Missed practice exam questions
Which of the following activities might results in a positive yield curve in the bond market? A) a parallel downward shift in interest rates B) investors buying short-term bonds and selling long-term bonds C) a parallel upward shift in interest rates D) investors buying long-term bonds and selling short-term bonds
A positive yield curve is the normal condition and occurs when long-term rate are higher than short-terms rates. Buying short-term bonds tends to drive their prices up and their yields down, while selling long-term bonds has the opposite effect.
An investor is concerned that interest rates will be volatile over the next few years. Which of the following would eliminate interest rate risk? Zero-coupon bonds TIPS Insured bank CDs Cumulative preferred stock
Any negotiable instrument that has a yield component will be subject to interest rate risk. The insured bank CD cannot be traded and, therefore, will not be affected by changes in market interest rates. TIPS protect against inflation and zero-coupon bonds have the greatest interest rate risk.
Daphna works for AAA, an investment advisor having offices in States D, E, and F and registered with SEC. Daphna spends most of her time in an office in State D, but once every other week she goes to the branch in State E. Daphna would be exempt from registration as an IAR in which of the following states? A) States E and F B) State E, where she has no retail clients C) State F, where she has 227 retail clients D) Dapha would have to register in all three states
As an IAR with a Federal covered IA, Daphna only has to register in those states in which she maintains a place of business. That means registering in States D and F. The number of clients is irrelevant.
A state-registered investment advisor maintaining custody of customer funds and securities discovers that its net worth is $32,000. Which of the following steps would NOT be required? A. Notifying the Administrator of the deficiency by the close of business on the net business day B. Returning the customer funds and securities within three business days of the discovery C. Filing a financial report with the Administrator by the close of business on the next business day following notice D. Reporting to the Administrator the number of client accounts being served by the investment advisor
B. Once the firm's net worth is below $35,000, notifications must be sent to he Administrator. Unless ordered by the Administrator, there is no requirement to return client assets to them. U1LO4
Listed options are also known as standardized options. Which of the following choices is NOT one of the standardized terms of a listed option? A. the exercise price B. the premium C. the underlying asset D. the expiration date
B. Supply and demand in the marketplace sets the premium of a listed option. All of the other choices are standardized. U16LO1
In order to come under the SEC's requirement to file a Form 13F, an institutional manager must have discretion over A) more than 10% of the outstanding voting securities of a reporting company B) an equity portfolio of at least $100 million C) an equity portfolio of at least $100 million 13(f) securities D) an equity portfolio of at least $50 million 13(f) securities
C. Form 13F must be filed by institutional money managers with at east $100 million in 13(f) equity securities under discretionary management. U7LO6
Which of the following classes of mutual fund shares would be appropriate for an investor who doesn't mind paying some sales charges on a purchase, but wants to minimise operating expenses over a long-term holding period? A. Class A shares B. No-load shares C. Class C shares D. Class B shares
Class A shares have a front-end load, but their operating expense ratio is usually lower than that of any other class. Because the question states that the investor is willing to pay a sales charge, no load shares is an inappropriate choice.
NASAA's Model Rule on Business Continuity and Succession Planning requires that each investment advisor establishes a plan that provides for each of the following EXCEPT A) minimizing service disruptions and client harm B) office relocation in the event of a temporary loss of a place in business C) assignment of duties to qualified persons in the event of unavailability of key personnel D) assurance of continued profitability
D. Although NASAA would like to see registered IAs be financially successful, the BCP is not designed to assure profits. U7LO8
An estate-planning technique often recommended for those with large taxable estates is the use of A. The alternative valuation date B. The capital needs analysis C. A testamentary trust D. An irrevocable life insurance trust (ILIT)
For those with large taxable estates, the purchase of life insurance to cover the potential estate tax liability is frequently recommended. The use of the ILIT will generally keep the proceeds out of the estate. The alternative valuation date only helps if the value of the estate drops sometime during the six months after death. A testamentary trust does little, if anything to reduce estate taxes, and the capital needs analysis is used to determine the replacement value needed in the event of premature death - unlikely to have a need with this large of an estate. U18LO5
Which of the following statements are accurate when describing preferred stock? I. Owners of convertible preferred stock have an opportunity to participate in the growth of the company. II. Unlike any other securities the company may issue, the return on preferred stock is fixed. III. Issuing preferred stock confers certain tax benefits to the company. IV. In general, preferred stock does not have a maturity date.
I and IV The ability to convert into the company's common stock enables holders of convertible preferred stock to participate in the company's growth. With rare exception, there is no maturity date on preferred stock. Preferred stock does offer a fixed return, but so does any debt security issued by the company, and it is only debt securities, where the interest is a tax-deductible expense, where the issuer receives a tax benefit.
Which of the following would probably be the best indicator of where the economy is headed? A) permits for construction of new housing units B) average prime rate C) average duration of unemployment D) industrial production
Leading indicators: Money supply, building permits, average weekly initial unemployment claims, average weekly manufacturing hours, manufacturer's new orders for consumer goods, manufacturer's new orders for non defense capital goods, index of supplier deliveries, vendor performance, interest rate spread between 10-year treasury bond and federal funds rate, stock prices, index of consumer expectations
Your client with a traditional IRA splits her annual $6,000 contribution into four quarterly investments of $1,500 into a broad market ETF. In so doing, she is taking advantage of the principle of A) overfunding her IRA B) rebalancing C) tactical investing D) dollar cost averaging
Making regular periodic investments of a fixed amount is the principle of dollar cost averaging. There is no such concept as overfunding an IRA; excess contributions are penalized. U20LO11
In order to make a quantitative evaluation using the present value computation, which of the following is NOT needed? A) anticipated rate of return of the portfolio B) time period involved C) account value at the beginning of the period D) account value at the end of the period
Present value is calculated to determine the amount required to have a specified value at some time in the future
An investment advisor representative is meeting with a potential advisory client. Among the items of information the IAR needs to obtain in order to develop the proper plan are the prospect's I. anticipated number of years until retirement II. location of current bank and brokerage accounts III. current savings and investments IV. college alma mater
Proper investment planning involves saving for retirement and what steps are taken to reach that goal are influenced by the time remaining. Future plans are developed using current assets as the starting point. We don't care where the assets are, just what they are.
