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A company currently has earnings of $4 and pays a $0.50 quarterly dividend. If the market price is $40, what is the current yield? A) 10% B) 15% C) 5% D) 1.25%

5% The quarterly dividend is $0.50, so the annual dividend is $2.00; $2 ÷ $40 (market price) = 5% annual yield (current yield).

The current market interest rate for a bond rated AA with 20 years to maturity is 5%. In an efficient market, a similar bond with a coupon of 4% could be expected to have an internal rate of return of A) 5%. B) 8%. C) 4%. D) 6%.

5%. In an efficient market, bonds are priced so that their NPV is zero. That means the bond's yield to maturity is equal to the current market interest rates for similar bonds. When that rate is 5%, as is given in this question, all AA bonds with 20 years remaining to maturity should have a YTM of 5%.

Among the differences between an investment in a limited partnership offering and in a corporation is that A) limited partnership offerings do not pay dividends; corporations do. B) only corporations issue securities. C) limited partners take a more active role in the management of the enterprise than do stockholders of a corporation. D) only corporations are organized to run a business.

A) limited partnership offerings do not pay dividends; corporations do.

News reports indicate that the wheat crop scheduled to be harvested in 3 months will be much larger than normal. To hedge, a wheat farmer would most likely A) take a short position in wheat futures. B) take a long position in wheat futures. C) grow corn instead. D) sell wheat stocks short.

A) take a short position in wheat futures. A bumper crop means lower prices for the producers (farmers). The appropriate protection is a short hedge - selling wheat futures. Think of it this way - if you thought a stock's price was going to decline, you would sell that stock short. Here, believing that wheat prices will decline, you take a short position in that commodity futures contract. There is no such thing as wheat stock and the wheat has already been planted; it is too late to switch crops.

Which of the following investments would NOT be considered an exchange-traded derivative? A) Warrants B) Forwards C) Futures D) Options

B) Forwards Forwards are never traded on an exchange; the other 3 choices can be traded OTC or on an exchange.

Which of the following is least likely to be considered an investment constraint when preparing an investment policy statement? A) Liquidity needs B) Risk tolerance C) Legal and regulatory factors D) Tax concerns

B) Risk tolerance The commonly tested investment constraints are: liquidity needs, time horizon, taxes, legal and regulatory factors, and unique needs and preferences. Risk tolerance is used to help determine what investment objectives will best meet the investor's goals.

An inverted yield curve results in part by A) investors buying short-term bonds and selling long-term bonds B) investors buying long-term bonds and selling short-term bonds C) declining interest rates D) rising interest rates

B) investors buying long-term bonds and selling short-term bonds The demand for longer-term bonds is higher than that of short-term bonds and causes a negative slope in the yield curve. If investors were buying short-term bonds in greater demand, the rates of short-term bonds would decline rather than rise.

Money market instruments are: A) long-term equity B) intermediate debt C) short-term debt D) long-term debt

C) short-term debt Money market instruments are high-quality debt securities with maturities that do not exceed 1 year

A company has 15 million shares of stock outstanding, and the price per share is $10. The company's market capitalization is A) $1.5 million B) $25 million C) $15 million D) $150 million

D) $150 million D) $150 million

If GHI currently has earnings of $3 and pays an annual dividend of $1.75 and GHI's market price is $35, the current yield is A) 3% B) 8.6% C) 1.75% D) 5%

D) 5%

Many parents prefer to use a Section 529 plan over a Coverdell ESA to finance their child's education plans because contribution limits are higher funds may be withdrawn tax-free if used for qualified education expenses there are no earnings limits 529 contributions are tax deductible on the federal level A) III and IV B) I and III C) I, II, and III D) I and II

I and III contribution limits are higher there are no earnings limits

An IAR is doing some research on a company. When viewing the corporation's financial statements, prepaid expenses would most likely be found A) as a current liability on the balance sheet. B) as an expense on the income statement. C) as a fixed asset on the balance sheet. D) as a current asset on the balance sheet.

