Practice Exam

Low-risk tolerance and high liquidity needs are typical characteristics of which type of institutional investor? A) Banks B) Defined benefit pension plans C) Foundations D) Trusts

a

A corporation is capitalized with common stock, senior preferred stock, mortgage bonds, and subordinated debentures. Your client, who holds $10,000 of the debentures, is concerned about the future viability of the enterprise. You can inform the client that the debentures have a claim A) ahead of the common stock, the preferred stock, and the bonds. B) ahead of the common stock and the preferred stock, but after the bonds. C) behind the bonds, the preferred stock, and the common stock. D) ahead of the common stock, but after the preferred stock and the bonds.

b

You have a 45-year-old client wishing to save for retirement. The client does not have a great deal of investment sophistication and inquires about the risks you have exposed him to by placing the majority of his portfolio in listed common stocks. You would respond that one risk he should not concern himself with is A) systematic risk. B) liquidity risk. C) inflation risk. D) business risk.

b A portfolio of listed common stocks will have little to no liquidity risk, as listed shares are easily traded. Even though common stocks tend to offer protection against inflation, there is no assurance that the portfolio will keep pace with the rising cost of living

Under the provisions of Regulation SP, a person who has an investment advisory contract with a registered investment adviser is known as A) a consumer. B) a client. C) a customer. D) a cohort.

c The customer has an ongoing relationship, a consumer is a one-shot deal.

What is the tax-equivalent yield of a 7% municipal bond to an investor in the 35% federal income tax bracket? A) 4.55% B) 9.45% C) 20.00% D) 10.77%

d

Which of the following risks would most likely be minimized through portfolio diversification? A) Purchasing power risk B) Market risk C) Interest rate risk D) Credit risk

d only those risks that are unsystematic can benefit from diversification

In order to come under the SEC's requirement to file a Form 13F, an institutional manager must have discretion over A) an equity portfolio of at least $100 million in 13(f) securities. B) more than 10% of the outstanding voting securities of a reporting company. C) an equity portfolio of at least $100 million. D) an equity portfolio of at least $50 million in 13(f) securities.

a

A balance sheet shows that a corporation builds its capital structure with all of the following except A) capital stock. B) retained earnings. C) cash. D) long-term debt.

c

Which of the following is required for annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser? A) Sending a renewal notice to the SEC B) Filling out the consent to service of process C) Paying the state licensing fee D) Filling out Form U4

c

LMN, Inc., is preparing to report its net income for the past year. An increase in which of the following would not cause a decrease in the reported net income? A) Year-end bonuses to employees B) Corporate income tax rate increase C) Cash dividends D) Allowance for bad debts

c Cash dividends are paid out of the company's net income, so an increase or decrease will not impact that net income. Net income is a calculation determined by current operations, so an increase in the amount set aside as an allowance for bad debts will reduce operating income.

An investor is concerned that interest rates will be volatile over the next few years. Which of the following would eliminate interest rate risk? A) TIPS bonds B) Cumulative preferred stock C) Zero-coupon bonds D) Insured bank CDs

d

All of the following would decrease the U.S. balance of payments deficit except A) an increase in exports of domestic goods from the U.S. B) a decrease in imports of foreign goods into the U.S. C) a decrease in dividend payments by U.S. companies to foreign investors. D) a decrease in purchases of U.S. securities by foreign investors.

d Anything that will bring foreign money to the U.S. will decrease the balance of payments. Foreign investors pulling their money out of the U.S. or investing less in the U.S. will increase the deficit.

Jonah purchased 100 shares of DEF common stock at a price of $25 per share on August 4, 2020. On December 1, 2021, with the stock selling for $29 per share, he gifted the stock to his daughter. She subsequently sold the stock nine months later for $32 per share. Her tax consequence is A) $700 long-term capital gain. B) $700 short-term capital gain. C) $300 short-term capital gain. D) $300 long-term capital gain.

a

Which of the following classes of mutual fund shares would be appropriate for an investor who doesn't mind paying some sales charges on a purchase but wants to minimize operating expenses over a long-term holding period? A) Class A shares B) Class C shares C) No-load shares D) Class B shares

a Class A shares have a front-end load, but their operating expense ratio is usually lower than that of any other classes.