Prudent Asset Construction Enterprises (PACE) has offices in states X, Y, and Z. On their last annual updating amendment, they reported AUM of $218 million. In which of the following instances would PACE be receiving a substantial prepayment of fees? A) $1,600, paid at the first of each quarter B) $600, paid six or months in advance C) $1,600 paid one year in advance D) $10,000, paid monthly
SEC register IA's go by federal numbers. Those are more than $1,200, six or more months in advance. The $600 would have been substantial if PACE was state-registered. Although the other two choices are above $1,200, they are not prepaid for at least six months. U6LO1
A portfolio manager with a growth style would probably diversify by A) concentrating in stocks in one or two industries B) attempting to build a portfolio with a very high correlation C) devoting a portion of the portfolio to securities with a negative correlation D) placing a portion of the portfolio into high-yield bonds
Securities with a negative correlation add diversification to a growth portfolio because they move in the opposite direction of the balance of the holdings. Therefore, losses are offset by gains. U20LO5
Your client has a long position in a security that has had considerable appreciation since the date of purchase. The client is concerned that speculation that the company's CEO may retire could have negative implications for the stock. Wishing to protect those unrealized gains, which of the following orders would be appropriate? A) Sell stop B) Buy stop C) Buy limit D) Sell limit
Sell stop orders are frequently referred to as stop loss orders and are used either when a security is purchased to offer downside protection or, as in this case, to preserve a gain that has not yet been realized. Buy stops are used to protect against loss or preserve the gain on a short position. U22LO6
In which of the following instances would an investment advisor representative be exempt from the anti-fraud rules of there Uniform Security Act? A. In an effort to avoid possible conflicts of interest, the IAR only does personal trades through an account set up with a fictitious name B. The IAR makes a presentation at a seminar where the only topic discussed is fixed annuities C. Since the IAR understands how nervous a particular client is, he never admits a loss in the account to that client. D. The IAR is also agent of a broker-dealer and, in that capacity, makes a recommendation to a non advisory client.
Since fixed annuities are not securities, a presentation dealing solely with that topic is not covered under the anti-fraud statutes of the USA. U7LO5
What represents a set of instructions that is most commonly used when the author wants to express end-of-life wishes?
Sometimes referred to as a medical directive or advanced care directive, a living will is used to express the author's end-of-life wishes, such as organ donation plans, desired medical treatment, and so forth.
An investor conferenced about liquidity would be lest likely to invest in A. Common stock listed on the NYSE B. ADRs C. Cumulative preferred stock D. Stock subject to Rule 144
Stock subject to Rule 144 is stock that cannot be immediately resold U12LO4
One of your clients is a widow with three grown children. She wants the assets in her account to go to her children upon her death—50% to her daughter and 25% to each of her sons. She does not want the estate to have to deal with probate on these assets. How should her account be set up? A. tenants in common B. joint tenants with right of survivorship C. tenants in entirety D. transfer on death
TOD avoid probate, but not estate taxes, it allows the account owner to specify different percentages for each beneficiary if desired. U18LO5
What is the tax equivalent yield of a 7% municipal bond to an investor in the 35% federal income tax bracket? A) 9.45% B) 10.77% C) 4.55% D) 20%
Tax equivalent yield computation is found by dividing municipal bond's coupon rate (7%) by (100% - 35%). An investor would have to receive a taxable return in excess of 10.77% to put more money in the pocket than owning this 7% municipal bond.
The technical market theory that measures the breadth of the market is A) the short interest B) the support/resistance C) the odd-lot D) the advance/decline
The advance/decline theory compares the number of stocks advancing versus those declining, generally on the New York Stock Exchange. Because it uses such a large sample, it is used as an example of the breadth of the market. U12LO6
When a fundamental analyst views a corporation's balance sheet, it reveals the issuer's dividend payout ratio profitability owner's equity productivity
The balance sheet reflects the difference between the company's assets and liabilities. this is the owner's or shareholder's equity. Profits are on the income statement.
The issuance of new common stock will affect which of the following balance sheet items? Total assets Current liabilities Retained earnings Net worth
Total assets and net worth. Issuing stock brings in new capital in the form of cash. This raises the assets and, since stock is equity, raises the net worth by the same amount.
A significant difference between opening an account for a trust and an account for an estate is A) banks can be named as trustees for a trust, but not as an executor B) the standard of prudent investing applies to trusts, but not to executors C) only the estate has beneficiaries D) the trust account will generally be active for a much longer period of time
Trust can be set up to run for many years; the executor's job is over once the estate has been settled
A portfolio manager who follows the value style of investing would most likely focus her attention on A) market capitalization B) 52-week highs and lows C) financial statements D) moving averages
Value manager looks for value which is found on the company's financial statements U20LO5
An individual has just received an inheritance of $15,000 and has the goals of preservation of capital and income. The client is in a low tax bracket. Which of the following would be the most suitable choice? A) Insured municipal bonds B) Public utility stocks C) Newly issued U.S. Treasury bonds D) Bank-insured CDs
When preservation of capital is a goal and one of the choices is an insured bank CD, pick it. When the question refers to a low tax bracket, municipal bonds will never be the correct choice. Newly issued Treasury bonds have maturities of at least 10 years. During that time, changes to interest rates in the market place would cause the market price of those bonds to fluctuate. Although the public utilities will offer income frequently higher than the CD, there are no guarantees the principal will remain intact. (Some public utilities have gone bankrupt.) U19LO5
Most states have replaced the Uniform Gifts to Minors Act (UGMA) with the Uniform Transfers to Minors Act (UTMA). One of the major advantages of UTMA is A) reduced fiduciary exposure to the custodian B) better tax benefits C) greater flexibility in the choice of investments D) the beneficiary has access to the account at an earlier age
While UGMA only permits gifts of cash and securities, other property, such as real estate and limited partnership interests, may be held in UTMA accounts. Taxation is the same, as is the fiduciary liability of the custodian. In most cases, the beneficiary has access to a UTMA account at a later age than was the case with UGMA. U24LO7
To assist BDs with compliance, NASAA prepared a fee disclosure template. Based on the template, all of the following broker-dealer charges would be disclosed except brokerage commissions fees for issuance of common stock certificates account maintenance fees account transfer fees
not included in the fee disclosure documents are commissions, markups and markdowns, and advisory fees.
