Go Over These

Who does ERISA apply to

-private sector plans (publicly traded utility company plans) -government or public sector plans (school districts) do not apply

Which of the following assets will have the greatest effect on minimizing financial assistance when an individual is applying to college and using the FAFSA application? A) An UTMA account B) A prepaid tuition plan C) A Roth IRA D) A Coverdell ESA

20% of a UTMA is counted towards financial aid

in how many days is the SEC required to grant an advisor registration or begin proceedings to see if it should be denied according to the investment advisors act of 1940

45 days

A federal covered investment adviser has decided that it is necessary to increase its fee schedule and charge commissions on securities trades. However, they are going to leave the fee structure in place for existing customers. This information must be A) disclosed promptly only to those customers who will be affected by the change through an amended brochure B) disclosed in the summary of material changes in the annual updating amendment to the SEC C) disclosed promptly to all customers by amending the brochure D) disclosed promptly to the Administrator of the state where the IA maintains its principal office

A

In the securities industry, the term contra party refers to A) the person on the other side of the trade B) a securities regulator who begins an investigation against a securities professional C) the person identified on the trade confirmation as a broker D) the person on the other side of a civil suit

A

What does the term "guaranteed" mean when used to describe a security? A) The security has a third party other than the issuer that guarantees the payment of principal and interest or dividends. B) The security has been cleared and is backed by the SEC. C) The security is an annuity product that guarantees a retirement income. D) The broker-dealer will buy the security back at the same price or higher.

A

Under the Uniform Securities Act, the term broker-dealer would include A) a person with no office in the state who directs offers to no more than 5 individual residents of the state in any 12-month period B) an issuer distributing its own common stock offering C) an agent registered under the act who from time to time sells stock from personal inventory D) a trust company

A Although a person has no office in the state, offers are directed to residents of the state. Under the USA, this person is defined as a broker-dealer. There is no de minimis exemption for broker-dealers. A person is exempt from the definition of broker-dealer if there is no office in the state and offers are directed to institutional clients or existing individual clients who are not residents of that state. The agent is merely selling his own stock as would any other individual; that does not make one a broker-dealer.

In a financial market that is efficient, A) the prices of securities will not differ from their justified economic values for any length of time. B) investors who do not believe in the efficient market hypothesis (EMH) will stop seeking undervalued securities. C) investors will take an active investment strategy if they are strong believers in the efficient market hypothesis (EMH). D) new information will be slowly reflected in securities prices.

A An efficient market is a market that quickly reflects all new information. Accordingly, securities prices will not depart from their justified economic value for any extended period of time. Investors who are strong subscribers to the efficient market hypothesis (EMH) will be passive investors because they believe you just can't beat the market. On the other hand, investors who do not believe in the EMH will become active investors and will seek to identify undervalued securities.

Platinum Investment in Growth Group, Inc. (PIGGI) is registered in and has its principal office in State W. PIGGI has near-term plans to open offices in State A and B. In an effort to test the waters, PIGGI mails several hundred flyers to prospects in those 2 states. Under the Uniform Securities Act, A) these flyers could not be mailed until PIGGI was registered in States A and B B) these flyers could be mailed, but no accounts can be opened until PIGGI is registered in States A and B C) as a federal covered investment adviser, the flyers would need filing with the SEC D) as long as PIGGI did not maintain an office in either of these states, the flyers could be mailed

A Any attempt to hold oneself out as offering investment advice as part of a business would require the person to be registered in the state, unless that person qualifies for an exclusion or exemption. Nothing in this question implies that an exclusion or an exemption applies. We know that PIGGI is not a federal covered investment adviser (and therefore does not need to file its flyers with the SEC) because we are told it is registered in State W—federal covered advisers don't register in any state.

Which of the following is defined as a security under the Uniform Securities Act? A) An investment contract B) Fixed, guaranteed payments made for life or for a specified period C) Commodity futures contracts D) A guaranteed, lump-sum payment to a beneficiary

A As a result of the Howey decision, investment contracts are defined as (and often serve as a synonym for) a security under the Uniform Securities Act. A guaranteed, lump-sum payment to a beneficiary is an endowment policy excluded from the definition of a security. Fixed, guaranteed payments made for life or for a specified period are fixed annuity contracts not defined as securities. Commodity futures contracts and the commodities themselves are not securities.

Mr. Beale buys 10M 6.6s of 10 at 67. What will his annual interest be? A) $660.00 B) $670.00 C) $1,000.00 D) $820.00

A Interpret "10M" as "$10,000 worth of." Beale receives the nominal yield of the bonds, which is 6.6% of $10,000. The M is from the roman numeral for 1,000.

Which of the following statements regarding nonqualified annuities is CORRECT? A) It is possible to receive distributions from an annuity before age 59½ without incurring tax penalties. B) Because taxes on earnings are deferred, all money withdrawn will be subject to income tax when received. C) Because only insurance companies issue variable annuities, they are not considered securities. D) The exclusion ratio applies to accumulation units only.

