Series 65 Practice Test
5. A borrower will pay an interest rate determined and influenced by which of the following? a. inflation expectations b. the borrower's credit quality c. the length of time over which the funds will be borrowed d. all of the above
D: A borrower will pay an interest rate determined and influenced by inflation expectations, the borrower's credit quality, and the length of time over which the funds will be borrowed
20. Which of the following are TRUE of money market instruments? I. the borrower is the buyer of the instrument II. long-term loanable funds bought and sold as securities in the money market III. buying and selling these instruments involves the trading of money not cash IV. the money lender is the seller of the instrument a. III. only b. I. and IV. c. I., II., III., and IV. d. II. and III
20. A: The buying and selling of money market instruments involves the trading of money (loanable funds), NOT cash. The instruments bought and sold are short-term loanable funds, NOT long-term. The lender acts as the buyer of the instrument, and the borrower is the seller.
36. The category of defensive industry stocks include all of the following types of consumer goods companies EXCEPT: a. energy b. food c. pharmaceuticals d. automobiles
36. D: Defensive industry stocks are largely companies that produce goods that are considered nondurable. Public consumption and demand for these types of goods will usually remain somewhat consistent and more predictable. Accordingly, these stocks will be less affected by the ups and downs of the normal business cycle. Energy, food, and pharmaceuticals are all considered defensive. Automobiles, however, are considered cyclical in that they are a durable good and demand for this type of good is much more sensitive to inflationary movements and fluctuations in the business cycle.
38. Closed-end investment companies: I. may offer common stock, bonds, and preferred stock II. are publicly traded funds III. will have as their initially offering an open offering, registered as such with the SEC IV. have their bid and ask price determined by supply and demand a. I., II., and IV. b. II. and III. c. I. and III. d. II. and IV.
38. A: Closed-end investment companies may offer common stock, bonds, and preferred stock. They are publicly traded funds and have their bid and ask price determined by supply and demand. Their initial offering, however, would NOT be through an open offering but instead by registering a fixed amount of shares with the SEC and offering them to the public for a specific and limited period of time.
18. Which of the following bond strategies involves multiple bond purchases, made at potentially different times, and with all maturing at one single time? a. bullets b. ladders c. barbells d. none of the above
A: A bullet is a bond strategy that involves making multiple bond purchases, at potentially different times, and with all maturing at one single time. The investor here is trying to exploit the changes in interest rates over time while collectively capturing all gains at one single time at maturity. A ladder strategy involves purchasing a group of bonds at the same time up front, and then, having them all maturing at different times in the future. A barbell strategy involves only buying bonds with 1-2 year maturities and 10 or more year maturities, and is designed to take advantage of both long-term rates and quicker maturities.
11. All of the following are true of a stock pricing patterns and trendlines EXCEPT: a. a head and shoulders bottom indicates that the future trend of the stock price will be downward b. during a period of rising prices the trendline will connect all of the bottoms of the stock's price pattern c. the validity of a stock's trendline depends on the number of times the price pattern touches it d. all of the above are true
A: A head and shoulders bottom indicates that the future trend of the stock price will be upward (NOT downward) given that the past pattern shows the stock price has already "bottomed out". During a period of rising prices, the trendline will connect all of the bottoms of the stock's price pattern, and the validity of a stock's trendline depends on the number of times the price pattern touches it with the higher the number indicating a higher level of validity
93. An individual considering becoming a limited partner in a limited partnership can expect his role to include: I. acting as a passive investor II. assuming responsibility for some limited operational functions of the partnership III. taking no personal responsibility for any indebtedness that the partnership experiences IV. taking receipt of the partnerships gains and cash distributions a. I., III., and IV. b. II. and IV. c. I. only d. III. only
A: A limited partner in a limited partnership will primarily act as a passive investor, taking no personal responsibility for any indebtedness that the partnership experiences and taking receipt of the partnerships gains and cash distributions. He will NOT assume responsibility for even limited operational functions of the partnership
74. Of the powers that are retained by an Administrator, which of the following are associated with BOTH the registration of individuals and securities? a. summary order b. stop order c. cease and desist order d. all of the above
A: A summary order can postpone or suspend an individual's securities registration, postpone or suspend a security's registration, or deny or revoke an exemption related to a security or transaction. Accordingly, this type of order is associated with the registration of BOTH individuals and securities. A stop order is an action that only applies to securities, and a cease-and-desist order can only apply to registered individuals
49. Which of the following are TRUE of the accumulation stage of an annuity? I. is considered the pay-in stage II. provides for flexibility in contract terms III. termination of the contract is restricted during this time IV. missed periodic payments will not result in forfeiting prior contributions a. I., II., and IV. b. I. and IV. c. III. and IV. d. II. only
A: An annuity's accumulation stage is considered the pay-in stage, provides for flexibility in contract terms, and the benefit of there being no risk of forfeiture of prior contributions should a payment be missed during this time. It is NOT true, however, that the holder of the contract cannot terminate his contract during this time, and in fact, he may terminate his contract at any time during this period
79. Of the following individuals, which would NOT be considered an investment adviser and subject to regulation? a. an individual who has just graduated with an MBA in finance publishes an online newsletter offering general comments on where she sees the future direction of the overall market going b. a financial analyst who is employed by a firm to create general sector market reports meets with a client to offer advice on specific securities within those sectors c. an entertainment representative receives a percentage compensation from the salaries paid to his client for acting, but also occasionally advises the client on securities in which she should be investing d. an individual acting as a broker/dealer representative makes recommendations to a client regarding specific securities
A: An individual who has just graduated with an MBA in finance and publishes an online newsletter offering general comments on where she sees the future direction of the overall market going would NOT be considered to be an investment adviser nor would she be subject to regulation. Although providing analysis, she is making general comments, she is not in the business of doing so, and is not being compensated for her analysis. The financial analyst, entertainment representative, and broker/dealer representative ALL would be considered to be investment advisers and subject to regulation due to providing specific market advice, making it their business to do so, and being compensated (even indirectly) for their services
55. All of the following meet the definition of what an investment adviser representative is EXCEPT: a. acts as a team of two individuals working as representatives of an investment advisory firm b. manages accounts c. provides advice regarding securities d. makes decisions regarding the securities advice to be provided
A: An investment adviser representative (IAR) may manage accounts, make decisions regarding the securities advice to be provided, and then actually provide securities advice. An IAR may NOT be a team of two or more, and must be an individual. This individual may represent an investment advisory firm.
84. Discretionary trading authority is provided to: I. a business manager to which you have executed a document granting authority to, even though the manager hasn't taken receipt of the actual written document yet II. a business partner who has taken possession of a written document stating trading authorization has been granted to him III. an attorney to which an individual has given his power of attorney IV. an attorney to which an individual has given written authority to trade a. II. and IV. b. II. and III. c. I., II., and IV. d. I., II., III., and IV
A: Discretionary trading authority must be accomplished in writing and must provide specifically for giving authority to trade. The business manager would NOT have discretionary trading authority given that executing a document to that effect does not transfer authority until the individual actually takes receipt of the written authorization. An attorney who simply has a power of attorney would NOT qualify as having discretionary trading authority. The business partner who has taken receipt of the document granting him trading authorization, and the attorney given written authority to trade would BOTH qualify as having discretionary trading authority
42. Exchange traded funds (ETFs): I. are not considered a "pooled investment vehicle" II. can be purchased on margin III. associated with public indexes of only stocks and bonds IV. expenses are lower than a mutual fund with more minimal fees a. II. and IV. b. I. only c. I. and III. d. II., III., and IV
A: Exchange traded funds (ETFs) can be purchased on margin, and have expenses that are generally lower than mutual funds including incurring more minimal fees. They are, however, considered a "pooled investment vehicle" and are associated with the public index of any class of asset, NOT just stocks and bonds
72. A state Administrator in California would normally require which of the following on an issuer application? I. notice of any adverse judgment by the SEC associated with the offering II. the amount of securities to be offered in the state of California III. any additional states in which the securities will be offered IV. the amounts of securities to be offered in any additional states a. I., II., and III. b. II. only c. II., III., and IV. d. I., II., III., and IV.
