Final Exam 7
Which investment provides the BEST hedge against inflation? A) A fixed annuity B) A variable annuity C) A bank-issued CD D) A Treasury bill
B) A variable annuity **Compared to the other investment choices, variable annuities provide the best hedge against inflation because of the portfolio's potential to rise in a growing economy. Conversely, fixed-income investments (e.g., bonds and fixed annuities) have the highest inflation risk. **
When does a person become eligible for Social Security benefits? A) When she reaches the age of 62 B) After she's worked 40 quarters C) After she's worked for the same employer for more than 10 years D) When she reaches the age of 65
B) After she's worked 40 quarters **Social Security eligibility is based on credits that taxpayers earn by working. Individuals become eligible for Social Security benefits if they have earned 40 credits. Taxpayers can earn up to four credits for every year they work (i.e., one per quarter) and taxpayers become eligible by earning 40 credits. If an individual is earning the maximum credits per year, she can become eligible after 10 years (4 credits per year x 10 years = 40 credits). Be careful, even if a person has earned enough credits, she cannot take benefits until she turns age 62.**
All of the following maturities are offered for TIPS, EXCEPT: A) 1 year B) 5 years C) 10 years D) 30 years
A) 1 year **Treasury Inflation-Protected Securities (TIPS) are offered in 5-year, 10-year, and 30-year maturities. Maturities of one year are not available for TIPS.**
Which of the following allocations would be the LEAST suitable for an investor with a 30-year time horizon, moderate risk tolerance, and the goal of long-term growth? A) 50% money-market funds, 50% long-term government bond funds B) 50% large-cap stock index funds, 25% small-cap funds, 25% emerging markets funds C) 75% large-cap stock funds, 25% international stock funds D) 50% equity income funds, 30% small-cap funds, 10% global funds, 10% balanced funds
A) 50% money-market funds, 50% long-term government bond funds **An investor with a long time horizon and a goal of growth should have some part of her portfolio in equity securities. An allocation with 50% money- market funds and 50% long-term government bonds is unlikely to meet this investor's goal.**
What formula is used to find the present value of an investment by using a future value that is decreased at a compound rate over time? A) A discounting formula B) An adjusting formula C) Accretion D) Beta
A) A discounting formula **Present value is found by discounting the future value of an investment by an internal rate of return. The formula used to determine the present value is called the discounting formula.**
Which of the following investment advisers is subject to registration with the SEC? A) An Internet investment adviser B) An adviser that has retail clients in fewer than 15 states C) A hedge fund adviser that manages $100 million in assets D) An adviser that expects to be eligible for SEC registration within 120 days of its second anniversary
A) An Internet investment adviser **If an investment adviser provides advice to clients exclusively through an interactive website based on information that has been submitted by its clients, the adviser is considered an Internet investment adviser and is subject to SEC registration. Additionally, the IA must maintain a record which demonstrates that the advice was exclusively provided through the interactive website. Advisers that are required to register in fewer than 15 states and hedge fund advisers that manage less than $150 million in assets are required to register with the Administrator, not the SEC. A newly formed investment adviser is permitted to register with the SEC as long as it meets the eligibility requirements within 120 days of its formation, not within 120 days of its second anniversary.**
When recommending a leveraged ETF to a client, an agent should disclose that: A) Due to the daily resetting of the portfolio, a leveraged ETF's performance does not provide true tracking of the underlying index over long periods B) A leveraged ETF's performance will improve as the underlying index increases in value over time C) Since leveraged ETFs may only be purchased on margin, the leveraging factor is reduced D) Since leveraged ETFs are considered long-term investments, short-term strategies are unsuitable
A) Due to the daily resetting of the portfolio, a leveraged ETF's performance does not provide true tracking of the underlying index over long periods **Since an ETF's underlying portfolio is reset daily, price changes are based on a percentage value for one day only. Therefore, a leveraged ETF's performance does not provide true tracking of the underlying index over longer periods. Keep in mind, purchasing a leveraged ETF on margin increases leveraging; it does not decrease it. Due to the daily resetting feature, leveraged ETFs are not considered to be suitable long-term investments.**
An income statement of an individual would contain: A) Expenses B) Liabilities C) Real property D) Savings accounts
A) Expenses **The income statement of an individual contains all income (salary and investment income) and expenses that a person has had during a given period. It also contains any gains or losses on sales of assets by the individual as well as any interest paid on borrowed funds. The balance sheet includes the assets owned, the liabilities owed, and the person's net worth, which is assets minus liabilities.**
