66 Quiz Questions #2

Which of the following statements regarding participant loans in a 401(k) plan are CORRECT? The maximum allowable loan amount is the lesser of $50,000 or 50% of the participant's vested account balance. Unless the loan is taken out for the purpose of a mortgage on the participant's principal residence, repayment must be completed within 60 months of obtaining the loan. Payback of the loan will be through payroll deduction. Default on the loan will result in the IRS treating the loan as a distribution. A) I, II, III, and IV B) III and IV C) II and III D) I and II

A

The Securities Exchange Act of 1934 defines a market maker is A) a dealer who, with respect to a security, holds himself out as being willing to buy and sell that security for his own account on a regular or continuous basis B) an agent for the issuer C) a person who buys and sells securities for her own account or for the accounts of others D) an agent whose clients are institutions

A - A market maker is a dealer who holds himself out as being willing to buy or sell a security at a quoted price on a regular and continuous basis.

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) $6,500 B) $10,000 C) $4,500 D) $1,500

A - All investment income, regardless of source, will be considered DNI and will be included in the taxable income calculation to the trust unless distributed

Under current tax law (2019), how much can a married couple give to their adult son and his wife without incurring a gift tax obligation? A) $60,000 B) $15,000 C) Unlimited D) $30,000

A - The current gift tax exclusion (2019) is $15,000 per donor to each recipient. A married couple can give $30,000 to a single individual and qualify for the exclusion. In this case, the married couple can give $30,000 to their son and $30,000 to their daughter-in-law without paying any gift tax.

A margin account that contains both long and short stock positions is known as A) a mixed margin account B) an opposition margin account C) a hedged margin account D) a long/short margin account

A - When a margin account contains both long and short positions, it is known as a mixed or combined margin account.

An investor purchases 100 shares of a stock at $100 per share on January 1. On the following July 1, the shares are sold for $120 per share. The tax consequences are A) $2,000 short-term loss B) $2,000 short-term gain C) $2,000 long-term gain D) $2,000 long-term loss

B

Property included in a deceased's gross estate is generally valued for estate tax purposes at A) its fair market value (FMV) on any date the estate chooses to use B) its fair market value (FMV) on the date of the deceased's death C) the amount the deceased paid for it D) its original cost less depreciation

B

A stock is currently worth $75. If the stock was purchased one year ago for $60, and the stock paid a $1.50 dividend over the course of the year, what is the holding period return? A) 22.0% B) 27.5% C) 25.0% D) 24.0%

B - (75 − 60 + 1.50) ÷ 60 = 0.2750, or 27.5%.

Jill is an investment adviser representative with FairPlay Advisers, an SEC-registered investment advisory firm. At the recommendation of a close friend who is a client of Jill's, Tom comes in for an interview and portfolio analysis. When examining Tom's IRA, which of the following holdings would Jill feel the need to immediately review? A) DEF U.S. Government Bond Fund B) ABC Municipal Bond Fund C) GHI Large-Cap Equity Index Fund D) JKL Money Market Fund

B - Although not illegal, it is generally considered inappropriate to include tax-exempt securities, such as municipal bonds (whether individual bonds or in a fund), in a tax-deferred retirement plan.

A high net worth individual wishes to know when a gift can be made this year without being obligated to pay gift tax. You would respond that there is no gift tax when the gift is made to A) a sibling of the donor. B) the American Red Cross. C) a non-citizen spouse. D) a grandchild of the donor.

B - Gifts to recognized 501(c)(3) charities, such as the American Red Cross, are never subject to the gift tax.

The strong-form efficient market hypothesis (EMH) asserts that stock prices fully reflect which of the following types of information? A) Market B) Public, private, and future C) Public and private D) Inside only

C

If a client has realized a capital gain from the sale of a municipal bond, to reduce tax liability, the capital gain can be offset against a capital loss in GOs equity securities corporate bonds REITs A) II and III B) I and II C) I, II, III, and IV D) I only

C - A realized capital gain on a security may be offset by a capital loss realized from the sale of any type of security, including municipal bonds, equities, corporate bonds, or REITs.

Which of the following is guaranteed by a variable life policy? A) Policy loans after the policy has been in effect for at least 24 months B) Minimum separate account performance C) Cash value D) Minimum death benefit

D

Which of the following is indicative of the primary difference between variable life insurance and straight whole life insurance? A) Tax treatment of the death proceeds B) Cost of the insurance C) Amount of insurance that can be issued D) Way in which the cash values are invested

D

A Schedule K-1 would be received by an individual with an ownership interest in all of the following except A) an LLC. B) a partnership. C) an S corporation. D) a C corporation.

D - A shareholder in a C corporation who receives dividends will have that reported on a Form 1099.

An investor would have to pay the alternative minimum tax when A) the investor has received income from a limited partnership B) the investor's capital gains exceed 10% of total income C) there are tax-preference items reported on the tax return D) it exceeds the investor's regular income tax

D - A taxpayer must pay the alternative minimum tax in any year that it exceeds regular tax liability. Tax-preference items are re-input in figuring AMT, but the AMT is paid only if that amount is higher than the regular income tax.