The discounted rate that equates a bond's cash flow to its current price is known as the bond's A) yield to maturity. B) duration. C) coupon rate. D) current yield.

a the YTM of a bond considers the accretion of any discount or amortization of any premium as well as the annual coupon rate, taking into consideration the time value of money.

The head of marketing for a regional broker-dealer spots an article in the local newspaper that is an excellent presentation of an investment strategy the firm recommends. If the firm posts a link to the article on its website, it would be known as A) endorsement. B) adoption. C) entanglement. D) plagiarizing.

b adoption is the use of content or a link to content that is solely the creation of someone else; your firm is just using it. Entanglement is when the firm had a role in the creation of the material.

Which of the following items does not fall within the Section 28(e) safe harbor? A) Research reports prepared by a third party other than the broker-dealer B) Proprietary research reports analyzing the performance of a specific industry C) Software used to simplify the investment adviser's preparation of its tax returns D) Software used to analyze client's portfolios

c

Which of the following would probably be the best indicator of where the economy is headed? A) Average prime rate B) Rate of industrial production C) Number of permits for construction of new housing units D) Average duration of unemployment

c Industrial production is a coincident indicator, and the prime rate and rate of industrial production are lagging indicators.

Daphna works for Automated Asset Allocators (AAA), an investment adviser that has offices in States D, E, and F and is registered with the SEC. Daphna spends most of her time in an office in State D, but, once every other week, she goes to the branch in State E. Daphna would be exempt from registration as an IAR in which of the following states? A) State E, where she has no retail clients B) States E and F C) Daphna would have to register in all three states D) State F, where she has 227 retail clients

d As an IAR with a federal covered investment adviser, Daphna only has to register in those states in which she maintains a place of business.

An investor concerned about liquidity would be least likely to invest in A) ADRs. B) common stock listed on the New York Stock Exchange. C) cumulative preferred stock. D) stock subject to Rule 144.

d In most cases, stock sold subject to Rule 144 is stock that cannot be immediately resold (restricted stock)

Which of the following is the primary advantage to the employer who offers a nonqualified plan when compared to one that offers a qualified plan? A) The nonqualified plan allows for an immediate employer deduction for contributions. B) The qualified plan is permitted to discriminate in favor of key employees. C) The qualified plan costs less to administer than the nonqualified plan. D) The nonqualified plan is permitted to discriminate in favor of highly compensated employees.

d The nonqualified plan, typically deferred compensation, allows for a tax deduction when the money is ultimately paid out to the employee or the beneficiary

Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A) GHI 7s of 2052 B) ABC 5s of 2050 C) DEF 6s of 2051 D) JKL 4s of 2022

b The bond with the longest duration is generally going to have the greatest exposure to interest rate risk. Because there is very little difference between maturity dates of 2050 through 2052, the bond with the lowest coupon will have the longest duration.

With regard to an SEC-registered investment adviser employing the services of a promoter to solicit on its behalf, it would be correct to state that A) referral fees may be paid only if the promoter is also registered with the SEC. B) cash referral fees may be paid pursuant to a written or oral agreement to which the investment adviser is a party. C) the investment adviser may not compensate a solicitor who is subject to a statutory disqualification. D) delivery of the solicitor's brochure must take place within five days after the entry into the advisory contract.

c

Which of the following statements regarding an agent's registration is correct? A) Revocation of the registration of an agent's broker-dealer will result in placing that agent's effective registration in suspense. B) If the broker-dealer with which that agent is registered should have its registration revoked, the agent's license will be held by the Administrator, and the agent will be required to register with an active broker-dealer no later than 30 days following the revocation. C) Individuals whose only securities activity with a broker-dealer is trading for the firm's proprietary account are not required to register as agents. D) Agents may be licensed in a state even if their broker-dealer is not.

a

Which of the following activities might result in a positive yield curve in the bond market? A) Investors buying short-term bonds and selling long-term bonds B) A parallel downward shift in interest rates C) A parallel upward shift in interest rates D) Investors buying long-term bonds and selling short-term bonds

a Buying short-term bonds tend to drive their prices up and their yields down, while selling long-term bonds has the opposite effect.