In the over the counter market, the person who performs the function that a DMM is responsible for on an exchange is the OTC trader the broker-dealer the market maker the floor broker
on an exchange, the specialist (now called DMM) performs both an agency and a dealer function. That action of buying and selling from inventory is performed by market makers in the OTC market.
Under the provisions of Regulation S-P, a person who has an investment advisory contract with a registered investment advisor is known as a cohort a customer a consumer a client
regulation S-P uses two terms: customer and consumer. The customer is one with an ongoing relationship, such as would be the case with an advisory contract. A consumer is basically a one-shot deal. U7LO7
Which of the following forms of joint ownership is most used for real estate? A) tenants in common B) joint tenants with right of survivorship C) tenancy by the entirety D) totten trust
tenancy by the entirety is most commonly used for ownership of real property (real estate) U18LO2
the discounted rate that equates a bond's cash flow to its current price is known as the bond's yield to maturity current yield coupon rate duration
yield to maturity of a bond considers the accretion of any discount or amortization of any premium as well as the annual coupon rate, taking into consideration the time value of money U23LO1
A corporation with a 6%, $25 par cumulative preferred paid $.50 to preferred stockholders last year. This year, the company wants to pay common dividends. How much must it pay each preferred share? A) $2.50 B) $0.50 C) $1.50 D) $11.50
A 6% cumulative preferred stock with a $25 par value would pay an annual dividend of $1.50 ($25 × 6%). Cumulative preferred requires all dividends that have previously been skipped be paid before any dividends paid to common stock. The $.50 that was paid last year left $1 in dividends in arrears. Therefore, this year requires that a $2.50 dividend be paid to the preferred shareholders before any common dividend paid to common shareholders. U12LO2
A broker-dealer having no place of business in a state is not required to be registered in that state if the broker-dealer A. is a member of the NYSE B. limits its clientele to employee benefit plans with assets of at least $1 million C. is a federal covered broker-dealer D. is registered in the state where its principal office is located
A broker-dealer must be registered in every state it sells or offers to sell securities, unless an exemption is available. If a BD has no office in a particular state and no business is done in that state other than with institutional clients, registration there is not required. U3LO2
Looking at the balance sheet, a corporation builds its capital structure with all of the following except A) long-term debt B) capital stock C) retained earnings D) cash
A corporation's capital structure consists of its long-term debt plus shareholder's equity U9LO1 A company's capital structure is the relative amounts of debt and equity that compose a company's capitalization, which is the combined sum of its long-term debt and equity securities. Four elements of capital structure: 1) long-term debt 2) capital stock (common and preferred) 3) capital in excess of par 4) retained earnings (earned surplus)
When a market maker publishes a quote, what prices will be shown? Bid Market Offer Spread
A market maker's quote always reflects the price he is willing to pay (the bid) and the price at which he is willing to sell (offer). The difference between these two is the spread.
As defined in the Uniform Securities Act (USA), which of the following would be considered an exempt transaction? A) A purchase of bonds by a trustee of an irrevocable trust B) A sale of U.S. Treasury bonds to a retail investor C) A sale of stock by an administrator of an estate D) A purchase of stock by an accredited investor under Rule 506(b)
A sale by certain fiduciaries, such as an executor or administrator of an estate, is an exempt transaction under the USA. Even though the Treasury bonds are an exempt security, the sale to an individual is not an exempt transaction. Rule 506(b) is the federal transaction exemption not found in the USA, and only a trustee in bankruptcy is considered for the exemption.
The head of marketing for a regional broker-dealer spots an article in the local newspaper that an excellent presentation of an investment strategy the firm recommends. If the firm posts a link to the article on its website, it would be known as A) endorsement B) plagiarizing C) adoption D) entanglement
Adoption is the use of content or a link that is solely the creation of someone else; your firm is just using it. Entanglement is when the firm had role in the creation of the material. U6LO5
To be in compliance with the rules under the Investment Advisors Act of 1940, which two of the following statements are correct regarding a registered investment advisor's relationship with solicitors? I. An individual who is subject to statutory disqualification from registration as an investment advisor representative may solicit clients for the advisor as an employee of a third-party solicitor. II. There must be a written agreement between the investment advisor and the solicitor. III. While the sales script used may be written by the solicitor, its content is the responsibility of the advisor. IV. Cash referral fees to solicitors may only be paid in the case of impersonal advisory services.
