65 #5

Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A) ABC 5s of 2040 B) GHI 7s of 2042 C) JKL 4s of 2020 D) DEF 6s of 2041

A) ABC 5s of 2040 The bond with the longest duration is generally going to have the greatest exposure to interest rate risk. Because there is very little difference between maturity dates of 2040 through 2042, the bond with the lowest coupon will have the longest duration. The 4s of 2020 have a relatively short duration, even though their coupon is low.

The sale of a life insurance policy in the secondary market by a terminally ill individual is known as A) a viatical settlement B) a trade in the OTC market C) an unethical trade practice D) a vertical settlement

A) a viatical settlement A viatical settlement is the sale of a life insurance policy to a third party (the investor). The owner (viator) of the life insurance policy sells the policy for an immediate cash benefit. The buyer becomes the new owner of the life insurance policy, pays future premiums, and collects the death benefit when the insured dies. At one time, most viatical settlements were from people with a life-threatening illness. Now, individuals who are not facing a health crisis may sell their life insurance policies to get cash.

An investor owns five DEF call options with a strike price of $40. The options are European style. If the holder exercises, the cost will be A) zero because European options are exercisable only at expiration. B) $20,000. C) $2,000. D) $4,000.

B) $20,000. Each option contract represents 100 shares. Exercising five call options means buying 500 shares at a price of $40 each, which equals $20,000. Although it is true that European-style options are exercisable only at expiration, nothing in the question indicates the investor tried to exercise before then.

The common stock of companies within which industry sector would be most adversely affected by an increase in the general level of interest rates? A) The clothing industry B) The electronics industry C) The food industry D) The utilities industry

D) The utilities industry Utilities are generally very heavily funded with debt. If interest rates go up, their new debt will be at higher interest rates, causing lower earnings available for common stocks.

A pension plan administrator would probably be able to qualify for the exemption offered under the safe harbor provisions of 404(c) of ERISA if the plan offered which of the following choices? A) ABC Large-Cap Growth Fund; DEF Long-term Investment Grade Bond Fund; GHI Money Market Fund B) PQR U.S. Government Bond Fund; GHI Money Market Fund; VWX Global Bond Fund C) DEF Long-term Investment Grade Bond Fund; PQR U.S. Government Bond Fund; STU High Yield Bond Fund D) ABC Large-Cap Growth Fund; JKL Small-Cap Technology Fund; MNO International Equities Fund

A) ABC Large-Cap Growth Fund; DEF Long-term Investment Grade Bond Fund; GHI Money Market Fund In order to qualify for the safe harbor under 404(c), the portfolio selections must include at least 3 different asset classes, such as equity, debt, and cash equivalent. All equities or all debt won't qualify.

Among the provisions of the Investment Company Act of 1940 designed to protect the interests of investors is the provision that A) any change in fundamental investment policy must be approved by stockholders B) communications with the public must be approved by FINRA before its use C) selection of company investments must be approved by SEC D) for diversification purposes, an investment company may own up to 10% of the shares of another investment company

A) any change in fundamental investment policy must be approved by stockholders One of the requirements of the Investment Company Act of 1940 is that an investment company cannot change its investment policy without approval of a majority vote of the shareholders. For example, the board of directors of a growth fund could not change the fund's investment objective to income without that approval. This has the effect of offering protection to the investors that they won't be "blindsided" by the board or the portfolio manager. On this exam, you shouldn't expect to see anything "approved" by the SEC as a correct answer. An investment company may own up to 3% of another investment company, not 10%. Even though FINRA rules do require approval of investment company communications with the public, such approval is not part of the Investment Company Act of 1940.

A federal covered investment adviser may enter into a contract with a client that provides for performance-based compensation under all of the following conditions EXCEPT A) disclosure that the performance compensation may create an incentive for the adviser to take greater risks B) the client must meet certain minimum financial standards C) compensation is based on gains, less losses, for a period of no less than 1 year D) the formula used to calculate compensation includes realized capital losses and unrealized depreciation

A) disclosure that the performance compensation may create an incentive for the adviser to take greater risks Because these types of compensation agreements may only be entered into with clients meeting minimum financial standards, the SEC assumes that clients understand the increased risks they are being exposed to. The minimum net worth requirement is over $2.1 million, or a client is qualified if he has at least $1 million under management with the adviser. Any performance fee must take into consideration gains and losses, both realized and unrealized, and the performance period must be no less than 1 year. Please note: State-registered investment advisers must make this "incentive" disclosure so if the question asked about them, there would be no exception.

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

B) I and III An Administrator may deny the registration of a security when the activity to be conducted in the state is illegal. The underwriter's compensation may not be unreasonable. There is no requirement that dividends be paid in order to register a security.

The Uniform Securities Act authorizes the state Administrator to require either oral or written qualification examinations of investment adviser representatives and officers of investment adviser partnerships or corporations officers of investment advisers to pass a qualification examination an applicant for initial registration to publish an announcement of the application in one or more specified newspapers published in the state investment adviser representatives to pass a qualification examination A) I only B) I, II, III, and IV C) III and IV D) I and II

B) I, II, III, and IV The state Administrator may require qualification examinations for officers of investment advisers, as well as its representatives, and may require them to publish an announcement in one or more newspapers published in the state. The Administrator may also require either an oral or written examination.

Thomas Smith, a registered agent of XYZ Broker-Dealer, believed that his client's security was overvalued. If Smith exaggerated the amount by which the security was overpriced to protect the client from a downturn in the price of the security, each of the following statements is true EXCEPT A) Smith engaged in fraud in connection with the sale of a security B) Smith provided investment advice while acting in a sales capacity, which is a prohibited practice C) Smith made an untrue statement in connection with the sale of a security D) Smith acted in a dishonest and unethical manner

B) Smith provided investment advice while acting in a sales capacity, which is a prohibited practice Smith acted in a dishonest and unethical manner, made an untrue statement in connection with the sale of a security, and engaged in fraud in connection with the sale of a security. The advice to sell the securities was good investment advice, but the sales method was fraudulent.

A person who renders investment advice solely with respect to securities issued by the U.S. government A) need not be federal registered under the Investment Advisers Act of 1940 but must register in any state in which it has an office B) is exempt from state registration under the Uniform Securities Act but must be federal registered under the Investment Advisers Act of 1940 C) must be registered both with the SEC and the state D) is excluded from the definition of investment adviser under federal law and is, therefore, exempt from state registration requirements

D) is excluded from the definition of investment adviser under federal law and is, therefore, exempt from state registration requirements A person who renders advice solely with respect to securities issued or guaranteed by the U.S. government is excluded from the definition of investment adviser under the Advisers Act and is therefore a federal covered adviser under the NSMIA of 1996.