Practice
Your client has an annual income exceeding $250,000. He tells you that he wishes to retire in 18 years with a lump sum of at least $5,000,000. You tell him he can invest in zero-coupon municipal bonds that have a yield of 4%. If the client buys 5,000 bonds now, how much will he pay for each bond to achieve a yield of 4%? A $500 B $250 C $600 D $125
A $500 The rule of 72 is a shorthand method of determining how many years it will take an investor's money to double given a fixed rate of interest. If you divide 72 by the rate of interest, this approximates the number of years it will take for the money to double. At 4%, the money would double approximately every 18 years. This means the investor would need to invest $2,500,000 to have $5,000,000 in 18 years. $5 million dollars of bonds is equal to 5,000 bonds at a par value of $1,000. $2,500,000 divided by 5,000 equals $500.
If the economy is experiencing rising inflation, this will generally lead to: A A decrease in bond prices B An increase in bond prices C No change in bond prices D Volatility in bond prices
A A decrease in bond prices Rising inflation will usually lead to the FRB increasing short-term rates. This increase in rates will cause outstanding bond prices to decrease.
A 30-year-old single mother has income of $25,000 and has put money into an equity fund for her 12-year-old son's college education. She wants to balance out the risk with a small bond investment and is hoping to avoid accessing any of this money until her son turns 18. Which of the following securities is the MOST appropriate for the mother? A A government bond fund B A 15-year zero-coupon bond C A 15-year municipal bond D A high-yield corporate bond fund
A A government bond fund The most appropriate choice for the mother is to invest in a government bond fund. Since U.S. government securities have no credit risk, this choice will balance out the risk of the equity fund. Additionally, the fund will offer the benefit of a diversified portfolio of government securities. Buying a zero-coupon bond is NOT appropriate. Zero-coupon bonds are a growth investment and the investor needs to diversify into something providing income and safety. Buying high-yield bond funds is too risky for a person who only makes $25,000 per year. Remember, high-yield bonds have high interest payments since the creditworthiness of the issuer is questionable.
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.
Which of the following investments would be MOST suitable for an estate account? A Commercial paper B Treasury bonds C Preferred stock D Nonnegotiable CDs
A Commercial paper Estates are intended to last only for a short time (a year or two). The executor or administrator of the estate has a fiduciary responsibility to safeguard the estate's assets until they can be distributed to the heirs. Estates should generally invest only in short-term, safe, liquid assets such as money-market instruments. Money-market instruments include T-bills (not Treasury notes or bonds), commercial paper, and negotiable CDs.
Which of the following statements regarding a sports representative is accurate? A In certain cases, a sports and entertainment representative who provides advice about investments is considered an investment adviser B Under IA-1047SER-EXCL, sports and entertainment representatives are specifically excluded from the definition of investment adviser C Sports representatives are considered investment advisers only when they have a power of attorney to execute transactions for their clients' accounts D Sports representatives are considered investment advisers only when they charge a separate fee for any investment advice rendered
A In certain cases, a sports and entertainment representative who provides advice about investments is considered an investment adviser Sports or entertainment representatives may offer a variety of services to professional athletes or entertainers including help in negotiating employment contracts, obtaining endorsement deals, and helping with various financial matters. If the representative's services include providing advice about securities, the representative might be considered an investment adviser under the USA. This designation would apply even if the representative did not earn a separate fee for the investment advice.
When would a variable annuity be most suitable for a client? A When the client wants capital appreciation or growth over a long period B When the client wants a fixed rate of return C When the client wants an inflation-adjusted rate of return D When the client wants to receive a predictable amount of income at retirement
A When the client wants capital appreciation or growth over a long period Variable annuities are suitable for clients who are willing to invest for the long term and want to invest in the markets. The investment objective of variable annuities is capital appreciation (growth). Since a variable annuity's performance is tied to the market, its return is unpredictable and is not based on inflation.
Which of the following choices would meet the definition of an investment adviser under the Investment Advisers Act? A A broker-dealer that holds itself out to the public as a provider of securities research B An accountant who holds herself out to the public as a provider of financial planning advisory services C A bank that holds itself out to the public as a provider of trust services D A technical analyst who holds himself out to the public as a provider of foreign currency research
B An accountant who holds herself out to the public as a provider of financial planning advisory services According to SEC Release 1092, accountants who hold themselves out to the public as providers of financial planning services would meet the definition of an investment adviser. In these circumstances, the advice they provide would no longer be incidental to their accounting business.