Which TWO of the following statements are TRUE of stop orders? I) A stop order may be described as a suspended market order II) A stop order may be executed only at the stop price or better III) A stop order, when triggered, guarantees an execution IV) A stop order, when triggered, becomes a limit order and needs its limit price to be satisfied for execution A) I and III B) I and IV C) II and III D) II and IV
A) I and III **A stop order becomes a market order (in turn receiving immediate execution) when a round-lot trades at or through its stop price. A stop-limit order becomes a limit order when a round-lot trades at or through its stop price, and requires that its limit price be satisfied to receive an execution. A stop order is sometimes described as a suspended market order since execution depends on the stop price being triggered first. **
An Administrator from State A has jurisdiction over an offer made: I) On a radio or television program that originated in State A II) On a radio or television program broadcast in State A where the communication originated outside the state III) In a newspaper circulated in State A, but published in State B IV) In a newspaper published in State A, but with more than two-thirds of its circulation outside the state in the last year A) I only B) I and II only C) I and III only D) I, II, III, and IV
A) I only **Generally, an Administrator will have jurisdiction over any offer if it originated in that state, was directed in that state, or was accepted in the Administrator's state. However, if the communication originated outside the state and was in the form of a radio or television broadcast, the Administrator would not have jurisdiction. The Administrator has jurisdiction if the newspaper is published in that state and more than one-third of the circulation is inside that state. **
Which of the following would be considered a sale of securities? I) A car dealership gives each customer a gift of one free share of stock for buying a new car. II) An investor converts a bond into 50 shares of common stock. III) A minor is named as a beneficiary of a trust containing common stock. IV) An individual inherits a security from the estate of a deceased parent. A) I only B) I and II only C) II, III, and IV only D) I, II, III, and IV
A) I only **If an individual is required to pay for an item in order to receive a free security, then the security investment is not actually free. The required payment would constitute a sale of the security. The other examples involve either the gift or transfer of securities and would not be considered a sale.**
A sector rotation strategy would include investing in which of the following? A) Industrial stocks in an expanding economy B) Precious metals at the peak of the economy C) Consumer goods stocks in an expanding economy D) Technology stocks in a contracting economy
A) Industrial stocks in an expanding economy **A sector rotation strategy involves investing in businesses that will grow along with the economy. Industrial stocks are cyclical and will rise and fall with the economy. The best time to buy technology stocks is right before an expansion, not during a contraction. Commodities help protect against inflation, but inflation is generally not anticipated if the market is peaking. Consumer goods companies make staples (e.g., groceries and household products) and would generally perform well during a recession. **
The tax rate that applies to the last dollar that a person earns is called the: A) Marginal tax rate B) Federal tax rate C) Nominal tax rate D) Average tax rate
A) Marginal tax rate **The marginal rate is the rate at which the last dollar a person earns is taxed. In the U.S., a person's marginal tax rate (tax bracket) will rise as her total income increases. **
After analyzing the financial sector, an analyst writes a report indicating that he expects a downturn in that sector. This could BEST be described as: A) Market risk B) Interest-rate risk C) Liquidity risk D) Business risk
A) Market risk **A downturn in the prices for an entire sector of the economy is a form of market risk. Business risk is the risk that one company, not an entire sector, will perform poorly.**
The Uniform Securities Act prohibits: A) Soliciting orders for unregistered, non-exempt securities B) Maintaining discretionary accounts C) Charging extraordinary commissions on certain transactions D) Accepting unsolicited orders
A) Soliciting orders for unregistered, non-exempt securities **Soliciting orders for unregistered, non-exempt securities is prohibited by the Uniform Securities Act. The Act permits broker-dealers to maintain discretionary accounts for customers, to charge fees for services performed in customer accounts, and to accept unsolicited orders.**
f a client's objective is long-term capital appreciation, all of the following insurance policies may be recommended by an adviser, EXCEPT: A) Term life B) Whole life C) Variable life D) Universal life
A) Term life **A term life policy would not provide future capital as it does not accumulate cash value. A whole life policy would accumulate cash value, though generally at a low rate. Universal life would also accumulate cash value that can be used to pay the premium, which reduces the cash value. With a variable life policy, a portion of the premium is invested in the separate account, which historically would provide a higher market based return.**
