18

Under the Uniform Securities Act, the Administrator may require a broker-dealer to post a surety bond of A) $25,000.00 B) an amount not in excess of that set by the SEC C) $50,000.00 D) $10,000.00

an amount not in excess of that set by the SEC Unlike investment advisers where the USA specifies posting a surety bond in the amount of $35,000, the Uniform Securities Act does not specify an amount for broker-dealers. However, the NSMIA states that the Administrator may not require a broker-dealer be bonded in an amount above that set by the SEC. Furthermore, bonds will not be required of broker-dealers that maintain a specified net capital.

One of your clients enters a sell stop order at 60, limit 59. Subsequent to the entry of the order, trades occur at 61, 61.10, 60, 58.95, 59, 60. The client's order was most likely filled at A) 59 B) 58.95 C) 60 D) 61.10 Explanation

A) 59

Over the past year, the market, with a beta of 1.0, has returned 15%. Under CAPM, which of the following stocks would be considered overvalued? A) RJP, beta 1.2, return 17.5% B) ACR, beta 0.9, return 13.6% C) LQR, beta 0.7, return 11% D) BED, beta 1.5, return 23.5%

A) RJP, beta 1.2, return 17.5%

An investor who is long a put option for 100 shares of ABC common stock A) has the right to sell 100 shares at the stated exercise price B) has the right to buy 100 shares at the stated exercise price C) has the right to buy 100 shares at the lower of the exercise or market price D) has the right to sell 100 shares at the higher of the exercise or market price

A) has the right to sell 100 shares at the stated exercise price

An investor diversifying a corporate bond portfolio does NOT consider A) issuer B) domicile of the investor C) quality D) maturity

B) domicile of the investor Domicile, or geographic location of the investor, is not relevant in diversifying a corporate bond portfolio. For example, it is irrelevant if the client is located in Michigan or New Jersey or any other state; that will have no impact on the risks facing the issue. This could be a factor for municipal bond investors due to the possibility of avoiding state income tax. A corporate bond portfolio can be diversified by issuer, quality (rating), domicile of the issuer, and maturity.

The Investment Company Act of 1940 allows a majority vote of outstanding shares of a registered investment company to authorize the fund to do all of the following EXCEPT A) change the nature of its business and cease to be an investment company B) invest in securities consistent with the fund's objectives C) change from an open-end to a closed-end investment company D) change the objectives of the fund

B) invest in securities consistent with the fund's objectives Shareholder approval is not necessary to authorize the fund to invest consistent with the fund's objectives; it is required as part of the contract with the fund's investment adviser. Under the Investment Company Act of 1940, a vote of the majority of outstanding shares may approve changing from an open-end to a closed-end company, changing the investment objectives of the fund, and deciding to cease to be an investment company.

You have a client who originally invested $25,000 into the ABC Growth Fund. Over the past 5 years, there have been no distributions and the value of the shares is now $35,000. If the client should ask about exchanging the entire holding for shares of the ABC Income Fund, you would explain A) the new shares will have the same cost basis as the old ones B) there is a long-term capital gain of $10,000 C) that taking advantage of the exchange privilege results in taxes being deferred until the liquidation of the account D) the new shares would be acquired at the public offering price

B) there is a long-term capital gain of $10,000

A client owns an investment-grade bond with a coupon of 7%. If similarly rated bonds are being issued today with coupons of 5%, and the market is efficient, it would be expected that the client's bond A) will be selling at a discount from par B) has a positive net present value C) has a zero net present value D) has a negative net present value

C) has a zero net present value With a discount rate of 5% (the discount rate in a present value computation is the current market interest rate), a debt instrument with a 7% coupon rate will be selling at a premium (interest rates down, prices up). If the market is efficiently pricing that bond, its market price should be equal to its present value, resulting in an NPV of zero.

An Administrator can deny an investment adviser's registration for all of the following reasons EXCEPT A) filing an incomplete application B) claiming to be qualified as the result of experience as a broker-dealer C) planning to exercise discretion over customer accounts while maintaining a net worth of only $10,000 D) failure to pass a written exam

C) planning to exercise discretion over customer accounts while maintaining a net worth of only $10,000 The minimum net worth for an IA exercising discretion is $10,000, so this firm cannot be denied because of lack of capital. The Administrator must consider that an applicant for registration as an investment adviser is not necessarily qualified solely on the basis of experience as a broker-dealer.

A client purchased a security for $60 and sold it 1 year later for $59. If he received 4 quarterly dividends of $0.50 each during the period, his total percentage return would be A) 2% B) 0% C) 3.30% D) 1.67%

D) 1.67%

If an economist were to describe defensive issues, he would probably not include companies that produce A) food products B) clothing C) tobacco products D) building materials

D) building materials Defensive issues are issues that are defensive against a downturn in the economy. Building materials are usually susceptible to downturns when the economy is bad.

