Questions I got wrong :/
A 3X leveraged fund priced at $42 tracks an index that is up 2% one day and then down 3% on the next day. What should this fund be approximately priced at following these 2 volatile days? A) $40.50 B) $41.55 C) $43.18 D) $45.86
A Starting with the $42 purchase price, a 2% increase to the index on day 1 equals $0.84 up (0.02 × $42 = $0.84). Given the 3X leverage, this would equate to a $2.52 increase on day one (3 × $0.84 = $2.52). At the start of day 2, the fund would be priced at $44.52 ($42 + $2.52 = $44.52). On day 2, the index falls by 3%. A 3% decrease in the fund equals $1.34 [0.03 × $44.52 ($1.3356 rounds up to 1.34)]. Again due to the 3X leverage structure of the fund, the $1.34 decrease equates to a $4.02 drop in the fund price (3 × $1.34 = $4.02). Therefore, after the 2 volatile days, the fund should be priced at approximately $40.50.
The term "derivative" would NOT apply to which of the following? A) Futures B) REITs C) Warrants D) Forwards
B REITs are not based on the value of something other than their own assets. Warrants (and rights) derive their value from the underlying security. Futures and forwards are contracts whose value is based on some underlying asset.
Which of the following statements about equity securities is NOT true? A) Preferred stock pays a fixed dividend. B) Common stock is less sensitive to interest rate risk than preferred stock. C) Preferred stock is an equity security while common stock is a hybrid. D) Preferred stock is usually nonvotin
C Both common and preferred stock are equity securities. Common stock is never referred to as a hybrid; there are times when preferred stock is because of those features that are similar to a debt security. The dividend on preferred stock is fixed, and shares do not have voting rights. The price of a common share generally doesn't fluctuate with changes to interest rates in the same manner as that of preferred stock.
All the following securities are issued at a discount EXCEPT A) zero-coupon bonds B) Treasury bills C) commercial paper D) CDs
D CDs are interest-bearing debt instruments issued by banks at their face value. All of the others are issued at a discount. In truth, only about 85% of commercial paper is, but that's good enough for NASAA.
ALFA Enterprises pays a quarterly dividend of $0.15 and has earnings per share of $2.40. Assuming that payout rate is continued, what is the dividend payout ratio? A) 6.25% B) 30% C) 14.4% D) 25%
D Earnings per share are typically calculated for a year. If the quarterly dividend rate of $0.15 is continued, that will be an annual payout of $0.60 ($0.15 × 4). So the annual dividend of $0.60 is divided by $2.40 to calculate what percentage of earnings is paid as a dividend; or rather, the dividend payout ratio (0.60 ÷ 2.40 = 25%).
Which of the following accounts could be opened with a TOD designation? 1 Individual 2 Joint tenants in common 3 Joint tenants with rights of survivorship 4 UTMA A) II and IV B) I and II C) I, III and IV D) I and III
D The only types of accounts that may have the Transfer on Death (TOD) designation are individual and JTWROS. Minors cannot designate a beneficiary. Upon the death of a minor, any assets belong in the deceased's estate.
The SROs have instituted maintenance margin levels for those situations where the equity in a client's margin accounts is reduced to a dangerous level. Currently, those levels are A) 25% for a long account. B) 30% for a long account. C) 50% for a long account. D) 25% for a short account.
The current minimum maintenance levels set by the SROs is 25% equity in a long margin account and 30% equity in a short margin account. The initial margin requirement under Reg. T is 50% for both long and short accounts.
Phocine and Ursus, LLC, a covered investment adviser, has a client with a large short position in PQR common stock. Their chief analyst believes that PQR is an attractive target for an acquisition. Based on this information, it might be wise for the firm to suggest this client A) sell call options on PQR. B) purchase call options on PQR. C) purchase put options on PQR. D) take a long position in PQR.
B If the analyst is correct, a takeover usually occurs at significant premium to the current market. That would be bad news for the client with a short position because covering the short would be at that higher price. The best protection for a short stock position is buying a call because that fixes the future purchasing price. In the event the analyst is wrong, or the takeover bid fails, the client has maintained the short position and is only out the premium paid for the "insurance".
The most common form of investment vehicle for venture capital is A) the limited liability company. B) the limited partnership. C) the corporate venture capital funds. D) the venture capital fund of funds.
B The limited partnership structure is by far the most common for venture capital.
A corporate bond that pays interest semiannually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. What is the value of the bond today if the coupon rate is 8%? A) $1,051.23 B) $1,144.31 C) $922.78 D) $1,221.17
C How did we calculate that? We used tool that you won't have available at the test center (a financial calculator), but there is a great tool you will have - common sense. When a bond has a yield to maturity that is greater than its coupon rate, the bond must be selling at a discount and that only leaves one possible answer. The only way to get a 10% return on an 8% bond is to buy it at a price below par.
Mitch purchased a 30-year bond for 97¾ with a stated coupon rate of 8.5%. What is the approximate yield to maturity for this investment if Mitch receives semiannual coupon payments and expects to hold the bond to maturity? A) 4.36% B) 8.50% C) 8.67% D) 5.68%
C No calculation is necessary here. Why not? Because anytime a bond is purchased at a discount from par (97¾% is a discount), the YTM must be greater than the nominal (coupon) rate. There is only one choice greater than 8.5%. It isn't about your computational skills; it is about your understanding the relationship between prices and yields.
