SERIES 66 SATURDAY PRACTICE TEST

BLOCK TRADE

10K SHARES

Which of the following investment strategies is likely to have the lowest tax impact for the client?

BUY AND HOLD

In lieu of a separately prepared brochure, an investment adviser is permitted to deliver potential clients a copy of its:

Form ADV Part 2.

What would be the time horizon for a 65-year-old client who has just retired?

It depends on the individual's life expectancy. The time horizon for an individual who has just retired is the balance of expected life.

A senior citizen had the following scenarios presented to him by his IAR. Which one had the lowest volatility: A) Stock high return: +9%; low return: -2%; Standard Deviation: 4.9%. B) Stock high return: +5%; low return: -1%; Standard Deviation: 3.6%. C) Stock high return: +18%; low return: -4%; Standard Deviation: 8%. D) Stock high return: +12%; low return: -2%; Standard Deviation: 5.5%.

) Stock high return: +5%; low return: -1%; Standard Deviation: 3.6%. The higher the standard deviation the higher the volatility and the higher the risk. So, the lower the standard deviation the lower the volatility and the lower the risk.

Which of the following transactions are NOT exempt from registration? A) Transactions with intrastate manufacturing companies. B) Unsolicited nonissuer transactions. C) Transactions with pension or profit-sharing trusts. D) Isolated non

.Transactions with intrastate manufacturing companies. A transaction with a corporation that is not a financial institution is neither an exempt transaction nor exempt from the registration rules.

Which of the following statements regarding the powers of the Administrator under the USA would NOT be true?

A final order of the Administrator may not be appealed. Final orders of the Administrator may be appealed to the appropriate court within 60 days of the issuance of the order.

Which of the following are features of Class C mutual fund shares? Typically charge no front-end load Typically charge a front-end load Typically impose lower CDSCs than Class B shares for a shorter period Typically convert to Class A shares after they are held for a defined period

I and III Class C shares generally have the following features: no front-end sales charge, lower CDSCs than Class B shares for a shorter period, and no conversion to Class A shares regardless of how long they are held. Because of these features, Class C shares may be less expensive for investors with shorter investment horizons. They may be more expensive for investors who plan to hold their shares for a long time, since the level load never discontinues.

One of your clients is in the process of forming a new business venture with a friend and is considering whether to operate as a partnership or a C corporation. Among the advantages of operating as a partnership are: 1.ease of dissolution. 2.ease of raising additional capital. 3.flow-through of income or loss. 4.limited liability.

I and III. Unlike a C corporation, operating income or losses of a partnership flow through directly to the partners. There are several easy ways to dissolve a partnership. However, they do not offer the limited liability protection of a corporation. The corporate form of business is generally the most suitable for raising additional capital.

To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes name verbal assurance that the customer is of legal age a street address, unless the primary mailing address is a PO Box located in the state of residencea taxpayer identification number

I and IV Mere verbal assurance that the customer is of legal age is not sufficient; the actual date of birth must be obtained. A PO Box is never acceptable without a physical address. In addition, the identity of the person opening the account must be verified through documentation such as an unexpired driver's license or passport.

Under the Securities Exchange Act of 1934, which of the following is TRUE regarding the jurisdiction of the SEC over a person who violates the rules of the Municipal Securities Rulemaking Board?

The SEC has the authority to investigate such violations unless the person is a financial institution. The SEC is charged with administering the federal securities laws, under which the Municipal Securities Rulemaking Board (MSRB) exists. So the SEC has jurisdiction over the MSRB. However, financial institutions come under the jurisdiction of banking regulatory authorities.

Two contrasting styles of portfolio management are growth and value. Which of the following pairs best describes the contrast? A) High P/E ratio/low current ratio B) Capital structure/earnings per share C) Dividend yield/dividend payout ratio D) Earnings momentum/book value

D) Earnings momentum/book value One of the important metrics to growth managers is the rate at which the company is growing. Earnings momentum is an excellent indicator of that. On the other hand, the primary tool of the value manager is the company's financial statements. Value managers frequently look for companies whose market price is less than their book value. Perhaps you misread "low current ratio" as "low P/E ratio" (which would have been a correct contrast). This is why you have to read each word carefully.

Which of the following is NOT a type of diversification that is achieved by investing in international equities? A) Currency. B) Asset class. C) Geographic. D) Style.

D) Style. Following a value or a growth style, or using a buy-and-hold strategy, is independent of the continent of domicile of the issuer. Investing in different countries diversifies investments among various currencies, other than the client's domestic currency. Different geographic areas have different types of industries whose performance may vary on the basis of regional resources. International equities are considered another asset class for purposes of asset allocation in one's portfolio.