Which of the following is a discounted cash flow computation? A) Net present value B) Holding period return C) Standard deviation D) Current yield

A) Net present value

Included in the definition of derivative would be all of the following EXCEPT A) leveraged ETFs B) rights C) options D) futures

A) leveraged ETFs

Clients should be aware of the potential effects of volatility on their portfolios. Which of the following would most likely have the lowest volatility? A) A balanced fund B) A money market fund C) A government bond fund D) A large-cap fund

B) A money market fund Money market funds traditionally maintain a stable net asset value resulting in no market volatility.

Which 2 are most associated with a U. S. Treasury bond? Credit risk Liquidity risk Reinvestment risk Interest rate risk A) II and III B) III and IV C) I and II D) I and IV

B) III and IV Reinvestment risk Interest rate risk We negate credit risk when it comes to U.S. Treasury securities. Liquidity is also not an issue. However, any interest-bearing bond carries interest rate risk, as well as reinvestment risk.

If the return on Treasury bills is 3% and the equity risk premium is 4%, the expected equity returns should be: A)4%. B)7%. C)1%. D)12%.

B)7%. The expected return on an equity investment is the risk-free (for example, T-bill) rate of return added to the equity risk premium (3% + 4% = 7%).

In order to comply with the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following is NOT required to open a margin account for a trust? A) Specific text in the trust agreement authorizing a margin account B) Approval of the account by the designated supervisory person C) A completed margin suitability form D) A margin agreement

C) A completed margin suitability form

Which of the following will most likely be the most volatile investment over a short-term period? A) A money market fund B) An intermediate corporate bond fund C) A growth-oriented common stock fund D) An intermediate municipal bond fund

C) A growth-oriented common stock fund Because stocks are more volatile than bonds, a growth-oriented stock fund will be more volatile than bond funds.

An individual works for an accounting firm that does not have a retirement fund. She is paid $18,000 per year. During her spare time, she is a commercial artist and earned $16,000 doing this work last year. What is the basis for her contribution under a Keogh plan (HR-10)? A) $0.00 B) $34,000.00 C) $18,000.00 D) $16,000.00

D) $16,000.00 Contributions to a Keogh must be based on self-employment income.

A complex trust has the following income for the year: $1,500 in taxable interest, $2,000 in dividends (reinvested in the stock), and $3,000 in tax-exempt interest. In addition, the portfolio realized $3,500 in capital gains that were reinvested in the corpus. What is the distributable net income (DNI) for the trust? A) $10,000 B) $4,500 C) $1,500 D) $6,500

D) $6,500 All investment income, regardless of source, will be considered DNI and will be included in the taxable income calculation to the trust unless distributed. That portion of the DNI representing tax-exempt interest maintains its tax-free status. Reinvested capital gains are not part of a trust's DNI. The computation is: $1,500 in taxable interest + $2,000 in dividends (reinvestment means nothing here) + $3,000 in tax-exempt interest. This is a total of $6,500 of DNI. When distributed, only $3,500 will be taxable.

An investment adviser representative is evaluating ABC stock to see if it is a good fit for a client's portfolio. Using the security market line (SML), what is the expected return for ABC when the return on the market is 20%, the 91-day Treasury bill is yielding 4%, ABC's beta is 0.70, and the inflation rate, as measured by the CPI, is 3%? A) 10.2% B) 11.2% C) 14.0% D) 15.2%

D) 15.2% The formula for this computation is as follows: 20% (the return on the market is a beta of 1.0) minus the risk-free rate of 4%, or 16%. Then, multiply that by the beta of this stock (0.7) to arrive at 11.2%. That is, the stock should return 11.2% over the risk-free rate of 4%, or 15.2%. Inflation rate is only important if we are looking for the real (inflation-adjusted) return, not the expected return.

What is the total return on a 1-year, newly issued (365 days to maturity) zero-coupon bond priced at 950? A) The return cannot be determined without knowing current interest rates B) 5.00% C) 5.26% plus the implied coupon rate D) 5.26%

D) 5.26% To determine the total return on this zero-coupon bond, the $50 capital appreciation is divided by the cost of the bond (in this case, $50 divided by $950 equals a total return of 5.26%). Total return of a zero-coupon bond is made up entirely of the difference between the cost of the bond and the sale or maturity price of the bond.

