K65 SE - 1/14
Mr. Berg has been charting DMF stock prices. The stock usually fluctuates between 71 and 86. The stock is currently at 84, and the increasing upside volume makes him believe that a breakout is possible. Which of the following would he most likely enter? A) A buy stop at 88 B) A sell limit at 88 C) A sell stop at 70 D) A buy limit at 85
A) A buy stop at 88 A breakout occurs when a security trades outside an established range. In this case, because Mr. Berg has no position, he would want to purchase only if the stock breaks through the resistance level already established. U22LO6
One of your clients asks about a Coverdell Education Savings Account for college savings. To avoid income taxation and penalties, your advice is that these funds must be used before the student reaches age A) 25. B) 30. C) 32. D) 24.
B) 30. All funds within a CESA must be used before the student reaches 30 years of age. Any funds remaining must be distributed within 30 days of the birthday and earnings in the account are subject to ordinary income tax plus a 10% penalty. There is an exception for a special needs beneficiary and that would have to be mentioned in the question to apply. U24LO6
In this industry, many words have similar meaning. Which of the following choices consists of a pair which are NOT properly considered synonyms? A) Inflation risk—purchasing power risk B) Financial risk—market risk C) Liquidity risk—marketability risk D) Interest rate risk—money rate risk
B) Financial risk—market risk Financial risk is an unsystematic risk; generally, the concern that an issuer will be unable to meet its debt obligations as they come due. It could be paired with either credit risk or default risk. Market risk is a systematic risk. U11LO2
All the pundits are predicting bad times ahead—not only a recession but a period where prices actually fall (deflation). If they are right, the best place for your client would probably be A) gold B) U.S. Treasury securities C) common stock D) real estate
B) U.S. Treasury securities It is times like this that the flight to safety has investors commit their funds to U.S. government securities. Gold (and other commodities) tends to increase in price during inflationary, not deflationary, periods. Both real estate and equities tend to rise when things are good, not during recessions. U8LO3
Under the Uniform Securities Act, persons providing investment advice do not have to register as investment advisers if they have no place of business in the state and they I. limit their clientele to individuals who meet the accredited investor standards II. deal only with institutional investors III> have 5 or fewer noninstitutional clients in the state during any 12-month period IV. deal only with other registered investment advisers
II, III, and IV If a person offering advice on securities has no place of business in a state and deals only with institutional investors or other investment advisers, registration is not required. Also, if a person has no place of business in a state and has 5 or fewer noninstitutional clients in the state during any rolling 12-month period, they are not deemed to be investment advisers in that state under the USA. Please note that choice I specifies individuals who are accredited investors. Although institutional accredited investors would qualify the adviser for the exemption, individuals do not. U1LO3
Overnight loans between banks are made at A) the federal funds rate B) the call loan rate C) the discount rate D) the prime rate
A) the federal funds rate When a bank borrows from another bank on an overnight basis, it is at the federal funds rate. When a bank borrows from the Federal Reserve, it does do at the discount rate. The prime rate is charged by the banks to their stronger borrowers, and the call loan rate is what broker-dealers pay on stock market collateral pledged for margin accounts. U8LO1
What is the appropriate procedure to follow when a customer fails to sign the form provided by the investment adviser stating that he has received a copy of the investment adviser's brochure? A) Proceed with the account; the signature is not required. B) Only unsolicited orders may be accepted until the signed receipt is received. C) Don't do anything with the account until the customer's signature acknowledging receipt of the brochure is received. D) Proceed with the account, but make a supervisory person aware of this.
