Kaplan 5
A wealthy client wishes to endow her favorite charity with a lump-sum gift that, with an assumed rate of return of 4% per annum, will provide $2,500 per month in perpetuity. What amount does the client need to deposit? $750,000 $1,000,000 $75,000 $100,000
750,000 A monthly income of $2,500 is equal to $30,000 per year. At a 4% earning rate, $750,000 must be deposited togenerate that amount (30,000 ÷ 4%).
Which of the following is NOT required under ERISA Section 404(c)? Individual accounts must be provided for each plan participant. Each plan participant must have the ability to exercise independent control over assets in her account. All plan participants must have been employed by the plan sponsor for a minimum of 3 years. Plan participants must have access to a broad range of investment alternatives.
All plan participants must have been employed by the plan sponsor for a minimum of 3 years. ERISA Section 404(c) relieves the employer of fiduciary responsibility for investment decisions made by employees. Toqualify for this protection, employees must enjoy the benefits and risks of their decisions (individual accounts), have theright to exercise independent control over the account, and have a sufficiently broad range of choices to make the rightof control meaningful. Section 404(c) has nothing to do with the employee's length of employment.
Under the Securities Exchange Act of 1934, which of the following statements regarding reports required to be filed withthe SEC is TRUE? - Institutional investment managers who exercise discretion over accounts valued at $100 million or more of 13(f) securities must file reports quarterly. - Persons who become the beneficial owner of more than 2% of a security registered under the Securities Exchange Act of 1934 must file a report within 5days. - Persons who become the beneficial owner of more than 5% of a security registered under the Securities Exchange Act of 1934 must file a report within 2 days. - Institutional investment managers who exercise discretion over accounts valued at $100 million or more need not file reports if all their clients are insurance companies.
Institutional investment managers who exercise discretion over accounts valued at $100 million or more of 13(f) securities must file reports quarterly. The requirement for reports of beneficial ownership is that anyone who becomes the owner of more than 5% of asecurity registered under the Securities Exchange Act of 1934 must file a report within 10 days; therefore, neither 2days nor 5 days is correct. The requirement for institutional investment managers is that they must file reports quarterly(13F) if they exercise discretion over accounts valued at $100 million or more of 13(f) securities. Whether theinstitutional investment manager's clients are insurance companies is not relevant.
Which form of the efficient market hypothesis (EMH) suggests that fundamental analysis and insider information may produce above-market returns? Semi-strong Semi-weak Strong Weak
Weak Explanation The weak form holds that current stock prices reflect all historical market data and that historical price trends aretherefore of no value in predicting future prices. However, this form holds that credible fundamental analysis and insiderinformation may produce above-market returns. Those who truly believe in the EMH are of the opinion that none ofthese will do any better than the market; random selection is as good as anything else.
An individual employed by or associated with an investment adviser that is registered or required to be registered under the Uniform Securities Act, or who has a place of business in this state and is employed by or associated with a federal covered adviser and whose only role is to solicit, offer, or negotiate for the sale of or sell investment advisory services would be considered an IAR only if soliciting noninstitutional clients an administrative employee exempt from registration a solicitor and required to register as an IAR a solicitor and required to register as an IA
a solicitor and required to register as an IAR Explanation The term "investment adviser representative" is quite broad and includes any partner, officer, director of (or a person occupying a similar status or performing similar functions) or other individual employed by or associated with an investment adviser that is registered or required to be registered under the USA, or who has a place of business in this state and is employed by or associated with a federal covered adviser; and who does any of the following: (1) makes any recommendations or otherwise renders advice regarding securities; (2) manages accounts or portfolios of clients;(3) determines which recommendations or advice regarding securities should be given; (4) solicits, offers, or negotiates for the sale of or sells investment advisory services; or (5) supervises employees who perform any of the foregoing.
In the Howey decision, the U.S. Supreme Court held that in order for an investment contract to be considered asecurity, it must represent - personal interest in a business - an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others - an investment of money in a common enterprise with the expectation of profit from the efforts of the investor - debt in a publicly traded corporation whose managers are engaged in commercial activity Explanation In the Howey decision, the U.S. Supreme Court held that a security must represent an investment of money in acommon enterprise with the expectation of profit from the managerial efforts of others.
an investment of money in a common enterprise with the expectation of profitfrom the managerial efforts of others Explanation In the Howey decision, the U.S. Supreme Court held that a security must represent an investment of money in acommon enterprise with the expectation of profit from the managerial efforts of others.
