Series 65 Simulated Exam

One way in which incentive stock options (ISOs) differ from nonqualified stock options (NQSOs) is that

the bargain element of the ISO is an AMT preference item.

One respect in which an investment adviser differs from a broker-dealer is that of fiduciary responsibility to the client. Therefore, the investment adviser will have greater concerns about various non-financial needs and attitudes of the client when making recommendations. Included in those concerns would be all of these except

the client's retirement plan vested balance.

All of the following actions will increase the deficit in the U.S. balance of payments except

the purchase by foreigners of U.S. securities.

A risk-averse investor, who had only invested funds in bank certificates of deposits, was informed by his investment adviser representative that higher returns with safety could be achieved by investing in U.S. Treasury notes with a 10-year maturity. The adviser representative assured the client that investment in federal government-backed securities is riskless. In this situation, the representative acted

unethically because the agent failed to disclose that the customer retains interest rate risk.

An agent opening a wrap account for a wealthy client is required to disclose that

wrap fees may result in higher costs than separate charges for advice, management, and transactions.

An investor purchases a Treasury note and the confirmation shows a price of $102.25. Rounded to the nearest cent, the investor's cost, excluding commissions, is

$1,027.81. Treasury notes are quoted in 32nds, where each 32nd equals $0.3125. The 102 in the quote equals $1,020 and the 25/32 is an additional $7.81, bringing the total to $1,027.81.

An investor begins contributing $600 on the third day of each month to a purchase plan for the KAPCO Total Return Fund. For the first six months, the per share prices were: $10 $12 $15 $20 $12 $8 What is this investor's breakeven point?

$12.50 per share. Here's the math: Month 1- $600 divided by $10 = 60 shares Month 2 - $600 divided by $12 = 50 shares Month 3 - $600 divided by $15 = 40 shares Month 4 - $600 divided by $20 = 30 shares Month 5 - $600 divided by $12 = 50 shares Month 6 - $600 divided by $8 = 75 shares The total expenditure was $3,600 (6 months××$600) and the total number of shares purchased was 305. That makes the average cost per share $11.80 ($3,600 divided by 305). With the investor's average cost per share being $11.80, a sale of the shares at that price will cause the investor to break even.

Denise is an expert in retirement planning working with a client to estimate the client's inflation-adjusted retirement funding. If in today's terms, the annual retirement income needed by the client is $15,000. What would be the approximate amount required after three years, given an inflation rate of 4%?

$16,872. his is simply a compound interest calculation: $15,000 × 1.043= $16,872.

A farmer entered into a forward contract to sell his produce at $2.25 per bushel. At the expiration date of the contract, the price was $2.00 per bushel. The farmer would receive

$2.25. The reason the farmer entered into this contract was to hedge against a drop in price. Because the strike price was higher than the market price at expiration, the farmer made a good deal, while the buyer of the contract lost.

The DERP Corporation has an outstanding convertible bond issue that is convertible into eight shares of stock. If the current market price of the bond is 80, the parity price of the stock is

$80 per share. Parity means equal. With a conversion ratio of eight shares per bond, the investor can convert the bond into eight shares. If the bond is currently selling for $800, then, to be of equal value (parity), the eight shares must be selling at $100 each.

An investor purchased stock for $50 per share at the beginning of the year. In December, the investor liquidated the position for $55 per share while also receiving dividends of $2 per share during the year. Assuming an inflation rate of 3%, the investor's real rate of return is closest to:

11%. The investor receives a total of $7 in return on this investment: $5 in capital gains and $2 in dividend income. The return on this $50 investment is 14%, and when adjusted for 3% inflation, the investment's real rate of return is 11%.

According to the Investment Company Act of 1940, all of the following statements are true except

12b-1 distribution charges must be approved semiannually by a majority vote of the outstanding shares and by the board of directors.

