Series 65: Simulated Exam 3

In order for an individual to receive Social Security benefits based on the earnings of the ex-spouse, the couple must have been married for at least A. 2 years. B. 5 years. C. 10 years. D. 1 year.

10 yrs If a couple has been married for at least 10 years prior to divorcing, an ex-spouse may claim benefits. There are other requirements including unmarried status for the claimant.

A technical analyst would be most interested in which of the following? A. 200-day moving averages B. Price-to-earnings ratios C. Working capital D. Capitalization ratios

200-day moving averages Technical analysts try to predict the market by examining price and volume trends. They expect the market to act in the future as it has in the past. Technical analysts are not interested in the fundamental aspects of a company, such as its financial statement ratios.

You recently took a trip to Warsaw, Poland, and when you received your credit card statement, you noticed that your vodka purchase for 100 Polish Zlotys resulted in a $30 charge on your statement. Based on this exchange rate, each dollar was worth approximately A. $.33 B. 3.33 Zlotys C. $3.33 D. 3 Zlotys

3.33 Zlotys When making an investment (or a transaction) in a foreign currency, it is important to be able to translate that into the exchange rate for your home currency. To do so, we divide the purchase in the foreign currency by the charge in U.S. dollars. In this case, 100 Zlotys only cost us $30, so that makes each dollar worth 3.3 Zlotys.

If the current risk-free rate is 4%, and the expected return from the market is 10%, what return should we expect from a security that has a beta of .9? A. 9% B. 6.4% C. 9.4% D. 13%

9.4% Required return = 4% + ([10% - 4%] × .9) = 4% + (6% x .9) = 4% + 5.4% = 9.4%.

Gaston is a police officer and wishes to contribute to a retirement plan sponsored by the city. Gaston wants the flexibility of being able to have unfettered penalty-free access to his funds before reaching age 59½. This can only be accomplished if Gaston contributes to A. a 403(b). B. a SEP-IRA. C. a 457 plan. D. a 401(k) plan.

A 457 plan The 457 plan is unique in that it is the only tax-qualified retirement plan permitting withdrawals, for any reason, before reaching 59½ without penalty. All qualified plans have exceptions to the 10% penalty tax, but only the 457 allows the withdrawals for any reason.

An investor owns five DEF call options with a strike price of $40. The options are European style. If the holder exercises, the cost will be A. $20,000. B. $0 because European options are exercisable only at expiration. C. $2,000. D. $4,000.

$20k Each option contract represents 100 shares. Exercising five call options means buying 500 shares at a price of $40 each, which equals $20,000. Although it is true that European-style options are exercisable only at expiration, nothing in the question indicates the investor tried to exercise before then.

If the Consumer Price Index (CPI) rose 5% during the past year, during which time your client held a 6% bond, what would be the approximate annualized inflation-adjusted return? A. 5% B. 6% C. 0% D. 1%

1% Because inflation, as measured by the CPI, rose by 5% during the year and the client's bonds returned 6% annually, inflation would have reduced the client's purchasing power by 5%, leaving an inflation-adjusted return of 1% for that year.

Julie owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will she own? 1. 125 shares 2. 100 shares 3. Cost basis of $25 4. Cost basis of $20

125 shares and cost basis of $25 Remember that the ex-date is the first day on and after which a purchaser of a stock is not entitled to a previously declared dividend (cash or stock). That means the owner of the stock on and after the ex-date is the one who receives the cash or, in this case, the additional stock. The payment of a stock dividend causes the number of shares owned to increase while the cost per share decreases. The total value of the position will always remain unchanged. Julie had 100 shares at $25 per share, or $2,500, and now has 125 shares × $20 = $2,500.

Given the following annual returns, what are the median and mode returns, respectively? Year 1 15% Year 2 2% Year 3 5% Year 4 -7% Year 5 0% A. No median exists; no mode exists B. 2.00%; no mode exists C. 2.00%; 3.00% D. 5.00%; 5.00%

2%; no mode exists Median: Arrange the return values from largest to smallest and take the middle value: -7%, 0%, 2%, 5%, 15%. The middle value is 2.00%. Mode: The mode is defined as the value that most often shows up in a distribution. Because no return value shows up more than once, this distribution has no mode.

Which of the following choices offers the highest tax-equivalent yield? A. 5.5% municipal bond to an individual in the 28% tax bracket B. 5.8% municipal bond to an individual in the 25% tax bracket C. 6.2% municipal bond to a corporation in the 21% tax bracket D. 5.0% municipal bond to an individual in the 35% tax bracket

6.2% municipal bond to a corporation in the 21% tax bracket Corporations receive the same tax break on municipal bonds as do individuals. Therefore, receiving a 6.2% return in the 21% tax bracket is equivalent to 7.85% before tax. A 5% bond to someone in the 35% bracket is equivalent to 7.69%; a 5.5% coupon to someone in the 28% bracket is equivalent to 7.64%; and a 5.8% coupon to someone in the 25% bracket is equivalent to 7.73%.

If a publicly traded corporation was going to sell a wholly owned subsidiary, the information would be made available through the filing of Form A. 8-K. B. 13F. C. 10-Q. D. 10-K.

8-K Form 8-K is filed with the SEC within four business days of any one of a number of significant actions, including the sale of a significant asset such as a wholly owned subsidiary.

One of your customers would like to buy a life insurance policy that has no participation in the stock market, has no cash value, and provides coverage for 20 years. You should recommend A. a 20-year term life policy. B. a 20-pay life insurance policy. C. a variable annuity with a death benefit. D. a whole life insurance policy.

A 20-year term life policy Term life insurance generally offers no cash value and is not tied to the stock market. Coverage terminates at the sooner of death or the stated term, which in this case is 20 years. Whole life, as the name implies, provides coverage for your entire life and does generate cash values. A 20-pay life policy offers lifetime coverage with the feature of premium payments for only 20 years (at a much higher rate than whole life). A variable annuity death benefit is not considered a life insurance policy. It simply pays back the greater of the annuity value or the total paid into the annuity when the policyholder dies.

The type of tax-favored retirement plan that is available to nonprofit entities such as schools and hospitals and that is sometimes called a tax-sheltered annuity is A. a simplified employee pension (SEP) B. a 401(k) plan C. a SIMPLE retirement plan D. a 403(b) plan

A 403(b) plan A 403(b) plan is a special type of tax-favored retirement plan allowed for nonprofit entities. Amounts contributed to 403(b) plans are often invested in annuity contracts, so these plans are sometimes referred to as tax-sheltered annuities.

One of your customers notices that the short interest on KAPCO common stock is high. When she asks you for an interpretation, you should tell her that this signals A. a shortage of enough stock to go around B. that a change in interest rates is coming C. a bearish outlook D. a bullish outlook

A bullish outlook Even though short interest represents the number of share sold short (typically by bearish investors), technical analysts believe that when it gets high, it is a bullish indicator. Each share that has been sold short must be replaced (covered) at some point. To replace the stock, an investor must go into the market to buy that stock. When all of those short sellers have to buy back the stock they shorted, it puts upward pressure on the price of that stock.

Which of the following is an order to purchase at higher than the current market? A. A buy stop B. A buy limit C. A buy, immediate or cancel D. A buy, fill, or kill

A buy stop Buy stop orders are entered above the current market value of the stock.

The Employment Retirement Income Security Act of 1974 (ERISA) is A. a state law regulating many aspects of private retirement plans B. a federal law establishing the Social Security system C. a federal law regulating many aspects of private retirement plans D. a state law establishing a pension system for state employees

A federal law regulating many aspects of private retirement plans The Employment Retirement Income Security Act of 1974 (ERISA) is a federal law that regulates many aspects of retirement plans established by employers in the private sector. It was enacted to help protect the rights of employees who participate in retirement plans. ERISA provides many of the rules that retirement plans must meet if they want to be considered qualified plans.

An investment advisory contract is considered assigned if an adviser formed as A. a partnership with two partners and adds five partners. B. a corporation with two officers and adds five officers. C. a partnership with five partners and adds two partners. D. a corporation with five officers and adds two officers.

A partnership w/ 2 partners and adds 5 partners If an advisory firm is formed as a partnership and there is a change in the majority of partners, this is considered to be an involuntary assignment to the new partnership. In this case, client approval of the contract assignment (not the addition of the partners) is required. This rule applies to partnerships. In the case of a corporation, a change in the ownership of a majority of the stock (or a pledge of a majority interest in the stock) would be considered an assignment.

Protection of the investing public is one of the major objectives of the SEC. Much of the protection comes from the disclosure requirements enveloping the industry. Among the disclosure forms used is Form 13F. To come under the SEC's requirement to file Form 13F, an institutional manager must have discretion over A. more than 10% of the outstanding voting securities of a reporting company. B. a portfolio of at least $100 million of 13(f) securities. C. a portfolio of at least $100 million. D. a portfolio of at least $50 million.

A portfolio of at least $100 million of 13(f) securities An institutional money manager with at least $100 million in 13(f) securities under discretionary management is required to file Form 13F. This form must be filed within 45 days of the end of the quarter. How does the money manager know which securities are 13F securities? The SEC publishes a quarterly list (but that is not tested).

When a brokerage firm sells stock from its own inventory, it is acting in the capacity of A. an agent, and charges a commission B. a principal, and charges a commission C. an agent, and charges a markup D. a principal, and charges a markup

A principal, and charges a markup A broker-dealer that purchases securities for, or sells securities from, its inventory is acting in the capacity of a principal. Principals charge markups on sales from inventory. When acting in the capacity of agent (facilitating a transaction between a buyer and seller), the broker-dealer receives a commission.