The holding period return (HPR) on a share of stock is equal to A) the dividend yield plus the risk premium B) the capital appreciation minus the inflation rate over the period C) the capital appreciation plus the dividend income received over the period D) the current yield plus the dividend yield

the capital appreciation plus the dividend income received over the period

Which of the following individuals would be considered a noninterested person in a mutual fund? A) A shareholder who owns 10% of the fund's shares B) A person who holds a position with the fund's underwriter C) A member of the board of directors who does not hold another position within the investment company D) A member of the board of directors who is also employed as the investment adviser

A member of the board of directors who does not hold another position within the investment company

An investment advisory firm advertises a stock-picking system that helps investors choose the timing and selection of securities for purchase. Under the Investment Advisers Act of 1940, which of the following must be disclosed in the advertisement? The number of years the system has been used successfully The difficulty of using the system The limitations of the system A) II and III B) I and II C) I only D) I and III

A) II and III The difficulty of using the system The limitations of the system The difficulty of using the system The limitations of the system

Which of the following statements regarding foreign investing is (are) true? Foreign financial markets are more efficient than the U.S. market. Most foreign investment entails foreign exchange or currency risk. Adding foreign-issued securities to a portfolio provides the greatest diversification when the foreign stock market has a 1.0 correlation relative to the U.S. market. Foreign securities markets are more highly regulated than the U.S. market. A) II only B) I and II C) II and IV D) I, II, III, and IV

A) II only Most foreign investment entails foreign exchange or currency risk.

Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) purchasing shares from advisory clients that were originally acquired as a result of the adviser's previous buy recommendation B) directing securities transactions to an affiliated broker-dealer C) the trade is being executed by an officer or partner of the firm D) engaging in an agency cross transaction

A) purchasing shares from advisory clients that were originally acquired as a result of the adviser's previous buy recommendation There are 2 principals in every securities trade: the buyer and the seller. In this case, buying shares directly from clients who own those shares places the IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. In agency cross transaction, the firm is acting as an agent—that's the reason for the term.

If the risk-free rate of return is 3.5%, the expected market return is 9.5%, and the beta of a stock is 1.3, what is the required return on the stock according to the capital asset pricing model? A) 7.80% B) 11.30% C) 12.35% D) 8.85%

B) 11.30% The formula for the required return is: E(R) = Rf + (E (RM) - Rf) × Beta or 0.035 + (1.3 × [0.095 - 0.035]) = 0.035 + 0.078 = 0.113, or 11.3%.

Which of the following is not an assumption of the capital market theory? A) There are no taxes or transaction costs. B) All market participants borrow and lend at different risk-free rates. C) Market participants have the same expectations about the returns and standard deviations of all assets. D) All investors want to achieve a maximum return for minimum risk.

B) All market participants borrow and lend at different risk-free rates. One of the assumptions of the capital market theory is that all market participants borrow and lend at the same risk-free rate. The other choices are all true statements (and might be tested).

A technical analyst is least likely to consider which of the following when selecting securities? A) Short interest ratio B) Corporate earnings C) Advance/decline line D) Trend lines

B) Corporate earnings Corporate earnings would be of least interest to a technical analyst, who is interested in market statistics indicative of future buying, market statistics that could reflect price or market trends, and trading volume.

As used in the Uniform Securities Act, which of the following entities would NOT be included in the term "institutional investor"? A) Open-end investment companies B) Insurance companies C) Any accredited investor D) Closed-end investment companies traded on the NYSE

C) Any accredited investor

Which of the following has the least exposure to inflation risk? A) Fixed annuity B) Cash C) Preferred stock D) Common stock

D) Common stock

A common stockholder's rights include all of the following EXCEPT A) electing the board of directors B) preemptive rights C) the receipt of dividends, if declared by the board of directors D) the right to determine the par value of the stock

D) the right to determine the par value of the stock

With respect to the specific commodity that is the subject of the contract, all of the following are standardized parts to an exchange-traded futures contract except A) the market price. B) the quantity. C) the quality. D) the time for delivery.

the market price.

Which of the following is a characteristic of an investment-grade general obligation municipal bond? A) The taxing authority of the issuing government or municipality backs the issue's repayment. B) The bond's main source of investment risk is financial risk. C) The bond's periodic interest is paid to investors only when sufficient revenue is collected by the municipality. D) The bond retains a direct claim on specific property.

A) The taxing authority of the issuing government or municipality backs the issue's repayment. General obligation bonds are backed by the full faith and credit of the government issuing the debt and are repaid through taxes collected by the government body. The main source of investment risk for a municipal security is interest rate risk. General obligation bonds do not retain a claim on specific property. The government issuing the bonds uses its taxing authority to pay the interest and repay the principal. Revenue bonds, not general obligation bonds, are dependent on revenue collected from the financed project.

