Series 65 Simulated Exam 1
A bond's yield to maturity reflects its A) internal rate of return B) nominal return C) taxable equivalent return D) return based on annual interest as a percentage of current price
A
A client has just finalized her divorce and intends to sell her gold wedding band. Because the price of gold has risen significantly since she married 20 years ago, she will be able to realize a profit on the sale, but she does not know what to use as the cost basis. You suggest she speak to a tax specialist who will tell her to A) use the original cost of the ring. B) obtain an appraisal from a qualified jeweler and use that as the cost basis. C) ignore the profit for tax purposes because precious metals are not subject to capital gains taxation. D) use a cost basis of zero because it was a gift.
A
An investment adviser representative is discussing various investment strategies with a prospective client. When discussing the "buy and hold" strategy, it would be correct to state that a characteristic of this strategy is it A) has low expenses. B) outperforms most equity indexes. C) is favored by market timers. D) better aligns with the risk tolerance of the investor.
A
An investment adviser representative recommends that a customer purchase shares of Silicon Switches. The representative indicates that the company has reduced market risk because it has graduated to the level of quality acceptable to the New York Stock Exchange (NYSE). According to the Uniform Securities Act, the adviser's statement is A) not permitted because it is misleading to imply that meeting listing requirements reduces market risk. B) not permitted because the transaction is not suitable for the customer. C) permitted because the NYSE sets stringent earnings requirements for listed stocks. D) permitted because an investment adviser may recommend listed stocks.
A
An investor purchases two PMJ Dec 16 calls at $0.85. If the commission charge is $8, the total cost is A) $178. B) $93. C) $188. D) $328.
A
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 A) footnotes to the financial statements. B) balance sheet. C) income statement. D) tax return.
A
Five years ago, an investor purchased an ABC Corporation BBB-rated debenture with a coupon of 6% maturing in 2037. Currently, new BBB-rated debentures maturing in 2037 are being issued with coupons of 5%. Based on the discounted cash flow method, one could say that the present value of the investor's security is A) more than the par value B) equal to the par value C) positive D) less than the par value
A
If a broker-dealer provides investment advice or discretionary portfolio management services to its clients and the firm also recommends or sells products that it or affiliated companies issue, A) disclosure of the potential conflict of interest must be made. B) disclosure of the capacity in which the firm acts in the transaction must be made on the trade confirmation. C) the firm would be engaged in a dishonest or unethical business practice. D) the firm would be straddling a commingled arbitrage.
A
If a client wishes the assets in her account to pass directly to specific beneficiaries after her death, her account should be titled A) TOD. B) testamentary account. C) JTWROS. D) TIC.
A
In accordance with the stated provisions of the Investment Company Act of 1940, renewal of an open-end management investment company's investment adviser's contract must be approved by A) majority vote of the fund's board of directors or of the outstanding voting shares, as well as by majority vote of the noninterested members of the board. B) the SEC. C) FINRA. D) the principal underwriter of the fund.
A
It would be correct to state that when an investor has a longer time horizon, A) the need for liquidity is less important B) the exposure to inflation risk is lessened C) the risk level is lowered D) the greater the initial deposit to reach a projected future goal
A
Malcolm, CLU®, is an insurance agent catering to highly successful business executives. During a routine servicing call, one of those clients asks Malcolm if he knows anyone who is sharp enough to handle his $50 million investment portfolio. Malcolm refers the client to Superb Asset Managers Company (SAMCO), an investment adviser (IA) doing business in this state. The CEO of SAMCO meets with Malcolm's client and an advisory contract is signed. To show their appreciation, Malcolm receives a $500 finder's fee from Superb Asset Management Company (SAMCO). Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) SAMCO must disclose the existence and circumstances of the finder's fee to the client. B) no disclosure is necessary unless it will result in the IA's fee being higher than it would have been without finder's fee. C)
A
Securities issued by which of the following would be exempt from the registration requirements of the Uniform Securities Act? 1. Nonprofit organization 2. Exchange-listed security 3. Federal savings and loan association 4. Federal credit union A) I, II, III, and IV B) I and IV C) III and IV D) I and II
A
The RIF Corporation would not be able to issue A) RIF call options. B) RIF warrants. C) RIF common stock. D) RIF rights.
A
The pundits are predicting slowly-rising inflation over the next 5 years. An IAR recommends that one of her clients splits his bond portfolio into equal percentages with maturities ranging from 1 to 5 years. As each bond matures, the proceeds are used to purchase bonds with a 5-year maturity. The IAR is using A) the laddering strategy. B) the bullet strategy. C) the interest discount model. D) the barbell strategy.