A broker-dealer must keep all the following records, EXCEPT: A Original copies of all incoming client correspondence B Form ADV for any investment adviser for which the broker-dealer provides safekeeping services C Signed copies of all discretionary account agreements executed by clients D Copies of all order tickets
B Form ADV for any investment adviser for which the broker-dealer provides safekeeping services According to the Securities Exchange Act of 1934 (Rules 17a-3 and 17a-4), a broker-dealer must keep all these records except for Form ADV. Investment advisers who have custody of client assets must place these assets with a qualified custodian for safekeeping (such as a broker-dealer) and must notify the regulators that it has custody using Form ADV.
One of the main differences between futures contracts and forward contracts is that: A Forward contracts do not involve commodities B Forward contracts may not be offset without permission C Futures contracts are always used to speculate D An investor may not be short a futures contract
B Forward contracts may not be offset without permission One of the main differences between futures contracts and forward contracts is that future contracts may be offset (bought or sold). Indeed, most buyers and sellers of future contracts never actually take delivery of the underlying commodity or financial instrument. In a forward contract, however, both parties involved in the contract must agree before the contract may be bought or sold.
According to the Uniform Securities Act, the Administrator may require federal covered advisers to: A Register in every state in which they have a branch office B Give notice or notice file in any state where they transact business with six or more individual retail clients C Register with the Administrator in any state where they transact business with six or more individual retail clients D Do nothing because the Administrator has no jurisdiction
B Give notice or notice file in any state where they transact business with six or more individual retail clients The Administrator may require federal covered investment advisers to notice file if they transact business with more than five noninstitutional clients over a 12-month period. Notice filing is not a form of registration. Instead, it is the process of a federal covered adviser sharing information with the Administrator that it has filed with the SEC.
Gross Domestic Product (GDP) has declined for two consecutive quarters in the U.S. Which of the following industries would most likely be negatively affected by this downturn in the economy? A Cosmetics B Transportation C Food D Medical
B Transportation A downturn in GDP for two consecutive quarters is indicative of a recession. During a recession, cyclical industries, such as transportation, construction, and steel, will generally decline. Defensive industries, including cosmetics, food, and medicine, will not be as strongly affected.
An investment adviser presented a statement regarding the performance of its recommendations for the past 10 years. In compliance with the minimum recordkeeping requirement, the IA has only kept evidence of its performance for the last five years. In this case, has the IA violated the Uniform Securities Act? A No, the IA has not violated any regulations. B Yes, because the IA did not maintain evidence of performance for the last 10 years. C No, because the IA maintained records for the minimum of five years. D No, because the IA maintained the minimum documents for five years; however, it was unethical because it doesn't have the appropriate documents.
B Yes, because the IA did not maintain evidence of performance for the last 10 years. Although most IA books and records are maintained for a minimum of five years, performance records are different. According to NASAA's IA Recordkeeping Model Rule, records regarding performance must be maintained for the "period of the statement." This means that if an IA intends to disclose performance for 10 years, it must maintain keep records regarding the performance of that 10-year period.
An investment adviser has an office next door to a broker-dealer. The adviser directs all client transactions to the broker-dealer for execution and, in exchange, the broker-dealer rebates 10% of the commissions that it receives to the adviser. This practice is: A Prohibited under the Uniform Securities Act B An irreconcilable conflict of interest C A conflict of interest that must be disclosed to clients in writing D An acceptable practice as long as the broker-dealer is registered as a solicitor
C A conflict of interest that must be disclosed to clients in writing The NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers states that an investment adviser must disclose all conflicts of interests to clients in writing. These conflicts include the scenario described in this question in which the investment adviser is receiving compensation (rebates) for the execution of client transactions. However, note that this arrangement also needs to comply with the federal securities laws and the FINRA rules pertaining to directed brokerage arrangement, which may require more than mere disclosure.
What are the advantages of a limited liability company (LLC) compared to an S Corporation? A Limited liability B Lower corporate tax rates C A simpler managerial structure D Continuity of life
C A simpler managerial structure Owners of S Corporations and limited liability companies have limited liability. Both entities also have a flow-through tax structure. Income, capital gains, and capital losses are passed directly on to the investors and reported on their personal income tax returns. Neither entity pays federal corporate taxes on income earned. The advantage of a limited liability company is that its managerial structure is much simpler. There is no need for a board of directors or annual meetings or the other formalities of a corporation. However, unlike an S Corporation that has continuity of life, LLCs are dissolved after an event (e.g., owner dies) or a specific period passes.
