Which of the following plans allows the contributor to withdraw both his earnings and contributions tax-free if certain conditions are met?
Answer(s): A
The Roth IRA allows the contributor to withdraw both his earnings and contributions tax- free if the Roth IRA has been in existence for at least 5 years and the contributor has reached the age of 59 ½. In all of the other choices, only non-tax-deductible contributions may be withdrawn tax-free.
Which of the following correctly describes a difference between closed-end and open-end investment companies?
Answer(s): B
A difference between closed-end and open-end investment companies is that open-end investment company shares will never be offered at a price below the net asset value of the fund; this is not true of closed-end companies. The shares of open-end investment companies (mutual funds) are bought (and sold) through the company itself at net asset value or net asset value plus a load charge.Therefore, the offer price will always be greater than or equal to the fund's net asset value per share.Closed-end company shares are bought and sold on exchange floors, and the price is set by supply and demand, so closed-end shares may sell for less than the net asset value of the fund. Closed-end companies have a fixed number of shares. Open-end companies can create new shares if there are more buyers than sellers. Both types of management companies can be either diversified or non-diversified in their holdings.
Which of the following is not a potential advantage associated with investing through a mutual fund?
Answer(s): C
Price discovery is not a potential advantage associated with investing through a mutual fund. The net asset value of the fund determines its price, not the interaction of buyers and sellers in the market. All the other choices are advantages of investing through a mutual fund.
Which of the following statements regarding the separate account of an insurance company is true?
Answer(s): D
The true statement is that the separate account must register as an investment company under the Investment Company Act of 1940. The premiums paid by investors for variable life insurance (less numerous charges) are invested in subaccounts within the separate account, and the earnings of the subaccounts are used, in turn, to make payments to the owners of variable life insurance policies, but not to any of the other policyholders of the company, such as the fixed annuity investors. The insurance company pays its operating expenses out of its general account.
MBIA, Inc., a municipal bond insuring company, has a bond issue that is selling for $80.05 per $100 of par. The bond has a coupon rate of 7%, with semiannual payments, and matures in 2025. The current yield on this bond is:
The current yield on this MBIA bond is 8.745%. The current yield is the annual interest payment of $7 per $100 of par divided by the bond price of $80.05: $7/$80.05 = 8.745%.
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