D) Proceed with the account, but make a supervisory person aware of this. Although it is true that there is no legal requirement for a client to sign acknowledging receipt of the brochure, if it is the adviser's practice, the account may proceed, but only with notice to the appropriate supervisory person. U6LO4
Under IA-1092, an investment adviser I. makes advice his principal activity II. makes advice his regular activity III. is compensated directly for advice IV. compensated directly or indirectly for advice A)
II and IV Under the SEC's release, the rendering of advice does not have to be a person's principal activity. Rather, it must be a regular activity, and compensation may be received directly or indirectly. U1LO2
Which of the following is NOT affected by the issuance of a bond? A) Assets B) Shareholders' equity C) Working capital D) Total liabilities
B) Shareholders' equity When bonds are issued, cash is received (thus increasing current assets) and long-term debt increases (increasing total liabilities). Because there is no corresponding increase in current liabilities, working capital increases. There is no effect on shareholders' equity because the increased liability is offset by the asset (cash) received. U9LO1
A living will is used to A) avoid the cost and time of probate. B) express the author's end-of-life wishes. C) ensure that the author's assets are properly distributed after death. D) eliminate, or at least reduce, estate taxes.
B) express the author's end-of-life wishes. Sometimes referred to as a medical directive or advanced care directive, a living will is used to express the author's end-of-life wishes, such as organ donation, "pulling the plug," and so forth. It has nothing to do with a last will and testament describing the distribution of assets after death. U18LO4
Regarding performance-based fees charged by covered investment advisers, all of the following statements are correct EXCEPT A) performance-based fees may be charged against the assets of a closed-end investment company listed on the NYSE B) performance-based fees are generally prohibited C) it must be disclosed that performance-based fees may motivate the investment adviser to assume greater investment risk than would apply with other compensation methods D) to determine performance, the results of the client's investment portfolio must be compared against an appropriate index or benchmark
C) it must be disclosed that performance-based fees may motivate the investment adviser to assume greater investment risk than would apply with other compensation methods Covered advisers are those under federal jurisdiction rather than state. The SEC assumes that any investor meeting the qualifications is aware of the greater risk entailed, so no disclosure is necessary. Although performance-based investment adviser compensation is generally prohibited, it is permitted under certain circumstances on the basis of the nature of the client. Charges of this type may be made to clients who are registered investment companies. When charging performance-based compensation, the results of the client's portfolio must be compared against an appropriate index or benchmark. Please note that the NASAA Model Rule on Performance-based Compensation would require the risk disclosure. U7LO1
Which of the following are considered unsystematic risks? I. Business II. Liquidity III. Market IV. Purchasing power
I and II There are 4 general unsystematic risks: business, liquidity, political, and regulatory. Market and purchasing power risk are systematic. U11LO2
An investor inherits 1,000 shares of the ABC Global Growth Fund when NAV is $9.50 and POP is $10.00 and elects to receive all distributions in cash. Two years later, sells all when NAV is $14.25 and POP is $15.00. What are the tax consequences of this sale? A) Long-term capital gain of $4,750 B) Long-term capital gain of $5,000 C) Long-term capital gain of $5,500 D) Long-term capital gain of $4,250
A) Long-term capital gain of $4,750 Upon death, the beneficiary inherits mutual funds at their NAV ($9.50). The IRS uses that number because it represents the price at which those shares could have been redeemed. The final sale (redemption) takes place at the NAV ($14.25) for a profit of $4.75 per share (times 1,000 shares). Had this question said the investor bought the shares, then the cost basis would have been the price paid for the shares, the POP. That would have made the answer $4,250 ($14.25 - $10 times 1,000 shares). U21LO5
An individual is employed by a federal covered investment adviser for the sole purpose of giving advice related to monitoring investment portfolios, but only to qualified employee benefit plans. Under the Uniform Securities Act, this individual is A) defined as an IAR because the individual is rendering investment advice B) not defined as an IAR because the individual works for a federal covered investment adviser C) not defined as an IAR because the plan is considered an institutional client D) defined as an IAR because the plan is qualified
A) defined as an IAR because the individual is rendering investment advice Regardless of whom the advice is given to, unless there is some kind of exemption involved, individuals working for IAs (state or federal) must register as IARs in at least one state. It makes no difference if the plan is qualified or not. U2LO1
Five years ago, an investor purchased an ABC Corporation BBB-rated debenture with a coupon of 6% maturing in 2037. Currently, new BBB-rated debentures maturing in 2037 are being issued with coupons of 5%. Based on the discounted cash flow method, one could say that the present value of the investor's security is A) equal to the par value B) more than the par value C) positive D) less than the par value