A
When building an investment portfolio, it is generally recommended that an asset allocation process be used to increase the portfolio diversification and reduce risk. Which of the following is least likely to be considered an asset class? A) Mutual funds B) Bonds C) Cash and cash equivalents D) Stock
A
Which of the following could be a red flag regarding identity theft? 1. Receipt of a credit card for which no application was made 2. Receipt of a replacement credit card two months before the expiration date of the current card 3. Receipt of a notice of a change of address on a credit card account that was not made by the account holder 4. Receipt of a notice from the credit card company of an offer for a 0% balance transfer A) I and III B) III and IV C) II and IV D) I and II
A
Which of these is among the advantages of including preferred stock in an investor's portfolio? A) Dividends must be paid before any distribution to common stockholders. B) There is an opportunity for increased income if the issuer's profits increase. C) The rate of return is likely to keep pace with inflation. D) The maturity date is likely shorter than that of debt securities offered by the same issuer.
A
In the construction of a qualified retirement plan portfolio, which of the following investment vehicles would be considered generally inappropriate? 1. A guaranteed investment contract (GIC) 2. A municipal bond fund 3. A leveraged real estate limited partnership 4. A corporate bond rated A or higher A) II and III B) III and IV C) I and II D) I and IV
A GIC's and investment-grade corporate bonds (A or higher-rated bonds) are considered appropriate investments for a qualified plan. A municipal bond fund will potentially convert tax-free income into ordinary income, and using leveraged investments in retirement plans is generally prohibited.
Many investment advisers prepare an investment policy statement (IPS) when counseling their clients. Which of the following should least likely be included as a constraint in an investment policy statement? A) How the funds are spent after being withdrawn from the portfolio B) Asset classes the client specifically forbids or limits based on past experience C) Any unique needs or preferences an investor may have D) Constraints put on investment activities by regulatory agencies
A How funds are spent after withdrawal would not be a constraint of an IPS. Anything that might be an obstacle to reaching the goals, such as regulatory restrictions and specific investor preferences, are considered constraints.
All of the following are progressive taxes except A) excise taxes on cigarettes. B) estate taxes. C) personal income taxes. D) gift taxes.
A Progressive taxes are those where the tax rate increases as the amount being taxed increases. The opposite of that is the regressive tax, where the rate remains the same regardless of the dollar amount being taxed. Excise taxes, such as those on cigarettes, are a prime example. Whether someone purchases a pack, a carton, or a case, the tax rate is constant.
Which of the following is not included in fundamental analysis of a company? A) The study of a company's historical stock prices and trading volume. B) The study of the direction of the economy. C) The study of a firm's position within its industry. D) The study of a firm's financial statements.
A Studying historical stock prices and volume is related to technical analysis. Fundamental analysis is concerned with the earnings potential and risk associated with a particular firm. Doing so requires viewing the entire economy, that company's industry, and its financial statements.
Wynifred is an investment adviser representative for an SEC-registered investment adviser. She lives in State X and receives a letter from a former boyfriend requesting a contribution to the friend's political campaign for governor of State X. As it happens, Wynifred's firm provides advisory services to State X's employee retirement fund and Wynifred actively solicits business from other state agencies. Which of the following actions would be permitted to Wynifred under the SEC's pay-to-play rule without causing any concerns to her firm? A) Donating a maximum of $350 to the campaign B) Donating a maximum of $150 to the campaign C) Donating a maximum of $250 to the campaign D) Sending a letter to the friend indicating that the rules would not permit her to contribute to the campaign
A Wynifred's solicitation activities define her as a covered employee. The rule allows covered employees to make contributions of up to $350 per official or candidate per election in which they can vote, or $150 for other elections. Because the friend is running for governor in a state in which Wynifred can vote, the upper limit applies.
A federal covered investment adviser registered with the SEC that has offices in five states must do which of the following? 1. Pay state filing fees if required by the Administrator. 2. Notify the Administrator within one business day if net worth falls below the required minimum. 3. Notice file in any of those states where required by the Administrator. 4. Become licensed as a broker-dealer. A) II and III B) I and III C) II and IV D) I and II
B
All of the following are characteristics of exchange-traded funds except A) they usually trade at or near their net asset value. B) they may not be sold short. C) large investors known as authorized participants buy or sell shares on an in-kind basis. D) they are generally tax efficient.
