Series 65 Q&A

Mr. Beale buys 10M RAN 6.6s of 32 at 67. What is his total purchase price? A) $6,700 B) $10,200 C) $6,600 D) $10,000

The correct answer was: $6,700 For those of you not familiar with bond listings, this means that Mr. Beale bought $10,000 (10M) of the RAN Corporation bonds with a 6.6% coupon (interest rate stated on the face of the bond) that mature in 2032 (32). The price is 67, which represents 67% of $10,000, or $6,700. Reference: 1.2.7 in the License Exam Manual.

Mr. Beale buys 10M 6.6s of 10 at 67. What will his annual interest be? A) $1,000.00 B) $820.00 C) $660.00 D) $670.00

The correct answer was: $660.00 Interpret "10M" as "$10,000 worth of." Mr. Beale receives the nominal yield of the bonds, which is 6.6% of $10,000. Reference: 1.2.6 in the License Exam Manual.

A fundamental analyst would be most interested in which of the following? A) A 200-day moving average. B) Resistance and support levels. C) The outstanding short interest in the market. D) A PE analysis of the stocks included in the Dow Jones Industrial Average.

The correct answer was: A PE analysis of the stocks included in the Dow Jones Industrial Average. Fundamentalists look at PE ratios; the other tools mentioned are technical. Reference: 7.4.3.9.6 in the License Exam Manual.

Given the following information, calculate the risk-adjusted return I. 90-day T-bill rate: 4% II. Actual return:14% III. Beta = 1.4 IV. CPI 3% Standard deviation 5.0 A) 11 B) 2 C) 5 D) 10

A) Any question asking about the risk-adjusted return is going to be referring to the Sharpe Ratio. This is shown as a simple number and is calculated by subtracting the risk-free rate (90-day T-bill) from the actual return and dividing that remainder by the standard deviation. In this example, 14%−4% = 10% divided by 5 = 2. Reference: 7.6.4 in the License Exam Manual.

Which of the following statements describes a person who provides investment advice on a regular basis but does not charge fees, yet would be considered an adviser under Release IA-1092? A) A financial planner who sold his business and spends his time consulting with pension plans on whether to retain or hire new investment managers based on their performance. He does not charge fees; however, those managers retained as a result of his recommendations routinely provide him with noncash benefits such as vacations, computers, and office space. B) A retired chief investment officer of a well-known investment management company who, without compensation, writes a column in a general circulation newspaper commenting on the value of investing in equity securities; many readers find his advice useful and become clients of his former investment management company. C) The Secretary of the U.S. Treasury who, as part of his official duties, comments on conditions in the financial markets and their future investment implications. D) A wealthy college professor who gives free lectures on sound investment practices and makes specific securities recommendations based on a quantitative model he has developed.

A) If an individual is in the business of providing advice and receives any economic benefit, such benefit is considered compensation under Release IA-1092. Since the financial planner is in the business of giving advice to pension plans, actually provides that advice, and is compensated for it, he meets all 3 elements in the definition of an adviser. The noncash benefit, as in this case, need not come directly from the beneficiary of the services to be considered compensation. The college professor, the chief investment officer, and the Secretary of the Treasury do not receive separate compensation, nor are they in the business of providing investment advice. Reference: 10.2.1.1.2 in the License Exam Manual.

Your client is following a constant dollar investment plan and the market value of the equity portfolio has increased from $100,000 to $120,000. To maintain her investment plan, she should: A) continue to invest a fixed dollar amount each month in specific equity securities. B) transfer $20,000 from the equity portfolio to the bond portfolio. C) increase her bond portfolio so it will also have a market value of $120,000. D) continue to invest a fixed dollar amount in both equity and debt securities.

B) In a constant dollar plan, an investor keeps a constant dollar amount of the portfolio in equity securities. If the equities' market value rises, the excess is transferred to fixed-income securities. Reference: 6.4.1.1.2 in the License Exam Manual.

Under the NASAA Model Custody Rule, an investment adviser would be permitted to take or have custody of any securities or funds of any client if: A) the IA maintained adequate net worth or a surety bond. B) notification was given to the Administrator that he has or may have custody and custody was not prohibited by that state's rules. C) customer permission was obtained prior to entering into the contract. D) permission was obtained from the Administrator and custody was not prohibited by that state's rules.

B) It is unlawful for any investment adviser to take or have custody of any securities or funds of any client if The Administrator, by rule, prohibits custody; or in the absence of rule, the investment adviser fails to notify the Administrator that he has or may have custody. It is true that there is a minimum net worth or bond required, but that is not part of NASAA's Custody Rule - those requirements are found in Model Rule 202(d)-1, NASAA's Minimum Financial Requirements For Investment Advisers. Reference: 10.11 in the License Exam Manual.

According to the Investment Advisers Act of 1940, the SEC must either grant investment adviser registration or begin proceedings to determine whether registration should be denied within how many days of filing? A) 90 days. B) 45 days. C) 30 days. D) 60 days.

B) The SEC is required by the Investment Advisers Act of 1940 to either grant an adviser registration or begin proceedings to determine whether the registration should be denied within 45 days of application. Reference: 10.5.3.1 in the License Exam Manual.

Which of the following does NOT have a federally imposed exemption from registration with the SEC? A) Promissory notes and bankers' acceptances with maturities of 9 months or less where the proceeds are not used for capital expenditures. B) Shares of bank holding companies traded on the New York Stock Exchange. C) Securities issued or guaranteed by the U.S. government. D) Securities issued or guaranteed by a state or political subdivision of a state.

B) Shares of bank holding companies traded on the New York Stock Exchange. Under the Securities Act of 1933, shares of bank holding companies listed on the NYSE are not exempt securities and they must be registered with the SEC. However, securities of commercial banks are exempt because they are regulated by the Controller of the Currency or some other banking agency. What might be confusing is that these NYSE listed shares are federal covered securities which makes them exempt from registration with the states. Securities issued or guaranteed by the U.S. government are exempt from registration under federal law. All securities issued or guaranteed by a state or political subdivision of a state qualify for a federal exemption. Promissory notes and bankers' acceptances with maturities of 9 months or less where the proceeds are used for working capital purposes rather than the purchase of fixed assets also have federally imposed exemptions. Reference: 8.2 in the License Exam Manual.

When describing exempt transactions under the USA, which of the following are fiduciaries? I. Executor of an estate II. Administrator in intestacy. III. Custodian for a minor in an UTMA account. IV. An agent with authority over time and price execution. A) I and III. B) I and II. C) III and IV. D) II and IV.

Both executors and administrators are fiduciaries. An agent is a fiduciary if the agent has discretionary authority over the assets in the account, but time and price authority is not considered discretion. As sale made by the custodian for a minor in an UGMA or UTMA account does not qualify as an exemption transaction under the USA, even though, as a matter of law, the custodian is functioning in a fiduciary capacity. Reference: 9.8.2 in the License Exam Manual.

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) I and III. B) II and III. C) I and IV. D) II and IV.

C) At the beginning of the period, the P/E ratio was 23.5 to 1 ($47 divided by $2.). At the end of the period, the P/E ratio was 20 to 1 ($50 divided by $2.50). Initially, Kapco was paying out 50% of its $2.00 per share earnings, or $1.00 in dividends. At the end, Kapco was paying out 40% of its $2.50 per share earnings, also $1.00 in dividends. Reference: 7.4.3.9 in the License Exam Manual.

The Conference Board releases information about the economy on a monthly basis. Included are a number of different indicators. Economic indicators can be leading, lagging, or coincidental, which indicates the timing of their changes relative to how the economy as a whole changes. Which of the following is a lagging economic indicator? A) Hours worked. B) Housing permits issued. C) Average prime rate. D) S&P 500.

C) Both the S&P 500 and housing permits are leading economic indicators, as is the measure of hours worked because it reflects changes in the average workweek during the current period of time. The average prime rate is a lagging indicator because, in an economic downturn, the longer rates stay low, the quicker the recovery should be. Reference: 7.3.6.3 in the License Exam Manual.

Among the differences between a Coverdell Education Savings Account and Section 529 plans are: I. one has adjusted gross income limits, the other does not. II. one has contribution limits set by federal law, the other by the individual state. III. if the money is not used, money reverts back to the donor in one and to the beneficiary in the other. A) I and II. B) II and III. C) I, II and III. D) I and III.

C) The Coverdell may only be used by persons who fall within certain income limits-no such limits apply to the 529 plan. The Coverdell has contribution limits set by federal law; each state sets its own 529 limit. If the money is not used for education, it reverts back to the donor in a 529 plan but to the beneficiary in a Coverdell. Reference: 4.7.2 in the License Exam Manual.

Which of the following statements relating to Form ADV-E are CORRECT? I. The form is completed by an investment adviser who maintains custody of customer funds and/or securities. II. The form is completed by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser. III. The form is submitted by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser. IV. The form may be used to amend the IA's registration. A) I, III and IV. B) I, II and IV. C) I and III. D) I and II.

C) The Form ADV-E (E for surprise Examination) must be completed by investment advisers that have custody of client funds or securities and that are subject to an annual surprise examination. Then the IA gives this Form to the independent public accountant that, in compliance with the Investment Advisers Act of 1940 or applicable state law, examines client funds and securities in the custody of the investment adviser. The independent public accountant performing the surprise examination must submit this Form within 120 days of the time chosen by the accountant for the surprise examination. Reference: 10.11.1 in the License Exam Manual.

Which of the following best describes the death benefit provision of a variable annuity? A) Upon death, the beneficiary has a choice of settlement options. B) Upon death, the proceeds pass to the beneficiary free of federal income tax. C) The principal amount at death is the greater of the total of premium payments or the current market value. D) If death should occur prior to age 59½, the 10% early withdrawal penalty does not apply.

C) The death benefit insures that the investor will never receive back less than the original amount contributed to the account. Unlike life insurance proceeds, with annuities, anything above the cost basis is taxed as ordinary income. Reference: 2.2.4.4 in the License Exam Manual.

The definition of "offer" (offer to sell) includes which of the following? An attempt to dispose of a security for value. A solicitation of an offer to buy an interest in a security for value. The actual sale of a security for value. An offer to dispose of a security for value. A) I, II, III and IV. B) I only. C) I, II and IV. D) I and IV.

C) The term "offer" (or offer to sell) is any activity in an effort to dispose of a security for value, such as the offer to sell or the solicitation of an offer to buy a security. The term "sale" or "sell" includes every contract of sale, contract to sell, or any disposition of a security for value. Reference: 9.12.1 in the License Exam Manual.

Which of the following funds would you recommend to a moderate-risk client seeking long-term capital gains who also values professional stock selection? A) S&P 500 Index fund. B) An international index fund. C) A small-cap growth fund. D) A large-cap growth fund.

D) A large-cap growth fund is the most appropriate choice for a moderate-risk client because large capitalization stocks are generally less volatile than small-cap stocks and provide long-term capital growth. This is a more appropriate choice than the index fund because there is no stock selection there, only investing to parallel the index. Reference: 6.3.3 in the License Exam Manual.

Under the Securities Act of 1933, the Securities and Exchange Commission has the authority to: I. issue stop orders. II. approve new issues. III. review standard registration forms. A) I, II and III. B) II and III. C) I and II. D) I and III.

D) During the cooling-off period, the SEC reviews registration statements and may issue stop orders. The SEC does not approve securities; it only clears them for distribution to the public. Reference: 8.4.2 in the License Exam Manual.

When must an investment adviser disclose personal securities transactions to a client? I. If the adviser makes trades in his own account that are inconsistent with advice given to a client. II. If the adviser makes trades that are designed to take advantage of the impact caused by recommendations to clients. III. Investment advisers must disclose all personal transactions to clients. A) II only. B) III only. C) I only. D) I and II.

D) SEC Release 1A-1092 requires certain disclosures under the antifraud provisions of the Investment Advisers Act. They must disclose an affiliation with a securities broker/dealer if the advisory service is independent of the broker/dealer; the adviser only recommends products offered by the broker/dealer; the adviser will be compensated by the broker/dealer for the transaction; or the products recommended by the adviser are available from other broker/dealers. The adviser must also disclose personal securities transactions if they are designed to take advantage of the market impact caused by recommendations to clients or if personal transactions are inconsistent with the advice given to clients. Advisers must disclose the amount of compensation received from transactions through any broker/dealer, from any issuer, and from sales of nonsecurities products. They are not required to disclose all personal transactions. Reference: 10.12 in the License Exam Manual.

The RAN Corporation's common stock is listed on the American Stock Exchange. To raise additional working capital, RAN's board of directors has authorized the sale of $75 million in subordinated debentures. Under the Uniform Securities Act, which of the following is NOT a true statement? A) The Administrator can bring an enforcement action against the issuer if it is deemed that the issue is fraudulent. B) The Administrator may require a filing fee be paid prior to sales taking place in the state. C) The Administrator can require that the issuer provide a notice filing in the state. D) The Administrator can require the RAN Corporation to register the debentures prior to an offering in the state.

Since the RAN Corporation's common stock is listed on the AMEX, it, and any security equal or senior to it, is a federal covered security. As such, the state has no registration authority over the security. However, notice filing and payment of fees may be required. The Administrator always has the power to enforce anti-fraud statutes. Reference: 9.8.1 in the License Exam Manual.

If interest rates decline sharply, which of the following bonds is likely to appreciate the most? A) 15-year 8% bond trading on an 8.10 basis. B) 15-year zero coupon bond trading on a 7.60 basis. C) 15-year 7% bond trading at par. D) 15-year 8% bond trading on a 7.90 basis. Your answer, 15-year 7% bond trading at par., was incorrect. The correct answer was: 15-year zero coupon bond trading on a 7.60 basis.

The correct answer was: 15-year zero coupon bond trading on a 7.60 basis. Prices of zero-coupon bonds tend to be more volatile than prices of interest-bearing bonds because of their longer duration. Reference: 1.2.7.4 in the License Exam Manual.