A client requests that her agent display a quote in a thinly traded security. The client is the majority shareholder in this security and the broker-dealer honors the request and displays the quote. Which of the following statements is TRUE? A) This would be permissible if the broker-dealer believed the quote was bona fide B) This would be considered an unethical business practice C) A broker-dealer may always enter a quote on behalf of a client D) A broker-dealer is not permitted to enter quotes on behalf of its clients
A) This would be permissible if the broker-dealer believed the quote was bona fide **A broker-dealer is permitted to publish quotes (bid and ask prices) on behalf of its clients or for its own account. The broker-dealer must believe the quotes are bona fide and not intended to manipulate the market price of a security. If the quotes are not bona fide and the broker-dealer publishes them, they would have engaged in an unethical business practice.**
An investor buys a two-year U.S. Treasury note that has a 6% coupon. If the note is purchased at par and held to maturity, what is the real rate of return over the holding period, assuming the CPI is 3%? A) 3.3% B) 3% C) 6.3% D) 6%
B) 3% **The method used to calculate the note's real rate of return (or inflation adjusted return), is to subtract the rate of inflation as measured by the CPI, from the note's coupon. Therefore, the real rate of return is 3% (6% coupon less the CPI of 3%).**
An investor in the 35% tax bracket is considering investing in a corporate bond, which has a 6% coupon. In order to earn an amount equal to her after-tax return from the corporate bond, she would need to invest in a tax-free bond that is yielding: A) 2.1% B) 3.9% C) 2.5% D) 6%
B) 3.9% **To determine the after-tax return, multiply the yield on the corporate bond by (1 - Tax Bracket). .06 x (1 - .35) = .039 3.9% is also known as the net yield, or the after-tax return. If the investor bought a tax-free bond (e.g., a municipal bond) yielding 3.9%, divide by (1 - .35) to obtain the taxable-equivalent yield, or 6% in this example.**
Klearkettle Associates is a registered investment adviser in Delaware. Due to the retirement of the firm's senior partner and namesake, Horace Klearkettle, the firm decides to close it doors permanently, effective Thanksgiving weekend. What is the status of the registrations of Klearkettle's IA representatives upon the firm's closing? A) All registrations will remain effective until December 31 B) All registrations will be ineffective upon the closing of the firm C) All registrations will remain effective until year-end but are classified as administrative jurisdictional transitional registrations D) All registrations will remain effective for 90 days but are classified as independent agent registrations
B) All registrations will be ineffective upon the closing of the firm **Investment adviser representative registrations only remain in force as long as the IA representative is affiliated with a firm that has a current registration. An agent is not permitted to act independently if her firm goes out of business.**
Regarding risk tolerance and suitability, Modern Portfolio Theory contends that: A) Risk should be minimized, regardless of the client's ability to bear that risk B) An investment that is risky on its own might be less risky in a portfolio if it behaves independently from the other investments in that portfolio C) Investment advisers should abide by the prudent man standard D) The more risk a client can tolerate, the better the chance that positive returns will result
B) An investment that is risky on its own might be less risky in a portfolio if it behaves independently from the other investments in that portfolio **An investment that might not be suitable on its own, such as a hedge fund, might be appropriate as part of a larger portfolio. According to Modern Portfolio Theory, an investment that is risky but relatively uncorrelated with other investments in the portfolio, could reduce the risk of the portfolio while maintaining or even increasing the portfolio's expected return.**
A company is issuing stock through an underwriting syndicate. As a part of the syndicate's compensation, it will be given warrants which are able to be exercised at any time over the next two years. Under the Uniform Securities Act, which TWO of the following statements is TRUE regarding the issuer of the stock? I) The issuer must register the stock or distribute it under an exemption before the warrants can be issued II) The issuer may distribute the warrants when the registration statement for the stock is filed III) The issuer is subject to state reporting requirements until the warrants expire IV) The issuer is subject to state reporting requirements only until the stock distribution is completed A) I and II B) I and III C) II and III D) II and IV
B) I and III **According to the Uniform Securities Act, in order for the warrants to be exercised/converted, the underlying stock must be registered or sold under an exemption prior to the warrants being issued. Under the Uniform Securities Act, the conversion/exercise privilege being offered by the warrants constitutes an offer/offer to sell for the term of the warrant. In this example, since the warrants do not expire for two years the issuer is subject to state reporting requirements for that period.**