A: For an issuer registration application, a state Administrator in California would normally require the issuer to provide the amount of securities to be offered in the state of California, a list of any additional states in which the securities will be offered, and notice of any adverse judgment(s) by the SEC associated with the offering. The amounts of securities to be offered in any additional states is NOT something that would be required by the state Administrator when filing a registration statement
30. An investor purchases a bond paying $925 for it. If annual interest is fixed at 11.5%, what can this investor expect to GAIN (over his initial investment) in total from this investment if held to maturity (here, 5 years)? a. $650 b. $575 c. $115 d. $75
A: If held to maturity, this investor first will receive back the par value of $1,000. $1,000 − $925 = $75 This will provide this investor with a GAIN of $75 above the discount to par value originally paid at the time of purchase. Annual interest will be calculated as: $1,000 × .115 = $115 $115 × 5 years = $575 Total gain on investment: total annual interest over 5 years + gain from purchase at discount $575 + $75 = $650
57. Investment adviser representatives (IAR): a. must not provide only impersonal investment advice in order to stay qualified as an IAR b. are not at risk of registration revocation simply due to the occurrence of bankruptcy c. must register with the state as well as the SEC d. require meeting a net worth threshold in order to register
A: Investment adviser representatives (IARs) must not provide only impersonal investment advice in order to stay qualified as an IAR, meaning any advice that is not meant to meet the financial objectives of SPECIFIC accounts. IARs must, however, ONLY register with the state, not the SEC, do NOT require meeting a net worth threshold in order to register, and do risk registration revocation simply due to the occurrence of bankruptcy
45. Which of the following describes a reason an investor should invest in a hedge fund? a. investment participation of fund management b. ease of liquidity c. minimal expenses d. lower relative risk for large loss of capital
A: One reason an investor should invest in a hedge fund is the fund management investing along with the other fund investors. When organized as a limited partnership, fund management will have its own money invested, tying it closer to the potential success or failure of the fund and accordingly, motivating it more to having it, in fact, succeed. Hedge funds, however, do have liquidity risk due to a lock-up period during which they may not make a withdrawal from the fund and their funds are not accessible. Further, expenses can be high, and due to the design of the fund involving relatively riskier strategies, the potential for larger loss of capital is very real
88. Per the Uniform Securities Act, which of the following would be an allowable action to be performed by a security professional? a. a security professional borrows cash from his client Union Bank, repaying the loan in a timely manner b. a client gives discretionary authority over her account to her security professional, that individual borrows cash from the client's account, and then quickly repays the loan c. a security professional lends cash to a client that is also a longtime friend and business associate d. all of the above
A: Per the Uniform Securities Act, a securities professional may only lend money or securities to or from a client if that client is either a broker/dealer, or a financial institution that makes it his business to participate in such lending services. Here, a security professional borrowing cash from his client Union Bank is deemed allowable due to this client being a financial institution who in the normal course of business loans funds to the public. The security professional either borrowing cash from his client's account, or lending cash to his client, are both unallowable per the Uniform Securities Act given that the client in both cases is NOT a broker/dealer or financial institution
32. Preferred stock is often viewed as a fixed income investment for which of the following reasons? a. fixed rate of return b. scheduled redemption date c. preset maturity date d. none of the above
A: Preferred stock is often viewed as a fixed income investment because of its fixed rate of return provided through a fixed dividend paid out quarterly. Preferred stock does NOT have a scheduled redemption date or a preset maturity date. It is in fact considered a perpetual security.
81. Section 28(e)'s safe harbor provision of the Securities Exchange Act of 1934 detail all of the following EXCEPT: a. research provided must be proprietary in nature b. brokerage services can include transaction settlement c. research can be provided via publications d. research services can include portfolio analysis and strategy
A: Section 28(e)'s safe harbor provision of the Securities Exchange Act of 1934 specifies that the research provided can be EITHER proprietary (created and distributed by the broker/dealer), OR created by a third party and then passed through to the broker/dealer for distribution to his or her clients. Research can also be provided via publications and can include portfolio analysis and strategy. Brokerage services can include transaction settlements.
15. All of the following are examples of systematic risk EXCEPT: a. financial risk b. interest rate risk c. purchasing power risk d. market risk
A: Systematic risk is associated with the overall market and changes within it producing adverse effects for companies regardless of their specific current condition or performance. Examples of this type of risk are interest rate risk (the risk of interest rate fluctuations), purchasing power risk (the risk of inflation), and market risk (the risk of an overall market decline due to an event outside of individual companies and their performance). Financial risk is NOT a systematic risk and instead is an unsystematic risk in that it is the type of risk that will be unique to only a specific industry or company. It involves a company's debt financing and its ongoing ability to meet its financial obligations.
94. Of the following business structures, which provides the owner with limited liability and a passthrough of both profits and losses? I. C corporation II. limited liability company (LLC) III. limited partnership IV. S corporation a. II., III., and IV. b. I. and II. c. II. and III. d. III. and IV
A: The business structures that will provide for the owner limited liability and a pass-through of both profits and losses are the limited liability company (LLC), limited partnership, and S corporation. A C corporation does provide the owner with limited liability but no pass-through of profits and losses given that the company is viewed as a separate entity from the owners.
26. Which of the following are examples of the income sources utilized to provide payments to municipal bondholders? I. the sale of a property that is delinquent on the payment of taxes II. toll bridge earnings III. property taxes IV. lease rentals a. I., II., III., and IV. b. III. only c. I., II., and III. d. II. and III.
A: There are two types of municipal bonds, general obligation bonds (GOs) and revenue bonds. General obligation bonds (GOs) pass along income received from sources such as property taxes or the sale of a delinquent property in order to satisfy obligations to bondholders. Revenue bonds may use toll bridge earnings or lease rental income to satisfy their obligations to bondholders.