If a federal covered adviser's fiscal year ends on October 31, 2014, it must file its annual updating amendment to its Form ADV no later than: A) 30-Mar-15 B) 29-Jan-15 C) 28-Feb-15 D) 31-Dec-14

The correct answer was: 29-Jan-15 The annual updating amendment to Form ADV must be filed within 90 days of the adviser's fiscal year end. Reference: 10.5.2 in the License Exam Manual.

Under the Investment Advisers Act of 1940, an adviser's registration usually becomes effective how many days after it is filed? A) 45 days. B) 10 days. C) 30 days. D) 20 days.

The correct answer was: 45 days. In the absence of any denial order or pending proceedings, registrations of federal covered investment advisers (and broker/dealers) will become effective on the 45th calendar day after the date of filing (the date received in the SEC's office). The SEC may specify an earlier date. Reference: 10.5.3 in the License Exam Manual.

If an investment adviser representative commits a criminal violation of the Uniform Securities Act, he is subject to legal action for: A) 5 years after the alleged violation. B) 3 years after the alleged violation. C) 10 years after the alleged violation. D) there is no statute of limitations under the act.

The correct answer was: 5 years after the alleged violation. Under the criminal provisions of the Uniform Securities Act, no indictment may be returned more than 5 years after the alleged violation. Reference: 9.15.2.1 in the License Exam Manual.

Which of the following choices offers the highest tax-equivalent yield? A) 5% municipal bond to a corporation in the 39% tax bracket. B) 5.5% municipal bond to an individual in the 28% tax bracket. C) 6% municipal bond to an individual in the 25% tax bracket. D) 4% municipal bond to an individual in the 35% tax bracket.

The correct answer was: 5% municipal bond to a corporation in the 39% tax bracket. Corporations receive the same tax break on municipal bonds as do individuals. Therefore, receiving a 5% return in the 39% tax bracket is equivalent to 8.20% before tax. A 4% bond to someone in the 35% bracket is equivalent to 6.15%; a 5.5% coupon to someone in the 28% bracket is equivalent to 7.64%; and a 6% bond to someone in a 25% bracket is equivalent to 8.0%. Reference: 1.2.6.4 in the License Exam Manual.

Which of the following statements relating to termination of registration of a securities professional registered under the USA is TRUE? A) An Administrator may revoke the registration of a securities professional who is declared mentally incompetent. B) A registration, once in effect, may never be voluntarily withdrawn. C) An Administrator may cancel the registration of a securities professional if mailings addressed to that registrant are returned with the notification, "no forwarding address". D) An Administrator may deny a registration of a securities professional based solely on a lack of experience.

The correct answer was: An Administrator may cancel the registration of a securities professional if mailings addressed to that registrant are returned with the notification, "no forwarding address". Cancellation of a registration will generally result when mail is returned without a forwarding address. A person may request a withdrawal of a registration. Withdrawals become effective after 30 days if there are no revocation or denial proceedings in process. An Administrator may not deny a registration solely on the basis of an individual's lack of experience. An Administrator does not revoke the registration of a person who is declared mentally incompetent but cancels such registration; this is a nonpunitive administrative action. Reference: 9.14.5 in the License Exam Manual.

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) An agent sold shares at a price less than authorized by a client. B) 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. C) Within the first ten days of a client's initial transaction, an agent accepted oral discretion and purchased securities on behalf of the client. D) 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.

The correct answer was: 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. 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 days after the initial discretionary transaction in the account. Reference: 9.11.5 in the License Exam Manual.

Under the Uniform Securities Act, which of the following would NOT be considered an exempt transaction? A) An agent sells U.S. treasury bonds to an individual client. B) The sale of ABCD common stock, listed in the "Pink Sheets", to an insurance company. C) An executor liquidates the estate's portfolio. D) The sale of an unregistered nonexempt security to an individual client at that client's request.

The correct answer was: An agent sells U.S. treasury bonds to an individual client. Even though the bonds are an exempt security, the sale to an individual client is not an exempt transaction. Sales to institutions, or sales by fiduciaries, or unsolicited transactions are all exempt. Reference: 9.8.2 in the License Exam Manual.

The Uniform Securities Act grants exemptions to the securities of a number of issuers. If you were the Administrator, which of the following securities would NOT be eligible for an exemption in your state? A) Bonds issued by the Province of Alberta. B) Common stock issued by the XYZ Trust Company, organized under the laws of a neighboring state, but not authorized to do business in this state. C) Equipment trust certificates issued by a regulated common carrier. D) Debt securities issued by the ABC Savings and Loan Association, organized under the laws of a neighboring state, but not authorized to do business in your state.

The correct answer was: Debt securities issued by the ABC Savings and Loan Association, organized under the laws of a neighboring state, but not authorized to do business in your state. Any issue from a state or Canadian province is always exempt. Equipment trust certificates issued by any regulated common carrier are always exempt. Banks, savings institutions, and trust company securities are also exempt as long as they are organized under the laws of the United States or any state. However, securities issued by a savings and loan or building and loan are only exempt if the issuer is authorized to do business in this state. Reference: 9.8.1 in the License Exam Manual.

A method of assessing the value of a fixed income security by looking at the future expected free cash flow and discounting it to arrive at a present value is known as: A) Future value. B) Internal rate of return. C) Discounted cash flow. D) Current yield.

The correct answer was: Discounted cash flow. The discounted cash flow, DCF, is used to asses the value of a fixed income security is by looking at the future expected free cash flow and discounting it to arrive at a present value. This is basically nothing more than taking the income payments you are scheduled to receive over a given future period and adjusting that for the time value of money. Reference: 7.6.5.2 in the License Exam Manual.

Which of the following would constitute political risk that might affect a security? A) A bad decision by the company's CEO B) FED monetary policy decisions C) A strike by the union representing the company's employees D) New environment regulations

The correct answer was: FED monetary policy decisions Political risk involves political activities and, of the choices given, the only one connected to a political body is actions taken by the FED (Federal Reserve Board). Some might argue that is legislative risk, but, without that as a choice, chose the political answer. A strike has nothing to do with politics (theoretically) and environmental regulations create regulatory risk. Reference: 7.7.5.2 in the License Exam Manual.

With respect to the recordkeeping rules under the USA, which of the following statements is NOT correct? A) Broker/dealers must maintain records of trade blotters for a minimum of three years. B) Following termination of the business, investment advisers organized as corporations must maintain copies of their articles of incorporation for a minimum of five years. C) Broker/dealers must maintain records of electronic communications for a minimum of three years. D) Investment advisers must maintain copies of all powers of attorney and other evidences of the granting of any discretionary authority by any client to the adviser for a minimum of five years.

The correct answer was: Following termination of the business, investment advisers organized as corporations must maintain copies of their articles of incorporation for a minimum of five years. Partnership articles and any amendments thereto, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor must be maintained in the principal office of the investment adviser and preserved until at least three years after termination of the enterprise. Emails are treated as any other communication: three years for broker/dealers and five years for investment advisers. Reference: 10.9 in the License Exam Manual.

All of the following debt instruments pay interest semiannually EXCEPT: A) municipal revenue bonds. B) industrial development bonds. C) municipal General Obligation bonds. D) Ginnie Mae pass-through certificates.

The correct answer was: Ginnie Mae pass-through certificates. Ginnie Maes pay interest on a monthly basis, not semiannually. Reference: 1.2.4.5.6 in the License Exam Manual.

Under the Investment Advisers Act of 1940, an adviser who has custody of a client's funds must I. notify a client when the client's funds are moved to another location. II. segregate clients' funds and keep them identified by client. III. not move the client's funds without prior notification and specific written authority from the client. A) II and III. B) I, II and III. C) I and III. D) I and II.

The correct answer was: I and II. Advisers who have custody must segregate a client's securities and keep them in a safe place, deposit client funds in bank accounts which contain only client funds (may be combined in one account, but complete records must be kept), report to clients at least every three months with a statement, and annually arrange for an unannounced audit by an independent accountant that will report the audit results to the SEC. All clients must be notified in writing of the location of their securities or funds and of any changes to the location. It is not necessary to notify the client before the move to obtain the client's specific written authority to move the fund. The original custodial agreement includes that authority at the discretion of the adviser. Reference: 10.11 in the License Exam Manual.

An investor is considering the purchase of $100,000 maturity value of zero-coupon AAA rated corporate bonds scheduled to mature in 20 years. Among the risks that this investor will be assuming are I. Default risk. II. Interest rate risk. III. Pre-payment risk. IV. Reinvestment risk. A) I and II. B) II and III. C) III and IV. D) I and IV.

The correct answer was: I and II. Even though these bonds are rated AAA, 20 years is a long time and it is possible that this corporation may not even exist when the maturity date arrives. Adding to the risk is the fact that there are no interest payments in the interim. That is why the most commonly recommended zero-coupon bonds are those issued or guaranteed by the U.S. Treasury. Since zero-coupon bonds have the longest duration for their maturity of any bonds, they have the greatest exposure to interest rate changes. Pre-payment risk is only found with mortgage-backed securities and one of the benefits of zeroes is that there is no reinvestment risk. Reference: 1.2.7.4 in the License Exam Manual.

When must an investment adviser disclose personal securities transactions to a client? I. If the adviser makes trades in his own account that are inconsistent with advice given to a client. II. If the adviser makes trades that are designed to take advantage of the impact caused by recommendations to clients. III. Investment advisers must disclose all personal transactions to clients. A) II only. B) III only. C) I and II. D) I only.

The correct answer was: I and II. SEC Release 1A-1092 requires certain disclosures under the antifraud provisions of the Investment Advisers Act. They must disclose an affiliation with a securities broker/dealer if the advisory service is independent of the broker/dealer; the adviser only recommends products offered by the broker/dealer; the adviser will be compensated by the broker/dealer for the transaction; or the products recommended by the adviser are available from other broker/dealers. The adviser must also disclose personal securities transactions if they are designed to take advantage of the market impact caused by recommendations to clients or if personal transactions are inconsistent with the advice given to clients. Advisers must disclose the amount of compensation received from transactions through any broker/dealer, from any issuer, and from sales of nonsecurities products. They are not required to disclose all personal transactions. Reference: 10.12 in the License Exam Manual.

Which of the following would NOT constitute custody of a client's account under the Investment Advisers Act of 1940? I. Client pre-payment of $1,000 of advisory fees, six months in advance II. Having temporary custody of a client's securities III. Depositing client funds in bank accounts accessible by the investment adviser A) II and III. B) II only. C) I only. D) I, II and III.

The correct answer was: I only. "Custody" means possession (even temporarily) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement, but does not include the acceptance by the adviser of prepaid advisory fees. Reference: 10.11 in the License Exam Manual.

Penalties for violations of the Uniform Securities Act include: I. fines of up to $5,000 and/or imprisonment for up to 3 years. II. fines of up to $5,000 and/or imprisonment for up to 5 years. III. imprisonment for 3 years and/or fines of up to $5,000, regardless of whether the violator had knowledge of the rule or order. IV. fines of up to $5,000 or imprisonment, regardless of whether an indictment had been returned later than 5 years after the alleged violation. A) I, III and IV. B) I, II, III and IV. C) I, II and III. D) I only.

The correct answer was: I only. Under the Uniform Securities Act, penalties can include fines for up to $5,000 or imprisonment for up to 3 years, or both. No person, however, may be imprisoned for violation if he proves that he had no knowledge of the rule or order, and no indictment can be returned later than 5 years after the alleged violation. Remember the distinction between criminal penalties and civil liability. Reference: 9.15.2 in the License Exam Manual.

Under section 13(d) of the Securities Exchange Act of 1934, a person who acquires more than 5% of a class of securities registered under the act must, within 10 days, file a report of beneficial ownership with: I. the SEC. II. the issuer. III. the exchange where traded. A) I and II. B) II and III. C) I, II and III. D) I and III.

The correct answer was: I, II and III. Persons who own more than 5% of the outstanding equity securities of a registered issuer are known as interested persons under the act. These persons are required to file a Schedule 13D report of beneficial ownership with the issuer, the exchanges, and the SEC within 10 days of reaching the greater than 5% level. Reference: 8.6.4.1 in the License Exam Manual.

Under SEC Release 1A-1092, which three standards are used to define an investment adviser? I. Provides advice, reports, or analyses concerning securities. II. Is in the business of providing securities-related advice or analysis. III. Receives compensation. IV. Is the principal business activity. A) I, II and IV. B) II, III and IV. C) I, III and IV. D) I, II and III.

The correct answer was: I, II and III. The release establishes three criteria in defining an investment adviser. First, the person must provide advice, reports, or analyses concerning securities. Second, the person must be in the business of providing securities-related advice or analyses. Third, the person must receive compensation. Investment advising does not have to be the person's principal business. They need only hold themselves out as advisers and provide investment advice on a frequent or regular basis. Reference: 10.2.1 in the License Exam Manual.

Which of the following are required for an initial application for registration as an investment adviser? I. A consent to service of process. II. A fee. III. Disclosure as to whether the applicant will have discretionary powers over client funds and/or securities. IV. Disclosure as to whether the applicant will have custody of client funds or securities A) II only. B) I, II and IV. C) I, II, III and IV. D) I and II.

The correct answer was: I, II, III and IV. An initial application must contain a consent to service of process, a fee, and must disclose whether the applicant will have discretionary powers over, or custody of, client funds and/or securities. Reference: 10.14 in the License Exam Manual.

Which of the following are NOT investment advisers under the Uniform Securities Act? Joe advises customers regarding the value of gold and silver coins. The trust department of ABC Bank provides investment advice to its clients. Tammy writes a newspaper column in which she analyzes and recommends securities. Jack is an investment adviser representative. A) I, II, III and IV. B) I and IV. C) I and II. D) II, III and IV.