B
An individual who has passed the NASAA examination for registration as an investment adviser representative may begin soliciting advisory clients A) when informed by the Administrator that the representative's registration is effective. B) when informed by the investment adviser that the representative's registration is effective. C) immediately. D) within 48 hours.
B
An investment adviser subsidiary of a broker-dealer is the subject of a civil lawsuit alleging a fraudulent sale of securities to a customer. Under the Uniform Securities Act, the brokerage firm may not be held jointly liable for the violation if the firm A) discussed the purchase with the customer. B) could not have reasonably known about the transaction. C) has a record of similar violations. D) received payment or another benefit from the transaction.
B
An investor interested in obtaining the benefit of professional portfolio management has been tracking a particular investment company for the past several months. In so doing, it becomes obvious that the market price of the shares moves in direct relation to the computed NAV. This investor must be following A) a balanced fund. B) an open-end fund. C) a closed-end fund. D) a money market fund.
B
As used in the Uniform Securities Act, the term institutional investor would not include A) savings institutions. B) individuals qualifying as accredited investors. C) investment companies. D) employee benefit plans with assets of at least $1 million.
B
For larger accounts, a broker-dealer is least likely to waive its normal fee for A) safekeeping of funds or securities in the account. B) transferring the account to another broker-dealer. C) the annual account maintenance charge. D) wiring funds to the client's bank.
B
In the securities industry, the term contra party refers to A) the person on the other side of a civil suit B) the person on the other side of the trade C) the person identified on the trade confirmation as a broker D) a securities regulator who begins an investigation against a securities professional
B
Sally is an agent with a broker-dealer. She has used her degree in computer science to develop her own stock-picking software program. The program creates a model portfolio with a 70:30 ratio of equity to debt securities. Backtesting has shown that the program is likely to produce returns that beat the overall market. As a result, Sally plans to use this model portfolio for each of her clients. Sally A) is going to make her clients very happy. B) is likely violating suitability requirements. C) must make the details of how the program works available to all who request it. D) is engaging in an unethical business practice.
B
The Investment Company Act of 1940 requires certain types of investment companies to compute their net asset value on a regular basis. Excluded from this requirement are A) unit investment trusts. B) face-amount certificate companies. C) open-end management investment companies. D) closed-end management investment companies.
B
The death benefit of a variable life policy must be calculated at least (blank) & the cash value (blank) A) monthly,annually B) annually,monthly C) weekly,monthly D) semiannually,monthly
B
The term digital assets would include all of the following except A) cryptocurrency. B) electronic communications such as email. C) nonfungible tokens. D) stablecoins.
B
Washington, Adams, and Jefferson, Inc., (WAJI) is an investment adviser whose principal and only office is in Alexandria, VA. WAJI's sole business is advising institutional investors. Rutherford Buchanan is employed by the firm in the main office and has the responsibility of servicing the firm's bank and insurance company clients. Which of the following statements is correct regarding Rutherford's licensing requirements? A) Rutherford cannot register as an IAR of WAJI because providing advice exclusively to institutions exempts the firm from registration. B) Rutherford must register as an IAR of WAJI with the State of Virginia. C) Rutherford is exempt from registration because his only clients are institutions. D) Rutherford is exempt from registration because he has fewer than six retail clients.
B
Which of the following actions should be taken by an agent when a client decides to open an options account? A) Obtain approval from the designated options supervisor to open the account no later than 1 business day after the first options trade B) Review with the client the risks involved when trading options before the first options trade C) Provide an options disclosure document (ODD) no later than 15 days after the first trade D) Assure that an options agreement has been signed prior to the first trade taking place
B
Which of the following debt instruments does not make periodic interest payments? A) T-bonds B) T-bills C) T-notes D) TIPS
B
Which of the following is a motivation for creating structured products? A) Structured products improve profits for broker-dealers. B) Structured products improve market completeness. C) Structured products are less expensive for investors to buy and trade. D) Structured products reduce costs to issuers.
