Series 65 final exam

Which of the following investments would not be considered exchange-traded derivatives? A) Forwards B) Warrants C) Futures D) Options

A

Who safeguards the securities held in a mutual fund's portfolio? A) The custodian B) The trustee C) The corporation D) The manager

A

Which of the following accounts could be opened with a TOD designation? I. Individual II. Joint tenants in common III. Joint tenants with rights of survivorship IV. UTMA A) I and III B) II and IV C) I, III, and IV D) I and II

A (The only types of accounts that may have the Transfer on Death (TOD) designation are individual, JTWROS, and TBE accounts. Minors cannot designate a beneficiary. Upon the death of a minor, any assets belong in the deceased's estate.)

Which of the following are characteristics of commercial paper? I. Backed by money market deposits II. Negotiated maturities and yields III. Issued by insurance companies IV. Not registered with the SEC A) III and IV B) II and IV C) I and III D) I and II

B (Commercial paper represents the unsecured debt obligations of corporations needing short-term financing. Most commercial paper is sold to institutions, and the borrower and lender negotiate the terms. Those terms include the interest rate (the yield because they're discounted) and whether these are overnight, 30-day, or longer maturities. Because commercial paper is issued with maturities of no more than 270 days, it is exempt from registration under the Securities Act of 1933.)

Under Keogh plan provisions, a full-time employee is defined as one working at least how many hours per year? A) 100 B) 2,000 C) 1,000 D) 500

C

Under the Investment Advisers Act of 1940, as amended by the Marketing Rule for Investment Advisers, advertising done by investment advisers prohibits which of these? I. The use of testimonials II. Reference only to specific past recommendations III. Untrue statements A) III only B) I only C) II and III D) I and III

C

You have a client who has sold short 100 shares of RIF at $50 per share. If the client wished to use options to protect against unlimited loss, you would suggest the client A) sell 1 RIF 45 call B) sell 1 RIF 45 put C) buy 1 RIF 55 call D) buy 1 RIF 55 put

C (Buying a call option on stock where you have a short position will give you a guaranteed cost to cover the position, thus preventing against unlimited loss. This is the most common way to protect a short stock position.)

The general rules dealing with a broker-dealer extending credit for a customer to purchase securities are found in Regulation T of the Federal Reserve Board. However, Regulation T does not address A) loan value of securities B) mixed margin accounts C) maintenance margin D) initial margin requirements

C (Maintenance margin levels are set by the SROs, such as FINRA. They are currently 25% for long accounts and 30% for short accounts (you will not have to calculate these).)

A company's dividend on its common stock is A) voted on by shareholders. B) mandatory if the company is profitable. C) specified in the company charter. D) determined by its board of directors.

D (A common stock's dividend payment and amount are determined by the company's board of directors.)

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

D (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 statements about zero-coupon bonds are true? I. Zero-coupon bonds are sold at a deep discount from face value. II. Zero-coupon bonds pay periodic interest payments. III. The owner of a zero-coupon bond receives his return only at maturity. A) I and III B) I and II C) II and III D) I, II, and III

A (A zero-coupon bond is a type of debt security that pays no periodic interest payments. Instead, the investor receives his return only at maturity, when the bonds are redeemed. Zero-coupon bonds are sold at a deep discount from face value, but they are redeemed at full face value when they mature.)

Which of the following statements regarding ADRs are true? I. The securities are vehicles used to facilitate U.S. trading of foreign securities. II. Dividends are received in the foreign currency. III. Holders have foreign currency risk. IV. The receipts are issued by a foreign branch of a domestic bank. A) I and III B) II and IV C) I, III, and IV D) I, II, and III

A (ADRs are vehicles that facilitate U.S. trading of foreign securities. They are issued in English in the United States by domestic banks. Dividends are declared in the foreign currency but are payable to holders in U.S. dollars, which means that ADR holders are subject to foreign currency risk.)

If an investment adviser representative of a federal covered adviser that transacts business in a state terminates employment with that investment adviser, which of the following statements is true? A) The representative must notify the Administrator. B) Both the representative and the investment adviser must notify the Administrator. C) No notice to the Administrator is required. D) The investment adviser must notify the Administrator.

A (It is the investment adviser representative's responsibility to notify the Administrator. The advisory firm is not registered with the state; only the representative is registered.)

Fundamental analysts give significant credence to financial ratios. Which of the following tends to give an indication of the profitability of the enterprise? A) Sales-to-earnings ratio B) Current ratio C) Price-to-earnings ratio D) Debt-to-equity ratio

A (Of the four choices given, the sales-to-earnings ratio is the only one not discussed in the License Exam Manual. Why not? Because we know there will always be a question or two on the real exam that was not covered in our material. It is important that students use good test-taking skills to correctly answer those questions. It would seem logical that a question about profitability would relate to earnings. That would reduce the choices to two from four. The price-to-earnings (P/E) ratio reveals the relationship between the market price of the company's stock and its earnings, but it doesn't tell us anything about the degree of profitability of the enterprise. If we know that the P/E ratio compares the price to the earnings, then it makes sense that the sales-to-earnings ratio compares the net sales of the business with its earnings. Companies with a higher percentage of earnings from each dollar of sales are more profitable. For example, Company A and Company B both reported $100 million in net sales for the year. The net income (earnings) of Company A was $20 million and Company B was $8 million. We can see that each dollar of sales generated $0.20 of profit for Company A and only $0.08 of profit for Company B. Or, we could say that it takes $5 of Company A sales to generate $1 of profit ($100 ÷ 20) while it takes $12.50 of Company B sales ($100 ÷ 8) to earn that same $1 of profit.)

Your client who owns a DPP that generated a $10,000 passive loss for the year could A) only deduct the passive loss against passive income. B) deduct $10,000 against capital gains. C) deduct $10,000 against ordinary income. D) deduct $3,000 against ordinary income and carry over the rest.

A (Passive losses, such as those generated by limited partnership investments (DPPs), are only deductible against passive income.)

Starflier Mutual Fund, regulated under the Investment Company Act of 1940, wishes to change its investment policy. It may do so with approval of A) the fund's investment adviser. B) a majority of the outstanding shares. C) the Securities and Exchange Commission (SEC). D) a majority of the board of directors.

B

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

B (A corporation's capital structure consists of its long-term debt plus shareholders' equity. Included in shareholders' equity are the equity capital (stock) and the retained earnings.)

Traders in stock index options are exposed to A) call risk. B) credit risk. C) systematic risk. D) redemption risk.

C

When reviewing a corporation's financial statements, shareholders' equity is computed by A) multiplying the current market price per share times the number of outstanding shares. B) adding together retained earnings, preferred and common stock, and long-term debts. C) subtracting total liabilities from total assets. D) subtracting current liabilities from current assets.

C

Which of the following statements is most accurate regarding employer-sponsored retirement plans? A) In a defined contribution plan, the payments received are related to the number of years of service and the individual's final salary. B) The employee in a defined benefit plan bears the shortfall risk. C) In a defined benefit plan, the client can have some reasonable certainty about the amount of income that will be received in retirement. D) In a defined benefit plan, the payments provided are related to the contributions made and investment performance achieved.

C

As a general matter, the regulators do not treat posts by customers or other third parties as the firm's communication with the public. Under certain circumstances, however, third-party posts may become attributable to the firm. Whether third-party content is attributable to a firm depends on whether the firm has (1) involved itself in the preparation of the content or (2) explicitly or implicitly endorsed or approved the content. Where the firm endorses or approves of the material but has no part in its creation, it is known as A) entanglement. B) usage. C) adoption. D) retail communication.

C (Adoption is the term used to describe material posted to a securities professional's social media site by a third party, where the securities professional explicitly or implicitly endorses or approves of the content but plays no role in its development. Where the firm is involved in the preparation of the content, it is known as entanglement.)

Which of the following statements correctly expresses requirements under the Investment Company Act of 1940? A) No registered investment company may acquire less than 3% of the shares of another investment company. B) Renewal of the advisory contract can only be done with majority vote of the fund's board of directors. C) No investment advisory contract may be entered into that does not provide for termination with no more than 60 days' notice in writing. D) A registered open-end investment company using a bank as custodian must choose one that has FDIC coverage.

C (One of the provisions of the Investment Company Act of 1940 is that the maximum permitted termination notice is 60 days in writing. The custodial bank does not need FDIC coverage (this is not your local bank account) and the 3% limit is the maximum, not a minimum. In order to renew the advisory contract, it is either a majority vote of the fund's directors or by a vote of a majority of the outstanding voting securities of the fund.)

The Uniform Securities Act authorizes the state Administrator to require which of these? I. Either oral or written qualification examinations of investment adviser representatives and officers of investment adviser partnerships or corporations II. Officers of investment advisers to pass a qualification examination III. An applicant for initial registration to publish an announcement of the IV. application in one or more specified newspapers published in the state Investment adviser representatives to pass a qualification examination A) III and IV B) I only C) I, II, III, and IV D) I and II

C (The state Administrator may require qualification examinations for officers of investment advisers, as well as its representatives, and may require them to publish an announcement in one or more newspapers published in the state. The Administrator may also require either an oral or written examination.)

Which of the following transactions would not be exempt under the Uniform Securities Act? A) The executor of an estate sells securities to liquidate the property. B) Securities are sold that were collateral for a defaulted loan. C) A registered dealer sells Canadian government securities to a retail client. D) A customer calls his broker-dealer and submits an order to purchase a specific security.

C (Unsolicited, nonissuer transactions (customer calls the broker-dealer to order or sell a security) are exempt transactions, as are fiduciary transactions to liquidate estates or receiverships by guardians, executors, administrators, trustees in bankruptcy, or conservators. Sales of securities that had been pledged as collateral for a defaulted loan are also exempt transactions. The sale of Canadian government securities by a registered dealer represents a security that is exempt under the Uniform Securities Act, but the transaction itself is not.)

Whippet Bus Lines, Inc., serving most of the country, has just been informed by the Surface Transportation Board of the United States that all of its buses must be retrofitted with expensive safety equipment. The effect of this will be a significant drop in Whippet's net income. To an investor in Whippet Bus Lines, Inc., this would be an example of A) country risk. B) business risk. C) regulatory risk. D) market risk.

C (When an action by a regulatory agency, such as the STB, leads to increased costs and lower income, that is regulatory risk.)

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

D

The term security would include which of the following? A) Indentures B) 403(b) plans C) Coverdell ERAs D) Section 529 plans

D

Which of the following are considered unsystematic risks? I. Business II. Liquidity III. Market IV. Purchasing power A) I and III B) III and IV C) II and IV D) I and II

D

By investing in a REIT, you are provided all of the following except A) ownership of real property without management responsibilities. B) flow-through tax treatment of income. C) diversification of real estate investment capital. D) flow-through tax treatment of operating losses.

D (REITs do not offer flow-through of losses to investors. It is important to remember that the portion of the REIT's income that is distributed flows through; losses do not flow through. Although there are investments offering flow-through of both income and loss, such as DPPs, REITs are not one of them. Two of the benefits of investing in REITs are the professional management and the diversified real estate portfolio.)

Which of the following is most commonly used to evaluate the marketplace's perceived value of a particular stock? A) Dividend payout ratio B) Margin of profit C) Earnings per share D) Price-to-earnings ratio

D (The price-to-earnings ratio compares the market price of a stock to the company's earnings per share. When investors are very positive regarding a stock's future, the P/E ratio will generally be higher than those of other companies in the same industry.)

A popular funding technique that involves investing the same amount at regular intervals is known as dollar cost averaging. Participating in this funding approach tends to lessen which risk? A) Timing B) Inflation C) Market D) Credit

A (Timing risk, sometimes called market timing risk, is the uncertainty that an investor will be buying at the market top or selling at the market bottom. In other words, at the wrong time. When one dollar cost averages, that risk is lessened because you automatically acquire more shares when the market is down and less when it is high. Is it foolproof? No, but it does take some of the timing risk away.)

An investment adviser representative tells an advisory client that by investing in U.S. Treasury bonds, you are guaranteed to make money. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements is true? A) This is ethical if the Treasury bonds mature in less than one year. B) This is ethical because U.S. Treasury bonds carry no risk. C) This is unethical because it constitutes a guarantee against market risk. D) This is unethical if the customer loses money but not if he at least breaks even.

C

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 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, I. Kapco's P/E ratio has decreased II. Kapco's P/E ratio has increased III. an investor holding Kapco over this period would have noticed a decrease in income received IV. an investor holding Kapco over this period would have noticed no change in income received A) II and IV B) I and III C) I and IV D) II and III

C

The present value of a dollar A) indicates how much needs to be invested today at a given interest rate to equal a specific cash value in the future B) cannot be calculated without knowing the level of inflation C) is equal to its future value if the level of interest rates stays the same D) is the amount of goods and services the dollar will buy in the future at today's rate price level

A

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

B

A nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees is called A) a payroll deduction plan. B) a SERP. C) a defined benefit plan. D) a defined contribution plan.

B (A supplemental executive retirement plan (SERP) is a nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees. It is probably not a testable point, but these are frequently funded with cash value life insurance policies. Defined benefit and defined contribution plans are qualified - the question states, nonqualified. A payroll deduction plan is usually nonqualified, but that is most often used by lower income employees; it is definitely not an executive's plan.)

The RIF Corporation would not be able to issue A) RIF rights. B) RIF call options. C) RIF warrants. D) RIF common stock.

B (Options contracts are not issued by the underlying asset. Technically, listed options (the only type that will be on the exam) are issued by the Options Clearing Corporation (OCC). A corporation issues common stock and can issue rights (preemptive rights) and/or warrants.)

The Smiths are saving money for a down payment on a house. The Smiths have $25,000 in cash, and they estimate that in 5 years they will have approximately $31,000 if they deposit their cash in a savings account that compounds interest yearly. To calculate the $31,000 amount, the Smiths determined A) the future value of the $25,000 B) the internal rate of the return on the $25,000 C) the net present value of the $25,000 D) the present value of $25,000

A

Regarding the treatment of estates by the IRS, it would not be correct to state any of the following except A) the maximum tax rate on estates is the same as that on gifts. B) estates may be valued either at date of death or 9 months later using the alternative valuation option. C) income received by the estate is reported on Form 1040. D) a deceased person may reduce the value of the estate by taking advantage of the annual gift tax exclusion.

A (The maximum tax rate on estates and gifts is 40% (the number is not tested; only that the rates are the same). The alternative valuation date is 6 months after death; nine months after death is when the tax is due. Dead people can't make gifts and any income received by the estate before it is liquidated is reported on Form 1041.)

In the field of securities analysis, there are many tools available. Which of the following would most likely be used by an analyst to approximate a reasonable price for a common stock? A) Yield to maturity B) The dividend discount model C) Book value per share D) Par value

B (The simplest model for valuing equity is the dividend discount model—the value of a stock is the present value of expected dividends on it. Yield to maturity only applies to debt securities with a fixed maturity date. The par value of a common stock has nothing to do with its market price. Although fundamental analysts will examine a company's book value per share, it generally has little or no bearing on the current market price of the stock.)

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements about material conflicts of interest is true? I. Any conflicts of interest must be disclosed either orally or in writing before rendering advice. II. Material conflicts of interest must be disclosed in writing before rendering advice. III. Material conflicts relating to the adviser, adviser representative, or adviser employees must be disclosed. A) II only B) I and III C) II and III D) I only

C (Advisers must disclose any material conflicts of interest in writing before rendering advice. Material conflicts of interest include any compensation to be received regarding recommendations to the client from other sources in addition to the advisory fee charged and affiliations between the adviser and suppliers of related services or other investment products.)

Which of the following statements regarding convertible debentures is true? A) The debenture holders receive a variable rate of interest. B) The issuer pays a higher rate of interest compared with a comparable nonconvertible debenture. C) The issuer has the right to convert the debentures during the time period specified in the indenture. D) When compared with similar nonconvertible debentures, convertible debentures are issued with a lower coupon rate.

D (A conversion feature is a benefit to the debtholder. It allows the debtholder a choice to either continue holding the debt represented by the debenture or to convert it into shares of common stock of the underlying issuer. Everything that is done in the securities industry has to be a win-win situation. The win for the debtholder in this instance is the ability to take advantage of the capital appreciation potential the common stock may offer, and the win for the issuer is that by offering something extra to the debenture purchaser, that purchaser is willing to accept a lower interest rate on the debt (as compared to a nonconvertible debenture), therefore giving the issuer a lower cost of capital. It is the debtholder, not the issuer, who determines when and if to convert.)

The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is A) reported as cash income on the income statement. B) the net change in the cash position of the firm for the reporting period. C) reported as a separate line item on the balance sheet. D) an integral part of the footnotes to the balance sheet required by generally accepted accounting principles.

B

When a sale violates provisions of the Uniform Securities Act, which of the following statements regarding civil liabilities is true? I. A buyer may not sue for compensation later than three years after the sale. II. A rescission offer must include interest. III. A rescission offer must be at the current market price. A) II only B) I and II C) I, II, and III D) I only

B (Rescission must occur by the earlier of two years after the discovery of the facts or three years after the occurrence. The offer of rescission is based on the price originally paid for the security plus interest at a rate determined by the Administrator (less any income received from that security).)

Under the Uniform Securities Act (USA), an investment adviser's current clients must be delivered a brochure A) quarterly if the adviser has both discretion and custody. B) annually, whether or not the adviser has custody or discretion. C) annually​, but only​ if the adviser has neither custody nor discretion. D) within 48 hours of renewal.

B (Unless there have been no material changes, a copy of the adviser's brochure or brochure supplement must be delivered to all current clients (except those who are exempt from the brochure delivery requirements [impersonal advice costing less than $500 per year and investment companies registered under the Investment Company Act of 1940]) within 120 days of the end of the adviser's fiscal year. Custody or discretion is irrelevant to this question.)

If general interest rates increase, the interest income of an open-end bond fund whose sales exceed redemptions will likely A) remain unchanged. B) not be determined from the information given. C) increase. D) decrease.

C (The primary portfolio holding of a bond mutual fund is bonds. When sales exceed redemptions, the fund has a net cash inflow (just like when your income exceeds your expenses). When that continuous flow of "new" money in invested in these higher yielding bonds, the fund's interest income increases.)

Under the Uniform Securities Act, which of the following statements regarding the employment of investment adviser representatives by a state-registered investment adviser is true? I. The investment adviser must notify the Administrator whenever an investment adviser representative is terminated. II. An investment adviser is not required to notify the Administrator when an investment adviser representative begins employment. III. The registration of an investment adviser representative is effective only as long as the individual is employed by a registered investment adviser. A) III only B) I, II, and III C) I and III D) I only

C (Whenever an individual begins or ends association as an IAR with a state-registered IA, the IA must notify the Administrator. An IAR's registration is only valid while employed by a registered IA.)

If securities of an issuer registered with the state are outstanding, how long after the effective date of registration must an issuer wait before the registration may be withdrawn? A) Only at the Administrator's discretion B) 6 months C) 18 months D) 12 months

D

Mary teaches physics at the local high school and makes about $70,000 per year. She could maximize her annual retirement savings by participating in A) a 403(b) plan and an IRA. B) a 403(b) plan. C) an employer-funded 401(k) plan. D) a 403(b) and a 457 plan.

D

One of your customers asks you to interpret her observation that the short interest in a stock she owns has been rapidly increasing over the past 4 months. Aligning with the short interest theory, you would tell her that this is a A) indication of predictable stability in the stock B) bearish indicator C) indication of predictable volatility in the stock D) bullish indicator

D

Nonsecurities derivatives would include which of these? I. Forward contracts II. Futures contracts III. Hedge funds IV. REITs A) I, II, and III B) I, II, and IV C) I and IV D) I and II

D (Forward contracts and futures contracts are known as nonsecurities derivatives because they derive their value from something that is not a security. REITs and hedge funds are securities, not derivatives.)

An employee is offered a nonqualified stock option with an exercise price of $20 per share. If the option is exercised when the current market value of the stock is $30, the employee A) is taxed on $10 per share as if it were salary. B) is taxed on $20 per share as if it were salary. C) has a capital gain of $10 per share. D) is taxed on $30 per share as if it were salary.

A (In the case of NSOs, the difference between the exercise (or strike) price and the current market value is considered salary to the employee.)

In which of the following cases is the exemption from registration with the SEC not based on the value of assets under management? A) An investment adviser with assets under management of less than $25 million B) An investment adviser that acts as an adviser solely to one or more venture capital funds C) An investment adviser that acts as an adviser solely to one or more national banks D) An investment adviser that acts as an adviser solely to private funds and has assets under management in the United States of less than $150 million

B (It is only in the case of the adviser to venture capital funds where there is no dollar limitation on AUM. Private fund advisers with AUM of $150 million or more must register, and "small" investment advisers—those with less than $25 million in AUM—are generally prohibited from SEC registration. If the investment adviser's only clients are insurance companies, the adviser is exempt from SEC registration even if the firm has billions in AUM, but that exemption does not apply when the only clients are banks.)

The SEC requires that reporting companies (those registered with the SEC) file certain information within specified time limits. Which of the following reports carries the shortest time limit? A) Annual report B) Form 10-K C) Form 8-K D) Form 10-Q

C (Form 8-K is used to report newsworthy events to the SEC, thereby making them available to the public. These reports must be filed within four business days of the event. Form 10-Q is a quarterly report and, depending on the size of the company, is filed within 40 to 45 days of the end of the quarter. Form 10-K is the annual report, and once again, the filing time depends on the size of the company and ranges from 60 to 90 days after the end of the fiscal year. The annual report is technically Form 10-K, although most major corporations publish an additional expanded document with pretty pictures and other information about the company.)

Which of the following statements are not true? The kiddie tax applies to any income received by a child under the age of 19. IRAs have advantages over other estate assets when left to charity. Simple trusts have to distribute income annually. For U.S. citizens, there is an unlimited marital estate tax deduction. A) II, III, and IV B) I, II, and III C) I and II D) I, II, III, and IV

C (The kiddie tax applies to unearned income only such as that received in an UTMA account. Leaving IRA assets to a charity offers the same estate tax benefits as any other asset. Simple trusts must distribute income annually, and there is an unlimited marital estate tax deduction between spouses who are U.S. citizens.)

Under the NASAA brochure rule requirements for investment advisers, an investment adviser (unless qualifying for an exemption) must deliver, A) within 120 days of the end of its fiscal year, a free, updated brochure and related brochure supplements that include or are accompanied by a summary of material changes. B) a free, updated brochure and related brochure supplements every year, even when there are no material changes. C) within 90 days of the end of its fiscal year, a free, updated brochure and related brochure supplements that include or are accompanied by a summary of material changes. D) at least 48 hours in advance of entering into the advisory contract, a copy of the adviser's brochure.

A

A TIPS bond is issued in the principal amount of $1,000, paying 3.5%. Over the security's five-year term, the inflation rate is 4%. What is the amount of the final semiannual interest check? A) $17.50 B) $35.00 C) $21.33 D) $42.66

C (The semiannual interest of a TIPS bond is computed on the basis of the inflation-adjusted principal. Because the principal increases with the inflation rate, at the end of the five-year term, it has grown to $1,219 ($1,000 × 102% ten times). Therefore, the final interest check is for $1,219 × 1.75% (remember that it is a semiannual check). The License Exam Manual (LEM) contains a step-by-step example of how this computation works.)

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) The sale of XYZ Lathe Manufacturing bonds B) The purchase of a new computer-driven lathe C) The purchase of a new building to store inventory D) Payment of cash dividends

D (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. This is a perfect example of the need to read every word in the question and answer choices. Payment of cash dividends is a financing activity while receipt of cash dividends is considered an operating activity.)

One of your customers would like to be able to reduce current taxable income. Contributions to which of the following would be an appropriate recommendation? A) A Roth IRA B) A Section 529 plan for grandchildren C) A deferred annuity D) A donor advised fund

D (A donor-advised fund operates as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code. As such, contributions to the fund will generate a current tax deduction for the customer. Section 529 plans offer tax-deferred growth but not a current tax deduction. Roth IRAs offer the potential of tax-free income, but current contributions are not tax-deductible. A deferred annuity means the earnings in the account are deferred until the money is withdrawn. Once again, there is no current tax benefit. Remember, every annuity on the exam is nonqualified unless something in the question indicates otherwise.)

As part of its suitability determination, an IA firm requires that all potential nonbusiness clients complete a family balance sheet. Items that would be included are I. gold jewelry II. loan secured by the family automobile III. the amount paid thus far this year for Botox injections IV. the balance owed to the dentist for new crowns A) I, II, III and IV B) I and IV C) II and III D) I, II and IV

D

In which of the following situations is an agent committing a prohibited practice? A) Buying a security on behalf of a customer and then reselling it before the customer has paid for it B) Allowing the customer to place an order to sell 100 shares of ABC in the client's discretionary account C) Buying a security on one exchange and simultaneously selling it on another to take advantage of a price disparity D) Using discretion to purchase a security in a discretionary account while awaiting written receipt of trading authority

D (Written receipt of trading authority is required before conducting any trade on a discretionary basis. Oral authorization is not sufficient; it must be in writing. It is not a prohibited practice to sell a security before the customer has paid for it (day trading), and arbitrage (buying securities on one exchange and selling them on another to take advantage of temporary price differences) is also an acceptable practice. Although the agent may have trading authority in a discretionary account, nothing prohibits the client from making his own trades.)

According to the NASAA investor advisory regarding fees charged by broker-dealer firms for services and maintenance of investment accounts, A) as long as the schedule is available in electronic form, it is not necessary to provide a paper version to retail customers. B) the schedule should be made available on the broker-dealer's public website and should be password protected. C) fee schedules should only be delivered by hand or postal mail, to reduce cybersecurity threats. D) the schedule should be made available on the broker-dealer's public website without requiring any login or password.

D (Transparency requires that obtaining the fee schedule should be a simple process for retail customers and prospects. That means access without logging in to the broker-dealer's website or needing a password. Paper copies should always be available, and cybersecurity is not a threat because there is no confidential information included.)

Which of the following would be a violation of the NASAA Contents of Investment Advisory Contract Model Rule? A) It is indicated that a performance-based contract has a fee arrangement that may create an incentive for the investment adviser to make investments that are riskier or more speculative than would be the case in the absence of a performance fee. B) An investment adviser permits clients to renew their investment advisory contracts by email. C) Without the consent of advisory contract holders, the owner of a majority of the stock of the advisory firm pledges that stock to a bank as collateral for a loan enabling the firm to acquire better cybersecurity technology. D) An investment adviser organized as a partnership has the practice of notifying clients of any change in the membership of the partnership within a reasonable time after the change.

C (The NASAA Contents of Investment Advisory Contract Model Rule states that no direct or indirect assignment or transfer of the contract may be made by the investment adviser without the consent of the client or other party to the contract. Pledging a majority interest in the company as collateral for a loan to the business is considered an indirect assignment; the reason for the loan is of no significance. All contract renewals for state-registered advisers must be in writing—email is considered written communication. Notification of changes to members of the partnership and warning of the incentive in a performance-based contract are requirements of the Model Rule.)

All of the following statements concerning qualified tuition programs for educational funding are correct except A) control over the account passes to the student/beneficiary once withdrawals commence B) a college savings plan is a type of QTP where the owner of the account contributes cash to the account so that the contributions can grow tax deferred C) prepaid tuition plans are plans where prepayment of college tuition is allowed at current prices for enrollment in the future D) unless there is a change in beneficiary, assets in the QTP may be moved from the plan of one state to the plan of another as frequently as once per 12 months

a (One of the advantages of QTPs (qualified tuition ​programs, better known as Section 529 plans) is that the owner-contributor ​is always in control of the program. Without a change in beneficiary, plan "rollovers" are limited to once per 12-month period.)

According to North American Securities Administrators Association's (NASAA) Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following practices is not unethical? A) To protect the client in a declining market, an agent sold all shares in the client's account when the client had only authorized the sale of 30% of the shares. B) An agent of a broker-dealer exercised discretion in deciding the time that a sale took place during the trading day without expressed written discretionary authority. C) Within the first 10 days of a client's initial transaction, an agent accepted oral discretion and purchased securities on behalf of the client. D) An agent sold shares at a price less than authorized by a client.

B (An agent of a broker-dealer may exercise discretion in deciding the time or the price at which a sale takes place during the trading day without express written discretionary authority. Such action is not unethical because time and price are not considered true discretion. An agent may not exercise discretion over the number of shares to be sold without prior written discretionary authority. Oral discretion is only permitted for investment advisers and their representatives (never broker-dealers or agents) during the first 10 business days after the initial discretionary transaction in the account.)

Which of the following would be considered an unethical business practice? A) Agents exercising discretion in discretionary accounts B) Agents correcting execution orders in their customer's accounts C) Broker-dealers sending retail clients an email 30 days in advance of a change to fees D) Broker-dealers charging larger-than-ordinary commissions on certain transactions

B (When a good-faith error is made, only the firm can make the correction; the regulators are concerned that giving that power to an agent could lead to covering up unethical activity. When the security involved in the trade is thinly traded (inactive), it is customary to charge a higher commission to cover the added expense. Broker-dealers are required to deliver a copy of their fee schedule no later than account opening. When changes are made, notice must be given at least 30 days in advance and may be done electronically (by email or posting on the firm's website).)

Under the Uniform Securities Act, which of the following statements are true regarding private placements? I. They may be offered to no more than 10 persons in a state in a 12-month period. II. They may be offered to an unlimited number of institutional investors. III. Institutional buyers need not be purchasing for investment. A) II and III B) I and II C) I, II, and III D) I and III

A (With the exception mentioned shortly, private placements are transactions resulting from offers to no more than 10 noninstitutional persons (retail clients) in 12 months for investment purposes only. The offeror must be convinced that retail clients are purchasing for investment purposes. This means no immediate resale intentions are allowed on the buyer's part. No commissions may be paid, directly or indirectly, for these transactions. The exception is that sales to institutional purchasers are exempt from the limitations regarding number of offers, immediate resale restrictions, and commissions. They may, therefore, be offered to more than 10 persons. (Remember that the term person is defined very broadly in the act.))

All of the following are potential benefits of high frequency trading (HFT) except A) greater trading opportunities for the small investor. B) arbitrage opportunities increase market efficiency. C) lower costs for institutional purchasers. D) increased liquidity, especially in very active stocks.

A

Damon is an agent with ABC Investment Planning, a registered broker-dealer and investment adviser. Under what circumstances would Damon not have to obtain client consent when ABC Investment Planning is acting in a principal capacity? A) When the trade that is made is unrelated to the advisory relationship B) Never C) When the client has given ABC blanket permission to engage in this type of transaction D) Only if the client terminates the advisory relationship

A

For purposes of the maximum allowable annual contribution, an individual would have to aggregate contributions made to A) a 401(k) and a 403(b). B) a 401(k) and a Roth IRA. C) a 401(k) and a 457. D) a 403(b) and a 457.