When operating a Keogh plan, a self-employed individual must make contributions for all employees all employees scheduled to work for 1,000 hours per year or more full-time employees who are at least 21 years old and have worked for the company for 1 or more years part-time employees who have worked for the company for 3 or more years
full-time employees who are at least 21 years old and have worked for thecompany for 1 or more years Employees must be covered under a Keogh plan if they are at least 21 years old, have been employed a minimum of 1year, and work full time (at least 1,000 hours per year). Keogh plans do not include employees who are under 21 orhave just started working with the employer. U24LO2
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, - monthly payments will cease at age 78. - monthly payments will continue until death. - monthly payments will remain fixed until age 78 and then reduce until death. - monthly payments will continue to the beneficiary(s) for 10 years after the annuitant's death
monthly payments will continue until death. When choosing the settlement option, life with 10 years certain, the annuitant will receive payments until the later of death or 10 years.
An investor who is long XYZ stock would consider going long an XYZ call to hedge the long position protect against a decrease in the market price of XYZ stock protect against an increase in the market price of XYZ stock obtain income from the premium
protect against an increase in the market price of XYZ stock Explanation Going long a call means that you have bought it. Only sellers of options generate income. If you wish to hedge yourlong stock position, you buy a put, not a call. That leaves us with two choices that are polar opposites. Good test-takingskills teach us that, in almost all cases, when we see that, one of those must be the right answer. Buying a call isbullish. Forget the first part (you are long the stock). You would buy a call so that, if the price of the stock went up, youcould exercise at the lower strike price of your call option.
An analyst would use the discounted cash flow method in an attempt to find the fair value of a security. the current market price of a security. the cash flow from operations. the current rate of return of a security.
the fair value of a security. Explanation DCF uses the present value of future cash flows, based on a specified discount (interest) rate, to evaluate the price thata security should be selling for in the market. If the current market price of the security is less than this value, it has apositive net present value (NPV) and should be a good investment. The opposite is true if there is a negative NPV (themarket price is higher than that computed under the DCF method).
Each of the following terms is commonly found in modern portfolio theory EXCEPT the internal rate of return the feasible set the capital asset pricing model the efficient set
the internal rate of return Explanation Internal rate of return (IRR) is not a component of modern portfolio theory as are the other 3 terms.
A client of an investment adviser needs a bridge loan and approaches the IA to see if the firm is interested. Because theIA is not in the business of lending money, a special agreement is drawn up specifying the terms of the loan. Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers the loan could be made if the client was an institutional investor the loan could be made if the IA was affiliated with a bank the loan could only be made after the advisory contract was terminated the loan would not be permitted under any circumstances
the loan could only be made after the advisory contract was terminated First of all, a "bridge" loan has nothing to do with a bridge. The client is not trying to cross over anything. The term isused to refer to a short-term loan to provide funds until permanent financing may be arranged. Now that we've got thatout of the way, we can answer the question. Loans may never be made to clients unless the firm is in the business oflending money. Because this IA states that it is not their business model, the only way this loan could be made is ifthere was no adviser/client relationship.
A customer purchased a variable annuity from an agent 5 years ago with an initial investment of $200,000. The annuity's surrender fee will expire in year 7, which coincides with the customer's anticipated need for the funds. In the5th year of the contract, the value of the annuity increased from $300,000 to $375,000. The agent notices that the general market is on the decline and recommends she enter a 1035 exchange of the variable contract for another, thus increasing her death benefit and locking it in at a higher minimum. This recommendation is suitable because 1035 exchanges have no adverse tax consequences unsuitable unless the customer agrees with the recommendation unsuitable because of surrender fees suitable because of the increased death benefit
unsuitable because of surrender fees Incurring the surrender fee for the 1035 exchange of one contract and initiating a new long-term contract is inappropriate for a customer, in general, and particularly for this customer, considering her need to access her funds only two years later.
An investor purchased stock for $50 per share at the beginning of the year. In December, the investor liquidated hisstock for $55 per share, while also receiving dividends of $2 per share during the year. Assuming an inflation rate of3%, what is the investor's real rate of return? 10% 11% 14% 4%
11% Explanation Given the fact the client liquidated his shares at a price of $55, we can conclude that he attained a 10% ($5 profit ÷ $50initial investment) return based on capital appreciation of the stock. He also received dividends of $2 per share giving him an additional return of 4% ($2 ÷ $50). By adding these 2 percentages together, we can conclude that his total returnis 14%, less an inflation rate of 3%, which would give a real rate of return of 11%.
An agent receives an order from a client to purchase $20,000 worth of stock in whatever company looks good. In whattype of account could the agent accept this type of order? Cash Margin Custodial account managed by an administrator for the client's deceased cousin Discretionary
Discretionary Explanation If the agent has the ability to make the decision with respect to the specific security, even though the client specified theaction (buy) and the quantity ($20,000), discretionary authorization is required.
