Missed Q-Bank Questions Test 12
An investor has $50,000 to invest in bonds. Currently, 10-year bonds are offering very attractive yields, but the client is concerned that in a few years, rates will be even higher. What would you suggest? A) Barbell bonds B) Bullet bonds C) Laddering D) Diversifying
A) Barbell bonds With the barbell strategy, the investor would place $25,000 into bonds maturing in 10 years and the other half into bonds maturing in two years. This makes $25,000 available for reinvestment in two years enabling the investor to take advantage of the higher rates (if they materialize).
While reviewing nationwide industrial production figures, an analyst notices that inventories have been rising. From that information, one would gather that the economy is most likely in which phase of the business cycle? A) Contraction B) Recovery C) Peak D) Expansion
A) Contraction
An investor would have to pay the alternative minimum tax when A) it exceeds the investor's regular income tax B) the investor has received income from a limited partnership C) there are tax-preference items reported on the tax return D) the investor's capital gains exceed 10% of total income
A) it exceeds the investor's regular income tax
A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclosing which of the following fees? A) Advisory fees B) Commissions C) Account closing fees D) Markups and markdowns
C) Account closing fees
Which of the following categories of assets is most likely classified as an alternative asset? A) Convertible bonds B) Preferred stocks C) Real assets D) Cash
C) Real assets
To which of the following situations does the transaction exemption apply? A) City of Chicago bond offering B) Offering an unregistered security to a maximum of 12 individual customers in a 10-month period C) The sale of an estate's holding of IBM shares by an executor D) Canadian government bond offering
C) The sale of an estate's holding of IBM shares by an executor An exempt transaction relieves the security from any state advertising or registration requirements. Transactions by executors and estate administrators are examples of exempt transactions.
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) the inflation rate B) life expectancy C) market volatility D) future earnings
C) market volatility Of these choices, the only one that we cannot in anyway predict is market volatility.
Formula methods of investing that involve selling equities in rising markets and buying them in falling markets would include I. constant dollar plan II. constant ratio plan III. dollar cost averaging IV. DRIPs A) II and III B) I and IV C) III and IV D) I and II
D) I and II I. constant dollar plan II. constant ratio plan
Which of the following statements regarding ADRs are TRUE? The securities are vehicles used to facilitate U.S. trading of foreign securities. Dividends are received in the foreign currency. Holders have foreign currency risk. The receipts are issued by a foreign branch of a domestic bank. A) I, III and IV B) I, II and III C) II and IV D) I and III
D) I and III The securities are vehicles used to facilitate U.S. trading of foreign securities. Holders have foreign currency risk.
One reason why employers like using deferred compensation plans is that A) they provide larger tax deductions than any other plan B) IRS approval is easily obtained C) with all employees receiving the same benefit, plan administration is simplified D) they can be structured so that the employee's benefits are forfeited upon termination with cause
D) they can be structured so that the employee's benefits are forfeited upon termination with cause Deferred compensation plans frequently provide that employees leaving before a certain period of time, going to the competition, or being terminated for cause forfeit plan benefits
Under the USA, all of the following are exempt transactions EXCEPT A) a sale of a primary offering registered with the SEC B) isolated nonissuer transaction C) transaction executed by a trustee in bankruptcy D) unsolicited customer orders
A) a sale of a primary offering registered with the SEC In almost every instance, an issuer transaction—that is, one for the benefit of the issuer—will not be considered an exempt transaction.
Trade confirmations sent by broker-dealers to their customers must always include A) the amount of commission charged B) the tax identification number of the customer C) the current market price of the security traded D) the amount of markup or markdown charged
A) the amount of commission charged Commissions must always be disclosed. Markup or markdown has to be disclosed under certain, but not all, situations. The trade price, not the current market price, is always disclosed.