Which of the following are governed by the prudent investor rule? Trustee Executor Custodian Agent who has been granted discretionary authority A) I and II B) III and IV C) I, II, III, and IV D) I, II, and III
C The prudent investor rule applies to fiduciary accounts, or accounts in which someone is acting on someone else's behalf. In these accounts, the fiduciary must act prudently. An agent who has been granted discretionary authority is acting in a fiduciary capacity.
If the Consumer Price Index (CPI) is down but consumer demand is up, the economy is likely in which stage of the business cycle? A) Peak to contraction B) Contraction to trough C) Recovery to trough D) Recovery to expansion
D As prices trend downward and consumer demand increases, the economy is moving from recovery to expansion. As demand continues to increase, assuming supply remains constant, upward pressure will be put on prices through the expansion to the peak. DUPLICATE
With regard to taxation of distributions from a REIT, 1 in the majority of cases, dividends are taxed as ordinary income 2 in the majority of cases, dividends are considered qualified for the lower tax rate 3 capital gains distributions are treated as long-term capital gains 4 capital gains distributions are taxed as ordinary income A) I and III B) II and III C) I and IV D) II and IV
A Although there are some rare exceptions, you should consider any dividend paid to an investor in a REIT subject to taxation at ordinary income rates. Just as with mutual funds, capital gains distributions are treated as long-term capital gain.
Written discretionary authorization is not required for an agent to choose which of the following order instructions? Security to be bought or sold Number of shares to be bought or sold Time of execution Price of execution A) III and IV B) I and II C) II and IV D) I and III
A If an agent chooses price or timing of an order only, that order is not a discretionary order, and a written discretionary authorization is not required. To be discretionary, the agent must choose 1 or more of the following: the action (buy or sell), the asset (the specific security), or the amount (number of shares).
An investor buys a 5% AA-rated corporate bond at par. After 1 year, if his total return on the position is 4%, the most likely explanation for this is A) interest rates increased causing the bond price to decrease B) the bond rating was downgraded C) interest rates decreased causing the bond price to increase D) the investor paid accrued interest when he bought the bond diminishing his first year's return
A Total return is computed by adding together the income received plus any capital gain or loss. Because the bond is purchased at par, selling the bond at a loss is the only way the investor's total return could be less than the coupon rate. When interest rates go up, bond prices go down.
For a bond selling at a discount, the yield to maturity will be A) higher than the nominal yield B) lower than the nominal yield C) higher than the yield to call D) equal to the nominal yield
A Yield to maturity is a measure of the total return on a long-term bond, including capital appreciation and interest, while nominal yield measures the interest rate stated on the face of the bond. An investor who buys a $1,000 bond at a discount (for less than $1,000) will receive the interest payments on the bond at the nominal rate and will still receive $1,000 for the bond when it matures. As a result, the total return will be higher than the nominal yield. When a bond is selling at a discount the YTC will always be higher than the YTM.
Sharon Smith is an investment adviser representative with Highwater Advisers, a federal covered investment adviser with its principal office in State X. Sharon provides advisory services to a bank located in State X, a state in which she has no place of business. Under current regulations, A) because Sharon has no place of business in State X, she does not have to register as an IAR in State X. B) because Sharon has a client in State X, registration as an IAR would be required in State X. C) because Sharon's client is a bank, she does not have to register as an IAR in State X. D) because Highwater's principal office is in State X, Sharon would be required to register as an IAR in State X.
A) The key is that Sharon is an IAR for a covered IA. When that is the case, the IAR is only required to register in states where she (the IAR) maintains a place of business. Sharon does not have a place of business in State X so no registration is required there.
Which of the following statements regarding a qualified profit-sharing plan is TRUE? A) Contributions are required annually. B) It must be established under a trust agreement. C) It must define a specific contribution amount. D) It can permit regular direct cash payouts to participants before retirement.
B All qualified retirement plans must be established under a trust agreement. Contributions with this type of plan are not required annually, nor can the plan make direct cash payouts to participants before retirement.
An individual has been employed by a broker-dealer to make cold calls to solicit prospects for the firm's new wrap fee program. Under the USA, it is true to state that this individual A) is not defined as an investment adviser representative because he is only making cold calls B) would be defined as an investment adviser representative C) does not need supervision because he is only making cold calls D) would be permitted to use the term investment counsel
B As we know, when a broker-dealer offers wrap fee programs, the exclusion from the definition of investment adviser is lost. Any individual soliciting for that program would be considered an investment adviser representative and would need adequate supervision. Cold calling is about as far as you can get from the role of an investment counsel.
Your client in the 28% federal income tax bracket currently owns some U.S. government bonds with a coupon yield of 6%. In order to receive the same income after taxes, she would need to buy municipal bonds with a coupon of A) 7.68% B) 4.32% C) 1.68% D) 6.00%
B Because the 6% on the government bond is fully taxable on a federal basis, the client receives a net of 4.32% ($60 per bond less 28% in taxes {$16.80}, or $43.20 per year). Interest on municipal bonds is tax free, so a 4.32% coupon will result in the same amount of after-tax income.