54. An investment adviser who does not have a place of business in the state of Arizona and is registered in the state of California, would NOT be considered exempt from registration within the state of Arizona given which of the following circumstances? a. his only clients within the state of Arizona total 6, and they've all been residents of the state during the previous 12 months b. his only clients are not actually residents of the state of Arizona, but instead are only temporarily in the state c. his only clients are also investment advisers d. his only clients are institutional investors who have assets of more than $1,000,000
A: This investment adviser would be exempt from registering with the state of Arizona if his only clients were not actually residents of the state of Arizona, but instead were only temporarily in the state, his only clients were also investment advisers, or his only clients were institutional investors who had assets of more than $1,000,000. He would NOT, however, be exempt from state registration in Arizona if his only clients within the state of Arizona totaled 6. The exemption applies only if the adviser has 5 or less clients within the state
68. All of the following are allowable when considering the Uniform Securities Act EXCEPT: a. sale of an unregistered nonexempt security b. sale of an unregistered exempt security c. unregistered sale of currencies d. sale of registered nonexempt security
A: When considering the Uniform Securities Act, all nonexempt securities must be registered in order to be sold. Further, exempt securities need not be registered to be sold, and accordingly, the sale of currencies does NOT require registration
9. Given the following balance sheet totals, calculate this company's working capital. Total current assets: $42,000,000 Total fixed assets: $57,000,000 Total other assets: $3,500,000 Total current liabilities: $7,000,000 Total long-term liabilities: $55,000,000 a. $35,000,000 b. $9,500,000 c. $40,500,000 d. $95,500,000
A: Working capital represents the amount of cash a company has readily available to it at any given time and is utilized as a tool to measure liquidity (the degree to which a company can convert assets into cash). working capital = current assets − current liabilities $42,000,000 − 7,000,000 = $35,000,000
6. If a borrower pays 6.5% on a 2-year loan, and the expected rate of inflation is said to be 1.5%, what would be the real rate of interest on this loan? a. 5% b. 8% c. 6.5% d. unknown, must have more information to calculate
A: real rate of interest = nominal rate of interest - expected rate of inflation This borrower's nominal rate of interest is the actual rate being paid for the funds borrowed, which here is 6.5%. Therefore: real rate of interest = 6.5% − 1.5% = 5%
73. All of the following are true regarding broker/dealer capital requirements EXCEPT: a. may be set by the broker/dealer's state Administrator b. a broker/dealer who has met the net capital requirement set for him by the SEC may still need to satisfy the capital requirement set by his state Administrator, if higher c. considered to be a broker/dealer's liquidated net worth d. if met by the broker/dealer, no posting of bond will be required
B: A broker/dealer's net capital requirement is defined as his liquidated net worth. It may be set by his state Administrator, and if met, no posting of bonds beyond those requirements will be necessary. If a broker/dealer meets the net capital requirement set for him by the SEC, he they will NOT be required to satisfy a higher capital requirement set by his state Administrator. In fact, in matters such as this one, the state Administrator hands over primary authority to the SEC, leaving the net capital requirement set by the SEC as the only requirement the broker/dealer has the responsibility to meet
2. Which of the following is TRUE of a business cycle pattern? I. the pattern is impacted by Gross Domestic Product (GDP) II. just prior to a trough, the economy is in an expansionary phase III. depression is defined as GDP declining for at least eight consecutive quarters IV. recession is defined as GDP declining for at least four consecutive quarters a. I., III., and IV. b. I. only c. I. and III. d. I., II., and IV
B: A business cycle pattern is impacted significantly by the increase or decrease of an economy's goods and services output, or Gross Domestic Product (GDP). Just prior to a trough in the business cycle, the economy is experiencing a contraction, NOT an expansion. An economic contraction known as a depression is characterized by a GDP decline lasting at least six consecutive quarters, NOT eight. An economic contraction known as a recession is characterized by a GDP decline lasting at least two consecutive quarters, NOT four.
7. All of the following are true of a company's balance sheet EXCEPT: a. it communicates the value of a company in what it owns and what it owes b. it acts as a great tool in telling an analyst whether a company is in an upward trend of improvement or a downward trend of decline c. assets = liabilities + owner's equity d. owner's equity is equal to a company's "net worth"
B: A company's balance sheet communicates the value of a company in what it owns and what it owes. The balance sheet equation states that a company's liabilities plus its owner's equity will equal its overall assets. Further, a company's owner's equity will indicate what its "net worth" is. The balance sheet, however, in only providing a snapshot of a company's value at one point in time, will NOT act as a great tool in telling an analyst whether a company is in an overall upward trend of improvement or a downward trend in decline
14. Given the following 5-year annual returns for companies TRX, PFF, GRW, and SKT, which of the four would be a LEAST appropriate investment choice for a highly conservative investor? 2010 2011 2012 2013 2014 TRX. -1% 4% 2% 7% 4.50% PFF. 1% 6% -1.5% 8% 11% GRW. 6% -4% 18% 12% 1% SKT. 7% 9.5% 10.75% 11% 8% a. company SKT b. company GRW c. company TRX d. company PFF
B: A conservative investor would be seeking in an investment choice one that would provide the LEAST amount of annual return volatility. The standard deviation of each company's annual returns provides information regarding the dispersion and variance of values from the mean (average) of all of the 5 return numbers for each company. The higher the standard deviation of the return values, the higher the return volatility. By observing the above information, company GRW would be the LEAST appropriate investment choice for this investor due to it having the HIGHEST amount of variance (high and low dispersion) from its mean return over the last 5 years.
85. All of the following are true of a fiduciary EXCEPT: a. may be acting as the receiver in a bankruptcy b. may not assign any portion of the responsibilities to a third party, including assuming the role of portfolio management and security selection unless and until another fiduciary is named c. may be acting as a trustee for a trust account d. she is limited in the securities she may purchase if operating in a legal list state
B: A fiduciary MAY assign a portion of the fiduciary responsibilities to a third party if he does not feel qualified to fulfill that role in the best interest of that individual. A fiduciary may be either a receiver in a bankruptcy or a trustee for a trust account, and a fiduciary operating in a legal list state would be limited in the securities he could purchase for the account.
37. Which of the following types of industries would a computer company best be categorized as? a. defensive b. growth c. countercyclical d. cyclical
B: A growth industry is one that is said to be growing at a pace that is faster than the economy itself. Reasons for this might include advancements in technology and the introduction of new products. Accordingly, a computer company would best be considered to be in a growth industry. A defensive industry company produces nondurable goods and is the least affected by changes in the business cycle. A cyclical industry company produces durable goods and is the most affected by the ups and downs of a normal business cycle. A countercyclical industry company tends to move in the direction that is opposite to that of the economy.
35. An employee exercises an incentive stock option to purchase shares of his company's stock and after some period of time has proceeded with the sale of those shares. Under which of the following conditions would any profits made on that sale NOT be reported as long-term capital gains? a. held stock for one and half years after date of exercise, sold two and half years after grant b. held stock for eleven months after date of exercise, sold two years after grant c. held stock for one year after date of exercise, sold two years after grant d. held stock for four years after date of exercise, sold three years after grant
B: An employee exercising an incentive stock option to purchase shares of his company's stock, who then proceeds to sell those shares, will have any profit from said sale reported as ordinary income rather than long-term gains if the stock is held for eleven months after the exercise date, and the sale is made at least two years after grant. Profits in this scenario will be reported as longterm capital gains only if the stock is held for at least one year after date of exercise and sold at least two years after grant. Here, that is not the case.