Hal and Amy are covered by a pension plan at Benson Industries, Inc., where they are both employed as executives. Their incomes total $300,000 per year, and they file a joint tax return. Which of the following best describes what they can do in a regular IRA program for the year 2021? A) They may make an $12,000 deductible contribution. B) They may each make a $6,000 deductible contribution. C) They may contribute $6,000 each, but they cannot take a deduction. D) They cannot have an IRA because they are covered by a pension plan.
C) They may contribute $6,000 each, but they cannot take a deduction. They may each contribute to their own IRA and enjoy tax-deferred growth within their IRAs, but neither may take the $6,000 annual contribution as a deduction to taxable income on a tax return.
A speculator, believing that a drought in the Midwest will lead to a weak corn crop, would probably A) take a short position in corn futures B) take a long position in orange juice futures C) take a long position in corn futures D) take a long position in corn forwards
C) take a long position in corn futures A weak corn crop means a shortage in the supply. That will lead to an increase in prices. When one is speculating that prices will go up, the best position is a long one.
An investor interested in obtaining the benefit of professional portfolio management has been tracking a particular investment company for the past several months. In so doing, it becomes obvious that the market price of the shares moves in direct relation to the computed NAV. This investor must be following A) a money market fund B) a balanced fund C) a closed-end fund D) an open-end fund
D) an open-end fund Because closed-end funds trade in the secondary markets, their price is determined by supply and demand. On the other hand, open-end investment companies (mutual funds) always trade based on their NAV. Although money market funds are open-end, the market price of their shares doesn't move.
A man divorces his spouse after 10 years of marriage and remarries. If the man is the sole provider, what part of the worker's Social Security benefits is the new spouse entitled to? A) The new spouse is entitled to splitting the benefits with the ex-spouse. B) She is entitled to the same Social Security benefits as the ex-spouse. C) She will be entitled to the same Social Security benefits as the ex-spouse after 10 years of marriage. D) The new spouse is entitled to more benefits than the ex-spouse.
She is entitled to the same Social Security benefits as the ex-spouse.
A state securities Administrator may do all of the following except A) require the use of specific forms B) issue an injunction after a hearing C) issue interpretive opinions D) issue a subpoena to registrants who are out of state
B) issue an injunction after a hearing A state securities Administrator may not issue injunctions, which are issued by courts, not administrative agencies.
Which of the following is a method for determining the internal rate of return by portfolio managers without the influence of additional investor deposits or withdrawals to or from the portfolio? A) Dollar-weighted return B) Dollar cost averaging C) Time-weighted return D) Discounted cash flow
C) Time-weighted return Time-weighted returns are used to evaluate the performance of portfolio managers separate from the influence of additional investor deposits or withdrawals. Dollar-weighted return is more commonly used for evaluating investor performance.
Computing the Sharpe ratio for a specific stock requires using all of the following EXCEPT: A) the standard deviation of the subject security. B) the actual rate of return for the subject security. C) the beta for the subject security. D) the risk-free return available in the market.
C) the beta for the subject security. The formula for the Sharpe ratio is as follows: (actual rate of return minus the risk-free rate of return) divided by the standard deviation of the security. Beta is not a component.
An elderly client explains to you that he is risk averse and wishes to find an investment that will provide him with preservation of capital. Which of the following might you recommend? A) Variable annuities B) An index fund C) Long-term U.S. government bonds D) Bank-insured CDs
D) Bank-insured CDs Preservation of capital is almost always a sign that the client needs CDs. Sure, the U.S. government bonds will pay back the principal when due, but with long-term maturities, there will be plenty of interest rate risk that could affect the client if he needs the capital prior to maturity.
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, I. the RMD from each IRA is computed and may be made from one or both of them. II. the RMD from each IRA is computed and must be paid from that IRA. III. both 401(k)s are combined to compute the required distribution which may be made from one or both of them. IV. the RMD from each 401(k) is computed and must be paid from that 401(k). A) II and III B) I and III C) I and IV D) II and IV
I. the RMD from each IRA is computed and may be made from one or both of them. IV. the RMD from each 401(k) is computed and must be paid from that 401(k).