All of the following are prohibited sales practices EXCEPT A) withholding a material fact from the buyer B) buying on one exchange and selling on another C) buying and selling intentionally to create market activity D) falsifying a quote
B Buying on one exchange and selling on another is the perfectly acceptable market practice known as arbitrage. Withholding material facts, buying and selling to show market activity, and falsifying quotes are all prohibited practices.
All of the following would qualify as management companies EXCEPT face-amount certificate companies unit investment trusts closed-end investment companies open-end investment companies A) I and II B) I and III C) II and IV D) III and IV
A As defined in the Investment Company Act of 1940, closed- and open-end funds are subclassifications of management companies (actively managed portfolios). Face-amount certificate companies and unit trusts are separate investment company classifications and do not have managed portfolios.
An employee wishing to obtain long-term capital gain treatment would prefer the employer to offer A) incentive stock options B) listed stock options C) non-qualified stock options D) portable stock options
A Assuming the time limit conditions are met, exercise of an ISO can result in long-term capital gains while non-qualified options are always treated as ordinary income.
Calvin has the following securities in his portfolio: ABC common stock, XYZ common stock, PQR mutual fund (domestic small cap), DEZ mutual fund (foreign small cap), 30-year Treasury bond, and 5-year Treasury note. Which of the following risks should not concern Calvin? A) Default risk B) Financial risk C) Reinvestment rate risk D) Systematic risk
A Default risk only applies to debt securities and Treasuries (at least on the exam) and are considered default risk free. Financial risk is the uncertainty introduced from the method by which a firm finances its assets (i.e., debt vs. equity financing). Reinvestment rate risk is the risk that as cash flows are received they will be reinvested at lower rates of return than the investment that generated the cash flows. Systematic risk is the risk that all securities are subject to and typically cannot be eliminated through diversification.
Which of the following statements regarding a zero-coupon corporate bond is TRUE? A) The investor has phantom income, which must be reported on an annual basis. B) The investor reports the difference between the purchase price and maturity value as ordinary income at maturity. C) These bonds have higher reinvestment risk as to interest than bonds paying semiannual interest. D) Bonds selling at a premium have a yield lower than the coupon rate.
A On a taxable zero-coupon bond, the annual imputed interest is reported for tax purposes. Because this income is not actually received annually, it is referred to as phantom income. Zero coupon bonds always sell at a discount from their maturity value - never at a premium and one risk that zero coupon bonds avoid is reinvestment risk because there are no interest payments to reinvest.
Amie Lear is a securities analyst employed by Empyreal Benefits, Inc., a registered broker-dealer. She is assigned to cover a number of different equity and debt investments. One of the investments is Taylor, Inc. (Taylor), a manufacturer of a wide range of children's toys. Based on her extensive analysis, she determines that her expected return on the stock, given Taylor's risks, is 10%. However, when applying the capital asset pricing model (CAPM), the result is a 12% rate of return. Based on Lear's analysis, Taylor's stock is A) overvalued. B) correctly valued. C) undervalued. D) neither overvalued nor undervalued.
A The CAPM gives us the expected rate of return on an investment. It is sometimes referred to as the required rate of return. That is, based on the risks, the CAPM reveals the return that should be earned. In this example, that return is 12%.Lear's computation expects the return to be only 10%. Therefore, Lear is showing that instead of providing the required return of 12%, she believes the stock will only return 10%. That makes the stock overpriced (a lower price will generate a higher rate of return). As a result, Lear would not recommend this stock because her calculations indicate it will not return as much as it should for the risk being taken.
An analyst is viewing a subject company's financial statements. She notices that the company has current assets of $20 million, fixed assets of $50 million, and total liabilities of $45 million (of which $10 million is considered long-term). This company's debt-to-equity ratio is A) 28.6% B) 40% C) 64.3% D) 22.2%
A The debt-to-equity ratio is computed by dividing the issuer's long-term debt by their total capitalization. Total capitalization is the company's net worth (assets minus liabilities) plus the long-term debt. In this example, the net worth is $70 million minus $45 million, or $25 million. Adding the long-term debt of $10 million results in total capital of $35 million. Divide the $10 million by that $35 million to arrive at 28.57%. As we point out in the LEM, this is really a misnomer—it should be called the debt-to-total-capital ratio, but probably will not be shown that way on the exam.
Which of the following investors aligns most closely with the strong form of the efficient market hypothesis (EMH)? A) An investor using a buy-and-hold strategy dollar cost averaging into an S&P 500 Index fund. B) An investor using dollar cost averaging to purchase shares in growth mutual funds having the highest portfolio turnover. C) An investor who uses stock charts to predict price movements and capitalize on buy-and-sell opportunities. D) An investor who researches corporate annual reports and industry publications to uncover buyand-sell opportunities within an industry or individual security.
A The strong form of EMH maintains that there is no information, public or private, that can assist an investor in achieving consistently superior investment returns. The strong form holds that stock prices follow a random walk and no technical analysis (price charting) or fundamental analysis (annual report or industry publication research) is of value in obtaining superior results. Dollar cost averaging is a passive strategy, which a subscriber to the strong form may use, but using a buy-and-hold strategy by dollar cost averaging into an index fund is more aligned with the strong form than investing in a fund with the highest portfolio turnover.