A corporate bond with a 6% coupon is purchased for your customer's portfolio. If current bonds of the same quality and maturity are yielding 7.25% and the net present value (NPV) of the bond is zero, the bond's internal rate of return (IRR) is

7.25%. When a bond's NPV is zero, it means that it is priced to provide a yield to maturity equal to the current market interest rate.

A letter of intent for a mutual fund purchase may be backdated to include previous investments in the same fund during the past

90 calendar days.

Which of the following is an example of business risk?

A company's earnings decline because of a change in technology.

ABC and MNO both have the same market price and shares outstanding for their common stock. If ABC's P/E ratio is higher, that would indicate that

ABC sales are lower than MNO's. If ABC's P/E ratio is higher than MNO's, then its earnings (defined as net income ÷ shares outstanding) is lower than MNO's.

Which of the following activities would not be considered a prohibited practice under the NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents?

An agent shares in the profits and losses in a customer's account without making a financial contribution to the account.

Which of the following statements regarding derivative securities is not true?

An owner of a put has the obligation to purchase securities at a designated price (the strike price) before a specified date (the expiration date).

Which of the following is not a characteristic of the active management approach to investing?

Belief in random walk theory and efficient markets. Proponents of the active management approach do not believe that markets are completely efficient or random.

A company has two outstanding bond issues, both with a coupon rate of 8%. Bond A will mature in 2 years, while Bond B will mature in 15 years. If market interest rates were to increase to 10%, which of the following statements is correct?

Bond B will be selling at a greater discount than Bond A. An increase in interest rates in the marketplace will cause the price of a debt security to fall.

A broker-dealer is registered in States A and B. An agent of theirs is registered in State A, and one of the agent's clients moves from State A to State C. If the agent wishes to continue to do business with this client, which of the following statements is correct?

Both the broker-dealer and the agent must register in State C. As long as a broker-dealer has at least one retail client in a state, registration is required. Furthermore, an agent cannot do business with a client who has become a resident of a state unless she is registered as an agent of a registered broker-dealer in that state.

Which of the following takes place on the New York Stock Exchange?

Buying and selling stocks on the primary market

Which of the following mutual fund share classes generally has a 1% CDSC that is eliminated once the shares have been held more than one year?

Class C. It is the Class C shares that have no front-end load, but they do have a 1% CDSC for a period of one year.

Which of the following business entities has an income tax filing due date (disregarding possible extensions) of March 15?

For partnership returns (including LLCs with more than 1 member) and S corporation returns, the due date is March 15. One effect of this is that LLCs, partnerships, and S corporations all have the same filing deadline. For C corporations, the due date is the 15th day of the 4th month following the close of the corporation's year; this date is April 15 for a calendar-year filer.

If a customer assumes the risk involved with her variable annuity, what does this mean? I. She is not assured of the return of her invested principal. II. The underlying portfolio of the selected subaccount is primarily common stocks, which have no guaranteed return. III. As an investor, she can be held liable for the debts incurred by the insurance company.

I and II

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

I and II

Which of the following securities are the most interest rate sensitive? I. Utility stocks II. Growth stocks III. Preferred stocks IV. Common stocks

I and III

Which of the following situations would require registration as an investment adviser? I. A broker-dealer provided investment research services to a customer and charged a fee for the services. II. An agent of a broker-dealer recommends the purchase of ABC securities to a customer, who then purchases 100 shares, and the agent earns a commission. III. A broker-dealer has its agents prepare complete financial plans for customers for a nominal fee. The plans recommend specific securities transactions, and when the customers place orders, the agents earn commissions on those securities transactions. IV. A broker-dealer charges its customers for collecting dividends and maintaining their accounts in addition to commission charges for transactions executed.

I and III

Which of the following describe unsystematic risk? I. The risk that an individual stock will not perform well II. The same as market risk III. Can be diversified to lower risk IV. Cannot be diversified to lower risk

I and III. Unsystematic risk is company risk, the risk that an individual investment will perform poorly. Systematic risk is market risk, the risk that the market will perform poorly, dragging one's portfolio along with it. Diversification will remove most unsystematic risk. The more stocks owned, the lower the risk that a poor performer will jeopardize the overall value of the portfolio.