Section 15 of the Investment Company Act of 1940 spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that A) no contract may be terminated with more than 60 days' written notice. B) the initial contract is for a maximum of one year and then may be renewed on either an annual or biannual basis. C) the contract should be in writing. D) the fund may not engage in margin trading unless a specific exemption applies.

a Contracts between funds and their advisers may not be terminated with more than 60' days written notice and these contracts MUST, NOT should be in writing. The initial contract is for a two-year period after which the contract is renewed on an annual basis.

All of the following statements relating to ADRs are true except A) currency risk is avoided. B) the issuer is a domestic bank. C) trading takes place on domestic secondary markets. D) dividends are paid in U.S. dollars.

a Even though everything relating to ADRs is done in English using U.S. dollars on domestic stock markets, there is still currency risk since the ultimate value of the stock and its dividends are based upon the foreign company's home currency

Your client has a long position in a security that has had considerable appreciation since the date of purchase. The client is concerned that speculation that the company's CEO may retire could have negative implications for the stock. Wishing to protect those unrealized gains, which of the following orders would be appropriate? A) Sell stop B) Buy stop C) Buy limit D) Sell limit

a Sell stop orders are frequently referred to as stop loss orders and are used either when a security is purchased to offer downside protection or, as in this case, to prevent a gain that has not yet been realized. Buy stops are used to protect against loss or preserve the gain on a short position.

Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of I. the Securities Exchange Act of 1934. II. the Investment Company Act of 1940. III. the Investment Advisers Act of 1940. IV. the Uniform Securities Act. A) II and IV B) II, III, and IV C) I, II, and III D) I and III

a The requirement for written advisory contracts is found in both the Investment Company Act of 1940 and for those advising registered investment companies and the Uniform Securities Act for state-registered advisers. Oddly, there is no mention made of this requirement in the Investment Advisers Act of 1940.

One of your customers purchased a TIPS bond three years ago. The bond's nominal yield is 4%, and inflation has averaged 6% over the holding period. The interest payment at the end of the three years would be closest to A) $23.88. B) $47.76. C) $33.78. D) $21.60.

a With TIPS, the principal is adjusted every six months by the inflation rate. 1000*1.03 (six times) gives you 1,194. Since the nominal yield is paid twice a year, and it asks for the end of the year, take 1,194*0.02 = 23.88

An investor would be entitled to a breakpoint on quantity purchases made together with all of the following accounts except A) his brother with whom he regularly shares investment ideas. B) his wife's personal account. C) a custodian account under UTMA for his child. D) shares of that fund held in his 401(k) that were purchased with employer-matching funds.

a the breakpoint allows for combinations from a number of family accounts, but they have to be spouse or dependent children, not brothers

A broker-dealer with no place of business in a state is not required to be registered in that state if the broker-dealer A) is registered in the state where its principal office is located. B) limits its clientele to employee benefit plans with assets of at least $1 million. C) is a federal covered broker-dealer. D) is a member of the New York Stock Exchange.

b A broker-dealer must be registered in every state in which it sells or offers to sell securities, unless an exemption is available. If a broker-dealer has no office in a particular state and not business is done in that state other than with institutional clients, registration there is not required. There is no such term as federal covered broker-dealer. The term federal covered applies to certain investment advisers and securities.