Present value is a computation frequently used to determine the amount of deposit needed now to meet a future need, such as a college education. If an investor uses an expected return of 8%, but the actual return over the period is 6%, A) the future value will not be able to be computed B) the present value was insufficient to meet the objective C) the yield to maturity will be lower than anticipated D) the accumulated value will meet the objectives
B Present value is the amount deposited to meet a future goal based on an expected rate of return. If the return is lower than expected, the amount deposited will not grow to the required amount (a bad thing).
Which of the following is not included in the calculation of a mutual fund's NAV per share? A) Accrued custodian bank fees B) Accrued sales charges C) Closing values of portfolio assets D) Accrued management fees
B Sales charges have nothing to do with a mutual fund's net asset value. The NAV is computed by subtracting all liabilities (it is the investor who pays the sales charge, not the fund) from the fund's assets. The principal asset is the portfolio and that is valued as of the close of the markets, generally 4PM Eastern time.
An issuer is planning to offer securities for sale in State A and several other states. Which of the following statements regarding registration in State A under the Uniform Securities Act is NOT true? A) The Administrator may, as a condition of registration by qualification or coordination, rule that the securities may only be sold on a specified form of subscription and that a signed copy be filed with the Administrator. B) The Administrator may not, as a condition of registration by qualification or coordination, require the security be deposited in escrow and the proceeds be impounded until the issuer receives a specified amount. C) Every registration must specify the total amount of securities to be offered in State A, the states in which offering is to be made, and any adverse order or judgment by a regulatory authority. D) The Administrator may by order permit omission of items of information or documents from a registration statement.
B The Administrator may, as a condition of registration by qualification or coordination, require the security to be deposited in escrow and the proceeds to be impounded until the issuer receives a specified amount. It is true that every registration must specify the amount of securities to be sold in the state, the states in which offering is to be made, and any adverse order or judgment of a regulatory authority. The Administrator may by order permit omission of any item of information or document from a registration statement. The Administrator may, as a condition of registration by qualification or coordination, rule that the securities may only be sold on a specified form of subscription and that a signed copy be filed with the Administrator.
A client has been contributing to a periodic payment annuity for 20 years. The M&E charge is 1.25% per year. What happens to that charge when the client annuitizes at attained age 68? A) It increases because the client's mortality risk is higher at the older age B) It ceases C) It continues but at a reduced rate D) It continues
B The M&E charge is for mortality and expenses. Once an annuity contract, fixed or variable, is annuitized, that charge no longer applies to the account. There may be an internally computed charge, but unlike the accumulation period, the charge is not broken out separately.
If an agent recommends the purchase of a technology company with an impressive growth record, but fails to inform the client that the company's technology will become obsolete pending the approval of a competitor's patent, the agent has A) not violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents because no untrue statements were made B) violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents C) not committed a prohibited business practice D) committed a prohibited business practice by selling an unsuitable investment
B The agent has violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents by failing to inform the client of the potential downside in the sale of a security.
Among the benefits of an HSA is A) the amount that may be contributed is based on the number of dependents. B) funds not used for health expenses may be invested in mutual funds and other securities. C) funds may be used for various medical expenses once the low deductible has been met. D) up to $10,000 per year may be accumulated.
B Unlike an FSA (flexible spending account), employee contributions to a health savings account (HSA) not used for medical expenses may be invested in a wide variety of securities. Although mutual funds are the most common, many providers offer the opportunity to invest in stocks and bonds. Remember, one of the eligibility requirements for an HSA is a high, not low, deductible. Currently, the maximum contribution is $3,450 for an individual or $6,850 if family coverage, regardless of the number of dependents covered.
Which of the following would be considered an unethical business practice? A) Broker-dealers sending retail clients an email 30 days in advance of a change to fees B) Agents correcting execution orders in their customer's accounts C) Agents exercising discretion in discretionary accounts D) Broker-dealers charging larger than ordinary commissions on certain transactions
B When a good-faith error is made, only the firm can make the correction; the regulators are concerned that giving that power to an agent could lead to covering up unethical activity. When the security involved in the trade is thinly traded (inactive), it is customary to charge a higher commission to cover the added expense. Broker-dealers are required to deliver a copy of their fee schedule no later than account opening. When changes are made, notice must be given at least 30 days in advance and may be done electronically (by email or posting on the firm's website).
Your firm's market analyst believes the current bullish market in equities will continue. Which of the following would be most suitable for a growth-oriented investor? A) Bond fund B) Preferred stock fund C) Large-cap stock fund D) GNMA fund
C A mutual fund investing in large-cap stocks (see Glossary of Terms) would be a reasonable investment for a growth-oriented investor in a bullish economic environment. Bonds are not a growth-oriented investment vehicle, GNMAs provide monthly income (not the growth that the client seeks), and preferred stocks are appropriate for income-oriented investors.
