Question 1

Which of the following correctly describes a difference between closed-end and open-end investment companies?

Accepted Answer

A) Open-end investment companies have a fixed number of shares; closed-end companies can create new shares if there are more buyers than sellers. 
B) Open-end investment company shares will never be offered at a price below the net asset value per share of the fund; this is not true of closed-end companies. 
C) Open-end companies may invest in non-diversified portfolios; closed-end companies are required to invest only in diversified portfolios. 
D) Shares of open-end companies sell on exchange floors; shares of closed-end companies are bought and sold through the company itself.

Question 2

Glamourless Fund is a value fund. As such, it invests primarily in stocks with:

Accepted Answer

A) low cash dividend yields. 
B) high betas. 
C) high price-earnings ratios. 
D) low earnings growth rates.

Question 3

The AGRO Mutual Fund invests in aggressive growth stocks of midcap corporations. The fund is running an advertisement on the radio that informs the listeners that AGRO earned a 22% return last year while the S&P 500 Index returned only 10%.The ad also contains information regarding how an interested investor can contain a fund prospectus. Has AGRO violated any securities laws with this advertisement?

Accepted Answer

A) No. This would be considered a generic advertisement and not an offer to sell. 
B) No. In addition to providing the listeners with its own return last year, AGRO appropriately provided the listeners with a benchmark return; thus there has been no violation of any laws. 
C) Yes. Although AGRO provided the return on the S&P 500 as well as its own return, the S&P 500 Index is comprised of average risk stocks and is not an appropriate benchmark for AGRO to use. 
D) Yes. AGRO is required to provide information on the specific investments it made to earn that 22% return, given that the return is unusually high.

Question 4

Under the Investment Company Act of 1940, an investment company must:

Accepted Answer

A) provide a prospective investor with a copy of its registration statement when offering shares for sale. 
B) maintain a minimum net worth of $5 million. 
C) have a board of directors composed of no more than 50% who are "interested persons." 
D) include a statement of its investment policy in its prospectus.

Question 5

Liz is a new client of yours. She is 36 years old, single, and has been working and earning a nice salary since her graduation from high school. She has been contributing the maximum allowed to a TSA plan through her employer, and you have no reason to doubt that she will meet her stated goal to retire when she is 58.She also has a good health care plan through her employer and is in excellent health. She has been depositing her non-retirement savings in a money market fund and is not pleased at the pathetic return she has been earning on her current balance of $140,000. Liz has been reading some articles on the web and understands she could allocate her funds to receive a higher return. She's willing to take on a moderate level of risk, but needs your help. She informs you that she does plan to use $40,000 of her current savings as a down payment for a condo and that her investment goals are to have money available for travel and for unexpected expenses and periodic purchases such as new cars and new furniture as the needs arise. She pays taxes at the highest marginal tax rate for individual tax payers. Based on these facts, which of the following asset allocations would best meet her needs?
I. Money market fund: 30%; investment-grade corporate bonds: 20%; blue-chip stocks: 20%; high-yield bonds: 10%; small cap stocks: 10%; foreign stocks: 10%
II. Money market fund: 10%; investment-grade municipal bonds: 5%; blue-chip stocks: 25%; high-yield bonds: 25%; small cap stocks: 10%; foreign stocks: 25%
III. Money market fund: 10%; investment-grade municipal bonds: 25%; growth stocks: 40%; small cap stocks: 15%; foreign stocks: 10%

Accepted Answer

A) I 
B) II 
C) III 
D) Either II or III would be suitable recommendations.

Question 6

The dividends distributed by which of the following are taxed as ordinary income?

Accepted Answer

A) mutual funds 
B) closed-end investment companies 
C) IBM 
D) real estate investment trusts

Question 7

Which of the following is not an auction market?

Accepted Answer

A) NASDAQ 
B) NYSE 
C) CHX 
D) All of the above are auction markets.

Question 8

Which of the following entities is eligible to establish a Keogh Plan?

Accepted Answer

A) Ms. Dee Ziner is the owner of an interior design company that is established as a sole proprietorship. 
B) Mr. Hans Deutsch is the owner of a Subchapter S Corporation that imports only Bavarian-made goods. 
C) Mr. Will Writer teaches English at a community college and does freelance writing to supplement his income. 
D) Both A and C are eligible to establish a Keogh Plan.

Question 9

Schaker hasn't been seeing a lot of clients these days with the recent market downturn-which means he hasn't been generating any commissions, and commissions are his bread and butter. So, Mr. Schaker does some Googling on his computer and notes that a prominent family of load funds has just introduced a new global fund. Scribbling the name and contact information of the fund family on his notepad, he begins calling his existing clients and promoting the new fund, encouraging his clients to redeem some shares in their existing funds to invest in this fund. Has Mr. Schaker violated any securities laws?