Which of the following asset management techniques would NOT be used to identify a security that is either undervalued or overvalued? A) Fundamental analysis B) Indexing C) Technical analysis D) Tactical management
B) Indexing **When a portfolio is indexed, the manager is attempting to match the performance of the market. An indexed portfolio is one with a composition that mirrors a benchmark index. Fundamental, technical, and tactical approaches all attempt to identify securities that are either overvalued or undervalued and use this information in an attempt to outperform the market.**
What's the benefit to creating a will? A) It eliminates estate taxes and appoints an intestate administrator for the estate B) It reduces estate taxes and speeds up the probate process C) It reduces estate taxes and protects property solely for the benefit of minors D) It eliminates estate taxes and avoids the probate process
B) It reduces estate taxes and speeds up the probate process **Wills are legal documents that provide directions for managing an estate after a person's death. Although wills make the probate process quicker and easier, all estates must go through probate. By distributing assets, wills can minimize estate taxes; however, they may not always be able to be avoided altogether.**
If an advisory client is most concerned with minimizing her tax liability, common stocks may provide a greater benefit than corporate bonds because: A) Stocks tend to offer a lower yield than corporate bonds B) Qualified cash dividends are taxed at a maximum rate that is less than the rate at which the interest on corporate bonds is taxed C) The unrealized capital gains on some bonds is taxed each year as ordinary income D) Capital gains on stocks are taxed at a lower rate than the capital gains on corporate bonds to encourage investments in stocks
B) Qualified cash dividends are taxed at a maximum rate that is less than the rate at which the interest on corporate bonds is taxed **If an investor owns stock of a domestic corporation (or shares of a fund that contains these types of stocks) and has satisfied a holding period, any dividends that are distributed by the company (or fund) are considered a qualified cash dividends and are taxed at a maximum rate of 20%. On the other hand, the interest on corporate bonds is taxed as ordinary income (possibly as high as 39.6%). Capital gains are only taxable if they are realized (i.e., the investor sells the asset at a price that is higher than what he originally paid). **
According to the Uniform Securities Act, if the Administrator revokes, denies, or suspends a registration, it would NOT be required to provide which of the following? A) Written findings of facts or conclusions B) Written prior notice C) All documents created by the Administrator's office regarding the action D) An opportunity for a hearing
C) All documents created by the Administrator's office regarding the action **Prior to revoking a registration, an Administrator is required to provide a registrant with a written notice, written findings of fact, and an opportunity for a hearing. However, the Administrator is not required to release every document created in the course of the investigation.**
According to the Securities Exchange Act of 1934, which of the following is NOT required to be included on the confirmation for a bond trade? A) Disclosure of the bond's coupon rate B) Disclosure of the bond's yield-to-maturity C) Disclosure of the bond's rating D) Disclosure of the bond's purchase price
C) Disclosure of the bond's rating **Although a bond's rating is not required to be included on a confirmation, if the bond is unrated, this fact must be disclosed. A bond's price and its yield-to-maturity at the time of the trade must be disclosed on a confirmation.**
According to the Capital Asset Pricing Model (CAPM), all of the following statements are TRUE, EXCEPT: A) In an efficient market, all securities are priced fairly in relation to their risks and returns. B) In an inefficient market, it may be possible to find securities that are selling for less than their "true" value. C) Given a choice of two investments that offer the same return, investors will choose the investment with greater variability. D) Most investors are able to borrow or invest money easily at the same rate as three-month T-bills.
C) Given a choice of two investments that offer the same return, investors will choose the investment with greater variability. **CAPM makes the assumption that all investors are risk-averse. Therefore, when given a choice between two investments that offer the same return, a risk-averse investor will choose the one with less variability (less risk). Likewise, when given a choice between two investments with the same variability (risk), risk-averse investors will choose the one with the higher return.**
Triangle Advisers is a very small investment adviser that is planning to register in three states. Which parts of Form ADV must Triangle file? I) Part 1A II) Part 1B III) Part 2 A) I and III only B) II and III only C) I, II, and III D) Triangle is not required to file any part of Form ADV since it does not fall under federal jurisdiction.