As defined in the Uniform Securities Act, which of these is not an investment adviser? 1. A broker-dealer who charges for investment advice 2. A publisher of a financial newspaper 3. A person who sells security analyses 4. A CPA who, as an incidental part of his practice, suggests certain tax-sheltered investments to his affluent clients

A publisher of a financial newspaper and a CPA who, as an incidental part of his practice, suggests certain tax-sheltered investments to his affluent clients A publisher of a financial newspaper and a CPA who, as an incidental part of his practice, suggests tax-sheltered investments are not investment advisers. Once a broker-dealer is compensated for investment advice, usually referred to as special compensation in the rules, the exclusion from the definition is lost. This answer would be the same under either the USA or federal law.

Which of the following stocks would probably be most appealing to a value investor? A. A stock with a relatively low P/E ratio B. A stock with a relatively high price-to-book-value ratio C. A stock that has relatively high volatility D. A stock with a relatively low dividend yield

A stock w/ a relatively low P/E ratio Value investors look for stocks in companies that have been overlooked or undervalued by other investors. They often focus on stocks with relatively low P/E ratios or price-to-book-value ratios or stocks with relatively high dividend yields compared with other stocks in the same industry.

A stock has been in a downtrend for several days. When its price decreases to near $30, many investors enter orders to buy the stock and the price increases to $31. This is most likely an example of A. a resistance level. B. a support level. C. a reversal. D. a change in polarity.

A support level The downtrend reached a support level where buying demand sustained the price. A resistance level is a price at which selling pressure emerges that stops an uptrend.

If an agent, broker-dealer, investment adviser, or investment adviser representative is found to be in violation of the provisions of the Uniform Securities Act, penalties could include which of these? 1. Administrative action 2. Fines 3. Imprisonment

Administrative action, fines, and imprisonment Those securities professionals found guilty of violating the USA could face various sanctions from the Administrator, including a fine and/or jail sentence if mandated by the courts.

A type of fraud using social media where the fraudster pretends to be a member of a group, sometimes using respected leaders of the group to spread the word about the scheme, is known as A. relationship fraud. B. ethnic fraud. C. affinity fraud. D. group fraud.

Affinity fraud This is a classic definition of how affinity fraud operates. Although it is frequently aimed at ethnic groups, there is no such term as ethnic fraud.

Which of the followings measures should be used to assess the risk-adjusted return of an active portfolio manager? A. Beta B. Alpha C. Gamma D. Theta

Alpha Alpha is a measure of risk-adjusted return. It is the return in excess of the compensation for risk. It is often used to assess the performance of active managers.

When does a customer have to receive the OCC Options Disclosure Document? A. With the confirmation of the first options transaction B. Within 15 days of account approval by the firm's designated options supervisor C. At or prior to accepting the customer's first order to trade options covered by the ODD D. Within 5 business days of the first options trade

At or prior to accepting the customer's first order to trade options covered by the ODD When opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document titled Understanding the Risks and Uses of Options, the broker-dealer satisfies the risk disclosure requirements. There are 2 alternatives for meeting the delivery requirement. It may be done before or at the time the broker-dealer approves that customer's options account or accepts the customer's first order to trade the listed options covered by the ODD.

One of your clients owns 2 different 6% corporate bonds maturing in 15 years. The first bond is callable in 5 years, while the second has 10 years of call protection. If interest rates begin to fall, which bond is likely to show a greater change in price? A. Both will increase by the same amount B. Bond with the 5-year call C. Both will decrease by the same amount D. Bond with the 10-year call

Bond w/ the 10-yr call As interest rates fall, the investor benefits from having the highest interest rate for as long as possible. The price change will not be the same for both bonds. The greater the call protection, the more likely a bond will appreciate if rates fall. That additional call protection in essence lengthens the duration of the bond and, as we know, the longer the duration, the greater sensitivity to interest rate changes. In this case, with declining rates, bond prices will rise.

John and his sister, Alice, open a margin account as JTWROS. John contributes $50,000, and Alice contributes $25,000. They have agreed that Alice will trade the account, and they will share in the profits and losses equally. As their agent, you would gather information regarding suitability for A. John, because he has made the larger contribution. B. either, because in a JTWROS account the owners share equally. C. both, because information regarding all owners is relevant. D. Alice, because she will be trading the account.

Both, b/c information regarding all owners is relevant When determining suitability and making recommendations to the owners of a joint account, it is the agent's responsibility to know each and every customer, regardless of their contribution or participation level.

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? A. Class A B. Class 1% C. Class C D. Class B

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.

Commodity contracts are available on many different types of commodities. One of those types is precious metals. Included in the definition of a precious metal would be all of the following except A. gold. B. platinum. C. silver. D. diamonds.

Diamonds Diamonds may be more valuable than any of the other choices, but they are not a metal.

Steve and Haley, ages 48 and 45, respectively, invest in large-cap stocks, international stock mutual funds, and real estate. They consider themselves moderately aggressive investors. Their investment portfolio is subject to all of the following risks except A. systematic risk. B. default risk. C. currency risk. D. business risk.

Default risk Their investment portfolio is subject to all of these risks except default risk. Default risk primarily applies when holding debt securities. A portfolio heavily concentrated in equity securities is going to have market (systematic) risk. Business risk is the risk that a company's managerial decisions or even factors out of its control, such as expiration of a patent, may negatively affect the value of an equity investment. By holding investments in international stock mutual funds, they are subject to exchange rate risk.

A fundamental analyst would be interested in all of the following except A. statistics of the U.S. Department of Commerce on disposable income B. daily trading volumes on the NYSE C. corporate annual reports D. innovations within the automotive industry

Daily trading volumes on the NYSE Trading volume interests the technical analyst, who looks at fluctuations in the market, not at fundamental economic values.

Expansions in the business cycle are characterized by A. increasing college enrollments and enlistment in military service. B. an increase in want ads in newspapers and a decrease in nonfarm jobs. C. higher consumer debt and rising inventories. D. increasing consumer demand for goods and services, increasing industrial production, and rising stock markets and property values.

Increasing consumer demand for goods and services, increasing industrial production, and rising stock markets and property values Expansions in the business cycle are characterized by increasing consumer demand for goods and services, increasing industrial production, and rising stock markets and property values. Simply stated, business activity is expanding.

As defined in the Uniform Securities Act, an investment adviser A. is any person who, for compensation, engages in the business of advising issuers on methods of raising capital. B. is any person who, for compensation, engages in the business of executing transactions in securities for others. C. is any person who, for compensation, engages in the business of advising others as to the value of securities. D. must be organized as a corporation or a partnership.

Is any person who, for compensation, engages in the business of advising others as to the value of securities Under Section 401 of the USA, an investment adviser is any person who (1) for compensation, engages in the business of advising others—either directly or through publications or writings—as to the value of securities or as to the advisability of investing in, purchasing, or selling securities or (2) for compensation and as a part of a regular business, issues or promulgates analyses or reports concerning securities.

Which of the following are characteristics of commercial paper? 1. It represents a loan by the holder to the issuer. 2. It is a certificate of ownership in the corporation. 3. It is commonly issued to raise working capital for a corporation. 4. It is junior in preference to convertible preferred stock.

It represents a loan by the holder to the issuer and it is commonly issued to raise working capital for a corporation Commercial paper instruments are debt securities; they represent loans to the issuing corporation by the holder. They are commonly issued to raise working capital and, as debt obligation, are senior in preference to preferred stock in claims against an issuer.

If an investor has $20,000 to invest, but requires $500 per month to pay for her mother's nursing home care, which of the following funds should you recommend? A. Biotechnology B. Aggressive growth C. Money market D. Foreign stock

Money market The client's monthly income requirements suggest that the money market fund, the most liquid and safest of the investments, is the most appropriate.

According to the Investment Company Act of 1940, an open-end investment company must compute its NAV A. annually. B. weekly. C. no less frequently than once per day. D. monthly.

No less frequently than once per day Mutual funds must calculate the value of fund shares at least once per business day; funds may calculate the value more often and will disclose this fact in the prospectus.

Which of the following statements regarding the antifraud provisions of the Uniform Securities Act (USA) is true? A. The only securities exempt from the provisions are those that are properly registered under blue-sky laws. B. Exempt securities are not subject to the antifraud provisions of the USA. C. No securities are exempt from the antifraud provisions of the act. D. The only securities exempt from the provisions are those issued by national governments or political subdivisions of countries that maintain diplomatic relations with the United States.

No securities are exempt from the antifraud provision of the act Neither exempt nor nonexempt securities are ever exempt from the USA's antifraud provisions.

Under the Investment Company Act of 1940, which of the following are considered management companies? 1. Open-end companies 2. Closed-end companies 3. Unit investment trusts 4. Face-amount certificate companies

Open-end and closed-end companies Management companies are subclassified into open-end companies (mutual funds) and closed-end companies. Unit investment trusts are a type of investment company that is not managed, as are face-amount certificate companies.

Many sophisticated investors have added alternative investments to their portfolios. Benefits in doing so include A. portfolio diversification. B. greater regulation than traditional investments such as stocks and bonds. C. returns that almost always exceed those of traditional stock and bond investments. D. lower expenses than traditional stock and bond investments.

Portfolio diversification Alternative investments, such as limited partnership vehicles and hedge funds, have a tendency to add diversification to a traditional stock and bond portfolio. Many alternative investments have little or no regulation, and their expenses are typically high. Although many alts offer the opportunity for higher returns, that opportunity is not always realized. Therefore, we cannot make a statement that the returns almost always generate higher returns than traditional investments.

LMN Manufacturing Company, listed on the NYSE, is an SEC reporting company. Each of the following would require the filing of Form 8-K except A. a change in the external CPA firm engaged to perform the annual audit. B. acquisition of a major asset. C. a change in top management. D. relocation of a wholly owned subsidiary.