Accepted Answer

A) No. In FINRA's rules regarding fair dealing with customers, the SRO clearly states that "This does not mean that legitimate sales efforts in the securities business are to be discouraged. . . " 
B) Yes. Mr. Schaker is recommending the fund to his existing clients to benefit himself, not them. 
C) No. Research indicates that new funds tend to offer abnormally high returns for the first 12 months of their existence, so Mr. Schaker is doing his clients a favor even if he himself stands to profit. 
D) Yes. A registered representative should always refrain from recommending shares of a load fund; trades involving load funds should always be "unsolicited."

Question 10

Which of the following statements about hedge funds is true?

Accepted Answer

A) They are fairly low risk since the portfolio managers use investment strategies designed to "hedge their bets." 
B) They are not regulated by the Investment Company Act of 1940. 
C) They are considered to be very liquid investments. 
D) They have low management fees, like index funds.

Question 11

Fortune died at the relatively young age of 60. Which of the following options are available to her 65-year-old spouse, the beneficiary of her IRA?
I. withdraw the entire balance in a single lump sum
II. continue to make contributions to the IRA as if it were his own
III. roll his deceased wife's IRA into an existing IRA that he owns

Accepted Answer

A) I only 
B) I and II only 
C) I and III only 
D) I, II, and III

Question 12

Nancy invested $1,850 in the MidFee Mutual Fund, which has a 4% front-end load. The net asset value (NAV) per share of the fund at the time of her purchase was $22.20.How many shares of the fund was Nancy able to purchase?

Accepted Answer

A) 83.33 
B) 80.00 
C) 80.13 
D) None of the above is correct.

Question 13

Which of the following plans allows the contributor to withdraw both his earnings and contributions tax-free if certain conditions are met?

Accepted Answer

A) Roth IRA 
B) traditional IRA 
C) money purchase plan 
D) 401(k) plan

Question 14

A settlement option associated with a variable life policy in which the insurance company guarantees that the beneficiary will receive equal payments over a specific length of time is known as a:

Accepted Answer

A) fixed-amount settlement. 
B) fixed-period settlement. 
C) life-income settlement. 
D) guaranteed-payment settlement.

Question 15

A table providing detailed information on the various fees and expenses charged by a mutual fund can be found in the fund's:

Accepted Answer

A) Statement of Additional Information (SAI.) 
B) prospectus. 
C) financial statements. 
D) annual report.

Question 16

Bashful, Mr. Sleepy, Mr. Doc, Mr. Grumpy, Mr. Sneezy, and Mr. Happy are all employees of S. White Investment Advisers. Mr. Doc, Mr. Sneezy, and Mr. Happy give investment advice to the firm's clients and manage their portfolios. Mr. Sleepy greets clients and makes cold calls to solicit more business for the firm. Mr. Bashful performs general clerical services, such as filing. Mr. Grumpy is the office manager and is the direct supervisor of the other five employees. Which of S. White's employees must register as investment adviser representatives under the Investment Advisers Act of 1940?

Accepted Answer

A) only Mr. Grumpy 
B) Mr. Grumpy, Mr. Doc, Mr. Sneezy, and Mr. Happy 
C) Mr. Grumpy, Mr. Doc, Mr. Sneezy, Mr. Happy, and Mr. Sleepy 
D) All of them must register as investment adviser representatives.

Question 17

Which of the following steps in the underwriting process will occur last?

Accepted Answer

A) The underwriting syndicate is formed. 
B) The selling group is organized. 
C) The public offering price is set. 
D) A red herring prospectus is circulated to the public.

Question 18

The entity through whom investors buy and redeem mutual fund shares is the fund's:

Accepted Answer

A) custodian. 
B) transfer agent. 
C) principal underwriter. 
D) investment adviser.

Question 19

After passing the Series 6 and becoming a registered representative, you will be able to execute transactions in which of the following securities?
I. corporate stocks
II. mutual funds
III. corporate bonds
IV. variable contracts

Accepted Answer

A) I, II, III, and IV 
B) I, II, and IV only 
C) II and III only 
D) II and IV only

Question 20

A bond issued by the Needy Corporation pays an 8% coupon, matures in ten years, and is selling for its face value of $1,000.The yield-to-maturity on this bond is:

Accepted Answer

A) less than its coupon rate of 8%. 
B) greater than its coupon rate of 8%. 
C) equal to its coupon rate of 8%. 
D) indeterminable with the information provided.

Exam 1: Investment and Bond Market