To be in compliance with the rules under the Investment Advisers Act of 1940, which two of the following statements are correct regarding a registered investment adviser's relationship with promoters engaged to solicit for advisory business? I. An individual who is subject to statutory disqualification from registration as an investment adviser representative may be compensated to solicit clients for the adviser when employed by a third-party promoter. II. If the compensation exceeds a de miminis amount, there must be a written agreement between the investment adviser and the solicitor. III. While the sales script used may be written by the promoter, making sure that its content is fair and reasonable is the responsibility of the investment adviser. IV. Cash referral fees to promoters hired to solicit may be paid only in the case of impersonal advisory services. A) I and IV B) II and III C) III and IV D) I and II

b All relationships between registered investment advisers and a promoter where compensation is involved must be in writing. It is important to note that compensation is defined as more than $1,000 over a 12-month period. Those subject to statutory disqualification (bad actors) may not be used as solicitors if compensation is to be received. Cash referral fees to promoters are not restricted to impersonal advisory services

An investment adviser representative is required to make disclosure to the client when I. the IAR, in preparing a recommendation, uses research provided by a third party with whom the IAR is not affiliated. II. the IAR recommends a specific insurance policy for the client's overall financial plan, where a commission will be received on that sale. III. transactions recommended to a specific client are inconsistent with those for other clients with objectives that are similar to that particular client. IV. transactions recommended to the client are inconsistent with those for the IAR's own account. A) I and III B) II and IV C) II, III, and IV D) I, II, and III

b An investment adviser must provide full disclosure to his client if there would be even a hint of conflict of interest. This includes a case where a recommended product will generate a commission or other source of income to the adviser, as well as full disclosure if a recommendation if not consistent with the adviser's own activity in his own account. The adviser can use any source of information to create his own analysis, with disclosure of source only being required if the adviser uses the product of a third party as the presentation to the client. It would be unusual that all clients with the same or similar objectives would purchase or have recommended for purchase the same securities.

You have a client who is interested in a preferred stock with gauranteed dividends. What is likely the reason for using the term gauranteed? A) As a fixed income security, the dividends are guaranteed to never increase. B) The issuer has a AAA rating that is tantamount to dividend payments being a sure thing. C) Someone other than the issuer has guaranteed the payment of those dividends. D) A previous IAR has improperly used that term in an effort to make a sale.

c In the USA, guaranteed means guaranteed as to payment of principal, interest, or dividends by some third party other than the issuer.

Investors seeking current income would benefit from A) buying U.S. Treasury STRIPS. B) buying LEAPS. C) selling call options. D) buying periodic payment variable annuities.

c LEAPS are long-term options and, like all long options positions, do not generate any income. People generate income by selling something.

Both state-registered and federal covered investment advisers have brochure delivery requirements. One significant difference between the two is that A) state-registered advisers must deliver the brochure within 90 days of the end of their fiscal year while covered advisers have 120 days. B) federal covered advisers are exempt from the brochure delivery requirements to investment company clients while state-registered advisers are not. C) state-registered advisers who do not deliver the brochure at least 48 hours prior to contract signing must offer a five-day penalty free withdrawal. D) state-registered advisers who do not deliver the brochure at least five days prior to contract signing must offer a 48-hour penalty-free withdrawal.

c State-registered investment advisers who do not deliver the brochure at least 48 hours prior to entering the contract must offer a penalty-free withdrawal of five days. There is nothing comparable to that in federal law. Both have the 120 day requirement, and state-registered investment advisers cannot have investment companies as clients.

Listed options are also known as standardized options. Which of the following choices is not one of the standardized terms of a listed option? A) The expiration date B) The exercise price C) The premium D) The underlying asset

c Supply and demand in the marketplace sets the premium of a listed option

Which of the following clients of a federal covered investment adviser are not exempt from the delivery requirements of the brochure rule? A) An open-end investment company with less than $25 million in assets B) An individual investor purchasing the IA's newsletter with an annual subscription price of $410 C) An employee benefit plan with assets of at least $5 million D) A closed-end investment company traded on the New York Stock Exchange

c The only exemptions from the IA brochure rule are registered investment companies (both open and closed-end) and impersonal advice costing less than $500 per year.