Which of the following does NOT benefit both the employee and the employer? A) A SEP IRA B) A defined benefit plan C) A traditional IRA D) A SERP

c - There is no employee-employer relationship in a traditional (or Roth) IRA

All of the following are progressive taxes except A) gift taxes. B) excise taxes on cigarettes. C) personal income taxes. D) estate taxes.

B - Excise taxes, such as those on cigarettes, are a prime example. Whether someone purchases a pack, a carton, or a case, the tax rate is constant.

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

B - No form of insurance works, A limited group of coins, especially the "eagles" minted by the U.S. Treasury Department, are eligible for investment in an IRA

If an employed client has $12,000 of capital gains and $15,000 of capital losses in the most recent taxable year, how much unused loss, if any, is carried forward by the client to the following tax year? A) $3,000.00 B) $0.00 C) $12,000.00 D) $15,000.00

B - Step 1: Offset the capital gains with the capital losses ($15,000 - $12,000). This leaves $3,000 remaining in capital losses. Step 2: Note that the client can apply up to a maximum of $3,000 of any remaining losses against ordinary income. Once all $3,000 in remaining losses is used to reduce ordinary income, this would leave $0 to carry forward to the next year.

An investor purchases $10,000 of A-rated debentures in early January. At the end of the year, $500 in interest has been received and the value of the investment is $9,500. If the investor is in the 25% tax bracket, the after-tax yield is A) 3.75%. B) -1.25%. C) 5.0%. D) 0.0%.

A - The only return (as far as yield is concerned) is the $500 of interest. Subtracting 25% for taxes leaves $375 which, when divided by the $10,000 initial cost, is an after-tax yield of 3.75%

Given the following information, calculate the risk-adjusted return. 91-day T-bill rate: 4% Actual return: 14% Beta = 1.4 CPI: 3% Standard deviation: 5.0 A) 2% B) 11% C) 5% D) 10%

A = 14-4/5=2

Ebony sets up a revocable trust, naming her daughter, Sylvia, as the sole beneficiary. Ebony has appointed the Pacific Atlantic Trust Institution (PATI) as the trustee. Any income to the trust will be taxable to A) the trust B) the grantor C) the trustee D) the beneficiary

B

The death benefit of a variable life policy must be calculated at least A) semiannually B) annually C) weekly D) monthly

B

The main benefit that variable life insurance has over whole life insurance is A) a lower sales charge B) the potential for a higher cash value and death benefit C) the availability of policy loans D) an adjustable premium

B

Your client turns in a buy limit order for 100 shares of ABC at $58. Following the entry of the order, trades occur at 59, 59, 58.80, 58.20, 58.40, 57.95, 57.85. At what price was this limit order triggered? A) $57.95. B) $58.20. C) $57.85. D) The order was not triggered.

D - The subject of the question is a limit order and then it asks for the trigger price. Stop orders are the only orders that have triggers so there is no trigger for this limit order

One of your clients invested $10,000 into a mutual fund. The client elected to reinvest all dividends. As a consequence of this, A) the investor's basis is increased by the amount of the reinvested dividends B) taxes are deferred until those shares are redeemed C) the reinvestments will purchase shares at a discount from the NAV D) the dividends will be taxed as capital gains once the shares are liquidated

A - Because the reported dividends are taxed each year, when the shares are ultimately liquidated, they have already been taxed. So, the investors cost basis is increased by the amount of the reinvestment.

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

A - To compute holding period return, you calculate the total return for that holding period. Total return combines any dividend income plus appreciation (or minus depreciation).

An investor inherits 1,000 shares of the ABC Global Growth Fund when the NAV is $9.50, the bid price is $9.00, and the ask price is $9.15. Two years later, the investor sells all shares when the NAV is $14.25, the bid is $14.50, and the ask is $14.60. What are the tax consequences of this sale? A) Long-term capital gain of $5,500 B) Long-term capital gain of $5,450 C) Long-term capital gain of $5,350 D) Long-term capital gain of $4,750

A - Upon death, the beneficiary inherits closed-end funds at their bid price (what the estate could have sold them for), or $9.00 per share. The sale two years later takes place at the bid ($14.50) for a profit of $5.50 per share (times 1,000 shares).

Which of the following is an improper activity under the Uniform Securities Act? A) An investment adviser charges a customer a fee for advice leading to the sale of a security, receives a commission on the sale, and discloses the amount of the commission to the customer. B) A dealer charges commissions for securities it sells from its inventory and discloses the amount of the commission to the customer. C) An investment adviser collects a commission on the sale of insurance products that he recommended, disclosing that a commission would be earned. D) An investment adviser charges two customers two different fees for a similar service.

B - Dealers who act as principals in transactions charge markups, not commissions

If a married couple establishes a JTWROS account with a balance of $25 million and the wife dies, what is the husband's estate tax liability? A) He pays federal estate taxes on $12.5 million. B) He pays no estate tax. C) He pays federal estate taxes on the entire balance. D) He pays federal estate taxes only on the amount that exceeds the estate tax credit.