All relationships between registered investment advisors and solicitors must be in writing. Any scripts are the responsibility of the advisor, regardless of who prepared them. Those subject to statutory disqualification may not be used as solicitors. Cash referral fees are not restricted to impersonal advisory services U7LO1
A portfolio manager looking to create alpha would most likely use which of the following? A) Indexing B) Buy and hold C) Tactical asset allocation D) Strategic asset allocation
Alpha is the extent to which a portfolio outperforms its expected returns. Expected returns are based on the systematic risk of the portfolio (its beta). In order to exceed those returns, one must generally construct a portfolio that deviates from the market allocations. With tactical asset allocation, the manager either overweights or underweights the portfolio allocations based on near-term expectations of returns on those assets classes. The other choices are all basically the same, with little or no attempt to time the market's ups and downs. U20LO3
The term "alternative investment" would least likely apply to A) exchange traded notes (ETNs) B) closed-end funds (CEFs) C) inverse ETFs D) leveraged ETFs
Although there are closed-end funds that invest in alternative investments, those are in the minority. The other choices are all clearly labeled as alternatives U17LO3
One of the usual practices of the fiduciary handling a qualified retirement plan is providing a written document that sets forth the objectives and constraints on a managed portfolio. This document is called A) the management agreement B) the legal opinion C) the statement of fiduciary responsibility D) the investment policy statement
An Investment Policy Statement (IPS) is designed to describe the plan's investment goals and investment strategies. It typically identifies levels of risk acceptable in the construction of a portfolio. An IPS establishes the strategic framework utilized by the fiduciary to manage a portfolio. U24LO5
An investment advisor wishes to advertise a proprietary charting system used to time the market. In order to be in compliance with the Investment Advisors Act of 1940 A. a statement reflecting the limitations and difficulties of using the system must be included in the ad B. authorship of the system must be prominently disclosed results obtained by using the system must be shown using a time period of no more than 12 months D. the advertisement must be filed with the appropriate SRO within 10 business days of first use
An advertisement describing a charting system or any type of formula must always state that there are limitations and difficulties to using said system.
During your initial interview with a potential advisory client, you obtain the following information: He is 58, he is 56,and they both plan to continue working until she reaches 65 and is eligible for Medicare. As you begin to develop a plan for this couple, you would probably project their time horizon as A. approximately 30 years B. 7 years C. 16 years D. 9 years
An investor's time horizon is the length of time the planned investment strategy is designed to serve. In the case of a couple looking ahead to retirement, the time horizon is their life expectancy. U19LO5
Early in the year, an investor purchased 100 shares of KAP common stock at a price of $60 per share. Just prior to the end of the year, after receiving three quarterly dividends of $1, the investor liquidated all of the KAP at a price of $59 per share. If the Consumer Price Index increased by 3%, the investor's total return over the holding period was A) 5% B) 2% C) 0.33% D) 3.33%
An investor's total return is computed by adding together income plus capital gain (loss). In this case, the investor received $3 in dividends and lost $1. That resulted in a total return of $2 which, when divided by the initial $60 cost, results in a percentage return of 3.33%. Even though the CPI is given, the question is not asking for inflation adjusted or real rate of return.
Low risk tolerance and high liquidity needs are typical characteristics of which type of institutional investor? A) Banks B) Defined benefit pension plans C) Trusts D) Foundations
As with so many suitability questions, students frequently have to sit back and try to find a logical answer. Although the risk tolerance for all of these choices tends to be on the lower end of the scale, banks are different when it comes to liquidity needs. Banks tend to have high liquidity needs because they must be ready to meet withdrawals at any time by depositors. The nature of foundations, trusts, and defined benefit pension plans is such that they typically have lower liquidity needs than banks. U19LO4
All of the following statements relating to ADRs are true EXCEPT A. trading takes place on domestic secondary markets B. currency risk is avoided C. dividends are paid in U.S. dollars D. the issuer is a domestic bank
B. Even though everything relating to ADRs is done in English using U.S. dollars on domestic stock markets, there is still currency risk since the ultimate value of the stock and its dividends are based on the foreign company's home currency.
An advisory client is interested in learning more about municipal bonds. It would be correct to state that I. general obligation bonds are usually, but not always, safer than revenue bonds II. interest received on municipal bonds is generally free of both federal and state income taxes III. municipal bonds are usually suitable for investors in higher tax brackets IV. the coupon yield on AAA rated municipal bonds will generally be higher than that of AAA-rated corporate bonds with a comparable maturity
Because general obligation bonds are backed by taxes rather than revenues, they are generally more secure. Coupon yields on highest-rated municipal bonds are generally lower than those available on corporate bonds with similar maturities. However, the federal tax-free status makes those yields competitive, but only to those in the higher tax brackets. In most cases, only municipal bonds offered by issuers in a specific state are exempt from that state's income tax.
A company prepares to report its net income for the past year. An increase in which of the following would NOT cause a decrease in reported net income? A. Year-end bonuses to employees B. Corporate income tax C. Cash dividends D. Allowance for bad debts
C. Cash dividends are paid out of the company's net income, so an increase or decrease will not impact that net income. Net income is a calculation determined by current operations, so an increase in the amount set aside as an allowance for bad debts will reduce operating income. Because net income is always after taxes, raising the company's income tax rate will obviously decrease the net income of the corporation. One of the major expense for most corporations is labor so any increase, whether in the form of raises or bonuses, will decrease the net income.
One of the purposes of filing the annual updating amendment to the Form ADV Part 1A is to A) disclose the amount and location of securities or funds of clients that are being held by the advisor or qualified custodian B) provide updated information on those associated persons who are in charge of giving investment advice C) verify that the investment advisor still qualifies for SEC registration D) ensure that full disclosure has been made in the advisor's brochure
C. In order to maintain SEC registration, an investment advisor must maintain assets under management of no less than $90 million. The annual updating amendment is used to disclose this information.
John Jones purchased 100 shares of DEF common stock at a price of $25 per share on August 4, 2016. On December 1, 2017, with the stock selling for $29 per share, he gifted the stock to his daughter. She subsequently sold the stock nine months later for $32 per share. Her tax consequence is A) $700 short-term capital gain B) $300 long-term capital gain C) $700 long-term capital gain D) $300 short-term capital gain
C. Securities acquired as a gift retain the donor's cost basis and date of purchase for capital gains. So, the cost is $25 dollars and the holding period began in 2016; making the sale over 12 months later, a long term sale and the profit at $7 per share.