Prepaid expenses, such as rent, insurance, and postage, are considered current assets and are shown as such, sometimes under the listing, "other assets". The amounts paid for those expenses will not appear on the income statement until the specific item is actually used. For example, if a company pays its property insurance premiums six months in advance, it isn't until the next premium is paid that the prepaid expense comes off the balance sheet and is reflected as an actual expense.

All of the following are characteristics of a rights offering EXCEPT A) it is issued to current stockholders B) the subscription period is up to 2 years C) the subscription price is below the current market value D) the rights are marketable

the subscription period is up to 2 years Rights offerings are usually very short-lived (30 to 45 days).

A money market mutual fund would be least likely to invest in which of the following assets? A) Newly issued ​U.S. Treasury notes B) Newly issued ​U.S. Treasury bills C) Repurchase agreements D) Jumbo CDs

A) Newly issued ​U.S. Treasury notes *A money market mutual fund typically invests in money market instruments; those with a maturity date not exceeding 397 days. Treasury notes are issued with maturity dates of 2-10 years.

An investment advisory contract is considered assigned if an adviser formed as A) a partnership with 2 partners and adds five partners B) a corporation with 5 officers and adds 2 officers C) a corporation with 2 officers and adds 5 officers D) a partnership with 5 partners and adds 2 partners

A) a partnership with 2 partners and adds five partners

A mortgage-backed security (MBS), such as a Ginnie Mae, makes a combination principal and interest payment to an investor. This payment will be A) taxed as ordinary income B) partly taxed as ordinary income and partly a tax-free return of principal C) taxed as a capital gain if underlying mortgage is prepaid D) tax free

B) partly taxed as ordinary income and partly a tax-free return of principal All interest payments made a MBS are taxed as ordinary income. Mortgage-backed securities may make principal and interest payments to investors, which would be partly taxed as ordinary income and partly a tax-free return of principal.

Wealth Creation Advisers (WCA) is a federal covered investment adviser specializing in consulting to pension plans. WCA's principal office is located in State L. The governor of State L is running for re-election. If WCA were to make a $350 contribution to the campaign, under the SEC's pay-to-play rule, A) WCA could be subject to disciplinary action B) WCA would be prohibited from receiving compensation for advisory services rendered to any agency of State L for 2 years C) WCA's contribution is within the de minimis limitation because their principal office is located in State L D) WCA would be prohibited from rendering any advisory services to any agency of State L for 2 years

WCA would be prohibited from receiving compensation for advisory services rendered to any agency of State L for 2 years

Sally Sherman purchased 100 shares of Chocolate Manufacturers Corporation for $19 per share on February 12. She received a 10% stock dividend on May 18. She sold all of her CMC at $13 per share in June of the same year. What were her tax results? A) $575 long-term loss B) $470 short-term loss C) $575 short-term loss; $105 long-term gain D) $575 long-term gain, $105 short-term loss

$470 short-term loss Sally paid $1,900 for 100 shares and sold 110 shares for $1,430 (13 at 110). Because the transactions all took place in less than a year, the transaction was a short-term loss.

Ineligible investments in an IRA would include all of the following EXCEPT A) American Silver Eagles B) Kruggerands C) stamps D) cash value life insurance

A) American Silver Eagles A limited group of coins, especially the "eagles" minted by the U.S. Treasury Department, are eligible for investment in an IRA. The South African Gold Krugerrand is the world's first modern bullion gold coin and remains one of the most popular gold coins ever minted, but is not eligible for investment in an IRA. No form of life insurance is, and collectibles, such as stamps, are also ineligible.

During an economic recession, which of the following items will most likely increase? A) Bond prices B) Consumer confidence and profits C) Inflation D) Interest rates

A) Bond prices During a recessionary period, inflation and interest rates generally decline. This causes bond prices to increase because they are inversely related to the change in interest rates. Consumer confidence and profits are declining at this point in the economic cycle.