Relocation of a wholly owned subsidiary Form 8-K is used to report significant events that could affect the price of the company's stock. The SEC does not consider relocation of a subsidiary to be of significant magnitude.

Commodity futures contracts are available on all of the following except A. eggs. B. industrial metals. C. soybeans. D. single-family homes.

Single-family homes Commodity futures contracts are available on metals, both precious and industrial; animal products, such as eggs; and agricultural crops, such as soybeans. Single-family homes are not a tradable commodity.

The Conference Board releases information about the economy on a periodic basis. Included are a number of different indicators. These indicators can be used to predict how the economy as a whole might change. Which of the following would be considered a leading indicator? A. Industrial production B. Stock prices as measured by a broad index such as the S&P 500 C. Gross domestic product D. CPI for services

Stock prices as measured by a broad index such as the S&P 500 The stock market, which anticipates economy activity, is a leading economic indicator. Industrial production is a coincident, or current, economic indicator. The CPI for services is a lagging indicator. GDP is not included in the Conference Board's list of economic indicators.

An investment adviser representative of a federal covered investment adviser registers with A. the Administrator. B. NASAA. C. FINRA. D. the SEC.

The Administrator Registration of IARs is done solely on the state level. IARs register with the Administrator of each state in which they are required to be registered.

One of your clients has recently turned 73 and has questions about RMDs. The client has a traditional IRA, a rollover IRA, and 401(k) plans from two previous employers. When computing the RMDs, 1. the RMD from each IRA is computed and may be made from one or both of them 2. the RMD from each IRA is computed and must be paid from that IRA 3. both 401(k)s are combined to compute the required distribution, which may be made from one or both of them 4. the RMD from each 401(k) is computed and must be paid from that 401(k)

The RMD from each IRA is computed and may be made from one or both of them and the RMD from each 401(k) is computed and must be paid from that 401(k) For RMD purposes, each IRA is figured separately and the distribution can be made from one or all of them. That is not the case with a 401(k) plan. Each account has an RMD that can only be paid from that account.

Surrender charges may cause a reduction to all of the following except A. the cash value of a variable life insurance policy B. the liquidation value of a variable annuity C. the redemption value of Class B mutual fund shares D. the death benefit of a variable life insurance policy

The death benefit of a variable life insurance policy Surrender charges never apply in the case of a death benefit. There may be a surrender charge in the case of early surrender of a variable annuity, taking out the cash value of a variable life policy, or redemption of Class B (back-end load) mutual fund shares.

In most cases, the front cover of a prospectus for a registered stock offering must contain a statement to the effect that the SEC, or state if an intrastate offering, had not approved or disapproved of the security. This statement is known as A. the tombstone. B. the warning. C. the caveat. D. the disclaimer.

The disclaimer The word the exam will be looking for is disclaimer.

An investment adviser should develop an investment policy based on the needs and objectives of the client. When the client is a business entity structured as a general partnership, the investment policy would have to consider A. the objectives of all the partners on a collective basis. B. the mean requirement of the wealthiest and the poorest partner. C. the number of limited partners. D. the liability of the general partner.

The objectives of all the partners on a collective basis Because all income and gains pass through to the partners, and because there is unlimited personal liability for all general partners, we must examine the objectives of each of them to determine proper suitability.

An investor wishing to buy US Treasury bonds receives a quote from the dealer of 98.16. This represents A. the offer price B. a discount C. an indication of falling interest rates D. the bid price

The offer price A dealer's quotes consist of the bid and the offer (ask). The bid price is what the dealer will pay a customer to purchase a security, and the offer is the dealer's selling price. In this case, the client wishes to purchase bonds, so the 98.16 represents the price the dealer is asking for them. Yes, the quote is a discount, but the better answer for this question is offer.

Which of the following is not included in fundamental analysis of a company? A. The study of a firm's financial statements. B. The study of a firm's position within its industry. C. The study of a company's historical stock prices and trading volume. D. The study of the direction of the economy.

The study of a company's historical stock prices and trading volume 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.

One of your clients will be separating from his current employer and asks you for your suggestion as to what should be done with the assets in his contributory 401(k) plan. The plan documents indicate that plan assets must be distributed upon termination. Given the following choices, your recommendation would be to A. take the cash and put it into a managed account B. use a direct rollover to have the assets placed into a rollover IRA C. reconsider the decision to separate D. take the distribution in cash and rollover the assets into an IRA within 60 days

Use a direct rollover to have the assets placed into a rollover IRA Most would agree that the best plan is to preserve the tax deferral as long as possible. A direct rollover into a rollover IRA is preferable to taking the cash first because there is no 20% withholding, so all the money goes to work immediately.

If you are registered as an agent for a broker-dealer in State Y and you conduct business as an agent of theirs in State Z, a state in which you are not registered as their agent, which of these are true? 1. You expose yourself and your employer to disciplinary action by State Z. 2. You expose yourself to a possible fine. 3. You may obligate your broker-dealer to offer your client the right to rescind the sale. 4. You may have your registration in State Y revoked.

You expose yourself and your employer to disciplinary action by State Z, you expose yourself to a possible fine, you may obligate your broker-dealer to offer your client the right to rescind the sale, and you may have your registration in State Y revoked. Agents must be registered in each state where selling or offering to sell securities unless an exemption is available. Failure to do so exposes the agent and the broker-dealer to fines and possible disciplinary action. In addition, the agent could have his registration revoked where he is registered, and the broker-dealer could be required to offer customers the right to rescind any securities transactions.

An investor in the 28% tax bracket has a $5,000 loss after netting all capital gains and losses realized. How much may the investor deduct from income for the year? A. $5,000 B. $0 C. $3,000 D. $2,500

$3k The maximum deduction of net capital losses against other income in any one year is $3,000; any remaining loss can be carried forward into the next year.

One of the likely consequences of a rating downgrade on a bond is A. an increase to the coupon by the issuer. B. a reduction in the market price of the bond. C. the call feature will be employed. D. the current yield will be reduced.

A reduction in the market price of the bond If the rating agencies downgrade the quality of a bond, potential investors will look to compensate for the increased risk by demanding a greater yield on the issuer's bonds. This will inevitably result in a lower bond price. A change in rating is unlikely to lead to a call. In fact, with the reduction in the market price, the bond may be selling below par, giving the issuer the opportunity to retire the debt at a discount. Bonds are fixed-income securities because the coupon rate is fixed when the bond is issued and does not change.

Which of the following would not be considered derivatives? A. An ETF tracking the Bloomberg Commodity Index B. Forward contracts C. Futures contracts D. Equity options

An ETF tracking the Bloomberg Commodity Index An exchange-traded fund (ETF) is an investment company, regardless of what is contained in its portfolio. Forwards, futures, and equity options are derivatives.

A form of business organization that offers flow-through of income and loss while providing the owner(s) with limited liability is 1. a sole proprietorship 2. an LLC 3. a C corporation 4. an S corporation

An LLC and an S corporation Only an LLC or an S corporation allows for direct participation in the income or losses of the business while offering limited liability. The sole proprietorship has flow-through, but unlimited liability. The C corporation limits liability but has no flow-through.

Which of the following compensation arrangements is typically not allowed under the Investment Advisers Act of 1940? A. An adviser charges clients a percentage of assets under management. B. An adviser varies fees according to the time spent managing the account. C. An adviser waives a client's fee if the client experiences a loss for the year. D. An adviser charges all clients a set fee, regardless of how long it takes to generate a recommendation or a recommendation's results.

An adviser waives a client's fee if the client experiences a loss for the year A fee in which payment is contingent on investment results is prohibited unless the client meets certain financial standards; advisers are permitted to charge by the hour.

An investment adviser executes a transaction for a client who has a contract for advisory services. The adviser also represents the person who is the contra party in the sale and is paid a commission. Which of the following best describes this transaction? 1. A riskless and simultaneous transaction. 2. An agency cross transaction. 3. Not permitted under any circumstances. 4. Permitted with prior written disclosure and consent.

An agency cross transaction and permitted w/ prior written disclosure and consent This is an example of an agency cross transaction in which the investment adviser represents both parties in a trade. This transaction is permissible if the adviser did not recommend the trade to both parties and the client received written disclosure prior to the first cross and gave consent.

Under the Uniform Securities Act, all of the following may provide investment advice incidental to their normal business without requiring registration as an investment adviser except A. a lawyer. B. an engineer. C. a teacher. D. an economist.

An economist The Uniform Securities Act (and the Investment Advisers Act of 1940, as well) does not exclude economists from the definition of investment adviser, as it does lawyers, accountants, teachers, and engineers who give advice that is incidental to the practice of their profession. Remember the acronym LATE—lawyers, accountants, teachers, and engineers. Do not be fooled by the E in economist.

Which of the following would be agents as the term is defined in the Uniform Securities Act? 1. An individual representing a registered broker-dealer in the sale of securities to the general public 2. An assistant to the president of a broker-dealer who accepts orders from clients on behalf of the senior partners 3. A subsidiary of a major commercial bank registered as a broker-dealer that sells securities to the public 4. An issuer of nonexempt securities registered in the state and sold to the general public

An individual representing a registered broker-dealer in the sale of securities to the general public and an assistant to the president of a broker-dealer who accepts orders from clients on behalf of the senior partners Under the USA, only individuals can be agents. A person who sells securities for a broker-dealer is an agent. An administrative person, such as the assistant to the president of a broker-dealer, is considered an agent if he takes securities orders from clients. Corporate entities are excluded from the definition of an agent. Broker-dealers and issuers are not agents.

Under the USA, each of the following is specifically excluded from the definition of a broker-dealer except A. an agent. B. an international bank. C. an investment adviser. D. an issuer.