The dividend discount model is A) the complement of the dividend payout ratio B) a function of the price to earnings ratio C) an analytical tool used to project the current value of a common stock using projected dividends D) a method of determining the appropriate relationship between the price of the corporations common stock and its preferred stock
C. There are two widely accepted forms of common stock price valuations using dividends - the dividend discount model and the dividen growth model
What is the term generally given by analysts to the number generated by the addition of a company's annual depreciation expense to its net income? A) Dividend payout ratio B) Book value per share C) Working capital D) Cash flow
Cash flow from operations is the sum of net income plus non-expended businesses expenses such as depreciation. U9LO2
Which of the following actions by an agent would be an unethical practice under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents? A) An agent with discretionary authority enters a buy order for a security when its price is rising B) Splitting commissions with a customer service representative who is not registered but works for the same firm C) Recommending securities that result in major losses in the customer's account D) Telling a customer that the investment being recommended will be sold from the inventory of the broker-dealer and indicating on the trade confirmation that the firm acted in a principal capacity
Commissions can be received only by those with the appropriate registrations. A nonregistered person cannot participate in transactional-based compensation. U7LO4
Section 15 of the Investment Company Act of 1940 spells out many of the specific requirements for the contract between management investment company and its investment manager. Among those requirements is that A) unless a specific exemption applies, the fund may not engage in margin trading B) the contract should be in writing C) the initial contract is for a maximum of one year and then may be renewed on either an annual or biannual basis D) no contract may be terminated with more than 60 days' written notice
Contracts between funds and their advisors may not be terminated with more than 60 days' written notice, and those on tracts must - not should - be in writing. The initial contract is for a two-year period and then renewed on an annual basis. Whether or not fund can trade on margin is not a function of the management contract. U14LO1
Under the provisions of the Uniform Security Act, which of the following statements about unsolicited orders is TRUE? A) A client may not purchase, at his own initiative, securities trading in the secondary market if the agent is otherwise prohibited from soliciting the order B) If the order ticket is appropriately marked, the Administrator may not challenge a BD's assertion that the order was unsolicited C) Under certain conditions, an Administrator may prohibit a broker-dealer registered in the state from accepting any unsolicited orders D) An unsolicited order from a noninstitutional client for an unregistered, nonexempt security is considered a transaction exempt from the registration and advertising filing requirements of the act
D. Clients have the right to buy or sell whatever they desire. The issue becomes a question of who initiates the trade. An unsolicited transaction may be executed by an agent if it is the client who asks for the trade. The trade ticket should be marked as unsolicited. The State Securities Administrator has the right to seek verification from the client that the trade was, in fact, unsolicited. The security involved in the trade can be one that is non exempt and unregistered in the state. U4LO3
An investor indicates that her objective is long-term growth. Income is of secondary importance, and while she is basically quite conservative, she feels her time horizon is long enough to give her a bit more risk tolerance. Which of the following common stock mutual fund selections would probably be most suitable? A) 100% large-cap B) 75% small-cap, 25% large-cap C) 100% small-cap D) 75% large-cap, 25% small-cap
D. The large-cap stocks are generally the most conservative when looking for growth. Adding 25% small-cap stocks to the mix adds the small extra risk the investor indicated she was willing to assume. U19LO6
In which of the following cases does exercise not involve the issuer of the underlying asset? A) A convertible bond B) a right C) a warrant D) an option
D. When an option is exercised, the seller (writer) of the option is the one who must deliver (call) or purchase (put). In all of the other choices, the issuer is the one who delivers the stock.
Which of the following is required to effectuate annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser? A) Renewal notice to the SEC B) Form U-4 C) Consent to service of process D) State licensing fee
D. All investment adviser representatives are registered with the states, not the SEC. Renewal requires the payment of the annual renewal registration or licensing fee. The consent to service of process is a permanent document submitted with the initial application for registration. Form U-4 is establishes registration for broker-dealers. U2LO3
KAPCO, Inc. has 100,000,000 shares of $1 par common stock outstanding. If the current market price of the KAPCO common stock is $33 per share, KAPCO would be considered a A) large-cap stock B) mid-cap stock C) small-cap stock D) micro-cap stock
Doing the arithmetic, we see that the market capitalization of KAPCO common stock is $3.3 billion. Stocks with a market cap in the range of $2 - $10 billion are considered mid-cap. U20LO6
Which of the following statements regarding REITs are TRUE? I. equity REITs offer possible income and capital appreciation II. investors receive interest and principal payments periodically III. in order to receive favorable tax benefits, the REIT must pay out at least 90% of its net income in the form of dividends. IV. interests in REITs offer the benefit of flow through of income or loss.
I and III REITs are pooled tangible real estate assets. Owning an equity REIT gives the investor beneficial ownership of tangible real estate with the possibility of both income and capital appreciation. Most REITs trade in the open market, and their price is determined by supply and demand; there is no redemption by the issuer. REITs will pay distributions in the form of dividends and not a pass-through of principal and interest, as is the case with a mortgage-backed security, such as those issued by GNMA. Although REITs pass through at least 90% of their income, there is no flow-through of losses as is the case with direct participation programs (DPPs).