A significant difference between opening an account for a trust and an account for an estate is A) banks can be named as trustees for a trust but not as an executor. B) the standard of prudent investing applies to trusts but not to executors. C) the trust account will generally be active for a much longer period of time. D) only the estate has beneficiaries.

c Trusts can be set up to run for many years; the executor's job is over once the state has been settled

The technical market theory that measures the breadth of the market is A) the support/resistance theory. B) the odd-lot theory. C) the advance/decline theory. D) the short interest theory.

c the advance/decline theory compares the number of stocks advancing versus those declining, generally on the NYSE. (large sample)

Current market interest rates are 6%. Using the discounted cash flow method of valuation, you would expect to arrive at the highest valuation for which of the following? A) 7% coupon maturing in 9 years B) 5% coupon maturing in 20 years C) Zero-coupon bond maturing in 11 years D) 10% coupon maturing in 10 years

d The discounted cash flow method considers the future expected free cash flow (the interest payments plus the eventual return of the principal) and discounts it to arrive at a present value. In its simplest iteration, this is nothing more than taking all the money you are scheduled to receive over a given future period and adjusting that for the time value of money. In general, bonds with higher coupons will have the greatest value because they will clearly produce the most cash flow.

Which of the following are not exempt from the delivery requirements of the NASAA Model Brochure Rule Requirements for Investment Advisers? A) An adviser whose only clients are exchange-traded funds B) An adviser who only provides impersonal advisory services at an annual charge of less than $500 C) An adviser whose only clients are closed-end investment companies D) An adviser who deals with qualified clients only

d There are only two exemptions from NASAA's (and the SEC's) brochure delivery rule. They are when the client is a registered investment company and when the adviser's clients receive only impersonal advice and pay less than $500 in fees per year. Qualified clients, those with at least $1.1 million in assets with the investment adviser or a net worth of at least $2.2 million, may be charged performance fees, but that has nothing to do with brochure delivery.

One of the differences between state and federal law involving an investment adviser maintaining custody of customer funds and/or securities relates to the handling of client checks made payable to third parties such as broker-dealers. Which of the following properly expresses that difference? A) Under state law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within 24 hours of receipt. B) Under federal law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within 24 hours of receipt. C) Under federal law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within three business days of receipt. D) Under state law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within three business days of receipt.

d Under the UNIFORM SECURITIES ACT, if an IA receives a check made payable to an unrelated third party, it will be considered custody unless forwarded within three business days of receipt. Third-party checks are never considered custody under federal law.

Each of the following would be exempt from the definition of an agent under the Uniform Securities Act except A) Florence, an employee of the First Fidelity Trust Company, who buys and sells securities to meet the needs of her trust clients. B) Beatrice, who was appointed by the other members of her investment club to make the portfolio decisions for the next quarter. C) Katrina, the administrator of the Widget Spinners Corporation pension plan, who is paid for making investment decisions for the portfolio. D) Violet, an employee of the Widget Spinners Corporation, who is paid a commission on sales of the company stock to fellow employees.

d When an individual receives compensation for selling employer stock to employees, that person is defined as an agent and must register as such. Managing a pension plan (and getting paid for it, naturally) does not make one an agent, she is not being compensated for trades. Because banks and trust companies are excluded from the definition of a broker-dealer, their employees cannot be considered agents.

As defined in the Uniform Securities Act (USA), which of the following would be considered an exempt transaction? A) A purchase of stock by an accredited investor under Rule 506(b) B) A sale of U.S. Treasury bonds to a retail investor C) A purchase of bonds by a trustee of an irrevocable trust D) A sale of stock by an administrator of an estate

d even though t-bonds are an exempt security, the sale to an individual is not an exempt transaction. Rule 506(b) is the federal transaction exemption not found in the USA, and only a trustee in bankruptcy is considered for the exemption

With regard to nonqualified stock options (NSO) and incentive stock options (ISO), which of the following statements is incorrect? A) Board of director approval is required for both NSOs and ISOs. B) A tax deduction for the employer is generally only available with NSOs. C) AMT is only an issue for those exercising ISOs. D) Capital gain treatment is only available with NSOs.

d only the ISO offers the employee a capital gain treatment. REVIEW ISOS AND NSOS!!!!!