ABC Corporation has 10,000,000 shares outstanding that are currently selling for $50 a share. ABC Corporation is an example of which kind of company? A Cyclical B Defensive C Small capitalization D Large capitalization
C Small capitalization The market capitalization of a company is determined by multiplying the number of its outstanding shares by the current market price of the shares. The market capitalization of ABC is $500 million. Thus, ABC is considered a small capitalization company since its market capitalization is less than $1 billion. There is nothing in the question to suggest that ABC is a cyclical company or a defensive one.
A corporation's shareholders must vote for: A Cash dividends B Stock dividends C Stock splits D Stopping dividends
C Stock splits The board of directors has control over dividends but must have shareholder approval for a stock split.
If an options contract is exercised, which of the following statements is TRUE? A The buyer of a call must deliver the underlying stock B The buyer of a put will receive the underlying stock C The seller of a put will be required to buy stock D The seller of a call will lose the premium
C The seller of a put will be required to buy stock If a put option is exercised, the buyer has the right to put (deliver) the underlying stock to the seller at an agreed-upon price. The seller or writer has the obligation to accept delivery of the stock at the exercise or strike price.
How does an Administrator determine whether excessive trading has occurred in a customer's account? A The client's financial situation B The frequency of unsolicited trades in the account C The suitability of solicited trades in the account D The suitability of unsolicited trades in the account
C The suitability of solicited trades in the account Churning or excessive trading is a prohibited activity. To determine whether churning has occurred, regulators typically examine the suitability of solicited trades (i.e., those which were recommended by agents of a broker-dealer). Unsolicited trades are executed at the client's own volition, without advice from an agent of a broker-dealer, and are irrelevant for churning determination.
Preemptive rights provide which of the following benefits to their holders? A The ability to vote when they cannot attend the shareholders' meeting. B A guarantee that bonds can be purchased at a predetermined price from the issuer. C Their proportionate ownership will not be diluted if additional shares are issued. D That dividends will continue to be paid on their common stock.
C Their proportionate ownership will not be diluted if additional shares are issued. If a company decides to issue additional shares, preemptive rights allow existing shareholders to maintain their proportionate interest in the company by exercising their rights.
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).
A trustee is managing a trust that has beneficiaries ranging in age from 2 through 17. Under the Uniform Prudent Investor Act (UPIA), how should the assets of the trust be managed? A All assets should be invested based on the investment recommendations of the grantor B The trust should be managed based on the most conservative beneficiary profile C The investment profile of the oldest beneficiary is the determining factor, since she will need the money for college within one year D All beneficiaries' interests should be weighed prior to making any investments
D All beneficiaries' interests should be weighed prior to making any investments Under the Uniform Prudent Investor Act (UPIA), a trustee managing an account that has multiple beneficiaries must act impartially when investing and managing the trust's assets. When making investments, a trustee must take into account the different interests of all beneficiaries.
A 6% coupon bond is selling at a basis of 6.20. If interest rates in the market decline below 6%, the bond's basis will: A Increase B Remain the same C Increase or decrease, depending on its maturity D Decline
D Decline A bond's basis is synonymous with its yield-to-maturity. Interest rates and yield-to-maturity on a bond will move in the same direction. If market interest rates decline, it means that yields (including the yield-to-maturity) will also decline.
All of the following risks are considered types of unsystematic risk, EXCEPT: A Political risk B Business risk C Credit risk D Market risk
D Market risk Remember, market risk is a form of systematic risk and cannot be avoided by securities investors. For example, if the overall stock market is declining, this will negatively affect all of the stocks in the market. Conversely, unsystematic risk is able to be reduced through appropriate diversification
What method of crediting an equity indexed annuity's returns is based on the index value over a specified period? A American style B Capped C Binary D Point-to-point
D Point-to-point Equity index annuities (EIAs) provide returns that are based on the return of an equity index; however, if the market falls, they also provide a minimum rate of return. Insurance companies will credit the annuitants' accounts periodically. Some insurance companies credit their policyholders monthly, annually, or bi-annually, while others do it on a specific date (e.g., the starting point may be the value of the index on the date of issuance and the ending point is the value of the index on a particular date), which is referred to as "point-to-point." The amount of credited interest will then be based on the increase or decreased in the indexed value since the last time it was credited.
Which of the following items is not included in an income statement? A Sales B Interest C Taxes D Retained Earnings
D Retained Earnings The income statement for a business will disclose its sales (revenues) less its expenses. Interest and taxes are both expenses which are reflected on a company's income statement. However, retained earnings reflects a company's historical earnings and is found on the company's balance sheet, not its income statement.