The correct answer was: I, II, III and IV. Joe's advice does not concern securities. Banks are exempt from the definition. Tammy's advice is neither specific nor based on the situation of each client (impersonal advice). An adviser representative is specifically excluded from the definition of an investment adviser. Reference: 10.2.3 in the License Exam Manual.

Which of the following statements regarding financial requirements that may be imposed by the Administrator are TRUE? I. Agents may be required to be bonded. II. Investment adviser representatives may have to meet certain net worth standards. III. Broker/dealers may have to meet certain net capital levels. IV. Investment advisers may post a bond instead of meeting certain net worth levels. A) I, III and IV. B) I, II, III and IV. C) I, II and III. D) III and IV.

The correct answer was: I, III and IV. Individuals registered as agents may be required to be bonded, but these individuals, as well as those registered as investment adviser representatives, never have to meet net worth or net capital standards; those are for broker/dealers and investment advisers only. The USA does allow a broker/dealer or investment adviser to post a bond instead of demonstrating a certain net capital or net worth. Reference: 9.3.1.3; 9.3.2.4 in the License Exam Manual.

Under the Investment Advisers Act of 1940, it is legal for an investment adviser to: I. rebate the commission on a mutual fund sale to a client who has already paid a fee for investment advice. II. keep the commission on a mutual fund sale when the client who purchased the shares has already paid for investment advice. III. reduce a client's advisory fee by any commissions earned on mutual fund sales to that client. A) II and III. B) I and III. C) I and II. D) I, II and III.

The correct answer was: II and III. Rebating commissions on mutual fund sales is prohibited. However, because mutual fund commission are not negotiable (as are secondary market transactions), the adviser may reduce the client's advisory fee by the commission or, with appropriate disclosure, keep the commission. Reference: 8.10.10 in the License Exam Manual.

In response to an evolving marketplace, the SEC, through Release IA-1092, expanded the coverage of the definition of investment adviser to include: I. broker/dealers offering wrap fee programs. II. financial planners. III. life insurance agents. IV. pension consultants A) I and II. B) II and IV. C) I and III. D) III and IV.

The correct answer was: II and IV. SEC Release IA-1092 added financial planners, pension consultants, and sports and entertainment representatives to the list of potential IAs. Unless the life insurance agent is offering investment advice, the agent does not meet the definition of investment adviser. The Release did not address wrap fee programs because the exclusion for broker/dealers is part of the Investment Advisers Act of 1940; once special compensation in the form of wrap fees is received, the exclusion is lost. Reference: 10.2.1 in the License Exam Manual.

Under the Investment Company Act of 1940, which of the following statements is(are) TRUE about an investment company that wishes to contract with an outside investment adviser to manage its portfolio? This is prohibited under the act. Investment companies may employ outside advisers if a written contract is executed. The initial contract must be approved by either the board of directors or a majority vote of the outstanding shares. A) I only. B) II and III. C) I, II and III. D) II only.

The correct answer was: II only. One of the requirements of the Investment Company Act of 1940 is that the contract between a management investment company (open or closed-end) must be in writing. The initial contract must be approved by a majority vote of the outstanding shares and the "non-interested" members of the board of directors. It is renewed annually by either a majority vote of the outstanding shares or the board of directors as well as a majority of the directors who are considered to be non-interested parties. Reference: 8.10.9 in the License Exam Manual.

Rank the following bonds in order of shortest to longest duration. ABC 8s of 2035. DEF 9s of 2034. GHI 5s of 2036. JKL zeros of 2033. A) IV, II, I, III. B) II, I, III, IV. C) IV, III, I, II. D) III, I, II, IV.

The correct answer was: II, I, III, IV. There is an inverse relationship between a bond's coupon rate and its duration. A higher coupon will pay the investor back through cash flow at a faster rate. Therefore, a zero-coupon bond with no cash flow has a duration equal to its maturity. Reference: 7.6.5 in the License Exam Manual.

As used in the Uniform Securities Act, included in the term institutional investor would be: I. accredited investors. II. banks III. employee benefit plans with assets of no less than $1 million. IV. investment companies. A) I and IV. B) I, II, III and IV. C) II and III. D) II, III and IV.

The correct answer was: II, III and IV. Institutional investors include banks, insurance and investment companies, and employee benefit plans. Although each of these is included in the term accredited investor, that term, as used in federal law (the term is not found in the USA), also includes certain individuals, and they would never be considered institutional investors under the USA. Reference: 9.8.2 in the License Exam Manual.

Under the Uniform Securities Act, the term person would include: I. a minor who has a valid U.S. passport. II. a political subdivision. III. an unincorporated association. IV. an inter vivos trust. A) III and IV. B) II, III and IV. C) II and III. D) I and II.

The correct answer was: II, III and IV. The term person has an extremely broad definition. It is best to remember the three things that are not persons: minors, individuals who have been judged incompetent, and deceased individuals. Reference: 9.2 in the License Exam Manual.

An Administrator may initiate a suspension or revocation proceeding against a broker/dealer registered in his state: I. up to 2 years after a broker/dealer voluntarily withdraws its registration. II. when an agent of the broker/dealer is convicted of a felony violation of the Securities Exchange Act of 1934. III. upon discovery that the broker/dealer's license had been suspended in another state. IV. upon discovery of new facts unknown to the Administrator at the time of the broker/dealer's initial registration. A) II, III and IV. B) I, II, III and IV. C) I and II. D) III and IV.

The correct answer was: III and IV. The Administrator maintains jurisdiction over a license that has been withdrawn for a period of 1 year after the effective date of the withdrawal. An action against an agent of the broker/dealer does not allow the regulatory authority to also go after the broker/dealer unless that agent is a principal of the broker/dealer or part of the ruling indicated that there was a failure to supervise. The broker/dealer must disclose all suspensions by other regulatory agencies, including other states, to the state Administrator of its own state. A broker/dealer must also provide full disclosure of all relevant facts to the state Administrator concerning its registration. Reference: 9.14.4.1 in the License Exam Manual.

Which of the following activities would be prohibited for an agent? I. Executing a transaction in a discretionary account. II. Charging a larger than average commission on certain transactions. III. Soliciting sales of a security not yet registered A) II only. B) II and III. C) III only. D) I, II and III.

The correct answer was: III only. An agent is prohibited from soliciting sales of a security that has not been registered. An agent is not prohibited from executing a transaction in an account over which he has been granted discretionary authority. An agent may also charge higher than average commissions on certain transactions typically involving low market volume securities and penny stocks among others. Reference: 9.6 in the License Exam Manual.

If a customer buys 1 US Treasury 7-½% due Dec 2019 at 102, which of the following statements regarding this bond is TRUE? A) Interest paid on it is subject to state and local taxes. B) It has a nominal yield of less than 7-½%. C) Interest paid on it is subject to federal income tax. D) It has a yield to maturity of more than 7-½%.

The correct answer was: Interest paid on it is subject to federal income tax. Interest earned on U.S. government obligations is subject to federal tax. This bond is trading at a premium ($1,020), so its yield to maturity is lower than the nominal yield of 7-½%. The nominal yield is the same as the coupon rate (7-½%). Interest on U.S. government obligations is exempt from state and local taxes. Reference: 1.2.4.5.4 in the License Exam Manual.

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

The correct answer was: Interest rate risk. Treasury STRIPS are zero coupon bonds and, as such, have a longer duration than those paying semi-annual interest. The longer the duration, the greater the interest rate risk. Since both are guaranteed by the U.S. government, there is no credit risk. Both have the same purchasing power risk and there is no reinvestment risk with a zero coupon bond. Reference: 7.7.3 in the License Exam Manual.

State laws provide for exclusions from the definition of investment adviser. Which of the following persons is specifically excluded under the Uniform Securities Act? A) Bank subsidiary offering investment advice. B) Broker/dealers receiving special compensation. C) Investment adviser representatives. D) Economists whose advice is strictly incidental to their professional activity.

The correct answer was: Investment adviser representatives. The USA specifically excludes IARs from its definition of investment adviser. Excluded are banks but not subsidiaries offering investment advice. Once broker/dealers receive special compensation, such as in a wrap fee program, they lose their exclusion. Economists are not included in the list of exclusions. Reference: 10.2.3 in the License Exam Manual.

Sharon Smith is an agent for Highwater Securities, a broker/dealer registered in all 50 states. Sharon receives an unsolicited order from a bank located in State X, a state in which she has no place of business. Under the Uniform Securities Act, A) because Sharon has no place of business in State X and the client is an institution, Sharon may accept the order without registering in State X. B) Sharon must be registered in State X in order to accept the order. C) because Sharon has no place of business in State X and the order is unsolicited, Sharon may accept the order without registering in State X. D) because Highwater Securities is registered in all 50 states, Sharon must also be registered in all of them.

The correct answer was: Sharon must be registered in State X in order to accept the order. Regardless of whether the security is exempt or the transaction is exempt, one must be licensed in any state which is the domicile of a client placing an order. One does not have to be registered as an agent in every state the B/D is, only in those where she expects clients to reside. Reference: 9.3.2.3 in the License Exam Manual.

Which of the following statements regarding registration provisions is NOT true? A) The Administrator may, as a condition of registration by qualification or coordination, rule that the securities may only be sold on a specified form of subscription and that a signed copy be filed with the Administrator. B) The Administrator may by order permit omission of items of information or documents from a registration statement. C) Every registration must specify the total amount of securities offered, the states in which offering is to be made, and any adverse order or judgment by a regulatory authority. D) The Administrator may not, as a condition of registration by qualification or coordination, require the security be deposited in escrow and the proceeds be impounded until the issuer receives a specified amount.

The correct answer was: The Administrator may not, as a condition of registration by qualification or coordination, require the security be deposited in escrow and the proceeds be impounded until the issuer receives a specified amount. The Administrator may, as a condition of registration by qualification or coordination, require the security to be deposited in escrow and the proceeds to be impounded until the issuer receives a specified amount. It is true that every registration must specify the amount of securities to be sold in the state, the states in which offering is to be made, and any adverse order or judgment of a regulatory authority. The Administrator may by order permit omission of any item of information or document from a registration statement. The Administrator may, as a condition of registration by qualification or coordination, rule that the securities may only be sold on a specified form of subscription and that a signed copy be filed with the Administrator. Reference: 9.9.1.3 in the License Exam Manual.

Which of the following statements regarding a $1,000 corporate 8.50% bond offered at 110 is TRUE? A) The bond is a discount bond. B) To determine the bond's current yield, its stated rate must be compared against other fixed-rate investments in the client's portfolio. C) The bond's current yield is calculated by dividing its annual interest by its market price. D) The bond's current yield is lower than its yield to maturity.

The correct answer was: The bond's current yield is calculated by dividing its annual interest by its market price. A bond's current yield is calculated by dividing its annual interest by its current (market) price. The current yield will be higher than its yield to maturity which will include the premium return. The determination of a bond's yield is unrelated to other bonds. In addition, this is a premium bond, not a discount bond. Reference: 1.2.7.3 in the License Exam Manual.

Which of the following would NOT be considered evidence of custody of a client's funds or securities? A) The adviser writes checks on the client's account to pay for client's securities. B) Client funds and securities are kept at a qualified custodian. C) The investment adviser has discretionary authority over the client's account. D) The client makes a partial purchase, and the broker/dealer holds the securities until full payment is made.

The correct answer was: The investment adviser has discretionary authority over the client's account. "Custody" means possession (even temporary possession) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement, but does not include the acceptance by the adviser of prepaid advisory fees or discretionary authority. Reference: 10.14 in the License Exam Manual.

An investment adviser who has not been given discretionary authority notices a stock's value declining in a client's portfolio. The adviser is unable to contact the client and sells the stock to prevent the loss. Which of the following statements is TRUE regarding this situation? A) It is proper to make the transaction to prevent the loss. B) It is proper to make the transaction provided the loss would have been more than $5,000. C) The investment adviser acted unethically by purchasing the stock in the first place. D) The investment adviser is acting unethically by selling the stock without the client's permission.

The correct answer was: The investment adviser is acting unethically by selling the stock without the client's permission. Unauthorized trading, as is the case when discretionary authority has not been given, is unethical conduct. Unless authority is granted in writing, trading the stock is not allowed. Best intentions aside, the adviser's actions were unauthorized and illegal. Reference: 10.17 in the License Exam Manual.

Regarding the use of testimonials in advertising, all of the following are true EXCEPT: A) an investment adviser representative may only use a testimonial from an existing client. B) a prominent celebrity speaking publicly about his relationship with the investment adviser is considered to be giving a testimonial. C) divulging a list of the investment adviser's clients in response to a court order is not considered a testimonial. D) an agent of a broker/dealer may use a testimonial from an existing client with the approval of a designated principal of the firm.

The correct answer was: an investment adviser representative may only use a testimonial from an existing client. Testimonials are prohibited under any circumstances for investment advisers and their representatives. Agents and broker/dealers are permitted to use testimonials if they meet FINRA standards. Reference: 10.13 in the License Exam Manual.

The USA considers certain transactions to be exempt from the requirements to register and the filing of advertising material. Included in that group are all of the following EXCEPT A) any offer or sale to a pension or profit-sharing trust as long as the plan has assets of no less than $750,000. B) any transaction by an executor, administrator, sheriff, marshal, or guardian. C) an isolated nonissuer transaction effected through a broker/dealer. D) any transaction executed by a bona fide pledgee without any purpose of evading the act.

The correct answer was: any offer or sale to a pension or profit-sharing trust as long as the plan has assets of no less than $750,000. In general, the USA does not consider a transaction with an employee benefit plan to be exempt unless the plan has assets of at least $1 million. Reference: 9.8.2 in the License Exam Manual.

Under the USA, all of the following statements are true regarding investment advisory contracts EXCEPT that they: A) cannot allow for prepaid advisory fees. B) must be in writing. C) cannot be assigned without customer approval. D) can only allow fees to be performance related under certain limited circumstances.

