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AAMS Module Quizzes (1-10) with Complete Solutions
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AAMS Module Quizzes (1-10) with Complete Solutions
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AAMS Module Quizzes (1-10) withComplete Solutions
A "walk in" customer tells you how his best friend has made a profit through rapid
trading of small over-the-counter (OTC) stocks. He wants to do the same. You explain
the high risks involved in such a strategy and your personal reservations about it. He
gives you all the information you need for your new account form. The next week, he
requests that you buy large positions in two thinly traded OTC issues. You think the
order is too risky given his circumstances and tell him so, but he insists that you initiate
the transaction. Which one of the following would represent an appropriate course of
action? - ANSWER-Consult with your branch manager about what to do.
When faced with a difficult customer situation, investment professionals should consult
with their branch manager.
A barrier of effective investment strategy is - ANSWER-inadequate time horizons
One of the biggest enemies of effective strategy is inadequate time horizons, since
many effective strategies can take years to unfold.
A beneficiary who is guaranteed payments for life (with a minimum guarantee of 10
years of payments) has selected which one of the following settlement options? -
ANSWER-life income with period certain
A "life income with period certain" settlement option guarantees payments for life to the
primary beneficiary with a guarantee of 10 years of payments minimum to a contingent
beneficiary should the primary beneficiary be unable to collect. If the first beneficiary
dies prior to collecting the 10 years of payments, the second beneficiary gets the
remaining payments.
A bond investor buys $10,000 of 1-year bonds, $10,000 of 2-year bonds, and so on—
with the final $10,000 invested in 15-year bonds. What type of strategy is this investor
using? - ANSWER-ladder strategy
The ladder strategy spreads equal amounts of bond holdings among different
maturities.
A client can best estimate his or her old age Social Security benefits by - ANSWER-
obtaining an estimate of future benefits directly from the Social Security Administration.
The Social Security Administration is the best source for an estimate of Social Security
old-age benefits.
A client has decided to move the funds from her former employer's 403(b) plan into an
IRA. The best way to avoid a 20% withholding tax or any taxable income, would be if
she - ANSWER-instruct the pension plan to roll over the funds directly to her new IRA.
Direct rollovers avoid the 20% withholding.
,A client who expects his portfolio of intermediate-term government bonds to earn 13% a
year suffers from which one of the following? - ANSWER-unrealistic expectations
Historically, intermediate-term government bonds have had an annual return of between
5% and 6%, so this client has very unrealistic expectations.
A client, age 55, takes a $3,000 distribution from his rollover IRA to pay for a semester
of college tuition for his 21-year-old son. Which one of the following correctly explains
the tax consequences for the father? - ANSWER-The entire distribution is subject to
income tax, but it is free from the 10% early withdrawal penalty.
There is no 10% early withdrawal penalty for funds withdrawn to pay for higher
education. The distribution is, however, subject to ordinary income taxation.
A client, age 55, takes a $3,000 distribution from his rollover IRA to pay for a semester
of his son's college tuition; his son is age 21. Which one of the following correctly
explains the tax consequences for the father? - ANSWER-The entire distribution is
subject to income tax, but it is free from the 10% early withdrawal penalty.
There generally is a 10% penalty (with some exceptions) for distributions taken from an
IRA if the individual is under 59½ years old; these same distributions are also subject to
current income taxation. Penalty-free withdrawals may be taken from rollover IRAs if the
withdrawal is to be used pay for qualified education expenses, such as college tuition
for a son or daughter.
A contingent (standby) trust - ANSWER-receives the donor's income tax basis if the
value of the property equals or exceeds the donor's basis.
The recipient receives the donor's income tax basis if the value of the property equals or
exceeds the donor's basis.
A correlation of 0.0 between two securities means that the returns of the two move -
ANSWER-independently—there is no relationship between the two.
A correlation of 0.0 means there is no relationship between the returns of the two
securities. Perfectly positively correlated securities (1.0) move in the same direction and
perfectly negatively correlated securities (-1.0) move in opposite directions.
A Crummey power is - ANSWER-a type of power of appointment.
A Crummey power is a type of power of appointment.
A custodial account for a minor is - ANSWER-required to terminate when the minor
reaches the age of majority as specified by state law.
Custodial accounts must terminate when the minor reaches the age of majority as
specified by state law.