Rank the following securities from the same issuer from most suitable to least suitable for a client whose primary objective is income. I. Cumulative preferred stock II. Convertible preferred stock III. Common stock IV. Warrant

I, II, III, IV

NASAA holds that the most important duty of an investment adviser (IA) is the disclosure of all information relating to the relationship between an adviser and a client. Because of this, when performing an examination of the IA, the Administrator not only will look for disclosure-related items in the disclosure document but may also check which of these? I. The adviser's advertising II. The adviser's contracts III. The adviser's seminar materials IV. The adviser's websites

I, II, III, and IV

Which of the following investment activities are acceptable for a fiduciary acting under the prudent expert rule? I. Purchasing AAA-rated debentures II. Purchasing a growth mutual fund III. Purchasing new issues of a AAA-rated issuer IV. Writing covered calls on dividend-paying stocks

I, II, III, and IV

Which of the following securities are exempt from registration under the Uniform Securities Act? I. Municipal securities II. Government securities III. Stock or bonds issued by an insurance company authorized to do business in this state

I, II, and III

All of the following statements are true regarding investment advisory contracts under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers.

I. the contract must describe the services the adviser will provide to the client. II. the contract may be for an initial period of more than one year. III. the contract must describe the discretionary powers the client is granting to the adviser.

Due to changes in market rates, a corporation is able to purchase some of its outstanding 20-year bonds at a discount. Which of the following is correct? I. Working capital is increased. II. Working capital is reduced. III. Net worth is increased. IV. Net worth is reduced.

II and III

If a customer purchases shares in a municipal bond fund, which of the following statements are true? I. Dividends are subject to federal income tax II. Dividends are not subject to federal income tax III. Capital gains distributions are subject to federal capital gains tax. IV. Capital gains distributions are not subject to federal capital gains tax.

II and III

In the construction of a qualified retirement plan portfolio, which of the following investment vehicles would be considered generally inappropriate? I. A guaranteed investment contract (GIC) II. A municipal bond fund III. A leveraged real estate limited partnership IV. A corporate bond rated A or higher

II and III

Under the NASAA Model Custody Rule, an investment adviser is considered to have custody of client assets if which of these are true? I. The adviser inadvertently receives a check from a client for a purchase that is made payable to the investment adviser and does not return the check within 24 hours. II. The adviser inadvertently receives a check from a client for a purchase that is made payable to a third party and does not forward the check within 3 business days. III. The adviser inadvertently receives stock certificates from a client and does not forward them within 3 business days. IV. The adviser inadvertently receives stock certificates from a client and does not return them within 3 business days.

II and IV

When is an investment adviser representative (IAR) required to make disclosure to the client? I. The IAR, in preparing a recommendation, uses research provided by a third party with whom the IAR is not affiliated. II. The IAR recommends a specific insurance policy for the client's overall financial plan, where a commission will be received on that sale. III. Transactions recommended to a specific client are inconsistent with those for other clients with objectives that are identical to that particular client. IV. Transactions recommended to the client are inconsistent with those for the IAR's own account.

II and IV

Which of the following are subject to the holding period requirements of Rule 144 of the Securities Exchange Act of 1934? I. Registered securities held by a control person II. Unregistered securities held by a noncontrol person III. Registered securities held by a noncontrol person IV. Unregistered securities held by a control person

II and IV

Your retired 72-year-old client still lives in the home he purchased 35 years ago for $40,000. It is currently valued at $700,000 and there is no mortgage. The client has almost $500,000 in his self-directed IRA rollover account. When determining suitable investments for this client, you would base your recommendations on the fact that I. the client is an accredited investor having a net worth in excess of $1 million II. a home equity loan could more than double the amount of funds available to invest III. as a retiree, any losses suffered cannot be made up from current income IV. the client's time horizon could be as long as 20 years