The correct answer was: cannot allow for prepaid advisory fees. Nothing in the USA prohibits prepaid advisory fees. The contract must describe the nature of these fees and the circumstances, if any, under which any or all of the prepaid fee may be returned in the event of early cancellation of the contract. The USA requires initial and renewal contracts to be in writing and state that assignment may take place only with the client's consent. There are certain circumstances, such as an investor with a net worth of at least $2 million, where performance-based fees are permitted. Reference: 10.14 in the License Exam Manual.

Under the USA, the term "security" refers to all of the following EXCEPT: A) certificate of deposit for a security. B) commodity futures contract. C) put, call, straddle, or option. D) bonds.

The correct answer was: commodity futures contract. Commodities and futures contracts on commodities are not securities. Just remember the short list of items that are not securities. Reference: 9.5.1.1 in the License Exam Manual.

Hugh Clark, a partner with a minority interest in ABC Investment Partners, a registered investment adviser, withdraws from the partnership to form his own separate partnership, Clark Advisers. ABC Investment Partners: A) must notify its clients of Clark's departure within a reasonable period. B) need not notify its clients of Clark's departure because Clark was only a minority partner. C) must notify Clark Advisers of Clark's withdrawal from ABC Investment Partners within a reasonable period. D) must change its name because the partnership has a new mix of partners as a result of Clark's departure.

The correct answer was: must notify its clients of Clark's departure within a reasonable period. ABC Investment Partners must promptly notify its clients of Clark's departure. Under the Uniform Securities Act, a change to a minority interest in the membership of a partnership requires the partnership to notify all investors of the change within a reasonable period. ABC has no obligation to notify Clark Advisers of Clark's new employment. Reference: 10.14 in the License Exam Manual.

A federal covered investment adviser may enter into a contract with a client that provides for performance-based compensation under all of the following conditions EXCEPT: A) compensation is based on gains, less losses, for a period of no less than 1 year. B) disclosure that the performance compensation may create an incentive for the adviser to take greater risks. C) the formula used to calculate compensation includes realized capital losses and unrealized depreciation. D) the client must meet certain minimum financial standards.

The correct answer was: disclosure that the performance compensation may create an incentive for the adviser to take greater risks. Since these types of compensation agreements may only be entered into with clients meeting minimum financial standards, the SEC assumes that clients understand the increased risks they are being exposed to. The minimum net worth requirement is $2 million, or a client is qualified if he has at least $1 million under management with the adviser. Any performance fee must take into consideration gains and losses, both realized and unrealized, and the performance period must be no less than one year. Please note - state covered investment advisers must make this "incentive" disclosure so if the question asked about them, there would be no exception. Reference: 10.14 in the License Exam Manual.

Registration as an investment adviser or investment adviser representative under the Uniform Securities Act is required of a(n): A) tax attorney who, as an incidental part of his tax practice, recommends that his high tax bracket clients investigate the use of municipal bonds in their portfolios. B) economics professor at a local community college who gives lectures in the evenings to public groups about portfolio analysis for which he charges a nominal fee. C) officer of a trust company handling investments for trust accounts. D) agent of a broker/dealer who recommends model portfolios to clients in exchange for them executing their trades through him.

The correct answer was: economics professor at a local community college who gives lectures in the evenings to public groups about portfolio analysis for which he charges a nominal fee. If you are putting yourself out to the public as providing investment advice and charging a fee for doing so, you must register. The exceptions to this are if your giving of investment advice is incidental to your primary reason of doing business and if you are not charging specifically for the giving of that advice. Trust companies and their employees are specifically excluded from the definition of "investment adviser". A tax attorney making recommendations incidental to his legal practice and not charging specifically for the making of those recommendations is also not an investment adviser. The professor would have also been exempt from registration except for the fact that compensation was received for securities-related advice. Agents who are compensated only on the basis of recommended trades are not receiving special compensation and are, therefore, not considered to be in the business of giving advice. Reference: 10.2.3 in the License Exam Manual.

The NASAA Statement of Policy on Unethical and Dishonest Business Practices of Broker/Dealers and Agents contains an extensive list of prohibited practices. However, it would not be considered a violation: A) when a broker/dealer sells a security out of inventory to a retail customer and indicates on the confirmation that the firm acted in an agency capacity. B) to borrow money from a client who is not in the lending business. C) for two individuals employed by the same broker/dealer and with the same category of license to share in commissions without telling the client. D) if a properly registered agent were to share in the profits and losses in a customer's account proportionate to the amount of time the agent devoted to handling the account.

The correct answer was: for two individuals employed by the same broker/dealer and with the same category of license to share in commissions without telling the client. Properly registered individuals employed by the same or affiliated broker/dealers are permitted to split their commissions. Since there is no additional cost to the client, this action does not have to be reported. Sharing with clients may only based on the proportion of funds invested in the account and a B/D selling out of inventory must disclose that the firm acted in a principal capacity. No B/D or agent may ever borrow money from a client who is not in the money lending business. Reference: 9.11.26.4 in the License Exam Manual.

If an agent fails to inform a client that a company whose security he is selling is changing the investment managers of its employee's pension plan, under the Uniform Securities Act, this omission constitutes: A) a misdemeanor. B) no violation. C) a criminal violation punishable by up to three years in prison. D) a civil violation punishable by a fine up to $5,000.

The correct answer was: no violation. No violation occurs because the Uniform Securities Act requires the disclosure of only material facts. Material facts are those that could influence the price of a security. Changing investment managers on a pension plan would not affect the price of a stock and is not material to the investment decision. Reference: 9.10.1.2 in the License Exam Manual.

An adviser has custody of a client's securities or funds if the adviser: A) maintains the customer's funds and securities in an account as JTWROS with the registered investment adviser. B) accepts prepayment of advisory fees or has discretion over a customer's account. C) has authority to withdraw funds from a client's account for the benefit of the adviser for the payment of the quarterly advisory fees. D) uses a broker/dealer to hold the customer's funds and securities and has limited trading authority over the account.

The correct answer was: has authority to withdraw funds from a client's account for the benefit of the adviser for the payment of the quarterly advisory fees. Custody is the physical possession of the asset. Discretion is the authority to make decisions independent of the authorization of the account holder on a trade-by-trade basis. Authorization is in a blanket form in the existence of either a limited trading authority or full trading authority. Acceptance of prepayment of adviser's fees or discretionary authority does not constitute custody. The ability to withdraw funds for the purpose of paying quarterly advisory fees from a customer's accounts is deemed to be custody of the funds. A broker/dealer holding a customer's funds and securities would have custody, but the adviser who has trading authority over the account would only have discretion. If the funds and securities of the client are held with the funds and securities of the adviser in a joint account, the adviser would be involved in commingling (or theft), not custody. Reference: 10.11 in the License Exam Manual.

Recent rule changes to the Investment Advisers Act of 1940 require all of the following EXCEPT: A) independent review of an advisory firm's compliance procedures. B) appointment of a chief compliance officer (CCO). C) written compliance policies and procedures. D) annual compliance review.

The correct answer was: independent review of an advisory firm's compliance procedures. Although new rules require annual compliance reviews, such reviews may be conducted internally by the firm's appointed chief compliance officer. The new rules require written policies and procedures, an annual compliance review, and the appointment of a chief compliance officer (CCO). Reference: 10.21 in the License Exam Manual.

The risk of a bond decreasing in value during periods of inflation is known as: A) reinvestment risk. B) marketability risk. C) credit risk. D) interest rate risk.

The correct answer was: interest rate risk. Interest rate risk is the possibility that interest rates might rise, causing bond prices to fall. Periods of inflation are accompanied by rising interest rates. Reference: 7.7.3 in the License Exam Manual.

A sale of a security has been made by an agent not registered in the state. The agent is brought to court by the Administrator. The court has the power to require the agent to: A) make the client whole. B) terminate his current registration. C) requalify by taking the agent's licensing exam again. D) go to prison for a period not to exceed three years.

The correct answer was: make the client whole. The Administrator may bring a case to court where the agent is found civilly liable. In that case, restitution may be ordered by the court. The Administrator does not have to go to court to require the agent to retake a qualification exam. Civil cases like this would not result in a prison sentence; that punishment is for criminal cases. Reference: 9.15.1.2 in the License Exam Manual.

In September 2001, if ABC Manufacturing Company showed a strong balance sheet but its stock lost 15 points after September 11, this is an example of: A) business risk. B) systematic risk. C) opportunity cost. D) beta.

The correct answer was: systematic risk. Systematic risk (market risk) is the danger that a specific stock's price will be driven by factors largely independent of its issuer. Business risk is unique to each business entity. Beta is a measure of a stock's volatility relative to the overall market. Opportunity cost refers to the return given up in order to invest in another instrument or project. Reference: 7.7.2 in the License Exam Manual.

If an agent fails to inform a client that a company whose security he is selling is changing the investment managers of its employee's pension plan, under the Uniform Securities Act, this omission constitutes: A) no violation. B) a misdemeanor. C) a civil violation punishable by a fine up to $5,000. D) a criminal violation punishable by up to three years in prison.

The correct answer was: no violation. No violation occurs because the Uniform Securities Act requires the disclosure of only material facts. Material facts are those that could influence the price of a security. Changing investment managers on a pension plan would not affect the price of a stock and is not material to the investment decision. Reference: 9.10.1.2 in the License Exam Manual.

An investment adviser representative, who also receives commissions as an agent at a brokerage firm, has opened an account with a client whose net worth is $200,000. The customer wants the account aggressively traded and wishes the investment adviser to be compensated based on the account's performance. In this account, payment on a performance basis is: A) not permissible. B) permissible with approval from the principal of the brokerage firm and written permission from the customer at the time the account is opened. C) permissible. D) permissible if the customer's net worth is a minimum of $1 million.

The correct answer was: not permissible. It is not permissible to trade this account on a performance basis; the investment adviser representative must be paid on commission or through a fixed fee arrangement. Under the Investment Advisers Act of 1940, performance fees are allowed only for clients with a minimum of $1 million invested or a minimum net worth of $2 million. Reference: 10.14 in the License Exam Manual.

Under federal law, the statute of limitations for civil liability is: A) two years after discovery or three years after the action, whichever is sooner. B) one year after discovery of the action. C) two years after the action. D) one year after discovery or three years after the action, whichever is sooner.

The correct answer was: one year after discovery or three years after the action, whichever is sooner. In the federal regulations, the statute of limitations for a civil action is the sooner of one year after discovery or three years after the action. Under the USA, it is the sooner of two years after discovery or three years after the action. Reference: 8.4.6 in the License Exam Manual.

Under the Securities Exchange Act of 1934, the SEC may suspend all trading on an exchange: A) under no circumstances. B) only if it has cause to believe that such suspension is necessary to prevent criminal violations that are about to occur on the exchange. C) for ten days, in its discretion. D) only with prior notification to the President of the United States.

The correct answer was: only with prior notification to the President of the United States. To suspend all trading on an exchange, the SEC must first notify the President of the United States. The SEC may summarily suspend trading in any nonexempt security for up to 10 days without prior notice. Reference: 8.8 in the License Exam Manual.

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

The correct answer was: permitted if the secretary is also registered as an agent and the firm's principal agrees to the arrangement. If the secretary is a registered agent, then the agent may split commissions, but only if the arrangement is approved by the firm's principal. Reference: 9.3.2.5 in the License Exam Manual.

Under the USA, a guaranteed security is protected by someone other than the issuer against loss of all of these EXCEPT: A) interest on debt securities. B) principal repayment at maturity on debt securities. C) dividends on equity securities. D) principal on equity issues.

The correct answer was: principal on equity issues. Guarantees generally apply to income from the security (dividends or interest) and to payment of the principal amount at maturity. Third-party guarantees do not provide against market loss. Please note that capital gains are never included in this type of guarantee. Reference: 9.11.14 in the License Exam Manual.

Under NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker/Dealers and Agents, a securities agent may NOT: A) be registered with a licensed real estate broker as well as with a licensed securities broker/dealer. B) be licensed by both an independent insurance company and a securities broker/dealer. C) simultaneously represent two different unrelated broker/dealers in the same transaction. D) be registered with two broker/dealers under common control.

The correct answer was: simultaneously represent two different unrelated broker/dealers in the same transaction. A registered agent may not simultaneously represent two different, unrelated broker/dealers in the same transaction. Under current regulations, only a few states allow agents to have dual registrations with more than one broker/dealer, unless those broker/dealers are under common management. In those cases, the agent may only represent one of the broker/dealers in any single transaction. Agents of broker/dealers may be simultaneously registered with real estate agencies, insurance companies, and with two broker/dealers, provided the broker/dealers are under common ownership or control or the arrangement has been authorized by the Administrator. Reference: 9.3.2.6 in the License Exam Manual.

The SEC has enumerated specific items that must be included in Investment Adviser written compliance manuals, required as of October 5, 2004, EXCEPT: A) the advisory firm must review policies and procedures at least on an annual basis. B) the advisory firm should indicate the educational requirements necessary for employment. C) the advisory firm should implement procedures for allocating investment opportunities such as best executions among clients. D) the advisory firm must monitor the consistency of portfolios with guidelines established by clients, disclosures, and regulatory requirements.

The correct answer was: the advisory firm should indicate the educational requirements necessary for employment. Guidelines under SEC rules require (at minimum) that the chief compliance officer of each federal covered investment adviser conduct an annual review of its compliance procedures. Among the duties of the compliance officer is to monitor the consistency of portfolios with guidelines established by clients, disclosures, and regulatory requirements. The firm should implement procedures for allocating investment opportunities such as best executions among clients. If the firm does have internal educational requirements, that would be found in its HR manual, not in its compliance manual. Reference: 10.21 in the License Exam Manual.

A contract between an investment adviser and a customer may be assigned to another investment adviser provided: A) the assignment is done 1 year after the initial contract. B) the broker/dealer handling the account's transaction is notified in writing. C) the client consents to the assignment. D) the client is notified in writing within a reasonable period of time.

