Simulated Exam Wrong answers

An investor purchases zero-coupon bonds issued by the U.S. Treasury due to mature in 18 years at $100,000. Which of the following might describe the primary reason for selecting that investment vehicle?

2. The investor is 45 years old and has purchased these in an IRA rollover account and wants the assurance of funds for retirement. 3. The investor is 30 years old and has a newborn child and wishes to assure funds for a college education.

Limited liability is a characteristic of being an owner of

2. an interest in a limited partnership 3. shares of an S corporation

An investor purchases 100 shares of Kapco stock at $50 per share. At the time of the purchase, the stock is paying a quarterly dividend of $0.25. The dividend increases 5% each year over the next 5 years. The purchaser sells the 100 shares 5 years after purchase for $82 per share. What is the total return for the investor over the 5 years holding period?

75% Total return includes capital appreciation plus income. The capital gain realized was $32 per share. The income was $1.00 per share (four quarterly dividends of $0.25) the 1st year, 5% higher the 2nd year ($1.05) and 5% higher each successive year. The total of the dividends received is $5.53. Adding that to the $32, we compute by dividing $37.53 by $50 resulting in a 75% total return.

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

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

You have a client whose income from a real estate limited partnership is $11,000. During the same year, your client had net capital losses of $2,000 and losses from an oil and gas drilling program of $6,000. The effect of this investment activity would be to increase the client's taxable income by

$3,000 The $11,000 passive income is offset by the $6,000 of passive loss giving the client $5,000 of passive income. Because capital losses up to $3,000 are deductible from taxable income, we can deduct the $2,000 in net losses giving a net increase to taxable income of $3,000.

Under the Uniform Securities Act, in which of the following circumstances may the Administrator take action against an advisory firm?

1. Nine years ago, the Administrator of another state found that the president of the firm violated the securities laws of that other state. 2. The firm has liabilities that exceed its assets.

Which of the following statements regarding ADRs are TRUE?

1. The securities are vehicles used to facilitate U.S. trading of foreign securities. 3. Holders have foreign currency risk. ADRs are vehicles that facilitate U.S. trading of foreign securities. They are issued in English in the United States by domestic banks. Dividends are declared in the foreign currency but are payable to holders in U.S. dollars, which means that ADR holders are subject to foreign currency risk.

During the past year, the market price of Kapco common stock has increased from $47 to $50 per share. Over that period, Kapco's earnings per share (EPS) have increased from $2.00 to $2.50 per share, and their dividend payout ratio has decreased from 50% to 40%. Based on this information, the current yield on Kapco common stock is

2% The current yield on a stock is computed by dividing the annual dividend rate by the current market price. With EPS of $2.50 and a 40% payout ratio, the annual dividend is $1.00. This dollar divided by the current market price of $50.00 results in a current return of 2%

XYZ Corporation has a beta of 1.0, and ABC has a beta of 1.4. XYZ has returned 12% and ABC 14.8%. Based on this information, ABC had alpha of

2% Alpha is the extent to which a security's performance exceeds (or falls short of) that of the market compared to what would be expected based on its beta. A key to this question is that XYZ's beta of 1.0 equals the beta of the market. A stock with a beta of 1.4 would be expected to perform 40% better in an up market than the market itself. Because XYZ with a beta of 1.0 gained 12%, ABC should return 140% of that or 16.8% (12% × 1.4). With an actual return of 14.8%, ABC underperformed the expected by 2% and that is why it has a negative alpha.

Jason, a recently divorced individual, is currently 55 years old and has built up approximately $400,000 in several initially funded and rollover individual retirement accounts (IRAs). He now wants to take an early distribution from one of these IRAs. Which one of the following distributions will escape the imposition of a tax penalty for early withdrawal?

A distribution made in payment for higher-education costs of Jason's granddaughter QDROs do not apply to IRAs. Separation from service will not affect Jason's ability to take a distribution from his IRA. A distribution due to financial hardship is always subject to the early distribution penalty if the participant is not yet age 59½.

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

Account closing fees It is very common for a broker-dealer to charge a fee for processing the closing of an account. There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: 1. commissions; 2. markups and markdowns; and 3. advisory fees for those firms that are also registered as investment advisers.