B - Establishing a joint tenants with right of survivorship account allows for the transfer of assets to the survivor upon death. The surviving spouse is not taxed on assets transferred in this manner because under current tax law, there is an unlimited marital deduction.

Investors looking to minimize the effects of taxation on their investments would probably receive the least benefit from A) an apartment building B) a corporate bond C) an S&P 500 index fund D) a growth stock

B - Investors receive interest income from corporate bonds. That income is fully taxable at ordinary income rates. Real estate ownership has certain tax benefits, such as depreciation and a deduction for operating expenses. Index funds are known for their high tax efficiency and investors in growth stocks anticipate long-term capital gains which are taxed at a lower rate than ordinary income.

One of your new clients has only been working for 3 years but is already interested in retirement planning. In order to be fully eligible for Social Security, the client must A) have at least 40 years of employment. B) be at least age 62. C) have a minimum of 40 covered quarters of employment. D) have minimum credited earnings of at least $20,000 per year.

C - Current Social Security requirements are a minimum of 40 covered quarters of employment (10 years)

A person is excluded from the definition of investment adviser under the Investment Advisers Act of 1940 if the investment advice and reports are restricted to A) securities listed on a national stock exchange B) foreign securities C) bank and insurance company securities D) U.S. government securities

D - Among the exclusions found in the act is one for persons whose advice relates exclusively to securities issued or guaranteed by the U.S. government.

A high net worth individual wishes to know when a gift can be made this year without being obligated to pay gift tax. You would respond that there is no gift tax when the gift is made to A) a non-citizen spouse. B) a sibling of the donor. C) a grandchild of the donor. D) the American Red Cross.

D - Gifts to recognized 501(c)(3) charities, such as the American Red Cross, are never subject to the gift tax

A U.S. citizen purchases a bond issued by the government of Sweden. The interest payments received are taxed at which of the following levels? Federal State Local A) II and III B) I only C) II only D) I, II, and III

D - Interest on foreign bonds is taxed in the United States by federal, state, and local governments.

An individual investor specifies to her investment adviser representative that her portfolio must produce a minimum amount of cash each year. This would be considered A) a tax constraint. B) a unique circumstance. C) a legal and regulatory constraint. D) a liquidity constraint.

D - Liquidity constraints arise from an investor's need for spendable cash.

Which of the following is not included in adjusted gross income on an individual's federal income tax return? A) State income tax refunds B) Income from a sole proprietorship C) Wages and tips D) Stock dividends

D - Stock dividends (dividends paid as additional shares of stock rather than in cash) adjust the investor's cost basis and don't come into play until the stock is sold.

Expected return is A) the difference between an investment's present value and its cost B) the one discount rate that equates the future value of an investment with its net present value C) the worth of future income discounted to reflect what that income is worth today D) an estimate of probable returns an investment may yield

D - The expected return is the estimate of probable returns that an investment may yield when taking the sum of all probabilities.

During your annual review with a client, you go over all the year's transactions. The beginning of the year balance in the account was $3,000. The client purchased 100 shares of ABC on February 1 at $30 per share and sold it on June 1 at $33 per share. During that period, ABC paid 1 quarterly dividend of $.30. The client used the proceeds of the ABC sale to purchase 66 shares of DEF on June 15 at $50 per share and sold it on December 15 at $60 per share. DEF pays quarterly dividends of $0.25 on the 1st of each month on a cycle beginning with February. Based on this information, you would inform the client that the account's total return is A) 34.10% B) 102.70% C) 100% D) 46%

A

Tamika is an investment adviser representative with Financial Engineers, LLC, a covered investment adviser. The firm uses an investment policy statement to help design financial plans for their clients. One of Tamika's current clients plans to purchase a new boat 7 months from now. When using the IPS, this would be considered A) an investment constraint B) an investment goal C) a capital need D) a financial objective

A

The most common form of organizational structure for venture capital investment is the A) limited partnership. B) corporate venture capital funds. C) venture capital fund of funds. D) limited liability company.

A

Which of the following statements regarding the brochure delivery requirements of the Investment Advisers Act of 1940 are TRUE? The brochure must be updated each time Part 1A of Form ADV is updated. The brochure delivery requirement does not apply to investment companies or clients who are serviced on an impersonal basis, such as with a newsletter, with an annual cost of less than $500. A brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. A) II and III B) I, II, and III C) I and III D) I and II

A - Because the information in the brochure is derived from Part 2A of the Form ADV, changes to Part 1A will not necessarily apply to items that are important to the client.

During the previous fiscal year, The Kaplan Family Trust received $24,000 in dividends and $35,000 in interest from corporate bonds. Securities transactions during the year resulted in long-term capital gains of $48,000, $20,000 of which were reinvested in the corpus. The DNI for the Kaplan Family Trust is A) $87,000 B) $11,000 C) $107,000 D) $79,000

A - Distributable Net Income (DNI) is dividends and interest plus capital gains that have not been reinvested back into the trust. In this case, $24,000 + $35,000 + $28,000 = $87,000.