The correct answer was: the client consents to the assignment. In addition to prohibiting assignment of an advisory contract to another adviser without the customer's consent, the contract must contain provisions for notification of a change in partners if the adviser is organized as a partnership. Reference: 10.14 in the License Exam Manual.

A new client inherits $25,000 and wishes to use the money to purchase an 8% municipal general obligation bond selling at an 8.45% yield. The $1 million bond issue, due in 15 years, is rated Baa. All of the following factors would result in your recommending against such a purchase EXCEPT: A) the client is in the 18% tax bracket. B) the client is well diversifed and has a moderate to high risk tolerance. C) this would be the client's only investment. D) the client's job is not secure.

The correct answer was: the client is well diversifed and has a moderate to high risk tolerance. Recommending a bond with a Baa rating (the lowest investment grade) is appropriate for an investor with this risk tolerance. The investor's tax bracket is too low to reap the benefits of the bond's tax exemption and we know that diversification is not an issue here. Reference: 1.2.5 in the License Exam Manual.

When an IAR submits an order ticket to purchase securities for a client, all of the following would appear EXCEPT: A) the broker dealer's name. B) the details of the order. C) the current market price of the security. D) the IAR's name.

The correct answer was: the current market price of the security. Any order ticket submitted by an IAR for execution at a broker/dealer will always include the IAR's name and that of the B/D. All order details must be listed, e.g. the number of shares, limit or market, etc. but the current market price is never included. Reference: 8.6.6.1 in the License Exam Manual.

All of the following factors would be considered if an investor was trying to minimize the market risk of investing in a particular stock EXCEPT: A) the timing of the purchase of the stock. B) the period of time the investment can be held. C) the earning power of the company. D) the price behavior of the stock.

The correct answer was: the earning power of the company. The earning power of the company is not a measurement of the stock market (market risk), while the other factors here are. That is a fundamental strength and protects against business or financial risk. Market risk tends to be a technical factor and anytime the words time, price, volume or charts are used, it's technical. Reference: 7.7.1 in the License Exam Manual.

If three individuals have a tenants in common account with your firm and one individual dies, then A) trading is discontinued until the executor names a replacement for the deceased B) account is converted to joint tenants with rights of survivorship C) the account must be liquidated and the proceeds split evenly between the two survivors and the decedent's estate D) the two survivors continue as co-tenants with the decedent's estate

The correct answer was: the two survivors continue as co-tenants with the decedent's estate The decedent's estate (via the executor or administrator) becomes a tenant in common with the survivors. Assets belonging to the deceased are ultimately disposed of as provided for in the will (or the state). Reference: 5.2.2.1 in the License Exam Manual.

A client purchased an index annuity from you three years ago and made an initial deposit of $100,000. The contract calls for a 90% participation rate with a 15% cap. The index had a return of + 20% in the first year, - 5% the second year, and +10% the third year. The investor's current value is approximately A) $117,829 B) $128,620 C) $125,350 D) $126,500

The correct answer was: $125,350 In the first year, the index gained 20%. With a 90% participation rate, the investor might have earned 18%, but was limited by the 15% cap. So, after one year the value was $115,000. In the second year, the index lost money. However, with an index annuity there are never any reductions in a down market so the account remained at $115,000. In the third year, the investor received 90% of the 10% growth and that increased the account value to $125,350. This resulted in an overall gain of 25.35%, or an average return of almost 8.5% per year. Reference: 2.2.1.4 in the License Exam Manual.

William died in 2014 with the following assets and liabilities: $200,000 in securities left to his wife, $650,000 home left to his wife (the home cost $150,000), $250,000 life insurance policy with his daughter as beneficiary, $75,000 in debts and estate expenses. What is William's taxable estate? A) $175,000 B) $625,000 C) $750,000 D) $0; it is below the $5 million exemption equivalent

The correct answer was: $175,000 The question is asking for the taxable estate, not the amount of estate tax due. The market value of all assets which William has an incident of ownership in will be included in the gross estate. All assets left to the spouse and the debts/expenses are allowable reductions to arrive at the taxable estate. In this case, the $1.1 million gross estate is reduced by the $850,000 left to his wife and then by the $75,000 in debt and expenses. Technically, there is still a taxable estate. However, any estate tax due is reduced by a credit equivalent to $5.34 million in assets for 2014. Reference: 6.5.4.1 in the License Exam Manual.

A TIPS bond is issued in the principal amount of $1,000, paying 3.5%. Over the security's 5-year term, the inflation rate is 4%. What is the amount of the final semiannual interest check? A) $35.00. B) $17.50. C) $21.33. D) $42.66.

The correct answer was: $21.33. 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 5-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 it is a semiannual check). Reference: 1.2.4.4 in the License Exam Manual.

A customer has invested a total of $10,000 in a nonqualified deferred annuity through a payroll deduction plan offered by the school system where he works. The annuity contract is currently valued at $16,000, and he plans to retire. On what amount will the customer be taxed if he chooses a lump-sum withdrawal? A) $16,000.00 B) $10,000.00 C) He will not owe taxes because the annuity was nonqualified. D) $6,000.00

The correct answer was: $6,000.00 Payments into a nonqualified deferred annuity are made with after-tax money; taxes must only be paid on the earnings of $6,000. Reference: 2.2.4.2 in the License Exam Manual.

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

A) If an individual dies without a will (intestate), the state will appoint an administrator in intestacy who, just as an executor for one who had a will, has control over the deceased's assets. A durable power of attorney, just like any other power, expires upon the death of either party to the power. Reference: 5.2.6.2 in the License Exam Manual.

Ms. Abbot has a joint account with her sister. She enters a sell order in the account and instructs that the proceeds check be made out to her only. If your firm sends the check but makes it payable to both Ms. Abbot and her sister, this is an example of: A) the proper joint account procedure. B) not following instructions, a prohibited practice under the Uniform Securities Act. C) an unfortunate error that can be reconciled with the broker/dealer through a process called reclamation. D) an unlawful practice because the transaction was unauthorized.

A) In joint accounts, either party may act. However, by law, all checks must be made payable to all owners so the firm is following required procedure. Reference: 5.2.2 in the License Exam Manual.

Regarding the withdrawal of funds from a qualified retirement plan I. the employee will be taxed at the ordinary income tax rate on the cost basis. II. the funds may be withdrawn on retirement (as defined) and no tax need be paid on the amount withdrawn. III. the funds may be withdrawn early by the beneficiary if the covered person dies. IV. all qualified plans must be in written form. A) III and IV. B) I, III and IV. C) I and II. D) I, II, III and IV.

A) In the case of death or total disability of the participant, funds can be withdrawn early from retirement plans. All qualified plans must be in written form as outlined by the Internal Revenue Code. The employee is taxed on the total amount withdrawn, not just the cost basis. Any amounts withdrawn are taxable income to the employee in the year withdrawn, whether early or at retirement, unless rolled over into an IRA within 60 calendar days. Reference: 4.5 in the License Exam Manual.

Which of the following statements regarding loans from 401(k) plans is NOT correct? A) They must be made available to highly compensated employees in amounts greater than that made available to other employees. B) They must be adequately secured. C) They must be made in accordance with the loan provisions stipulated in the 401(k) plan. D) They must bear a reasonable rate of interest.

A) Loans must be repaid with interest, generally within 5 years. They must be secured and made in accordance with plan provisions. Loans may not be made available to highly compensated employees in amounts greater than that made available to other employees. Reference: 4.4.5.2 in the License Exam Manual.

If a client in the 30% marginal income tax bracket can earn an after-tax rate of return of 7% when the estimated inflation rate during the holding period of an investment is 4%, the client's real rate of return is A) less than 7%. B) 7%. C) more than 7%. D) 10%.

A) Real return reduces nominal return by an inflation factor. Thus, the client's real return must be less than 7%. Reference: 7.5.2.6 in the License Exam Manual.

A European corporation seeking a short-term loan would probably be most concerned about an increase to the: A) Eurobond rate. B) LIBOR. C) FED funds rate. D) U.S. Treasury bill rate.

B) LIBOR stands for London Interbank Offered Rate and, for the rest of the world outside of the U.S., is the standard upon which short-term rates are based. Reference: 1.2.11.1 in the License Exam Manual.

The financial ratio that shows the relationship between the price of a company's stock and the company's net worth (stockholders' equity) is the: A) dividend discount ratio. B) price-to-book value ratio. C) price-earnings (PE) ratio. D) price-sales ratio.

B) The price-to-book value ratio is calculated by dividing the price per share by the stockholders' equity per share. This ratio shows the relationship between a company's stock price and the company's book value. Reference: 7.4.3.9.7 in the License Exam Manual.

Which one of the following statements regarding a characteristic or use of a Roth IRA is CORRECT? A) Roth IRA withdrawals are tax-deferred in their entirety regardless of the participant's age at withdrawal. B) Roth IRAs are not subject to the minimum distribution rules until the death of the owner-participant of the plan. C) Like regular IRAs, Roth contribution eligibility is restricted by active participation in an employer's retirement plan. D) Like regular IRAs, Roth IRA contributions may not be made after the participant attains age 70½.

B) The correct answer was: Roth IRAs are not subject to the minimum distribution rules until the death of the owner-participant of the plan. Unlike the regular or traditional form of IRA, Roth IRAs are not subject to the minimum distribution rules upon the participant attaining age 70½. Rather, distributions need not be made until the death of the owner/participant. For a Roth IRA withdrawal to be entirely tax free, it must be made after a 5-year holding period and after the participant reaches age 59½. Reference: 4.1.2 in the License Exam Manual.

A customer with an aggressive growth investment objective and short-term (6- to 12-month) time horizon wants to invest $50,000 in a mutual fund. He has a substantial net worth, but none of it is invested in mutual funds. You inform him that mutual fund investments are intended to be long-term investments, but he expresses his intention to make the short-term investment anyway. If the XYZ fund family (one you have dealt with in the past) offers an aggressive growth fund that has a respectable track record, your recommendation should be to: A) buy the XYZ Aggressive Growth Class A shares with a 4% load and 0.25% 12b-1 fee. B) decline the transaction because short-term trading of funds is not allowed. C) buy the XYZ Aggressive Growth Class B shares with a declining CDSC and 0.75% 12b-1 fee. D) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and 0.75% 12b-1 fee.

D) If the client insists on making this type of investment, then the Class C shares are most appropriate for this customer's objectives; the sales load would be lower than that of either Class A or Class B shares. But, you ask, we don't know what the CDSC is for the Class B shares - it isn't given. It doesn't have to be because the CDSC for redemptions in the first year would never be lower than the Class A front-end load (4% in this question and certainly higher than the 1% on the Class C shares). Reference: 2.1.2.2 in the License Exam Manual.

Over the past 5 years, a stock has had returns of +16%, +5%, -4%, +12% and +8%. The mid-range value of this stock's returns is: A) +8.2%. B) +7.4%. C) +6.0%. D) +9.0%.

The correct answer was: +6.0%. The range of a stock's performance is the low to the high, in this case, -4% to +16%. The mid-range is that number that is exactly in the middle of the range. With a range of 20 points, the midpoint is going to be the high minus 10 or the low plus 10. +6.0% is 10 points higher than the low and 10 points lower than the high. Reference: 7.5.2.11.5 in the License Exam Manual.

If a security has an anticipated return of 8.7% and a standard deviation of 14.6%, you would expect the returns to have a 95% probability (assuming a normal distribution) of falling between: A) 8.7 and 23.3%. B) -5.9 and 23.3%. C) -20.5 and 37.9%. D) 0 and 37.9%.

The correct answer was: -20.5 and 37.9%. A security with a normal distribution has a 95% probability of falling within 2 standard deviations of its anticipated return. In this case, that would be -20.5% and 37.9%, which is computed by calculating return movements of 29.2% (14.6 × 2) in either direction. Reference: 7.6.2 in the License Exam Manual.

An investor owns a common stock that has been paying a $2.00 annual dividend. If the investor buys 100 shares of the stock at $50 and sells it 3 months later for $52, the approximate annualized rate of return is: A) 4%. B) 5%. C) 12%. D) 20%.

The correct answer was: 20%. Annualized rate of return is computed by taking the investor's total return and annualizing it. In this case, the investor had $2 of appreciation and $.50 (one quarter) in dividends. Total return of $2.50 divided by the $50 cost is 5%. But, that is for three months - one quarter. Multiply that by 4 to get the annual rate. Reference: 7.5.2.4 in the License Exam Manual.

An analyst is viewing a subject company's financial statements. She notices that the company has current assets of $20 million, fixed assets of $50 million, and total liabilities of $45 million (of which $10 million is considered long-term). This company's debt to equity ratio is: A) 64.3%. B) 28.6%. C) 22.2%. D) 40%.

The correct answer was: 28.6%. The debt to equity ratio is computed by dividing the issuer's long-term debt by their total capitalization. Total capitalization is the company's net worth (assets minus liabilities) plus the long-term debt. In this example, the net worth is $70 million minus $45 million, or $25 million. Adding the long-term debt of $10 million results in total capital of $35 million. Divide the $10 million by that $35 million to arrive at 28.57%. Reference: 7.4.3.7.7 in the License Exam Manual.

An investment company whose portfolio contains which of the following does NOT meet the definition of a diversified investment company under the 1940 Investment Company Act? A) 80% of its assets in securities of 50 health care companies. B) 18% of a given corporation's voting stock. C) 14% of its assets invested in stock of a major publicly held corporation. D) 33% of its assets in the common stock of a small-cap technology company.

