Simulated Exam 11.8.17
If a married couple establishes a JTWROS account with a balance of $25 million and the wife dies, what is the husband's estate tax liability?
He pays no estate tax. Establishing a joint tenants with right of survivorship account allows for the transfer of assets to the survivor upon death. The surviving spouse is not taxed on assets transferred in this manner because under current tax law, there is an unlimited marital deduction. Reference: 17.5.1 in the License Exam Manual
One of the offshoots of the capital asset pricing model (CAPM) is the Capital Market Line (CML). The equation for the CML uses which one of the following?
Standard deviation The CML provides an expected return for a portfolio based on the expected return of the market, the risk-free rate of return, and the standard deviation of the portfolio in relation to the standard deviation of the market. The equation for the CML uses the •expected return of the portfolio •risk-free rate •return on the market •standard deviation of the market •standard deviation of the portfolio
An analytical tool used to predict the future price of a common stock using projected dividends is the:
There are two widely accepted forms of common stock price projection using dividends - the dividend discount model and the dividend growth model. Reference: 4.1.7.1 in the License Exam Manual
What is the total return on a 1-year, newly issued (365 days to maturity) zero-coupon bond priced at 95?
To determine the total return on this zero-coupon bond, the $50 capital appreciation is divided by the cost of the bond (in this case, $50 divided by $950 equals a total return of 5.26%). Total return of a zero-coupon bond is made up entirely of the difference between the cost of the bond and the sale or maturity price of the bond. Reference: 19.2.1 in the License Exam Manual
Allowable investments in an IRA would include
U.S. government issued silver eagles There are certain coins minted by the U.S. Treasury that are eligible for inclusion in an IRA. No life insurance is allowed (though annuities, both fixed and variable, are allowed), and collectibles, such as art and stamps, are prohibited. Reference: 20.1.5.4 in the License Exam Manual
Under the Uniform Securities Act, all of the following are excluded from the definition of an investment adviser EXCEPT:
an individual providing advice on municipal bonds. Providing advice on municipal bonds (even though they are exempt securities) does not entitle one to an investment adviser exclusion. Reference: 3.2.3 in the License Exam Manual
If a car dealer offers $1,000 bonds as a bonus for the purchase of cars, the car dealer is:
engaging in the offering for sale of a security.
According to the NASAA investor advisory regarding fees charged by broker-dealer firms for services and maintenance of investment accounts,
the schedule should be made available on the broker-dealer's public website without requiring any login or password Transparency requires that obtaining the fee schedule should be a simple process for retail customers and prospects. That means access without logging in to the broker-dealer's website or needing a password. Paper copies should always be available and cyber security is not a threat because there is no confidential information included. Reference: 2.11.11.1* in the License Exam Manual
Under the Insider Trading and Securities Fraud Enforcement Act of 1988, a person who buys securities with material, privileged, nonpublic information may be subject to a civil penalty of:
up to 3 times the amount of gain or prevention of loss. Trading on inside information is prohibited under the Securities Exchange Act of 1934, and, under the Insider Trading and Securities Fraud Enforcement Act of 1988, the SEC is empowered to seek the greater of $1 million or treble damages through the courts for violations of the inside trading rules. The damages can amount to up to three times the profit gained or three times the loss avoided on the transaction. All persons who controlled the insider are also subject to these damages if improper supervision is proven. Reference: 1.7 in the License Exam Manual
Under the USA, private placements are exempt from state registration if they limit solicitations to how many noninstitutional clients per 12 month period?
10 or fewer The USA states that private placements are exempt from registration if they solicit a maximum of 10 noninstitutional (retail) clients during any 12 month period. Reference: 2.8.2 in the License Exam Manual
A TIPS bond is issued in the principal amount of $1,000, paying 3.5%. Over the security's 5-year term, the inflation rate is 4%. What is the principal value of the bond at the end of 5 years?
$1,219. In addition to paying interest, a TIPS bond increases its principal value semiannually by the amount of inflation. If the inflation rate is 4% for 5 years, the principal value of the bond increases semiannually by that inflation rate. Allowing for compounding, the best choice would be the $1,219. This is computed by multiplying $1,000 by 102% 10 times. Reference: 5.1.1.4 in the License Exam Manual
State covered investment advisers who have discretionary powers but NOT custody of customer funds are usually required to have a net worth in the amount of:
$10,000. The NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, requires an adviser who does not have custody of customer funds or securities but has discretionary power over customer accounts to have a minimum net worth of $10,000. Reference: 3.6.5 in the License Exam Manual
Which of the following is defined as a security under the Uniform Securities Act?