B
Which of the following must register with a state Administrator? 1. Investment adviser representatives of federal covered advisers who have natural person clients and have a place of business in the state 2. A person who only provides impersonal investment advice through newspaper columns, magazine articles, or financial publications of general and regular circulation 3. An investment adviser registered in a different state and who has no place of business in the state but has had fewer than six individual advisory clients in this state during the previous 12 months 4. A person who is an officer of a federal covered investment adviser and does not function as an investment adviser representative A) II and III B) I only C) I, II, III, and IV D) II only
B
Which of the following statements best represents modern portfolio theory (MPT)? A) Given a choice between a higher return with a higher risk and a lower return with a lower risk, most investors will choose the latter path. B) It differs from a traditional securities analysis in that it emphasizes determining the relationship between risk and reward in the total portfolio rather than analyzing specific securities. C) It differs from a traditional securities analysis in that it emphasizes determining the relationship between risk and reward in specific securities rather than analyzing the total portfolio. D) Because investors tend to act irrationally, the optimum portfolio is one consisting of a limited number of high-performing securities.
B
Which of the following transactions is not exempt from registration? A) A bona fide pledge of securities B) A sale of an exempt security to an individual customer as a result of an agent's solicitation C) Transactions between an issuer and underwriter or between underwriters D) Transactions with banks, savings and loan associations, and other financial institutions
B
To register a sole proprietorship as an investment adviser in a state, the application for initial registration (Form ADV) must be filed with the appropriate party. This application must include all of the following except A) a consent to service of process. B) a copy of the articles of incorporation for the business. C) any information to be furnished or disseminated to any client or prospective client. D) the appropriate fees.
B Articles of incorporation only apply to corporations. Sole proprietorships are not incorporated. To register as an investment adviser in a state, Form ADV is filed with the Administrator or with a central registration depository designated by the Administrator. The application must include, among other things, a consent to service of process, appropriate fees, and the brochure or any other information that will be used to solicit clients.
A research analyst studying the performance of ABC Industries compares that with reports from other analysts reviewing other companies in other industries. This is known as A) sector analysis. B) bottom-up analysis. C) fundamental analysis. D) top-down analysis.
B Bottom-up analysis starts by attempting to find superior performing companies, regardless of the industry. Those analysts believe that these companies will provide attractive returns even if they are in an industry sector that is in a negative position in the economic cycle.
The writer of a call option A) has the right to sell the underlying asset. B) receives the premium. C) pays the premium. D) is obligated to buy the underlying asse
B The option premium is the money paid by the buyer of an option to the writer at the beginning of the options contract. That trade settles in T+1 and the premium paid is not refundable. Hence, the call writer would receive the premium. In turn, the call writer is obligated to sell the underlying at the exercise price to the call buyer.
A federal covered registered investment adviser who receives compensation for advice and whose business is primarily as an investment adviser may describe his business as investment counsel if A) it maintains its registration by filing an updating amendment to its Form ADV annually. B) it maintains custody of customer funds and/or securities. C) a substantial part of his business is providing investment supervisory services. D) it receives SEC approval to use the definition.
C
A married couple, both age 28, are considering the purchase of an annuity to help them save monthly for their retirement at age 65. They want an annuity that will allow them to participate in the equities market, and because of their long-term investment horizon, they are not particularly concerned about safety of principal. Which of the following annuity products best meets their needs? A) Single premium deferred variable annuity B) Periodic payment deferred fixed annuity C) Periodic payment deferred variable annuity D) Single premium deferred fixed annuity
C
A portfolio manager who follows the value style of investing would most likely purchase shares A) that are currently trading with a higher than average volume B) at the high end of their price range for the past 52 weeks C) at the low end of their price range for the past 52 weeks D) based on their market capitalization
C
A profitable company reports net income of $10 million. A cash dividend of $7 million is declared. From an accounting standpoint, the other $3 million will be credited to which balance sheet account? A) Working capital B) Dividends payable C) Retained earnings D) Capital surplus
C
One of the features of convertible preferred stock is that A) the dividend is paid ahead of all other securities. B) the holder is able to select the conversion price. C) the owner has the opportunity to participate in the growth of the company. D) the owner has the opportunity to convert the stock into the issuer's bonds.