The correct answer was: 33% of its assets in the common stock of a small-cap technology company. An investment company that has invested 33% of it assets in any issue, small-cap or not, exceeds the limits set in the 75-5-10 test. This test requires that 75% of the assets be invested in securities issued by companies other than the investment company (regardless of the type of companies) so that no more than 5% of total assets are invested in any one company, and no more than 10% of an outside corporation's voting securities are owned by the investment company. There are no restrictions on the other 25%, making it possible to have as much as 30% of the fund's assets in the securities of one issuer, but not 33%. In fact, with that "other 25%", a diversified company could, theoretically, own 100% of the voting stock of an issuer so owning 18% is no problem. Reference: 2.1.1.3.3 in the License Exam Manual.

A client enters an order as follows: Sell stop 100 shares of LTC at 45 limit 45.50. Following the entry of that order, trades occur in the following sequence: 47; 46; 45.12; 44.97; 45.28; 45.97; 46.05. More than likely, the client received A) 45.28 B) 46.05 C) 44.97 D) 45.97

The correct answer was: 45.97 This is really two orders. The first is to stop at 45. That is, once the stock trades at 45 or lower, enter the order. The second order is a sell, but with a limit of 45.50. So, the first time the stock hits 45 (or less), is the trade at 44.97. That triggers the sell limit. The next trade is at 45.28 and that is not acceptable to the limit order at 45.50. Since the limit order is saying, "get me 45.50 or higher," the 45.97 is an acceptable price. Reference: 3.1.4.6.2 in the License Exam Manual.

GHI currently has earnings of $4 and pays a $0.50 quarterly dividend. If GHI's market price is $40, the current yield is A) 15% B) 1.25% C) 10% D) 5%

The correct answer was: 5% The quarterly dividend is $0.50, so the annual dividend is $2; $2 ÷ $40 market price = 5% current yield. Reference: 1.1.2.2 in the License Exam Manual.

An investment adviser representative has a client who prefers the safety of securities guaranteed by the U.S. Government, yet is concerned about volatility due to uncertainties in the future direction of interest rates. Which of the following recommendations would best address these concerns? A) Treasury STRIPS, maturing in 2036. B) 8% Treasury bond maturing in 2036. C) 5% Treasury bond, maturing in 2037. D) 6% Treasury bond maturing in 2035.

The correct answer was: 8% Treasury bond maturing in 2036. Generally speaking, those bonds with the highest coupons have the shortest duration, therefore, are the least subject to interest rate risk. STRIPS, which are zero-coupon bonds, are the most volatile since they have the longest duration. The actual calculation of the duration of each of the other bonds given is beyond the scope of this exam. Reference: 7.6.5 in the License Exam Manual.

Over the past 5 years, a stock has had returns of +16%, +5%, -4%, +12% and +8%, The median of the returns is: A) 9.0%. B) 8.0%. C) 7.4%. D) 8.2%.

The correct answer was: 8.0%. The median of a series of returns is that number that has an equal number of occurrences below as above. In this case, that number is 8% because there are 2 returns less than 8% (-4% and +5%) and 2 above (+12% and +16%). Reference: 7.5.2.11.2 in the License Exam Manual.

When are estate taxes due? A) 9 months after valuation. B) 6 months after death. C) 6 months after valuation. D) 9 months after death.

The correct answer was: 9 months after death. Estate taxes are due 9 months after death. The taxes are based on either the value at death or the alternative valuation 6 months after death. Reference: 6.5.4.1.3 in the License Exam Manual.

Those who place bonds in client's portfolios usually focus their attention on yields. For which of the following bonds would the yield to maturity be lower than the yield to call? A) A municipal bond. B) A bond selling at a discount. C) A high-yield bond. D) A bond selling at a premium.

The correct answer was: A bond selling at a discount. One of the contributing factors to the yield to maturity on a discounted bond is the realization of that discount. If a bond is called prior to maturity, that discount is realized sooner, thus increasing the yield. When the bond is selling at a premium, the reverse is generally true. Reference: 7.5.2.1.4 in the License Exam Manual.

Which of the descriptions of time-related orders is NOT true? A) An all-or-none order must be filled in full but not immediately. B) A fill-or-kill order must be executed immediately and the remainder of the shares not sold or purchased is canceled. C) An immediate-or-cancel order must be executed immediately and the remainder of the shares left unsold, or not purchased, are canceled. D) A market not held order allows the floor broker to use his judgment as to price and timing of the transaction.

The correct answer was: A fill-or-kill order must be executed immediately and the remainder of the shares not sold or purchased is canceled. A fill-or-kill order must be executed immediately and completely, or the entire order is canceled. An immediate-or-cancel order must be executed immediately, and the remainder of the shares left unsold or not purchased is canceled. A market not held order is a type of market order that allows the investor to give discretion regarding the price and/or time at which a trade is executed. An all-or-none order must be completed in full, but not immediately. Reference: 3.1.4.2 in the License Exam Manual.

Ms. Foster is retiring in two years and will need income. Which of the following mutual fund types would most likely be the least desirable for her? A) A special situation fund. B) A balanced fund. C) A growth and income fund. D) A bond fund.

The correct answer was: A special situation fund. Special situation mutual funds are risky and would not usually be considered suitable for a potential retiree. Reference: 2.1.3.1 in the License Exam Manual.

Which of the following market analysts is using the efficient market theory? A) An analyst sells stock when he sees small investors buying. B) An analyst has developed a system for identifying reversals in downward trendlines. C) An analyst picks company names out of a hat. D) Before he invests in a company, an analyst visits its headquarters to see whether management is running the company effectively.

The correct answer was: An analyst picks company names out of a hat. Efficient market theory holds that securities are efficiently priced and therefore, it makes no sense to analyze particular stocks; or rather, picking stocks out of a hat is as effective as technical or fundamental analysis. Reference: 7.4.6.1 in the License Exam Manual.

Which of the following is among the most important reasons to form an S corporation? A) Enjoy the same legal status of a general partner in a partnership. B) Avoid the double taxation of dividends. C) Ability to retain and reinvest earnings in a growing business. D) Ability to enjoy corporate tax rates.

The correct answer was: Avoid the double taxation of dividends. One of the most beneficial features of the S corporation is that the earnings pass through to the shareholders in proportion to their share of ownership and are taxed at the individual level (as opposed to the corporate level). Dividend distributions are not taxed twice as with the regular form of corporate ownership. Reference: 6.1.5.4 in the License Exam Manual.

A category of bonds were created in the late 1980's in an attempt to "bail-out" defaulted commercial loans issued by banks from developing countries. These are commonly known as: A) Greenspan Bonds. B) Resolution Trust Bonds. C) Brady Bonds. D) Series BB Bonds.

The correct answer was: Brady Bonds. Named after U.S. Secretary of the Treasury Nicholas Brady, these bonds were created in 1989 to exchange defaulted commercial bank loans issued in less-developed countries, particularly Latin America. Reference: 1.2.11.3 in the License Exam Manual.

Which of the following debt securities does not have a fixed maturity date? A) Subordinated debenture. B) General obligation bond. C) Treasury STRIPS. D) Collateralized mortgage obligation (CMO).

The correct answer was: Collateralized mortgage obligation (CMO). Collateralized mortgage obligations (CMOs) are mortgage-backed securities which are often paid off ahead of the scheduled maturity so the maturity date remains uncertain. The operative word is "fixed"; as opposed to "scheduled". Reference: 1.2.10.2 in the License Exam Manual.

Mr. Adam Samuels suffers a massive heart attack and dies at the age of 62. As part of his estate, there is an IRA with a current value of $170,000. A review of the IRA documents reveals that Mrs. Eve Samuels, the wife, is the primary beneficiary and their two children have been named as contingent beneficiaries. Eve is 50 years old and does not need the income from the IRA and would like to preserve the IRA for her children to inherit. Which of the following steps would you recommend Mrs. Samuels take? A) Disclaim the IRA and let it pass to the contingent beneficiaries. B) Cash in the IRA because as a spouse of a deceased, she will avoid the 10% tax penalty. C) Execute a rollover into an IRA in her name. D) Execute a rollover into an inherited IRA.

The correct answer was: Execute a rollover into an IRA in her name. This is a highly complicated question and there is room for disagreement. However, if a question similar to this were to appear on your exam, the answer selected is the one that NASAA would mark as the correct one on their test. The key to this question is the word, preserve. By executing a rollover into an IRA in her name, tax deferral of the assets continues and RMDs are not required until after Mrs. Samuels turns 70 ½. Thus, the assets are preserved for at least 20+ years. If she took the distribution, she would not have to pay the penalty tax, but there would be ordinary income tax due and this would not meet her objective of preservation of the IRA. If she disclaimed, the assets would then go to the children, but, they would have to begin taking RMDs based on their life expectancy. Not a bad choice, but the assets are being distributed, not preserved. The benefit of rolling over into an inherited IRA (sometimes called a beneficiary IRA) instead of one in her own name is that she can begin taking distributions right now without the 10% penalty, even though she is only 50. However, the question stated that she did not need the income and, RMDs must begin at the time they would have been required for Mr. Samuels, 12 years earlier than if she chooses to rollover into her own IRA. Reference: 4.1.5.5* in the License Exam Manual.

Buying stocks with high PE ratios normally reflects which of the following investment styles? A) Value. B) Turnaround. C) Special situations. D) Growth.

The correct answer was: Growth. The purchase of stocks with high PE ratios represents a growth investment style. Growth-oriented investors will pay for high PE ratios. Value investment style is associated with the purchase of low PE stocks or stocks trading below their intrinsic value. Reference: 6.4.2.2 in the License Exam Manual.

Last year, an investor had a $5,000 loss after netting all realized capital gains and losses. This year the investor has a $1,000 capital gain. After netting his gains and losses, what will be his tax situation this year? A) He will have a $1,000 gain. B) He will have a $1,000 loss to carry over to the next year. C) There will be no tax consequences. D) He will offset $1,000 ordinary income this year.

The correct answer was: He will offset $1,000 ordinary income this year. Only $3,000 of last year's loss can be deducted against that year's income. Therefore, the losses carried forward from the previous year are the remaining $2,000. These losses are netted against the gain of $1,000 for a net loss of $1,000. That loss can be used to offset $1,000 of ordinary income. There are now no longer any losses to carry forward. Reference: 6.5.3.4 in the License Exam Manual.

Which of the following vehicles make use of the unified estate tax credit? bypass trust. generation skipping trust. living trust. simple trust. A) III and IV. B) II and III. C) I and IV. D) I and II.

The correct answer was: I and II. Both the bypass trust and the generation skipping trust are tools used by estate planners to reduce estate taxes. They do so by passing the amount in the unified credit (currently $5.34 million for 2014) to heirs other than the spouse, usually grandchildren in the case of the GST. Reference: 6.1.2.8 in the License Exam Manual.

Which of the following factors would be considered by an investor who uses fundamental analysis to value a company's stock? I. The company's financial condition, as revealed by its income statement and balance sheet. II. General economic conditions, such as employment levels and changes in interest rates. III. Charts showing past movements in stock prices and trading volumes. A) I and II. B) I, II and III. C) II and III. D) I and III.

The correct answer was: I and II. Fundamental analysis attempts to value stock by examining general economic conditions and the company's financial condition and growth prospects. Technical analysis, on the other hand, tries to identify trends and predict changes in the market. Charts showing past price movements and trading volumes would be used in technical analysis but not in fundamental analysis. Reference: 7.4.2 in the License Exam Manual.

Bail Bonds, Inc., might issue warrants in connection with a bond issue for which of the following reasons? As an inducement to make the bonds more marketable. To lower their interest cost on the issue. To increase the marketability of their common stock. To increase the number of common shares outstanding. A) I, II, III and IV. B) I only. C) I and II. D) I and IV.

The correct answer was: I and II. Warrants permit the purchase of common stock of the issuer at a fixed price. A bond with warrants attached has more value than a straight bond and is more attractive (marketable) to investors. Attaching warrants to a bond issue usually permits the bonds to be issued with a lower interest rate. Reference: 1.1.8.2 in the License Exam Manual.

Which of the following statements regarding ADRs are TRUE? I. They are issued by large domestic commercial banks. II. They are issued by foreign banks. III. They facilitate U.S. trading in foreign securities. IV. They facilitate a foreign investor who wants to trade U.S. securities. A) II and IV. B) II and III. C) I and IV. D) I and III.

The correct answer was: I and III. ADRs are issued by large domestic commercial banks to facilitate U.S. investors who want to trade in foreign securities. Reference: 1.1.5 in the License Exam Manual.

The GEMCO Asset Allocation Fund is in registration. In order for the fund to charge the maximum allowable sales charge on its Class A shares, the fund's prospectus must allow which of the following? I. Rights of accumulation. II. The privilege to exchange shares of this fund with other GEMCO funds at NAV. III. Price breakpoints offering reduced commissions for larger purchases. A) II and III. B) I and III. C) I, II and III. D) I and II.

The correct answer was: I and III. Industry rules prohibit sales charges in excess of 8-½% on mutual fund purchases. However, in order to do so, shareholders must be given rights of accumulation and breakpoints must be available for larger purchases (generally starting at $10,000 or $15,000). There is no requirement to offer the exchange privilege. Reference: 2.1.2.4 in the License Exam Manual.

A client profile is not complete without a family income statement. A typical one would include: I. dividends. II. credit card debt. III. autos. IV. mortgage interest. A) II and III. B) I and II. C) III and IV. D) I and IV.

The correct answer was: I and IV. Income statements reflect the family's income and expenses, not assets and liabilities. Dividends represent money received and mortgage interest is money paid out. Credit card debt is a liability and autos are assets. Reference: 6.2.1 in the License Exam Manual.

Which of the following statements concerning universal life insurance are CORRECT? Universal life has flexible premiums. Universal life is based on the assumption that level annual premiums are to be paid throughout the insured's life. The death benefit can fluctuate, but never below the guaranteed minimum face amount. Cash values can fluctuate and may even fall to zero. A) I and IV. B) I and II. C) III and IV. D) II and III.