John owns a nonqualified, tax-deferred annuity. When he retires, what will be the tax consequences of his annuity payments? A) His annuity payments are all taxable as ordinary income. B) His annuity payments are partly taxable and partly tax-free return of capital. C) His annuity payments are tax free. D) His annuity payments are partly taxable as capital gain and partly taxable as ordinary income.

B) His annuity payments are partly taxable and partly tax-free return of capital.

Which of the following business entities has an income tax filing due date (disregarding possible extensions) of March 15? Sole proprietorship Single-member LLC Multiple-member LLC electing to be treated as a corporation​ S corporation A) I and II B) III and IV C) I and IV D) II, III, and IV

B) III and IV III. Multiple-member LLC electing to be treated as a corporation​ IV. S corporation For partnership returns (including LLCs with more than 1 member) and S corporation returns, the due date is March 15. One effect of this is that LLCs, partnerships, and S corporations all have the same filing deadline. For C corporations, the due date is the 15th day of the 4th month following the close of the corporation's year; this date is April 15 for a calendar-year filer.

When preparing an asset allocation program, all of these would be considered asset classes EXCEPT A) debt securities B) cash or cash equivalents C) Brady bonds D) equity securities

C) Brady bonds

Which items would change if a company declared a cash dividend? Working capital Total assets Total liabilities Shareholders' equity A) I, II, III, and IV B) I and IV C) I, III, and IV D) I only

C) I, III, and IV Working capital Total liabilities Shareholders' equity The key word is "declared". Liabilities increase when a dividend is declared, and total assets decrease when it is paid. A declared dividend (but not yet paid) would increase current liabilities (and would therefore decrease working capital). It would increase total liabilities (this is a pending obligation) and reduce shareholders' equity because retained earnings would be decreased by the dividend. Total assets would not be affected until the dividend is actually paid.

For a bond selling at a discount, the yield to maturity will be A) equal to the nominal yield B) higher than the yield to call C) higher than the nominal yield D) lower than the nominal yield

C) higher than the nominal yield Yield to maturity is a measure of the total return on a long-term bond, including capital appreciation and interest, while nominal yield measures the interest rate stated on the face of the bond. An investor who buys a $1,000 bond at a discount (for less than $1,000) will receive the interest payments on the bond at the nominal rate and will still receive $1,000 for the bond when it matures. As a result, the total return will be higher than the nominal yield. When a bond is selling at a discount the YTC will always be higher than the YTM.

Saving for higher education using which of the following tools will generally result in the worst outcome when filing the FAFSA form? A) Cash value in the parent's insurance policy B) Section 529 plan C) Coverdell ESA D) UTMA

D) UTMA One of the negatives of using UTMA (or UGMA) to save for a child's education is that those funds are counted at a far higher percentage of the child's assets than are funds in a Coverdell ESA or 529 plan. Cash value in the parent's life insurance policy is not counted at all.

ABC Manufacturing Company is in the business of making high quality machine tools. Which of the following would be included in ABC's cash flow from financing activities? A) Payment of cash dividends B) The purchase of a new building to store inventory C) The sale of XYZ Lathe Manufacturing bonds D) The purchase of a new computer-driven lathe

A) Payment of cash dividends All financing activities deal with the flow of cash to or from the business owners. Who do dividends go to? The company's shareholders and that is why they are included in financing activities. The other choices are part of cash flow from investing activities.

Corporations have found that one way to increase employee motivation is to grant options to purchase stock in the company. Incentive (qualified) options differ from nonqualified options in all of the following respects except A) there is a maximum 10-year limit for exercising an ISO; no such time limit exists for an NSO. B) the holder of an ISO can recognize capital gain (loss) as a result of exercise, whereas ordinary income (loss) is the result with an NSO. C) the recipient of the grant of the ISO has no income tax consequences at the time of the grant. D) ISOs may only be granted to employees while NSOs may be given to virtually anyone.

the recipient of the grant of the ISO has no income tax consequences at the time of the grant.

According to North American Securities Administrators Association's (NASAA) Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following practices is NOT unethical? A) To protect the client in a declining market, an agent sold all shares in the client's account when the client had only authorized the sale of 30% of the shares. B) An agent of a broker-dealer exercised discretion in deciding the time that a sale took place during the trading day without expressed written discretionary authority. C) Within the first 10 days of a client's initial transaction, an agent accepted oral discretion and purchased securities on behalf of the client. D) An agent sold shares at a price less than authorized by a client.

B) An agent of a broker-dealer exercised discretion in deciding the time that a sale took place during the trading day without expressed written discretionary authority.