An investment adviser The USA specifically excludes agents/issuers and banks (international or domestic) from the definition of a broker-dealer. Investment advisers also may have to register as broker-dealers if their method of operation requires it.

All of the following must be disclosed by an investment adviser except A. a senior officer of the firm was convicted of a felony six years ago. B. the president of the investment adviser was found liable in a civil action involving unsuitable advice in a state where the adviser does not have an office. C. a senior officer's suspension from the securities industry. D. an investment adviser representative in the firm was fined $1,000 by FINRA for making unsuitable recommendations.

An investment adviser representative in the firm was fined $1k by FINRA for making unsuitable recommendations Legal and disciplinary action successfully brought against an investment adviser must be disclosed to customers, as well as disciplinary actions that resulted in a fine in excess of $2,500. Convictions for a misdemeanor or felony involving securities or money within the past 10 years must also be disclosed.

An investment adviser has a client who wants to save for college for her child. The child will be entering college in 5 years. This would be an example of A. an investment constraint B. planning too late C. tactical asset allocation D. a capital need

An investment constraint The goal is having money for college. The investment constraint (obstacle in the way of meeting the goal) is the short time horizon. It may be true that the client has started too late, but that is not what the exam would be looking for as the correct answer.

Despite superior stock price increases in the computer industry in a given year, the stock of ABC Computers loses 47%. Following the third losing quarter, if the chief financial officer is fired, this is an example of: A. business risk B. market risk C. regulatory risk D. default (credit) risk

Business risk Business risk is a unique danger related to a specific business entity, and both the chief financial officer and the stock suffered risk unique to the corporation. Market risk refers to the general risk of investing in securities rather than to the operating risk of a company. Regulatory risk refers to the risk of decisions of a regulatory body adversely affecting an industry. Default risk refers to the ability of a corporation to meet its debt payments.

Angela, a wealthy client of yours, has constructed her portfolio with individual common stocks that closely match the weighting of the S&P 500 index. In so doing, Angela has significantly reduced her A. systematic risk B. default risk C. market risk D. business risk

Business risk By matching the composition of the S&P 500 index, the client has broadly diversified her portfolio. One of the primary benefits of diversification is the reduction of business risk, an unsystematic risk. Market risk, one of the systematic risks, is not reduced through diversification. Default (or credit) risk, would apply when the portfolio contains debt securities.

An investor is short stock at 60. The current market price of the stock is 35, and he anticipates it will continue to decline. If he thinks the price will rise temporarily and if he does not wish to close out his short position, his best strategy to prevent a loss would be to A. sell an XYZ 35 put B. buy an XYZ 35 put C. buy an XYZ 35 call D. sell an XYZ 35 call

Buy an XYZ 35 call This client is temporarily bullish on the stock but, in the long term, feels that it will continue to decline so the short stock position is to be maintained. If the client is correct, a near-term rise in the price of XYZ will cause the long 35 call to be in the money and the investor can sell the call at a profit. When it comes to hedging a short stock position, buying a call is always the best strategy.

Under current regulations, registration with the SEC is optional for all of the following investment advisers except A. Midwestern Asset Managers, LLC, with $53 million in AUM, required to register in 17 states B. Employee Benefit Specialists, Inc., a pension consultant with $225 million in AUM. C. CEF Investment Managers, LTD., a partnership managing a small, registered, closed-end investment company traded on the OTCQB. D. Grand Visions Advisers, a sole proprietorship with $104 million in AUM

CEF Investment Managers, LTD., a partnership managing a small, registered, closed-end investment company traded on OTCQB Currently, registration with the SEC is mandatory (not optional) for any investment adviser managing a registered investment company (open- or closed-end). It is optional for 1. pension consultants once their AUM reach $200 million; 2. small and mid-size advisers who would be required to register in 15 or more states; and 3. those advisers with at least $100 million in AUM, but not $110 million in AUM. Any of these choosing to register with the SEC are federal covered advisers and do not register with any state, although a notice filing may be required.

Which of the following statements regarding the correlation coefficient is not correct? A. Perfectly positively correlated assets have a correlation coefficient of +1.0. B. A correlation coefficient of 0.0 means there is no relationship between the returns of the assets. C. Perfectly negatively correlated assets have a correlation coefficient of -1.0. D. Combining assets with less than perfect positive correlation will not reduce the total risk of the portfolio.

Combining assets w/ less than perfect positive correlation will not reduce the total risk of the portfolio Watch out for the double negatives here. Combining assets with less than perfect positive correlation can reduce the total risk of the portfolio. The further the correlation coefficient between the two assets is away from +1.0, the greater the diversification benefits that may be attained.

In the securities industry, when a person is acting in an agency capacity, the form of compensation received is A. markup or markdown B. commission C. fees D. account maintenance charges

Commission Broker-dealers act in the capacity of brokers (agency); they earn commissions. When acting in the capacity of a dealer (principal), the compensation comes from markup or markdown. Compensation in the form of fees is most common for investment advisers.

Which two of the following investments would offer your clients the best chance of minimizing inflation risk? 1. Common stock 2. Callable preferred stock 3. Money market mutual funds 4. TIPS

Common stock and TIPS Historically, common stock has been the best hedge against inflation. TIPS (Treasury Inflation-Protected Securities) are government-guaranteed debt issues that automatically adjust the principal based upon the inflation rate.

Here is a list of the current ratios of 4 companies. The industry standard for an acceptable current ratio is 2:1. Company A: 3.47:1 Company B: 1.47:1 Company C: 1.19:1 Company D: 0.89:1 Which of the following is correct? A. Company B is above industry standards. B. Company A is below industry standards. C. Company B's financial status is better than company C. D. Company D is in the best financial standing.

Company B's financial status is better than company C It should be clear that a 1.47:1 ratio of current assets to current liabilities is stronger than 1.19:1. Company A is well above industry standards, and Company D is well below with current assets less than its current liabilities.

In the investment industry, the term spread has many different meanings. When used in a discussion about bonds, which of the following would be most appropriate? A. Calendar spread B. Inverse spread C. Debit spread D. Credit spread

Credit spread A credit spread refers to the difference between yields of bonds with similar maturities but different ratings. For example, a bond analyst might compare the yield of a 10-year Treasury note with a AAA rated bond with 10 years to maturity. Wider spreads generally indicate a concern about the economy (investors are seeking the safety of the Treasury issue), while narrow spreads generally indicate economic optimism. Debit spread and calendar spread refer to options (as does credit spread, but our question asks about bonds). Bond prices and interest rates have an inverse relationship, but that isn't called an inverse spread.

Liquidity ratios measure the solvency of a firm or the firm's ability to meet short-term financial obligations. Which of the following is a liquidity ratio? A. Gross profit divided by net sales B. Dividend divided by earnings per share C. Net income divided by average total equity D. Current assets divided by current liabilities

Current assets divided by current liabilities Current assets divided by current liabilities is the current ratio, a ratio that measures the liquidity of a firm. Gross profit divided by net sales is a profitability ratio that measures the gross profitability of the firm's business operations, not its liquidity. Net income divided by average total equity is the return on stockholders' equity, which measures the efficiency of common shareholders' investment or equity in the firm. Dividend amount divided by earnings per share is the dividend payout ratio which measures how much of a company's earnings are distributed to common stockholders.

An investor is analyzing various risks related to corporate and government bonds. She is interested in finding a risk that is more specific to corporate bonds than to government bonds. Which of the following options correctly defines that risk? A. Default risk B. Purchasing power risk C. Liquidity risk D. Interest rate risk

Default risk Default risk is avoided with U.S. government bonds. There is no chance (at least for test purposes) that timely payment of interest and principal will not be made on them. All bonds have interest rate and purchasing power risk. Although it is true that government bonds are generally more liquid than corporate bonds, many corporate bonds are exchange listed. That ensures good liquidity. More important is the test-taking skill. If you have to choose between lack of credit risk and lack of liquidity, it should be clear where the government bond comes out ahead.

All of the following activities of an investment adviser are prohibited under the Uniform Securities Act except A. engaging in a practice not expressly forbidden by the act but defined as unethical by courts, self-regulatory organizations such as FINRA, or both. B. selling recommended securities to a client from one's own account without disclosing this fact to the client. C. deliberately omitting a material fact when soliciting a client. D. disclosing potential conflicts of interest.

Disclosing potential conflicts of interest Potential conflicts of interest must be disclosed to clients. The USA gives the Administrator, and self-regulatory organizations, the power to define certain practices as unethical with the same force as those spelled out in the act. Omitting a material fact is specifically prohibited under the act. Investment advisers must always disclose the capacity in which they acted in a transaction with advisory clients.

An increase in the earnings per share growth rate from one reporting period to the next is called A. earnings momentum. B. profitability. C. price-to-earnings ratio. D. finding alpha.

Earnings momentum When a company's rate of earnings per share growth is increasing, that is, not only is the company becoming more profitable, but it is doing so at an accelerating rate, analysts call that earnings momentum. The company may or may not be generating positive alpha. We would have to know its beta, the risk-free rate, the market return, and the stock's return to compute that. It is likely that earnings momentum would cause the P/E ratio to increase, but that doesn't answer the question. Earnings momentum is one of the goals of the growth style of investing.

Under the NSMIA, state securities Administrators retain authority to A. impose state registration requirements on all investment advisers. B. regulate the securities registration and offering process for registered investment companies. C. forward all filing fees received from issuers, broker-dealers, and agents to the SEC. D. enforce antifraud provisions.

Enforce antifraud provisions Under the NSMIA, state Administrators are not prohibited from enforcing the antifraud provisions of state and federal securities laws. Investment companies and SEC-registered advisers are exempt from state registration, but they may be required to pay state filing fees.