The correct answer was: I and IV. Universal life features flexible premiums that add to the cash value account although there are no guarantees and the cash value can disappear if insufficient premiums are paid. There is no guaranteed minimum death benefit as there is with fixed (scheduled) premium variable life. The assumption that level annual premiums are to be paid throughout the insured's life is associated only with ordinary whole life and scheduled premium variable life policies. Reference: 2.2.5.3 in the License Exam Manual.

If the U.S. dollar has fallen relative to foreign currencies, which of the following statements are TRUE? I. U.S. exports are likely to rise. II. U.S. exports are likely to fall. III. Foreign currencies buy fewer U.S. dollars. IV. Foreign currencies buy more U.S. dollars. A) II and IV. B) I and III. C) I and IV. D) II and III.

The correct answer was: I and IV. When the U.S. dollar loses value compared to a foreign currency, the same amount of the foreign currency now buys more dollars. As a result, U.S. goods are cheaper in terms of that foreign currency, which means that the foreign country and its residents tend to buy more U.S. products and U.S. exports rise. Reference: 7.3.4 in the License Exam Manual.

Minimum distributions from a traditional IRA must begin: A) a year after the owner turns 59-½. B) by April 1, the year after the owner turns 70-½. C) once the owner retires. D) as soon as the owner turns 70-½.

The correct answer was: by April 1, the year after the owner turns 70-½. Minimum distributions from a traditional IRA must begin by April 1 of the year after the owner turns 70-½. Reference: 4.1.4 in the License Exam Manual.

Which of the following statements about brokers and dealers are TRUE? A broker acts as an agent in a trade; it brings buyers and sellers together. A dealer acts as a principal in a trade. A securities firm may act as both a broker and as a dealer. A) II and III. B) I and II. C) I and III. D) I, II and III.

The correct answer was: I, II and III. All three statements are true. A broker buys and sells securities for another person and not for its own account. This means it acts as an agent. A dealer, however, buys and sells securities for its own account; this means it acts as a principal. A dealer maintains an inventory of securities and buys and sells them directly to other firms and individuals. Many firms, called broker/dealers, act both as brokers and as dealers but never both in the same transaction. Reference: 3.1.2 in the License Exam Manual.

Which of the following is (are) TRUE regarding qualified pension plans? I. They must not discriminate. II. They must have a vesting schedule. III. They must be in writing. IV. Every month the employer must update the current status of all accounts. A) I and III. B) III only. C) I, II and III. D) I, II, III and IV.

The correct answer was: I, II and III. An employer must update the status of all employees at least annually, not monthly. Reference: 4.4.1 in the License Exam Manual.

An investment policy statement would likely include: I. expected returns of the recommended strategy and the expected range of these returns. II. recommended allocations among differing asset classes. III. strategies used for selecting specific stocks in the equity portion of the portfolio. IV. disclosure of the fees that the adviser will earn for implementing the recommended strategy. A) I only. B) I, II and III. C) I and II. D) II, III and IV.

The correct answer was: I, II and III. An investment policy statement prepared for clients delineates the allocation percentages for each asset class and the expected returns from each class, and outlines strategies that may be used for timing the market and choosing specific investments within each class, but fees the adviser may earn are not included in the policy statement; they are disclosed separately. Reference: 6.1.1 in the License Exam Manual.

Which items would change if a company declared a cash dividend? I. Working capital. II. Total assets. III. Total liabilities. IV. Shareholders' equity. A) I, II, III and IV. B) I and IV. C) I, III and IV. D) I only.

The correct answer was: I, III and IV. The key word is "declared". Liabilities increase when a dividend is declared, and total assets decrease when it is paid. A declared dividend (but not yet paid) would increase current liabilities (and would therefore decrease working capital). It would increase total liabilities (this is a pending obligation) and reduce shareholders' equity because retained earnings would be decreased by the dividend. Total assets would not be affected until the dividend is actually paid. Reference: 7.4.3.6 in the License Exam Manual.

Becky Biggins has an executive position with a large corporation that covers her under its defined benefit pension plan. This year, Becky's salary will top $135,000. Becky has no dependents and wishes to maximize funds that she can accumulate for her retirement. Becky could: I. not open a traditional IRA. II. open a traditional IRA but would not be able to deduct her contributions. III. open a Roth IRA. IV. not open a Roth IRA. A) II and IV. B) I and IV. C) I and III. D) II and III.

The correct answer was: II and IV. Anyone with earned income can open a traditional IRA. Deductibility of contributions may be disallowed if the individual is covered under a corporate plan and has earnings in excess of a certain level. Becky's salary exceeds the maximum permitted for a single person so her contributions would be made with after-tax dollars. In the case of a Roth, nothing is deductible, so it doesn't matter if you are covered at work. However, Becky's salary is far in excess of the maximum permitted for a single person to contribute to a Roth IRA. Reference: 4.1.2.2 in the License Exam Manual.

Which of the following statements regarding nonqualified (nonstatutory) stock options (NSOs) are CORRECT? I. There is one specified manner in which NSO stock option plans may be designed. II. There are no nondiscrimination rules to apply when establishing one of these plans. III. This is one type of stock option in which participating employees can actually suffer a loss. IV. When the employee purchases shares, the employer must withhold and pay federal income taxes with respect to the "bargain element" of the shares purchased. A) II and IV. B) I and II. C) III and IV. D) I, II and III.

The correct answer was: II and IV. One of the benefits of NSOs is that the employer may discriminate when it comes to offering the options. One of the disadvantages is that the "profit" as it were when the shares are purchased is considered salary income with the attendant payroll and income taxes. Reference: 1.1.9.1 in the License Exam Manual.

If the value of the U.S. dollar increases with respect to other currencies, it would make I. U.S. exports, like heavy equipment, more competitive in foreign markets. II. U.S. exports, like heavy equipment, less competitive in foreign markets. III. foreign imports into the United States, such as cars, less competitive in U.S. markets. IV. foreign imports into the United States, such as cars, more competitive in U.S. markets. A) II and III. B) II and IV. C) I and III. D) I and IV.

The correct answer was: II and IV. When the value of the U.S. dollar rises in relation to other currencies, exported products become more expensive in those foreign markets and are less competitive. On the other hand, imported products become less expensive in U.S. markets and are more competitive. Reference: 7.3.4 in the License Exam Manual.

Which of the following securities is the least suitable recommendation for a qualified money-purchase plan account? A) Large-cap common stock. B) Investment grade municipal bond. C) Treasury bill. D) A rated corporate bond.

The correct answer was: Investment grade municipal bond. Investment-grade municipal bonds bear low yields that are tax exempt. Since money in a qualified retirement plan account grows tax deferred regardless of the investment instrument, tax-exempt securities are unsuitable. In addition, when the money is withdrawn it is taxable as ordinary income so, in effect, tax-free income has been converted into taxable income. Reference: 4.1.5.4.1 in the License Exam Manual.

Client inherits 1,000 shares of ABC mutual fund when NAV is 9.50 and POP is $10.00 and elects to receive all distributions in cash. Two years later, sells all when NAV is 14.25 and POP is 15.00. What are the tax consequences of this sale? A) Long-term capital gain of $4,750. B) Long-term capital gain of $5,000. C) Long-term capital gain of $4,250. D) Long-term capital gain of $5,500.

The correct answer was: Long-term capital gain of $4,750. Upon death, the beneficiary inherits mutual funds at their NAV ($9.50). Sale (redemption) takes place at the NAV ($14.25) for a profit of $4.75 per share (times 1,000 shares). Reference: 6.5.4.1.2 in the License Exam Manual.

Which of the following investments is the most liquid? A) Long-term municipal bond fund. B) Municipal revenue bond issued by a township. C) Oil drilling limited partnership interest. D) Common stock in a small oil drilling corporation that is quoted on the Pink Sheets.

The correct answer was: Long-term municipal bond fund. The long-term municipal bond fund is the most liquid because it is a mutual fund (a redeemable security), and the investor is assured of a buyer that will exchange money for the redeemed fund shares within seven days of the redemption request. Municipal bonds of a township, especially those that are from extremely small issuers, may have thin markets where sellers have difficulty finding willing buyers. There is not an active secondary market for reselling interests in limited partnerships. Stock of a small corporation that trades in the over-the-counter market may also have a thin market. Reference: 2.1.5.1 in the License Exam Manual.

Frank and Joe Hardy have formed Hardy Investigative Services, (HIS), with each owning 50% of the stock in the company. HIS is organized as an S corporation. Unless receiving an extension, the Form 1120S is due A) April 15 B) January 15 C) 90 days after the end of their fiscal year D) March 15

The correct answer was: March 15 All business returns, other than sole proprietorships and single member LLC's, are due 2½ months after the end of the year (always a calendar year for businesses other than a C corporation). Reference: 6.5.1.5 in the License Exam Manual.

Mr. Hawkins sets up a trust for the benefit of his adult daughter, Madeleine. His wife may draw from it only if she needs to. Income on the trust will be taxed to: A) Mr. Hawkins as the donor. B) the trust as it is a separate legal entity. C) Madeleine as the primary beneficiary. D) Mrs. Hawkins as the contingent beneficiary.

The correct answer was: Mr. Hawkins as the donor. As Mrs. Hawkins has an economic interest, this is a grantor trust. Thus, all income will be taxed to the donor, Mr. Hawkins. Reference: 6.1.2.4 in the License Exam Manual.

Which of the following is NOT an asset class that is used in determining the allocation of a portfolio of investments? A) Fixed-income. B) Real estate. C) Equities. D) Options.

The correct answer was: Options. Options are derivative securities. They derive their value from an underlying asset such as a common stock, currency, or bond; they are not a separate class of assets. Real estate is a separate asset class, so a client might, for example, allocate 15% of his assets to real estate. Fixed-income securities and equities are also separate classes of assets. Reference: 6.4.1 in the License Exam Manual.

Your client's wife retired as a 3rd grade teacher in 2009 where she was covered under the school system's 403(b) plan. If she resumes employment with a corporate employer, and that new employer has a 401(k) plan, is she entitled to defer RMDs from the 403(b) plan past the regular age 70 ½ date? A) RMDs may never be deferred for those who were participants in a 403(b) plan. B) RMDs may be deferred only from the plan sponsored by the current employer. C) RMDs may be deferred only if the current employer offered a 403(b) plan. D) RMDs may be deferred as long as the individual is employed on a full-time basis.

The correct answer was: RMDs may be deferred only from the plan sponsored by the current employer. The rule is that you can only defer RMDs in the plan of the employer where you are currently employed. For example, assume you retire from Company A and get a job with Company B, and both companies have a 401(k) plan. You can only defer RMDs from the Company B plan, because that is your current employer; you will have to take RMDs from the Company A plan. The same would be true if it were two different school systems with 403(b) plans. Reference: 4.1.4 in the License Exam Manual.

One method of diversifying an investment portfolio is by spreading it out among different investment classes. Which of the following would be considered an asset class? A) Automobiles B) A small-cap index fund based on the Russell 2000 C) Gold jewelry D) Real estate

The correct answer was: Real estate Of the choices, only real estate would be considered an asset class. Gold jewelry is a specific type of the tangible asset class and the index fund is a specific type of the stock (equity) asset class. If the automobiles were collectibles, they would be part of the tangible asset class. Reference: 6.4.1 in the License Exam Manual.

Which of the following is a characteristic of the passive investment style? A) Income rather than growth objective. B) Tactical management. C) Rebalancing. D) High portfolio turnover.

The correct answer was: Rebalancing. Because the passive (strategic) style of investing does not involve frequent trading (as does the tactical or active style), periodically the portfolio will be rebalanced to insure that the asset mix is at the desired level. This style may be used for either income or growth objectives. Reference: 6.4.1.1 in the License Exam Manual.

Which of the following is a characteristic of the passive investment style? A) Tactical management. B) High portfolio turnover. C) Income rather than growth objective. D) Rebalancing.

The correct answer was: Rebalancing. Because the passive (strategic) style of investing does not involve frequent trading (as does the tactical or active style), periodically the portfolio will be rebalanced to insure that the asset mix is at the desired level. This style may be used for either income or growth objectives. Reference: 6.4.1.1 in the License Exam Manual.

Beta is most frequently measured against which of the following? A) Dow Jones Industrial Average. B) S&P 500. C) S&P 100. D) Nasdaq Composite Index.

The correct answer was: S&P 500. The index most commonly used to analyze the beta of an individual security or portfolio is the S&P 500. Companies (portfolios) with a beta of 1.0 would be expected to move in tandem with the market, while companies with a beta greater than 1.0 would be more volatile than the market as a whole. Companies with a beta less than 1.0 should show a rate of change less than that of the market as a whole. Reference: 7.4.4.9 in the License Exam Manual.

Writing an option provides all of the following EXCEPT: A) limited downside protection when long the underlying asset. B) hedging. C) maximum protection against loss. D) income.

The correct answer was: maximum protection against loss. Writing an option provides only limited protection for a long or short position. That protection is limited to the amount of the premium received. Reference: 2.4.4.2 in the License Exam Manual.

A client approaches an agent about investing in a risky security and insists on doing so even when told by the agent that the security is not suitable for that client. What should the agent do? A) The agent should explain the risks of investing and, if the client still insists, place the order and mark it unsolicited B) The agent should refuse the transaction because it is unsuitable for the client C) The agent should contact a supervisor and accept the order only with the supervisor's approval D) The agent should suggest that the client engage the services of another broker/dealer

The correct answer was: The agent should explain the risks of investing and, if the client still insists, place the order and mark it unsolicited When a client wishes to enter an order for a security that, at least in the eyes of the agent handling the account, is unsuitable, an attempt should be made to educate the client as to the risks involved. However, if the customer still insists, the order may be placed but should be marked unsolicited. Reference: 6.1.1 in the License Exam Manual.

When a trustee is managing the trust assets, which of the following is the most important consideration? A) Reasonable income. B) Preservation of capital. C) Minimizing expenses. D) The purposes, terms, distribution requirements, and other circumstances of the trust.