It would be least likely for dividends paid on which of the following investments to meet the requirements to be considered qualified? A) Bond mutual funds B) Preferred stock C) Common stock D) Equity mutual funds

A - Dividends on bond funds and money market funds are not qualified because the majority of those dividends represent interest earned by the fund and the tax break does not apply to earnings from interest.

A U.S. citizen owns stock in a Canadian company and receives dividends. The Canadian government withholds 15% of the dividends as a tax. As a result, the investor reports A) a tax credit on the investor's U.S. tax return B) a reduction in the investor's ordinary income C) a nonrecoverable loss on the investor's U.S. tax return D) a tax credit on the investor's Canadian tax return

A - ONLY BECAUSE ITS CANADA . An investor receives a credit for taxes withheld on investments by countries with which the United States has diplomatic relations; the tax credit directly decreases the investor's American tax liability.

All of the following statements concerning qualified tuition programs for educational funding are correct EXCEPT A) control over the account passes to the student/beneficiary once withdrawals commence B) prepaid tuition plans are plans where prepayment of college tuition is allowed at current prices for enrollment in the future C) unless there is a change in beneficiary, assets in the QTP may be moved from the plan of one state to the plan of another as frequently as once per 12 months D) a college savings plan is a type of QTP where the owner of the account contributes cash to the account so that the contributions can grow tax deferred

A - One of the advantages of QTPs (qualified tuition ​programs, better known as Section 529 plans) is that the owner-contributor ​is always in control of the program. Without a change in beneficiary, plan "rollovers" are limited to once per 12-month period.

The Securities Exchange Act of 1934 gives the SEC the power to do all of the following EXCEPT A) set margin requirements B) administer oaths C) refer evidence for prosecution D) subpoena witnesses

A - The Securities Exchange Act of 1934 gives the SEC the power to make, amend, and rescind rules; issue cease and desist orders; administer oaths; conduct investigations; take evidence; and subpoena witnesses, books, and records.

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

A - 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%).

A business organized as which of the following pays federal income tax on its income? A) Sole proprietorship B) Partnership C) LLC D) S Corporation

A - The income generated by a sole proprietorship is reported on Schedule C of the Form 1040 of the individual owner.

The term used to describe a broker-dealer contacting a margin account client with a demand for additional funds is A) maintenance margin B) Reg. T call C) margin call D) market call

A - The original call for funds is the Reg. T or margin call. But, when the call is for additional money, it is known as maintenance margin. This generally occurs when the value of the collateral in the account has fallen sharply.

A new client indicates a desire to avoid investing in mid-cap stocks because of large losses suffered several years ago. What type of consideration would this be? A) Nonfinancial B) Systematic C) Unsystematic D) Financial

A - There are 2 basic investment considerations, financial and nonfinancial. The former deals largely with quantifiable items and the latter with attic attitudinal ones.

A client enters an order as follows: Sell stop 100 shares of LTC at 45 limit 45.50. Following the entry of that order, trades occur in the following sequence: 47; 46; 45.12; 44.97; 45.28; 45.97; 46.05. More than likely, the client received A) 45.97 B) 44.97 C) 45.28 D) 46.05

A - This is really two orders. The first is to stop at 45. That is, once the stock trades at 45 or lower, enter the order. The second order is a sell, but with a limit of 45.50. So the first time the stock hits 45 (or less) is the trade at 44.97. That triggers the sell limit. The next trade is at 45.28 and that is not acceptable to the limit order at 45.50. Because the limit order is saying, "get me 45.50 or higher," the 45.97 is an acceptable price.

A 68-year-old individual, who purchased a single premium immediate fixed annuity, elected monthly payments for life with a 10-year certain settlement option. If the individual lives to the age of 80, A) monthly payments will continue until death. B) monthly payments will cease at age 78. C) monthly payments will continue to the beneficiary(s) for 10 years after the annuitant's death. D) monthly payments will remain fixed until age 78 and then reduce until death.

A - When choosing the settlement option, life with 10 years certain, the annuitant will receive payments until the later of death or 10 years.

Jean owns a $1 million life insurance policy on her mother, Clara. Jean is named as sole beneficiary, and so far she has paid $150,000 in premiums. If Clara dies, which of the following will occur? The proceeds will be exempt from income tax. $850,000 of the proceeds will be subject to income tax. The proceeds will be included in Clara's estate for estate tax purposes. The proceeds will not be included in Clara's estate. A) II and IV B) I and IV C) II and III D) I and III

B - Life insurance proceeds are generally free from income taxes and will be free from estate taxes, if the insured possesses no incidence of ownership. In other words, a beneficiary other than the deceased's estate has been named, and the owner is someone other than the insured.

Tax preference items are used for the purpose of computing the alternative minimum tax. They include all of the following except A) certain incentive stock options. B) straight-line depreciation. C) excess intangible drilling costs. D) accelerated depreciation.

B - Straight-line depreciation is not a preference item

The bulk of "dark liquidity" represents trades A) where the identity of the participants is disclosed. B) engaged in by institutional traders and trading desks away from the exchange markets. C) involving noninstitutional investors. D) engaged in by institutional traders and trading desks on the exchange markets.

B - The trades are "dark" because they are not made on the exchange markets. The identity of the participants is usually unknown and the participants are almost exclusively institutional.