A Nonqualified annuities, fixed or variable, are those where contributions are made with after-tax dollars. Withdrawals due to death or disability or taking substantially equal annuity distributions over the life of the insured can begin before age 59½ without being subject to a tax penalty. The exclusion ratio only applies during the payout period. Even though taxes on earnings are deferred, that portion of the withdrawal that represents a return of principal on a nonqualified annuity, is not subject to tax or penalty.

The Alpha-Gamma Mutual Fund reports a large number of their investors liquidating shares of the fund, so much so that the dollar amount of liquidations exceeds the incoming cash for new purchases. This would lead to a condition known as A) net redemptions B) reduced leverage C) cash outflow D) improved performance

A One of the main features of open-end investment management companies (mutual funds) is that there is a continuous offer of new shares and ready redemption of old ones. When redemptions exceed new purchases, the fund suffers from net redemptions.

Which of the following are regulated under the Securities Exchange Act of 1934? New issues Broker-dealers Transfer agents A) II and III B) I, II, and III C) I and III D) I only

A The Securities Exchange Act of 1934 was designed to regulate securities transactions, securities markets, and the securities firms who do the trading. While the Securities Act of 1933 covers requirements relating to new issues, the Securities Exchange Act of 1934 covers almost everything else in the securities industry. Its greatest impact is on the securities firms and the people who sell securities (i.e., broker-dealers and their agents) in the secondary market. Of the choices listed, new issues would be regulated by the Securities Act of 1933.

Assume Frank has a portfolio with an actual return of 10.50% for the past year. The portfolio beta equals 1.25, the return on the market equals 9.75%, and the risk-free rate of return equals 3%. Based on this information, what is the alpha for Frank's portfolio and did it outperform or underperform the market? A) -.9375%, underperform B) +3.3750%, outperform C) −1.6875%, underperform D) +9.1875%, outperform

A The alpha for Frank's portfolio equals −.9375% indicating that his portfolio underperformed the market based on the level of assumed investment risk. Let's do the computation. As with most math, there are two ways to arrive at the correct answer. The method shown in the LEM follows the formula: (Actual return - RF rate) - (beta x [market return - RF rate]). Plugging in the numbers we get, (10.5% minus 3%) - (1.25 x [9.75% - 3%]). That breaks down to 7.5% - (1.25 x 6.75%) or 7.5% - 8.4375% = negative .9375% Alternatively some might prefer this formula for alpha: alpha = actual return - [risk-free rate + beta x(market return - RF)]. If we plug in the numbers, we get .105 - [.03 +1.25 x(.0975 - .03)] = −.009375, or−.9375%.

Which of the following reasons is appropriate justification for selling a stock short? A) To benefit from a decline in the price of the stock B) To cut losses on a long position C) To seek a modest potential reward with limited risk D) To benefit from a rise in the price of the stock

A The appropriate time to sell short is when (one believes) a stock price is about to drop. The investor sells borrowed stock at current prices and then buys the stock later at a lower price to replace the borrowed stock. Selling short does not reduce the risk of a long position; the investor is selling borrowed, not owned, stock. If the stock moves up, the short investor can lose a great deal of money. If the stock price moves up, the risk of loss is unlimited.

If the current risk-free rate is 5%, and the expected return from the market is 10%, what return should we expect from a security that has a beta of 1.5? A) 12.5% B) 15% C) 11.5% D) 10%

A The expected return = 5% + (10% - 5%) × 1.5 = 5% + (5% x 1.5) = 5% + 7.5% = 12.5%.

A company's current ratio is .5:1. This could be an indication A) the company may have trouble paying its bills. B) the company's current assets are twice its current liabilities. C) the company's working capital is sufficient to meet daily needs. D) the company is highly leveraged.

A The formula for current ratio is the current assets divided by the current liabilities. A .5:1 ratio means that the company has current liabilities that are twice its current assets. This would also mean a negative working capital (current assets minus current liabilities) and would probably mean that the company is going to have a difficult time paying its bills.

An investor has been comparing several different mutual funds with the same objectives. When making the decision as to which fund to purchase, which of the following factors would be the most important? A) The fund manager's tenure B) The exchange on which the fund is listed C) The net asset value per share D) The date of the annual shareholders meeting

A The fund manager's tenure (the number of years that manager has been managing that fund's portfolio) is important because, although past performance is no guarantee of the future, in general, investors prefer someone who has performed well over the years instead of a manager with only a year or two at the helm. Because investors in mutual funds invariably purchase in a dollar amount rather than by the number of shares, the NAV per share is not a factor. That is, if you invest $10,000, what difference does it really make if the NAV per share is $10 or $100? No mutual funds are traded on the listed exchanges and why would someone buy a fund based on the date of the annual meeting?

The most common form of organizational structure for venture capital investment is the A) limited partnership. B) limited liability company. C) venture capital fund of funds. D) corporate venture capital funds.

A The most common structure for venture capital is the limited partnership. This is true for virtually all private equity including hedge funds.

The real interest rate of a fixed income investment is A) the interest earned after inflation B) interest earned after taxes C) interest earned adjusted for the investment's premium or discount price D) the coupon interest payment

A The real interest rate is the interest received minus the inflation rate.

A transactional exemption would be available under the Uniform Securities Act when an agent for a broker-dealer A) sells a large block of an unregistered nonexempt security to an insurance company that is not authorized to do business in this state B) sells a large block of an unregistered nonexempt security to an individual who meets the definition of an accredited investor C) sells a retail client $10,000 of U.S. Treasury bonds D) receives an unsolicited order from a client to purchase heating oil contracts

A The sale of a security to an institution, such as an insurance company, is considered an exempt transaction. The fact that the company is not authorized to do business in the state only means that its securities would not be exempt, but that does not change the fact that this is a sale to an institution and is, therefore, exempt. The term accredited investor is meaningless here, only institutions qualify for exempt treatment, not rich people. The T-bonds are an exempt security, but the sale to a retail client is not an exempt transaction. Heating oil contracts are a commodity, not a security.

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 disclose all of the following fees EXCEPT A) advisory fees B) issuance of a stock certificate C) charges for late payments D) account inactivity fee

A There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.

If an investor bought stock on one exchange and sold it at a higher price on another exchange, this practice constitutes A) a perfectly acceptable market arbitrage B) an offense punishable by three years in the county jail C) a violation of the Uniform Securities Act D) a violation under both the Uniform Securities Act and federal law

A This common practice is perfectly acceptable. Arbitrage is the practice of buying on one exchange and selling on another to take advantage of market disparities.

From the following 4 portfolios, choose the 1 that would generally be considered to be the most diversified. A) JKL common stock, beta 1.50, correlation to the S&P 500, +0.77; MNO common stock, beta 1.00, correlation to the S&P 500, +0.93, PQR common stock, beta 0.50, correlation to the S&P 500, +0.34 B) STU common stock, beta 0.95, correlation to the S&P 500, +0.84, VWX common stock, beta 0.90, correlation to the S&P 500, +0.07; YZA common stock, beta 0.88, correlation to the S&P 500, −0.45 C) ABC common stock, beta 1.20, correlation to the S&P 500, +0.82; DEF common stock, beta 0.90, correlation to the S&P 500, +0.91; GHI common stock; beta +0.65, correlation to the S&P 500, +0.06 D) DCB common stock, beta 1.00, correlation to the S&P 500, +0.75; HGF common stock, beta 0.10, correlation to the S&P 500, +0.25; KJI common stock, beta −0.50, correlation to the S&P 500 +0.50

B

Examples of identity theft would include taking over an individual's credit card account applying for new credit cards in the compromised individual's name lending money in the name of the compromised individual purchasing lottery tickets in the name of another individual A) III and IV B) I and II C) II and III D) I and IV

B -they wouldnt lend money

An agent has a client who calls in with the following instructions: "Please place a sell stop order at $33 for my 100 shares of ABC common stock." A week later, the agent receives inside information that ABC's upcoming earnings report will be disastrous. Three days after that, the report is released and the stock plunges, falling to $33. Can the client's stop order be executed? A) No, because the agent was in possession of material inside information B) Yes, because the order was received prior to the agent receiving the information C) No, because the order isn't triggered until the price falls below $33 D) Yes, but only if the execution price is higher than $33

B A sell stop order at $33 becomes a market order once the stock's price declines to $33 (or less). At that point, the order may be executed at, above, or below the stop price. The agent came into possession of the inside information after the order was received, so there is no concern that the client was benefiting from the agent's knowledge.

When referring to a federal covered investment adviser, all of the following are supervised persons EXCEPT A) an investment adviser representative B) an individual contracted to solicit for new advisory clients C) the chief securities analyst D) the receptionist who works for the investment adviser and analyzes client financial profiles

B All individuals working for an investment adviser who provide investment advice or management are considered supervised persons. Whether analyzing securities or customer profiles, one would be a supervised employee. Contracted solicitors are not employees of the adviser and, therefore, under the Investment Advisers Act of 1940, the adviser is only required to make a bona fide effort to determine that the solicitor complies with the solicitor agreement. Please be careful because this is not so under the USA. That act considers solicitors to be supervised persons, whether employed by the adviser or not, and requires IAR registration.

Which of the following is required to effectuate annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser? A) Consent to service of process B) State licensing fee C) Form U4 D) Renewal notice to the SEC

B All investment adviser representatives are registered with the states, not the SEC. Renewal requires the payment of the annual renewal registration or licensing fee. The consent to service of process is a permanent document submitted with the initial application for registration.

To which of the following situations does the transaction exemption apply? A) City of Chicago bond offering B) The sale of an estate's holding of IBM shares by an executor C) Canadian government bond offering D) Offering an unregistered security to a maximum of 12 individual customers in a 10-month period

B An exempt transaction relieves the security from any state advertising or registration requirements. Transactions by executors and estate administrators are examples of exempt transactions. Municipal and government bonds are exempt securities, and whether or not they are exempt transactions depends on to whom or how they are sold (that information is not given in this question). The sale of the unregistered stock is not an exempt transaction (private placement) because the USA only permits offers to a maximum of 10 noninstitutional investors over a 12-month period.

All of the following are advantages of a 401(k) plan EXCEPT A) tax deferral on the plan earnings is advantageous to employees B) the employer may make unlimited contributions, which generate unlimited tax deductions for the business C) the owner of the business may participate in the plan D) employees and the business may reduce current taxes

B Contributions are deductible by the employer but are not unlimited because contributions to a 401(k) are subject to a number of limits. Tax deferral on plan earnings is advantageous to employees. The owner of the business may participate in the plan.

The contribution limit has to be aggregated when participating in both A) a 401(k) and a 457 B) a 401(k) and a 403(b) C) a 457 and a Roth IRA D) a 403(b) and a 457

B Contributions to a 457 plan do not have to be aggregated with other retirement plans. That is, if eligible, one could contribute the maximum to a 401(k), a 403(b), or an IRA (traditional or Roth) and could also contribute the maximum to a 457 plan.

Jack, who is proficient in both fundamental and technical analysis, would like to become an investment adviser. Although Jack is fairly new to the securities business, he worked in the commodities business for many years. Five years ago, Jack's Commodity Pool Operator's license was suspended by the Commodity Futures Trading Commission for having willfully violated or willfully failing to comply with any provision of the Commodity Exchange Act. Which of the following best describes how Jack's application to open an investment advisory business will be handled under the Investment Advisers Act of 1940? A) Jack's application will likely be denied because he has little experience in the securities industry. B) Jack's application will likely be denied because he violated the Commodity Exchange Act within the 10-year period prior to his application. C) Jack's application will likely be accepted because he has not violated any securities law. D) Jack's application will likely be accepted because his violation of investment-oriented regulations occurred 5 years prior to his application.

B Jack's application will probably be denied because he was found guilty of violating the Commodity Exchange Act within the 10-year period prior to his application. Registration as an investment adviser will be denied to any party that has been convicted, within the 10-year period prior to application, of a violation of federal securities acts or the Commodity Exchange Act. Such statutory denial will also impact those enjoined under domestic or foreign court orders from engaging in the business of investing, presuming such orders were made in the 10-year period prior to the application date.

Which of the following is considered a sale of securities under the Uniform Securities Act? Redemption of mutual funds shares worth $10,000 Dividends of common stock for which no consideration was given for the dividends With the approval of the board of directors, an exchange of common stock for the stock in another company under a merger Disposition of stock for which cash consideration is received A) I, II, and III B) I and IV C) II and III D) II and IV

B Redemption of mutual fund shares is always treated as a sale by the redeeming shareholder. The exchange of securities in a merger is not considered a sale under the act. Any disposition (liquidation) of securities that involves cash consideration, or in which the shareholder has a choice of cash or securities, is a sale.

The economic theory that says economic growth results from lower tax rates and lower government spending is A) demand-side theory B) supply-side theory C) Keynesian theory D) monetary theory

B Supply-side economics is the theory of Arthur Laffer, who believed that heavy taxing and government intervention have a negative effect on the economy.

The term security would include which of the following? A) Indentures B) Section 529 plans C) Coverdell ERAs D) 403(b) plans

B Technically, Section 529 plans are known as municipal fund securities. As such, the rules of the MSRB require delivery of an official statement, sometimes called an offering circular but never referred to as a prospectus. Retirement plans are not included in the definition and an indenture is a document specifying the legal obligations of the bond issuer and rights of the bondholders. It is some¬times called the deed of trust, and although it details information about a security, it is not, in itself, a security.

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 change in polarity. D) a reversal.

B 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.

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

B 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 following U.S. government securities do NOT bear a stated interest rate but are sold at a discount through weekly auctions? A) TIPS B) Treasury bills C) Treasury notes D) Treasury bonds

B Treasury bills bear no stated interest rate. They are sold at a discount through weekly auctions and are actively traded in the money market. Treasury notes and Treasury bonds both carry stated interest rates.

You have a 70-year-old client who owns a whole life insurance policy. The face amount of the policy is $1 million and it currently has a cash value of $400,000. The client is interested in a life settlement. If the policy is accepted, the client would expect to receive A) the $1 million face amount. B) more than $400,000, but less than $1 million. C) less than $400,000. D) the face amount plus the cash value.

B When a policy is sold through the life settlement process, the insured receives more than the cash value, but less than the face amount of the policy.

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

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

According to federal law, an insurance company under the provisions of the Investment Company Act of 1940 must allow a variable life policyholder the option to convert the policy into a whole life contract for a period of A) 12 months B) 45 days C) 24 months D) 18 months

C

An investment adviser who trades on material nonpublic information is A) generally going to increase the returns in client accounts. B) straddling a commingled arbitrage. C) in violation of the antifraud provisions of the Uniform Securities Act. D) engaging in the unethical business practice known as front running

C

Under the USA, what are the maximum penalties for a securities-related felony? A) $5,000 and 5 years imprisonment B) $3,000 and 5 years imprisonment C) $5,000 and 3 years imprisonment D) $3,000 and 3 years imprisonment

C

Current market interest rates are 6%. A bond with an 8% coupon would be most likely to have a net present value of zero when the bond is A) selling at a discount. B) selling at par. C) selling at a premium. D) called for redemption.

C A bond's NPV is most likely to be zero when its IRR is equal to the current market interest rate. In this case, that would be 6%. The only way for a bond with an 8% coupon to have a yield to maturity of 6% is if the bond is selling at a premium.

With regard to taxation of distributions from a REIT, in the majority of cases, dividends are taxed as ordinary income in the majority of cases, dividends are considered qualified for the lower tax rate capital gains distributions are treated as long-term capital gains capital gains distributions are taxed as ordinary income A) II and IV B) I and IV C) I and III D) II and III

C Although there are some rare exceptions, you should consider any dividend paid to an investor in a REIT subject to taxation at ordinary income rates. Just as with mutual funds, capital gains distributions are treated as long-term capital gain.

Your client in the 28% federal income tax bracket currently owns some U.S. government bonds with a coupon yield of 6%. In order to receive the same income after taxes, she would need to buy municipal bonds with a coupon of A) 7.68% B) 1.68% C) 4.32% D) 6.00%

C Because the 6% on the government bond is fully taxable on a federal basis, the client receives a net of 4.32% ($60 per bond less 28% in taxes {$16.80}, or $43.20 per year). Interest on municipal bonds is tax free, so a 4.32% coupon will result in the same amount of after-tax income.

Although all new accounts must be approved by a designated supervisor before any trading activity may take place, there is one type of account that must be approved by a specially qualified supervisor. That would be A) a margin account B) a discretionary account C) an options account D) an IRA

C Because trading options (puts and calls) generally involves a higher degree of risk than stocks, bonds, or mutual funds, a designated supervisory person with knowledge about options must approve the account opening.

Which of the following is an improper activity under the Uniform Securities Act? A) An investment adviser collects a commission on the sale of insurance products that he recommended, disclosing that a commission would be earned. B) An investment adviser charges a customer a fee for advice leading to the sale of a security, receives a commission on the sale, and discloses the amount of the commission to the customer. C) A dealer charges commissions for securities it sells from its inventory and discloses the amount of the commission to the customer. D) An investment adviser charges two customers two different fees for a similar service.

C Dealers who act as principals in transactions charge markups, not commissions. The adviser can charge customers different fees for similar services without violating the Uniform Securities Act.

Harry Thomas has turned 19 and decided that he is going to join the Marines and postpone going to college. If Harry decides to stay in the military, the unused funds contributed to his Coverdell ESA A) must be distributed to Harry no later than 30 days after his 21st birthday B) must remain in the plan until Harry's 30th birthday C) may be transferred into another Coverdell ESA for Harry's 25 year-old cousin, Julia D) must be returned to the donor with tax plus a 10% penalty on the earnings

C Funds that are not used for qualified education expenses may be withdrawn, but the earnings are subject to income tax plus a 10% tax penalty. To avoid this, the IRS permits the funds to be transferred into another Coverdell ESA for someone related to the first beneficiary (Harry), who is under 30 years of age. In the case of the Section 529 plan, the transferee has no age limitations. Related parties include immediate family members of the original beneficiary, parents, cousins, aunts and uncles, and even in-laws. If funds remain unused in the Coverdell ESA, they must be distributed to the named beneficiary on the account by 30 days after the child's 30th birthday, not the 21st. By statute, there is no age limit for the Section 529 plan, but some states set a time limit for distribution of unused funds. In either case, there would be the tax and penalty.

A customer of an investment adviser inadvertently mails some stock certificates to the IA. The IA does not maintain custody of customer assets. If the certificates were received on a Monday, NASAA rules would requires that the certificates be A) returned no later than Tuesday B) forwarded to the broker-dealer promptly C) returned no later than Thursday D) returned the same day

C NASAA's custody rules require that an investment adviser who does NOT maintain custody must return certificates that are mistakenly sent within 3 business days. When it comes to checks, it depends on how the check is drawn. If made out to the investment adviser, it must be returned; if made out to a third party (usually the executing broker-dealer), it must be forwarded to that third party. In either case, the time limit is 3 business days (might be shown as 72 hours on the exam).

A frequent concern of parents initiating a savings plan for the college education of their child is the lack of control over the assets, particularly if the child decides to forego higher education. When you have a client who shares this concern with you, it would be most appropriate to suggest A) an UTMA account. B) opening a new account in the client's name for this purpose. C) a Section 529 plan. D) U.S. Treasury zero-coupon bonds.

C One of the features of the Section 529 plan is that the donor maintains control over the funds in the account. Therefore, should the child not go to college, the money can either be transferred to another family member or withdrawn by the donor (although that will incur taxation issues). With an UTMA account, once the child reaches the termination age set by the state, the money is now hers. The zero-coupon bonds would have to be purchased in a custodial account so the issue is the same. Yes, the client could open a separate account and consider its usefulness for the child's education, but there are no tax benefits, unlike with a 529 plan. Furthermore, there might be complications, such as those assets not being protected from creditors.

There are several financial models that refer to the "risk-free" rate of return. Which of the following instruments is used to measure that rate? A) 30-year Treasury bond B) 1-year CD C) 91-day Treasury bill D) Federal funds

C The standard benchmark used to measure the "risk-free" rate of return is the 91-day Treasury bill.

The type of analysis that attempts to value securities by examining general economic trends and the growth potential and productivity of individual companies is A) holding period analysis B) credit analysis C) fundamental analysis D) technical analysis

C There are two main approaches to valuing securities. Fundamental analysis takes the approach described in this question. The other approach—technical analysis—relies on charts of past performance to forecast future price movements.

The value of which of the following would be least likely to be impacted by changes in interest rates? A) A U.S. Treasury bond issued 25 years ago with a 30-year maturity B) A convertible preferred stock C) A bank CD maturing in 5 years D) A laddered bond portfolio

C This question is dealing with interest rate (or money-rate) risk. That risk refers to the inverse relationship between the price of fixed-income investments and interest rates. That is, when interest rates go up, the price of fixed-income securities falls (and vice versa). However, this risk only affects investments that are marketable (those with a fluctuating market price). Bank CDs are nonnegotiable (we're not referring to the negotiable jumbo CDs with a maturity of 1 year or less) and, as a result, will not fluctuate in price, regardless of changes to interest rates. In this case, interest rate risk is eliminated. That is one of the reasons why the exam's first choice for capital preservation is insured bank CDs. Will a laddered bond portfolio reduce interest rate risk? Yes, but it will not eliminate it. Is a convertible preferred (or bond) less subject to changes in interest rates than one without the conversion feature? Yes, but the risk is still there. Does a 30-year T-bond with 5 years remaining to maturity have a short duration and, therefore, a reduced interest rate risk? Yes, but the price of the bond will still be affected by changes in the market interest rates.

Although there may be some slight differences in methodology, when S&P or Moody's evaluate a security in order to assign a rating, they would be least likely to consider the issuer's A) profitability ratio B) cash flow to debt ratio C) asset turnover ratio D) liquidity ratio

C What is the purpose of a security's rating? To inform investors of the financial risk of the investment. The higher the rating, the lower the risk. This is one of those questions that students answer correctly because all of the other choices are incorrect (they are important factors). Remember, this is a negative question: "least likely." Certainly profitability of the issuer is a key factor in assessing the safety of the issue. Liquidity and cash flow are important factors as well. The rate at which assets are turned over is not nearly as important to determining a rating as the other three.

Risk-adjusted return is calculated by A) multiplying the return of an investment by its standard deviation B) dividing the security's price by its beta C) dividing the security's return in excess of the risk-free rate by its standard deviation D) dividing the price of the stock by the standard deviation

C The return from a security can be adjusted for the risk by dividing the security's return in excess of the risk-free rate by its standard deviation. This is the Sharpe ratio

Exceptional Results Advisers (ERA) has $15 billion in AUM and does not accept new clients who are unable to place at least $25 million under ERA's management. From time to time, ERA's clients ask for recommendations for friends or family who don't meet ERA's minimum investment level. In most cases, ERA recommends these prospects to Rational Investment Planning (RIP), a state-registered investment adviser, and receives a referral fee for each person who becomes a client of RIP. The practice A) would only be acceptable if the fee was nominal and not based on the size of the account. B) is prohibited under any circumstance. C) is acceptable because the referral fee is being paid to a registered investment adviser. D) would only be acceptable if the fee was used to reduce the referring client's advisory fees.

C - when a referral fee is being paid to another registered firm, there is no problem

MaryBeth Williamson is the CEO of MBW Software Associates. MBW is having an offering of common stock to investors on an intrastate basis. Williamson has been telling potential investors that the registration of the stock indicates approval by the state. Under the Uniform Securities Act, she is committing misrepresentation of A) material information. B) qualification. C) authorization. D) registration.

D

The currency reporting threshold for cash and equivalent instruments is A) over $3,000 B) over $25,000 C) over $5,000 D) over $10,000

D

The Administrator may deny registration of an agent because the agent A) was convicted of a drug-related misdemeanor B) is under investigation by the Administrator of another state C) is being investigated by the SEC for possible insider trading violations D) was convicted of a felony within the past 10 years

D -registration can be denied for any felony - not just securities related ones -if the misdemeanor was related to securities it could be denied -cannot deny based off of investigation

Jasper Quartermaine is interested in using the options market to create "insurance" against a severe drop in the value of a stock portfolio that he owns. How could he best accomplish this goal and what is this type of strategy called? Type of optionStrategy A) Write call optionsProtective call B) Buy call optionsProtective call C) Write call optionsCovered call D) Buy put optionsProtective put

D An investor who is long securities can obtain portfolio insurance by purchasing put options. Losses in the underlying portfolio are offset by gains in the put position. This is known as a protective put strategy. Buying calls would be "insurance" when having a short position and would be considered protective calls. Writing covered calls provides downside protection to the extent of the premium received, but if you want real insurance, you have to buy it.

Which two of the following statements are CORRECT? Time-weighted returns are generally of more use than dollar-weighted returns to evaluate portfolio manager performance. Time-weighted returns are generally of more use than dollar-weighted returns to evaluate individual investor performance. Dollar-weighted returns are generally of more use than time-weighted returns to evaluate portfolio manager performance. Dollar-weighted returns are generally of more use than time-weighted returns to evaluate individual investor performance. A) II and III B) III and IV C) I and II D) I and IV

D Because dollar-weighted returns reflect the individual investor's cash deposits and withdrawals from the investment account, it is the preferred measure of return for them. On the other hand, time-weighted returns are generally a more important tool to show portfolio manager performance.

An investor is considering the purchase of $100,000 maturity value of zero-coupon AAA-rated corporate bonds scheduled to mature in 20 years. Among the risks that this investor will be assuming are default risk interest rate risk prepayment risk reinvestment risk A) II and III B) III and IV C) I and IV D) I and II

D Even though these bonds are rated AAA, 20 years is a long time and it is possible that this corporation may not even exist when the maturity date arrives. Adding to the risk is the fact that there are no interest payments in the interim. That is why the most commonly recommended zero-coupon bonds are those issued or guaranteed by the U.S. Treasury. Because zero-coupon bonds have the longest duration for their maturity of any bonds, they have the greatest exposure to interest rate changes. Prepayment risk is only found with mortgage-backed securities, and one of the benefits of zeroes is that there is no reinvestment risk.

Which of the following terms pertains to registration with the Administrator of a mutual fund, closed-end investment company, or unit investment trust that is registered under the Securities Act of 1933 and also registered as an investment company under the Investment Company Act of 1940? A) Qualification B) Coordination C) Notification D) Notice filing

D Federal covered securities (securities listed on national stock exchanges, Nasdaq Stock Market or investment companies registered under the Investment Company Act) are exempt from state registration. A notice filing may be required, along with a payment of fees based on a schedule set forth by the Administrator.

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) 1 year. B) 5 years. C) 2 years. D) 10 years.

D 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.

An employer whose 401(k) plan complies with ERISA Section 404 is placing investment risk with the A) employer B) Internal Revenue Service C) Securities and Exchange Commission D) plan participant

D In a 401(k) plan, a plan sponsor can shift investment risk to the employee by complying with ERISA Section 404(c) rules. In this case, the employee is making the investment decisions rather than the investment managers employed by the plan.

Ebony sets up a revocable trust, naming her daughter, Sylvia, as the sole beneficiary. Ebony has appointed the Pacific Atlantic Trust Institution (PATI) as the trustee. Any distributed income will be taxable to A) the trustee B) the beneficiary C) the trust D) the grantor

D In almost all cases, income received into a revocable (grantor) trust, whether distributed or not, is taxable to the grantor. Things are different when the trust is irrevocable, but much more complicated and not likely to be tested.

A TIPS bond with a par value of $1,000 has a coupon rate of 4%. During years 1 and 2, the inflation rate has been 6%. What effect will this have on the TIPS 2½ years later? A) The principal value will be $1,080. B) The next interest payment will be $46.37. C) The next interest payment will be $20.00. D) The next interest payment will be $23.19.

D On a semiannual basis, the principal value of a TIPS is increased by that year's inflation rate. A TIPS bond adjusts principal every 6 months based on the inflation rate. With an annual inflation rate of 6%, each 6 months the principal will increase by 3% compounded. Because the question is asking about 2½ years later, there will be 5 periods (2 each year plus the first half of the 3rd year). Using the calculator at the testing center, you would enter the $1,000 initial par value and then multiply that times 103% five times to arrive at $1,159.27. Then, multiply that times the semiannual coupon rate (2%) and the result is $23.19. In almost every case, the "shortcut" will work. That is, if it was not a TIPS bond, then the interest would simply be 2% of $1,000, or $20. That will always be one of the choices—you look for the one that is a bit higher.

A company with 20 million shares outstanding paid $36 million in dividends. If the current market value of the company's shares is $36, the current yield is A) not determinable from the information given B) 10% C) 2% D) 5%

D The current yield formula is annual dividends per share divided by current market price. The dividends per share are $36 million ÷ 20 million shares = $1.80 per share. Current yield is $1.80 ÷ $36.00 = 5%.

A widowed customer with no children has a portfolio invested in mutual funds valued at $250,000. The portfolio generates a monthly income of $1,600, an amount that exceeds her living expenses by $300. The investment portfolio is her sole source of income. Her agent recommends she sell $30,000 worth of her mutual funds and purchase a deferred variable annuity to take advantage of the tax deferral and death benefit features. This recommendation is A) suitable because it provides tax deferral features B) suitable because it provides diversification C) suitable because it offers a growth opportunity with a death benefit for a portion of her holdings D) unsuitable

D The customer has no need for the death benefit (she has no immediate survivors) or tax deferral features (with $19,200 in annual income, there are virtually no income taxes due) of a variable annuity, so this transaction is unsuitable. Finally, she would be replacing income generating assets with one that does not offer immediate income and that could reduce her income cushion to an uncomfortable margin of safety.