C
Several entrepreneurs form an S corporation. Under which of the following circumstances will the entrepreneurs risk losing their tax benefits? 1. 150 new investors buy into the corporation during the year. 2. 1 new member is a nonresident alien. 3. 50% of the corporation's income is derived from passive investments in limited partnerships. 4. The corporation issues several classes of stock. A) I, II, and III B) I only C) I, II, III, and IV D) I and II
C
The future value of an invested dollar is dependent on 1. the exchange rate of the dollar at the beginning and end of the period 2. the interest rate at maturity 3. the rate of return it earns 4. the time period over which it is invested A) I only B) II only C) III and IV D) II and III
C
Under ERISA Section 404(c), plan participants must be able to reallocate plan assets A) daily B) once every week C) once every 3 months D) annually
C
Under Rule 144, which of the following sales are subject to volume limitations? 1. Control person selling registered stock held for one year 2. Control person selling restricted stock held for two year 3. Nonaffiliate selling registered stock held for one year 4. Nonaffiliate selling restricted stock held for two year A) I and III B) II and IV C) I and II D) III and IV
C
Under the Investment Advisers Act of 1940, for how many years must an investment adviser maintain the records required by regulation? A) One year B) Three years C) Five years D) No requirement
C
Under the Uniform Securities Act, Paul must register as a state-registered investment adviser if he A) sells registered securities on a commission basis for a registered broker-dealer. B) becomes a full-time employee of AAA Investment Advisers, Inc., where he will advise clients whose assets under his discretion will exceed $200 million. C) opens an investment advisory business as a sole proprietor in New Jersey with the intention of advising individual clients on the advisability of investing in securities. Paul will have $90 million in AUM within 120 days of opening. D) opens an investment advisory business as a sole proprietor in New Jersey with the intention of advising individual clients on the advisability of investing in securities. Paul will have $100 million in AUM within 120 days of opening.
C
Under the Uniform Securities Act, which of the following statements is true regarding registration of an investment adviser if the application has not been amended? A) Unless specified earlier, registration becomes effective no later than 90 days after the application is filed. B) Unless specified earlier by the Administrator, the registration becomes effective at noon on the 60th day after application. C) Unless specified earlier by the Administrator, the registration becomes effective no later than noon on the 30th day after application. D) Unless specified earlier, registration becomes effective no sooner than 15 days after the application is filed.
C
When a corporation is forced to liquidate its assets, holders of which of the following securities are treated as general creditors? A) Senior lien preferred stock B) Subordinated debentures C) Debentures D) Mortgage bonds
C
When applying for registration as an agent, which of the following must be disclosed? A) Complete employment history for the past five years B) Residential history for the past three years C) Certain financial information such as any unsatisfied judgments or liens against the applicant D) Highest educational level achieved and the institution attended
C
When deciding on the suitability of a particular investment, that client's need for liquidity is A) only significant if the individual is planning on retirement B) only important if the client has no other liquid investments C) an important consideration when determining the suitability of an investment D) not a significant consideration
C
Which of the following are examples of systematic risk? Business risk Market risk Interest rate risk Credit (default) risk A) I, II, III, and IV B) I and III C) II and III D) II, III, and IV
C
Which of the following concerning a money purchase pension plan are true? 1. All employees must contribute to the plan. 2. Voluntary employee contributions are optional. 3. Employer contributions are required. 4. Employer contributions are optional. A) II and IV B) I and III C) II and III D) I and IV
C
Which of the following is a multi-option strategy? A) Short call B) Protective put C) Straddle D) Long call
C
Which of the following is considered the most accurate method of measuring GDP? A) Eurodollars B) As a function of GNP C) Constant dollars D) Actual dollars
C
Which of the following statements concerning market efficiency is not correct? A) Any new information must be unexpected; therefore, any changes in the stock price resulting from this new information will be random. B) The efficient market hypothesis (EMH) is the proposition that the securities markets are efficient, with the prices of securities reflecting their current economic value. C) Investors who accept the efficient market hypothesis (EMH) usually adopt an active investment strategy. D) The fundamental assumption of market efficiency is that current stock prices reflect all available information for a company and that prices rapidly adjust to reflect any new information.
C
Which of the following statements regarding participant loans in a 401(k) plan are correct? 1. The maximum allowable loan amount is the lesser of $50,000 or 50% of the participant's vested account balance. 2. Unless the loan is taken out for the purpose of a mortgage on the participant's principal residence, repayment must be completed within 60 months of obtaining the loan. 3. Payback of the loan will be through payroll deduction. 4. Default on the loan will result in the IRS treating the loan as a distribution. A) I and II B) III and IV C) I, II, III, and IV D) II and III
C
Which of the following terms best describes ETNs and leveraged ETFs? A) Speculative investments B) Registered investment companies C) Alternative investments D) Forms of hedge funds
C
With respect to a qualified retirement plan, fiduciaries must act in all of the following ways except A) solely in the interest of plan participants and beneficiaries. B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent professional would use. C) solely in the interest of the sponsoring employer. D) to diversify investments to minimize the risk of large losses, unless doing so is clearly not prudent under the circumstances.
