Series 65 Exam

A bond is selling at a premium over par value. Therefore, its A) none of the above B) nominal yield is less than its current yield C) yield to maturity is greater than its current yield D) current yield is less than its nominal yield

D) current yield is less than its nominal yield Any bond selling at a premium will yield less than the coupon rate (nominal yield). Conversely, of course, a bond trading at a discount will certainly yield more. Remember, there is an inverse relationship between bond prices and bond yields.

What are the four different parts of the business cycle?

Expansion Peak Contraction Trough

What is the difference between technical analysts and fundamental analysts? (U12LO6)

Fundamental analysts evaluate broad-based economic trends, current business conditions within an industry, and the quality of a particular corporation's business, finances, and management. Technical analysts attempt to predict direction of prices on the basis of charts reflecting price and trading volume patterns of specific securities without regard to the issuer's profitability. **In a word, fundamental analysts care more about how the company itself is doing and how it compares to others in its industry. Technical analysts care more about how a specific security is doing without taking into account the issuer's profitability.

What are the threshold requirements for an investment adviser's registration?

If they have less than $100 million AUM, they have to register with the state (they pretty much have to do this regardless if they are not exempt from the definition of investment adviser). If they have more than $100 million in AUM, but less than $110 million, they have the option to register with the SEC but are not required to. If they have more than $110 million in AUM, they must register with the SEC.

How long does initial registration take until it becomes effective on the federal level?

Initial registration on the federal level for an investment adviser takes 45 days until it becomes effective.

Who is responsible for administering the Investment Advisers Act of 1940?

The SEC is responsible for administering the IAA of 1940. Since the IAA of 1940 is federal law, it doesn't come under the jurisdiction of the State Administrator (but the USA does).

What are the three "prongs" of the definition of an investment adviser?

1. Compensation must be received 2. Advice is provided regarding securities 3. The person must be in the business of providing investment advice.

What are the requirements for investment advisers giving "notice and consent" to clients?

1. Investment advisers organized as a partnership must notify clients when there is a change involving a minority of the partners (five partners, one leaves or dies). 2. Investment advisers organized as corporations don't have to notify clients of changes to shareholders.

Under the Uniform Securities Act, the maximum that a purchaser would be entitled to claim in the event of illegal agent activity is what?

1. The original consideration for the security 2. Interest at the state's legal rate 3. Attorney's fees 4. Court costs.

For Bonds: 1.) As coupon rates increase, duration ____________. 2.) As maturities increase, duration ___________.

1.) Decreases, because investors are receiving more cash flow sooner. 2.) Increases, because the payments are spread out over a longer time.

What is an exempt transaction?

A transaction of a security that's exempt from the regulatory control of the State Administrator because of the way the sale is made or who the sale is made to.

You have been following GEMCO stock for the past couple of months and notice a recent increase in the stock's volatility. In the past month, several negative reports have been published about GEMCO's product line. This has caused a drop in the market price of the stock even though the GEMCO has just reported earnings that exceeded analyst's projections. This is an example of: A) Market risk B) Financial risk C) Volatility risk D) Purchasing power risk

A) Market risk Market risk is the uncertainty that a stock's price will move in a manner unrelated to the company's fundamentals. A prime example of this is when earnings go one way and the stock price the other.

An investor signed a letter of intent to purchase $50,000 worth of Sky-High Mutual Fund. At the end of 13 months, he had only invested $48,000 in the fund. Which of the following is TRUE? A) The fund will liquidate shares to meet the additional sales charge. B) He must sign a new letter for the $2,000 to receive the breakpoint. C) There are no additional requirements; he will receive the breakpoint. D) He has 90 days to invest the additional $2,000 for the breakpoint.

A) The fund will liquidate shares to meet the additional sales charge. An investor has only 13 months to meet a letter of intent commitment. Once that period of time has elapsed, the investment company is entitled to a refund of the discount it had originally given the investor. This is accomplished by liquidating a sufficient number of shares to cover the additional sales charge to be imposed.

A significant increase in the importing of goods into the United States would likely have what effect on the strength of the U.S. dollar? A) Weaken B) No effect C) Fluctuation both ways D) Strengthen

A) Weaken A significant increase in imports represents a large outflow of U.S. dollars which results in a negative trade balance. As this builds, the value of the dollar falls against those currencies who have a positive trade balance.

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) interest rates decreased causing the bond price to increase C) the investor paid accrued interest when he bought the bond diminishing his first year's return D) the bond rating was downgraded

A) interest rates increased causing the bond price to decrease 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.

Which of the following statements regarding unsystematic risk are TRUE? I. It is the risk that an individual stock will not perform well. II. It is the same as market risk. III. Diversification reduces it. IV. Diversification does not reduce it.

Answer: I and III Unsystematic risk is company risk, the risk that an individual investment will perform poorly. Diversification can reduce most unsystematic risks.

The issuance of a long-term debt instrument, such as a bond, by a company would have an immediate effect on which of the following balance sheet items? I. Total assets II. Total liabilities III. Working capital IV. Shareholders' equity

Answer: I, II, and III The cash received from the sale of the bonds is a current asset of the company, and as such would increase assets and working capital on the balance sheet. The bonds are debt of the company and would increase the liabilities of the company.

Which of the following statements regarding the correlation coefficient is not correct? A) Perfectly positively correlated assets have a correlation coefficient of +1.0. B) Combining assets with less than perfect positive correlation will not reduce the total risk of the portfolio. C) Perfectly negatively correlated assets have a correlation coefficient of -1.0. D) A correlation coefficient of 0.0 means there is no relationship between the returns of the assets.

B) Combining assets with less than perfect positive correlation will not reduce the total risk of the portfolio. Watch out for the double negatives here. Combining assets with less than perfect positive correlation can reduce the total risk of the portfolio. The further the correlation coefficient between the two assets is away from +1.0, the greater the diversification benefits that may be attained.

Which one of the following option positions would generally command the greatest time value? A) Calls B) LEAPS C) Straddles D) Puts

B) LEAPS LEAPS, the acronym for long-term equity anticipation securities, have expiration dates that can run more than 3 years compared with the 9 months for standard option contracts. Because time value is a direct function of the length of the option, the longer the time until expiry, the greater the potential time value.

A variable annuity annuitant bears all of the following risks EXCEPT A) Interest rate risk B) Inflationary risk C) Mortality risk D) Market risk

C) Mortality risk The insurance company issuing the variable annuity bears mortality risk, or the danger that some annuitants will live to surpass their average life expectancy. The investor in a variable annuity bears inflationary risk, market risk, and interest rate risk.

What does "custody" mean when it comes to client funds? What is a qualified custodian?

Custody means holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them. A qualified custodian is a bank or savings association that has deposits insured under the FDIC, or a registered BD holding the client assets in customer accounts.

An investor is considering the purchase of some bonds to diversify his portfolio. If he should decide to purchase Treasury STRIPS instead of Treasury Bonds, his major risk would be A) Purchasing power risk B) Reinvestment risk C) Credit risk D) Interest rate risk

D) Interest rate risk Treasury STRIPS are zero-coupon bonds and, as such, have a longer duration than those paying semiannual interest. The longer the duration, the greater the interest rate risk.

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) Contraction to trough B) Peak to contraction C) Recovery to trough D) Recovery to expansion

D) Recovery to expansion As prices trend downward and consumer demand increases, the economy is moving from recovery to expansion.

Which of the following statements about technical analysis are TRUE? I. Technical analysis tries to identify trends and predict market changes. II. Technical analysis is often accomplished by reviewing data in the form of charts. III. Technical analysis looks primarily at past performance to predict future trends.

Answer: All Three Technical analysts attempt to identify trends so they can predict market changes. They do this by reviewing past performance as depicted in charts and graphs. The type of analysis that attempts to value stock by examining a company's financial condition and growth potential is fundamental analysis.

Which of the following purchases is most suitable for an investor pursuing an aggressive investment strategy? A) AMF stock with a beta coefficient of 1.0 B) GHI stock with a beta coefficient of 1.3 C) DOH stock with a beta coefficient of 0.7 D) LMN stock with a beta of -0.6

B) GHI stock with a beta coefficient of 1.3 Beta coefficients greater than 1.0 signify that the stock will fluctuate more than the market as a whole. In general, the higher the beta, the greater the risk. Such risk-taking is appropriate for investors who seek aggressive investment strategies.

The bulk of "dark liquidity" represents trades A) where the identity of the participants is disclosed. B) engaged in by institutional traders and trading desks away from the exchange markets. C) involving noninstitutional investors. D) engaged in by institutional traders and trading desks on the exchange markets.

B) engaged in by institutional traders and trading desks away from the exchange markets. The trades are "dark" because they are not made on the exchange markets. The identity of the participants is usually unknown and the participants are almost exclusively institutional.

One reason why employers like using deferred compensation plans is that A) IRS approval is easily obtained B) they can be structured so that the employee's benefits are forfeited upon termination with cause C) they provide larger tax deductions than any other plan D) with all employees receiving the same benefit, plan administration is simplified

B) they can be structured so that the employee's benefits are forfeited upon termination with cause Deferred compensation plans frequently provide that employees leaving before a certain period of time, going to the competition, or being terminated for cause forfeit plan benefits. There are no current tax deductions, the plans discriminate, and because they are nonqualified, there is no IRS approval.

A stock that does not have a ready market is said to have a higher than average degree of: A) Business risk B) Investment risk C) Market risk D) Liquidity risk

D) Liquidity risk When an asset (stock or any other kind) does not have a ready market, it means it is not easy to find a buyer (if you own the stock) or a seller (if you wish to buy the stock). That is the sign of a lack of liquidity leading to more liquidity risk than stocks readily traded on the exchanges or OTC. Lack of a ready market simply means there is a very low level of interest in buying or selling that stock.

What is the difference between fiscal and monetary policy?

Fiscal policy refers to a government's use of spending and taxation to influence economic activity. The budget is said to be balanced when tax revenues = government expenditures. (so think tax laws, federal gov't regulations, etc.) Monetary policy refers to the central bank's actions that affect the quantity of money and credit in an economy to influence economic activity. (think Federal Reserve).

What is the difference between systematic and unsystematic risk?

Systematic risk is market risk, or the risk associated with how the market performs. It's the risk in the return of an investment that is associated with the macroeconomic factors that affect all risky assets. It's the risk that changes in the overall economy will have an adverse effect on individual securities regardless of the company's circumstances. - Systematic risk is also referred to as "nondiversifiable risk" because it cannot be avoided through diversification. Unsystematic risk is business-specific, or company-specific risk. These would include things such as labor union strikes, lawsuits, and product failure. - These can be reduced through diversification.

What are examples of exempt transactions?

1. Isolated nonissuer transactions, such as someone selling their stocks to another (the issuer receives nothing). 2. Unsolicited brokerage transactions (client calls agent asking to buy or sell securities). 3. Underwriter transactions between issuers and broker-dealers. 4. Bankruptcy, guardian, or conservator transactions (transactions occurring because of a bankruptcy, paying out to trustees, etc.). 5. Institutional investor transactions, such as those with financial institutions.

Which four groups are excluded from the definition of investment advisor so long as their advice is incidental to their profession?

1. Lawyers 2. Teachers 3. Accountants 4. Engineers

What are the four broad powers of the State Administrator to enforce and administer the USA in their state?

1. Make, amend, or rescind rules and orders and require the use of specific forms. 2. Conduct investigations and issue subpoenas. 3. Issue cease and desist orders and seek injunctions. 4. Deny, suspend, cancel, or revoke registrations/licenses.

In the USA, it is unlawful for any person to offer or sell any security in a state unless what three conditions are met?

1. The security is registered under the Uniform Securities Act. 2. The security or transaction is exempted under the USA. 3. The security is a federal-covered security.

What does a yield-to-call calculation reflect? What type of bonds are most likely to be callable?

A yield-to-call (YTC) of a bond is the rate of return the bond provides from the purchase date to the call date and price. It reflects the early redemption date and consequent acceleration of the premium loss from the purchase price. Bonds that are being sold at a premium are most likely to be callable. This is because it's highly unlikely that an issuer would call in a bond that was available in the marketplace at a discount. If this were to happen, the YTC would be higher than the YTM because the profit resulting from the discount would be accelerated.

What is the maximum amount a taxpayer may contribute each year to a Coverdell Education Savings Account (ESA) for one student? A) $100.00 B) $500.00 C) $2,000.00 D) $1,000.00

C) $2,000.00 The most an individual may contribute to an ESA for one student is $2,000 per year. There is no limit on the number of students on whose behalf a taxpayer may contribute, however. A taxpayer with 5 grandchildren could contribute a total of $10,000 to 5 ESAs.

A bond with a par value of $1,000 and a coupon rate of 6%, paid semiannually, is currently selling for $1,200. The bond is callable in 6 years at 103. In the computation of the bond's yield to call, which of the following would be a factor? A) Future value of $1,200 B) Present value of $1,030 C) Interest payments of $30 D) 20 payment periods

C) Interest payments of $30 The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. A bond with a 6% coupon will make $30 semiannual interest payments.

Your married customers, ages 48 and 50, have a combined annual income of more than $200,000. They are concerned about the effects of rising inflation, and because they are heavily invested in bonds, they seek to invest a portion of their portfolio in a fund that will provide additional diversification. Which of the following mutual funds is the most suitable for these customers? A) NavCo Tax-Free Municipal Bond Fund B) ABC Investment-Grade Bond Fund C) XYZ Government Income Fund D) ATF Overseas Opportunities Fund

D) ATF Overseas Opportunities Fund Investment in an overseas equity fund will provide diversification not necessarily subject to U.S. inflation. The tax-free fund will not provide additional diversification nor the best hedge against inflation. A high-grade bond fund will not add diversification.

Which of the following items would be found on a family balance sheet? A) Annual salary B) Dividends and interest received C) Income taxes paid D) Spouse's engagement ring

D) Spouse's engagement ring A balance sheet, whether for a family or a business, shows assets and liabilities, not income and expenses. The ring is certainly an asset; the others are income or expenses.

An investor in the 28% income tax bracket is considering purchasing either an 8% municipal bond or a 10% corporate bond. Which of the following regarding the bonds is TRUE? A) The yield difference cannot be determined. B) The yields of the bonds are equivalent on an after-tax basis. C) The corporate bond yield is higher than the municipal yield after taxes. D) The municipal yield is higher than the corporate yield on an after-tax basis.

D) The municipal yield is higher than the corporate yield on an after-tax basis. Investors are interested in their return after taxes (what they get to keep). The 2 bonds must be compared on a tax-equivalent basis. For example, the tax-equivalent yield of a municipal bond equals tax-free yield divided by 100% minus tax rate. The tax-equivalent rate in this case is 0.08 ÷ 0.72 (100% − 28%) = 11.11%. In other words, a client in the 28% tax bracket would have to invest in a taxable bond that yields 11.11% to get the same after-tax return that the 8% tax-free bond offers.

One of your clients approaches you about setting up a trust. If your client assumes the role of grantor, what additional roles may be taken? A) As the grantor, no other roles may be taken B) Beneficiary C) Trustee D) Trustee and beneficiary

D) Trustee and beneficiary Under trust law, the grantor of a trust, sometimes referred to as the settlor, may also be the beneficiary and the trustee.

Which of the following securities has an easily determinable internal rate of return? A) 5% municipal bond B) 7% corporate bond C) 6% Ginnie Mae D) Zero-coupon bond

D) Zero-coupon bond With a zero-coupon bond, there are no periodic interest payments to reinvest, so a yield can be locked in. The interest rate that discounts the redemption price (par) to the discounted purchase price is the locked-in yield, which is the same as the internal rate of return, also referred to as the yield to maturity.

What are defensive industries?

Defensive industries are least affected by normal business cycles. Companies in defensive industries generally produce nondurable consumer goods, such as food, pharmaceuticals, tobacco, and energy. Simply put, public consumption of these goods remains fairly steady throughout the business cycle. Because of this, during recessions and bear markets, stocks in defensive industries generally decline less than stocks in other industries. However, as a result, during expansions/bull markets, defensive stocks may advance less.

Linda is applying with State A to become a registered investment adviser. She has never practiced as an investment adviser before, but she was a municipal bond broker for many years. Seventy-five months ago, Linda was barred from municipal bond activities by the MSRB. This would or could A) Possibly cause her registration to be denied B) Make the SEC refuse to review her investment adviser application on Form ADV C) Have no impact on her registration because she had no investment adviser violations D) Have no impact on her investment adviser registration because municipal bonds are exempt securities

A.) Possibly cause her registration to be denied. Generally, disciplinary action in conjunction with any professional securities or commodities activity resulting in a revocation or bar within the 10-year period preceding application, will cause the application as an investment adviser to be refused under statutory denial. However, the Administrator will review the application and the circumstances surrounding the action.

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) $43.18 B) $40.50 C) $45.86 D) $41.55

B) $40.50 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.

An investor owns a TIPS bond with an initial par value of $1,000. The coupon rate is 6% and, during the first year, the inflation rate is 9%. How much interest would be paid for the year? A) $90.00 B) $64.11 C) $65.40 D) $60.00

B) $64.11 TIPS bonds have a fixed coupon rate with a principal that varies each 6 months based on the inflation rate. With an annual inflation rate of 9%, each 6 months, the principal increases by 4.5% (half of the annual rate). Each semiannual coupon is half of the 6% rate times the new principal. The arithmetic is: $1,000 x 104.5% = $1,045 x 3% = $31.35 plus, $1,045 x 104.5% = $1,092 x 3% = $32.76. Adding the 2 interest payments together results in a total of $64.11 for the year.

If a portfolio manager wished to reduce inflation risk, which of the following would be most appropriate to add to the portfolio? A) AAA bonds B) Tangible assets C) Preferred stock D) Fixed annuities issued by an insurance company with Best's highest rating

B) Tangible assets Tangible assets, such as real estate, precious metals, and other commodities, tend to keep pace with inflation. Fixed dollar investments do not.

A corporation's balance sheet shows total assets of $930,000 of which $400,000 are current assets. It also shows $525,000 of total liabilities of which $215,000 are current liabilities. The company's working capital is:

$185,000

What are private placements? Are they exempt securities/transactions?

A sale of stock shares or bonds to pre-selected investors and institutions rather than publicly on an open market. Private placements are exempt transactions under Regulation D of the Securities Act of 1933, and are therefore exempt from registration.

What does it mean for a security to be registered by "coordination"? Who determines the effective registration date of that security?

A security is registered by coordination when there is a simultaneous federal and state registration. Under normal circumstances, once the SEC has declared the registration effective, it is also effective in those states where the registration was coordinated.

What is the alternative minimum tax (AMT)?

A separate tax for high earners - must recalculate using AltMinTax and pay higher of the two - designed to prevent high income people from using tax loopholes and evade their taxes Certain items that receive favorable tax treatment must be added back into taxable income to arrive at the AMTI (alternative minimum taxable income).

A married couple has lived in the same home for 40 years and now, with the children all gone, they've decided to sell and move to a retirement village. They purchased the home for $80,000 and have accepted a contract for $800,000. The tax consequences of this sale is A) $220,000 capital gain. B) $0 capital gain. C) $720,000 capital gain. D) $470,000 capital gain.

A) $220,000 capital gain. As long as a homeowner has lived in the primary residence at least 2 of the previous 5 years, the first $250,000 of profit on a home sale is excluded from tax. In the event it is a married couple, as in this question, the exclusion is doubled to $500,000. The profit on the sale was $720,000 ($800,000 minus the cost of $80,000) and the exclusion of $500,000 reduces the reportable gain to $220,000.

An investor purchases 100 shares of RIF common stock. In the year following the purchase, the RIF shares appreciated by 12% and paid a 2% dividend. If inflation, as measured by the CPI, was at a 4% rate, the investor's total return on the RIF shares is closest to A) 14% B) 12% C) 10% D) 8%

A) 14% This question is asking for the total return, which is 14% (12% appreciation + 2% dividend). Had the question asked for the inflation-adjusted return, (which it doesn't), that is 14% minus the 4% CPI.

Currency Transaction Reports must be filed for cash transactions exceeding: A) $10,000.00 B) $25,000.00 C) $50,000.00 D) $100,000.00

A.) $10,000 The Bank Secrecy Act requires every financial institution to electronically file with the Department of the Treasury a Currency Transaction Report (CTR) on FinCEN Form 112 for each cash transaction that exceeds $10,000. This report would include cash transactions used to pay off loans, electronic transfer of funds, and purchases of certificates of deposit, stocks, bonds, mutual funds, or other investments with cash.

What is considered an "offer to sell" under the Uniform Securities Act?

An offer to sell is any activity in an effort to dispose of a security for value.

Under the Uniform Securities Act, all of the following are exempt from state registration as investment advisers EXCEPT A) investment advisers with no office in the state who only advise employee benefit plans with assets of more than $1 million B) financial planners who provide fee-based investment advisory services to clients C) investment adviser representatives D) publishers of financial publications that are not addressed to clients' specific individual investment situations

B) financial planners who provide fee-based investment advisory services to clients Financial planners who provide fee-based investment advisory services to the public generally must register with their state securities Administrator, as long as their total assets under management are less than $100 million.

Investment companies must send financial reports to shareholders A) monthly B) semiannually C) annually D) quarterly

B) semiannually Investment company financial reports must be sent twice a year and must include a portfolio list, income statement, statement of compensation paid to the board of directors and the advisory board, and a statement of the total dollar amount of securities bought and sold during the period. One of these reports must be the audited annual report.

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 prime rate B) The discount rate C) The federal funds rate D) The call loan rate

C) The federal funds rate 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.

Alpha-Beta Advisers (ABA) has its principal office in State X. ABA limits its clientele to insurance companies that are authorized to do business in State X. Which of the following best describes the registration requirements for ABA? A) Neither the SEC nor State X B) Both the SEC and State X C) State X only D) SEC only

C) State X only Dealing exclusively with insurance companies makes this advisory firm exempt from registering with the SEC. However, unlike those who are excluded from the definition of investment adviser, being exempt does not make ABA a federal covered adviser. Although advisers dealing solely with institutions, such as insurance companies, are not deemed to be investment advisers in the state, that only applies when there is no place of business in the state. Obviously, with its home office in State X, that does not apply to ABA, so it would have to register in that state.

When a bond's NPV is zero, it is usually an indication that A) The bond is a zero-coupon bond. B) The bond is mispriced. C) The market is highly efficient. D) The bond is highly rated.

C) The market is highly efficient. An NPV of zero indicates that there is no difference between the bond's present value and its current market price. That usually indicates a highly efficient market.

A person is excluded from the definition of investment adviser under the Investment Advisers Act of 1940 if the investment advice and reports are restricted to A) foreign securities B) securities listed on a national stock exchange C) U.S. government securities D) bank and insurance company securities

C) U.S. government securities Among the exclusions found in the act is one for persons whose advice relates exclusively to securities issued or guaranteed by the U.S. government.

All of the following are leading indicators for economic growth EXCEPT A) stock prices as measured by the S&P 500 index B) orders for durable goods C) average prime rate D) average weekly initial claims for state unemployment compensation

C) average prime rate The average prime rate is a lagging indicator. The duration of unemployment is also a lagging indicator, but the number of initial unemployment claims is a leading indicator. The S&P 500 index and orders for durable goods are leading economic indicators.

A business organized as which of the following pays federal income tax on its income? A) Partnership B) LLC C) S corporation D) Sole proprietorship

D) Sole proprietorship The income generated by a sole proprietorship is reported on Schedule C of the Form 1040 of the individual owner. The IRS considers that business as a taxable entity. In the case of the other three choices, their income flows through to the owners (members, shareholders, or partners, respectively), for the business itself pays no tax.

Tax preference items are used for the purpose of computing the alternative minimum tax. They include all of the following except A) excess intangible drilling costs. B) certain incentive stock options. C) accelerated depreciation. D) straight-line depreciation.

D) straight-line depreciation. Straight-line depreciation is not a preference item. All of the other choices are included in the IRS listing of tax preference items. In the case of the ISO, it is a preference item to the extent that the fair market value of the employer's stock is in excess of the strike price of the option. As a test-taking tip, when you see two opposites as answer choices, it is likely that one of them is the correct answer. In this case, we have straight-line and accelerated depreciation, only one of which is a preference item.

What is net present value (NPV)?

Net present value is a computation taking into consideration future cash flows, discounted to the present, and comparing that to the capital investment necessary to obtain those flows. It is always expressed in monetary units and, if positive, indicates a potentially worthwhile investment.

Under the Dodd-Frank bill, when does SEC registration become an option for pension fund managers?

Pension fund managers must register with the state. It only becomes an option to register with the SEC when they have at least $200 million in AUM at the end of the year.

When is the annual renewal requirement of an investment adviser on the state level?

Renewal is required on December 31st every year, no matter when you register. So if you register on November 30th, you have to renew your registration on December 31st.

When is the most likely time that a State Administrator would cancel the registration of an IA?

Termination of an investment adviser's registration by cancellation will generally occur when the adviser goes out of business or ceases performing the functions of an investment adviser.

What is the tax-equivalent yield? How is it calculated?

The tax-equivalent yield is the return that a taxable bond would need to equal the yield on a comparable tax-exempt municipal bond. The calculation is a tool that investors can use to compare the returns between a tax-free investment and a taxable alternative. Tax free (municipal) rate / (1 - income tax bracket %)

What is an exempt security?

Those which are exempt from the USA's registration and sales literature filing requirements.

How is the expected return of an investment calculated using the capital asset pricing model (CAPM)?

((current market return - risk-free rate) * stock's beta) + risk-free rate. The amount calculated in the parenthesis is the expected return on the stock, but it's the return above the risk-free rate. So you would need to add back the risk-free rate.

How is the Sharpe ratio calculated?

(actual rate of return minus the risk-free rate of return) / standard deviation of the security

What are examples of exempt securities?

1. U.S. and Canadian gov't municipal securities 2. Foreign gov't securities with which the U.S. has diplomatic relations. 3. Securities issued or guaranteed by depository institutions 4. Securities issued by an insurance company authorized to do business in the state. 5. Federal covered securities.

A portfolio manager whose universe of stocks is those with market caps of $4 - $6 billion would most likely be graded against A) S&P 400. B) S&P 500. C) Dow Jones Composite Average. D) Nasdaq 100.

A) S&P 400. Stocks with a market capitalization between $2 billion and $10 billion are considered mid-cap stocks. The S&P 400 is the index for those.

Which of the following is an allowable early withdrawal from a traditional IRA without penalty? A) A wealthy individual withdraws $10,000 from his IRA to purchase his first principal residence. B) A single parent supplements a home equity loan with $5,000 from her IRA to pay for an additional home (a vacation home). C) A person withdraws funds from his IRA to buy a principal residence after he sold his first home as a result of medical expenses. D) A single parent withdraws funds from her IRA to pay for the education of a nephew.

A) A wealthy individual withdraws $10,000 from his IRA to purchase his first principal residence. Any individual withdrawing $10,000 from his IRA to purchase his first principal residence would have the penalty waived. The wealth of the individual is not relevant. The purchase must be a first-time purchase as well as the primary residence.

Which of the following are true of Ginnie Maes but NOT of other agency mortgage-backed securities? A) Backed by the full faith and credit of the U.S. government B) Are pass-through securities C) Collateralized by mortgage. D) Yield more than T-bonds

A) Backed by the full faith and credit of the U.S. government Of the mortgage-backed government agency securities, only the Ginnie Maes are backed by the full faith and credit of the U.S. government. They are all collateralized by mortgages (the name, MBS gives that away) and, even the Ginnie Maes yield more than Treasury bonds. As an MBS, they all pass through the income and principal repayments to the investors.

Which of the following is not correct regarding the capital asset pricing model (CAPM)? A) CAPM uses standard deviation as a measure of market risk. B) CAPM only considers the systematic risk. C) The market risk premium is the incentive required for the individual to invest in the securities market. D) The stock risk premium is the inducement necessary to entice the individual to invest in a particular stock.

A) CAPM uses standard deviation as a measure of market risk. CAPM accounts for the impact of systematic risk (as measured by beta) only and does not take into consideration unsystematic risk, which is assumed to have been diversified away.

An agent learns of material, inside information regarding a company that is publicly held. Which of the following with respect to the information would NOT violate the Uniform Securities Act? A) Discussing the situation with a superior or compliance officer in the agent's firm B) Soliciting orders based on this information C) Trading for the agent's personal account based on this information D) Discussing the information at a seminar but not making an investment recommendation

A) Discussing the situation with a superior or compliance officer in the agent's firm Discussing the situation with a superior or compliance officer is the appropriate action. An agent may not solicit or trade on the basis of material inside information. Discussing material inside information in a public forum is prohibited, regardless of investment recommendations.

A 45-year-old employment counselor has a Keogh plan for himself and 3 full-time employees who have been working for him for the past 4 years. If he earns $150,000 this year and contributes the maximum amount allowed to his Keogh plan, how much may he invest in an IRA? A) He may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less. B) He may not have an IRA. C) He may invest any amount up to 100% of his earned income. D) He may have an IRA but may not make a contribution for this year.

A) He may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less. Regardless of how much is invested in a Keogh plan, an investor may still invest in an IRA if he has earned income. The maximum contribution to an IRA is 100% of earned income or the maximum allowable limit, whichever is less. In this individual's case, however, the contribution would probably be nondeductible.

An investor in a high tax bracket who invested in a DPP should have which of the following characteristics? I. Need for tax benefits II. Substantial liquid assets III. Ability to identify both risks and merits of the program IV. Ability to commit money for a long time A) I, II, III, and IV B) I and II C) II, III, and IV D) II and III

A) I, II, III, and IV DPPs are appropriate for investors who can benefit from substantial tax deductions or credits, are not bothered by illiquidity, understand the business risks and benefits involved, and can stay in the program until completion.

Which of the following securities are exempt from registration at the state level? I. Bonds issued by the American Red Cross II. United States Treasury bonds III. American Advisers Unit Investment Trust IV. Common Stock in AAA Commercial Bank, member of the FDIC A) I, II, III, and IV B) I and II C) II and III D) I, II, and III

A) I, II, III, and IV Securities offered by nonprofit organizations, the United States government, or investment companies registered under the Investment Company Act of 1940, as well as securities issued by commercial banks, are exempt from registration with the states under the Uniform Securities Act and the NSMIA.

The James Henry Company (JHC), an SEC-registered securities broker-dealer with offices in Chicago and Los Angeles, limits its clientele to banks and trust companies. JHC makes a sale of U.S. government securities to the Wall Street Bank located in New York City. Which of the following statements is (are) TRUE under the Uniform Securities Act? I. The security itself is exempt from registration. II. The transaction is exempt. III. The broker-dealer is not required to be registered in the state of New York. A) I, II, and III B) I only C) II only D) I and II

A) I, II, and III The sale involves a U.S. government security, which is exempt from the registration requirements under the act. The transaction itself is also exempt because it involves a sale to a financial institution. Remember, in an exempt transaction, the security subject of the transaction need not be registered with the state in which the transaction takes place.

Ways in which a Section 529 plan differs from a Coverdell ESA include I. tax-free distributions when the funds are used for qualifying educational expenses II. higher contribution limits III. no earnings limitations IV. contributions that may be made by someone other than a parent or legal guardian A) II and III B) I and II C) I and IV D) II and IV

A) II and III Contributions to an ESA are limited to $2,000 per beneficiary per year, whereas the 529 limit is set by the plan sponsor, sometimes as high as $300,000. Unlike the ESA, where there is a ceiling on the earnings for a contributor, there is no limit for someone setting up a 529. Both Section 529 plans and Coverdell ESAs enjoy tax-free distributions, and plans may be established by almost anyone.

Which of the following is a risk common to all fixed-income securities? A) Interest rate risk B) Market risk C) Opportunity cost D) Liquidity risk

A) Interest rate risk One of the characteristics of all fixed income securities is that the income never changes (fixed), so when interest rates change, the income of those securities can't follow along. Therefore, one risk common to all fixed-income securities is interest rate risk.

A couple in their early 30s has been married for 4 years, their disposable income is relatively high, and they are planning to buy a condominium. If they need a safe place to invest their down payment for about 6 months, which of the following mutual funds is the most suitable for these customers? A) LMN Cash Reserves Money Market Fund B) XYZ Investment-Grade Bond Fund C) ABC Growth & Income Fund D) ATF Capital Appreciation Fund

A) LMN Cash Reserves Money Market Fund These customers are preparing to make a major purchase within the next few months, so they require a highly liquid investment to keep their money safe for a short amount of time. The money market fund best matches this objective.

When an income-oriented investor wishes to compute the current yield of a specific investment, which one of these items would NOT be considered? A) Net present value B) Current market price C) Interest coupon D) Dividends paid

A) Net present value The current yield of any investment is the income return (dividends on equity; interest on debt) divided by the current market price. The NPV is a tool that evaluates the reasonableness of the price of an investment.

ABC Manufacturing Company is in the business of making high quality machine tools. Which of the following would be included in ABC's cash flow from financing activities? A) Payment of cash dividends B) The sale of XYZ Lathe Manufacturing bonds C) The purchase of a new building to store inventory D) The purchase of a new computer-driven lathe

A) Payment of cash dividends All financing activities deal with the flow of cash to or from the business owners. Who do dividends go to? The company's shareholders and that is why they are included in financing activities. The other choices are part of cash flow from investing activities.

If Wallace resigned his position as an agent with Rockland Securities to work for Gibraltar securities, which of the following parties must notify the Administrator of Wallace's move? A) Rockland, Gibraltar, and Wallace B) Rockland and Gibraltar C) Wallace and Rockland D) Gibraltar and Wallace

A) Rockland, Gibraltar, and Wallace When an agent with one broker-dealer resigns and affiliates with another, both broker-dealers and the agent must notify the Administrator of the change in registration.

On a balance sheet, dividends payable would fall under the category of A) current liabilities B) assets C) fixed liabilities D) stockholders' equity

A) current liabilities Dividends payable are dividends that have been declared but have not yet paid out. They are a type of current liability—that is, an obligation that will come due within 1 year from the date on the balance sheet.

The Uniform Securities Act grants the Administrator the power to deny or revoke a registration of a securities professional. However, the Administrator generally would not deny or revoke a registration A) if a person associated with a registered investment adviser has been convicted of any non-securities-related misdemeanor within the last 10 years B) if a registrant is temporarily enjoined by any court of competent jurisdiction from engaging in the securities business C) of a securities professional in the case of insolvency D) if a registrant has engaged in dishonest or unethical (but not illegal) practices in the securities business

A) if a person associated with a registered investment adviser has been convicted of any non-securities-related misdemeanor within the last 10 years In most cases, conviction for a non-securities-related misdemeanor is not sufficient cause for revocation.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser's fee A) may be considered unreasonable if it is not competitive with fees charged by other advisers for essentially the same services B) must reflect the amount of time the adviser spends managing a client's account C) may not be based on a percentage of the client's assets under management D) is not subject to regulatory oversight by the Administrator if the client may be considered financially sophisticated

A) may be considered unreasonable if it is not competitive with fees charged by other advisers for essentially the same services

A broker-dealer holds fully paid-for customer securities for safekeeping. Under the NASAA Statement of Policy on Unethical and Dishonest Business Practices of Broker-Dealers and Agents, the broker-dealer: A) must segregate them B) may lend them to make delivery on short sales C) would be in violation unless a properly executed margin agreement was in effect D) must pay interest to the clients

A) must segregate them Any securities held in custody by a broker-dealer (or, for that matter, an investment adviser) must be segregated from those belonging to the broker-dealer (or investment adviser). To do otherwise would be to commit the prohibited practice of commingling.

One of your clients dies. You could legally take instructions regarding the individual's estate from A) the administrator in intestacy B) a CPA who prepared the deceased's tax return C) a person with durable power of attorney D) the spouse of the deceased

A) the administrator in intestacy If an individual dies without a will (intestate), the state will appoint an administrator in intestacy who, just as an executor for one who had a will, has control over the deceased's assets. A durable power of attorney, just like any other power, expires upon the death of either party to the power.

Investment advisers who preach the benefits of strategic asset allocation do so because they believe A) the market is perfectly efficient because stock prices reflect all available information B) over the long run, strategic management will eventually outperform the market C) the market is basically inefficient and there is a strategy that can beat it D) active management of a portfolio offers tactical benefits

A) the market is perfectly efficient because stock prices reflect all available information The primary difference between strategic and tactical asset allocation comes down to the belief by those following the strategic style that it is not possible, over a long period of time, to beat the market.

With the current rate of the 91-day Treasury bill at 2%, a stock paying dividends at a rate of 4% and having a total return over the measured period of 7% would have a risk premium of A) 9% B) 5% C) 2% D) 4%

B) 5% The risk premium is a premium demanded for internal and external risk factors. It is the amount of total return in excess of the risk-free rate. In this case, the total return is 7% (the dividend return is included in the total) minus the 2% T-bill rate.

Under the Uniform Securities Act, which of the following concerning the withdrawal of an agent's registration is NOT true? A) At the Administrator's discretion, disciplinary proceedings may delay effectiveness of a withdrawal application indefinitely. B) Absent any disciplinary proceedings, withdrawal is effective 60 days after application. C) Absent any disciplinary proceedings, withdrawal is effective 30 days after application. D) Disciplinary proceedings may be taken against an agent after the agent's withdrawal is effective.

B) Absent any disciplinary proceedings, withdrawal is effective 60 days after application. Under the USA, withdrawals of registration are generally effective on the 30th day after filing, unless a disciplinary action is instituted.

The main purpose of dividend reinvestment in a mutual fund accumulation plan is to A) Avoid commissions or sales charges B) Compound the growth of a mutual fund investment C) Protect against capital loss D) Avoid taxes

B) Compound the growth of a mutual fund investment Reinvesting dividends compounds the growth of the fund with periodic purchases of new shares. Taxes are due on dividends whether or not they are reinvested. Capital gains or losses will occur whether or not dividends are reinvested. The purchase of additional shares with reinvested dividends may increase the capital gain or loss in proportion to the dividends reinvested. Avoiding commissions or sales charges is not the main rationale for reinvesting dividends, even though sales charges are not applied to reinvested dividends.

Causes listed in the Uniform Securities Act that could lead to the revocation of the registration of a broker-dealer would include: I. the conviction of a principal officer for a securities-related crime II. the firm had no employees III. the firm was unable to meet its obligations as they came due A) I, II, and III B) I and III C) II and III D) I and II

B) I and III Conviction of a principal officer of a broker-dealer could be a cause for suspension or revocation of that broker-dealer's registration. Insolvency is another cause, but the USA does not have any requirements relating to the number of employees of a broker-dealer.

Which of the following statements regarding a 100% stock dividend are TRUE? I. The share price is reduced by half. II. The total market value of the outstanding stock decreases. III. The total market value of the outstanding stock may increase or decrease as a result of the split. IV. The number of shares doubles. A) II and IV B) I and IV C) I and III D) II and III

B) I and IV In a 100% stock dividend, the number of outstanding shares is doubled and the price is reduced by half. The total market value (market cap) of the issuer's stock remains the same.

Securities industry rules require that securities professionals disclose all potential conflicts of interest to their clients. Examples of potential conflicts of interest include I. offering a proprietary product II. an agent having a financial interest in a recommended security III. a broker-dealer publishing a favorable research report after underwriting the issuer's stock offering IV. the sponsor of a mutual fund offering a trip to Key West for all agents reaching a minimum sales level of any of the sponsor's funds A) II and IV B) I, II, III, and IV C) I and III D) I, III, and IV

B) I, II, III, and IV

A registration of an IAR can be denied or revoked if it is in the public interest and I. the registrant fails to include the fact that he had been convicted of a non-securities-related misdemeanor within the last 2 years II. the registrant has willfully violated the securities laws of a foreign jurisdiction III. the registrant is qualified on the basis of knowledge and training but lacks requisite experience IV. the registrant has engaged in dishonest or unethical practices in the securities business A) II and III B) II and IV C) III and IV D) I and II

B) II and IV Just cause for denial, suspension, or revocation of an IAR's license would include engaging in dishonest or unethical practices in the securities business and willfully violating the securities laws of a foreign jurisdiction

Without prior authorization from the client, an investment adviser could release information relating to the client's account I. in order to comply with the brochure delivery requirements of the USA II. when requested by the IRS as part of litigation against the client III. for the purpose of furnishing information for a statistical survey being compiled by the Administrator IV. upon the receipt of a subpoena from a court of competent jurisdiction A) I, III, and IV B) II and IV C) II and III D) I, II, III, and IV

B) II and IV Without the prior consent of the client, an IA may disclose information relating to specific accounts only when requested by the IRS or by court order.

Which of the following is required to effectuate annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser? A) Consent to service of process B) State licensing fee C) Form U4 D) Renewal notice to the SEC

B) State licensing fee All investment adviser representatives are registered with the states, not the SEC. Renewal requires the payment of the annual renewal registration or licensing fee.

Which of the following statements concerning transactions exempt from registration under the Uniform Securities Act is TRUE? A) A security sold under an exempt transaction must be registered. B) The antifraud provisions of the Uniform Securities Act apply to exempt transactions. C) An unregistered, nonexempt security may be lawfully sold in a nonexempt transaction. D) The Administrator may require that a security be registered and a prospectus delivered in an exempt transaction.

B) The antifraud provisions of the Uniform Securities Act apply to exempt transactions. The antifraud provisions of the act are always applicable, even if the securities or the transaction are exempt from the registration provisions of the act. Fraud is a crime, and no criminal acts are exempt from the law.

Under UTMA, which of the following are allowable distributions for the benefit of the minor? A) A percentage of food expense B) The cost to attend a summer camp C) A percentage of housing expenses, such as the utilities for his bedroom D) Clothing expense for a child who has gone through a growth spurt

B) The cost to attend a summer camp You cannot use UTMA (or UGMA) money for the basics: food, clothing, and shelter; those are the responsibility of the parent. An optional expense, such as summer camp, vacation, and sports league registration, would be permitted.

Which of the following is NOT related to the variability of a portfolio's returns? A) Asset allocation B) Total return C) Security selection D) Market timing

B) Total return Total return is a measurement of the investor's past return on the portfolio. It measures what has happened and has no effect on future variability.

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, but after 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, the preferred stock, and the bonds

B) ahead of the common stock and the preferred stock, but after the bonds Any debt security, even a subordinated debenture, has a claim ahead of all equity. However, it is subordinated to all other debt.

An investor who buys a stock and wishes to limit the potential downside risk should A) enter a sell limit order B) buy a put C) enter a buy stop order D) buy a call

B) buy a put This is the classic example of a protective put. It can be thought of as insurance that limits the downside risk to the difference between the stock price and the put's strike price. For example, if the investor bought stock at 93 and then purchased a 90 put, no matter how low the price of the stock fell (even to zero), the investor can exercise the put and sell the stock for 90. The loss is limited to that $3 per share difference (plus the premium paid for this insurance). This is the most common way to hedge a long stock position.

Under the Uniform Securities Act, all of the following are exempt from registration EXCEPT A) airport authority bonds B) common stock only sold intrastate C) airplane equipment trust certificates D) securities issued by a 501(c)(3) nonprofit religious organization

B) common stock only sold intrastate Local companies that issue common stock sold only within the state must register their securities with the state Administrator.

An IAR is viewing the balance sheet of a corporation. Included in the computation of the company's working capital are all of the following EXCEPT A) marketable securities of other companies B) convertible bonds it has issued C) cash D) accounts receivable

B) convertible bonds it has issued The working capital of a corporation is equal to its current assets minus its current liabilities (a current liability is payable within 12 months). Because all bonds, convertible or not, issued by the corporation are long-term liabilities, they are not included in the working capital computation. Accounts receivable, marketable securities, and cash are short-term assets included in the calculation of working capital.

The nondiscrimination rules imposed on qualified retirement plans by the Internal Revenue Code are intended primarily to ensure that retirement plans do not discriminate A) against a company's owners, top executives, and key employees B) in favor of a company's owners, top executives, and key employees C) against employees over age 40 D) against female employees

B) in favor of a company's owners, top executives, and key employees The IRS nondiscrimination rules are primarily intended to ensure that qualified retirement plans do not discriminate in favor of owners, executives, and key employees at the expense of rank-and-file workers. A retirement plan that excessively benefits key employees is said to be top-heavy and must meet additional special requirements.

If an agent feels that his secretary is underpaid and decides to split his commissions on an 80%/20% basis, this practice is A) permitted if the secretary is also registered as an agent B) permitted if the secretary is also registered as an agent and the appropriate supervisory person agrees to the arrangement C) a violation in certain states D) a violation under all circumstances

B) permitted if the secretary is also registered as an agent and the appropriate supervisory person agrees to the arrangement Just as with any other individual, splitting commissions can only be done with those having the proper registration, in this case, that of an agent. Because compensation is determined and processed by the employing broker-dealer, any splitting would need the approval of the appropriate supervisor.

Currency Transaction Reports must be filed for cash transactions that exceed A) $100,000.00 B) $25,000.00 C) $10,000.00 D) $50,000.00

C) $10,000.00

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) 2.13% B) 6.34% C) 2% D) 4.26%

C) 2% 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%.

According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, under which of the following circumstances has the investment adviser acted properly? A) An adviser tells a client that, by keeping his entire portfolio invested in government securities, he will not experience a great deal of appreciation but is guaranteed not to lose money. B) An adviser promises a client that by following the firm's trademark investment program, the returns will exceed those of the previous 12 months or all fees paid will be returned. C) An adviser discloses confidential information about an advisory account to the spouse, who is a joint owner of the account. D) An advisory firm states in the advisory contract that if the investor does not experience a minimum return of 6%, the firm will pay the client out of its own funds to make up any difference.

C) An adviser discloses confidential information about an advisory account to the spouse, who is a joint owner of the account.

Which of the following statements is TRUE? A) A corporation is required to pay a cash dividend to stockholders if the earnings are sufficient, especially if it is of preferred stock. B) A growth company would be more likely to pay a cash dividend than a stock dividend. C) Dividends have a significant influence on the value of the corporation's stock. D) A stock split increases the owner's proportionate share of the company.

C) Dividends have a significant influence on the value of the corporation's stock. Dividends play a large role in what someone is willing to pay for the stock. For example, the dividend discount model (DDM) values a stock as the discounted present value of future dividends.

All of the following would qualify as management companies EXCEPT I. face-amount certificate companies II. unit investment trusts III. closed-end investment companies IV. open-end investment companies A) III and IV B) II and IV C) I and II D) I and III

C) I and II 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.

Federal covered securities: I. are exempt from registration under the USA II. are nonexempt from registration under the USA III. can be required to pay state filing fees IV. cannot be required to pay state filing fees A) II and III B) II and IV C) I and III D) I and IV

C) I and III Federal covered securities are exempt from registration under the USA. However, issuers of federal covered securities may be required to pay state filing fees, (notice filing), in the states where they are sold and are subject to the antifraud provisions of the USA.

Under the Uniform Securities Act, any partner, officer, or director of a registered investment adviser is an investment adviser representative if a function of the position involves I. offering advice concerning securities II. managing client accounts or portfolios III. determining securities recommendations for representatives to disseminate IV. supervising personnel engaged in advisory activities but not directly dealing with the public A) I only B) I and II C) I, II, III and IV D) I, II and III

C) I, II, III and IV The Uniform Securities Act defines persons associated with an investment adviser, who offers advice concerning securities, as an investment adviser representative. This includes any partner, officer, or director. The definition also includes persons who manage client accounts or portfolios, determine securities recommendations, or supervise personnel engaged in the above activities.

Under the Uniform Securities Act, the definition of sale includes I. bona fide gifts of securities II. giving a security as a bonus with any purchase III. exercising a right to convert one security into another IV. preliminary agreements between issuers and underwriters. A) III and IV B) II, III, and IV only C) II and III D) I and II

C) II and III Bona fide gifts of securities and preliminary agreements between issuers and underwriters are specifically excluded from the definition of sale. A security given as a bonus with any other purchase is considered to be part of the purchase and has therefore been sold. When a right to convert or purchase a security is exercised, it is considered to be a sale.

An issuer of federal covered securities, whose registration is effective under the Securities Act of 1933, would use which of the following procedures to permit sale of its securities in a specific state? A) Qualification B) Registration C) Notice filing D) Coordination

C) Notice filing Notice filing is the procedure by which federal covered securities, most commonly registered investment company securities, receive clearance for their securities to be sold in a specific state. No formal registration is required, but payment of fees and filing of certain documents may be.

Among the benefits of an HSA is A) up to $10,000 per year may be accumulated. B) funds may be used for various medical expenses once the low deductible has been met. C) funds not used for health expenses may be invested in mutual funds and other securities. D) the amount that may be contributed is based on the number of dependents.

C) funds not used for health expenses may be invested in mutual funds and other securities. 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.

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) the investment adviser representative and the employing adviser must notify the Administrator promptly B) only the terminating investment adviser must notify the Administrator C) only the investment adviser representative must notify the Administrator promptly D) the investment adviser representative and the federal covered advisers must notify the Administrator promptly

C) only the investment adviser representative must notify the Administrator promptly 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 economic theory that says economic growth results from lower tax rates and lower government spending is A) demand-side theory B) Keynesian theory C) supply-side theory D) monetary theory

C) supply-side theory Supply-side economics is the theory of Arthur Laffer, who believed that heavy taxing and government intervention have a negative effect on the economy.

An investment adviser representative is evaluating ABC stock to see if it is a good fit for a client's portfolio. Using the security market line (SML), what is the expected return for ABC when the return on the market is 20%, the 91-day Treasury bill is yielding 4%, ABC's beta is 0.70, and the inflation rate, as measured by the CPI, is 3%? A) 10.2% B) 14.0% C) 11.2% D) 15.2%

D) 15.2% The formula for this computation is as follows: 20% (the return on the market is a beta of 1.0) minus the risk-free rate of 4%, or 16%. Then, multiply that by the beta of this stock (0.7) to arrive at 11.2%. That is, the stock should return 11.2% over the risk-free rate of 4%, or 15.2%. Inflation rate is only important if we are looking for the real (inflation-adjusted) return, not the expected return.

Create A Large Legacy (CALL), Inc., is a state-registered investment adviser with offices in States X, Y, and Z. CALL currently does not have a place of business in State W, but does have 5 retail clients who are residents there. Opening an account for which of the following prospective clients domiciled in State W would now require CALL to register in State W? A) A small community bank depositing $500,000 B) A county in State W desiring advice on investment over $250,000 of surplus funds C) An insurance company account with an opening balance of $750,000 D) A trust having 4 minor children as beneficiaries with total trust assets of $5 million

D) A trust having 4 minor children as beneficiaries with total trust assets of $5 million Regardless of the assets involved, a trust account, unless one for an employee benefit plan with at least $1 million in assets, is considered a retail rather than institutional client. Once the investment adviser goes over the de minimis limit of 5, registration with the state is required.

Which of the following statements best describes rights of rescission under the USA? A) Rights of rescission are not generally available to public customers under the USA, although such rights may be made available to institutional investors. B) An agent who unknowingly violated the USA may be imprisoned for up to 5 years. C) Any investor who loses money in a securities transaction can be made financially whole under the rights of rescission. D) An investor who believes he has been wronged in conjunction with a violation of the USA may be entitled to restore his former financial condition as if the transaction had not occurred.

D) An investor who believes he has been wronged in conjunction with a violation of the USA may be entitled to restore his former financial condition as if the transaction had not occurred An investor who believes he has been wronged in conjunction with an investment transaction may have recourse under rights of rescission to restore his original financial condition. Generally, an investor exercising rights of rescission is entitled to recover the amount of the initial investment, a reasonable rate of interest on that amount, and attorney's fees, if any, less any income received on the security

Which of the following is generally NOT an appropriate product for retirement planning? A) Bonds B) Mutual funds C) Life insurance D) Commodities

D) Commodities Commodities are among the most speculative investments and not generally an element in retirement planning.

Where would you be most likely to find an IPS? A) GRAT B) IRA C) SPD D) Defined benefit plan

D) Defined benefit plan The investment policy statement (IPS), although not required under Department of Labor (DOL) rules, is generally found in corporate qualified plans, such as the defined benefit or defined contribution plan. Because the investor manages the IRA, there is no need to prepare an IPS for participants to review.

Grandma has decided to give her grandson some stock that she bought many years ago. When the grandson sells the stock, how is the tax liability figured? A) Both the cost basis and holding period are determined from the date of the gift. B) Her date of purchase is used, but the cost basis is from the date of the gift. C) Her cost basis is used, but the holding period begins on the date of the gift. D) Her cost basis and date of purchase is used.

D) Her cost basis and date of purchase is used. When stock is given as a gift, the donee (recipient) takes over the cost basis and the holding period of the donor.

Among the differences between C corporations and S corporations is I. the liability assumed by the shareholders II. the number of allowable shareholders III. the tax treatment of the corporation's earnings IV. residency requirements of shareholders A) II and III B) I, II, III, and IV C) I and IV D) II, III, and IV

D) II, III, and IV A feature common to both C and S corporations is the limited liablity of the investor. That is, the investor is not liable for the debts of the business and cannot lose more than the original investment. Unlike C corporations, there is a limit placed on the number of shareholders in an S corporation. The primary practical difference is the fact that S corporation earnings (and losses) flow through to the shareholders, whereas C corporation earnings are only received by shareholders when dividends are paid.

One of the ways in which a simple trust differs from a complex trust is that simple trusts A) Are easier to prepare. B) May make distributions from the corpus of the trust. C) May retain income. D) Must distribute their distributable net income each year.

D) Must distribute their distributable net income each year Unlike complex trusts, simple trusts must distribute their DNI on an annual basis.

Agent A with Firm Y and Agent B with Firm Z conduct a joint seminar. They agree to share the commissions on any resulting business. Under the Uniform Securities Act, which of the following statements regarding sharing commissions is CORRECT? A) Sharing commissions that are a result of a joint seminar is never permitted. B) Only an agent who makes a sale is eligible to earn a commission. C) In this instance, sharing of commissions could only be done with the approval of both firms. D) Sharing of commissions by agents of two unrelated firms is prohibited.

D) Sharing of commissions by agents of two unrelated firms is prohibited. Unless an exception is granted by the Administrator, it is prohibited for an agent to share commissions with any person not also registered as an agent for the same or affiliated broker-dealer.

Assuming all of the following mature at about the same time, which of the following bonds should experience the greatest price decline if interest rates rise by 1%? A) Treasury bond issued at par carrying a 7% coupon B) Treasury bond issued at par carrying a 5% coupon C) Treasury bond issued at par carrying a 6% coupon D) Treasury bond issued at par and carrying a 4% coupon

D) Treasury bond issued at par and carrying a 4% coupon This is an example of duration. With approximately equal maturity dates, the bond with the lowest coupon will always have the longest duration. The longer the duration, the greater the susceptibility to price changes due to fluctuations in interest rates.

Which of the following strategies would be considered most risky in a bull market? A) Buying calls B) Writing naked puts C) Buying a put D) Writing naked calls

D) Writing naked calls Writing naked calls provides unlimited liability and the most risk. Buying a call would be an attractive strategy in a bull market with risk limited to calls paid. Writing naked puts risks only the difference between the strike price and zero, less any premium received. Buying a put is a bearish strategy with risk limited to the amount paid for the put.

A young customer who is a novice investor wishes to begin an investment program. He is eligible for his employer's 401(k) plan, to which the employer makes matching contributions, but he does not participate in the plan. Your advice to the customer should be to begin A) by making regular contributions to an income mutual fund B) by taking positions in individual stocks C) by making regular contributions to a growth mutual fund D) contributions through elective deferral of his salary to the employer's 401(k) plan, at least to the employer's matching level

D) contributions through elective deferral of his salary to the employer's 401(k) plan, at least to the employer's matching level The first piece of advice to offer a customer eligible for a 401(k) plan is to make regular contributions to the plan, particularly when the employer makes matching contributions.