An adviser has custody of a client's securities or funds if the adviser A) uses a broker-dealer to hold the customer's funds and securities and has limited trading authority over the account B) maintains the customer's funds and securities in a joint account with the registered investment adviser C) has authority to withdraw funds from a client's account for the benefit of the adviser for the payment of the quarterly advisory fees D) accepts prepayment of advisory fees or has discretion over a customer's account
C Custody is the physical possession of the asset. Discretion is the authority to make decisions independent of the authorization of the account holder on a trade-by-trade basis. Authorization is in a blanket form in the existence of either a limited trading authority or full trading authority. Acceptance of prepayment of adviser's fees or discretionary authority does not constitute custody. The ability to withdraw funds for the purpose of paying quarterly advisory fees from a customer's accounts is deemed to be custody of the funds. A broker-dealer holding a customer's funds and securities would have custody, but the adviser who has trading authority over the account would only have discretion. If the funds and securities of the client are held with the funds and securities of the adviser in a joint account, the adviser would be involved in commingling (or theft), not custody.
Based on the Investment Advisers Act of 1940, which of the following would be excluded from the definition of investment adviser? A lawyer who advertises financial planning services Persons whose advice relates solely to government securities An accountant who receives separate fees for providing investment advice A) I and III B) I only C) II only D) II and III
C Lawyers and accountants may not claim the exclusion if they advertise their investment advisory or financial planning services, or if they charge a separate fee for such services. Broker-dealers may not claim the exception if they provide investment advice beyond the scope of the brokerage business or if they charge a separate fee for advice.
When a bank that is a member of the Federal Reserve System borrows from another member bank, the rate that is charged is known as A) the discount rate B) the prime rate C) the federal funds rate D) the call loan rate
C Loans between banks, usually on an overnight basis, are made at the federal funds rate. It is the most volatile of the money market rates. The discount rate is the rate charged when banks borrow directly from the Federal Reserve.
The National Securities Markets Improvement Act of 1996 (NSMIA) affects federal and state laws in that A) federal laws and state laws remain the same B) the Uniform Securities Act supersedes the Investment Advisers Act of 1940 C) federal securities laws preempt state laws D) state law preempts federal law
C The NSMIA defines the functions and respective responsibilities of the SEC and state Administrators. State law does not preempt federal law, and the NSMIA requires states to adapt their securities laws to comply with the standards required by the NSMIA.
During the past year, the market price of Kapco common stock has increased from $47 to $50 per share. Over that period, Kapco's earnings per share (EPS) have increased from $2.00 to $2.50 per share, and their dividend payout ratio has decreased from 50% to 40%. Based on this information, the current yield on Kapco common stock is A) 4.26% B) 6.34% C) 2% D) 2.13%
C The current yield on a stock is computed by dividing the annual dividend rate by the current market price. With EPS of $2.50 and a 40% payout ratio, the annual dividend is $1.00. This dollar divided by the current market price of $50.00 results in a current return of 2%.
Which of the following entities would issue a Schedule K-1? A) C corporation B) Sole proprietorship C) Limited partnership D) REIT
C Schedule K-1s are issued to owners of partnerships (limited or general), LLCs with more than one member, and S corporations. Sole proprietors use a Schedule C, C corporations report dividends and/or interest paid on a Form 1099, and the same is true for distributions from a REIT.
An exchange specialist is A) a floor broker on the New York Stock Exchange who only executes trades for other brokers in return for commissions B) an electronic brokerage concern that executes trades online and through specialized trading order executing services C) a trader who makes a market in OTC stocks and ADRs D) a dealer on the New York Stock Exchange who executes orders for other brokers and who also acts as a market maker with the responsibility of keeping an orderly market in designated stocks
D A specialist (more accurately a designated market maker - DMM, but NASAA may not use the current term on the exam) is a dealer on the NYSE who executes orders for other brokers and who also acts as a market maker with the responsibility of keeping an orderly market in designated stocks. A specialist must have sufficient capital to buy and sell from his own account in order to maintain a liquid and orderly market.
The alternative asset investments class is least associated with which of the following characteristics? A) Non-normal returns B) Illiquidity C) Diversification D) Efficient pricing
D Alternative assets are most often characterized by inefficient pricing, providing potential abnormal returns or alpha returns.
A nonqualified, single premium variable annuity differs from a Keogh plan in that A) both are subject to early withdrawal penalties B) earnings are tax deferred C) it is open to self-employed persons D) all payouts are fully taxable in a Keogh plan
D Earnings on investments made in both a Keogh plan and nonqualified annuity grow on a tax-deferred basis; they are not taxed until withdrawn. The cost basis in a Keogh plan is zero because contributions are tax deductible, but distributions are fully taxable upon receipt. However, in a nonqualified annuity, the cost basis is equal to the amount invested because the contributions are nondeductible; only the earnings portion of the distributions is taxable.
A client is considering the purchase of American depositary receipts (ADRs). The client is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle? A) Information regarding the foreign company is more easily attainable than if directly purchased. B) ADRs are both liquid and marketable. C) ADRs are denominated and pay dividends in U.S. dollars. D) They are not subject to exchange rate, or currency, risk.
D Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk. The bank furnishes information about the underlying security in English rather than the foreign language and ADRs are traded like any domestic stock.