Under the USA, which of the following statements regarding the withdrawal of an IAR's registration is TRUE? The withdrawal automatically becomes effective 90 days after filing. If disciplinary action is initiated within 30 days after filing, the automatic effective date may be delayed. The Administrator may institute disciplinary proceedings within one year after the effective date of the withdrawal. A) II and III B) I and III C) I, II, and III D) I and II

A) II and III The withdrawal automatically becomes effective 90 days after filing. If disciplinary action is initiated within 30 days after filing, the automatic effective date may be delayed.

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 basis B) Capital gains tax on earnings exceeding basis C) 10% penalty plus payment of ordinary income tax on all funds withdrawn D) 10% penalty plus payment of ordinary income tax on all funds withdrawn exceeding basis

A) Ordinary income tax on earnings exceeding basis

Under the Uniform Securities Act, the Administrator has the power to deny or revoke exemptions for which of the following types of securities? Stock issued by a bank organized under the laws of another state. Securities of nonprofit organizations. Investment contracts issued by employee benefit plans. A) II only B) I and II C) II and III D) I, II, and III

C) II and III Securities of nonprofit organizations. Investment contracts issued by employee benefit plans.

Which of the following statements regarding a qualified profit-sharing plan is TRUE? A) Contributions are required annually. B) It must define a specific contribution amount. C) It can permit regular direct cash payouts to participants before retirement. D) It must be established under a trust agreement.

D) It must be established under a trust agreement. All qualified retirement plans must be established under a trust agreement. Contributions with this type of plan are not required annually, nor can the plan make direct cash payouts to participants before retirement.

A sales assistant employed by a full service broker-dealer would be required to register as an agent when accepting orders for A) gold coins. B) commodity futures contracts. C) fixed annuities. D) direct participation programs.

D) direct participation programs.

A client in the 28% marginal federal income tax bracket invests in a corporate bond with an 8% coupon. To calculate the client's after-tax rate of return, A) divide 0.08 by 0.72 B) multiply 0.08 by 0.28 C) divide 0.08 by 0.28 D) multiply 0.08 by 0.72

D) multiply 0.08 by 0.72 To determine a taxable bond's after-tax rate of return, multiply the coupon rate by the complement of the client's marginal federal income tax bracket. The client's tax bracket is 28% (0.28), so the complement is 100% − 28% (1.00 − 0.28) = 0.72.

USAAdvisers is registered in 10 Midwest states. Regarding financial requirements, USAAdvisers must meet those of A) the state in which its principal office is located B) the SEC C) each state in which it has a place of business D) the state with the most stringent financial requirements

A) the state in which its principal office is located

An Administrator could use which of the following as a reason for issuing an order denying the registration of a security? The issuer's enterprise or method of business includes or would include activities that, although legal in the state of incorporation, are illegal in the Administrator's state. The company has not been paying dividends. The offering would be made with unreasonable amounts of underwriters' and sellers' discounts. A) I only B) I and III C) III only D) I, II, and III

B) I and III The issuer's enterprise or method of business includes or would include activities that, although legal in the state of incorporation, are illegal in the Administrator's state. The offering would be made with unreasonable amounts of underwriters' and sellers' discounts.

Howard Robard is an investment adviser representative with Hughes & Company, a state-registered investment adviser having its principal office in State O and offices in States P and D. Howard works out of an office in State P and has 4 retail clients there. In addition, Howard has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Howard would be required to register as an investment adviser representative in A) State P. B) States P, D, and M. C) States P, D, M, and O. D) States D and M.

B) States P, D, and M. Individuals working as IARs for state-registered investment advisers must register in any state in which they (the IAR) maintain a place of business as well as any other state in which they serve more than 5 retail clients (the de minimis exemption). With an office in State P, registration is required there, regardless of the number of clients. In both States D and M, the de minimis has been exceeded so registration is required there. The fact that the IA's principal office is in state O has no bearing on Howard and, with only 1 retail client there, he qualifies for the de minimis exemption.