Under the Investment Advisers Act of 1940, for which of the following is an investment adviser required to disclose toclients the amount of compensation he will receive? I. Commissions on recommended securities transactions II. Commissions on insurance sales III. Incentives from the issuer of a recommended security I, II, and III I and II I and III II and III Explanation Advisers must disclose compensation received on sales of securities and non securities products and also compensation received from the issuer of a recommended security.
I, II, and III Explanation Advisers must disclose compensation received on sales of securities and nonsecurities products and alsocompensation received from the issuer of a recommended security.
A broker-dealer with an office in this state would be defined as an investment adviser if it charges: I. commissions for selling securities II. commissions for selling securities while offering investment advice incidental to the sale of the securities III. a fee for selling investment research and additional fees in the form of commissions for the sale of securities IV. fees for investment research sold exclusively to institutions located in this state III and IV I and IV I and II II and III
III and IV Explanation A broker-dealer would be considered an investment adviser if it has a place of business in this state and if it charges afee for selling investment research or any other form of investment advice, even to institutions. If a person is in thebusiness of selling research for a fee, that person or firm meets the definition of an investment adviser. If a broker-dealer charges commissions for selling securities and offers investment advice incidental to the sale of the securities, the broker-dealer is not an investment adviser because it is not compensated for the research.
A man is planning to start his own glass-sculpturing business. He wants to be able to deduct his anticipated losses for the first 2 years. He anticipates that the enterprise will borrow money from lenders and is willing to personally guarantee the debt. He also wants to attract other investors but does not want to give up control of the day-to-day business decisions. What business form do you recommend? C corporation Limited partnership General partnership S corporation Explanation A limited partnership with him as general partner would allow for additional investment capital without giving up management control. C corporations do not allow deductibility of losses; S corporations do not allow guaranteed debt to be included in the taxpayer's basis. General partnerships could allow the other partners to more easily control the day-to-day operations than a limited partnership, in which the other investors (presumably
Limited partnership Explanation A limited partnership with him as general partner would allow for additional investment capital without giving upmanagement control. C corporations do not allow deductibility of losses; S corporations do not allow guaranteed debt tobe included in the taxpayer's basis. General partnerships could allow the other partners to more easily control the day-to-day operations than a limited partnership, in which the other investors (presumably limited partners) would not bepermitted to take a role in the running of the business.
Under the Uniform Securities Act, the Administrator may require a broker-dealer to post a surety bond of an amount not in excess of that set by the SEC $50,000.00 $25,000.00 $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 UniformSecurities Act does not specify an amount for broker-dealers. However, the NSMIA states that the Administrator maynot require a broker-dealer be bonded in an amount above that set by the SEC. Furthermore, bonds will not be requiredof broker-dealers that maintain a specified net capital.
It is not uncommon to find financial planners who use their home as the base of their operations. When a financialplanner who works from home is also registered as an agent of a broker-dealer, she must - not use personal computers to store client information - ensure that her office is separate from her living quarters - have cybersecurity policies and procedures in place to protect customer data - not remain open during hours when the broker-dealer is closed
have cybersecurity policies and procedures in place to protect customer data Explanation Cybersecurity policies and procedures are necessary for the broker-dealer to protect customer data in the firm's offices,and an agent's office at home is nothing more than an extension of the firm's office. As long as adequate cybersecuritymeasures are taken, a personal computer may be used. There are no restrictions on when the agent can use her homeoffice to meet with clients, nor are there restrictions on where the office can be located within her home.
If a company's dividend increases by 5% but its market price remains the same, the current yield of the stock will remain at 5% increase decrease remain at 7%
increase Explanation The current yield of a stock is the annual dividend divided by the market price. If a company's dividend increases andits market price remains the same, its current yield will increase.
All of the following are true of negotiable, jumbo certificates of deposit EXCEPT they are secured obligations of the issuing bank they are usually issued in denominations of $100,000 to $1 million they usually have maturities of 1 year or less they are readily marketable
they are secured obligations of the issuing bank Negotiable CDs are general obligations of the issuing bank; they are not secured by any specific asset. They do qualifyfor FDIC insurance (up to $250,000), but that is not the same as stating that the bank has pledged specific assets ascollateral for the loan.
An agent opening a wrap account for a wealthy client may tell the customer that wrap fees generally result in higher costs than separate charges for advice, management, and transactions wrap account managers will generally outperform index funds wrap fees may result in higher costs than separate charges for advice, management, and transactions wrap fees always result in lower costs than separate charges for advice, management, and transactions.
wrap fees may result in higher costs than separate charges for advice, management, and transactions When prospecting for new wrap accounts, agents are required to disclose to customers that wrap fees may result inhigher costs than separate charges for advice, management, and transactions if the client is not able to use all of theservices included. For those clients that are able to make use of all of the services provided, the costs will generally belower than the cost of buying them piecemeal. Future performance of managed accounts may not be stated or implied.