Registration as an investment adviser or investment adviser representative under the Uniform Securities Act is required of A) a tax attorney who, as an incidental part of his tax practice, recommends that his high-tax-bracket clients investigate the use of municipal bonds in their portfolios B) an agent of a broker-dealer who recommends model portfolios to clients in exchange for them executing their trades through him C) an officer of a trust company handling investments for trust accounts D) an economics professor at a local community college who gives lectures in the evenings to public groups about portfolio analysis for which he charges a nominal fee
D If you are putting yourself out to the public as providing investment advice and charging a fee for doing so, you must register. The exceptions to this are if your giving of investment advice is incidental to your primary reason of doing business and if you are not charging specifically for the giving of that advice. Trust companies and their employees are specifically excluded from the definition of "investment adviser." A tax attorney making recommendations incidental to his legal practice and not charging specifically for the making of those recommendations is also not an investment adviser. The professor would have also been exempt from registration except for the fact that compensation was received for securities-related advice. Agents who are compensated only on the basis of recommended trades are not receiving special compensation and are, therefore, not considered to be in the business of giving advice.
Investors looking to minimize the effects of taxation on their investments would probably receive the least benefit from A) an S&P 500 index fund B) a growth stock C) an apartment building D) a corporate bond
D Investors receive interest income from corporate bonds. That income is fully taxable at ordinary income rates. Real estate ownership has certain tax benefits, such as depreciation and a deduction for operating expenses. Index funds are known for their high tax efficiency and investors in growth stocks anticipate long-term capital gains which are taxed at a lower rate than ordinary income.
When an analyst takes a stock's actual return minus the risk-free return and divides that remainder by the stock's standard deviation, the result is A) the expected return. B) the alpha. C) the beta. D) the Sharpe ratio.
D The Sharpe ratio for a stock is computed as follows: (actual return minus the risk-free rate) divided by the stock's standard deviation. You might see this expressed as: (r − RF) ÷ sd. This gives us the risk-adjusted return and the higher the Sharpe ratio, the better the investment is performing compared with the risk being taken. In the formula, the risk-free rate used is the 91-day T bill.
When an analyst adds back the current year's depreciation to the net income, she is computing the company's A) cash flow from operations B) earnings per share C) cash flow from investments D) net value of fixed assets
A
Which of the following definitions involving derivatives is inaccurate? A) A call option gives the owner the right to sell the underlying asset at a specific price for a specified time period. B) The seller of a put option has a neutral outlook. C) A long straddle consists of a long call and a long put on the same underlying stock with the same strike price and the same expiration date. D) An option writer is the seller of an option.
A A call option gives the owner the right to buy the underlying security at a specific price for a specified time period. Writers of put options are neutral to bullish; it is the put buyers who are bearish. A short straddle is the opposite of a long straddle - it is a short call and a short put on the same underlying stock with the same strike price and the same expiration date.
Daniel has a number of investment company products within his retirement portfolio. One of these investments trades on an exchange, may trade at a premium or discount to its net asset value, and has a fixed capital structure. These features are most likely found in what type of investment? A) Closed-end investment company B) Open-end investment company C) Hedge fund D) Unit investment trust
A A closed-end investment company (closed-end fund) is a type of investment company whose shares trade in the secondary market.
A basic difference between a Section 457 plan established on behalf of a governmental entity and one established by a private tax-exempt organization is that A) a governmental plan must hold its assets in trust or custodial accounts for the benefit of individual participants B) a governmental plan cannot make a distribution before the participant attains age 70½ C) a tax-exempt plan participant does not have to include plan distributions in taxable income D) a tax exempt plan's distributions are not eligible for a favorable lump sum 10-year averaging treatment.
A A governmental Section 457 plan must be funded—that is, it must hold plan assets in trusts or custodial accounts for the benefit of individual participants. Conversely, a tax-exempt (nongovernmental) Section 457 plan may not be funded.
Which of the following portfolio management styles would most likely incur the highest transaction costs? A) Tactical asset allocation B) Strategic asset allocation C) Indexing D) Buy and hold
A) A tactical allocation strategy calls for active trading of a portfolio and will likely incur the highest transaction costs. Passive styles, such as buy and hold and index, have relatively low transaction costs.
Those investors wishing to examine a document that would probably give them the most information about a corporation's current and planned operations would seek out A) the annual report B) the investor's brochure C) the Form 10-K D) the balance sheet
A) The annual report to shareholders is going to contain not only a complete financial report of the prior year's operations but will also include statement from key personnel dealing with the company's future plans. The Form 10-K does not include discussion of future business plans - it is a report of "what has happened over the previous fiscal year."
An agent has a client who calls in with the following instructions: "Please place a sell stop order at $33 for my 100 shares of ABC common stock." A week later, the agent receives inside information that ABC's upcoming earnings report will be disastrous. Three days after that, the report is released and the stock plunges, falling to $33. Can the client's stop order be executed? A) No, because the agent was in possession of material inside information B) Yes, because the order was received prior to the agent receiving the information C) Yes, but only if the execution price is higher than $33 D) No, because the order isn't triggered until the price falls below $33
B A sell stop order at $33 becomes a market order once the stock's price declines to $33 (or less). At that point, the order may be executed at, above, or below the stop price. The agent came into possession of the inside information after the order was received, so there is no concern that the client was benefiting from the agent's knowledge.