For purposes of safeguarding customer information, which of the following would be considered a covered account? A) A margin account in the name of the Interglobal Hedge Fund B) An account in the name of the Wells Morgan Bank C) An account in the name of the State of X employee pension fund D) A margin account in the name of Mary Beth Simmons

D The term covered account does not apply to institutional customers, such as banks, pension funds, and investment companies.

Under the Securities Exchange Act of 1934, the SEC may suspend all trading on an exchange A) only if it has cause to believe that such suspension is necessary to prevent criminal violations that are about to occur on the exchange B) for 10 days, in its discretion C) under no circumstances D) only with prior notification to the president of the United States

D To suspend all trading on an exchange, the SEC must first notify the president of the United States. The SEC may summarily suspend trading in any nonexempt security for up to 10 days without prior notice.

An investment constraint that is unique to private foundations is the requirement to A) have a board of directors. B) invest 5% of its assets each year in qualifying investments. C) have an investment policy statement. D) distribute 5% of its assets each year as qualifying distributions.

D Under Section 4942 of the Internal Revenue Code, a private foundation must pay out each year an amount equal to 5% of its net investment assets in "qualifying distributions". There is no legal requirement on how much must be invested each year, and having an investment policy statement is not unique to foundations. Likewise, there is nothing unique about the requirement to have a board of directors and that isn't an investment constraint.

Under the USA, an Administrator may A) revoke the registration of an agent and thereby place into suspense the registration of the agent's broker-dealer B) require that registrants post a surety bond prior to hearing to ensure payment of money fines C) require broker-dealers to retain books and records for the life of the firm plus two years D) revoke the registration of a broker-dealer and thereby place into suspense the registration of all the agents employed at the broker-dealer

D Under the USA, if the sentence fits the crime, an Administrator may revoke the registration of a broker-dealer. When a broker-dealer's registration is revoked, all its agents' registrations are placed into a suspended status because agents must be associated with a registered broker-dealer for their registration to be valid. While revocation of the broker-dealer's registration affects each of the agents, the reverse is not true when an agent's registration is revoked. The USA does not provide for posting of bonds on the part of registrants subject to an Administrator's investigation.

Beta is most frequently measured against which of the following? A) Dow Jones Industrial Average B) S&P 100 C) Nasdaq Composite Index D) S&P 500

D The index most commonly used to analyze the beta of an individual security or portfolio is the S&P 500. Companies (portfolios) with a beta of 1.0 would be expected to move in tandem with the market, while companies with a beta greater than 1.0 would be more volatile than the market as a whole. Companies with a beta less than 1.0 should show a rate of change less than that of the market as a whole.

Under the Uniform Securities Act, the Administrator may require that a prospectus for a security registered under qualification be sent or given to each person to whom an offer is made A) within 72 hours of the effective date. B) before or concurrent with the filing of the registration statement. C) only upon request of the offeree. D) before the sale of the security.

D - before the sale of the security

Which of the following investments would NOT be considered an exchange-traded derivative? A) Forwards B) Options C) Warrants D) Futures

Forwards are never traded on an exchange; the other 3 choices can be traded OTC or on an exchange.

what is guaranteed vs not in a variable life insurance policy

In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months allowing the conversion of the variable policy to a comparable form of permanent insurance and the 75% cash value loan minimum applies after the 3rd year of coverage.

what happens if an agent transfers from one BD to another

In the event an agent transfers from one broker-dealer to another broker-dealer, all three (the former employer, the new employer, and the agent) must report the transfer to the Administrator.

Statute of limitations for a civil action under federal regulations

In the federal regulations, the statute of limitations for a civil action is the sooner of 1 year after discovery or 3 years after the action.

Defalcator Investment Advisers (DIA), registered in States A, K, and R, would be required to provide a balance sheet as part of its brochure if it charged fees of

MORE than $500 in 6 months or more

front running

Placing broker's personal orders ahead of a customer's large order to profit from the market effects of the trade

Statute of limitations for a civil action under state regulations

Under the USA, it is the sooner of 2 years after discovery or 3 years after the action.

direct rollovers

best option for an individual leaving a qualified plan because there are no current taxes and no limit on the number that may be done per 12-month period.

semi strong form

current stock prices represent all historical price data and reflects data from analyzing financial statements, industry, or current economic outlook only insider info can produce above market returns technical and fundamental analysis is of no value

Weak form

information contained in historical stock prices is already incorporated into the current stock price -technical analysis (looking at historical data) is not worhtwhile

When should an RMD be taken when someone turns 72

it should happen no later than April 1 of the year following the year they turned 72

what is the most common form of investment vehicle for venture capital

limited partnership

rollover

must be completed within 60 days and is limited to one per 12-month period.

out of rights, warrants, and options, which are listed by the underlying corporation?

rights and warrants

strong form

security prices reflect all info from public and private sources

what is the investor's cost basis for the inherited stock

the market value on the date the decendent died

municipal bonds

those issued by any domestic political body or subdivision from the state level down

up to how long can orders from the administrator be appealed?

within 60 days