91. An account where one beneficial non-business owner has singular control over the investments in the account, as well as the ability to request distributions from the account is: a. a joint tenants with right of survivorship b. an individual account c. sole proprietorship d. a tenants in common
B: An individual account is an account where one beneficial non-business owner has singular control over the investments in the account, as well as the ability to request distributions from the account. A sole proprietorship is similar to an individual account except for being an individual business owner. Joint tenants with right of survivorship and tenants in common are both joint accounts, owned by two or more adults
21. Certificates of deposit (CD's): a. must have a face value of at least $10,000 b. are secured time deposits c. pay periodic interest d. all of the above
C: Certificates of deposit (CD's) are the only money market instrument that pays periodic interest, and it's usually semiannually. CD's however, must have a face value of at least $100,000 and are considered unsecured deposits, NOT secured, due to there being a lack of assets pledged as collateral
82. The following include some examples of "soft dollar compensation". Which would NOT be covered under 28(e) of the Securities Exchange Act of 1934? a. an investment adviser receives analytical software b. an investment adviser receives payment to cover travel expenses incurred while attending a research seminar c. an investment adviser is provided an invitation and then attends a research conference put on by the broker/dealer firm d. an investment adviser receives research reports analyzing the current and future performance of one specific company
B: An investment adviser receiving payment to cover travel expenses that are incurred while attending a research seminar would NOT be covered under 28(e) of the Securities Exchange Act of 1934 due to being a benefit to the adviser that is not research related. Soft dollar arrangements involve research related products or services that are provided to an investment adviser by a broker/dealer in exchange for the adviser "directing" client transactions to the broker/dealer. Examples of items that are covered under 28(e) are an investment adviser attending a research conference put on by the broker/dealer firm, receiving analytical software, and receiving research reports analyzing the current and future performance of one specific company.
70. An investor makes the request to his broker that he would only like to participate in issuer transactions. Which of the following would be appropriate for this investor? I. an initial public offering II. a subsequent public offering III. a primary offering IV. secondary transactions a. I. only b. I., II., and III. c. I. and III. d. I., III., and IV
B: An investor making the request for issuer-only transactions would participate in initial public offerings (IPO's), primary offerings, and subsequent public offerings (SPOs). Secondary transactions would NOT be appropriate for this investor in that they are considered to be nonissuer transactions, and transacted between individual investors, not between the issuer and the investing public.
29. All of the following are true of an investor purchasing a bond at a premium to par EXCEPT: a. the bond was sold to the investor at a price above par b. if held to maturity, the investor will receive back par value which is greater than what she paid for the bond c. the yield is lower than the coupon rate d. all of the above are true
B: An investor purchasing a bond at a premium to par will be holding a bond that was sold to her at a price above par, and one where the yield is lower than the coupon rate. If held to maturity, this investor will receive back par value but that will be LESS than what she originally paid, NOT more
44. All of the following would be considered an "in-the-money" option EXCEPT: a. MGA 34 call when MGA stock's current price is at $36 b. HNY 43 call when HNY stock's current price is at $41 c. PPL 65 call when PPL stock's current price is at $75 d. RST 35 put when RST stock's current price is at $31
B: An option that is in-the-money has intrinsic value in the amount that is equal to the difference between the option's strike price and the stock's price. A call option is in-the-money when the strike price is BELOW the stock's price. Here, the investor can exercise his or her option to purchase the stock at the lower price and immediately sell into the market at the higher current price of the stock. A put option is in-the-money when the strike price is ABOVE the stock's price. Here, the investor can exercise his or her option to sell the stock at the higher price and after having just purchased the stock in the market at the lower current price of the stock. Given the above explanation, here the HNY 43 call would NOT be considered in-the-money in that the stock's current price of $41 is less than the call's strike price of $43. This investor would not exercise an option to purchase stock at a price higher than what he or she could currently get in the market. The two other calls and one put would all be considered in-the-money
41. All of the following are reasons to invest in real estate investment trusts (REITs) EXCEPT: a. provide investors with dividends and investment gains without passing losses onto them b. provide for dividends to avoid being taxed at the full ordinary income rate c. provide for an investment in real estate without the degree of liquidity risk experienced with actual real estate ownership d. all of the above
B: Benefits to investing in real estate investment trusts (REIT's) include that they provide investors with dividends and investment gains without passing losses onto them, and provide for an investment in real estate without the degree of liquidity risk experienced with actual real estate ownership. However, they do not qualify for a reduced tax rate, and instead, dividends ARE taxed at full ordinary income rates
33. Which of the following types of preferred stock has its value linked to that of common stock? a. cumulative b. convertible c. callable d. adjustable-rate
B: Convertible preferred stock has its value linked to the common stock shares that it can be converted into. The price for convertible preferred shares often moves in line with that of the common share price. Cumulative preferred stock accrues dividend payments, callable preferred stock can be bought back from investors by the issuing company, and adjustable-rate preferred stock is largely tied to interest rate movements, not the movement of the associated common stock.
60. The role of a dealer includes which of the following? I. acts as a principal in transactions II. charges a commission III. is not a market maker IV. takes on risk during transactions a. I. only b. I. and IV. c. I., II., and IV. d. II. and III
B: Dealers act as principals in their own transactions, and accordingly take on their own risk during those transactions. They do NOT, however, charge commissions, and they DO in fact make markets in securities
90. Which of the following would NOT be considered a permissible practice? a. a broker/dealer authorizes his agent in writing to execute a transaction that will then not be recorded on the regular books and records of the firm b. establishing an account that is fictitious for the purpose of executing transactions that are prohibited in nature c. with prior written authorization from the client and broker/dealer, an agent shares in the profits of their client's accounts d. all of the above are permissible practices
B: Establishing an account that is fictitious for the purpose of executing transactions that are prohibited in nature is NOT considered to be a permissible practice. A broker/dealer authorizing his agent in writing to execute a transaction that will then not be recorded on the regular books and records of the firm is permissible due to the prior authorization that was given. An agent sharing in the profits of his client's accounts is considered permissible due to the prior written authorization received from the client and the agent's broker/dealer to do so
75. An adviser has had two material legal actions against her. The first occurred at the beginning of her career, 14 years ago, and the second occurred 8 years ago. Which of the following are TRUE regarding these disclosures in relation to clients? I. if the adviser is federally-covered, she has up to 48 hours before entering into the contract with the client to personally disclose these legal actions II. if the adviser is state-covered, the disclosures regarding these legal actions should be made to prospective clients regardless of when they occurred III. if the legal actions occurred within the last 10 years, a state-covered adviser has until the point of actually entering into a contract with her client, given that client has the right to terminate that contract without penalty IV. for federally-covered advisers, disclosures of this nature are made via a brochure provided to the client a. II. only b. III. and IV. c. I. and II. d. IV. only
B: For a state-covered adviser, the requirements regarding disclosing these legal actions to a prospective client depend on when they occurred. Here, only actions within the last 10 years must be disclosed, so the older action, not both must be disclosed. For a federally-covered adviser, disclosures of this nature are made via a brochure that is provided to the client. Therefore, the "48 hour rule" does NOT apply.