When an investor notices that a bond's coupon yield is lower than its current yield, that is an indication that the bond: A) is probably rated investment grade. B) is selling at a premium. C) is in danger of going into default. D) is selling at a discount.

D) is selling at a discount. The coupon yield, or nominal yield, is the rate stated on the face of the bond. It never changes. However, because the current yield is computed by dividing the coupon rate by the current market price, this return will constantly be in flux. Anytime the price of the bond is below par (selling at a discount), its current yield will be higher than the coupon.

A client with limited assets seeking additional income in retirement would probably find which of the following investment choices to be the least suitable? Insured bank CDs B) ETNs C) ETFs D) Treasury bond

ETNs The question describes an individual with a low risk tolerance, so the Treasury bonds and CDs would certainly be considered appropriate. Because ETNs are a debt security backed solely by a single issuer while an ETF based on a specific index of debt securities represents a large group of issuers, they are only suitable for those who can understand and take the risks involved.

According to the Uniform Securities Act, after an agent passes the Series 66 exam and the Series 7 exam, asset-based compensation is permitted: immediately. after notification of investment adviser representative status by the appropriate supervisory person of the firm. when registration has been granted by the state Administrator. when permission is received from the SEC.

II and III. Passing the Series 7 licensing exam qualifies an individual to solicit securities but not to receive asset-based compensation. Once the Series 66 has been passed, the state Administrator must actually issue a registration, and the individual must be associated with an investment adviser before engaging in asset-based compensation in a particular state.

Which of the following would an investor who believes in MPT probably select for a client?

JKL, with a return of 15% and a standard deviation of 15 Modern portfolio theory (MPT) proponents believe that the most appropriate investments are those that offer the greatest return with the lowest risk. JKL has delivered the highest return with a standard deviation (risk) equal to that of ABC (which has a much lower return).

A client is in the 28% marginal federal income tax bracket, and the 3% state income tax bracket. Which of the following investments would produce the highest after-tax yield for the client? AAA corporate bond yielding 7.75%. B) The answer cannot be determined using the information provided. C) Public purpose municipal bond yielding 6%. D) Federally backed Treasury note yielding 7%.

Public purpose municipal bond yielding 6%.

In the banking industry, the term POD refers to an account similar to the TOD designation used by broker-dealers. An old, but sometimes still used term to describe this kind of account is A) Passbook savings account B) Revocable trust C) Demand deposit account (DDA) D) Totten trust

Totten trust

In general, a broker-dealer will disclose any changes to its fee schedule

by notifying clients of the change in advance Most broker-dealers disclose fee changes at least 30 days in advance and there is no requirement whatsoever to notify the Administrator.

In general, one would prefer to purchase a bond when its current market price is A) less than its future value B) more than its present value C) the same as its present value D) less than its present value

less than its present value When a bond can be purchased for less than its present value, it has a positive net present value (NPV). For example, if the present value of a bond is $600 and it can be purchased for $565, it has an NPV of $35 and should be an attractive investment. Every bond selling at a discount has a market price that is less than its future value (par), so that doesn't tell us anything about its NPV.

One of the terms defined in the Uniform Securities Act is "broker-dealer". Which of the following is NOT included in that definition?

A broker-dealer is defined as a person in the business of effectuating securities transactions for its own account or the account of others. Those employed to open new accounts are defined as agents. Those seeking to raise new capital are issuers, and a person who provides investment advice is an investment adviser.

Which of the following statements regarding the properties of duration is NOT true? A) Duration measures the holding period return on a bond. B) Duration measures the effect of an interest rate change on the price of a bond or bond portfolio. C) Duration measures a bond's price volatility by weighting the length of time it takes for a bond to pay for itself. D) Duration is a weighted-average term-to-maturity of a bond's cash flows.

A) Duration measures the holding period return on a bond. Duration does not measure the holding period return on a bond, it measures the effect of an interest rate change on the price of a bond or bond portfolio. Duration measures a bond's price volatility by weighting the length of time it takes for a bond to pay for itself. Duration is also a weighted-average term-to-maturity of a bond's cash flows.

The needs analysis approach to life insurance planning: A) provides an accurate insurance recommendation that ensures that the survivors' needs will be met. B) does not include other assets. C) involves calculating the present value of cash and future income needs of an individual's survivors. D) is based on a series of generally accepted rules of practice.

C) involves calculating the present value of cash and future income needs of an individual's survivors. The needs analysis approach evaluates the income replacement needs of one's survivors in the event of untimely death.

One popular method of determining the value of certain securities is discounted cash flow. Using the DCF with the current discount rate at 3%, which of the following would be expected to have the highest market value?