B) more than the par value The discounted cash flow method is just a technical way of computing the value of a security that demonstrates the inverse relationship between interest rates and bond prices. The discount rate here is the current market rate of 5%. Because this investor's debenture is paying at a rate of 6%, its cash flow is more valuable than a 5% bond; therefore, it will sell at a premium (above par). U13LO12
Investment companies must send financial reports to shareholders A) quarterly B) monthly C) annually D) semiannually
D) semiannually Investment company financial reports must be sent twice a year and must include a portfolio list, income statement, statement of compensation paid to the board of directors and the advisory board, and a statement of the total dollar amount of securities bought and sold during the period. One of these reports must be the audited annual report. U14LO1
Which of the following characteristics best exemplifies a value stock? A) Low price-to-book, low price-to-earnings ratio B) Low earnings-per-share growth, high profitability C) Low price-to-book, high price-to-earnings ratio D) High earnings-per-share growth, high profitability
A) Low price-to-book, low price-to-earnings ratio A value investor focuses on share price in anticipation of a market correction and improving company fundamentals. Therefore, such an investor tends to select a stock featuring lower price-to-earnings and price-to-book value ratios. A growth investor focuses on high earnings-per-share, growth, and high profitability. U20LO5
Under the USA, which of the following statements regarding the posting of surety bonds is NOT true? A) The Administrator requires all broker-dealers to post bonds even if they maintain net capital in excess of minimum amounts. B) The Administrator can accept securities instead of cash if the posting of a bond is required. C) Bonds may be required for agents of broker-dealers. D) The Administrator requires the posting of bonds primarily to cover the cost of civil liabilities associated with violations of the Uniform Securities Act.
A) The Administrator requires all broker-dealers to post bonds even if they maintain net capital in excess of minimum amounts. Firms that maintain net capital in excess of minimum requirements may be exempted from the requirement of posting surety bonds. Agents exercising discretion over client accounts may be required to post a surety bond. U3LO5
An upward sloping yield curve represents all of the following EXCEPT A) foreign interest rate differentials B) increased risk of default over time C) inflation expectations D) time value of money
A) foreign interest rate differentials Foreign interest rate differentials are not reflected in an upward sloping yield curve. Interest rate differentials between countries reflect differences in domestic monetary and fiscal conditions. The time value of money is reflected in the upward sloping yield curve. Longer-term rates require higher rates to compensate for loss of current buying power and liquidity. Longer-term funds bear a higher risk of default than do shorter-term funds and, as a result, command higher rates. Increasing inflation expectations cause the yield curve to slope upward to compensate lenders for the loss of future buying power. This is an example of how you get a question correct by process of elimination.
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) more than $400,000, but less than $1 million. B) less than $400,000. C) the face amount plus the cash value. D) the $1 million face amount.
A) more than $400,000, but less than $1 million. 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. U17LO4
A client has made both tax-deductible and nondeductible contributions to a traditional IRA. When distributions are taken from the IRA, A) they are taxed on a pro rata basis B) that portion derived from the nondeductible contributions is not subject to penalty if withdrawn before age 59½ C) they are treated as being from the tax-deductible portion first and the nondeductible last D) they are treated as being from the nondeductible portion first and the deductible portion last
A) they are taxed on a pro rata basis The portion of the distribution that is nontaxable must be prorated with amounts that are taxable. For instance, if the individual contributed $2,000 in after-tax amounts and $8,000 in pre-tax amounts, a distribution of $5,000 would be prorated to include $1,000 after-tax and $4,000 in pre-tax assets. U24LO1
A mutual fund's computed NAV on April 24 is $100 per share. On April 25, the portfolio realized gains of $2 per share, and enjoyed $1 per share in unrealized appreciation. What would the NAV be on April 26 assuming an unchanged market? A) $103 per share B) $101 per share C) $100 per share D) $102 per share
B) $101 per share A mutual fund's net asset value per share (NAV) is the fund's total assets minus total liabilities (net asset) divided by the number of shares outstanding. The major asset is the fund's portfolio. Portfolio securities are carried at their value as of the close of the markets (4PM ET). As a result, unrealized appreciation (and depreciation) are part of the NAV. Therefore, when that gain (or loss) is realized, paper profit (or loss) is now real and there is no change to total assets. In the subject question, the realization of the $2 per share gain has no effect, but, the new $1 in unrealized appreciation increases the NAV by that amount. U14LO3
The Zxion Corporation has just distributed a 7½ to 1 split of its common stock. Prior to the split, Zxion had EPS of $15, the market price of Zxion common stock was $225 per share, and the price of its $75 par preferred stock was $82.50. As a result of the split, the price-to-earnings (P/E) ratio is now A) 6 x 1. B) 15 x 1. C) 2 x 1. D) 7.5 x 1.