A feature common to all passive real estate investing is A) low initial investment requirements. B) flow-through of operating losses. C) high liquidity. D) someone other than the investor is doing the management.
D) someone other than the investor is doing the management.
Which two of the following statements are CORRECT? I. Time-weighted returns are generally of more use than dollar-weighted returns to evaluate portfolio manager performance. II. Time-weighted returns are generally of more use than dollar-weighted returns to evaluate individual investor performance. III. Dollar-weighted returns are generally of more use than time-weighted returns to evaluate portfolio manager performance. IV. Dollar-weighted returns are generally of more use than time-weighted returns to evaluate individual investor performance.
I and IV I. Time-weighted returns are generally of more use than dollar-weighted returns to evaluate portfolio manager performance. IV. Dollar-weighted returns are generally of more use than time-weighted returns to evaluate individual investor performance.
Which of the following would probably NOT be an attractive investment during periods of rising inflation? A) Corporate bonds B) Real estate C) Oil stocks D) Gold
A) Corporate bonds Interest rates tend to increase with inflation. Rising interest rates cause the values of all fixed-income securities to decline. That is why bonds are not an attractive investment during periods of inflation. Values of real estate, gold, and natural resources tend to rise with inflation.
An investment adviser representative has uncovered an unusual investment opportunity that he believes is perfect for one of his clients. When presenting the recommendation to the client, it becomes clear that the client is concerned about the potential of loss. To alleviate that concern, the IAR tells the client that he agrees to repurchase the security from the client anytime within the next 6 months at the original purchase price. In so doing, the IAR A) has committed the unethical business practice of recommending an unsuitable investment. B) has acted ethically because he has not guaranteed a profit to the client. C) has acted fraudulently because his actions would be considered market manipulation. D) has committed the unethical business practice of guaranteeing against loss.
D) has committed the unethical business practice of guaranteeing against loss.
Minnie's Uncle Bob would like to contribute to his one-year-old niece's education expenses. He is able to contribute a maximum of $1,200 per year. There is no other family member in a position to make a contribution. If minimizing the taxes at withdrawal and low cost investing, such as index mutual funds, is the objective, which of the following would you recommend? A) Section 529 plan B) Coverdell ESA C) UTMA D) Dollar cost averaging
B) Coverdell ESA When you see contribution levels at $2,000 per year or less, that is a signal that Coverdell is the proper recommendation. Higher levels would be the 529 plan. There are no specific tax benefits to the UTMA. In fact, tax rates on unearned income can be rather high. Although Uncle Bob might dollar cost average by investing $100 per month, that does not specifically answer the question.
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) 25% B) 30% C) 27% D) 32%
D) 32% 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.
All of the following are true of government agency bonds EXCEPT A) older ones have coupons attached, new ones are book entry B) they trade openly C) they are considered relatively safe investments D) they are direct obligations of the U.S. government
D) they are direct obligations of the U.S. government The only government agency that is a direct obligation of the U.S. government is the Ginnie Mae security. All of the others are moral obligations.
A 50-year-old client with modest means wants to construct an investment program. He has no investment experience, his major consideration is saving for retirement, and he has limited risk tolerance. Which of the following would you recommend? A) Aggressive growth mutual funds B) High-grade bond fund C) Call options on the S&P 500 Index D) Growth and income mutual funds
D) Growth and income mutual funds Mutual funds that offer growth and income best meet the client's needs, offering growth for retirement and current income. A high-grade bond fund would not offer the growth that the client needs for retirement, although the fund would supplement the modest income of the client. A client of modest means may not be able to sustain the risk of principal that accompanies an aggressive growth fund; in addition, this alternative is unsuitable because the client has limited risk tolerance. Index options are a speculative investment.
If an agent recommends the purchase of a technology company with an impressive growth record, but fails to inform the client that the company's technology will become obsolete pending the approval of a competitor's patent, the agent has A) violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents B) not violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents because no untrue statements were made C) not committed a prohibited business practice D) committed a prohibited business practice by selling an unsuitable investment
A) violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents
