65 #6
John and Jane have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills totals $8,000, how much are their total liabilities? A) $130,000 B) $150,000 C) $138,000 D) $122,000
A) $130,000 The balance sheet formula is assets − liabilities = net worth. Therefore, $150,000 − liabilities = $20,000, where liabilities = $130,000. Did you answer $122,000? That is the amount of the liabilities other than the revolving credit, but that is not what the question is asking for.
An investment adviser must meet the net worth requirements of the Administrator. When doing the computation, which of the following assets would be included? A sofa in the reception area The value of the copyright on an investment manual authored by the investment adviser The reputation of the investment adviser Patents held by the investment adviser on a stock tracking software program A) I only B) II, III, and IV C) I, II, and III D) IV only
A) I only For purposes of this Rule, the term "net worth" means an excess of assets over liabilities. But net worth does not include the following as assets: goodwill, franchise rights, patents, copyrights, marketing rights, and all other assets of intangible nature; home, home furnishings, automobile(s), and any other personal items not readily marketable in the case of an individual; advances or loans to stockholders and officers in the case of a corporation; and advances or loans to partners in the case of a partnership. So, what's the deal with the sofa? Because the choice specifically says that it is in the reception area, we must assume that it is not a "home" furnishing, rather one in the office and those are not excluded assets.
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, requirements of advisory contracts include which of the following? They must be renewed on an annual basis. They must describe the amount of any prepaid fee that will be returned to the client in the event the contract is terminated. They must prohibit assignment of the contract without the client's consent. A) II and III B) I, II and III C) I and II D) I and III
A) II and III There is no requirement that advisory contracts be renewed on an annual basis. Contracts can be written for any length agreed upon. Advisory contracts must describe the amount of any prepaid fee that will be returned to the client if the contract is terminated and must prohibit assignment without the client's consent.
Which of the following would not be justification for the Administrator to cancel the registration of an agent? A) The agent violated several provisions of the Uniform Securities Act B) A court has declared the agent mentally incompetent C) The Administrator's repeated attempts to contact the agent were futile D) The agent has been reported as deceased
A) The agent violated several provisions of the Uniform Securities Act Cancellation is a form of nonpunitive termination. If an agent dies, is declared mentally incompetent, or mail is returned with no forwarding address, registration will be canceled. Violation of the Act is cause for disciplinary action, not cancellation.
Tax preference items are used for the purpose of computing the alternative minimum tax. They include all of the following except A) straight-line depreciation. B) certain incentive stock options. C) excess intangible drilling costs. D) accelerated depreciation.
A) straight-line depreciation. Straight-line depreciation is not a preference item. All of the other choices are included in the IRS listing of tax preference items. In the case of the ISO, it is a preference item to the extent that the fair market value of the employer's stock is in excess of the strike price of the option. As a test-taking tip, when you see two opposites as answer choices, it is likely that one of them is the correct answer. In this case, we have straight-line and accelerated depreciation, only one of which is a preference item.
Under the NASAA Model Rule on financial requirements for investment advisers, investment advisers who have custody of customer funds are usually required to have a net worth in the amount of A) $10,000 B) $35,000 C) $50,000 D) $5,000
B) $35,000 The NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, requires an investment adviser with custody of customer funds or securities to have a minimum net worth in the amount of $35,000. If the adviser does not have custody of customer funds or securities but does have discretionary power over customer accounts, the minimum net worth amount is reduced to $10,000. In the event the adviser wishes to post a bond because it doesn't meet the net worth requirement, it must be an amount determined by the Administrator based upon the number of clients and the total assets under management of the investment adviser.
Sharon Smith is an investment adviser representative with Highwater Advisers, a federal covered investment adviser with its principal office in State X. Sharon provides advisory services to a bank located in State X, a state in which she has no place of business. Under current regulations, A) because Highwater's principal office is in State X, Sharon would be required to register as an IAR in State X. B) because Sharon has no place of business in State X, she does not have to register as an IAR in State X. C) because Sharon has a client in State X, registration as an IAR would be required in State X. D) because Sharon's client is a bank, she does not have to register as an IAR in State X.
B) because Sharon has no place of business in State X, she does not have to register as an IAR in State X. The key is that Sharon is an IAR for a covered IA. When that is the case, the IAR is only required to register in states where she (the IAR) maintains a place of business. Sharon does not have a place of business in State X so no registration is required there. The fact that the client is a bank is of no relevance nor is the location of her employer's principal office
You are doing an investment plan for a new client, age 55, who plans to retire at age 70. The client is somewhat risk averse and wants to preserve capital while at the same time not falling prey to possible inflation. Which of the following portfolios would probably be most suitable? A) 40% high-yield bonds; 60% large-cap stocks B) 90% high-quality bonds; 10% large-cap stocks C) 60% high-quality bonds; 30% large-cap stocks; 10% cash equivalents D) 90% large-cap stocks; 10% high-quality bonds
C) 60% high-quality bonds; 30% large-cap stocks; 10% cash equivalents Although it is possible to debate this choice (but don't), NASAA would suggest that the bonds and cash offer sufficient capital preservation while this proportion of equities will combat the risk of inflation. High-yield (junk) bonds have no place in the portfolio of a risk-averse investor.
Which of the following best describe the balance sheet formula? Assets minus liabilities equals net worth. Sales minus expenses equals operating income. Liabilities plus equity equals assets. Dividends plus retained earnings equals net income. A) II and III B) I and IV C) I and III D) II and IV
C) I and III A balance sheet basically lists what is owned (assets) and what is owed (liabilities). The difference between these 2 is the net worth or equity. Sales, expenses, and dividends are all found on the income statement.
