S66 Test #6 (Wrong Answers)
A firm is registered as an investment adviser under the Investment Advisers Act of 1940. It has decided to raise its annual management fee from $1,500 to $1,800 and require that it be paid one year in advance instead of quarterly. The firm would A) now come under the requirement to include a balance sheet as part of its brochure. B) continue doing business as before because the firm was already charging more than $1,200 per year. C) need SEC permission to make this change. D) be in violation of the law that prohibits prepayments more than six months in advance.
A) now come under the requirement to include a balance sheet as part of its brochure. Explanation For federal covered investment advisers, a prepayment in excess of $1,200 and for periods of six months or more in advance (substantial prepayment) requires the adviser to submit an annual audited balance sheet as part of its Form ADV Part 2 (and brochure). Previously, even though the firm's fee was in excess of $1,200, because it was collected on a quarterly basis, the firm did not fall under the balance sheet rule. Had this been a state-registered investment adviser, the answer would have been the same, even though the dollar limit is $500 rather than $1,200. That is for the reason given above—the former fee was charged quarterly and the substantial prepayment definition requires both exceeding a stated dollar amount ($500 or $1,200) and it being for six months or more in advance. LO 9.e
Current market interest rates are 6%. A bond with an 8% coupon would be most likely to have a net present value of zero when the bond is A) selling at a premium. B) called for redemption. C) selling at a discount. D) selling at par.
A) selling at a premium. Explanation A bond's NPV is most likely to be zero when its IRR is equal to the current market interest rate. In this case, that would be 6%. The only way for a bond with an 8% coupon to have a yield to maturity of 6% is if the bond is selling at a premium. LO 20.a
Differences between static and interactive content on social media include which of these? I) Only static content can be reused by others. II) Only static content needs preapproval. III) Only static content can be changed by the person who originated it. IV) Only interactive content can be commented on by others. A) I and III B) I and IV C) II and IV D) II and III
C) II and IV Explanation Static content requires preapproval. Interactive content can be reused by others and can be commented on by others. Both static and interactive content can be changed by its originator, but static can be changed only by its originator and interactive by the originator or others. LO 13.h
Which of the following statements about the gift tax annual exclusion are true? I) The annual exclusion is the amount that an individual may give to other individuals each year without incurring a gift tax. II) The annual exclusion is indexed to account for inflation. III) A separate annual exclusion is available for each donee. A) II and III B) I and II C) I and III D) I, II, and III
D) I, II, and III Explanation All these statements are true. The annual exclusion that an individual donor may give to another individual (donee) each year without incurring a gift tax is indexed for inflation and is currently (2024) $18,000. A separate annual exclusion is available for each donee. So, if an individual gives $18,000 to four donees in one year, the annual exclusion will shelter all $72,000. Please note that the exact number will never be tested; we are including it here for your personal information. LO 16.g
Quick and Fast Executions, Inc., a broker-dealer registered with the administrator, maintains a website describing the services offered by the firm. Which of the following statements would be in compliance with the requirement to maintain certain books and records? A) Because websites tend to be fluid, administrators require only that they be available for spot-checking. B) Retention of any revised design must be kept for a period of at least three years after the initial design's retention period ends. C) The original website design must be retained for a period of at least five years from initial use. D) The original website design must be retained for a period of at least three years from initial use.
D) The original website design must be retained for a period of at least three years from initial use. Explanation Websites, like any other advertisement, must be retained for a period of at least three years from initial use. Because they are fluid (frequently changing), each design change must be filed after first use, beginning a new three-year holding period. LO 13.h
A bond investor's portfolio consists of the following 3 bonds: ABC First Mortgage bond, current market value of $4 million with a duration of 5 years. DEF Debenture, current market value of $5 million with a duration of 8 years. U.S. Treasury bond, current market value of $1 million with a duration of 10 years. What is the average duration of the portfolio? A) 7 years B) 3.04 years C) 7.67 years D) 6.54 years
A) 7 years Explanation It is unlikely that you will have a question this complicated on the exam, but, just in case, we wanted to show you the way to do it. Computing average duration of a bond portfolio involves taking each bond and figuring the proportion of the portfolio its duration represents. In this question, ABC is 40% of the portfolio so we take 40% of its 5-year duration (2). Then, we do the same with the other two bonds. DEF is 50% of 8 (4) and the Treasury bond is 10% of 10 (1). When we add the 3 numbers together, it results in an average duration of 7 years. LO 20.b
There are a number of requirements placed upon investment advisers found in NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers. Which of the following is not included in those requirements? A) Investment advisory contracts must be in writing. B) Advisory clients must receive the adviser's brochure at least 48 hours before entering into an advisory contract. C) The adviser may not provide a report or a recommendation to any advisory client prepared by someone other than the adviser without making a disclosure of that fact. D) The adviser may only accept an order from a third party if the proper trading authorization is in hand.
B) Advisory clients must receive the adviser's brochure at least 48 hours before entering into an advisory contract. Explanation Be careful to read the question. It is looking for the choice that is not covered under the stated Model Rule. The brochure delivery requirements are found in the Brochure Rule, not the Model Rule on Unethical Business Practices. You might want to check Appendix B in your LEM which covers the Model Rule. The Model Rule requires all initial and renewal investment advisory contracts to be in writing. If a specific securities report or recommendation has been prepared by someone other than the adviser, disclosure must be made to clients. In order to accept instructions from a third party (someone other than the client), the proper written authorization must be present. As far as brochure delivery requirements, under both state and federal law, new clients must receive the adviser's brochure no later than the time of entering into the advisory contract, not in advance. The 48-hour rule (state only) refers to the provision that if the brochure is not delivered at least 48 hours in advance, the client has the right to a penalty-free withdrawal from the agreement. LO 13.g
Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative can A) place the securities in the trust fund in a noncustodial brokerage account. B) have a check drawn on the account payable to the trustee for expenses. C) have funds withdrawn from the account at the direction of the beneficiary. D) arrange to have the trust's funds pledged to support a loan for the trustee.
B) have a check drawn on the account payable to the trustee for expenses. Explanation The trustee can be reimbursed for expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can withdraw funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial or trust accounts, not in noncustodial accounts. LO 16.d
A securities analyst reviewing the financial statements of the XYZ Corporation observes that the company's total liabilities are in excess of its total assets. From this information, the analyst could conclude that XYZ has A) a highly leveraged capital structure. B) a low price-to-earnings ratio. C) a negative book value per share. D) a high current ratio.
C) a negative book value per share. Explanation When the liabilities exceed the assets, there is a negative net worth. By extension, that means a negative book value per share. We don't know anything about the current assets and current liabilities, so we can't measure the current ratio. We also don't know if the debt is from borrowing or just an excess of payables over receivables, so we don't know if financial leverage has been employed. Likewise, we have no information about the company's earnings, so we can't compute the PE ratio. It is likely that it is low, but if this is a start-up enterprise, it is possible that the PE could be rather high. In any event, when faced with two choices that could be correct, always go with the one that is correct without any exceptions. LO 20.h