An investment contract. As a result of the Howey decision, investment contracts are defined as (and often serve as a synonym for) a security under the Uniform Securities Act. A guaranteed, lump-sum payment to a beneficiary is an endowment policy excluded from the definition of a security. Fixed, guaranteed payments made for life or for a specified period are fixed annuity contracts not defined as securities. Commodity futures contracts and the commodities themselves are not securities. Reference: 2.5.1 in the License Exam Manual
Advantages of using the partnership form of business organization include which of the following?
Ease of dissolution. Partnerships are relatively easy to form and to dissolve. They are not practical for raising large sums of capital as are corporations. General partners have full personal liability, and partnership agreements specify events that will lead to the termination of the entity. Reference: 14.3.7 in the License Exam Manual
A portfolio manager, putting most of his focus on the financial statements of the companies he is analyzing, is most likely using which management style?
Value Value managers seek to find companies that the market has ignored and primarily rely on information found in the financial statements of those companies. Reference: 16.3.2 in the License Exam Manual
Once an investment adviser's registration has been granted by the state Administrator, he may advertise that he is:
eligible to engage in selling securities advice to the public. Passing the Series 66 exam and obtaining registration by the Administrator makes an individual eligible to provide securities advice to the public. Only individuals registered as agents may execute transactions and the initials RIA may not be used, only the phrase" registered investment adviser." Reference: 3.13 in the License Exam Manual
Which of the following entities are considered to be exempt issuers under the Uniform Securities Act? I.State of Michigan. II.City of Calgary, Alberta. III.City of Birmingham, UK. IV.Kapco Leveraged Partners, an unregistered hedge fund whose adviser is registered with the SEC.
I and II. Any state or Canadian province, or political subdivision thereof, is considered an exempt issuer. Foreign national governments with which the US has diplomatic relations, but not their political subdivisions, are considered exempt issuers. SEC-registered investment companies are exempt issuers, but, unregistered hedge funds are not, regardless of with whom their advisers are registered. Reference: 2.8.1 in the License Exam Manual
Which of the following are TRUE of a REIT? I.It can qualify for special tax treatment under Subchapter M of the Internal Revenue Code if it distributes at least 90% of its taxable income. II.It may loan money for commercial construction projects. III.It generates income by the spread between rental income, the combined mortgage interest, and operating expenses of the property. IV.It is only suitable for an investor who is in a 28% or higher tax bracket, who has a net worth in excess of $200,000, or who is able to benefit from the flow through of losses.
I, II and III A real estate investment trust (REIT) is an investment that makes direct investments in real estate, generating its income from renting the property (e.g., apartments, shopping malls) to lessees. Alternatively, it can make mortgage loans and generate income from them. Depending on its distribution of income, it may qualify for the same type of special tax treatment as a regulated investment company. REITS are not flow-through vehicles as are DPPs. Reference: 7.1.7 in the License Exam Manual
Under the Investment Company Act of 1940, which of the following would be considered an affiliated person? I. Persons who control, are controlled by, or share common control with the company. II. Any officer, director, or employee of the company. III. Persons who own or control 5% or more of the voting shares of the company.
I, II and III. Affiliated persons are any investment company directors, officers, employees, or owners of 5% or more of the voting shares of stock, and/or any persons controlling or controlled by such persons. Reference: 1.10.9.1 in the License Exam Manual
Under the Uniform Securities Act, which of the following investment advisers would be required to include a balance sheet in their brochures? I. An adviser who exercises discretion in client accounts. II. An adviser who maintains custody over client funds and securities. III. An adviser who maintains less than $35,000 in net worth. IV. An adviser who, 6 or more months in advance, collects prepaid fees of more than $500.
II and IV The Uniform Securities Act requires that a balance sheet accompany an adviser's brochure when the adviser maintains custody of client assets or accepts substantial prepayments of fees. Reference: 3.11.1 in the License Exam Manual
Which of the following are asset classes?