All of these are true about a traditional 401(k) plan EXCEPT A) in service employees may be eligible for hardship withdrawals B) the employer can contribute more than 25% of total payroll C) employees may have a portion of their contribution matched by the employer D) employees can choose from a variety of investment options

B - There are exceptions to this, but, in general (and on the exam), you will have to know that the employer share of the contributions to a traditional 401(k) plan (or any other DC plan) may not exceed 25% of total payroll.

Under the Securities Exchange Act of 1934, the SEC may suspend all trading on an exchange A) under no circumstances B) only with prior notification to the president of the United States C) only if it has cause to believe that such suspension is necessary to prevent criminal violations that are about to occur on the exchange D) for 10 days, in its discretion

B - To suspend all trading on an exchange, the SEC must first notify the president of the United States. The SEC may summarily suspend trading in any nonexempt security for up to 10 days without prior notice.

Your client purchased 1,000 shares of ABC common stock on February 28, 2017. When would that purchase qualify for long-term capital gain or loss treatment? A) February 28, 2018 B) March 1, 2018 C) March 1, 2017 D) February 29, 2018

B - he best way to compute this is to add 1 day to the purchase and then that same date, 12 months in the future

A company with 20 million shares outstanding paid $36 million in dividends. If the current market value of the company's shares is $36, the current yield is A) 10% B) 5% C) not determinable from the information given D) 2%

B - he dividends per share are $36 million ÷ 20 million shares = $1.80 per share. Current yield is $1.80 ÷ $36.00 = 5%.

Two years after their wedding, Pam and Jim became the proud parents of child. Both grandparents want to help ensure educational funds for their new grandchild by using the Coverdell ESA. Assuming they are within the earnings limitations, which of the following would be permitted? A) $2,000 from Pam's mother, $2,000 from Pam's father, $2,000 from Jim's mother, and $2,000 from Jim's father B) $1,000 from Pam's parents and $1,000 from Jim's parents into separate ESAs C) $2,000 from Pam's parents and $2,000 from Jim's parents into separate ESAs D) $2,000 from Pam's parents and $2,000 from Jim's parents into a single ESA

B - the total contribution to all accounts on behalf of a beneficiary in any year can't exceed $2,000.

William died in 2019 with the following assets and liabilities: $200,000 in securities left to his wife, $650,000 home left to his wife (the home cost $150,000), $250,000 life insurance policy with his daughter named as beneficiary, and $75,000 in debts and estate expenses. What is William's net estate? A) $625,000 B) $0; it is below the $11.4 million exemption equivalent C) $175,000 D) $750,000

C - All assets left to the spouse and the debts/expenses are allowable reductions to arrive at the net or taxable estate. The math goes like this. The $1.1 million gross estate (add together the assets ($200,000 + $650,000 + $250,000) is reduced by the $850,000 left to his wife. That brings the net estate down to $250,000 ($1,100,000 minus $850,000). The net estate is further reduced by the $75,000 in debt and expenses. Subtracting $75,000 from $250,000 leaves a net estate of $175,000.

Which of the following is (are) advantages of irrevocable insurance trusts? Provide estate liquidity. Insurance proceeds are removed from the estate of the insured for tax purposes. The insured has the flexibility to alter the trust arrangements. Once set up, no changes may be made. A) I and III B) II and IV C) I and II D) III and IV

C - As with all life insurance, the proceeds are available almost immediately upon death providing estate liquidity. When done properly, the proceeds of the policy are not included in the deceased's estate, thereby saving estate taxes. The trust is irrevocable—no changes can be made, and this is one of the few disadvantages.

Which of the following statements regarding the SEC's power to revoke the registration of an investment adviser is TRUE? A) Revocation would occur, with appropriate notice, when a firm's annual updating amendment was received by the SEC 120 days after the end of the registrant's fiscal year. B) An investment adviser receiving substantial prepayment of fees from 50% of its clients that fails to include a copy of its balance sheet in its brochure delivered to all clients would give the SEC cause for beginning revocation proceedings. C) Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm's registration. D) If it is determined that an investment adviser is insolvent, the SEC may revoke the registration.

C - Failure to supervise, if proven, is one of the most common causes for disciplinary action against a broker-dealer or investment adviser. Insolvency is not a cause for revocation under the Investment Advisers Act of 1940, but it is for a state-registered investment adviser (it's tough to keep these straight; please see Appendix A)

One of your clients has recently turned 72 and has questions about RMDs. The client has a traditional IRA, a rollover IRA, and 401(k) plans from two previous employers. When computing the RMDs, the RMD from each IRA is computed and may be made from one or both of them. the RMD from each IRA is computed and must be paid from that IRA. both 401(k)s are combined to compute the required distribution which may be made from one or both of them. the RMD from each 401(k) is computed and must be paid from that 401(k). A) I and III B) II and III C) I and IV D) II and IVC

C - For RMD purposes, each IRA is figured separately and the distribution can be made from one or all of them. That is not the case with a 401(k) plan. Each account has a RMD that can only be paid from that account.