C
A portfolio manager who believes equity securities are overvalued in the short term reduces the weight of equities in her portfolio to 35% from its longer term target weight of 40%. This decision is best described as an example of A) strategic asset allocation. B) rebalancing. C) tactical asset allocation. D) contrarian investing.
C Tactical asset allocation refers to deviating from a portfolio's target asset allocation weights in the short term to take advantage of perceived opportunities in specific asset classes. Strategic asset allocation is determining the target asset allocation percentages for a portfolio and remaining there. Rebalancing is periodically adjusting a portfolio back to its target asset allocation. In this question, the portfolio manager changed the target allocation - no rebalancing is necessary. Contrarian investing is doing the opposite of what most others are doing.
If an index annuity has a participation rate of 80%, it means A) the investor's account will never be less than 80% of the initial investment. B) the investor's account will be charged with 80% of the amount lost by the index. C) the investor's account will be credited with 80% of the growth of the index. D) the investor's account will participate in 80% of the gains and losses of the index.
C The participation rate of an index annuity is the percentage of the growth of the index credited to the investor's account. For example, if the index had a return of 10% and the participation rate is 80%, the investor's account is credited with 8% growth. This may be limited by a cap (a maximum), but unless a cap rate is stated in the question, there isn't one. One of the benefits of an index annuity is that it only shares in the growth, never any losses. LO 24.c
An investor is looking for a pooled investment product that can provide rental income as well as potential capital gains. You would most likely recommend A) a GNMA pass-though. B) a growth mutual fund. C) an equity REIT. D) a mortgage REIT.
C When you see "rental," you immediately think of renting real estate. Of the two basic types of REITs, an equity REIT is the one that owns property. Rental income is received from the users of those properties. As an owner of real estate, there is always potential to sell the property for a gain. Think of the difference between an equity REIT and a mortgage REIT as the difference between a stock and a bond. A stock offers the possibility of income through dividends and a bond through interest. But, it is only the stock (equity) where there is a real potential for capital gain.
A client profile is not complete without a family income statement. A typical one would include 1. dividends 2. credit card debt 3. autos 4. mortgage interest A) II and III B) I and II C) III and IV D) I and IV
D
A customer opens a margin account with a broker-dealer and signs a loan consent agreement. The loan consent agreement allows the firm to A) commingle the customer's securities with securities owned by the firm B) hypothecate securities in the account C) lend the customer money D) loan out the customer's margin securities
D
A customer's limit order to buy 500 shares of QRS at 60 is executed and the agent reports the trade execution to the customer. One hour later, the customer notices that QRS is down 2 points and informs the agent that he no longer wants the stock and is not planning to pay for it. The agent should tell the customer that A) the firm will repurchase the securities from the customer for the price paid B) he may sell the stock at the purchase price in the open market C) he owns the stock and must submit payment D) he personally will repurchase the securities from the customer for the price paid
D
According to both the Investment Advisers Act of 1940 and the Uniform Securities Act, under which of the following circumstances is an investment adviser required to make disclosure to the client? 1. The adviser intends to recommend the use of the broker-dealer with whom he is affiliated. 2. The transactions recommended to the client are inconsistent with those for the adviser's own account. 3. The investment adviser intends to sell the client the insurance policy recommended for his financial plan. 4. The adviser is employed by a broker-dealer but provides investment advisory services outside the scope of his employment with the broker-dealer. A) II and IV B) III and IV C) I and III D) I, II, III, and IV
D
An agent is registered in Montana and North Dakota. While working in his North Dakota office, he places a call to the cell phone of one of his Montana resident clients who happens to be on vacation in Wyoming. After describing the reasons for a particular stock recommendation, the client asks the agent to call back tomorrow. The agent does so and reaches the client in Idaho. The client decides to purchase 100 shares of the stock. When the client arrives home, he notices that he has already received his stock certificate from the transfer agent located in Illinois. In this case, jurisdiction resides with the Administrators of which states? 1. North Dakota 2. Idaho 3. Wyoming 4. Illinois 5. Montana A) I and IV B) II and III C) I, II, III, IV, and V D) I, II, and V
D
An analyst uses a stock selection method that involves analyzing a specific corporation, followed by evaluating where it fits in its industry and then viewing the overall economy. The term that best describes this method is A) efficient frontier. B) top-down. C) capital asset pricing model. D) bottom-up.
D
An economic indicator that has turning points that tend to occur after the turning points in the business cycle is classified as A) a leading indicator. B) a trailing indicator. C) a coincident indicator. D) a lagging indicator.