III and IV

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements regarding investment advisory fees is true? I. Advisory fees may be any amount, provided the client has agreed in writing to the fees and disclosure has been made that the fees may be much higher than those charged by other advisers for the same service. II. Advisory fees are not regulated for sophisticated clients. III. Advisory fees must bear a relationship to the amount of time the adviser devotes to the client's account. IV. Advisory fees may be considered unreasonable if they are not comparable to fees charged by other advisers for the same advisory services.

IV only

Which of the following statements is true regarding the civil liability provisions of the Uniform Securities Act?

If the registration statement contains misrepresentations that were made deliberately, criminal penalties, in addition to civil ones, may be levied.

A client of yours owns some convertible preferred stock. She notices an article in the business section of her local newspaper that reports the company is going to pay a 20% stock dividend on their common stock. How will this affect her?

If there is an antidilution clause, her conversion privilege will permit her to acquire 20% more shares than before the stock dividend.

Which of the following is a risk common to all fixed-income securities?

Interest rate risk

An investor's portfolio that consists of all long-term Treasury bonds is most vulnerable to which of the following types of risk?

Interest rate risk. The client is most exposed to interest rate risk because a rise in interest rates would cause a decline in the value of the long-term bonds.

An investment adviser (IA) is a member of a country club and provides substantial fee reductions to those members who become clients. The adviser justifies this because these club members are known for great referrals. The IA charges regular clients a fee that is larger for the same services because they are not members of the country club. Is this permissible?

It is permissible as long as proper disclosure is made in the adviser's brochure.

What is the purpose of the Securities Exchange Act of 1934?

It regulates the persons involved in the secondary market.

For which of the following employer-sponsored qualified plans is it mandatory that annual contributions be made?

Money purchase pension plan

Which of the following is an example of a regressive tax?

Sales tax. Regressive taxes are those where the rate remains the same, regardless of the cost of the item subject to the tax.

Which of the following is not affected by the issuance of a bond?

Shareholders' equity. When bonds are issued, cash is received (thus increasing current assets) and long-term debt increases (increasing total liabilities)

A business organized as which of the following pays federal income tax on its income?

Sole proprietorship

Pontourny Advisory and Investment Services (PAIS) is a federal covered investment adviser. Its principal office is in State X. PAIS also maintains branch offices in States Y and Z. Brenda is the manager of the branch office in State Y. Some of the individuals being supervised by Brenda have clients in States X and Y, and others have clients in States Y and Z. Brenda must register as an IAR in

State Y.

Which of the following statements about the Consumer Price Index (CPI) is not true? A) The CPI measures the increase or decrease in the level of consumer prices with respect to the level of wholesale prices upon which consumer prices depend. B) The CPI measures the increase in the general price level of a basket of consumer goods. C) The CPI measures the rate of increase or decrease in a broad range of prices, such as food, housing, medical care, and clothing. D) The CPI is computed monthly.

The CPI measures the increase or decrease in the level of consumer prices with respect to the level of wholesale prices upon which consumer prices depend.

If the U.S. dollar has been appreciating against foreign currencies, all of the following statements are true except

The U.S. exports will cost more to foreigners and become less competitive. The dollar is worth more in terms of foreign currencies and will purchase more foreign goods per dollar.

On the initial public offering, an investor buys a $10,000 Aa-rated, 20-year corporate bond with a 4% coupon rate. One year later, the prevailing market rate is 5% and the bond has had its rating increased to Aa1. Which of the following statements is most likely true with reference to the current market price of this bond?

The bond would be selling at a discount. When interest rates go up, bond prices go down.

Which of the following statements regarding a $1,000 corporate 8.50% bond offered at 110 is true?

The bond's current yield is calculated by dividing its annual interest by its current market price.