Which of the following investors aligns most closely with the strong form of the efficient market hypothesis (EMH)?

An investor using a buy-and-hold strategy dollar cost averaging into an S&P 500 Index fund. The strong form of EMH maintains that there is no information, public or private, that can assist an investor in achieving consistently superior investment returns. The strong form holds that stock prices follow a random walk and no technical analysis (price charting) or fundamental analysis (annual report or industry publication research) is of value in obtaining superior results. Dollar cost averaging is a passive strategy, which a subscriber to the strong form may use, but using a buy-and-hold strategy by dollar cost averaging into an index fund is more aligned with the strong form than investing in a fund with the highest portfolio turnover

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

An owner of a put has the obligation to purchase securities at a designated price (the strike price) before a specified date (the expiration date). An owner of a put has the right to sell a security at a designated price (the strike price) before a specified date (the expiration date). Although this exam deals exclusively with listed equity options, there are options traded in the OTC market. Two of the factors affecting the market price of an option (its premium) are the length of time until expiration (the longer the time, the greater the time value) and whether or not the option has intrinsic value (the difference between the stock price and the market price).

Increases in which of the following indicators are regarded as predictors of the level of business activity?

Building permits Increases in building permits are indicative of increased future business activity and therefore are considered a leading economic indicator. Increases in personal income reflect current, not future, activity and is therefore considered a coincident indicator. Increases in inventories indicate that goods are not being sold in anticipated quantities and functions as a disincentive to manufacturing. Buildup in inventories is a lagging economic indicator. Corporate profits are not included in the Conference Board's list of economic indicators.

Which of the following is the simplest portfolio management style for individual stocks?

Buy and hold

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

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

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

Discount When interest rates go up, bond prices go down. Had interest rates remained the same, the slight improvement in rating would have probably caused the bond to sell at a very slight premium, but that rating increase is not nearly strong enough to offset a 25% increase in market interest rates.

Which of the following statements concerning equity securities is not correct?

Equity securities represent a lending interest in a corporation. Equity securities represent an ownership interest in a corporation. Preferred stock, as a senior security, has a claim ahead of common, but behind debt securities.

Which of the following statements regarding the growth style of investing is correct?

Growth managers focus on the denominator in the P/E ratio, searching for firms and industries where high expected earnings growth will drive the stock price up even higher. High P/E ratios are one of the keynotes of growth investing

A client invests $2,200 in an open-end investment company and signs a letter of intent for a $10,000 breakpoint. If 6 months later he deposits $11,000, which of the following statements is TRUE?

He will receive a reduced load on $13,200 worth of the shares. An investor signing a letter of intent has 13 months to contribute funds to reach the reduced load. The sales charge in this case, then, will be based on the total investment of $13,200. If at the end of the 13 months the investor had not invested up to the breakpoint, the fund would liquidate enough shares to pay the difference in sales load.

An investor holding which of the following equity securities would NOT expect to have preemptive rights?

Preferred stock Preferred stockholders do not have preemptive rights. Preemptive rights allow common stockholders to subscribe to additional issues of shares before they are offered to the public, to maintain their percentage ownership.

A portfolio manager using index options is trying to hedge which of the following types of risks?

Systematic Systematic risk (sometimes called market risk) refers to the impact the overall market has on an equity portfolio's value. Index options help insure portfolios against systematic risk. The purchase of index puts to protect a portfolio by hedging is termed portfolio insurance.

Which of the following debt instruments does not make periodic interest payments?

T-bills; Treasury bills are always issued at a discount from their face value. At maturity, the investor receives the face value. The other choices pay interest semiannually. What makes TIPS different from the others is that the principal adjusts for inflation every six months. That means the fixed interest rate is paid on a varying principal.

Under the Investment Advisers Act of 1940, which of the following statements regarding custody of a client's funds is (are) TRUE?