Why are "country" funds organized as closed-end funds? A) Because redemption at net asset value within 7 days is assured B) Because the United Nations Investment Act of 1952 requires that they all be closed-end C) So that additional capital may easily be raised D) Because it is often difficult to liquidate the foreign securities to get their value into the U.S.

Because it is often difficult to liquidate the foreign securities to get their value into the U.S.

Assume Frank has a portfolio with an actual return of 10.50% for the past year. The portfolio beta equals 1.25, the return on the market equals 9.75%, and the risk-free rate of return equals 3%. Based on this information, what is the alpha for Frank's portfolio and did it outperform or underperform the market? A) −1.6875%, underperform B) +9.1875%, outperform C) -.9375%, underperform D) +3.3750%, outperform

C) -.9375%, underperform Alternatively some might prefer this formula for alpha: alpha = actual return - [risk-free rate + beta x(market return - RF)]. If we plug in the numbers, we get .105 - [.03 +1.25 x(.0975 - .03)] = −.009375, or−.9375%.

In the field of securities analysis, there are many tools available. Which of the following would most likely be used by an analyst to approximate a reasonable price for a common stock? A) Yield to maturity B) Book value per share C) The dividend discount model D) Par value

C) The dividend discount model The simplest model for valuing equity is the dividend discount model—the value of a stock is the present value of expected dividends on it. Yield to maturity only applies to debt securities with a fixed maturity date. The par value of a common stock has nothing to do with its market price. Although fundamental analysts will examine a company's book value per share, it generally has little or no bearing on the current market price of the stock.

A broker-dealer acting as a principal in a trade would A) must always disclose the amount of markup on a client's confirmation statement B) add a markup to the bid price when offering shares to a client C) add a markup to the offering price when selling shares to a client D) must disclose to clients the amount of earnings he made on principal transactions in excess of the amount he would have made had he charged a commission

C) add a markup to the offering price when selling shares to a client When selling a security to a public customer, the broker-dealer adds his markup to the ask price (offer price), not the bid price. A broker does not add a markup to the bid price when buying shares from a client; the broker-dealer would mark down the bid price. Unlike commissions, which are always disclosed on the trade confirmations, only for certain categories of securities is the markup or markdown shown.

If an individual makes a withdrawal from her IRA at age 52, she pays no penalty tax if she A) used the funds for her nephew's college tuition B) had no earned income that year C) is disabled D) has retired

C) is disabled An individual may withdraw from an IRA before the age of 59½ without a penalty tax in the case of death or disability. Funds may be withdrawn without penalty for qualified education expenses for immediate family members, but that does not include nieces and nephews.

Under adverse market conditions, it is not unusual for mutual fund investors who had been investing on a regular basis to cease or reduce their level of financial commitment. This can have the effect of A) reducing the operating expense ratio of the fund B) a reduction in the fund's net operating income due to a reduction in sales charges received C) net redemptions D) reducing the NAV of the fund as the demand for new shares wanes

C) net redemptions

Your client who owns a DPP that generated a $10,000 passive loss for the year could A) deduct $10,000 against ordinary income B) deduct $3,000 against ordinary income and carry over the rest C) only deduct the passive loss against passive income D) deduct $10,000 against capital gains

C) only deduct the passive loss against passive income Passive losses, such as those generated by limited partnership investments (DPPs), are only deductible against passive income.

Sortel Industries has preferred stock outstanding that pays annual dividends of $3.75 a share. If an investor wants to earn a rate of return of 8.5%, how much should she be willing to pay for a share of Sortel preferred stock? A) $31.88 B) $42.10 C) $33.89 D) $44.12

D) $44.12 This is a middle school math question. It is asking, 3.75 is 8.5% of what number? The computation is: 3.75 ÷ 0.085 = $44.12.

Which of the following statements about balance sheets are TRUE? Balance sheets provide a snapshot of a company's financial position on a given date. Balance sheets represent the relationship between a company's assets, liabilities, and stockholders' equity. Balance sheets provide a record of a company's earnings over a given period. A) II and III B) I, II, and III C) I and III D) I and II

D) I and II Balance sheets provide a snapshot of a company's financial position on a given date. Balance sheets represent the relationship between a company's assets, liabilities, and stockholders' equity.