97. An investment adviser has just taken on a new client. In an effort to understand this client's risk tolerance, which of the following should she discuss with her client? I. ability to tolerate a variety of market fluctuations II. number of dependents and their ages III. time horizon, long or short IV. current employment status a. I., III., and IV. b. I. and III. c. I., II., and III. d. I. only
B: In an effort to understand a new client's risk tolerance an investment adviser should discuss with the client, his ability to tolerate a variety of market fluctuations, and the desired time horizon for his investment portfolio, long-term or short. Although the number of dependents he has and current employment status could be useful in making inferences about his current financial situation, they would not be useful in gaining any direct knowledge regarding his risk tolerance
99. Modern Portfolio Theory: I. theoretically stands for the idea that risk can be diversified away by building a certain type of portfolio II. promotes diversification as a risk reducer which will then cause an increase in returns III. analyzes the specifics of individual stocks within the portfolio, IV. proves that a higher level of portfolio volatility will produce better returns a. I., II., III., and IV. b. I. and II. c. III. and IV. d. I. only
B: Modern Portfolio Theory primarily focuses on the concept of controlling portfolio risk and in doing that examines the relationship that exists between risk and reward in the overall portfolio rather than for each of the independent securities. It theoretically stands for the idea that risk can be diversified away by building a certain type of portfolio, specifically one that has securities with returns that are not correlated. It further promotes diversification as a reducer of risk and the main contributing factor in causing an increase in returns. It analyzes the relationships that exist BETWEEN the investments in a portfolio rather than each of the individual stocks, and also seeks to prove that a lower, NOT higher amount of portfolio volatility, will produce better returns
67. Per the Uniform Securities Act, which of the following are considered "securities" and are, therefore, held to the provisions of the act? I. fixed annuity contract II. commodities III. debentures IV. collateral trust certificates a. I., II., and III. b. III. and IV. c. II. and IV. d. I., III., and IV
B: Per the Uniform Securities Act, debentures and collateral trust certificates are both considered to be "securities", and accordingly, would be covered by the provisions of the act. Fixed annuity contracts and commodities such as grains would NOT be considered "securities" are therefore NOT subject to the provisions of the act
48. With regards to index annuities, there are different ways that interest due to growth will be credited to an account. Which of the following methods involves comparing the calculated interest on the index value at the beginning and end of the contract? a. high-water mark b. point-to-point c. annual reset d. none of the above
B: The point-to-point method involves comparing the calculated interest on the index value at the beginning of the contract to the value at the end of the contract. The high-water math method involves comparing the highest index value between anniversary dates to the value of the index at the beginning of the year. The annual reset method involves comparing simply the index value at the end of the year to the value at the beginning of the year
63. Which of the following satisfies the definition of "agent"? a. corporation b. individual c. brokerage firm d. all of the above
B: The term "agent" is defined as being ONLY an individual, or a natural person. Legal entities such as corporations and brokerage firms do NOT qualify as being an individual or natural person. They are instead considered to be a "legal person", and as such, are represented by an agent, for the purposes of participating in securities transactions
23. TIPS: I. provides an investor with an interest payment that will decrease during inflationary times II. are issued with 5-, 10-, and 30-year maturities III. primarily provide an investor with protection from "financial risk" IV. pay interest to an investor every 6 months a. I., II., and III. b. II. and IV. c. I. and IV. d. II., III., and IV.
B: Treasury Inflation Protection Securities (TIPS) are issued with 5-, 10-, and 30-year maturities, and pay interest to an investor every 6 months. Further, they provide an investor with an interest payment that will increase, NOT decrease, during inflationary times and with that, provide the investor with protection from purchasing power (inflationary) risk, NOT financial risk which is associated with the risk of meeting debt obligations
16. Which of the following types of risk can be minimized simply through the diversification of a portfolio? a. market risk b. systematic risk c. business risk d. purchasing power risk
C: Business risk can be greatly minimized through the diversification of a portfolio in that it is a risk that is related to the operations of only one specific company. The overall return of the portfolio can be hedged by investing in other companies not experiencing the same operational issues. Market and purchasing power risk are both types of systematic risk which is a nondiversifiable type of risk and involves changes in the market that can negatively affect ALL companies and industries. This type of risk will NOT be minimized by diversifying a portfolio.
56. Which of the following qualify as an investment adviser representative's (IAR's) "place of business" and accordingly, provide for the requirement that he register in that state as stipulated in the Investment Advisers Act of 1940? I. IAR has an office that he travels to twice a month to have lunch with a fellow friend who works in that office II. IAR participates weekly in a basketball league with fellow representatives from the local investment office III. IAR has an office to which he travels twice a month to meet with clients in the local area IV. IAR publicizes monthly that he will be providing his investment advisory services to local clients at a YMCA hall a. I. and IV. b. I. and III. c. III. and IV. d. I., II., and III
C: "Place of business" as defined and stipulated in the Investment Advisers Act of 1940 provides for an office where the investment adviser representative (IAR) REGULARLY meets with clients and provides his services, or any other location that is represented to the general public as a place where the IAR communicates with clients and provides advisory services. Here, the locations that satisfy the definition of "place of business" are the office the IAR travels to twice a month to meet with local clients, and the YMCA hall where the IAR publicizes his services being offered to clients on a monthly basis. Both of these examples provide for the IAR providing his advisory services on a REGULAR basis, or a location that is represented to the public as a place where the IAR's advisory services will be provided. The office traveled to for lunch and the basketball league with fellow representatives from a local office do NOT qualify as "places of business" under the Act's definition
61. A broker: a. takes on his or her own risk in transactions b. charges either a markup or markdown c. participates in orders on his or her client's behalf, acting as an agent d. acts as a market maker
C: A broker's role includes participating in orders on his client's behalf and acting as an agent. He does NOT, however, charge a markup or markdown, act as market maker, or take on his own risk in transactions
64. Which of the following are TRUE regarding a broker/dealer's ministerial employees: a. because they are classified as clerical and administrative, they are always exempt from the registration requirement regardless of the extent to which they may or may not participate in efforts that are securities related b. they are excluded from receiving any year-end annual bonuses, even those based on the company's overall profits and performance c. they are customarily excluded from the definition of "agent", and accordingly, need not be registered as a requirement for their employment d. providing a quote as requested by a client would qualify as acting as an "agent" and accordingly, would require their registration as a requirement for performing their job
C: A broker/dealer's ministerial employees are customarily excluded from the definition of "agent", and accordingly, need not be registered as a requirement for their employment. They are NOT, however, excluded in all circumstances simply because they are considered clerical or administrative. If they participate in functions that are securities related, they WILL be required to be registered employees. Further, providing a quote as requested by a client would NOT qualify as acting as an "agent" and accordingly, would NOT require their registration in order for them to continue performing their job. Also, if the company that employs them were to pay out a year-end annual bonus based on the company's OVERALL profits and performance, they WOULD be allowed to receive that bonus
92. All of the following are true of a general partner EXCEPT: a. decisions made will be binding to partnership b. buys and sells property related to the partnership c. is required to maintain a financial interest in the partnership of at least 3% d. all of the above are true
C: A general partner is required to maintain a financial interest in the partnership of at least 1%, NOT 3%. A general partner is responsible for buying and selling property for the partnership, and the decisions made by the general partner will be fully binding to the partnership.
69. What is another term used to describe a "secondary transaction"? a. exempt transaction b. issuer transaction c. nonissuer transaction d. none of the above
C: A secondary transaction is one in which the resulting proceeds of the sale do NOT go to the entity that originally brought the securities to the market. Instead, the proceeds go to the investor offering the shares for sale now. Accordingly, this type of transaction is also known as a nonissuer transaction. An issuer transaction involves the proceeds of the sale going to the issuer of those securities
80. Which of the following is NOT true regarding adviser compensation? a. advisory fees may be paid by a third party and need not be paid directly by the recipient of the advice b. "special compensation" for advisory services go beyond the fees paid for typical broker/dealer services c. advisory services must be charged separately from other broker/dealer services d. compensation may include commissions
C: Advisory services need NOT be charged separately from other broker/dealer services. Adviser compensation may include commissions, and other types of fees. "Special compensation" for advisory services go beyond the fees paid for typical broker/dealer services. Advisory services need not be paid for directly by the recipient of the advice, and may be paid for by a third party
19. An investor would like to reduce his liquidity risk. Which of the following would best be a strategy he could utilize to do that? a. invest in mutual funds b. diversify his investments across cash, fixed income investments, equities, and hard assets c. maintain a portion of his assets in cash and cash equivalent asserts d. invest in fixed income diversifying across different maturity dates
C: An investor looking to reduce his liquidity risk would want to focus on maintaining a portion of his assets in cash and cash equivalents in order to have the ease of accessing some portion of his investments quickly and without any price or return issues. Purchasing mutual funds would target minimizing business risk; diversifying across all four asset classes will minimize market risk; and investing in fixed income assets of different maturities would minimize an investor's interest rate risk.