Which of the following statements regarding a state-registered investment adviser with custody of customer assets is true? A. Every three months, the adviser must send an itemized account statement to each customer whose assets are held in custody. B. An adviser who has discretion over customer accounts faces a higher net worth requirement than an adviser who has custody. C. The Administrator must give written approval before the adviser may hold customer assets in custody. D. Customer assets may be commingled with assets of the investment adviser.

Every 3 months, the adviser must send an itemized account statement to each customer whose assets are held in custody Customer assets held in custody by an investment adviser must be segregated, and the adviser must send a statement every three months. The Administrator does not approve custodial accounts. If there is no rule prohibiting custody, the Administrator must be notified that the adviser has custody. Advisers with custody of customer assets have a higher net worth requirement than advisers with discretionary authority, not the other way around. Commingling (mixing together) of client and firm assets is never permitted.

If your customer is pursuing an aggressive stock buying strategy, which of the following is most suitable for him? A. GHI stock with a beta coefficient of 1.20 B. ABC stock with a beta coefficient of 1.0 C. DEF stock with a beta coefficient of 0.93 D. Convertible bonds of a mid-cap company

GHI stock w/ a beta coefficient of 1.2 Beta coefficients greater than 1.0 signify that the stock will fluctuate more than the market as a whole. In general, the higher the beta, the greater the risk. Such risk-taking is appropriate for investors who seek aggressive stock-buying strategies and have both the financial ability and the temperament to withstand downturns in the market

Which of the following is a direct obligation of the U.S. government? A. Bank for cooperatives bonds B. Ginnie Maes C. Fannie Maes D. Government bond mutual funds

Ginnie Maes Ginnie Maes are backed by the full faith and credit of the United States. Other agencies have a moral, but not direct, government backing. Government bond mutual funds are not backed by the U.S. government.

Reasons why a corporation might issue a convertible preferred stock would include A. a lower cost to the issuer than would be incurred by the issuance of convertible bonds. B. tax savings to the issuer. C. giving those shareholders an opportunity to participate in the future success of the company. D. giving those shareholders the ability to convert into the issuer's bonds.

Giving those shareholders an opportunity to participate in the future success of the company The benefit of any convertible security, debt security, or preferred stock is that the ability to convert into the issuer's common stock allows those investors to participate in the potential future growth of the company. One does not convert into a bond, and because preferred dividends are an after-tax outlay, there are no tax savings, as there would be with bond interest. Because stock is lower in claim than bonds, the dividend rate would have to be higher than the interest rate on bonds.

As part of its suitability determination, an IA firm requires that all potential nonbusiness clients complete a family balance sheet. Items that would be included are 1. gold jewelry 2. loan secured by the family automobile 3. the amount paid thus far this year for Botox injections 4. the balance owed to the dentist for new crowns

Gold jewelry, loan secured by the family automobile, and the balance owed to the dentist for new crowns The balance sheet contains assets and liabilities as of a specific point in time. Personal property currently owned, such as jewelry, is an asset. A loan still outstanding, such as the car loan and the debt to the dentist, are liabilities. The amount already paid for the Botox injections is no longer on the balance sheet.

If John Good, a properly registered investment adviser, opens his own office and hires several representatives to work for him, his business card may not read A. Good Performance Advisers, Inc. B. John Good Investment Advisers, Inc. C. Good and Associates Investment Advisers, Inc. D. Good's Investment Advisers, Inc.

Good Performance Advisers, Inc. John Good, a registered investment adviser, cannot put on his business card "Good Performance Advisers." In this instance, the word Good can be interpreted as an adjective modifying the word performance, as opposed to John's given name, Good. An adviser cannot present himself to the public in terms that can be misleading or interpreted as exaggerating performance. The other three choices are appropriate because they do not use Good as an adjective touting the results of the adviser, but as the name of the adviser.

If an agent thinks that a technology stock is undervalued and actively solicits all customers, which of the following is true of the agent? A. He did not commit a violation if all clients are accurately informed of the price of the stock. B. He committed the unethical business practice of blanket recommendations. C. He committed an unethical sales practice because the firm has not recommended this technology stock. D. He did not violate the Uniform Securities Act if all material facts are disclosed.

He committed the unethical business practice of blanket recommendations Agents must always determine suitability before soliciting purchases or sales. An investment cannot be suitable for all your clients; therefore, the practice of blanket recommendation is unethical.

If a married couple establishes a JTWROS account with a balance of $25 million and the wife dies, what is the husband's estate tax liability? A. He pays federal estate taxes on the entire balance. B. He pays federal estate taxes on $12.5 million. C. He pays federal estate taxes only on the amount that exceeds the estate tax credit. D. He pays no estate tax.

He pays no estate tax Establishing a joint tenants with right of survivorship account allows for the transfer of assets to the survivor upon death. The surviving spouse is not taxed on assets transferred in this manner because under current tax law, there is an unlimited marital deduction.

You have a client who was divorced three years ago, maintains a home, and has custody of the children. More than likely, the most advantageous tax filing status for your client is A. divorced parent. B. head of household. C. single. D. joint.

Head of household When qualifying for head of household status (the technical qualifications are beyond the exam), the individual has the lowest tax burden. There is no such status as "divorced parent," and one cannot file jointly unless married. Filing as a single carries the highest tax burden.

An investment adviser representative's client lost her father to lung cancer. Among the assets bequeathed to her were 2,000 shares of a tobacco stock. Which of the following is most likely not a consideration when recommending to her what to do with the stock? A. Her father's years of investment experience B. The cause of her father's death C. Her financial goals D. Her employment situation

Her father's years of investment experience An adviser's recommendations to a client are not impacted by the degree of someone else's investment experience or knowledge. In this case, it is not unreasonable to expect some resentment towards holding shares of a tobacco company when the cause of a loved one's death is lung cancer.

Which of the following statements regarding internal rate of return (IRR) is true? A. IRR ignores the time value of money. B. IRR is a discount rate at which the net present value (NPV) of an investment is equal to zero. C. If the IRR is higher than the cost of borrowing to fund an investment, the investment is likely to be unprofitable. D. IRR cannot be used effectively to measure return on investments with even cash flows, such as bonds.

IRR is a discount rate at which the net present value (NPV) of an investment is equal to zero Internal rate of return (IRR) is a discount rate at which the net present value (NPV) of an investment is equal to zero. IRR can be used to measure return on bonds because of their even cash flows and on those stocks that pay stable dividends for the same reason. IRR accounts for the time value of money. If the IRR is higher than the cost of borrowing to fund the investment, the investment should be profitable.

Which of the following is a coincident economic indicator? A. Stock market prices as measured by the S&P 500 B. Agricultural employment C. Industrial production D. Machine tool orders

Industrial production Industrial production is a coincident indicator. The stock indexes and manufacturing orders are leading indicators. Economists do not use agricultural employment as an indicator.

A client of Wall Street Wealth Management (WSWM), a federal covered investment adviser, calls the IAR handling the account and gives instructions to use some of the surplus cash in the account to purchase 500 shares of RMBM, a small-cap stock traded on the Nasdaq Stock Market. Prior to submitting the order, the IAR checks with a supervisor and learns that WSWM has 1,000 shares of RMBM in its proprietary account and is looking to halve the position. If, instead of forwarding the order to the broker-dealer who normally handles trade executions for this client, WSWM filled the order out of its own account, A. because it was an unsolicited transaction, the only required disclosure would be the firm's capacity on the trade confirmation. B. it would be permissible as long as consent was obtained and written disclosure of the firm's capacity was disclosed prior to the completion of the transaction. C. it would be permissible only if consent was obtained and written disclosure of the firm's capacity was disclosed prior to execution. D. WSWM would be engaging in a prohibited practice.

It would be permissible as long as consent was obtained and written disclosure of the firm's capacity was disclosed prior to the completion of the transaction In almost every case, an IA acting as a principal (out of inventory) or agent in a trade with an advisory client must obtain client consent and provide written disclosure of the IA's capacity in the trade no later the completion of the trade. If the IA is also a broker-dealer and the transaction with the advisory client was not generated through a recommendation (generally an unsolicited order), the only disclosure necessary is the firm's capacity on the confirmation. In this question, we can't assume that WSWM is also a broker-dealer.

With respect to liquidity and potential for diversification, in comparing alternative investments to exchange-traded stocks, the markets for alternative investments are generally A. less liquid and provide less opportunity for diversification. B. less liquid and provide more opportunity for diversification. C. more liquid and provide more opportunity for diversification. D. more liquid and provide less opportunity for diversification

Less liquid and provide more opportunity for diversification Alternative investments can provide exposure to unique risks and trading strategies and thus provide good diversification to a stock and bond portfolio. The markets for alternative investments are generally less liquid than most listed stocks.

An investor who chooses to use preferred stock as an income source instead of bonds would potentially incur which of the following risks? 1. Loss of principal can occur. 2. Price volatility of preferred stock is closely related to interest rates. 3. Preferred stock cannot be traded as readily as bonds. 4. If the stock is callable, the client's income can be suddenly lowered.

Loss of principal can occur, price volatility of preferred stock is closely related to interest rates, and if the stock is callable, the client's income can suddenly be lowered Because bonds have seniority over any equity security, there is a greater risk of loss of principal with preferred stock than with bonds. The price volatility of preferred stocks, like bonds, is impacted by interest rate changes. Unlike bonds, however, preferred stock does not have a maturity date. This means that preferred shares may never return to their par value, as bonds do at maturity date. Because the preferred stock may have a callable feature, the company can redeem its shares anytime after the call protection period (if any) is over. This usually happens when interest rates have declined, so the client whose stock was called will not be able to reinvest the proceeds at the same rate and could, therefore, suffer an unexpected drop in income. Preferred shares, particularly those listed on the exchanges, are generally easier to trade than corporate bonds (and certainly no worse).