The separate account subaccounts chosen by the purchaser of a variable life insurance policy have had outstanding performance over the past 15 years. There would generally be no tax implications in which of the following situations? A) There is a cash withdrawal in excess of the cost basis B) The policy is surrendered C) A loan is taken equal to 95% of the policy's cash value D) The death benefit is paid

C - Funds obtained from a policy loan are not considered taxable income (same as any loan - you owe the money).

If a father makes a gift of securities to his 10-year-old daughter, gift taxes would be based on A) the market value of the securities as of April 15 of the year in which the gift is made B) the cost of the securities C) the market value of the securities on the date of gift D) the market value of the securities as of December 31 of the year in which the gift is made

C - If a gift tax is due, it is paid by the donor and based on the gift's value on the date it is given.

A married couple has lived in the same home for 40 years and now, with the children all gone, they've decided to sell and move to a retirement village. They purchased the home for $80,000 and have accepted a contract for $800,000. The tax consequences of this sale is A) $470,000 capital gain. B) $720,000 capital gain. C) $220,000 capital gain. D) $0 capital gain.

C - If lived in for 2 out of the last 5 years, each person can deduct $250,000 from the sale. 2 people in the married couples position can deduct $500,000. $500,000 - $720,000 = $220,000.

A participant in an ERISA qualified retirement plan is studying the investment policy statement (IPS) prepared by the plan's fiduciary. The contents of the IPS would not include A) determination for meeting future cash flow needs B) methods for monitoring procedures and performance C) specific security selection D) investment philosophy including asset allocation style

C - One thing that could never be in an IPS is a listing of the securities that will be purchased in the future. Types of securities, yes, but not the specific ones.

Which of the following is NOT required under ERISA Section 404(c)? A) Each plan participant must have the ability to exercise independent control over assets in her account. B) Individual accounts must be provided for each plan participant. C) All plan participants must have been employed by the plan sponsor for a minimum of 3 years. D) Plan participants must have access to a broad range of investment alternatives.

C - Section 404(c) has nothing to do with the employee's length of employment.

A highly compensated customer owns 200 shares of Datawaq. He bought it 20 years ago, and it is now trading at 90. If he donates the stock to a 501(c)(3) charity, how much can he claim as a tax deduction for this donation? A) $6,000 B) $0 C) $18,000 D) $12,000

C - Securities can be gifted to charity and deducted at their fair market value, as long as they have been held more than one year. The fair market value of the deduction allowed for 200 shares is 200 multiplied by the current market price of the stock, or $18,000.

The powers of the Administrator include the ability to determine A) maximum net capital requirements for broker-dealers B) surety bond requirements for investment advisers who do not exercise discretion or maintain custody C) minimum net worth requirements for investment advisers D) minimum net worth requirements for agents who exercise discretion

C - The Administrator can determine minimum, not maximum, net capital for broker-dealers (but not in excess of SEC requirements) and, for investment advisers, net worth. Agents who exercise discretion may need a surety bond, but not a minimum net worth.

Under the NSMIA, the term "federal covered adviser" includes a person registered with the SEC under the Investment Advisers Act of 1940 registered as an investment adviser in two or more states excluded from the definition of investment adviser under the Investment Advisers Act of 1940 required to register with the state Administrator A) I and IV B) II and IV C) I and III D) II and III

C - The NSMIA defines "federal covered adviser" as a person who is either required to register with the SEC under the Investment Advisers Act of 1940 or who is specifically excluded from the definition of "investment adviser" under that act.

A feature of which of the following business entities is limited liability but no flow-through of earnings or losses? A) LLC B) Limited partnership C) Corporation D) Sole proprietorship

C - The corporation (always assume C corporation unless it says different on the test) offers limited liability to its shareholders, but there is no flow-through of income or loss. LLCs and limited partnerships offer both and the sole proprietorship has unlimited liability.

An investor invests $1,000 into the shares of the Stratford Growth and Income Fund, an open-end investment company registered under the Investment Company Act of 1940. On the purchase application, the investor checked the boxes signifying that dividends were to be paid out in cash and capital gains were to be reinvested. During year, the fund pays dividends of $20 and distributes a $250 capital gain. At the end of the year, the fund's value is $1,300. The total return to this investor was A) 27% B) 30% C) 32% D) 25%

C - Total return is all distributions plus/minus appreciation/depreciation. In this question, the $1,300 includes the $250 capital gain so all we add is the $20 dividend. $320 divided by $1,000 equals 32% total return.

Grandpa bought 100 shares of XYZ common stock 10 years ago for $10 per share. The stock split 2 for 1 several years ago and grandpa gave all of the stock to his grandson when the price per share was $20. Three months ago, grandpa passed away and left the grandson another 100 shares of XYZ that had been purchased one month earlier at $25 per share. At the date of death, the XYZ stock had already climbed to $30 per share. If the grandson sells the XYZ stock for $35 per share, the taxable consequences would be A) $6,000 long-term capital gain plus $500 short-term capital gain. B) $4,000 long-term capital gain. C) $6,500 long-term capital gain. D) $2,500 long-term capital gain plus $1,000 short-term capital gain.