31. All of the following are benefits to owning common stock EXCEPT: a. can act as an excellent hedge against inflation b. right to vote for company directors c. in the event of a company bankruptcy, has a priority claim over preferred shareholders d. risk is limited only to investment made
C: Benefits to owning common stock include providing the investor the right to vote for company directors, limiting risk only to the actual investment made, and utilizing the investment as a hedge against inflation in that historically returns tend to outpace the inflation rate. In the event of a company bankruptcy however, common shareholders do NOT have a priority claim above preferred shareholders in either asset liquidation or dividend payment.
62. Which of the following are considered exclusions to the broker/dealer definition? I. investment firms II. issuers III. agents IV. banks a. II. and III. b. I., II., and III. c. II., III., and IV. d. II. only
C: For regulatory purposes, issuers and agents are both considered to be exclusions to the broker/dealer definition. Banks are also excluded from the definition; however, the broker/dealer subsidiaries through which they transact in securities are NOT excluded. Investment firms, by transacting in the purchase and sale of securities as a business, are definitely NOT considered to be exclusions from the definition and accordingly, must register and are subject to securities regulation
4. Which of the following are TRUE of inflation? I. as inflation increases, bond prices increase, and interest rates fall II. inflation is characterized as a general economic price increase as measured by an index such as the consumer price index (CPI) III. excessive demand is one contributing cause of inflation IV. inflation inertia occurs when the inflation rate is seen to be immediately impacted by changes in the economy a. I., II., and III. b. I., III., and IV. c. II. and III. d. II. and IV
C: Inflation is characterized as a general economic price increase as measured by an index such as the consumer price index (CPI). Excessive demand is one contributing cause of inflation in that prices for goods will increase as the demand for those goods exceeds the current supply for those goods. As inflation increases, however, bond prices will DECREASE, and interest rates will INCREASE, and inflation inertia occurs when the inflation rate is seen to NOT be immediately impacted by changes in the economy.
28. Investment-grade bonds are rated by Standard & Poor's as which of the following or higher? a. BB b. A c. BBB d. AA
C: Institutions such as banks and insurance companies are generally only able to purchase bonds that are rated investment-grade or higher. For Standard & Poor's investment-grade level refers to a rating of BBB or higher, or specifically, the top four categories of bond ratings
40. Nonfixed unit investment trusts (UITs): a. are actively involved in managing their own portfolios b. employ an investment advisor c. buy shares of an underlying mutual fund d. have their own board of directors
C: Nonfixed unit investment trusts (UITs) buy shares of an underlying mutual fund. They do NOT, however, actively manage their own portfolios, employ an investment advisor, or have their own board of directors.
77. A passive management style is characterized by: a. achieving higher returns by trading in and out of stocks b. utilizing market timing to outperform a market index c. putting together a portfolio of securities that will mimic the activity and performance of a market index d. focusing on fewer market sectors to achieve higher returns
C: PASSIVE management style involves primarily putting together a portfolio of securities that will be able to mimic the activity and performance of a market index. Minimal turnover of securities within the portfolio and keeping transaction costs low are also characteristics of this type of asset management. An ACTIVE management style attempts to achieve higher returns by trading in and out of stocks, utilizes market timing to outperform a market index, and focuses on securities in fewer market sectors to achieve higher returns
86. Per ERISA provisions, a fiduciary must: a. act as cautiously as the average person b. maximize profits even while assuming larger risk if necessary c. act as prudent as the average expert d. be all of the above
C: Per ERISA provisions, a fiduciary must act as prudent as the average expert, and his primary efforts should NOT be in maximizing profits while assuming larger risk, but instead, he should be minimizing losses while minimizing risk
8. Which of the following are examples of assets found on a balance sheet? I. prepaid expenses II. accounts receivable III. notes payable IV. accrued taxes a. II. only b. III. and IV. c. I. and II. d. I. and IV.
C: Prepaid expenses are considered assets in that they involve items where a future entitled benefit is still yet to be realized. Accounts receivable are also assets, given that the company is entitled to receive them from customers as payment for goods and services it provided to them. Notes payable and accrued taxes are NOT assets, but instead are considered to be current liabilities on the company's balance sheet
25. Company TWR's stock is currently trading at $55.50 per share. How many shares of TWR would a bond investor receive at conversion if the conversion price is $75? a. 133 shares b. 1 share c. 13 shares d. 18 shares
C: The convertible bond represents a debt by company TWR of $1,000 and accordingly, in calculating the number of shares at conversion that par value is used along with the conversion price. $1,000 / $75 = 13.33 = 13 shares
13. Which of the following measures of central tendency is defined as measuring the most common value in a given distribution of numbers? a. mean b. range c. mode d. median
C: The measure of central tendency that is defined as measuring the most common value in a given distribution of numbers is the mode. The mean is also known as the average, and is calculated by taking the sum of all values and dividing by the number of values. The range is the calculated difference between the high and low values in a distribution, and the median is the value that appears at the midpoint in the distribution
50. An investor would like to choose an annuity payout option that will provide for payments to continue after his death until the entire initial principal has been provided for. Which of the following payout options should this investor choose given those specifications? a. life annuity with period certain b. straight life c. refund annuity d. mortality guarantee
C: This investor is seeking an annuity payout option that will provide for payments to continue after death until the entire initial principal has been provided for. The refund annuity option would meet those specifications, and would further provide for that payment refund to be in the form of a lump sum of cash or monthly payments. The life annuity with period certain option provides for the receipt of payments for life, but further guarantees a minimum period of time OR for life, whichever is longer. The straight life option simply provides for payments over the investor's life. The mortality guarantee involves the idea that payments are guaranteed for life regardless of whether the annuitant's life expectancy is increased or not
53. Which of the following individuals could be considered an investment adviser under the Investment Advisers Act of 1940? I. a sports agent II. a pension consultant III. a financial planner IV. an entertainer's manager a. II. and III. b. III. and IV. c. I., II., III., and IV. d. I., II., and III
C: Under the Investment Advisers Act of 1940, an individual who offers advice, provides recommendations and further, is paid for those services, is in fact defined as an investment adviser and subject to the regulations of the Act. Both pension consultants and financial planners during the normal course of their everyday business would qualify as falling under the definition. Given the appropriate circumstances, both the sports agent and entertainer's manager may also fall under the definition of an investment adviser if they were to provide advice, or counsel regarding financial investments to someone they were under contract to represent.