One business succession issue that applies to virtually all investment advisers is A. loss of the designated regulatory contact person. B. death of the sole proprietor. C. permanent disability of a member of the board of directors. D. departure of a partner holding a majority interest.

Loss of the designated regulatory contact person All investment advisers must have a designated regulatory contact person. Only sole proprietorships are affected by the death of that sole person. Disability or death of a member of the board of directors will probably have no effect on succession, and only partnerships are concerned with a partner (of any size) leaving.

Under the Investment Company Act of 1940, which of the following qualify for a discount in a mutual fund's sales charge? 1. Mr. and Mrs. Jones each purchase $5,000 worth of shares; the fund offers a volume discount for a single purchase of $10,000. 2. Neighbors Jan, Mickey, and Lee form an investment club; Jan places an order for $10,000 worth of shares to be held in their three names. The fund offers a volume discount for a $10,000 purchase. 3. Allen is the vice president of a firm under contract to provide investment advice to a mutual fund. He buys shares of that fund.

Neighbors Jan, Mickey, and Lee form an investment club; Jan places an order for $10,000 worth of shares to be held in their three names. The fund offers a volume discount for a $10,000 purchase and Allen is the vice president of a firm under contract to provide investment advice to a mutual fund. He buys shares of that fund. A husband and wife and all children under 21 qualify as a single person for the purposes of obtaining a quantity discount, as do corporations formed for a purpose other than obtaining such a discount and employee benefit plans. But other associations acting collectively, such as the members of an investment club, do not qualify as a single person for such a purpose. Discounts may also be made to directors, officers, partners, employees, or sales representatives of the fund, its investment adviser, or its principal underwriter.

Which of the following practices is prohibited under the Uniform Securities Act? A. Offering services that an agent cannot realistically perform because of his broker-dealer's limitations B. Altering the customer's order prior to execution at the request of a customer, which subsequently results in a substantial loss C. Failing to inform the firm's principal of frequent oral customer complaints D. Actively trading a security in which an unusually high trading volume has occurred

Offering services that an agent cannot realistically perform b/c of his broker-dealer's limitations An agent may not offer services that he cannot perform. An agent may participate actively in trading a security in which an unusually high trading volume has occurred, provided the trading is not designed to create a false appearance of high volume. At the client's request, an agent can alter a client's order, even if the change results in a loss. An agent is only required to report written complaints to his employing principal, although it would be wise to report repeated oral complaints.

Individuals are faced with choices every day. Sometimes the choices we make result in a favorable outcome while some choices don't. When it comes to investing, an investor who, when presented with several investment options, selects one that ultimately provides the poorest returns has encountered which risk? A. Liquidity risk B. Opportunity cost C. Market risk D. Business risk

Opportunity cost Opportunity cost is the risk that making the wrong choice will provide lower returns. Investors can choose a risk-free investment (91-day T-bill) or some new tech stock promising enormous returns. If that tech stock turns out to be a bust, the investor will have lost the opportunity of a sure-thing (the return on the T-bill). The question doesn't give us enough information about the investment choices to know whether any of these other risks were pertinent.

Which of the following industries is most exposed to regulatory risk? A. Public utilities B. Publishing companies C. Consumer retailers D. Entertainment companies

Public utilities Most industries are subject to the regulation of their business through regulatory activity. Of the companies listed, public utilities are the most highly regulated. Their prices, production processes, and the economic returns are all subject to various regulators. Publishing companies experience little regulatory interference because of the nature of the products and services they offer. They face legal issues such as copyright infringement and libel suits, but enjoy relatively little interference from regulatory bodies. Entertainment companies do not have the same level of exposure to regulatory risk as the others listed. Retailers are middlemen in the product production process and face less legislative risk than other industries.

One way for an accredited investor with an aggressive stance to reduce the overall risk in his portfolio is by A. purchasing a hedge fund. B. purchasing insured bank CDs. C. selling uncovered calls. D. purchasing U.S. Treasury bills.

Purchasing a hedge fund Although the T-bills and the CDs will reduce the overall risk, they are not the best answer because the question is dealing with an aggressive investor. One of the reasons HNW clients buy these funds is for the diversification offered by adding an asset subclass to their portfolios.

An analyst is reviewing a company's financial statements. One of the calculations involves taking all of the current assets except the inventory and dividing that by the total current liabilities. This analyst is looking at the company's A. working capital. B. quick asset ratio. C. debt-to-assets ratio. D. current ratio.

Quick assets ratio The quick asset ratio (also known as the quick ratio or the acid test ratio) is calculated in one of two ways. One way is the analyst takes all of the current assets, subtracts the inventory, and then divides that by the current liabilities. The other, and the one used in this question, is to take all of the current assets excluding the inventory, and divide that by the current liabilities.

If a new customer opens an account with a broker-dealer and tells the agent to buy investments at his discretion, before engaging in any transactions in the account, the agent must A. receive a written discretionary power from the customer. B. designate which investments will be purchased. C. have the customer supply a letter of credit from a bank. D. register as an investment adviser.

Receive a written discretionary power from the customer Because the agent will be acting with discretion, a written power of attorney must be obtained from the customer before transactions can occur. This power is called discretionary power.

Which of the following would most likely be considered a prohibited practice under the Uniform Securities Act? 1. Recommending tax shelters to low-income retirees 2. Stating that a state Administrator has approved an offering based on the quality of information found in the prospectus 3. Soliciting orders for unregistered, nonexempt securities 4. Employing any device to defraud

Recommending tax shelters to low-income retirees, stating that a state Administrator has approved an offering based on the quality of information found in the prospectus, soliciting orders for unregistered, nonexempt securities, and employing any device to defraud All the choices are prohibited. Recommending tax shelters to low-income retirees is an example of an unsuitable transaction. Stating that an Administrator has approved an offering based on the quality of information in the prospectus, soliciting orders for unregistered nonexempt securities, and employing a device to defraud are all prohibited practices under the USA.

Greater Wealth Managers (GWM) is an investment adviser registered in States A, B, C, and D. An individual was recently hired to solicit new advisory accounts for the firm. This person will not be engaged in giving advice of any kind, and all activities will be closely supervised by senior personnel of the firm. Under Section 201 of the Uniform Securities Act, A. no registration is required, because this individual is not rendering investment advice. B. registration as an investment adviser representative is required for this individual. C. registration as an investment adviser representative and as an agent is required for this individual. D. no registration is required, because this individual is not rendering investment advice and is being closely supervised.

Registration as an investment adviser representative is required for this individual Because GWM is registered on the state level, it comes under the provisions of the Uniform Securities Act. Under the USA, the definition of investment adviser representative (IAR) includes, among others, those who solicit for the services of the investment adviser. Therefore, these individuals must register as IARs.

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. Dividends payable B. Capital surplus C. Retained earnings D. Working capital

Retained earnings Retained earnings are increased to the extent that company profits (net income) are undistributed—in essence, retained. Capital surplus comes from original investors purchasing stock at a price in excess of stated or par value. Working capital is not a balance sheet account; it is a computation. When the dividend is declared, it becomes a current liability (dividends payable), but this question is asking for the portion of the income that is not going to be paid out.

John is the owner of Mississippi Advisory Services (MAS), an independent financial planning organization. He is registered as an investment adviser representative of SSC Securities and Investments, registered as a broker-dealer, and an investment adviser with the SEC. Supervision over John's advisory activities is the responsibility of A. SSC's CCO. B. John. C. MAS's CCO. D. the SEC.

SSC's CCO It is common for independent financial planners to establish their own business entity and "hang" their registration as an IAR with another firm (as is the case in this question). The rules emphasize that these independent contractors are under the supervision of the carrying firm's CCO in the same way that in-house IARs are.

Which of the following is the best example of an exaggerated claim that may not be used in investment adviser advertising? A. Saying that every one of the firm's securities analysts has earned the CFA® designation B. Saying that the firm practices asset allocation principles when it generally designs portfolios consisting of equity, debt, and other investment classes C. Reporting actual portfolio returns of 15% in the prior year, accompanied by a disclaimer that past performance does not indicate future performance D. Saying that the firm has $300 million under management when it manages only $50 million

Saying that the firm has $300 million under management when it manages only $50 million Overstating the amount of client funds under management is an exaggeration. It is not an exaggeration to state the qualifications of the firm's analysts, unless the statement is untrue. Referring to asset allocation principles when the firm practices such principles is not an exaggeration. If superior investment performance is fact (actual), it is not an exaggeration to report such returns, as long as the report is accompanied by an appropriate disclaimer explaining that past performance does not indicate future performance.

An investor who is long a put option for 100 shares of ABC common stock has the right to A. sell 100 shares at the higher of the exercise or market price. B. buy 100 shares at the lower of the exercise or market price. C. buy 100 shares at the stated exercise price. D. sell 100 shares at the stated exercise price.

Sell 100 shares at the stated exercise price One who is long a put is an owner of the option. Owning a put option gives the holder the right to sell the underlying asset (in this case, 100 shares of ABC stock) at the stated exercise (or strike) price. This would be advantageous if the strike price is above the current market price.

A well-diversified investor following a rebalancing portfolio strategy in a rising market will most likely A. write covered calls on the long stock currently in the portfolio B. purchase additional stock C. sell part of the stock in the portfolio D. sell all the stock in the portfolio

Sell part of the stock in the portfolio Portfolio rebalancing is a strategy that seeks to maintain a constant ratio (percentage) of a portfolio's original investment allocation. If stock increases in value, some of it will be sold to maintain the proportion of stock in the portfolio.