A federally chartered credit union is domiciled in Texas. The credit union is making an offering of securities in Nebraska. To comply with the Uniform Securities Act's exclusion from the definition of agent, any individual offering the security in Nebraska A) would have to be an employee of a broker-dealer registered in Texas B) would have to receive only nominal commissions C) would have to be an employee of a broker-dealer registered in Nebraska D) could not sell without being an agent

D) could not sell without being an agent

A new convertible bond has a provision that it cannot be called for 5 years after the issue date. This call protection is most valuable to a recent purchaser of the bond if A) interest rates are falling B) interest rates are rising C) interest rates are stable D) the market price of the underlying common stock is increasing

D) the market price of the underlying common stock is increasing Convertible bonds are more sensitive to the price of the underlying common stock than they are to interest rates. Call protection would enable this investor to hold on to the bond while the stock rises in value rather than having the bond called away.

One of your clients has just completed a divorce. The client is a participant in a 401(k) and has a traditional IRA. The divorce settlement includes a QDRO providing for half of the client's account to go to the ex-spouse. The ex-spouse also receives half of the client's IRA. With regard to the ex-spouse, which of the following statements is correct? A) The name of the former spouse must appear on the ex-spouse's IRA. B) The ex-spouse has 60 days to rollover the distribution. C) Withdrawals from the IRA prior to age 59½ may be subject to the 10% penalty. D) Withdrawals from the 401(k)prior to age 59½ may be subject to the 10% penalty.

C) Withdrawals from the IRA prior to age 59½ may be subject to the 10% penalty.

A prospect has primary investment objectives of current income and safety of principal. During the initial public offering of a closed-end government bond fund, an agent explains to the prospect that the fund invests in U.S. government-backed bonds, which are very safe as to principal, and plans to make monthly distributions. Little could therefore go wrong. Taken as a whole, this representation is A) misleading because government bonds experience considerable credit risk B) accurate because the fund offers current income C) accurate because the fund invests in government bonds D) misleading because closed-end fund shares are subject to market pricing

D) misleading because closed-end fund shares are subject to market pricing

Under the Investment Company Act of 1940, which of the following statements regarding the investment objective of a mutual fund are TRUE? Only the board of directors needs to approve changes in the investment objective. The majority of outstanding shares must vote to approve changes in the investment objective. The SEC must approve all changes in the investment objective. The investment adviser does not set, but tries to meet, the investment objective. A) II and IV B) III and IV C) I and III D) I and II

A) II and IV The majority of outstanding shares must vote to approve changes in the investment objective. The investment adviser does not set, but tries to meet, the investment objective. A majority of the outstanding shares must vote to approve any change in investment objective or policy. The investment adviser's job is to try to achieve the investment objective.

When would an individual employed by an issuer to sell its stock to the public have to register as an agent? A) When the transaction is exempt B) When the employer is a savings institution C) When the employer is an insurance company D) When the employer is the U.S. Treasury

C) When the employer is an insurance company The question is not looking for the exemption - it wants to know when the individual must register. There are two instances where an individual employed by the issuer to sell its securities is not considered an agent. The first is when the issuer is one of 5 specific named cases. That list includes savings institutions (banks), and the federal governments of the United States and Canada, as well as any of their political subdivisions. The list does not include insurance companies. The second case is when the securities are being sold in an exempt transaction. From a practical standpoint, the most common case where this occurs is when the issuer makes a private placement of its shares.

Which of the following statements relating to Form ADV-E are CORRECT? The form is completed by an investment adviser who maintains custody of customer funds and/or securities. The form is completed by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser. The form is submitted by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser. The form may be used to amend the IA's registration. A) I, II, and IV B) I, III, and IV C) I and II D) I and III

D) I and III The form is completed by an investment adviser who maintains custody of customer funds and/or securities. The form is submitted by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser. The Form ADV-E (E for surprise Examination) must be completed by investment advisers that have custody of client funds or securities and that are subject to an annual surprise examination. Then the IA gives this form to the independent public accountant that, in compliance with the Investment Advisers Act of 1940 or applicable state law, examines client funds and securities in the custody of the investment adviser. The independent public accountant performing the surprise examination must submit this form within 120 days of the time chosen by the accountant for the surprise examination.

The distributable net income (DNI) of a simple trust would not include A) interest received on municipal bonds. B) dividends received. C) interest received on corporate bonds. D) reinvested capital gains.

D) reinvested capital gains. It is capital gains that are reinvested in the corpus (body) of a simple trust which are not part of DNI. Although the interest on municipal bonds in not taxable, it is still included as part of the DNI.