D
An investment adviser has devised a charting system and wishes to advertise this fact in order to obtain additional clients. To do so, the USA would require A) disclosure of the length of time the charting system has been employed. B) if the system is indeed foolproof, verification of that fact. C) past performance since inception of the system to be shown. D) a statement as to the limitations of and difficulties involved in using this system.
D
As a securities professional, one of your obligations to your clients is protecting their best interests. One of the ways to do that is to make them aware of the red flags of investment fraud. Those red flags would include all of the following except A) promises of guaranteed high, risk-free investment returns. B) pressure to invest immediately. C) unsolicited offers that seem too good to be true. D) the risk of losing money.
D
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) need not notify its clients of Clark's departure because Clark was only a minority partner. B) must notify Clark Advisers of Clark's withdrawal from ABC Investment Partners within a reasonable period. C) must change its name because the partnership has a new mix of partners as a result of Clark's departure. D) must notify its clients of Clark's departure within a reasonable period.
D
Corporate long-term debt securities that are issued on the general credit of the issuer and are not otherwise secured are called A) general obligation bonds. B) preferred stock. C) prior lien bonds. D) debentures.
D
It would not be considered an unethical business practice under NASAA's policies for an investment adviser to charge which of these? 1. Fees as well as commissions 2. Fees based on an hourly rate 3. Fees based on a percentage of the change in value of funds from quarter to quarter 4. Fees based on a percentage of the aggregate value of funds under management A) I and IV B) III and IV C) II and III D) I, II, and IV
D
One way in which incentive stock options (ISOs) differ from nonqualified stock options (NQSOs) is that A) there is a maximum five-year limit for exercise on the ISO, while the time limit on the NQSO is 10 years. B) the bargain element of the ISO is reported as wages on the tax returns of the employer and the employee. C) gains on an ISO are always short term, while those on an NQSO are long term. D) the bargain element of the ISO is an AMT preference item.
D
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 coincident economic indicator? A) Agricultural employment B) Stock market prices as measured by the S&P 500 C) Machine tool orders D) Industrial production
D
The offering document for a fund states that the minimum initial investment is $500,000. This is most likely what type of fund? A) Balanced B) Small-cap growth C) Specialized D) Hedge
D
The present value of a dollar A) is the amount of goods and services the dollar will buy in the future at today's rate price level B) is equal to its future value if the level of interest rates stays the same C) cannot be calculated without knowing the level of inflation D) indicates how much needs to be invested today at a given interest rate to equal a specific cash value in the future
D
Under the Securities Exchange Act of 1934, which of the following would not be considered associated with XYZ Corp., a broker-dealer? A) Paula, who is on XYZ's board of directors but who has no other connection with the firm B) Brian, an XYZ vice president C) Arvin, one of XYZ's agents D) Robert, a client who owns 1,000 shares of XYZ's voting stock
D
Which of the following are governed by the prudent investor rule? 1. Trustee 2. Executor 3. Custodian 3. Agent who has been granted discretionary authority A) III and IV B) I and II C) I, II, and III D) I, II, III, and IV
D
Which of the following has the least exposure to inflation risk? A) Fixed annuity B) Preferred stock C) Cash D) Common stock
D
When it comes to issuing a debt security, which of the following features will generally enable the issuing corporation to borrow at the lowest interest rate? A) Zero-coupon B) Cumulative C) Callable D) Convertible
D Because the convertible feature offers potential growth through the exercise of the conversion option, the interest rate on these securities is generally lower than other debt issues of the same corporation. The call feature increases the reinvestment risk and that is compensated for with a higher coupon. The descriptive adjective cumulative refers to dividend payments on preferred stock but not to bonds. Because zero-coupon bonds pay nothing until maturity, that added risk requires a higher yield to attract investors.
A TIPS bond with a par value of $1,000 has a coupon rate of 4%. During Years 1 and 2, the inflation rate has been 6%. What effect will this have on the TIPS 2½ years later? A) The principal value will be $1,080. B) The next interest payment will be $46.37. C) The next interest payment will be $20.00. D) The next interest payment will be $23.19.