The specifications for the account are such that using the term "any account" is incorrect. When advisers have custody, they must (1) ensure the safekeeping of client securities through segregation and identification by client; (2) deposit client funds into bank accounts containing only client funds, naming the adviser as trustee; (3) keep adequate records of all funds, securities, and transactions; (4) provide written notification of the location of securities and funds and changes in the same; (5) report quarterly to the client, itemizing the funds or securities in possession and any transactions that have taken place; and (6) arrange for an annual surprise audit by an independent public accountant that reports the results to the SEC.

Which of the following statements is TRUE about sales of new issues under the Securities Exchange Act of 1934?

The use of credit to purchase new issues is prohibited for the first 30 days. The Securities Exchange Act of 1934 specifically bars the use of credit in purchasing new issues for the first 30 days from the date of issue. In addition, it prohibits installment payments on issues that can be bought on margin. The Securities Exchange Act of 1934 also empowered the Board of Governors of the Federal Reserve Board (FRB) to set margin requirements, and the FRB determines which issues may be purchased on margin.

The Investment Advisers Act of 1940 would consider each of the following investment advisers to be exempt from registration EXCEPT

an adviser whose only clients are banks Advising banks only does not qualify one for the exemption. Advisers who only service insurance companies or venture capital funds are exempt, as are advisers performing intrastate who do not give advice to private funds or on listed securities.

Two sisters might wish to open an account as tenants in common (TIC) rather than JTWROS in order to

ensure that their respective shares go to their heirs instead of the surviving sister. In a TIC account, when one of the cotenants dies, that individual's share of the account passes to her estate, not directly to the survivor (as is the case with JTWROS). For either kind of account, only the named cotenants have access to the account, not their spouses. In both types of accounts, there is an undivided interest in the account and any cotenant has full right to withdraw assets (but any certificates or checks must be in all names).

In order to compute an investor's after-tax return on a corporate bond, all of the following are necessary EXCEPT

inflation rate

An individual has been employed by a broker-dealer to solicit new subscriptions for the firm's free monthly stock market report. The individual is paid a salary plus bonus based on his success rate with signing up subscribers. Under the USA, this person would

not have to be registered as an agent of the broker-dealer; Agents of broker-dealers are in the business of securities-related transactions on behalf of clients of the firm. A free-market report is not a security, so this individual is not soliciting securities business.

A country decides to nationalize its sugar industry. This is an example of

political risk; The decision to take over private enterprise is a political one. The nationalization of the sugar industry happened in Cuba after the Castro regime took over. Business risk is generally related specifically to actions taken by the company, such as bad management decisions. Financial risk is also company related, such as when the company incurs more debt than it can handle. Sovereign risk is when the investment is made in the country itself (buying its bonds) not private enterprise.

An investor's required rate of return is 6%. If the internal rate of return of the investment offered is 6.32%, then the NPV is

positive Anytime an investment's IRR is more than the required rate of return, the NPV is positive (and should probably be selected). The NPV is expressed as a dollar amount. It is the IRR which is expressed as a percentage.

In contrast with a typical forwards contract, futures contracts have:

standardized terms. Futures are contracts that trade on exchanges and have standardized terms, in contrast with forwards contracts, which are customized instruments. A futures clearinghouse reduces counterparty risk by guaranteeing the performance of buyers and sellers. Because futures contracts trade on organized exchanges and have standardized terms, they are more liquid than forwards contracts.

It is unlawful for a state-registered investment adviser to do any of the following EXCEPT

take custody of a client's securities and funds, in the absence of a rule on custody by the state Administrator

When an agent submits an order ticket to purchase securities for a client, all of the following would appear EXCEPT

the current market price of the security Any order ticket submitted by an agent for execution at a broker-dealer will always include the agent's name and that of the BD. All order details must be listed (e.g. the number of shares, limit or market, etc.), but the current market price is never included.

When reviewing potential securities to select for an investor's portfolio, a technical analyst would be most likely to evaluate

the daily trading volume A technical analyst charts price and volume over time. The other choices are of interest to a fundamental analyst.

A major benefit of a revocable trust is that

the grantor retains control of the assets.

The difference between present value and net present value represents

the initial cash outlay

One respect in which an LLC differs from an S corporation is that

there is no statutory limit on the number of investors in an LLC