In order to comply with the safe harbour requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must I. offer plan participants at least three different investment alternatives II. ensure that plan participants are insulated from control over their portfolios III. allow plan participants to change their investment options no less frequently than quarterly IV. permit immediate vesting of employer contributions
I and III The safe harbour requirements of ERISA Section 404(c) relieve the trustee of a 401(k) liability if the plan participants have the ability to select from at least three different investments and are allowed to make selection changes no less frequently than quarterly. Immediate vesting is required in a safe harbour 401(k), which is one that is safe from top-heavy testing. U24LO5
An investment adviser representative is required to make disclosure to the client when I. the IAR, in preparing a recommendation, uses research provided by a third party with whom the IAR is not affiliated II. the IAR recommends a specific insurance policy for the client's overall financial plan, where a commission will be received on that sale III. transactions recommended to a specific client are inconsistent with those for other clients with objectives that are similar to that particular client IV. transactions recommended to the client are inconsistent with those for the IAR's own account
II and IV. An IA must provide full disclosure to the client if there would be even an hint of conflict of interest. This would include. the case where a recommended product will generate a commission or other source of income for the advisor, as well as full disclosure if a recommendation is inconsistent with the adviser's own activity in his own account. Advisor's can source information to create their own analysis, with disclosure of source only being required if the advisor used the product of a third party as the presentation to the client. It'd be unusual to recommend the same purchases for clients even with the same or similar objectives
Which of the following is a prohibited action under the Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisors? A) Determining the price and time of execution of customer order without written discretionary authority B) Notifying the Admin that the advisor intends to maintain custody of customer securities C) Claiming that advisory fees are negotiable, but maintaining a fixed fee schedule D) Depositing securities or cash with the Admin in lieu of a required surety bond
If an advisor states that fees are negotiable but charges his fixed rates, that would be an unfair business practice. Time and price are not considered discretion. U6LO1
You have a client who is interested in a preferred stock whose dividends are guaranteed. What is likely the reason for using that term? A) Someone other than the issuer has guaranteed the payment of those dividends. B) The issuer has a AAA rating that is tantamount to dividend payments being a sure thing. C) A previous IAR has improperly used that term in an effort to make a sale. D) As a fixed income security, the dividends are guaranteed to never increase.
In the Uniform Securities Act, guaranteed means guaranteed as to payment of principal, interest, or dividends by some third party other than the issuer. U6LO3
The Uniform Securities Act provides for civil penalties in the event of illegal activities of broker-dealers and their agents. Under the act, a purchaser would NOT be entitled to A) court costs B) the original consideration paid for the security or the current market value, whichever is greater C) interest at the state's legal rate less any income received on the security D) attorney's fees
In the event of a civil judgement, the purchaser is able to claim for a return of the original investment, plus interest at the state's legal rate. The interest is reduced, however, by any income received on that security. In addition, the broker-dealer is liable for courts costs and attorney's fees. U5LO3
If a client prefers owning an investment company whose portfolio consists primarily of companies that have a history of paying regular dividends, rather than companies reinvesting their earnings for the purpose of generating capital appreciation, what type of mutual fund would you recommend? A) An income fund B) A growth fund C) A government bond fund D) An index fund
Income funds invest in those companies who tend to be more liberal in their dividend payout, thus enabling the fund to provide income to the investor. Be careful. The question did not ask about a fund that paid regular dividends; it was the portfolio securities that were the dividend payers, and that could not be a bond fund. U19LO6
With regard to non-qualified stock options (NSO) and incentive stock options (ISO), which of the following statements is incorrect? A. capital gain treatment is only available with NSOs B. board of director approval is required for both NSOs and ISOs C. a tax deduction for the employer is generally only available with NSOs D. AMT is only an issue for those exercising ISOs
It is only the ISO where the employee can possible receive capital gain treatment U12LO3
Richard, Tim, Sam, and Fred have a regular golf foursome every weekend. During one of their outings, they decide it is time they did something constructive with their money by opening an account with a brokerage firm. If the account is opened tenants in common, suitability information would be required on A) only that individual with the authorization to trade the account B) each of the four individuals C) each of the individuals, and if married, their spouses D) whichever person has been designated by the group as its spokesman
On any joint account, it is required to obtain suitability information on all of the account owners. U18LO2
An investor purchased a 2x leveraged ETF at a price of $100 per share. On the first day, the index was up 10%. On the next day, it was down 10%. The investor's share value is now $96 $101 $99 $100
On the first day, the value increased by *twice* the 10% the ETF gained (20% * 100 = 20). That makes the share value $120. On the second day, the value decreased by *twice* the 10% the ETF lost, (20% * 120 = 24). That makes the current value $96. U17LO3
With regard to an SEC-registered investment advisor employing the services of a solicitor, it would be correct to state that A. The investment advisor may not compensate a solicitor who is subject to a statutory disqualification B. Cash referral fees may be paid pursuant to a written or oral agreement to which the investment advisor is a party. C. Delivery of the solicitor's brochure must take place within five days after the entry into the advisory contract. D. referral fees may be paid only if the solicitor is also registered with the SEC
One of the important requirements when hiring a solicitor is making sure the person is not statutorily disqualified from registration. That is, any person who would be unable to register as securities professional because of prior conduct cannot act as a solicitor for a registered investment advisor.
Which of the following statements regarding agent registration under the Uniform Securities Act is TRUE? A) In the absence of any action by the Administrator, the effective date of a registration is noon on the 30th day after filing of a complete application. B) If, before the effective date of the registration, the Administrator requires amendments to the application, the registration will be considered to have first been filed as of the original filing date. C) The Admin may initiate a disciplinary action within two years of an agent's withdrawal of registration. D) The Admin may request the agent furnish a statement of assets an liabilities
Registration of persons becomes effective at noon of the 30th day following filing. If the Admin requires amendments, the clock starts over again with the filing of those amendments, not the original filing date. Agents do not have financial requirements, and the Admin has a max of 1 year after termination to initiate any actions.
Which of the following items does NOT fall within the Section 28(e) safe harbor? A) Proprietary research reports analyzing the performance of a specific industry B) Software used to simplify the investment advisor's preparation of its tax returns C) Research reports prepared by a third party other than the broker-dealer D) Software used to analyze client's portfolios
Research reports, whether prepared by the firm or by a third party, fall within the safe harbor provisions of Section 28(e). Software used to analyse securities is also permissible since that benefits the client. Tax preparation software benefits the advisor, but not the client. U7LO1
Both state-registered and federal covered investment advisors have brochure delivery requirements. One significant difference between the two is that A. State-registered advisors who do not deliver the brochure at least 48 hours prior to contract signing must offer a 5-day penalty free withdrawal. B. state-registered advisors must deliver the brochure within 90 days of the end of their fiscal year while covered advisors have 120 days. C. Federal-covered advisors are exempt from the brochure delivery requirements to investment company clients while state registered advisors are not. D. state-registered advisors who do not deliver the brochure at least five days prior to contract singing must offer a 48 hour penalty free withdrawal.