A member of the investment banking department of ABC Securities is explaining some of the advantages and disadvantages of rights and warrants to the board of directors of XYZ Corporation. Which of the following statements could he make? 1 The exercise prices of stock rights are usually below the current market price of the underlying security at time of issue. 2 The exercise prices of warrants are usually above the current market price of the underlying security at time of issue. 3 Both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value. 4 Warrants are often issued attached to a bond issue to reduce the interest costs to the issuer. A) I and II B) I, II, III, and IV C) I only D) I, II, and III
B All are true statements. The exercise prices of stock rights are usually below the current market price of the underlying security at time of issue. The exercise prices of warrants are usually above the current market price of the underlying security at time of issue. Both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value. Warrants are often issued attached to a bond issue to reduce the interest costs to the issuer.
A 69-year-old client of yours indicates that she is interested in changing the portfolio mix of her IRA. She wishes to sell most of the bonds in the account and replace them with 3x leveraged ETFs. You would probably infer from this that the client A) is preparing for her minimum required distributions. B) has insufficient retirement savings. C) is risk averse. D) has recently retired.
B Most studies have indicated that seniors with insufficient retirement savings attempt to compensate by being tempted to reach for higher returns to maximize retirement assets. They frequently do so without full consideration of the increased risk that comes along with the possibility of higher returns.
An analyst observes that the beta of a security is 1.3, the market return is 6%, and the risk-free rate is 1%. The analyst forecasts that the security will return 7% over the next year. Based on these assumptions, the security is A) overvalued, because the forecasted return exceeds the required return. B) overvalued, because the required return exceeds the forecasted return. C) undervalued, because the required return exceeds the forecasted return. D) undervalued, because the forecasted return exceeds the required return.
B Under the CAPM, the required return is the RF rate plus the beta times (the market return - RF rate). Using the numbers in this question, it is 0.01 + 1.3 (0.06 - 0.01) = 0.01 + 1.3 (0.05) = 0.01 + 0.065 = 0.075 which is 7.5%. Because the forecasted return of 7% is less than the required return of 7.5%, this security is considered to be overvalued.
When advisory clients wish to structure their portfolios to support companies that engage in social or environmental policies that they agree with, it is known as A) engineered investing B) asset allocation C) impact investing D) program-related investing
C
In which of the following funds would a buy-and-hold style most likely be used by the manager? A) Options income fund B) Information technology fund C) Equity index fund D) Market timing fund
C A manager of an equity index fund would use a buy-and-hold style. As the composition of the index changes through stock distributions or recapitalizations, the fund manager would buy or sell the issues to keep them in proportion to their position in the index prior to the distribution or recapitalization. By its nature, an options fund would require the active purchase and sale of securities or options to take advantage of market conditions. A market timing fund must be prepared to buy or sell securities as perceptions of the market change. An information technology fund has to buy and sell shares actively in response to the development of new technologies.
What is the total amount that may be invested in a Coverdell Education Savings Account in 1 year? A) The current maximum per parent B) The current maximum per couple C) The current maximum per child D) The current maximum per family member
C An indexed maximum contribution may be invested in each child's Coverdell Education Savings Account every year. For instance, if a couple has 3 children, they may invest the current maximum into each of three accounts.
Which of the following has the highest real return? A) A bond that yields 8% when inflation is 5% B) A bond that yields 6% when inflation is 4% C) A bond that yields 5% when inflation is 1% D) A bond that yields 10% when inflation is 7%
C Subtracting the inflation rate from the bond yield will result in a real return of 4% on the 5% bond, the highest of the choices offered.
What is the purpose of the Securities Exchange Act of 1934? A) It provides standards among the states. B) It provides requirements relating to new issues. C) It regulates the persons involved in the secondary market. D) It provides policies relating to unethical business practices.
C The Securities Exchange Act of 1934 was designed to regulate securities transactions, securities markets, and securities firms that trade in the secondary market. The Securities Act of 1933 was designed to provide regulation in the new issue market. Unethical business practices are covered in NASAA's Statements of Policy on Unethical Business Practices. The Uniform Securities Act provides a model for the states.
FNK Corporation reported earnings of $2.47 per share last year on its stock, currently trading at 24.75. Dividends paid out during the year totalled $0.93 per share. FNK's dividend payout ratio is closest to A) 27% B) 67% C) 38% D) 10%
C The company earned $2.47 per share and paid a $0.93 dividend per share, which is just under 38% of the earnings ($0.93 ÷ $2.47 = 37.65%).
Your client purchases 100 shares of XYZ Electric Auto Company on the assumption that rising fuel costs will create more interest in this more efficient means of transportation. If he is wrong, the resulting drop in the market price of that stock would be due to A) purchasing power risk B) market risk C) business risk D) money-rate risk
C This question refers to a client who is investing in the success of a specific company. The failure of this company does not mean that all securities will be affected; therefore, he is not subjected to market risk. The failure of XYZ would be due to the fundamentals of the company itself and considered business risk.
If an investor purchases 500 shares of an aggressive growth stock, which strategy would limit his downside risk? A) Writing 5 straddles B) Writing 5 puts on the stock C) Buying 5 calls on the stock D) Buying 5 puts on the stock
D A put gives the investor the right to sell stock at a set price (the strike price) for a period of time, and protects against losses below the strike price. Buying calls can protect a short stock position. If the customer is long stock, the purchase of calls on that security increases leverage and risk. Writing a put creates the obligation to buy more stock at the strike price, which increases downside risk.