A disadvantage to using life insurance to informally fund a nonqualified plan is -
ANSWER-additional death benefit proceeds would be paid to a beneficiary of an
executive with potentially a very large estate.
,Paying additional death benefits to a beneficiary of an executive with a large estate is a
disadvantage if there is no need for the protection, and it may cause additional estate
taxes to be owed.
A funded deferred compensation plan - ANSWER-will be taxable to an employee if
nonforfeitable.
If the employee has constructive receipt of plan compensation (funds are
nonforfeitable), such compensation will be taxable to the employee.
A life insurance's policy dividend generally - ANSWER-is not taxable.
There is generally no tax on life insurance dividends because they are a return of
premium. In other words, they are generally excluded from income.
A living will - ANSWER-applies only when a patient is terminally ill and incompetent to
make medical decisions.
Only when a patient is terminal and incompetent to make medical decisions will the
provisions of a living will apply.
A major difference between excess benefit plans and supplemental executive retirement
plans (SERPs) is(LO 7-3) - ANSWER-SERPs often provide for disability retirement
benefits.
SERPs are generally provided to high-level executives, and are primarily designed to
provide adequate post-retirement income, including the possibility of a disability-related
retirement.
A major responsibility of FINRA is - ANSWER-developing rules and regulations for its
members.
A major responsibility of FINRA is - ANSWER-developing rules and regulations for its
members.
FINRA is the largest securities industry self-regulating organization and, therefore,
develops rules and regulations for its members.
A measure of a security's systematic risk is - ANSWER-beta.
Beta measures the degree to which a security moves with the market or systematic risk.
A mutual fund sales load that is assessed on a descending scale if the fund is sold
within the first five or six years of purchase is called a - ANSWER-contingent deferred
sales charge.
A contingent deferred sales charge is a sales load assessed on a descending scale if
the fund is sold within the first five or six years of purchase.
A nonspringing durable power of attorney - ANSWER-remains effective after the
principal becomes incapacitated.
The very purpose of any durable power of attorney is to give the attorney-in-fact
authority to act after the principal becomes incapacitated. However, such authority does
, not survive the principal's death. Such authority is created in an independent document,
and is effective immediately in this type of power of attorney.
A person with no heirs (or anyone who is a financial dependent) would most likely select
the - ANSWER-straight life income option.
A straight life income option may be best for someone who has no heirs, because upon
the individual's death, payments stop. Income payments will be higher than payments
with a longer guaranteed income period (e.g., joint life or 10 years certain).
A person's marginal tax rate equals the rate of tax paid on the __________? -
ANSWER-last dollar of income.
The marginal tax rate is the tax rate paid on the last dollar of income.
A potential client, Dr. Shepard, is contacted by James Hyde, an investment
professional. Dr. Shepard tells James that he is a regular investor in biotech companies,
and that if James was knowledgeable about the industry, he would do business with
him. James tells the doctor that he has lots of contacts in the industry and that many of
his best clients are active investors in biotech issues. Actually, James has only one
such client, from whom he takes unsolicited orders. James clearly is violating the
principle of - ANSWER-integrity
A potential client, Ross Walker, is contacted by Amy Taylor, an investment professional.
Ross is interested in trading complex options and is willing to open an account if Amy is
knowledgeable about options. Amy implies to Ross that she is an expert in option
trading but, in fact, knows only the basic elements of it. Looking solely at Amy's lack of
competency in this area, which fiduciary duty has not been met? - ANSWER-duty of
care
Lacking the competency to provide advice in the best interest of the client falls under
the fiduciary duty of care.
A potential implication of a salary reduction plan is that - ANSWER-income tax is paid at
the employee's marginal tax rate in retirement, with the expectation it will be a lower rate
at that time.
While future tax rates are unknown, the employee expects to be taxed at a lower rate in
retirement.
A potential implication of a salary reduction plan is that - ANSWER-Income tax is paid at
the employee's marginal tax rate in retirement, with the expectation it will be a lower rate
at that time.
While future tax rates are unknown, the employee expects to be taxed at a lower rate in
retirement.
A power of appointment trust - ANSWER-will entitle the grantor to a marital deduction.
A power of appointment trust is a marital trust that automatically qualifies for the marital
deduction. Because the grantor's spouse is given a general rather than special power of
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