What is dollar cost averaging?

Dollar cost averaging is that formula method of investing that contemplates investing a fixed amount of money, in this case $100 at regular intervals, in this case on the 20th of each month, regardless of price swings in the market. By doing so, more shares are bought when the price is low and fewer when the price is high.

What is referred to as a company's "working capital"? How is this calculated?

Working capital is the amount of liquid capital or cash a company has available. This is a measure of a firm's liquidity, or its ability to quickly turn assets into cash to meet its short-term obligations. Working capital = current assets - current liabilities.

A TIPS bond pays interest at the rate of 4%. If the annual inflation rate is 5%, what is the principal value after the 4th year? A) $1,218.40 B) $1,169.86 C) $1,200.00 D) $1,171.66

A) $1,218.40 A TIPS bond's principal increases every 6 months based on the inflation (not the coupon) rate. An annual inflation rate of 5% means the adjustment every 6 months is 2.5% of the principal. At the test center, enter $1,000 and then multiply times 102.5%. Take that result and continue to multiply times 102.5% a total of 8 times (there are 8 six-month periods in 4 years).

The Zxion Corporation has just distributed a 7½ to 1 split of its common stock. Prior to the split, Zxion had EPS of $15, the market price of Zxion common stock was $225 per share, and the price of its $75 par preferred stock was $82.50. As a result of the split, the price-to-earnings (P/E) ratio is now A) 15 x 1. B) 6 x 1. C) 2 x 1. D) 7.5 x 1.

A) 15 x 1. A stock split does not change the P/E ratio because both the stock's price and its earnings decline by the same proportion. In this question, after the 7.5 to 1 split, the market price will drop to $30 per share ($225 ÷ 7.5) and the earnings per share are now $2 per share ($15 ÷ 7.5). That 30:2 is still a 15-to-1 P/E ratio.

Under the Investment Advisers Act of 1940, for which of the following is an investment adviser required to disclose to clients the amount of compensation he will receive? I. Commissions on recommended securities transactions II. Commissions on insurance sales III. Incentives from the issuer of a recommended security

All three. Advisers must disclose compensation received on sales of securities and nonsecurities products and also compensation received from the issuer of a recommended security.

The Uniform Securities Act provides an exemption from registration for certain securities and for certain transactions. However, the Administrator is not empowered to deny an exemption from state registration to (multiple options): I. U.S. government securities II. Private placement transactions III. A transaction with an insurance company IV. Municipal bonds issued by another state

Answer: I and IV Other than in a transaction involving a federal covered security, the Uniform Securities Act gives the power to the Administrator to deny an exemption to any exempt transaction such as private placements or transactions with professional investors, such as insurance companies or bank trust departments. However, when it comes to a security's exemption, the Administrator may only deny exempt security status to an issue of a nonprofit organization or an investment contract issued in connection with an employee benefit plan, never a U.S. government security or one issued by another state.

The difference between a fixed annuity and a variable annuity is that the variable annuity I. offers a guaranteed return II. offers a payment that may vary in amount III. will always pay out more money than the fixed annuity IV. attempts to offer protection to the annuitant from inflation

Answer: II. and IV. Variable annuities differ from fixed annuities because the payments vary and are designed to offer the annuitant protection against inflation.

Gross Domestic Product (GDP) is increasing. Real interest rates are relatively high. Consumer sentiment is strong, as are auto and retail sales. Labor productivity is declining. What state of the business cycle is the economy likely experiencing? A) Peak to contraction B) Expansion to peak C) Trough to recovery D) Recovery to expansion

B) Expansion to peak When the economy is moving from expansion to peak, labor productivity starts to decline and interest rates are at a level where the Federal Reserve Board usually starts to contract or slow economic activity.

The capital asset pricing model (CAPM) is used by many to assess the expected return of a security. If the current risk-free rate is 2%, the current return on the market is 10%, and a particular stock's beta is 1.5 with a standard deviation of 3.2, the expected return would be A) 15% B) 12% C) 14% D) 18.2%

C) 14% The formula for this computation is as follows: 10% (the return on the market is a beta of 1.0) minus the risk-free rate of 2%, or 8%. Then, multiply that by the beta of this stock (1.5) to arrive at 12%. That is, the stock should return 12% above the risk-free rate of 2%, or 14%.

Marianne has a fixed-premium variable life policy in which the separate account has been performing extremely well, and the face value has been increasing as a result of the investment performance. However, recently the separate account performance has been negative. If this continues, the face value could decrease A) to 0 B) to the original face value minus any future negative performance C) to 50% of the original face value D) to the original face value

D) to the original face value The face value in an insurance policy is the death benefit. In a variable life policy, the face value will fluctuate with the separate account's performance, but it will never decrease below the original minimum face value.

If an agent of a broker-dealer registers in State F in early November, when will their registration expire and need to be renewed?

December 31st of that same year. State registration for all securities professionals expires on December 31st following the date of registration.

A technical analyst would be most interested in which of the following? A) 200-day moving averages B) Price-to-earnings ratios C) Working capital D) Capitalization ratios

A) 200-day moving averages Technical analysts try to predict the market by examining price and volume trends. They expect the market to act in the future as it has in the past. Technical analysts are not interested in the fundamental aspects of a company, such as its financial statement ratios.

A margin account could be opened for which of the following? A) IRA B) Partnership C) UTMA account D) Coverdell ESA

B) Partnership There is no legal reason why a partnership (or other business structure) cannot open a margin account. A margin account could never be opened for retirement accounts, Coverdell ESAs, and UTMA/UGMA accounts.

The Sharpe ratio measures a stock's A) return earned compared to its total risk. B) excess return earned compared to its total risk. C) excess return earned compared to its unsystematic risk. D) excess return earned compared to its systematic risk.

B) excess return earned compared to its total risk. The Sharpe ratio is defined as a fund's excess return (fund's return exceeding the risk-free rate) divided by the total risk (standard deviation).

How much transparency do hedge funds provide to their investors? What about mutual funds?

Because hedge funds are not registered with the SEC (or the states), there are limited disclosures - the transparency is not nearly what investors have with mutual funds. Mutual fund investment managers always register with the SEC and the same is true of most hedge fund managers, typically those with AUM of at least $150 million.

A client of yours recommends your services to his mother, who is 80 years old. She lives on Social Security ($2,215 per month) and has a home with a net value of $186,000. She has lost a large amount of money that she had placed into a high-risk technology fund about 10 years ago. The fund is part of a family that has a wide range of funds with varying objectives. With only $27,000 left in that account, what would you suggest as the best option for her? A) Leave the funds where they are and hope for a recovery B) Sell all of the account and select a more appropriate fund in a different family C) Ask her attorney what the best choice would be D) Move her to a lower-risk fund that is in the fund family

D) Move her to a lower-risk fund that is in the fund family Obviously, this client invested in a fund that is not suitable for someone in her situation. Because families of funds offer the exchange privilege (exchanging shares from one fund to another at NAV), it is generally considered an unfair business practice to move to another fund and potentially incur a new sales charge.

A customer purchases stock for $40 per share and holds it for 1 year, selling it for $50 per share exactly 12 months after the date of purchase. Four quarterly qualifying dividends of $.50 were paid during the year. If the customer's tax bracket is 30%, what is the after-tax rate of return? A) 21.75% B) 21% C) 17.5% D) 18.40%

A) 21.75% The customer's return on the stock includes the $10 per share short-term capital gain ($50 − $40) plus the $2 qualifying dividend (quarterly dividend of $0.50 × 4). Remember, an asset must be held for more than 12 months for the gain to be long-term. After-tax rate of return is found by computing the total after-tax earnings. Short-term gains are taxed at the same rate as ordinary income, and qualifying dividends are taxed at a maximum rate of 15% (except for very high income earners—not tested). The tax on the $10 gain is $3 ($10 × 30%), and the tax on the $2 qualifying dividend is $0.30 ($2 × 15%). The investor's total return is the $12 total minus the $3.30 in taxes, or $8.70; $8.70 divided by the original investment of $40 results in an after-tax return of 21.75%.

Which of the following statements best describes the risk-free rate of interest? A) The rate of interest earned on the 91-day U.S. Treasury bill B) The arithmetic mean of the CPI over the past 12 months C) The rate of interest required to produce a net present value (NPV) of zero D) The rate of interest in excess of the pure time value of money

A) The rate of interest earned on the 91-day U.S. Treasury bill The risk-free rate will always bee the 91-day (or 13-week) U.S. Treasury bill. Because their price movements are not generally related to the stock market, those T bills are said to have a beta of zero.

Which of the following statements about systematic and unsystematic risk is most accurate? A) Total risk equals market risk plus company-specific risk. B) The unsystematic risk for a specific firm is similar to the unsystematic risk for other firms in the same industry. C) As an investor increases the number of stocks in a portfolio, the unsystematic risk will stay the same. D) As an investor increases the number of stocks in a portfolio, the systematic risk will go down.

A) Total risk equals market risk plus company-specific risk. Total risk equals systematic (market) risk plus unsystematic (company-specific) risk. Standard deviation is the tool that measures total risk. The unsystematic risk for a specific firm is not similar to the unsystematic risk for other firms in the same industry. Unsystematic risk is company-specific or unique risk, and when more stocks are added, the risk will change. The systematic risk of a portfolio can be changed up or down by adding high-beta or low-beta stocks.