Which of the following customer accounts would be funded with pretax dollars? A Nonqualified variable annuities B Universal life C 529 plan D Section 457 plan
D Section 457 plan Section 457 Plans are a type of payroll deduction plan that is offered to employees of state and local governments. These plans are funded pretax and are not subject to taxation until the funds are distributed.
To help a friend who needs to raise capital to start a new business, an agent markets his friend's limited partnership interests to some of his brokerage clients. The agent collects a commission from the sale of the interests, but has not told his broker-dealer about the sales. The agent's actions are best described as: A Unauthorized trading in customers' accounts B Churning in customers' accounts C Selling unregistered securities D Selling away
D Selling away Selling away is defined as an agent executing trades without the knowledge of his broker-dealer. Selling away most often occurs when an agent deals in a private placement outside his normal course of business. Participating in a private placement is acceptable provided the agent's employer is given notice.
For a single parent who has a low income and wants to protect her child in the event of her death, what's the best policy? A Whole life B Variable life C Variable annuity D Term life
D Term life Since term life insurance policies don't accumulate cash value, they have the lowest premiums and are likely the most suitable policies for investors with low income. In this question, it's doubtful that the single parent has enough discretionary income to afford the higher premium that's associated with a permanent insurance policy.
For a qualified dividend, what's the minimum and maximum tax rate? A Both the minimum and maximum rates are 20%. B The minimum rate is 15% and the maximum rate is 20%. C The minimum rate is at the person's ordinary income rate and the maximum rate is 20%. D The minimum rate is 0% and the maximum rate is 20%.
D The minimum rate is 0% and the maximum rate is 20%. For U.S. taxpayers in the lowest tax bracket, qualified dividends are not taxed. Only taxpayers in the highest brackets are taxed at the maximum rate of 20% on their qualified dividends. Some investors in the middle tax brackets are taxed at 15%. Bond interest payments, not dividends, are taxed at a person's ordinary income rate.
Currency risk is defined as: A The result of an increasingly global marketplace for securities B The possibility that a financial crisis in one region or country can spread to markets in other parts of the world C The likelihood that another emerging market country will devalue its currency D The possibility that changes in exchange rates will undermine the value of foreign investments for U.S. investors
D The possibility that changes in exchange rates will undermine the value of foreign investments for U.S. investors Currency risk (or exchange rate risk) is defined as the possibility that changes in exchange rates between currencies will undermine the value of foreign investments for U.S. investors.
Under the Uniform Securities Act, which of the following persons is required to register as an investment adviser? A A federal covered adviser B An accountant who provides investment advice that is incidental to her tax practice C A bank's trust department that provides fee-based investment advice D The publisher of a financial periodical that responds to each subscriber with personalized investment advice
D The publisher of a financial periodical that responds to each subscriber with personalized investment advice Federal covered advisers and trust companies are not subject to registration under the Uniform Securities Act. Lawyers, accountants, teachers, engineers, and publishers are also exempt provided their securities advice is incidental and not timed and tailored to a specific client. Of the choices given, the publisher is providing tailored investment advice and is therefore subject to registration
A client of an investment adviser is willing to speculate in order to achieve higher-than-average returns on his portfolio. The adviser wants to enter into transactions that are not permitted under the Investment Advisers Act of 1940. This is acceptable: A Provided the transactions are approved in writing by the client prior to being entered B Provided the transactions are disclosed to the client in writing prior to the settlement date C Provided the securities and/or transactions are exempt from registration D Under no circumstances
D Under no circumstances Any investment advisory contract that attempts to bind any person to transactions that are not permitted under the Act is null and void. Even if the client signs the contract, and the transactions are disclosed, the contract is void.
An investment adviser representative has been given a client's username and password in order to access her brokerage account. The client wants the IAR to have the ability to execute trades and withdraw cash to pay the client's bills. Does this constitute discretion? A. No, since the account is held by a brokerage firm. B. No, since the brokerage firm must hold client assets with a qualified custodian. C. Yes, IARs always have custody and discretion of their clients' cash and securities. D. Yes, since the IAR is able to withdraw funds and execute trades.
D. Yes, since the IAR is able to withdraw funds and execute trades. Custody is defined as having legal responsibility for, or control over, another person's assets. Since the IAR has access to a client's account, he has custody regardless of the fact that the assets are currently being held by a broker-dealer. In this scenario, the IAR also has discretionary authority and would need to have the client's written permission through a power of attorney.