REITs The general consensus is that the major classes, for purposes of an asset allocation program, are equity, debt, cash (or cash equivalents), real estate, and commodities. Large cap stock funds are not an asset class; they are a way to invest in the asset class known as equity. Derivatives, such as options, are not generally considered an asset class, and it is the actual commodity (precious metals, oil, and so forth), not a forward or futures contract, that is the asset class. Most agree that REITs are a proxy for real estate itself. Reference: 16.1 in the License Exam Manual
Among the reasons why a corporation might choose to utilize a deferred compensation plan for retirement planning would be
employees who leave the company prior to retirement would not receive benefits Deferred compensation plans are usually structured so that if the employee leaves prior to retirement or is terminated with cause, benefits are forfeited. These plans are discriminatory and there is no current tax saving, hence the term "deferred". As nonqualified plans, they do not have to comply with ERISA. Reference: 20.6.2.2 in the License Exam Manual
The Capital Asset Pricing Model (CAPM) is most commonly used to determine an investor's
expected return The CAPM suggests that we can determine the expected return of any security (or portfolio) by using the following mathematical formula: Er = Rf + Beta(expected return on the market − Rf). Er stands for expected return, Rf is the risk-free return. Reference: 16.5.3 in the License Exam Manual
A registered investment adviser recommends a stock that will be sold to an advisory client in a principal transaction. The broker-dealer that will sell the stock is also registered as an investment adviser and employs the investment adviser as an agent. This transaction:
requires both written disclosure to and the consent of the client prior to the completion of the transaction. Under normal circumstances, when a broker-dealer acts as a principal in a trade, that fact is noted on the confirmation. However, in this case, because it is an investment adviser who is recommending the transaction, both written disclosure by the adviser and consent by the client are required prior to completion of the transaction even when an adviser sells securities through an affiliated firm in a principal transaction. Reference: 3.12.3.1 in the License Exam Manual
When developing a client profile, it is important to note both the financial and nonfinancial considerations. These can be categorized as those which are objective and those which are subjective. Included in the list of subjective considerations would be
risk tolerance Subjective considerations are the nonfinancial ones—the ones that can't be expressed in monetary terms. Risk tolerance is one of the key subjective considerations to be evaluated. Reference: 15.2.1 in the License Exam Manual
Associated Wealth Managers (AWM) is registered with the SEC as a registered investment adviser. As a consequence, if there have been any material changes, AWM must
send a copy of its brochure, or a summary of the changes, to all clients within 120 days of the end of its fiscal year Whether the firm is a state- or federal-covered investment adviser, if there have been material changes, a copy of the IA's brochure, or a summary of the changes, must be sent to all clients no later than 120 days after the close of the IA's fiscal year. The rule is essentially the same for state-registered advisers, with one exception... Advisers are required to deliver brochure at least 48 hours before entering an advisory contract or at the time of entering into the contract; if not, the client can terminate contract penalty free within 5 business days after entering into the contract. Reference: 3.10.3.1 in the License Exam Manual
Superb Wealth Opportunities (SWO) is a broker-dealer registered with the SEC and 10 states. Recently, the SEC has completed an investigation of SWO's recordkeeping practices and has determined that they are not in accordance with SEC Rule 17a-4. If, as a result of a hearing, SWO is fined,
the Administrator of the state where SWO maintains its principal office could investigate SWO to determine if their recordkeeping requirements were violated Even though no state can enforce more stringent recordkeeping rules than those of the SEC, a broker-dealer can still be subject to state action if the rules of the state in which the broker-dealer maintains its principal office are broken. It is the usual case that when the SEC suspends or revokes the registration of a BD, the states in which that BD are registered follow suit, but it would be highly unlikely to revoke the registration when the SEC only levied a fine. Reference: 2.14.4.1 in the License Exam Manual
If you were using the discounted cash flow method to determine the appropriate value of a security, you would want to purchase that security when
the current market price is below the PV Those who use the DCF to value a security would recommend purchasing when the current market price is below the PV—that is, when the NPV is positive. Reference: 12.1.1.4 in the License Exam Manual
All of the following statements relating to an account registered as tenants in common are true EXCEPT
upon the death of one of the cotenants, that individual's share of the account passes to the survivor(s)
A client purchased an index annuity from you three years ago and made an initial deposit of $100,000. The contract calls for a 90% participation rate with a 15% cap. The index had a return of + 20% in the first year, - 5% the second year, and +10% the third year. The investor's current value is approximately
$125,350 In the first year, the index gained 20%. With a 90% participation rate, the investor might have earned 18%, but was limited by the 15% cap. So, after one year the value was $115,000. In the second year, the index lost money. However, with an index annuity there are never any reductions in a down market so the account remained at $115,000. In the third year, the investor received 90% of the 10% growth and that increased the account value to $125,350. This resulted in an overall gain of 25.35%, or an average return of almost 8.5% per year. Reference: 8.1.2.3 in the License Exam Manual