The correct answer was: The purposes, terms, distribution requirements, and other circumstances of the trust. Although there certainly is a case for preservation of capital, reasonable income, and minimizing expenses, the most important consideration is to follow the design and objectives of the trust. Reference: 6.1.4 in the License Exam Manual.

Which of the following statements is TRUE concerning variable life separate account valuation? A) Unit values are computed weekly and cash values are computed monthly. B) Unit values are computed daily and cash values are computed monthly. C) Unit values are computed monthly and cash values are computed daily. D) Unit values are computed monthly and cash values are computed weekly.

The correct answer was: Unit values are computed daily and cash values are computed monthly. Unit values are computed each day. Policy cash values are a monthly computation. Reference: 2.2.5.4.6 in the License Exam Manual.

Under which of the following circumstances would a premature distribution from a traditional IRA be exempt from the premature distribution penalty? A) When the distribution is paid in equal annual amounts over the owner's life. B) A distribution taken at age 55 if the owner is retired. C) A distribution taken to satisfy the terms of a court-ordered property settlement. D) When the account is fully funded with nondeductible contributions.

The correct answer was: When the distribution is paid in equal annual amounts over the owner's life. A distribution from an IRA taken in equal annual amounts over the owner's life is not subject to the 10% premature distribution penalty even if started before age 59½. This is one of the exceptions that apply to IRAs. The exception for qualified domestic relations orders (QDROs) and for retirement at age 55 apply to employer-sponsored plans but not to IRAs. Reference: 4.5.1.3 in the License Exam Manual.

When looking at an individual's income statement, which of the following would be included: A) jewelry. B) stocks and bonds. C) child support. D) alimony.

The correct answer was: alimony. An individual receiving alimony as part of a divorce decree must report that as income for tax purposes. The ex-spouse paying the alimony treats that as a deduction from income. There are two problems here. First, we're not told which side this individual is on - paying or receiving the alimony. Second, if we are doing a profile for a client, the receipt of child support is considered income in terms of figuring any discretionary income, even though it is not taxed. But, NASAA doesn't always think of these things so we have to give them the answer the way they want it. Reference: 6.5.2.2 in the License Exam Manual.

You are an investment adviser representative with the firm of Total Wealth Management Associates, an investment adviser registered in four states. One of your clients approaches you seeking advice on saving for college expenses for his 13-year-old child. In determining the proper course of action, this is an example of a client giving you A) an investment constraint B) a recommendation C) a capital need D) an investment policy statement

The correct answer was: an investment constraint Once investment objectives have been quantified (in this case, saving for college), the next step is to analyze investment constraints. These are limitations on the ability to make use of specific investments. Some of the most common investment constraints are: time horizon (the one in this case; with about five years until entering college, we must recognized this as a relatively short time horizon), liquidity, tax concerns, and unique circumstances, such as health needs, ethical, or social issues. Reference: 6.1.1 in the License Exam Manual.

An investor using yield curve analysis would expect to view: A) bonds of similar quality over varying maturities. B) bonds of varying quality of similar maturities. C) bonds of a single issuer over varying maturities. D) bonds of varying quality over a number of maturities.

The correct answer was: bonds of a single issuer over varying maturities. The most common yield curves are drawn using U.S. Treasury securities. The curve is plotted using maturities ranging from the short-term T-bills to the long bonds. There are other curves drawn with bonds from other sectors, such as corporate bonds, to show the "yield spread", but that is going beyond the scope of this question. Reference: 7.2.1.6 in the License Exam Manual.

A customer with an aggressive growth investment objective and short-term (6- to 12-month) time horizon wants to invest $50,000 in a mutual fund. He has a substantial net worth, but none of it is invested in mutual funds. You inform him that mutual fund investments are intended to be long-term investments, but he expresses his intention to make the short-term investment anyway. If the XYZ fund family (one you have dealt with in the past) offers an aggressive growth fund that has a respectable track record, your recommendation should be to: A) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and 0.75% 12b-1 fee. B) buy the XYZ Aggressive Growth Class A shares with a 4% load and 0.25% 12b-1 fee. C) decline the transaction because short-term trading of funds is not allowed. D) buy the XYZ Aggressive Growth Class B shares with a declining CDSC and 0.75% 12b-1 fee.

The correct answer was: buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and 0.75% 12b-1 fee. If the client insists on making this type of investment, then the Class C shares are most appropriate for this customer's objectives; the sales load would be lower than that of either Class A or Class B shares. But, you ask, we don't know what the CDSC is for the Class B shares - it isn't given. It doesn't have to be because the CDSC for redemptions in the first year would never be lower than the Class A front-end load (4% in this question and certainly higher than the 1% on the Class C shares). Reference: 2.1.2.2 in the License Exam Manual.

A client asks her investment adviser representative what footnotes to the financial statements are for. The best reply would be that footnotes: A) are used to explain how the various ratios are computed because companies recognize that many shareholders do not have a financial background. B) contain information that doesn't have a place in the main body of the financial statements. C) contain a detailed history of the enterprise and its products or services. D) serve as a bibliography indicating where additional information may be obtained.

The correct answer was: contain information that doesn't have a place in the main body of the financial statements. There are many important financial details that cannot be properly placed in either the balance sheet or the income statement. Examples of these are; method of accounting used, collateral securing debt, pension liabilities and many others. Footnotes are an integral part of the financial statements and are usually found with this notation, "The accompanying footnotes to the financial statements are an integral part of these statements." Reference: 7.4.3.7 in the License Exam Manual.

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

The correct answer was: convertible bonds it has issued. The working capital of a corporation is equal to its current assets minus its current liabilities (a current liability is payable within 12 months). Because all bonds, convertible or not, issued by the corporation are long-term liabilities, they are not included in the working capital computation. Accounts receivable, marketable securities, and cash are short-term assets included in the calculation of working capital. Reference: 7.4.3.5 in the License Exam Manual.

The Securities Exchange Act of 1934 defines a market maker is a(n): A) dealer who, with respect to a security, holds himself out as being willing to buy and sell that security for his own account on a regular or continuous basis. B) person who buys and sells securities for her own account or for the accounts of others. C) agent for the issuer. D) agent whose clients are institutions.

The correct answer was: dealer who, with respect to a security, holds himself out as being willing to buy and sell that security for his own account on a regular or continuous basis. A market maker is a dealer who holds himself out as being willing to buy or sell a security at a quoted price on a regular and continuous basis. Reference: 3.1.1.2 in the License Exam Manual.

All of the following statements regarding 529 plans are true EXCEPT: A) contributions to a 529 plan may be subject to gift taxation. B) eligibility is affected by the income level of the contributor. C) states impose very high overall contribution limits. D) the assets in the account are controlled by the account owner, not the child.

The correct answer was: eligibility is affected by the income level of the contributor. Unlike Coverdell ESAs, the income level of the contributor will not affect eligibility to contribute to a Section 529 plan. Reference: 4.7.2 in the License Exam Manual.

A corporation ends its accounting year on September 30th. It would be correct to state that they use a (an): A) fiscal year. B) alternative year. C) nine-month year. D) accounting year.

The correct answer was: fiscal year. Fiscal-year accounting is the term used to describe whenever an entity ends its accounting year on a date other than December 31st. Reference: 7.4.3.8.3 in the License Exam Manual.

Management style is a phrase that is often used to describe the methodology employed by a particular portfolio manager. If the manager under discussion used earnings momentum to select stocks, it could be said that the style being used was A) value B) asset allocation C) growth D) passive

The correct answer was: growth Growth managers focus on earnings momentum as a way to determine the appropriate positions for their portfolios. Reference: 6.4.2.1 in the License Exam Manual.

The execution of a market order to sell occurs at the: A) lowest bid. B) lowest offer. C) highest offer. D) highest bid.

The correct answer was: highest bid. A market order to sell is filled at the highest bid while a market order to buy is filled at the lowest offer. Reference: 3.1.4.3 in the License Exam Manual.

In the secondary market, Treasury bond prices are most influenced by the: A) primary dealers. B) inflation rate. C) Treasury department. D) prime rate.

The correct answer was: inflation rate. In the secondary market, the rate of inflation has the greatest influence on all bond prices. Reference: 1.2.5.2 in the License Exam Manual.

An employee is offered a non-qualified 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 $20 per share as if it were salary. B) has a capital gain of $10 per share. C) is taxed on $10 per share as if it were salary. D) is taxed on $30 per share as if it were salary.

The correct answer was: is taxed on $10 per share as if it were salary. In the case of NSOs, the difference between the exercise (or strike) price and the current market value is considered salary to the employee. Reference: 1.1.9.1 in the License Exam Manual.

An investor purchases 500 shares of stock on January 10th at $50 per share and sells it on August 4th of the following year for $40 per share. As a result, the investor has realized a: A) long-term capital gain. B) short-term capital loss. C) long-term capital loss. D) short-term capital gain.

The correct answer was: long-term capital loss. Buying stock at $50 per share and selling it for $40 per share creates a capital loss of $10 per share. In this case, because the holding period was more than a year and one half, the loss is long term. Reference: 6.5.3 in the License Exam Manual.

Mutual funds must do all of the following EXCEPT: A) maintain fully diversified portfolios. B) redeem their shares on request. C) publish their management fees. D) issue shares with voting privileges.

The correct answer was: maintain fully diversified portfolios. Mutual funds may choose to maintain diversified portfolios or select investments that concentrate in one group of companies, depending on their stated objectives. However, mutual funds must issue shares with voting privileges, redeem their shares on request, and publish their management fees. Reference: 2.1.1.3.3 in the License Exam Manual.

A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are: A) partially a tax-free return of capital and partially taxable. B) 100% tax deferred. C) 100% taxable. D) 100% tax free.

The correct answer was: partially a tax-free return of capital and partially taxable. The investor has already paid tax on the contributions but the earnings have grown tax-deferred. When the annuitization option is selected, each payment represents both capital and earnings. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income. Reference: 2.2.4.3 in the License Exam Manual.

The management style that is most similar to buy and hold is: A) strategic management. B) active management. C) contrarian. D) tactical management.

The correct answer was: strategic management. A strategic management style, sometimes referred to as passive, is less apt to have a high degree of portfolio turnover than active or tactical management. Contrarian style generally involves taking positions that are currently out of favor in the market place, but would incur somewhat frequent activity. Reference: 6.4.2.4 in the License Exam Manual.

The holding period return (HPR) on a share of stock is equal to: A) the dividend yield plus the risk premium. B) the current yield plus the dividend yield. C) the capital appreciation minus the inflation rate over the period. D) the capital appreciation plus the dividend yield over the period.

The correct answer was: the capital appreciation plus the dividend yield over the period. To compute holding period return, you calculate the total return for that holding period. Total return combines any dividend income plus appreciation (or minus depreciation). Reference: 7.5.2.3 in the License Exam Manual.

A new convertible bond has a provision that it cannot be called for five years after the issue date. This call protection is most valuable to a recent purchaser of the bond if: A) interest rates are rising. B) the market price of the underlying common stock is increasing. C) interest rates are falling. D) interest rates are stable.

The correct answer was: the market price of the underlying common stock is increasing. Convertible bonds are more sensitive to the price of the underlying common stock than they are to interest rates. Call protection would enable this investor to hold onto the bond while the stock rises in value rather than having the bond called away. Reference: 1.2.8.1.3 in the License Exam Manual.

All of the following are tools that may be employed by the Federal Reserve in an effort to control the economy EXCEPT: A) open market operations buying and selling Treasury securities. B) the discount rate. C) the prime rate. D) the reserve requirements.

The correct answer was: the prime rate. The prime rate is set by the banks. All of the others are under the control of the FED. Reference: 7.2.1.3 in the License Exam Manual.

ADR owners have all the following rights EXCEPT: A) the right to sell the ADR in the foreign market. B) the right to receive dividends in U.S. dollars. C) the right to sell in the secondary market. D) the right to receive the underlying foreign security.

The correct answer was: the right to sell the ADR in the foreign market. The purpose of the ADR is to facilitate trading in U.S. markets. The ADR can only be traded here. If the owner exercises the right to obtain the actual foreign security, it may be sold overseas. Reference: 1.1.5 in the License Exam Manual.

All of the following are true of negotiable, jumbo certificates of deposit EXCEPT: A) they are secured obligations of the issuing bank. B) they are readily marketable. C) they are usually issued in denominations of $100,000 to $1 million. D) they usually have maturities of 1 year or less.

The correct answer was: they are secured obligations of the issuing bank. Negotiable CDs are general obligations of the issuing bank; they are not secured by any specific asset. They do qualify for FDIC insurance (up to $250,000), but that is not the same as stating that the bank has pledged specific assets as collateral for the loan. Reference: 1.2.9.2 in the License Exam Manual.

A fiduciary, acting in accordance with the UPIA, would choose investments on the basis of all of the following EXCEPT: A) other resources of the beneficiaries. B) needs for liquidity, regularity of income, and preservation or appreciation of capital. C) general economic conditions. D) transaction costs.

The correct answer was: transaction costs. Under the Uniform Prudent Investor Act, transaction costs are not a primary factor in a trustee's determination of which investments to choose for the trust. They may be a factor in determining where to execute the transactions. The key for the prudent investor is to use skill and caution examining all of the factors involved to meet the stated objectives. Reference: 5.2.6.2 in the License Exam Manual.

According to the Efficient Market Hypothesis, one using fundamental analysis would most likely be of the opinion that he could do better than one following A) weak-form market efficiency B) semi-strong form market efficiency C) strong-form market efficiency D) charts

The correct answer was: weak-form market efficiency In weak-form market efficiency, current stock prices fully reflect available security market information such as volume and price movements. Investors cannot achieve excess returns using tech analysis, but may benefit from using fundamental analysis which looks deeper into the company's potential by examining its financial statements. Reference: 7.4.6.1.2 in the License Exam Manual.