permitted to sell variable contracts through another broker-dealer only if:
I. the broker-dealer is also a FINRA member.
II. there is a sales agreement in effect between the underwriter and the broker-dealer.
III. the broker-dealer is also a principal underwriter as defined by the Investment Company
Act of 1940.

  • A. either I or II is true.
  • B. both I and II are true.
  • C. all three statements-I, II, and III-are true.
  • D. any one of the three statements-I, II, or III-are true.


Answer : B

Explanation:
A FINRA member who is a principal underwriter under the definition provided in the
Investment Company Act of 1940 is permitted to sell variable contracts through another broker-dealer only if both statements I and II are true. The broker-dealer must also be a
FINRA member, and there must be a sales agreement in effect between the underwriter and the broker-dealer.

Which of the following would be the most suitable investment for a client who has retired and needs some current income to augment her social security check?

  • A. growth fund
  • B. variable life policy
  • C. money market fund
  • D. U.S. government bond fund


Answer : D

Explanation:
Of the choices provided, the most suitable investment for a client who has retired and needs some current income to augment her social security check would be a U.S. government bond fund. The growth fund is mostly invested in stocks that provide their return in the form of capital appreciation, not dividend income. The variable life policy would not offer her the current income she needs and may even have a surrender charge.
Furthermore, these policies are insurance, not investments. A money market fund is good for capital preservation and some of her funds should be invested in a money market fund to meet this objective, but it will not provide her with current income. A U.S. government bond fund is less risky than other bond funds--although its value will fluctuate with interest rate changes-and will provide her with the supplemental income she requires.

Which of the following are duties of the specialist on an exchange floor?
I. executing limit orders if/when the limit price specified is reached
II. minimizing any imbalance in supply and demand for the stock(s) that the specialist is assigned
III. determining an opening price for each assigned stock every day
IV. serving as an auctioneer for the shares of the assigned stocks

  • A. I and II only
  • B. I, II, and IV only
  • C. I and IV only
  • D. I, II, III, and IV


Answer : D

Explanation:
All of the choices listed are duties of the specialist on an exchange floor. The specialist maintains a limit order book and executes those orders if/when the limit price is reached.
The specialist is also charged with maintaining a fair and orderly market in the assigned securities, which means trading on his own account to ensure that the supply and demand of the stocks shares match. Additionally, the specialist is responsible for setting the opening price for the assigned stock each day and for serving as the auctioneer for the shares of the stock.

Ari Gaunt was affiliated with Savvy Investments and was terminated after some of the female representatives associated with Savvy filed sexual harassment complaints against him. Mr. Gaunt believes that he is still due money for some transactions he executed prior to his termination; Savvy believes otherwise. Under FINRAs Code of Arbitration:

  • A. Ari may either sue Savvy in a civil court of law or submit his claim to arbitration.if Ari submits his claim for arbitration and is unhappy with the panels decision, he can then sue
  • B. Ari has six years to submit his claim to arbitration.
  • C. both B and C are true statements.


Answer : C

Explanation:
If Mr. Gaunt believes he is still due money from Savvy, and Savvy disagrees, Ari has six years to submit his claim to arbitration under FINRAs Code of Arbitration. Ari cannot sue
Savvy in a court of law, and the decision of the arbitration panel is final.

Marshalls employer offers a 403(b) plan, and Marshall must decide into which of several mutual fund alternatives the contributions will be invested.
Regardless of other factors, which of the following would clearly not be a good choice?

  • A. a municipal bond fund
  • B. a fund that invests in stocks that are expected to experience high growth
  • C. a fund that invests almost exclusively in high-tech stocks
  • D. a fund that invests in both foreign and domestic stocks


Answer : A

Explanation:
A municipal bond fund is clearly not a good investment choice for a 403(b) plan. Earnings in a 403(b) plan grow tax-deferred, so Marshall would not be receiving the tax-free income benefits offered by a municipal bond fund. All he would be receiving is a lower return on his investment.

Dottie is a newly-minted, registered representative and is doing some cold calling to line up appointments with prospects. When doing so, Dottie:
I. must not call anyone on her firms do-not-call list.
II. must not call anyone on the FTCs national do-not-call-list.
III. must not call anyone before 7 a.m. or after 7 p.m., based on the time zone of the person being called.
IV. must provide the person called with her name, the name and contact information of her firm, and the purpose of her call.

  • A. I and III only
  • B. I and IV only
  • C. I, II, and IV only
  • D. I, II, III, and IV


Answer : C

Explanation:
Only Selections I, II, and IV are correct. When Dottie does her cold calling, she must not call anyone listed on either her firms do-not-call list or the FTCs national do -not-call list, and she must provide the person called with her name, the name and contact information of her firm, and the purpose of her call. Under FINRAs telemarketing rules, she must not call anyone before 8 a.m. or after 9 p.m., based on the time zone of the person being called.

Which of the following is not one of the rules stipulated by the Securities Exchange Act of
1934?

  • A. All securities’ exchanges and SROs are required to register with the SEC.
  • B. All brokers and dealers are required to be members of a national securities association.
  • C. Investment companies are prohibited from using any sales literature that contains an omission of a material fact.
  • D. Firms are required to send copies of their annual reports to investors before an annual meeting at which directors are to be elected.


Answer : C

Explanation:
The rule prohibiting investment companies from using any sales literature that contains an omission of a material fact is not one of the rules stipulated by the Securities Exchange Act of 1934. This involves the market for new securities and, as such, is a rule stipulated by the
Securities Act of 1933. The 1934 Act deals with the secondary market.

Which of the following is an example of a primary market transaction?

  • A. Exco Resources (XCO) sells a new issue of 7.5%, 8-year notes.
  • B. Ms. Talker calls her broker and places a market order to sell shares of AT&T (T) on the NYSE.
  • C. Mr. Safe purchases a Treasury bill with two weeks remaining to maturity.
  • D. Mr. Green places an order to buy shares of Sunvalley Solar, Inc. (SSOL), a stock selling on the OTC Bulletin Board.


Answer : A

Explanation:
Exco Resources new bond issue is a primary market transaction. The primary market refers to the market for new issues. The other three scenarios describe transactions in securities that are already being traded and are secondary market transactions.

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Exam contains 325 questions

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