ABC Corporation debenture maturing in 25 years with a 5% coupon The current discount rate represents market interest rates. At 3%, each of these bonds should sell at a premium (their coupon rates are higher than 3%). When a bond is paying interest at a rate higher than the current market rate, the longer the investor will be receiving that higher rate, the higher the premium. Therefore, the 5% bond with 25 years to maturity will have the highest present value using the DCF.

Which of the following is responsible for administration of the Bank Secrecy Act? A) Security Services. B) The Financial Crimes Enforcement Network. C) Department of Health and Human Service. D) Securities and Exchange Commission.

B) The Financial Crimes Enforcement Network. Or FinCEN as it is more commonly printed.

Common stockholders of a publicly traded corporation have which of the following rights and privileges? Residual claim to assets at dissolution. Right to a vote for stock dividends to be paid. Right to receive an audited financial report on an annual basis. Claim against dividends in default.

D) I and III. Common stockholders of publicly traded companies have a residual claim to assets of a corporation at dissolution and are entitled to receive an annual report containing audited financial statements. Stockholders never get to vote on dividends.

Under the Securities Act of 1933, a registration statement for a security must be signed by: A) a majority of the issuer's board of directors only. B) a majority of the issuer's board of directors and the underwriter. C) the issuer's chief executive officer and the underwriter. D) the issuer's chief executive officer, chief financial officer, and a majority of the issuer's board of directors.

D) the issuer's chief executive officer, chief financial officer, and a majority of the issuer's board of directors. The underwriter's signature is not required on a registration statement, but the chief executive officer, the chief financial officer, and a majority of the board of directors must all sign.

Without the need to meet any special conditions, a participant in which of the following retirement plans would be able to withdraw funds prior to age 59½ and not incur a 10% tax penalty?

457 The 457 Plan allows participants to withdraw funds at any time, not just after age 59½, without incurring the 10% tax penalty. Income taxes would, of course, be due, but no penalty.

Probably the most significant benefit of saving for retirement using a Roth IRA is: A) tax-free treatment at withdrawal. B) tax-deferred accumulation. C) tax-deductible contributions. D) larger contributions than a traditional IRA.

A) tax-free treatment at withdrawal. Although Roth IRA contributions grow without current taxation, that doesn't make them unique. What is truly special about the Roth is that, if certain conditions are met, withdrawals are totally free of income tax.

A registrant's registration may be canceled by the Administrator: A) as long as there is opportunity for a hearing. B) if the Administrator is unable to locate the registrant. C) upon the order of a court of competent jurisdiction. D) when the registrant has been found in violation of the Uniform Securities Act.

B) if the Administrator is unable to locate the registrant. Cancellation is non-punitive - nothing wrong was done. But, when the Administrator is unable to locate the registrant, or the registrant is declared mentally incompetent or is deceased, registration is canceled.

If you were using the discounted cash flow method to determine the appropriate value of a security, you would want to purchase that security when A) the rating of the security has just been upgraded B) the current market price is below the PV C) the current market price is above the PV D) the current market price equals the PV

B) the current market price is below the PV Those who use the DCF to value a security would recommend purchasing when the current market price is below the PV—that is, when the NPV is positive.

One respect in which an LLC differs from an S corporation is that A) there is more favorable tax treatment afforded to members of an LLC B) not only income, but losses, if generated, pass through to investors in an LLC C) there is no statutory limit on the number of investors in an LLC D) an LLC can be formed with as little as a single investor

C) there is no statutory limit on the number of investors in an LLC There is no limit to the number of investors (members) in an LLC, while current regulations limit the number of investors (shareholders) in an S corporation to 100. The tax treatment is the same and both can be formed with a single owner.

Which of the following is (are) advantages of irrevocable insurance trusts? Provide estate liquidity. Insurance proceeds are removed from the estate of the insured for tax purposes. The insured has the flexibility to alter the trust arrangements. Once set up, no changes may be mad

I AND II As with all life insurance, the proceeds are available almost immediately upon death providing estate liquidity. When done properly, the proceeds of the policy are not included in the deceased's estate thereby saving estate taxes. The trust is irrevocable - no changes can be made, and this is one of the few disadvantages.

Which of the following methods of calculating investment returns are discounted cash flow (DCF) techniques? Net present value (NPV). Holding period return (HPR). Internal rate of return (IRR).

I and III. A discounted cash flow (DCF) technique is one that takes into account the time value of money. Holding period return (HPR) is the total of the income cash flows and capital growth earned by an investment during the period for which it is held. It does not take into account the time value of money. Both net present value (NPV) and internal rate of return (IRR) take the time value of money into account.