Publicly-traded corporations are generally required to have an annual independent audit of their financial records. What is the highest opinion offered under GAAP? A) Unqualified opinion B) Disclaimer of opinion C) Adverse opinion D) Qualified opinion

A) Unqualified opinion An unqualified or "clean" opinion is the best type of report a business can get. The term qualified means that the auditor has some reservations about the information contained in the financial statements. An adverse opinion means the auditor is not willing to vouch for the accuracy of the information.

One way in which futures contracts differ from options contracts is that A) both parties are obligated on futures contracts where only the seller is obligated on an options contract B) only the buyer is obligated on a futures contract where only the seller is obligated on an options contract C) both parties are obligated on futures contracts where only the buyer is obligated on an options contract D) only the seller is obligated on a futures contract where both parties are obligated on options contracts

A) both parties are obligated on futures contracts where only the seller is obligated on an options contract Unlike options contracts, where only the seller of the option is obligated to perform (if the option is exercised), both parties to a futures contract are obligated to fulfill the terms.

Reasons why a corporation might issue a convertible preferred stock would include A) giving those shareholders an opportunity to participate in the future success of the company B) tax savings to the issuer C) a lower cost to the issuer than would be incurred by the issuance of convertible bonds D) giving those shareholders the ability to convert into the issuer's bonds

A) giving those shareholders an opportunity to participate in the future success of the company The benefit of any convertible security, bond or preferred stock, is that the ability to convert into the issuer's common stock allows those investors to participate in the potential future growth of the company

What is the difference between asset allocation and asset location?

Asset allocation involves dividing your investments among different assets, such as stocks, bonds, and cash. It's deciding what percentage of your portfolio is in equities, fixed securities, and cash. Asset location involves, after determining how much of each asset class you will hold, where you will place certain investments. This takes into account tax implications and potential capital gains/losses.

Which of the following are features of Class C mutual fund shares? I. Typically charge no front-end load II. Typically charge a front-end load III. Typically impose lower CDSCs than Class B shares for a shorter period IV. Typically convert to Class A shares after they are held for a defined period A) II and III B) I and III C) I and IV D) II and IV

B) I and III Class C shares generally have the following features: no front-end sales charge, lower CDSCs than Class B shares for a shorter period, and no conversion to Class A shares regardless of how long they are held. Because of these features, Class C shares may be less expensive for investors with shorter investment horizons. They may be more expensive for investors who plan to hold their shares for a long time, because the level load never discontinues.

Which of the following statements regarding internal rate of return (IRR) is TRUE? A) If the IRR is higher than the cost of borrowing to fund an investment, the investment is likely to be unprofitable. B) IRR is a discount rate at which the net present value (NPV) of an investment is equal to zero. C) IRR cannot be used effectively to measure return on investments with even cash flows, such as bonds. D) IRR ignores the time value of money.

B) IRR is a discount rate at which the net present value (NPV) of an investment is equal to zero.

A mortgage-backed security (MBS), such as a Ginnie Mae, makes a combination principal and interest payment to an investor. This payment will be: A) Taxed as ordinary income B) Partly taxed as ordinary income and partly a tax-free return of principal C) Tax free D) Taxed as a capital gain if underlying mortgage is prepaid

B) Partly taxed as ordinary income and partly a tax-free return of principal All interest payments made a MBS are taxed as ordinary income. Mortgage-backed securities may make principal and interest payments to investors, which would be partly taxed as ordinary income and partly a tax-free return of principal.

An investor interested in acquiring a convertible bond as part of his investment portfolio would A) Seek to minimize changes in the bond price during periods of steady interest rates B) Want the safety of a fixed-income investment along with potential capital appreciation C) Be interested in tax advantages available to convertible debt securities D) Want the assurance of a guaranteed dividend on the underlying common stock

B) Want the safety of a fixed-income investment along with potential capital appreciation An investor who wants the safety of a fixed-income investment with the potential for capital gains would be most interested in purchasing a convertible bond. However, because convertible bonds can be exchanged for common stock, their market price tends to be more volatile during times of steady interest rates than other fixed-income securities.

The capital asset pricing model (CAPM) is an investment theory that serves as a model for A) pricing securities based on their total risk B) pricing securities based on their systematic risk C) measuring the correlation between a security and the overall market D) pricing securities based on their unsystematic risk

B) pricing securities based on their systematic risk Under the CAPM, securities are priced based on their systematic risk only, because this risk cannot be eliminated through diversification. The expected return of a security or portfolio is calculated by adding the rate on a risk-free security to a risk premium multiplied by the asset's systematic risk.

Under the Uniform Securities Act, which of the following is NOT an offer or a sale? A) The sale of a warrant B) A broker-dealer offering 10 shares of XYZ common stock as a free gift to any client who invests at least $10,000 in mutual funds C) 100 shares of ABC stock received in exchange for 200 shares of XYZ stock as a result of a corporate merger D) A gift of assessable stock

C) 100 shares of ABC stock received in exchange for 200 shares of XYZ stock as a result of a corporate merger In order for a sale to occur, there must be some financial consideration. In the case of the merger, shares are exchanged without any payment of funds. Any bonus offered in connection with a sale of another security is a sale. A gift of assessable stock is always considered a sale; gifts of nonassessable stock are not sales.

Richard purchased a 30-year bond for 103½ with a stated coupon rate of 8.5%. What is the approximate yield to maturity for this investment if Richard receives semiannual coupon payments and expects to hold the bond to maturity? A) 8.68% B) 8.50% C) 8.19% D) 9.36%

C) 8.19% No calculation is necessary here. Why not? Because anytime a bond is purchased at a premium over par (103½% is a premium), the YTM must be less than the nominal (coupon) rate. There is only one choice lower than 8.5%. It isn't about your computational skills; it is about your understanding the relationship between prices and yields.

Nonqualified corporate retirement plans differ from qualified retirement plans because: I. nonqualified plan contributions are not exempt from current income tax II. nonqualified plan earnings accumulate on a tax-deferred basis III. the corporation need not comply with nondiscrimination rules that apply to qualified plans IV. the corporation must comply with ERISA requirements dealing with communications to plan participants A) I and II B) II and III C) I and III D) II and IV

C) I and III Two of the primary ways in which nonqualified corporate retirement plans differ from qualified retirement plans is that contributions are not exempt from current income tax and they need not comply with nondiscrimination rules that apply to qualified plans.

What is the difference between a cyclical and a countercyclical industry?

Cyclical industries are highly sensitive to business cycles and inflation trends. Most of these produce durable goods, such as heavy machinery and automobiles, as well as raw materials such as steel. During recessions, the demand for durable goods declines as manufacturers postpone investments in new capital goods and consumers postpone the purchases of automobiles. Countercyclical industries tend to turn down as the economy heats up and to rise when the economy turns down. Gold mining, for example, has historically been a countercyclical industry.

A client of yours comes to the office and shows you some sales literature from a mutual fund that has him very excited. According to the material, the fund's average annual return over the past 10 years has been in excess of 15% and it has achieved the highest rating from the major fund rating services. Before recommending this fund to your clients, the first thing you would probably check for in the fund's prospectus is A) The fund's objectives. B) The fund's expense ratio. C) The fund's sales charge. D) The portfolio manager's tenure.

D) The portfolio manager's tenure. Because this client has been "sold" on past performance, you need to verify if the manager achieving those results is still on the job. That is the prime reason why the regulations require disclosure of the fund manager's tenure; it is important for investors to know if the current manager was the one who had the winning streak or if that manager just came on board. The other choices are something to look at, but in this instance, they take a back seat to checking on the manager's tenure. Sure, the expense ratio is important, but the past performance is after expenses so that has already been taken into consideration.

According to the USA, under what circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent? A) The employee is not paid any commission or salary. B) The transaction is exempt. C) The securities are federal covered securities. D) Under no circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent.

D.) Under no circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent. It is unlawful for a person to transact business on behalf of a broker-dealer unless that person is registered as an agent in the state. Only individuals selling on behalf of the issuer may qualify to be exempt from registration as an agent.

What is a recession? How does it differ from a depression when it comes to the business cycle?

Economists call mild, short-term contractions recessions. The economy is in recession, according to the U.S. Department of Commerce, when a decline in GDP continues for two or more consecutive quarters. Economists call longer, more severe contractions depressions. The economy is in depression, according to the U.S. Department of Commerce, when a decline in GDP continues for six or more consecutive quarters.

If a convertible bond is purchased at its $1,000 par value and is convertible at $83.33 per common share, what is the conversion ratio of common shares per bond?

The conversion ratio is determined by dividing the par value of the bond, or $1,000, by its conversion price of $83.33 per common share. This results in a conversion ratio of 12 shares for each bond.

Under the Uniform Securities Act, an offer to sell would not include which of the following: I. Stock acquired through a merger II. The issuance of warrants or convertible securities III. The issuance of stock rights to existing shareholders.

The first option only (stock acquired through a merger). An offer to sell is any activity in an effort to dispose of a security for value. The issuance of warrants or convertible securities to anyone or stock rights to existing shareholders is considered an offer to sell the underlying security because they involve the payment of money to acquire the stock, thereby making them an offer to sell.

An agent for a broker-dealer member of FINRA may exercise his judgment as to which of the following without written authorization from the customer? I. Quantity II. Time III. Security IV. Price

Time and Price (II and IV). Agents (or any other securities professionals) have the authority to decide the timing and price of a trade. Under prevailing securities law, time or price does not constitute discretion. Decisions involving the quantity and security require written trading authority from the client.