C) I, II, and III **A firm must file Form ADV to register as an investment adviser. Generally, this is done electronically through the Investment Adviser Registration Depository (IARD), which forwards the forms to the appropriate regulator(s). The first section of the form consists of Parts 1A and 1B. Part 1A is completed by all firms regardless of their status as a state or federal adviser. Part 1B is completed only by firms that are registering at the state level. Form ADV also contains a separate section (Part 2), which is filed by both federal and state advisers. Part 2 contains the information about the investment adviser's business. Information contained in this section may be copied directly to, or used as, the basis for investor disclosure information found in the investment adviser's investor brochure.
Which of the following is an example of an exempt transaction under the Securities Act of 1933? A) U.S. Treasury securities B) Municipal securities C) Reg. D D) Railroad equipment trusts
C) Reg. D **Since this question is asking about an exempt transaction at the federal level (Act of 1933), the only appropriate answer is Regulation D. A Regulation D offering is also considered private placement and represents a federal exempt transaction. Under the Securities Act of 1933, U.S. Treasuries, municipal securities, and railroad equipment trusts are all exempt securities (not transactions). **
According to the Securities Act of 1933, a pooled investment fund is considered a federal covered security when it: A) Registers as a hedge fund B) Is managed by a federal covered adviser C) Registers with the SEC under the Investment Company Act of 1940 D) Files an application with an Administrator seeking an exemption
C) Registers with the SEC under the Investment Company Act of 1940 **An investment pool is considered a federal covered security when recognized as an investment company under the Investment Company Act of 1940 and when its offering is registered with the SEC. Requesting an exemption or employing a federal covered adviser does not make an investment pool an investment company.**
Which of the following is a characteristic of a Subchapter S corporation, but is not a characteristic of a limited partnership? A) Earnings are not subject to double taxation. B) Management is centralized. C) The number of potential investors is limited. D) Losses are passed through to investors.
C) The number of potential investors is limited. **Both Subchapter S corporations and limited partnerships pass through both earnings and losses to their investors, which eliminates double taxation. Neither organization is responsible for paying taxes on its earnings; instead, their earnings are distributed to the owners for tax reporting purposes. Additionally, both S Corporations and limited partnerships have centralized management. However, unlike limited partnerships, S Corporations are limited to 100 shareholders**
Which right is NOT granted to shareholders under the Investment Company Act of 1940? A) The right to approve changes to the firm's investment policy B) The right to approve the investment adviser's contract C) The right to receive real-time updates of changes in the firm's portfolio D) The right to vote for or elect the firm's board of directors
C) The right to receive real-time updates of changes in the firm's portfolio **Under the Investment Company Act of 1940, shareholders are not entitled to current information about the composition of the fund's portfolio. This information is considered to be proprietary and is not released in real-time. All of the other statements are true. On a semiannual basis, shareholders will receive reports which contain updated financial information about the fund as well as a list of the securities in the fund's portfolio. **
An IAR walks into a coffee shop and sees a friend who invites him over to meet a group of his coworkers. One person admits that his sister is a client of the IAR. According to NASAA's model rules, which of the following is an acceptable response for the IAR? A) To acknowledge that the person's sister is a client, but that the IAR cannot discuss any of her confidential information B) To acknowledge that the person's sister is a client and has made great returns as a result C) To acknowledge that he knows the person's sister D) State the actual returns achieved by the client since her brother is an immediate family member and understands the need for confidentiality
C) To acknowledge that he knows the person's sister **NASAA's model rules prohibit an IA or IAR from disclosing a client's identity, investments, or other confidential information without the client's specific written consent. Although acknowledging that the sister is a client and expressing that he can't discuss her confidential information seems like a reasonable answer, even if asked by a relative, the IAR is not permitted to disclose whether a person is a client. Remember, regulatory authorities have the ability to demand the disclosure of client information.**
A customer invested $25,000. After 20 years the investment is now valued at $100,000. How many years did it take to double in value? A) 4 B) 5 C) 7 D) 10
D) 10 **The $25,000 investment doubled twice, from $25,000 to $50,000, then to $100,000, over 20 years, or it doubled every 10 years.**
A sole proprietor desires to set up their business as a separate entity, but retain the same flow-through tax treatment with full ownership. Which of the following business entities would be BEST? A) A limited partnership B) A general partnership C) A C Corporation D) A Subchapter S Corporation