47. The following are all characteristics of a variable annuity EXCEPT: a. salesman require licenses for both securities and insurance b. keeps pace with inflation c. investor contributions are placed and kept in the insurance company's general account d. involve an investment in a portfolio of money market instruments, debt, and equities
C: Variable annuities involve an investment in a portfolio of money market instruments, debt, and equities, which provide for an increased chance of keeping pace with inflation. Further, anyone participating in the sale of variable annuities must first obtain licenses for both securities and insurance. However, investor contributions that are made into variable annuities are placed and kept in a separate account from the insurance's company's general account, NOT the general account itself
87. An individual opens an account for which she refuses to provide the information necessary to satisfy the suitability requirements needed to properly service the account. Which of the following are TRUE regarding this scenario? I. if the account is with an investment adviser, it must be refused until the suitability information is provided by the individual II. if the account is with an investment adviser, the account may be opened but only to transact unsolicited orders III. if the account is with a broker/dealer, the account may be opened but only to transact unsolicited orders IV. if the account is with a broker/dealer, the account may be opened with no restrictions on transacting both solicited and unsolicited orders a. II. and III. b. I. and IV. c. I. and III. d. I. only
C: When an individual opens an account, it is required that she provide a variety of suitability information to include net worth, tax status, risk tolerance, and investment objectives. Without this information, the broker/dealer or investment adviser cannot adequately provide the most appropriate investment advice to this potential client. Accordingly, if the account is with a broker/dealer, the account may be opened but only to transact unsolicited orders initiated by the client given that the broker/dealer's role is to make recommendations AND execute transactions. Without the applicable client information, recommendations cannot be made. If the account is with an investment adviser, it must be refused until the suitability information is provided by the individual. The investment adviser's role is to give advice and without the appropriate suitability information recommendations cannot be made, orders cannot be accepted, and the account cannot be opened.
89. A violation of insider trading: a. can be committed by almost anyone who is in possession of a company's nonpublic information b. can be punishable by the payment of treble damages c. requires an actual transaction taking place d. all of the above
D: A violation of insider trading requires that an actual transaction take place that is based in the receipt of a company's material, nonpublic information. A violation can be committed by almost anyone who is in possession of a company's nonpublic information and can be punishable by the payment of treble damages. Treble damages allow for the violator to potentially be fined up to three times either the gains gotten or losses avoided by acting on the inside information
1. All of the following are utilized by the "FED" (Federal Reserve Board) to influence the U.S. economy, and specifically, the money supply EXCEPT: a. raising or reducing the discount rate b. raising or reducing the reserve requirements for commercial banks c. purchasing and selling U.S. Treasury securities in the open market d. raising or reducing the prime rate
D: All of the tools above are utilized by the FED (Federal Reserve Board) to influence the U.S. economy, and specifically, the money supply EXCEPT the FED does NOT set the prime rate. That rate is determined by the larger commercial banks. Raising or reducing the discount rate does, however, impact member banks' ability to borrow funds from the FED; raising or reducing the reserve requirements for commercial banks dictates the amounts they must leave on deposit with the FED; and purchasing and selling U.S. Treasury securities in the open market directly impacts the money supply by adding to the reserves of commercial banks from whom the purchases were made, and reducing bank reserves when securities are sold to them.
71. An order is entered by the Administrator that suspends the registration of a securities professional. Which of the following must occur for that order to become final? a. there must be an effort to seek out the facts of the circumstance, provide written documentation to support those findings, and then formulate conclusions that are based in law b. an opportunity for a hearing must be provided c. all the necessary notices to all of the involved parties must be given d. all of the above
D: An Administrator's order will not become final until all the necessary notices to all of the involved parties are given, and an opportunity for a hearing is provided. Beyond that there must be an effort made to seek out the facts of the situation, provide written documentation to support the findings, and then formulate conclusions that are based in law
95. Compiling a client's financial profile would involve assessing all of the following EXCEPT: a. retirement account information b. security holdings and their value c. credit card debt totals d. all of the above would be assessed
D: An adviser must always assess a new client's personal and financial profile in order to establish a suitable investment plan. In order to do that, many different aspects of the client's profile must be looked into. The adviser should request the client's retirement account information, security holdings as well as his or her value totals, and credit card debt totals
78. An adviser working with a client on his investment portfolio would need to take under consideration which of the following constraints? I. risk tolerance II. liquidity III. taxes IV. time horizon a. I., III., and IV. b. II. and IV. c. I. and II. d. II., III., and IV
D: An adviser working with a client on his investment portfolio would need to take under consideration, both his investment constraints and objectives. A client's investment constraints would include liquidity, or the extent to which he may need cash available; his time horizon, or the time frame within which he would like to reach his investment goals; and his tax profile. His risk tolerance is an investment objective and will dictate the types of investments made over time.
100. The efficient frontier is all of the following EXCEPT: a. provides a reference point for evaluating portfolios, below which lie the inefficient, lower return/higher risk portfolios b. plotted as a curve c. used as a tool in constructing the most efficient portfolio d. made up of portfolios generally providing the most return
D: An efficient portfolio is one that either provides high return for a balanced amount of risk, or low risk with a balanced amount of return provided. The efficient frontier is a collection of those efficient portfolios all plotted on a curve and accordingly, is used as an aid in constructing the most efficient portfolio. Once established it provides a reference point for evaluating portfolios, below which lie the inefficient, lower return/higher risk portfolios. It is NOT, however, simply made up of portfolios that generally provide the most return, but instead those that provide the most return given a balanced amount of risk relative to that level of return. It does NOT seek high returns without consideration to the degree of risk to be taken
65. Which of the following describes an activity that would NOT require the employee to be registered as an agent? a. an employee prequalifies clients for specific firm services b. an employee makes recommendations over the phone to clients regarding increasing profits within their stock portfolio c. a summer intern is paid for each client with whom she makes contact regarding potential activity in his portfolio d. an employee asks a client over the phone if he would like to receive general information regarding the firm's services
D: An employee asking a client over the phone if he would like to receive general information regarding the firm's services would NOT require registration as an agent in that there is no attempt to transact securities. However, an employee prequalifying clients for specific firm services; an employee making recommendations over the phone to clients regarding increasing profits within their stock portfolio; and a summer intern being paid for each client with whom she makes contact regarding potential activity in his portfolio do all require registration as an agent in that each involve actions that at least attempt effecting a securities transaction with a client
98. An individual's incidents of ownership in a life insurance policy can be evidenced by his ability to: a. assign ownership of the policy b. designate a beneficiary c. borrow money from the cash value of the policy d. all of the above
D: An individual's incidents of ownership in a life insurance policy can be evidenced by his or her ability to assign ownership of the policy, designate a beneficiary, and borrow money from the cash value of the policy
34. Characteristic(s) of emerging market investments include: I. low commission rates II. lack of transparency III. potential for rapid growth rate IV. liquidity issues a. I., II., III., and IV. b. I., II., and IV. c. IV. only d. II., III., and IV.
D: Emerging market investments have high potential for rapid growth rates but tend to have higher potential for liquidity issues, and due to lower regulatory standards, have issues with a lack of transparency. Low commission rates are a characteristic of developed markets.