C - stock received as an inheritance always has a long-term holding period

Alexander Wimpton is registered as an agent with WorthMore Securities, a broker-dealer registered with the SEC and 10 states. Wimpton is also an investment adviser representative (IAR) with their wholly owned subsidiary, WorthMore Investments, a federal covered investment adviser. Many of Wimpton's advisory clients also maintain brokerage accounts at WorthMore Securities. If one of those clients were to call Wimpton and enter an order to purchase shares of a stock the broker-dealer is selling out of inventory, A) the commission charged on the trade would have to be fair and reasonable B) the order would have to be refused because of the potential conflict of interest C) consent of the client would be necessary anytime an advisory client is sold securities out of the broker-dealer's inventory D) consent of the client would not be necessary as long as the only capacity in which Wimpton was acting was that of an agent

D - Only when acting in an advisory capacity is there a requirement to obtain client consent when selling out of inventory.

A client owns a taxable bond with a coupon rate of 5%. His marginal tax rate is 28%. What is the after-tax yield he will receive on this investment? A) 1.40% B) 6.94% C) 6.40% D) 3.60%

D - The client will earn an after-tax yield of 3.60%, or 5% × (1 − 0.28). Or, you could simply take off the 28% tax from 5% (1.40%) and subtract that from the 5% to arrive at 3.60%.

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

D - The commonly tested investment constraints are: liquidity needs, time horizon, taxes, legal and regulatory factors, and unique needs and preferences.

Under the Investment Company Act of 1940, which of the following statements about advisory contracts between an investment company and an outside adviser is TRUE? A) The contract must be established for a 1-year period and renewed annually thereafter. B) The initial contract is effective once approved by the board of directors. C) The contract may be in writing, or it may be oral if there are at least 2 witnesses to the agreement. D) The contract may not be unilaterally assigned to another adviser.

D - The contract may not be unilaterally assigned to another adviser. The initial contract may be for 2 years, but it is subject to annual reapproval by a majority vote of the outstanding shares or the board of directors, as well as a majority of the directors who are considered to be noninterested parties.

You have a client who was divorced 3 years ago, maintains a home, and has custody of the children. More than likely, the most advantageous tax filing status for your client is A) single. B) divorced parent. C) joint. D) head of household.

D - When qualifying for head of household status (the technical qualifications are beyond the exam), the individual has the lowest tax burden

Life insurance is generally purchased to replace the lost income of the insured. A client wishing to purchase a policy with a level death benefit and level premium for as long as the premiums are paid would choose A) a decreasing term policy. B) a universal life policy. C) a 5-year renewable term policy. D) a whole life policy.

D - Whole life insurance is permanent insurance with a level premium and a level death benefit.

A client of a broker-dealer turns in an order to purchase 10,000 shares of XYZ stock on the NYSE. This would be A) a block trade B) churning C) arbitrage D) front running

A

A securities analyst reviewing the financial statements of the XYZ Corporation observes that the company's total liabilities are in excess of its total assets. From this information, the analyst could conclude that XYZ has A) a negative book value per share. B) a highly leveraged capital structure. C) a low price-to-earnings ratio. D) a high current ratio.

A

An investor inherits 1,000 shares of the ABC Global Growth Fund when NAV is $9.50 and POP is $10.00 and elects to receive all distributions in cash. Two years later, sells all when NAV is $14.25 and POP is $15.00. What are the tax consequences of this sale? A) Long-term capital gain of $4,750 B) Long-term capital gain of $5,000 C) Long-term capital gain of $4,250 D) Long-term capital gain of $5,500

A

A client owns 300 shares of BACH common stock in a margin account. If there were to be a significant decline in the market price of the BACH, the client would likely receive A) a maintenance margin call. B) a rehypothecation call. C) a short margin call. D) a Regulation T margin call.

A - A significant decline in the market price of the holdings in a margin account will probably lead to insufficient equity in the account

The main difference between the current ratio and the quick ratio is that the quick ratio excludes A) inventory. B) cost of goods sold. C) goodwill. D) assets.

A - Current ratio = (current assets ÷ current liabilities) = [cash + marketable securities + receivables + inventory] ÷ current liabilities.

If a client in the 30% marginal income tax bracket can earn an after-tax rate of return of 7% when the estimated inflation rate during the holding period of an investment is 4%, the client's real rate of return is A) less than 7% B) 10% C) more than 7% D) 7%

A - Real return reduces nominal return by an inflation factor. Thus, the client's real return must be less than 7%.

A 47-year-old investor purchases a single premium deferred variable annuity from the ABC Insurance Company with an initial premium payment of $25,000. Six years later, a 1035 exchange is made to an annuity offered by the XYZ Insurance Company when the value of the account is $35,000. Seven years later, the account has a current value of $50,000 and the investor withdraws $20,000. The tax consequence of this withdrawal is A) no tax until the withdrawal exceeds $25,000. B) ordinary income tax on $20,000. C) ordinary income tax on $20,000 plus a 10% penalty. D) ordinary income tax on $15,000.