Which of the following would appear as assets on a corporation's balance sheet? Prepaid expenses Deferred tax credits Notes payable Notes receivable A) I, II, and IV B) II and III C) I and IV D) I and III

I and IV Prepaid expenses Notes receivable Prepaid expenses, such as advertising, rent, or insurance, are listed as assets on the balance sheet. All receivables are assets, while payables are liabilities. Under current accounting practice, deferred tax credits are treated as a liability.

Mark's company, which is located in Oregon, makes unfinished wood furniture. His company sells this furniture directly to the public from a large warehouse. Theresa's company, which is located in southern Georgia, grows cotton for t-shirts manufacturers. Which of the following statements correctly identifies hedging strategies for Mark and Theresa? Mark should buy lumber futures. Theresa should sell cotton futures. Mark should sell lumber futures. Theresa should buy cotton futures. A) I and II B) III and IV C) I and IV D) II and III

I and II Mark should buy lumber futures. Theresa should sell cotton futures. Mark is "short" lumber because he needs lumber to produce his products. A hedge position for Mark would be to go long lumber futures, that is, to purchase lumber futures. Theresa is "long" cotton because she owns cotton for manufacturing purposes. A hedge position for Theresa is to go short, that is, to sell cotton futures.

Your 30-year-old client has $100,000 to invest and willing to assume a moderate amount of risk, but she would also like to have $10,000 available for a down payment on a home in 6 months. Which of the following asset allocation strategies would best suit her situation? A) 70% high-yield corporate bond fund, 20% growth fund, 10% government bond fund B) 50% government bond fund, 50% large-cap fund C) 70% large-cap stock fund, 20% balanced fund, 10% money market fund D) 50% large-cap stock fund, 40% municipal bond fund, 10% money market fund

70% large-cap stock fund, 20% balanced fund, 10% money market fund This question is dealing with 2 different time horizons. First we have the short-term of 6 months for the home down payment, so she'll need capital preservation and liquidity. That is accomplished with the money market fund. Then, being 30 years old, she has a long-term time horizon that necessitates investing for growth and inflation protection. That is where the 70% in large-cap securities is the most appropriate asset allocation for her. The 20% in the balanced fund helps keep the overall risk level on the moderate side. One point to remember is that municipal bonds (or municipal bond funds) will never be the correct investment choice unless the question states that the client is in a high tax bracket or is looking for tax-free income.

Searching Out New Growth (SONG) is a venture capital fund. As such, all of the following statements are true EXCEPT A) SONG's investment adviser is exempt from registration B) SONG only issues securities which are, except in extraordinary circumstances, non-redeemable C) SONG is not registered under the Investment Company Act of 1940 D) SONG must have less than $150 million in assets in the fund

D) SONG must have less than $150 million in assets in the fund Although venture capital funds are included in the general definition of private funds, unlike the private equity fund, there is no ceiling on the size of the fund before the adviser loses the exemption. Advisers to VC funds are exempt from registration. The funds themselves do not register with the SEC under the Investment Company Act of 1940 (and don't register with the states as well). These investments do not offer ready liquidity.

Those persons meeting the Uniform Securities Act's definition of a broker-dealer in a state must, unless otherwise exempted, register in that state. Which of the following is correct regarding the initial registration and expiration of the registration of a broker-dealer? A) The effective date of an initial registration is when ordered by the Administrator and the expiration, unless renewed, is each December 31st. B) The effective date of an initial registration is at noon on the 30th day after receipt of a completed application; expiration, unless renewed, is on the anniversary date of the initial registration. C) The effective date of an initial registration is when ordered by the Administrator and the same is true of the expiration date. D) The effective date of an initial registration is at noon on the 30th day after receipt of a completed application; expiration, unless renewed, is each December 31st.

D) The effective date of an initial registration is at noon on the 30th day after receipt of a completed application; expiration, unless renewed, is each December 31st.