An agent taking which of the following actions would be committing a violation? A. Buying securities in a cash account with the consent of the customer B. Selling securities from a corporate account by using limited power of attorney trading authority for the account C. Selling securities from a minor's custodial account without the custodian's consent but with the beneficial owner's consent D. Buying securities in a joint account at the request of one party only

Selling securities from a minor's custodial account w/o the custodian's consent but w/ the beneficial owner's consent The custodian, not the beneficial owner (minor), is the person who has the authority to make investment decisions for an account. Any tenant in a joint account may give instructions for the account.

Which of the following items is not required under the customer identification program (CIP)? A. Date of birth B. Visa details for non-citizens C. Sex D. Physical address

Sex The CIP does not ask if the account holder is male or female.

If the owner of a $1 million IRA leaves it to his daughter, which of the following best describes the income tax treatment to the daughter? A. She will pay income taxes on the full $1 million immediately. B. She will pay income taxes on the full amount she withdraws each year. C. She will pay no income taxes because the estate taxes have already been paid. D. She will pay income taxes only on a portion of the withdrawals which exceed $1 million.

She will pay income taxes on the full amount she withdraws each yr An inherited IRA will be subject to income taxes to the beneficiary at time of withdrawal, on the same terms as if it had been distributed to the original owner. How do we know that all of the contributions were made with pre-tax funds? We don't. What we do know is that we never read into a question to make it more complicated. If a portion of the IRA represented contributions that were not tax-deductible, the question would tell us that fact.

All of the following positions expose a customer to unlimited risk except A. short 2 XYZ uncovered calls. B. short 200 shares of XYZ. C. short 2 XYZ uncovered puts. D. short 200 shares of XYZ and short 2 XYZ puts.

Short 2 XYZ uncovered puts A put writer will lose money if the stock goes down, but the furthest it can drop is to zero. Therefore, the potential loss is not unlimited. All of the other positions expose the client to unlimited risk because a loss will occur if the stock price rises.

According to the Uniform Prudent Investors Act, it is not a breach of fiduciary duty if investment advisers do not inquire into a client's A. financial situation. B. specific financial needs. C. Social Security or tax ID number. D. investment objectives.

Social Security or tax ID number Although there are regulations requiring that a securities professional obtain certain client information, such as the Social Security or tax ID number, that has nothing to do with the fiduciary responsibility to always act in the client's best interest. Advisers must make reasonable inquiry into the client's financial situation, investment objectives, and needs before making recommendations. Recommendations must be suitable in light of any other information known to the adviser.

James is an investment adviser representative with Rock, Feller, and Standard (RFS), a covered adviser with its principal office in State O. James works out of an office in State P and has 4 retail clients there. In addition, James has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. He would be required to register as an investment adviser representative in A. States P, D, and M. B. States D and M. C. State P. D. States P and O.

State P As an IAR for a federal covered investment adviser, James is required to register only in those states in which he has a place of business. Although he has clients in several states, the question tells us that his place of business is the office in State P. Please note that, as long as an IAR with a covered adviser does not maintain a place of business in a state, there is no numerical limit on the number of clients he can have and he can still be exempt from registering in that state.

An exemption from state registration is granted under the specific authority of the Uniform Securities Act to securities issued by which of the following entities? 1. State of Georgia 2. City of London, Ontario 3. City of London, England 4. Kapco Income Fund, an open-end investment company registered with the SEC

State of Georgia and City of London, Ontario Any state, Canadian province, or political subdivision thereof is considered an issuer of exempt securities. The exemption also applies to securities issued by foreign governments with whom the United States has diplomatic relations—but not their political subdivisions, such as the City of London, England. Although securities issued by investment companies registered with the SEC are exempt from state registration, the authority for that exemption is found in the NSMIA of 1996 (federal covered securities) rather than the Uniform Securities Act.

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

Subtracting total liabilities from total assets Shareholders' equity is the corporation's net worth, sometimes called owners' equity. It is computed by subtracting the total liabilities from the total assets. Current assets minus current liabilities is the working capital. Taking all of the equity capital, including retained earnings, and adding the long-term debt to that is the company's total capitalization, and the market price per share times the number of outstanding shares is the company's market capitalization.

A client owning shares of a closed-end investment company entering an order to liquidate the position would receive a price based on A. the previous net asset value per share. B. supply and demand for the shares. C. the offering price computed after the order is received. D. the next computed net asset value per share.

Supply and demand for the shares Closed-end investment company shares are traded in the same manner as any other corporate stock. That is, the price received when selling or the price paid when buying is determined by supply and demand and has no direct relation to the net asset value. If this question was asking about an open-end investment company, the choice would be the next computed NAV, not offering price (that is the price when the investor is buying, not selling).

Which of the following statements regarding investment risk is not correct? A. A stock's level of risk is a combination of market risk and diversifiable risk. B. Investors expect to earn a higher rate of return for assuming a higher level of risk. C. The beta coefficient measures an individual stock's relative volatility to the market. D. Systematic risk may be reduced or eliminated by effective portfolio diversification.

Systematic risk may be reduced or eliminated by effective portfolio diversification. It is only unsystematic (diversifiable) risk that may be effectively managed through portfolio diversification. Standard deviation measure a stock's combined systematic (market) and unsystematic (diversifiable) risk. Beta indicates the relative volatility of a stock or portfolio to the market and MPT preaches that higher returns are accompanied by higher levels of risk.

Charles wishes to preserve his capital and generate income with moderate risk by investing in mutual funds. Which of the following mutual fund types would probably least meet these investment objectives? A. A bond fund B. Technology funds C. An income fund D. A balanced fund

Technology funds Technology mutual funds typically invest in high-risk, high-reward situations that are inappropriate for conservative investors. Balanced funds, income funds, and bond funds could be potential investments for conservative clients.

Under the SEC's Marketing Rule for Investment Advisers, which of the following is true with regard to advertising? A. The advertisement may refer to specific past recommendations if they reflect the actual performance of a client's portfolio. B. The advertisement may refer to any formula, charting device, or graphing method, provided a disclaimer is included stating there is no assurance that the same results will be obtained in the future. C. The advertisement may offer free services for a nominal charge. D. The advertisement may use testimonials from clients with proper disclosures.

The advertisement may use testimonials from clients w/ proper disclosures One of the key changes brought about by the Marketing Rule was the removal of prohibitions against testimonials. As long as it is from a client and discloses whether or not compensation was involved, the testimonial is generally permitted. Offers of free services are permitted but must be totally free with no strings attached. If past performance is included in the ad, it cannot cherry-pick and use only selected recommendations; everything must be shown. Charts, formulas, or other devices may be referred to in an ad, but the ad must disclose the difficulties or limitations in their use.

An agent is registered in Illinois and Ohio. One of her substantial clients has just moved from Ohio to Arizona, and the agent would like to continue to do business with her. Under the Uniform Securities Act, which of the following statements are true? 1. The agent's broker-dealer must already be registered in Arizona or complete the Arizona registration process within a time period specified by the act. 2. The agent must complete the Arizona registration process within a time period specified by the act. 3. The agent must ask the Ohio Administrator to request reciprocal registration from the Arizona Administrator. 4. The agent must suggest that the client maintain a mailing address, such as a post office box, in Ohio.

The agent's broker-dealer must already be registered in Arizona or complete the Arizona registration process within a time period specified by the act and the agent must complete the Arizona registration process within a time period specified by the act. The USA permits broker-dealers and their agents to continue to do business with existing customers who change their state of residence, as long as registration in the new state takes place within a reasonable period of time. This time period varies from state to state but is generally 30 days. Because an agent's registration is not valid without a broker-dealer, the agent and the agent's broker-dealer must be registered in Arizona for the relationship with this customer to continue. There is no such thing as reciprocal registration.

Computing the Sharpe ratio for a specific stock requires using all of the following except: A. the actual rate of return for the subject security. B. the standard deviation of the subject security. C. the beta for the subject security. D. the risk-free return available in the market.

The beta for subject security The formula for the Sharpe ratio is as follows: (actual rate of return minus the risk-free rate of return) divided by the standard deviation of the security. Beta is not a component.

A bond analyst reports that there is currently an inverted yield curve. That would mean A. the further the bond is from its maturity date, the higher the yield. B. bonds with intermediate maturities have the highest yields. C. the closer the bond is to its maturity date, the higher the yield. D. the closer the bond is to its maturity date, the lower the yield.

The closer the bond is to its maturity date, the higher the yield An inverted yield curve shows near-term maturities with higher yields than those of long-term maturities. Sometimes called a negative yield curve, it is usually an indication that interest rates are near a peak and the trend should soon reverse.

Suzie McQueen has a very successful interior design shop she has run as a sole proprietorship. She has just celebrated her 60th birthday and has been giving thought to an eventual sale of the business. She wants your opinion on whether she should incorporate or change to a partnership. You might respond that A. the partnership form of business structure would be the easiest for ultimate transfer of ownership B. the partnership form of business structure would enable Suzie to maximize her sale price C. the corporate form of business structure would be the easiest for ultimate transfer of ownership D. the corporate form of business structure would be the least expensive to form

The corporate form of business structure would be the easiest for ultimate transfer of ownership In general, the corporate form of business leads to the easiest transfer of ownership. Because Suzie would probably own 100% of the stock, all she would have to do is sell that stock to a new purchaser and the corporation could continue just as before. If Suzie wanted to reorganize as a partnership, she would have to bring in at least one additional individual, ending her total ownership of the business. Even then, a partnership interest is not as easy to sell as stock.

When a bank's reserve account is running low, it might choose to borrow from the Fed. When doing so, the bank will be charged A. the discount rate. B. the prime rate. C. the call loan rate. D. the federal funds rate.