State-registered investment advisors who do not deliver the brochure at least 48 hours prior to entering the contract must offer a penalty-free withdrawal of five days. There is nothing comparable to that in federal law. Both have the 120 day delivery requirement, and state-registered investment advisors cannot have investment companies as clients. U6LO4
Under which of the following asset allocation program is ti most likely that commission expense will have a significant impact on portfolio performance?' A) strategic B) rebalancing C) tactical D) buy and hold
Tactical asset allocation, aka active asset allocation, attempts to time the market. So, there is a relatively high amount of in and out trading, causing commission expense to be a significant factor. U20LO3
If a portfolio manager wished to reduce inflation risk, which of the following would be most appropriate to add to the portfolio? Preferred stock Annuities AAA bonds Tangible assets
Tangible assets, such as real estate, precious metals, and other commodities, tend to keep pace with inflation. Fixed-dollar investments do not. U20LO1
Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A) GHI 7s of 2052 B) ABC 5s of 2050 C) JKL 4s of 2022 D) DEF 6s of 2051
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 2050 through 2052, the bond with the lowest coupon will have the longest duration. The 4s of 2022 have a relatively short duration, even though their coupon is low. U13LO11
John Johnson was convicted five years ago of failure to pay child support—a misdemeanor in his home state. Johnson would now like to register as an IAR in a neighboring state where that crime is considered a felony. Under the Uniform Securities Act, the Administrator of the neighboring state A) will consider granting registration to Johnson, but only if he receives heightened supervision B) will disregard that conviction when determining Johnson's qualifications for registration C) will determine Johnson's status based upon the extent to which his child support payments are being paid D) will consider Johnson to be statutorily disqualified since in this state, his crime is a felony
The conviction on Johnson's record is for a misdemeanor. The fact that the same crime is a felony in another state is not relevant to his application for registration in that state. U5LO2
Current market interest rates are 6%. Using the discounted cash flow method of valuation, you would expect to arrive at the highest valuation for which of the following? A. Zero coupon bond maturing in 11 years B. 10% coupon maturing in 10 years C. 5% coupon maturing in 20 years D. 7% coupon maturing in 9 years
The discounted cash flow method considers the future expected free cash flow (the permanent interest payments plus the eventual return of the principal) and discounting it to arrive at a present value. In its simplest iteration, this is nothing more than taking all the money you are scheduled to receive over a given future period and adjusting that for the time value of money. In general, bonds with higher coupons will have the greatest value because they will clearly produce the most cash flow, and zero-coupon bonds will produce the lowest because they have no cash flow other than the return fo the face value at maturity. U13LO12
If the executor of an estate containing a substantial stock portfolio is of the opinion that the economy is about to enter a down cycle, estate taxes could be reduced by A) using the alternative valuation method B) reallocating assets to less risky securities C) liquidating the portfolio in advance of the market downturn D) asking for an extension to file the return
The executor of an estate has the option of valuing the assets either of the date of death or six months later (the alternative valuation date). If stock prices fall, then the estate will shrink, resulting in lower estate taxes. U21LO5
An options strategy that would be most useful for an investor with a long position in a stock who is concerned that a proposed management change will negatively impact the stock's price would be to A. Buy a call on that stock B. Buy a put on that stock C. Sell a call on that stock D. Sell a put on that stock
The investor is looking to hedge his risk of loss. The best way to hedge a long position is to buy a put option U20LO12
One respect in which advertising by investment advisors differs from that broker-dealers is that A) investment advisors are permitted to refer to charting systems in their advertisements, while broker-dealers cannot B) state-registered investment advisors are not permitted to use testimonials, while broker-dealers can C) investment advisors are permitted to conduct seminars, while broker-dealers cannot D) investment advisors are not permitted to used the internet, while broker-dealers can
The major difference between advertising by IAs and BDs is that state-registered IAs cannot use testimonials. In certain cases, federal law permits testimonials for covered investment advisors. U6LO5
When comparing futures and forwards, it would be correct to state that A) futures are considered securities, while forwards are not B) forwards are exchange-listed, while futures are not C) forwards are more likely to be closed out prior to expiration D) futures are more commonly used by speculators than forwards
The nature of futures, being standardized with a fluid secondary market, makes them more suitable for speculators than forwards. In fact, it is futures that are almost always closed out prior to expiration. U16LO4
Your client notices that the listing for the CDL $100 par common stock in the Wall Street Journal indicates that the current yield of the stock is 4%. If the last trade was at $40 per share, more than likely, CDL is paying quarterly dividends of A) $.40 B) $1.00 C) $1.60 D) $4.00
The par value of the common stock is irrelevant to this question. In order for a stock selling at $40 to have a current yield of 4%, the annual dividend must be $1.60. Because common stock dividends are typically paid quarterly, more than likely, the quarterly dividend is $.40 per share. U23LO1
While reviewing the financial statements of the ABC Corporation, you notice that the company has $5 million in cash on hand and $6 million in inventory. If the current assets total $15 million, the total assets are $22 million, and the current liabilities are $6 million, the quick asset ratio is 2.66:1 2.33:1 3.0:1 1.5:1
The quick asset ratio is CA minus inventory divided by the CL. In this question, it is $15 million - $6 million = $9 million / $6 million = 1.5:1.