Which of the following best describes a global mutual fund?

The portfolio consists of securities of companies domiciled throughout the world, including the United States.

Which of the following is not a characteristic of expansionary monetary policy?

The reserve requirement will be increased.

Which of the following features of exchange-traded funds (ETFs) are also features of mutual funds?

They compute their NAV daily.

A person is excluded from the definition of investment adviser under the Investment Advisers Act of 1940 if the investment advice and reports are restricted to

U.S. government securities.

Which form of the efficient market hypothesis (EMH) suggests that fundamental analysis and insider information may produce above-market returns?

Weak

Under which of the following circumstances would a premature distribution from a traditional IRA be exempt from the premature distribution penalty?

When the distribution is paid in equal annual amounts over the owner's life

An investor purchased 100 shares of a stock at $100 per share on January 1. On the following July 1, the shares were sold for $120 per share. The tax consequences are

a $2,000 short-term gain. One hundred shares sold for $120 per share that were purchased for $100 per share results in a capital gain of $2,000. Because the holding period did not exceed one year, the gain is considered short term for tax purposes.

Walter and Wanda Willingham are new client's. While reviewing their holdings, you notice an account at a local bank titled, "Walter Willingham, in Trust for Walter Willingham, Jr." The account provides that, upon Walter's death, the assets in the account will pass to his son. This is an example of

a Totten trust. A Totten trust is an informal trust that is set up as a bank account.

The Seeking Alpha Growth Fund directs a sizable portion of its portfolio executions to your broker-dealer. If the firm has this fund on its highly recommended list, this would be

a conflict of interest that would have to be disclosed. Recommending shares of a fund when the broker-dealer is aware that a policy exists to direct brokerage to them is an obvious conflict of interest and would have to be disclosed.

An employer has a qualified retirement plan that promises to pay employees a specific percentage of their average salary if they complete 20 years of service. This type of pension plan is

a defined benefit pension plan. A defined benefit pension plan is one that promises to pay employees a certain specified benefit at retirement.

Nite Capital Group is a registered broker-dealer whose primary business model is providing quotations for OTC stocks in which they position trade. Nite would be known as

a market maker. A market maker is a firm that stands ready to buy and sell a particular stock on a regular and continuous basis at a publicly quoted price.

Duration is

a measure of a bond's price sensitivity with respect to a change in interest rates. The longer the duration, the greater the change in a bond's price with respect to interest rate changes.

One of the benefits of adding precious metals to an investor's portfolio is

a potential inflation hedge.

A pooled investment fund buys all the shares of a publicly-traded company. The fund takes the company private, reorganizes the company, and replaces its management team. Three years later, the fund exits the investment through an initial public offering of the company's shares. This pooled investment fund is best described as

a private equity fund.

A private company can become a public company through

a special purpose acquisition company. An SPAC raises money through an IPO. It then takes that money and purchases one or more private companies.

In an efficient market:

any information that could affect a stock's value is quickly reflected in its price

A European-style option differs from an American-style option primarily in that it

can only be exercised on its expiration date.

A stock analyst viewing a corporation's income statement would not be able to determine the company's

cash on hand. The income statement reflects the firm's revenues (sales), expenses, and income. Assets, such as cash, are found on the balance sheet.

If an agent thought that a technology stock was undervalued and actively solicited purchase orders from all of her customers, the agent

committed an unethical business practice.

In the field of portfolio management, there are a number of different management styles. One of those styles involves committing additional capital to the market when others are reducing their exposure, or eliminating positions while others are increasing theirs. This style is generally referred to as

contrarian. The contrarian style of portfolio management takes positions opposite those of the market as a whole. They are buying when others are selling and selling when others are buying.

With respect to safety of principal, of the following investments, the least risky is

corporate AA debentures. As a debt instrument, it has priority over the others.

There are number of potential sources of income to a client that would have to be reported on their Form 1040 tax return. Among them could be all of these except

death benefit received from a life insurance policy.