One way to reduce the potential for conflicts of interest arising from offering agents the incentive of different compensation for different products is to create product agnostic compensation grids. These grids provide for

a flat percentage of the revenue an agent generates, regardless of product recommended An agnostic compensation grid is sometimes referred to as a neutral grid. That is, regardless of the product being sold, the compensation level is the same.

If a customer buys a 6% bond maturing in 8 years on a 7.33 basis, the price of the bond is:

below par. A bond with a basis, or yield to maturity, greater than its coupon is trading at a discount, or below par.

Unless done under a specific exemption described in the law, it would generally be prohibited for an investment adviser to:

charge fees based on performance. Section 102(c)(1) of the Uniform Securities Act states that, except as may be permitted by rule or order of the Administrator, it is unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract unless it provides in writing that the investment adviser shall not be compensated on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client.

USAAdvisers is registered in 10 midwestern states. Regarding financial requirements, USAAdvisers must meet those of A) the SEC B) the state with the most stringent financial requirements C) each state in which it has a place of business D) the state in which its principal office is located

the state in which its principal office is located Unlike broker-dealers, investment advisers register with either the SEC or the state(s), but never both. Therefore, we know this must be a state-registered adviser not under the jurisdiction of the SEC. Under the Uniform Securities Act, when it comes to financial requirements, bonding, recordkeeping, and so forth, as long as the adviser meets the requirements of the state in which the principal office is located the other states have no further claim.

Brandywine Investment Advisers has several clients whose contracts call for performance-based fees. These fees may be based on a performance comparison with which of the following? S&P 500 index. Russell 2000. Previous year's performance. Performance of related accounts

I and II. If an investment adviser charges performance-based fees to qualified clients, the fees may be based on the accounts' actual performance relative to a benchmark such as the S&P 500 Index or the Russell 2000. The previous years' performance or the performance of other accounts is not a valid basis for the calculation of performance-based fees.

Each of the following individuals is eligible to participate in a Keogh plan EXCEPT:

an executive of a corporation who receives $5,000 in stock options from his company. Individuals with income from self-employment may participate in Keogh plans. Stock options, capital gains, dividends, and interest are not considered income earned from self-employment.

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

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

A fiduciary of an ERISA plan is preparing an investment policy statement. Included would probably be specific security selection methods of performance measurement determination for meeting future cash flow needs the summary plan description

II and III The IPS will include methods of performance measurement (if it is meeting objectives) and a way to determine how future cash flow needs will be met (based on expected numbers of retirees). It will not include the specific securities to be purchased, but will include the types that may be placed in the portfolio. The Summary Plan Description (SPD) is a Department of Labor (DOL) required document that gives employees a summary of the plan and its features. It has nothing to do with determining how the money is invested.

According to the Uniform Securities Act's rules for an investment adviser with custody of customer assets, which of the following statements are TRUE? The Administrator must give written approval before the adviser may hold customer assets in custody. Customer assets must not be commingled with assets of the investment adviser. An adviser who has discretion over customer accounts faces a higher net worth requirement than an adviser who has custody. Every 3 months, the adviser must send an itemized account statement to each customer whose assets are held in custody.

II and IV 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.

Which of the following are characteristics of commercial paper? Backed by money market deposits. Negotiated maturities and yields. Issued by insurance companies. Not registered with the SEC.

II and IV. Commercial paper represents the unsecured debt obligations of corporations needing short-term financing. Both yield and maturity are open to negotiation. Because commercial paper is issued with maturities of less than 270 days, it is exempt from registration under the Securities Act of 1933.

According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment advisory contract must describe all of the following EXCEPT A) any record of securities industry violations by the investment adviser. B) whether or not the contract grants discretionary authority. C) that assignment of the contract cannot occur without client consent. D) the amount of prepaid fee to be returned if the contract is terminated.

any record of securities industry violations by the investment adviser. An investment advisory contract is not required to disclose securities industry violations by the investment adviser. These must be disclosed, however, in Form ADV. The investment advisory contract must include the amount of prepaid fee to be returned if the contract is terminated, the fact that assignment of the contract cannot occur without client consent, and the fact that the agreement does or does not contain discretionary authority.

A customer in his twenties, who is not risk averse, is in the market for life insurance. His main worry is that what looks like a generous death benefit today may not be sufficient for a beneficiary 40 or 50 years from now. A registered representative might consider recommending: whole life insurance with the option of purchasing additional coverage. B) term life insurance. C) an aggressive, long-term strategy of investment in small-cap stocks. D) variable life insurance.

variable life insurance. Variable life insurance has the advantage of offering possible inflation protection for the death benefit. The insured assumes investment risk for this benefit, but pays a fixed scheduled premium for the life of his contract.