D On a semiannual basis, the principal value of a TIPS is increased by that year's inflation rate. A TIPS bond adjusts principal every six months based on the inflation rate. With an annual inflation rate of 6%, each six months, the principal will increase by 3% compounded. Because the question is asking about 2½ years later, there will be five periods (two each year plus the first half of the third year). Using the calculator at the testing center, you would enter the $1,000 initial par value and then multiply that by 103% five times to arrive at $1,159.27. Then, multiply that by the semiannual coupon rate (2%); the result is $23.19. In almost every case, the shortcut will work. That is, if it was not a TIPS bond, then the interest would simply be 2% of $1,000, or $20. That will always be one of the choices—you look for the one that is a bit higher.
Among the differences between an investment in a limited partnership offering and in a corporation is that A) only corporations issue securities. B) only corporations are organized to run a business. C) limited partners take a more active role in the management of the enterprise than do stockholders of a corporation. D) limited partnership offerings do not pay dividends; corporations do.
D One of the key features of a limited partnership investment is the concept of flow-through of operating results. If the business operates at a loss, the limited partner's share of that loss is treated as a passive loss on the investor's tax return. If the business is profitable, the limited partner's share of the profit is treated as passive income. Corporations issue securities, primarily stocks and bonds, while limited partnerships issue units representing the limited partner's interest in the venture. Those units are investment contracts and, as taught in Unit 4, LO4, securities. Limited partners who take an active role in the partnership lose their limited status.
Under the Uniform Securities Act, broker-dealers are required to prepare and maintain certain records. Which of the following statements reflects the position of the act? A) A firm registered in more than one state must meet the recordkeeping requirements of the state where its principal office is located, even if those requirements are less comprehensive than those of some of the other states where it is registered. B) Once a broker-dealer's trade blotter has been posted, it may be discarded. C) A firm must maintain records of every email sent from the office by agents. D) A broker-dealer's website is considered advertising.
D Personal email sent by agents that is not business related does not have to be retained. Any broker-dealer registered in more than one state is also registered with the SEC. Remember, unlike investment advisers who register either with the SEC or the state(s) unless classified as an intrastate broker-dealer, BDs register with both. In that case, it is the recordkeeping requirements of the SEC that must be met. This broker-dealer's trade blotter must be kept for at least six years. In the case of an intrastate BD, the requirement is three years. In any case, it is not discarded shortly after posting.
An investor purchases 1,000 shares of ABC at $42 per share. One year later, the stock is trading at $50 per share and the investor receives 50 shares of ABC as a stock dividend. How will this dividend be currently taxed? A) As $2,500 ordinary income B) As a $2,500 capital gain C) As a $2,100 capital gain D) The shares are not subject to taxation
D Shares received per a stock dividend are not currently taxable. Instead, shareholders who receive stock dividends must adjust their cost basis in the shares downward. The total number of new shares, multiplied by their new adjusted basis, must equal the shareholder's total interest before the stock dividend was received.
Among the differences between a Coverdell Education Savings Account and Section 529 plans are 1. one has adjusted gross income limits, the other does not 2. one has contribution limits set by federal law, the other by the individual state 3. 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) I and III C) II and III D) I, II, and III
D 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.
A client in the 30% tax bracket owns a 5% XYZ, Inc., debenture due to mature shortly. What yield in a municipal bond will result in the same after-tax return that now exists has with the debenture? A) 5.3% B) 2.0% C) 1.5% D) 3.5%
D The client's tax rate is 30%; 70% of 5% is 3.5%. A nontaxable municipal bond with a 3.5% yield would give the client the same return.
In order to compute the real rate of return on a specific stock, all of the following information is required except A) the change to the CPI. B) capital gain or loss. C) any dividends paid. D) the stock's beta.
D The real rate of return on a stock is another way of asking for the inflation-adjusted return. That means the total return, which includes dividends plus any capital gain (or less any capital loss) minus the inflation rate as determined by the CPI. Beta has nothing to do with computing rate of return.
Which of the following bonds has the shortest duration? A bond with A) a 20-year maturity, 10% coupon rate. B) a 20-year maturity, 6% coupon rate. C) a 10-year maturity, 6% coupon rate. D) a 10-year maturity, 10% coupon rate.
D Two factors go into the computation of a bond's duration - the length to maturity and the coupon rate. When the maturities are the same, the bond with the highest coupon has the shortest duration. When the coupons are the same, the bond with the nearest maturity has the shortest duration. The 10% bond maturing in 10 years "wins" on both counts. It has the nearest maturity with the highest coupon. All else being equal, a bond with a longer duration will be more sensitive to changes in interest rates.
Wynifred's solicitation activities define her as a blank employee. The rule allows blank employees to make contributions of up to $blank per official or candidate per election in which they can vote, or $blank for other elections.
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