If an agent solicits a client to purchase nonexempt, unregistered securities, and the solicitation results in a sale, which of the following statements is NOT true? A) The broker-dealer may be sued if the client loses money, but if money is made the client may keep it. B) The broker-dealer who employs the agent may be sued. C) The employing broker-dealer must offer the right of rescission within 30 days of discovery. D) The agent may be subject to civil penalties.
C) The employing broker-dealer must offer the right of rescission within 30 days of discovery. There is no specified time limit on when the right of rescission must be offered. The 30-day period is the length of time the client has, after receiving the notice, to accept or reject the offer. Agents are prohibited from soliciting sales for unregistered, nonexempt securities and any broker-dealer who employs an agent who does so may be sued. The agent may also be subject to civil penalties. Both agents and their broker-dealers may be sued when a sale results from an improper solicitation. If money is made, the client may keep it.
An investor purchases 1,000 shares of ABC at $42 per share. One year later, the stock is trading at $50 per share and the investor receives 50 shares of ABC as a stock dividend. How will this dividend be currently taxed? A) As a $2,100 capital gain B) As $2,500 ordinary income C) As a $2,500 capital gain D) The shares are not subject to taxation
D) The shares are not subject to taxation Shares received per a stock dividend are not currently taxable. Instead, shareholders who receive stock dividends must adjust their cost basis in the shares downward. The total number of new shares, multiplied by their new adjusted basis, must equal the shareholder's total interest before the stock dividend was received.
Which of the following could reduce the amount that an individual may contribute to a Traditional IRA? Roth IRA contributions made for the year High income level Participation in an employer-sponsored plan Marital status A) I only B) I, II and III C) I and II D) I, II, III and IV
A) I only The maximum annual contribution applies as a total among your Roth and your traditional IRA. So, if the maximum is $6,000 and you put $3,000 into your Roth, you could only put $3,000 into your traditional IRA. You could do a total of $7,000 if you were 50 or older. High income level and participation in an employer-sponsored plan will affect the amount you may deduct but not the amount you may contribute. Even though a married couple can have their own IRAs or set up a spousal IRA if one is nonworking, that doesn't reduce the amount that either spouse can contribute.
A person is excluded from the definition of investment adviser under the Investment Advisers Act of 1940 if the investment advice and reports are restricted to A) U.S. government securities B) bank and insurance company securities C) securities listed on a national stock exchange D) foreign securities
A) U.S. government securities Among the exclusions found in the act is one for persons whose advice relates exclusively to securities issued or guaranteed by the U.S. government.
Included in the Uniform Securities Act's definition of broker-dealer would be A) a broker-dealer with a place of business in the state whose only clients are insurance companies. B) individuals who are registered as agents. C) issuers of securities. D) savings institutions.
A) a broker-dealer with a place of business in the state whose only clients are insurance companies. When the firm has a place of business in the state, regardless of its clientele, it is a broker-dealer. Exclusions from the definition include agents, issuers, and most financial institutions, such as banks and savings institutions. Also excluded are broker-dealers with no place of business in the state who only deal with institutional clients, such as banks and insurance companies.
In the securities industry, when a person is acting in an agency capacity, the form of compensation received is A) commission B) fees C) account maintenance charges D) markup or markdown
A) 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.
An agent lives in Montana and is registered in Montana and Idaho. His broker-dealer is registered in every state west of the Mississippi River. The agent's client, who lives in Montana, decides to enroll in a 1-year resident MBA program in Philadelphia, Pennsylvania. During the 1-year period, when the client is in Philadelphia, the agent may A) conduct business with the client as usual B) not deal with the client until the broker-dealer registers in Pennsylvania C) only accept unsolicited orders D) not conduct any business with the client
A) conduct business with the client as usual Even though the college program is called a resident program, that does not mean that the client has changed his state of residence. Although neither the firm nor the agent is registered in Pennsylvania, the agent may continue to conduct business with the client. This is because both the agent and his firm are properly registered in the client's state of permanent residence.
Using the net present value method, a potential investment should be undertaken if the present value of all cash inflows minus the present value of all cash outflows (which equals the net present value) is A) greater than zero B) less than zero C) equal to zero D) positively correlated
A) greater than zero NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a proposed investment is positive, it should be accepted. However, if NPV is negative, the investment should probably be rejected because cash flows will also be negative.
According to the NASAA investor advisory regarding fees charged by broker-dealer firms for services and maintenance of investment accounts, A) the schedule should be made available on the broker-dealer's public website without requiring any login or password B) the schedule should be made available on the broker-dealer's public website and should be password protected C) as long as the schedule is available in electronic form, it is not necessary to provide a paper version to retail customers D) fee schedules should only be delivered by hand or postal mail to reduce cyber security threats
A) the schedule should be made available on the broker-dealer's public website without requiring any login or password Transparency requires that obtaining the fee schedule should be a simple process for retail customers and prospects. That means access without logging in to the broker-dealer's website or needing a password. Paper copies should always be available and cyber security is not a threat because there is no confidential information included.
Which of the following statements regarding investment theory is not correct? A) In a well-diversified portfolio, diversifiable risk is zero. B) Combining two stocks with a negative correlation coefficient can significantly reduce the portfolio's standard deviation. C) The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume unsystematic risk. D) A correlation coefficient of 0.14 between the returns of Stock C and Stock L indicates that very little of Stock C's returns can be attributed to the returns of Stock L.
C) The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume unsystematic risk. Beta is a measure of systematic risk, not unsystematic risk. The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume systematic risk. Diversifiable risk (unsystematic risk) can be brought down to zero with proper diversification. Including securities with negative correlation is a prime method of reducing overall risk (expressed by the portfolio's standard deviation) and the closer the correlation coefficient gets to zero (and 0.14 is close), the more random the relationship between the returns earned by two securities.