D) A Subchapter S Corporation **By establishing a Subchapter S Corporation, the business is not taxed. Instead, income and losses flow through to the shareholders, which in this case is one person. While partnerships also provide flow-through of tax treatment, they require more than one owner or investor. A C Corporation is a taxable entity that lacks flow-through tax treatment.**
Which of the following may be advertised as a no-load fund? A) A fund that assesses a front-end sales charge B) A fund that assesses a back-end sales charge C) A fund that assesses a 12b-1 fee of 0.25% of average total assets per year D) A fund that assesses a 12b-1 fee of 0.25% of average net assets per year
D) A fund that assesses a 12b-1 fee of 0.25% of average net assets per year **Regulators have created standards for advertising a fund as a "no-load." No-load funds cannot have a front-end sales charge, a back-end sales charge, or a 12b-1 fee that exceeds 0.25% of the fund's average net (not total) assets for the year. **
A client has invested $20,000 in a variable annuity. After 10 years, the annuity is valued at $45,000. If the client withdrew $20,000 at age 59, he is subject to: A) A 10% penalty on the amount withdrawn B) Being taxed on the distribution as a capital gain C) Being taxed on the distribution as ordinary income D) Being taxed on the distribution as ordinary income, plus a 10% penalty on the amount withdrawn
D) Being taxed on the distribution as ordinary income, plus a 10% penalty on the amount withdrawn **If an individual purchases a variable annuity, it is not considered a tax-qualified plan. The contribution is not taxed upon withdrawal; however, any earnings withdrawn prior to age 59 1/2 are subject to a 10% penalty and ordinary income tax.**
Which of the following statements is TRUE regarding a 403(b) plan? A) Distributions from the plan will be taxed as long-term capital gains B) All distributions in excess of contributions will be taxable at ordinary income tax rates C) Only earnings will be taxed at ordinary income tax rates D) Distributions from the plan will be subject to taxation at ordinary income tax rates because of the zero cost basis
D) Distributions from the plan will be subject to taxation at ordinary income tax rates because of the zero cost basis **Contributions to a 403(b) plan are made on a pretax basis, resulting in a zero cost basis. Therefore, all distributions are taxed as ordinary income. **
Which of the following items is not included in an income statement? A) Sales B) Interest C) Taxes D) Dividends
D) Dividends **The income statement for a business will disclose its sales (revenues) less its operating expenses, less interest paid on its debt, which equals earnings before taxes. Then taxes are deducted, to determine net income, from which dividends may be declared. Once declared, the balance sheet will reflect the reduction in retained earnings, and an increase in current liabilities, and a decline in working capital. A word of caution: when constructing an income statement for a client, dividends received from owning investments are included on the client's income statement. **
Under the Investment Advisers Act, records that MUST be maintained by an investment adviser include: I) All checkbooks, bank statements, and cancelled checks II) A record of the personal securities transactions of the adviser and its employees III) Copies of all circulars, advertisements, and newspaper articles sent to ten or more persons A) I and II only B) I and III only C) II and III only D) I, II, and III
D) I, II, and III **The Investment Advisers Act specifies which records an adviser must keep and maintain. All of the choices listed are required.**
Which of the following items may not be bought on margin? I) Pink Sheets securities II) Nasdaq securities III) Options IV) Futures V) Open-end investment company shares A) I only B) I and III only C) II, IV, and V only D) I, III, and V only
D) I, III, and V only **Nonmarginable securities include those found in the Pink Sheets, on the OTCBB, as well as options, new issues, including IPOs, and mutual fund shares.**
Which of the following statements are TRUE regarding the administrative proceedings under the Uniform Securities Act? I) Denial orders issued by the Administrator are final, binding, and may not be appealed II) Administrators are not permitted to retroactively enforce orders and revocations III) Administrators are permitted to issue summary orders denying certain exemptions IV) The burden of proof for qualifying for an exemption is on the party claiming the exemption A) I and II only B) I, II, and IV only C) II and III only D) II, III, and IV only
D) II, III, and IV only **Choice (I) is not true since orders issued by the Administrator may be appealed within 60 days. All of the other choices are true statements. **
All of the following statements are TRUE about zero-coupon bonds, EXCEPT: A) It has no reinvestment risk B) The bondholder receives all interest at maturity C) The bondholder pays tax each year on the accretion D) It would be a suitable investment for a customer who needs cash flow
D) It would be a suitable investment for a customer who needs cash flow **A zero-coupon bond is purchased at a discount and does not pay periodic interest. All interest is paid at maturity (the difference between cost and par value). The discount must be accreted each year and is treated as ordinary income even though it was not actually received. Since interest is not paid each year, a zero-coupon bond would not satisfy an investor's need for cash flow.**