A

Under the brochure rule of the Investment Advisers Act of 1940, each client must be A) delivered a written disclosure statement no later than at the time of agreement to contract for the adviser's services. B) offered a written disclosure statement at the time of signing the contract C) delivered a written disclosure statement no later than 48 hours after signing the contract D) offered a written disclosure statement at least 48 hours before signing a contract.

A (No agreement between an investment adviser and a client may commence without delivery of the written disclosure statement known as the adviser's brochure. Thereafter, SEC rules require that a brochure—or summary of material changes, if any—be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent.)

All of the following statements regarding incentive stock options (ISOs) are correct except A) upon the exercise of an ISO, income for AMT purposes is created B) the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of grant or 2 years from the date of exercise C) if the holding period is satisfied, the gain upon the sale of ISO shares will be a long-term capital gain D) the exercise of ISOs does not create taxable income

B

An agent with a nationally known broker-dealer has been opening new accounts with middle-income clients. When asked for the reason for the success, the agent replies that prospects are offered a money-back guarantee. That is, if any security the agent recommends fails to increase in value by at least 25% in six months, the agent will make up the difference. This type of guarantee A) is permitted only if the guarantee is coming from a third party other than the agent. B) is an unethical and prohibited practice. C) must have been approved by the agent's supervisor before the agent began using it. D) would be considered fraudulent activityB

B

Grandpa bought 100 shares of XYZ common stock 10 years ago for $10 per share. The stock split 2 for 1 several years ago and grandpa gave all of the stock to his grandson when the price per share was $20. Three months ago, grandpa passed away and left the grandson another 100 shares of XYZ that had been purchased one month earlier at $25 per share. At the date of death, the XYZ stock had already climbed to $30 per share. If the grandson sells the XYZ stock for $35 per share, the taxable consequences would be A) $2,500 long-term capital gain plus $1,000 short-term capital gain. B) $6,500 long-term capital gain. C) $4,000 long-term capital gain. D) $6,000 long-term capital gain plus $500 short-term capital gain.

B

Interest rates are declining. An analyst would be most likely to state that the business cycle is in which stage? A) Trough B) Contraction C) Peak D) Expansion

B

A client bought 100 shares of a mutual fund on December 28, 2016, for $4,000 and received a capital gains distribution of $2.40 per share on March 6, 2017, which was taken in cash. He sold his 100 shares for $4,300 on June 19, 2017. For tax purposes, this transaction resulted in A) a $240 long-term capital gain. B) a $60 short-term capital gain. C) a $300 short-term capital gain. D) a $240 long-term capital gain and a $60 short-term capital gain.

C

All of the following are characteristics of exchange-traded funds except A) large investors known as authorized participants buy or sell shares on an in-kind basis. B) they usually trade at or near their net asset value. C) they may not be sold short. D) they are generally tax efficient.

C

If having discretion over $100 million or more in 13(f) securities, which of the following would be exempt from filing Form 13F? A) A trustee B) A natural person who exercises investment discretion over the account of any other natural person or entity C) A natural person who exercises investment discretion over her own account D) An investment adviser that manages mutual fund assets

C

Which type of contract obligates both parties to act? I. Forward contract II. Futures contract III. Options contract IV. Warrant A) II and III B) I, II, and III C) I and II D) I and IV

C

An investment adviser receives a favorable research report on a company he believes will increase substantially in value over the next few months. He places 100 shares in the account of each of his clients for whom he has written discretionary authorization. This activity is: A) a breach of fiduciary duty. B) a prohibited action under the blanket recommendation rule. C) permitted without restriction. D) permitted if disclosed to the clients.

D

Interest rates are rising. An analyst would be most likely to state that the business cycle is in which stage? A) Peak B) Trough C) Contraction D) Expansion

D

A feature of which of the following business entities is limited liability but no flow-through of earnings or losses? A) Corporation B) LLC C) Limited partnership D) Sole proprietorship

a

An options strategy that would be most useful for an investor with a long position in a stock who is concerned that a proposed management change will negatively impact the stock's price would be to A) buy a put on that stock. B) sell a call on that stock. C) buy a call on that stock. D) sell a put on that stock.

a (This investor is looking to hedge his risk of loss. The best way to hedge a long position is to buy a put option.)

One of your new clients has only been working for 3 years but is already interested in retirement planning. In order to be fully eligible for Social Security, the client must A) be at least age 62. B) have minimum credited earnings of at least $20,000 per year. C) have a minimum of 40 covered quarters of employment. D) have at least 40 years of employment.

c