Initial and renewal contracts between IA and clients must be in writing when the contract is under jurisdiction of I. Securities Exchange Act of 1934 II. Investment Company Act 1940 III. Investment Advisers Act of 1940 IV. Uniform Securities Act
The requirement for written advisory contracts is found in both the Investment Company Act of 1940 for those advising registered investment companies and the USA for state-registered advisors. Oddly, there is no mention made of this requirement in the IAA of 1940. There is nothing in the SEA of 1934 that relates to IAs much less their contracts with clients. U6LO4
On the basis of IRS guidelines, which of the following is most likely eligible to contribute to a Keogh plan? A) The CEO of a listed corporation who receives a large bonus after an outstanding year B) A public school teacher who gets paid during her summer vacation to give motivational speeches to training directors at major brokerage firms C) While employed full time for a major department store, a clerk who won $10,000 playing the state lottery D) A doctor who has formed a professional corporation with three other physicians
The speaking income earned by the school teacher is considered self-employment income and is therefore eligible for a Keogh Plan. Remember, corporate employees are not eligible unless they have a separate source of self-unemployment income. U24LO2
The weak form of the efficient market hypothesis A. implies that technical analysis is not worthwhile B. reinforces the value of technical analysis C. implies that fundamental analysis is not worthwhile D. implies that inside traders cannot earn superior risk-adjusted returns
The weak form implies that information contained in historical stock prices is fully incorporated into current stock prices; therefore, technical analysis (the study of historical prices and volume) is not worthwhile for predicting future prices. This form neither refutes fundamental analysis nor implies that traders using insider information cannot earn superior profits.
With regard to the NASAA Model Brochure Rule Requirements for Investment Advisers, which of the following are not exempt from the delivery requirements of that rule? A) An adviser who only provides impersonal advisory services at an annual charge of less than $500 B) An adviser whose only clients are exchange-traded funds C) An adviser who deals with qualified clients only D) An adviser whose only clients are closed-end investment companies
There are only two exemptions from NASAA's (and the SEC's) brochure delivery rule. They are when the client is a registered investment company and when the adviser's clients receive only impersonal advice and pay less than $500 in fees per year. Qualified clients, those with at least $1 million in assets with the investment adviser or net worth of at least $2.1 million, may be charged performance fees, but that has nothing to do with brochure delivery. U6LO4
Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisor Representatives, and Federal Covered Advisors, and investment advisor would have to disclose that the firm was acting in a principal capacity when A) directing a securities transaction to an affiliated broker-dealer B) engaging in an agency cross transaction C) selling shares from its proprietary account to an advisory client D) the trade was being executed by an officer or partner of the firm
There are two principals in every securities trade: the buyer and the seller. In this case, selling shares directly to the client from its own account 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.
A support level is the price range at which a technical analyst would expect the A) supply of a stock to increase substantially B) demand for a stock to decrease substantially C) demand for a stock to remain constant D) demand for a stock to increase substantially
This question is about comparing support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down within a narrow range. The lower limit to these fluctuations is called a support level - the price point where a stock appears cheap and attracts buyers. The upper limit is called a resistance level - the price point where a stock appears expensive and initiates selling. Generally, a support level will develop after a stock has experienced a steady decline from a higher price level. Technicians believe that, at some price below the recent peak, other investors will buy who did not buy prior to the first price increase and have been waiting for a small reversal to get into the stock. When the price reaches this support level, demand surges and price and volume begin to increase again. U12LO6
When discussing the suitability of investing in direct participation programs, particular attention should be focused on which risks? Legislative Liquidity Market Purchasing power
Two of the major risks faced by DPP investors are the lack of liquidity and the possibility of legislative change U17LO7
A US Treasury bond's price has moved rom 96.18 to 9.22. An investor's account holding 10 of these bonds would show an increase of A) $12.50 B) $0.40 C) $1.25 D) $4.00
U.S. Treasury bonds are quoted in 32nds, where the difference between 96.22 and 96.18 represents an increase of 4/32nds per bond. That is one-eighth, or $1.25, times 10 bonds, or $12.50 U13LO2
One of the differences between state and federal law involving an investment advisor maintaining custody of customer funds and/or securities relates to the handling of client checks made payable to third parties such as broker-dealers. Which of the following properly expresses that difference? A. Under state law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within 24 hours of receipt B. Under federal law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within 24 hours of receipt. C. Under state law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within three business days of receipt. D. Under federal law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to third party within three business days of receipt.
Under the Uniform Securities Act, if an IA receives a check made payable to an related third party, it will be considered custody unless forwarded within three business days of receipt. Third-party checks are never considered custody under federal law.
Which of the following is the primary advantage to the employer who offers a nonqualified plan when compared to one that offers a qualified plan? A) The nonqualified plan is permitted to discriminate in favor of highly compensated employees B) The qualified plan costs less to administer than the nonqualified plan C) The nonqualified plan allows for an immediate employer deduction for contributions D) the qualified plan is permitted to discriminate in favor of key employees
Unlike a qualified plan, a nonqualified plan is permitted to discriminate in favour of highly compensated employees. Because there are so few regulations involved, the administrative costs of a nonqualified plan are much lower than those for a qualified plan. The nonqualified plan, typically deferred compensation, allows for a tax deduction when the money is ultimately paid out to the employee or beneficiary.
Each of the following would be exempt from the definition of an agent under the Uniform Securities Act EXCEPT A) An employee of the First Fidelity Trust Company, who buys and sells securities to meet the needs of her trust clients B) an employee of Widget Spinners Corporation, who is paid on sales of the company stock to fellow employees C) Beatrice, who was appointed by the other members of her investment club to make portfolio decisions for the next quarter D) the administrator of the Widget Spinners Corporation pension plan, who is paid for making investment decisions for the portfolio
When an individual receives compensation for selling employer stock to employees, that person is defined as an agent and must register as such. Managing a pension plan (and getting paid for it, naturally) does not make one an agent; she is not being compensated for the trades. Because banks and trust companies are excluded from the definition of a BD, their employees cannot be considered agents.
An investment purchases one ABC October 50 call at 3 and one ABC October 50 put at 2. This position is a combination a spread a straddle an iron condor
When an investor is not sure which direction the market will move but has a strong opinion that there will be a dynamic movement, a strategy that might be employed is the purchase of a straddle. This is the combining of a put and call on the same stock with the same exercise price and expiration date.