The discount rate When a bank borrows from the Federal Reserve, it does so at the discount rate. When borrowing from another bank, it is at the federal funds rate. The prime rate is charged by the banks to their stronger borrowers, and the call loan rate is what broker-dealers pay on stock market collateral pledged for margin accounts.

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

The favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of grant or 2 years from the date of exercise The favorable tax treatment is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of exercise or 2 years from the date of grant. You are not taxed upon exercise, only upon sale, but the incentive portion of the option could be considered a preference item for purposes of AMT.

Under the Uniform Securities Act, it is required to file an application with the Administrator to become a registered broker-dealer in the state. Which of these are among the disclosures that must be made on that application? 1. The form of business organization to be used by the firm 2. Any felonies or certain misdemeanors on the records of partners or officers 3. Business history of the principals of the firm 4. Financial information about the firm

The form of business organization to be used by the firm, any felonies or certain misdemeanors on the records of partners or officers, business history of the principals of the firm, and financial information about the firm Many disclosures have to be made, and this is just a partial list. This would be the same answer if the question asked about an investment adviser.

With regard to an SEC-registered investment adviser employing the services of a promoter to solicit business, it would be correct to state that A. the investment adviser may not compensate a solicitor who is subject to a statutory disqualification. B. referral fees may be paid only if the solicitor is also registered with the SEC. C. delivery of the solicitor's brochure must take place within five days after entry into the advisory contract. D. cash referral fees may be paid pursuant to a written or oral agreement to which the investment adviser is a party.

The investment adviser may not compensate a solicitor who is subject to a statutory disqualification One of the important requirements when hiring a solicitor is making sure that the person is not statutorily disqualified from registration. The rule gives as an example a person considered to be a bad actor under Rule 506 of Regulation D. That is, any person who would be unable to register as a securities professional because of prior conduct cannot act as a solicitor for a registered investment adviser. Promoters do not have to prepare (much less deliver) a brochure. If the promoter is to be compensated more than the de minimis amount, there must be a written, not oral, agreement.

The primary responsibility for supervising the activities of an investment adviser representative (IAR) who is affiliated with a federal covered investment adviser lies with A. the IAR. B. the Administrator. C. the investment adviser the IAR represents. D. the SEC.

The investment adviser the IAR represents It is the obligation of every registered investment adviser, whether SEC or state registered, to supervise its representatives.

Investment advisers who preach the benefits of strategic asset allocation do so because they believe A. active management of a portfolio offers tactical benefits B. the market is basically inefficient and there is a strategy that can beat it C. the market is perfectly efficient because stock prices reflect all available information D. over the long run, strategic management will eventually outperform the market

The market is perfectly efficient b/c stock prices reflect all available information The primary difference between strategic and tactical asset allocation comes down to the belief by those following the strategic style that it is not possible, over a long period of time, to beat the market.

Among the special characteristics of a universal life insurance policy is A. death benefits may increase above the initial face amount B. that policyowners may borrow against the cash value C. the policy may be overfunded D. early termination could lead to surrender charges

The policy may be overfunded This question is looking for a feature found in universal life that is not generally found in other forms of life insurance, i.e, something special. In the case of universal life, the policyowner is permitted to pay in an amount in excess of the stated premiums (one of the reasons universal life is known as flexible premium life). The IRS puts limits on the amount of the overfunding before certain tax advantages are lost, but that is beyond the scope of the exam. Not only universal life, but variable life as well, has the possibility of increased death benefits. In fact, some whole life policies allow policy dividends to be used to increase the death benefit. Permanent forms of insurance policies, including whole life, universal life, and variable life, permit loans against the cash value. Therefore, being able to borrow against the cash value is nothing special. Many forms of life insurance have surrender charges for early termination.

Under the Investment Advisers Act of 1940, the definition of investment adviser excludes which of these? 1. The publisher of a financial newsletter on a paid-subscription basis, which contains only general securities recommendations 2. Persons whose investment advice relates solely to issues distributed or guaranteed by the U.S. government 3. A lawyer who charges a separate fee for investment advice that is provided as a separate part of the business

The publisher of a financial newsletter on a paid-subscription basis, which contains only general securities recommendations and persons whose investment advice relates solely to issues distributed or guaranteed by the U.S. government Under the Investment Advisers Act of 1940, publishers of bona fide publications, such as financial newsletters, on a paid-subscription basis with regular circulation are excluded as long as the publication does not contain recommendations of specific securities. One thing to look for on the exam is if the publication is market-event driven. That is, publication is not regular and is based on current events affecting the securities markets. In that case, the exclusion does not apply. Another exclusion is for persons whose advice relates solely to issues distributed or guaranteed by the U.S. government. One of the most tested exclusions is LATE, where lawyers, accountants, teachers, and engineers are excluded, but that is only the case when the advice is given as an incidental part of their professional practice. A lawyer charging a separate fee for advice cannot claim that it is incidental.

A customer purchased new issue bonds at par two years ago. Since then, the cost of living as measured by the consumer price index (CPI) has declined by almost half and the current yield on the bonds has also declined. Which of the following best describes the value of the bonds purchased? A. Their market price has declined. B. Their market price has increased. C. Their market price has remained unchanged. D. It cannot be determined from the information presented.

Their market price has increased The annual coupon interest payment on the bonds has not changed, but the current yield has. If the yield has decreased, it means the market price of the bonds must have increased. For example, if the bond has a 5% coupon but the current yield is now 4%, the bond's price must be 125 ($1,250) because $50 annual interest on $1,250 is a current return of 4%. Remember the inverse relationship: if interest rates decline, bond price rise (and vice versa).

A client is considering the purchase of American depositary receipts (ADRs). She is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle? A. ADRs are traded on exchanges and the OTC markets. B. ADRs are denominated and pay dividends in U.S. dollars. C. Information regarding the foreign company is easily attainable. D. They are not subject to exchange rate, or currency, risk.

They aren't subject to exchange rate, or currency, risk Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk. In order to trade in the U.S. markets, information about the foreign company must be available to investors. ADRs representing the best-known companies typically trade on the NYSE or the Nasdaq stock market while lesser companies trade OTC.

One of your existing clients wishes to open a new account in the name of his spouse and enter orders on her behalf. A. This practice is ordinary and acceptable. B. This action is prohibited unless the spouse signs a trading authorization. C. The agent could be liable if the stock declines in value. D. This action is prohibited unless the customer signs a trading authorization on behalf of his spouse.

This action is prohibited unless the spouse signs a trading authorization Effecting transactions without specific written authority from the beneficial owner of the account is prohibited. This customer cannot sign trading authorization on behalf of his spouse. The spouse must sign the authorization.

Discretion is exercised when a securities professional determines all of the following except A. to buy or sell a particular security. B. number of shares. C. dollar amount of a trade. D. time or price.

Time or price Determining control over the time or price of an order does not constitute discretion. The selection of the number of shares or the dollar amount of a trade constitutes discretion. When a registered securities professional (broker-dealer, agent, IA, or IAR) determines what to buy or sell or the number of shares to be bought or sold, that person is exercising discretion.

The issuance of a long-term debt instrument, such as a bond, by a company would have an immediate effect on which of the following balance sheet items? 1. Total assets 2. Total liabilities 3. Working capital 4. Shareholders' equity

Total assets, total liabilities, and working capital The cash received from the sale of the bonds is a current asset of the company and, as such, would increase assets and working capital on the balance sheet. The bonds are debt of the company and would increase the liabilities of the company. Shareholders' equity is only affected by gains, losses, new invested capital, and the declaration of cash distributions (dividends) to shareholders.

An investor regularly reads financial blogs on the internet, and they are filled with articles suggesting that the economy is headed for a slump. Some are even saying that there will be price deflation. If these projections are accurate, the best place for the investor to place funds would probably be A. common stock. B. gold. C. U.S. Treasury bonds. D. commercial real estate.

U.S. Treasury bonds When the economy is headed downward, safety is the imperative, and nothing is as safe (at least for exam purposes) as U.S. Treasuries. Gold and most other commodities are a hedge against inflation, not deflation. In down times, real estate—both residential and commercial—usually underperforms.

Mr. and Mrs. Williams are a retired couple receiving most of their income from a diversified portfolio of high-quality bonds and preferred stock. One of the reasons that life insurance might be a useful addition to their overall planning is that A. dividends received on a life insurance policy are tax free. B. the proceeds of a life insurance policy are free of income tax. C. the premiums can be paid directly from their brokerage account. D. upon the death of the insured, the insurance provides liquidity to preserve income-producing assets from having to be liquidated to cover death expenses.

Upon the death of the insured, the insurance provides liquidity to preserve income-producing assets from having to be liquidated to cover death expenses Even for those whose estate is not large enough to incur estate tax, life insurance proceeds provide liquidity to cover the expenses incurred at death without having to sell assets out of the portfolio. It is true that the proceeds are free of income tax, but that is not the major reason to own life insurance.

Which of the following statements regarding warrants is true? A. Warrants are safer than corporate bonds. B. Warrants' terms are generally shorter than rights' terms. C. Warrants give the holder a perpetual interest in the issuer's stock. D. Warrants are often issued with other securities to make the offering more attractive.

Warrants are often issued w/ other securities to make the offering more attractive Warrants are generally issued with bond offerings to make the bonds more attractive. Warrants are long-term options to buy stock, and because they are equity securities, warrants, as investments, are considered less safe than bonds.

Under industry regulations, when may an agent be given discretionary power to buy or sell securities for a client? A. Never B. If authority is given within one week after the discretionary act C. Only when the authority is specific, is provided in advance, and specifies the amount, type, and timing of the transaction D. When authority is given by a written document

When authority is given by a written document Discretionary authority must be in written form. The only exception is when the discretion relates to time or price because, under the law, that is not considered to be discretion.