When an investment adviser representative terminates employment with a federal covered investment adviser and then registers with a different federal covered investment adviser in the state where the individual has an office, A) only the terminating investment adviser must notify the Administrator B) the investment adviser representative and the employing adviser must notify the Administrator promptly C) the investment adviser representative and the federal covered advisers must notify the Administrator promptly D) only the investment adviser representative must notify the Administrator promptly
D If you are working for a registered investment adviser within a specific state, that state securities Administrator wants to know who you are. The problem becomes a question of who is responsible for notifying the state securities Administrator of your employment. A federal registered investment adviser is exempt from registration at the state level and therefore has very little contact with the state. If you go to work for a federal registered investment adviser, it becomes your duty to notify the state securities Administrator that you are working there, as well as when you terminate.
The STU Corporation has issued common stock, preferred stock, promissory notes, and mortgage bonds. Should STU enter bankruptcy proceedings, the order of payment against claims would be A) the mortgage bonds, the preferred stock the common stock, and the promissory notes. B) the preferred stock, the common stock, the mortgage bonds, and the promissory notes. C) the promissory notes, the mortgage bonds, the preferred stock, and the common stock. D) the mortgage bonds, the promissory notes, the preferred stock, and the common stock.
D In a bankruptcy, secured creditors, such as those with a mortgage against real property, have the first priority. They are followed by unsecured creditors, such as holders of promissory notes, with stockholders coming last. Preferred stock is "preferred" over common in both liquidation priority and payment of dividends.
Which school of economists encourages a government to spend money to move the economy into an expansionary phase? A) Monetarist B) Classical C) Supply side D) Keynesian
D Keynesians advocate government intervention in the workings of the economy through increased government spending, which in turn increases aggregate demand.
If a client owns 1,000 shares in a growth company and receives a 25% stock dividend, according to the Uniform Securities Act, this would be considered A) an offer B) a sale C) a secondary transaction D) neither a sale nor an offer
D With the typical stock dividend, the stockholder receives additional shares of stock without furnishing money or other valuable consideration in exchange for the stock. A sale must entail exchange of consideration. A stock dividend is not an offer; the stockholder did not choose whether to acquire the additional shares acquired through the stock dividend.
What is most likely to happen to outstanding fixed-income securities when interest rates decline? A) No change B) Coupon rates go up C) Yields go up D) Prices go up
D When interest rates drop, prices will rise, decreasing effective yield. Thus, there is an inverse relationship between interest rates and bond prices.
One of your clients has recently turned 72 and has questions about RMDs. The client has a traditional IRA, a rollover IRA, and 401(k) plans from 2 previous employers. When computing the RMDs, the RMD from each IRA is computed and may be made from one or both of them RMD from each IRA is computed and must be paid from that IRA both 401(k)s are combined to compute the required distribution, which may be made from one or both of them the RMD from each 401(k) is computed and must be paid from that 401(k) A) I and IV B) II and III C) I and III D) II and IV
For RMD purposes, each IRA is figured separately and the distribution can be made from one or all of them. That is not the case with a 401(k) plan. Each account has an RMD that can only be paid from that account. A)
Which of the following has the greatest liquidity risk? A) Long-term bond mutual fund B) Real estate investment trust (REIT) C) Rental apartment building D) Municipal bond unit investment trust (UIT)
Real estate (such as an apartment building) is among the most difficult investments to convert into cash and the most illiquid of the choices given. REITs provide investors with liquidity through trading in the secondary markets. A bond mutual fund is a redeemable security; the issuer provides liquidity. Unit investment trusts are more liquid than real estate because they are redeemable securities.
A technical analyst (chartist) with a long position in a particular stock would most likely enter a sell stop order below that stock's A) resistance level B) support level C) 200-day moving average D) previous high
Sell stops are entered below the market. They are used to turn an order into a market order if the current market value falls below the stop level. In technical analysis, support levels are theoretical levels where the market supports the stock price (keeps it from falling below the stated level). A technical analyst who makes investment decisions by watching the technical graphs and numbers would enter a sell stop below a support level in order to sell out if the support level is breached. A breakthrough of a support level is believed to forecast a major market price decline.
If a technician believed in the importance of volume, which of the following would indicate bullish sentiment? A) Prices decrease on heavy volume. B) Prices increase on light volume. C) Prices decrease on light volume. D) Prices increase on heavy volume.
Technicians watch volume changes along with price movements as an indicator of changes in supply and demand. A price increase on heavy volume relative to the stock's normal trading volume is interpreted as an indication of bullish activity.
A client in the 28% marginal federal income tax bracket invests in a corporate bond with an 8% coupon. To calculate the client's after-tax rate of return, A) multiply 0.08 by 0.72 B) divide 0.08 by 0.28 C) divide 0.08 by 0.72 D) multiply 0.08 by 0.28
To determine a taxable bond's after-tax rate of return, multiply the coupon rate by the complement of the client's marginal federal income tax bracket. The client's tax bracket is 28% (0.28), so the complement is 100% − 28% (1.00 − 0.28) = 0.72.