B

An employer has a qualified retirement plan that promises to pay employees a specific percentage of their average salary if they complete 20 years of service. This type of pension plan is A) a defined contribution pension plan B) a defined benefit pension plan C) a 401(k) plan D) a profit-sharing plan

B

Under the antifraud provisions of the Investment Advisers Act of 1940, an investment adviser must disclose to clients A) that the adviser has never been subject to disciplinary action or censure by the SEC B) the association between the investment adviser and the broker-dealer with whom the overall investment plan will be implemented C) that any transactions made on the adviser's own account are consistent with the advice given to clients D) the number of clients with whom the adviser does business

B - Advisers must disclose to clients any outside interest or potential conflicts of interest involved in its recommendations or transactions for those clients. Failure to disclose additional compensation related to the advisory function would be considered fraudulent.

When it comes to computing market returns, it is TRUE to state that A) the median is always higher than the geometric mean B) the geometric mean could never be greater than the arithmetic mean C) the mode is always higher than the mean D) the median is always lower than the average

B - Because the geometric mean always involves taking a "root" of the product of the numbers rather than an average, it is either the same or lower (can never be higher) than the arithmetic (average) mean.

The present value of a dollar A) is equal to its future value if the level of interest rates stays the same B) indicates how much needs to be invested today at a given interest rate to equal a specific cash value in the future C) is the amount of goods and services the dollar will buy in the future at today's rate price level D) cannot be calculated without knowing the level of inflation

B - The present value of a dollar will indicate how much needs to be invested today at a given interest rate to equal a cash amount required in the future.

A client owns an investment-grade bond with a coupon of 5% that is priced to yield 6.7%. If similarly rated bonds are being issued today with coupons of 7%, it would be expected that the client's bond A) has a zero net present value B) has a negative net present value C) will be selling at a premium over par D) has a positive net present value

B - With a discount rate of 7% (the discount rate in a present value computation is the current market interest rate), a debt instrument with a 5% coupon rate will be selling at a discount (interest rates up, prices down). We are told that this bond is offering a yield of 6.7%, which is less than the current market rate. Because a present value computation using a 6.7% rate would reflect a higher value than a 7% rate (the higher the discount rate, the lower the value), that would mean that the bond can be purchased at a price above its present value.

One of your clients has a margin account. There is a drop in the value of the stock owned in the account, and additional funds are required based on the terms of the firm's margin agreement. This would be known as A) a Regulation T call B) a margin call C) a house call D) a sellout

C - Margin call: Set by the Federal Reserve Board - House maintenance: Set by the individual broker-dealer firm.

A policyowner could surrender a whole life insurance policy and choose from all the following EXCEPT A) taking the cash value B) purchasing a reduced coverage whole life policy C) transferring the policy to another person D) purchasing an extended term life policy

C

The alternative minimum tax is designed to ensure that certain high-income taxpayers do not avoid all income tax. This is done by adding back to the taxpayer's ordinary income, items such as accelerated depreciation and excess intangible drilling costs. The term used to describe these items used to arrive at the taxpayer's alternative minimum taxable income (AMTI) is A) tax preferred items. B) Form 6251 items. C) tax preference items. D) AMT taxable items.

C

Insurance agents frequently use a capital needs analysis to help determine the correct amount of life insurance needed by their clients. That analysis would look at all of these EXCEPT A) life expectancy B) the inflation rate C) market volatility D) future earnings

C - Of these choices, the only one that we cannot in anyway predict is market volatility

Which of the following could reduce the amount that an individual may contribute to a Traditional IRA? Roth IRA contributions made for the year High income level Participation in an employer-sponsored plan Marital status A) I and II B) I, II and III C) I only D) I, II, III and IV

C - The maximum annual contribution applies as a total among your Roth and your traditional IRA

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 out outperform or underperform the market? A) −1.6875%, underperform B) +9.1875%, outperform C) −0.9375%, underperform D) +3.3750%, outperform

C - alpha = (actual return − risk-free rate) - (beta × [market return − RF])] 10.5% - 3%) - (1.25 × [9.75% − 3%]) = 7.5% - (1.25 x 6.75) = 7.5% - 8.4375 = -.9375

A loss derived from a limited partnership may be offset against income from A) capital gains from municipal bonds B) bonuses received in addition to regular salary C) dividends received from common stocks D) other limited partnerships

D

A taxpayer's marginal tax rate is A) generally lower than the effective tax rate B) the rate of tax paid on total taxable income C) the rate of tax paid on margin account interest D) the rate of taxation on any additional taxable income received

D

Allowable investments in an IRA would include A) collectible art B) rare stamps C) cash value life insurance D) U.S. government-issued silver eagles

D

The minimum size order that would be considered a block trade is A) 500 shares B) 1,000 shares C) 100,000 shares D) 10,000 shares

D

One of the most significant risks taken by bond investors is interest rate risk. All of these steps could be used to mitigate the effects of this risk EXCEPT A) holding bonds to maturity B) buying bonds with short-term maturities C) laddering the portfolio D) buying bonds of highest quality

D - Quality has no substantial impact on interest rate risk. When interest rates rise, all bonds fall in price. However, those that are closer to their maturity date are impacted less (they have a shorter duration).