A client who has no dependents wants to ensure that the securities in his account will go to his sister upon his death, but also wants to avoid probate. What type of account is the most appropriate for the client? A) Joint Tenants With Right of Survivorship (JTWROS) B) Tenants in Common (TIC) C) A durable account D) Payable On Death (POD)
D) Payable On Death (POD) **By setting up the account as POD, the assets pass to the client's sister without going through probate. If he chose JTWROS, his sister is considered an equal owner of the assets; however, with a POD account, she's only the beneficiary. Tenants in common is used most often by unrelated parties, such as business partners. There's no such thing as a durable account. **
An initial public offering (IPO) is being sold in one state only and is not being submitted for registration with the SEC under the Securities Act of 1933. According to the provisions of the Uniform Securities Act, what method of registration would be used for this offering? A) Notification B) Coordination C) Subordination D) Qualification
D) Qualification **The notification and coordination methods of state registration may only be used when the issuer also files a federal registration statement under the Securities Act of 1933. The qualification method of registration may be used in any state for any issuer that is not seeking federal registration.**
Who typically does not supply the property to create a trust? A) The settlor B) The grantor C) The maker D) The beneficiary
D) The beneficiary **The terms settlor, grantor, and maker are synonymous. The person who supplies the assets to place in a trust may also be referred to as the donor or trustor. When taking your examination, you may see these terms used interchangeably. The term beneficiary of the trust refers to whom the trust will benefit.**
Which of the following is NOT a characteristic of whole life insurance policies? A) The cash value is guaranteed B) The premiums are deposited into the general account of the insurance company C) The death benefit is guaranteed D) The death benefit fluctuates or adjusts to the market
D) The death benefit fluctuates or adjusts to the market **In a whole life insurance policy, premium payments are invested in the general account of the insurance company. The insurance company guarantees the owner's cash value and provides a fixed, guaranteed death benefit.**
Which of the following statements is TRUE according to ERISA section 404(b)? A) The fiduciary may maintain plan assets in any foreign jurisdiction B) Any plan participant may be considered a fiduciary C) The fiduciary may not maintain the indicia of ownership of assets of the plan outside the jurisdiction of the district courts of the U.S. D) The fiduciary may maintain the indicia of ownership of assets of the plan outside the jurisdiction of the district courts of the U.S. if authorized by the Secretary of the Department of Labor
D) The fiduciary may maintain the indicia of ownership of assets of the plan outside the jurisdiction of the district courts of the U.S. if authorized by the Secretary of the Department of Labor **The rules according to ERISA section 404(b) prohibits fiduciaries from maintaining the indicia or evidence, of ownership of plan assets outside the jurisdiction of U.S. courts, unless allowed by the Secretary of the Department of Labor.**
Broker-Dealer A is a publicly traded company listed on the New York Stock Exchange. Which of the following statements is TRUE regarding an agent of Broker-Dealer A who wants to sell securities of his company to a client? A) This would be considered an unethical business practice B) This is acceptable only if the agent discloses the relationship in writing prior to the transaction C) This is acceptable if the agent discloses the relationship verbally prior to the transaction since no written disclosure is necessary D) This is acceptable if the agent discloses the relationship verbally prior to the transaction and in writing before the settlement date
D) This is acceptable if the agent discloses the relationship verbally prior to the transaction and in writing before the settlement date **Failing to disclose that a broker-dealer is affiliated with or controlled by an issuer of securities is considered a dishonest and/or unethical business practice. The agent would need to disclose the affiliation before entering into any contract with a customer to buy or sell securities. The disclosure may be made verbally prior to the trade if written disclosure is made at or before the completion of the transaction (usually the settlement date). The disclosure would need to be made to any account of a broker-dealer.**
Which of the following is NOT an option exercise style? A) American B) Capped C) European D) Uncovered
D) Uncovered **Uncovered is a term that relates to an option position or strategy that investors may employ and it's in no way connected to an option exercise style. American, European, and Capped are option exercise styles. American style options allow the owners to exercise their contracts any time prior to expiration. European style options allow the owners to exercise their contracts only during a specified period, typically on the business day of expiration. Capped style options will be exercised automatically if the value of the underlying security hits or exceeds a specified capped price.**