3. A business cycle trough is characterized by all of the following EXCEPT: a. a positive forward outlook for consumer spending to increase b. a gradual transition for the Gross Domestic Product (GDP) growth rate from a negative to a positive c. a moderate rate of inflation d. all of the above are characteristics of a business cycle trough
D: Given that a business cycle trough is defined as the END portion of a declining pattern of economic business activity, it would accordingly be characterized by a positive forward outlook for consumer spending to increase, a gradual transition for the Gross Domestic Product (GDP) growth rate from a negative to a positive, and a moderate rate of inflation
17. If the Federal Reserve were to suddenly increase interest rates, all of the following would be a possible result EXCEPT: a. valuation models may be adjusted to account for the impending rate change impact b. stock market may decline c. certain highly leveraged companies may feel a negative effect d. bond prices would also increase
D: If the Federal Reserve were to suddenly increase interest rates, bond prices would decrease, NOT increase. Further, valuation models may need to be adjusted to account for the impending rate change impact, which could then trigger a decline in the stock market. It would also be likely that certain leveraged companies who are more susceptible to interest rate risk may feel a more negative effect than others.
27. Place the following in order of corporate liquidation priority. I. subordinated debt II. preferred stockholders III. mortgage bonds IV. debentures a. III., I., IV., II. b. IV., III., II., I. c. IV., I., III., II. d. III., IV., I., II
D: In the event of corporate liquidation, the order of priority for paying off debt obligations is first, mortgage bonds as they are a secured debt security, second, debentures which are considered unsecured, third, subordinated debt which is junior to any other creditor, and last, preferred stockholders which are senior to common stockholders
58. Regarding the termination of an investment adviser representative (IAR), all of the following are true EXCEPT: a. if the adviser involved is covered federally, the IAR must notify the administrator b. similar to the termination of an agent, a Form U-5 must be filed c. if registered through the state, notification must be given to the administrator by the IAR's firm d. similar to the termination of an agent, all involved parties are obligated to notify the administrator
D: Regarding the termination of an investment adviser representative (IAR), if the adviser involved is covered federally, the IAR must notify the administrator; if registered through the state, notification must be given to the administrator by the IAR's firm, and similar to the termination of an agent, a Form U-5 must be filed. UNLIKE the termination of an agent, all parties involved with the IAR's termination are NOT obligated to notify the administrator
76. In an effort to protect investors of new issues, the Securities Act of 1933: a. made the way for providing criminal penalties for those committing fraud in the issuance of an offering of new securities b. requires the issuer of an offering to provide accurate disclosures regarding itself and the offering c. requires that an investor have made available to him all material information regarding the offering he may require in determining its merits and impacting his decision to invest d. all of the above
D: The Securities Act of 1933 requires the issuer of an offering to provide accurate disclosures regarding itself and the offering, requires that an investor have made available to him all material information regarding the offering he may require in determining its merits and impacting his decision to invest, and most importantly, made the way for providing criminal penalties for those committing fraud in the issuance of an offering of new securities
66. Which of the following transactions describes an instance when the employee of an issuer is NOT considered to be an "agent"? a. those with financial institutions b. private placements c. those between an issuer and underwriter d. all of the above
D: The employee of an issuer will NOT be considered an agent when participating in transactions that are exempt from registration. Transactions with financial institutions, those between an issuer and underwriter, or private placements, are all exempt transactions and therefore would be NOT provide for the issuer's employee to be considered an agent
96. A client's non-financial profile is just as crucial for an adviser to compile as his financial one. All of the following non-financial items would be relevant to request EXCEPT: a. historical stability of the individual's employment b. future educational needs for the individual or family c. investment knowledge and experience d. all of the above would be relevant
D: The non-financial items that would be relevant for an adviser to request in order to complete a client's profile would be the historical stability of the client's employment, the future educational needs for the client or his family, and the individual's investment knowledge and experience. His employment stability speaks to the potential future reliability of his employment status and thus, income; future educational plans indicate predictably large income needs in the future; and his investment knowledge allows the adviser insight into what types of investments he may be comfortable with and/or the degree to which the advisor needs to provide investment education beyond advisement
59. A principal is: a. a bond's face value b. the role a dealer takes on within a transaction c. a firm employee who participates in a supervisory role d. all of the above
D: The term "principal" can take on different meanings within the securities industry. Its usage may be referring to a bond's face value, the role a dealer takes on within a transaction, or a firm employee who participates in a supervisory role
22. All of the following are true of Treasury securities EXCEPT: a. no credit risk b. trades with narrow spreads c. high liquidity in secondary markets d. interest is subject to state income tax
D: Treasury securities are NOT subject to state income tax. They are, however, highly liquid in the secondary markets and as a result of trading more actively, trade with narrow spreads. They also have no credit risk
52. Under the SEC Release 1A-1092, which of the following defines who can be considered an investment adviser? a. persons who do business providing advice or analyses b. persons who are compensated, either directly or indirectly, for providing analyses or advice c. persons who provide securities related investment advice, reports, or analyses d. all of the above
D: Under the SEC Release 1A-1092, investment advisers are defined as those who participate in the business of providing advice or analyses, who provide securities related investment advice, reports, or analyses, and who are compensated, either directly or indirectly, for any of these services. Further, such a person will be required to become registered accordingly
51. Which of the following describes a person who is a director, officer, partner, or employee of an investment adviser but whose function does NOT require registration as defined under the Investment Advisers Act of 1940? a. broker b. associated person c. dealer d. supervised person
D: Under the definitions of the Investment Advisers Act of 1940, a supervised person is a director, officer, partner, or employee of an investment adviser whose function does NOT require registration. The primary difference between associated persons and supervised persons involves the registration requirement. Associated persons are individuals who may be working in similar capacities, but ARE required to be registered
24. When considering most other securities, which of the following is a unique characteristic of Ginnie Mae? a. payments to investors consist of both interest and principal b. investor receives monthly payments c. pools of home mortgages underlie the security d. all of the above
D: When considering most other securities, Ginnie Mae's are unique in that they pay monthly payments to investors, and those payments consist of both interest and principal. Also, pools of home mortgages underlie the security and are the source of the monthly investor payments. These payments are the homeowner's mortgage payments as they are then "passed through" to the investor.
43. Which combination below would be considered a premium bond given only the coupon and current yield information? a. coupon: 6, current yield: 7% b. coupon: 7%, current yield: 7% c. coupon: 7%, current yield: 7.25% d. coupon: 7.5%, current yield: 6%
D: When prices go down, yields will rise. A bond is considered to be trading at a premium when its current yield is less than its coupon. Additionally, a bond is considered to be trading at a discount when its current yoked is more than its coupon. Here, the premium bond is the one with a coupon at 7.5% and a current yield of 6% due to the current yield being less than the coupon
83. With regard to the NASAA model rule, an adviser should provide which of the following safeguards related to the direct fee deduction arrangement he made with his clients' accounts? a. notice of fees being deducted b. written authorization to be able to deduct advisory fees c. provide notice of safeguard(s) d. all of the following
D: With regard to the NASAA model rule, an adviser should provide safeguards to his clients related to the direct fee deduction arrangement he has made with his clients' accounts. First is a notice of fees being deducted, including the amount to be deducted. Second is a written authorization allowing the deduction of advisory fees. Third, involves providing notice to the Administrator of all of the safeguards the adviser intends to provide
46. Limited partnerships have at least one general and one limited partner. Which of the following describe responsibilities assumed by a general partner within the partnership? a. buys and sells property b. maintains at least a 1% financial interest c. supervises all aspects of the business d. all of the above
D: Within a limited partnership a general partner's responsibilities can include buying and selling property on behalf of the partnership, maintaining at least a 1% financial interest in the partnership, and supervising all aspects of the partnership's business