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

discounted cash flow

While enjoying some après-ski after a long day vacationing out of state on the slopes, Gervaise, an investment adviser representative with a federal covered investment adviser, spots several existing advisory customers. They invite Gervaise to join them for some spirits, and the invitation is warmly accepted. After about an hour, some of these customers and their friends ask Gervaise if it would be possible to have a lesson on what specific stocks should be considered under current market conditions. To make this presentation, Gervaise

does not have to be registered in the state as long as the only participants are the existing customers without their friends.

Under the NSMIA, state securities Administrators retain authority to

enforce antifraud provisions.

An investment adviser with no place of business in the state is exempt from registration with the state when making recommendations to all of the following except

exclusively individual residents of the state who are accredited investors, specifically regarding new issues of exempt securities not registered in that state.

Due to changes in customer preferences, a manufacturing company has decided to discontinue the operations of one of its subsidiaries. An explanation of this decision would most likely be found in the company's

footnotes to the financial statements. Footnotes are used to explain extraordinary items such as the sale of a subsidiary.

While reading the prospectus of a mutual fund, you notice that the management describes their style as contrarian. They further explain that they

generally buy when the majority of other investors are selling and sell when the majority of other investors are buying. a contrarian takes positions that are opposite to the prevailing opinions.

Derivatives have a major role to play in the management of many large portfolios and can be used for all of the following except

highly risk-averse investors. Derivatives are generally not appropriate for highly risk-adverse investors due to the risk and sophistication involved.

The Uniform Securities Act grants the Administrator the power to deny or revoke a registration of a securities professional. However, the Administrator generally would not deny or revoke a registration

if a person associated with a registered investment adviser has been convicted of any non-securities-related misdemeanor within the last 10 years.

A measurement of investment return that takes the time value of money into consideration is

internal rate of return (IRR). The internal rate of return compounds returns and takes into consideration the time value of money. Real rate of return considers the inflation rate and risk-adjusted return is another way of stating the Sharpe ratio.

As used in the regulations, the term impersonal investment advice means

investment advisory services provided by means of written material or oral statements that do not purport to meet the objectives or needs of specific individuals or accounts.

An employee is offered a nonqualified stock option with an exercise price of $20 per share. If the option is exercised when the current market value of the stock is $30, the employee

is taxed on $10 per share as if it were salary.

Lisa is considering investing in gold. She owns a portfolio of stocks, bonds, and money market securities. Relative to her existing portfolio, the primary benefit of the gold investment is most likely

low correlation between traditional asset returns and gold.

In general, a broker-dealer is required to register with the SEC. An exception to that requirement would apply to a broker-dealer who

maintains a place of business in a single state, only deals with residents of that states, and does not execute transactions in securities traded on a national exchange.

A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees except

markups and markdowns on trades done as a principal.

If ABC Brokers, Inc., has its registration as a broker-dealer canceled, individuals registered as agents of ABC may

not sell any securities because their registrations are only effective when associated with a registered broker-dealer.

One of the features of broker-dealers is that they sometimes maintain an inventory of securities, even when not in the role of market maker. If a broker-dealer has shares of a somewhat speculative, thinly traded stock in its inventory whose last reported trade was several days ago at $4 per share and the firm were to offer its shares at $10 per share, the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents might consider this

prohibited because the offering price does not bear a reasonable relationship to the current market

The writer of a call option

receives the premium.

A concern of some investors is the volatility of a security. Securities with a higher volatility exhibit a greater variability in their returns. A statistical measure used to predict the volatility of a security by examining the dispersion in a set of historical returns is

standard deviation. The standard deviation measures how much variation there is in the returns from the average.

The purpose of the Investment Advisers Act of 1940 is to provide

standards at the federal level for the regulation of investment advisers.

The term used to describe the risk that affects all marketable securities is

systematic risk