B) 15 x 1. A stock split does not change the P/E ratio because both the stock's price and its earnings decline by the same proportion. In this question, after the 7.5 to 1 split, the market price will drop to $30 per share ($225 ÷ 7.5) and the earnings per share are now $2 per share ($15 ÷ 7.5). That 30:2 is still a 15-to-1 P/E ratio. The information about the preferred stock is extraneous. U10LO7
Which of the following statements regarding secondary trading in the private equity market is TRUE? A) Secondary trading makes it more difficult for investors to make strategic shifts in the private equity allocations within their portfolios. Which of the following statements regarding secondary trading in the private equity market is TRUE? A) Secondary trading makes it more difficult for investors to make strategic shifts in the private equity allocations within their portfolios. B) A trade in a secondary market may be motivated by the desire for increased access to deals in the primary market. C) Secondary markets are a form of distressed securities markets wherein limited partners sell securities with troubled performance histories. D) Secondary trading generally causes investors to have to wait over a longer time period to generate returns from their private equity investment.
B) A trade in a secondary market may be motivated by the desire for increased access to deals in the primary market. One of the advantages to secondary trading is that making secondary purchases can give an investor exposure to a general partner, which can create opportunities to gain access to future opportunities from that partner. The other statements are all incorrect. Secondary trading may allow investors to get into a private equity deal at a later stage and, thus, realize positive returns more quickly. Secondary trading provides liquidity and makes it easier for investors to make strategic shifts in their portfolios. Secondary markets are often used by investors due to changing portfolio needs, rather than a change in the value of their private equity funds. U14LO5
Which of the following would best describes a Yankee bond? A) U.S. dollar-denominated bond issued by a non-U.S. entity outside the United States B) U.S. dollar-denominated bond issued by a U.S. entity inside the United States C) U.S. dollar-denominated bond issued by a non-U.S. entity inside the United States D) U.S. dollar-denominated bond issued by a U.S. entity outside the United States
C) U.S. dollar-denominated bond issued by a non-U.S. entity inside the United States Yankee bonds are issued by non-U.S. entities in marketplaces inside the United States. The bonds are issued in U.S. dollars meaning these foreign issuers will have currency risk if the dollar drops in value against their local currency. U13LO7
If general interest rates increase, the interest income of an open-end bond fund whose sales exceed redemptions will likely A) remain unchanged B) It cannot be determined from the information given C) increase D) decrease
C) increase Most mutual funds do not have 100% of their assets in securities, and they continually receive new money from investors. Any increase in the general interest rate would allow the fund to purchase new, higher-yielding instruments, which would increase the fund's income. U14LO3
An investment adviser is approached by an investment company that has 25 investors. The company would like to employ the adviser to manage its account. The IA is willing to do so, but proposes a compensation agreement that provides for a 20% share of the profits if performance exceeds a certain benchmark. In order for this to be acceptable, A) a majority of the shareholders in the investment company must be qualified investors B) the individual in charge of the investment company must be a qualified investor C) the investment company must have net worth in excess of $2.1 million or at least $1 million in assets under management with the IA D) all the shareholders in the investment company must be qualified investors
C) the investment company must have net worth in excess of $2.1 million or at least $1 million in assets under management with the IA In 1987, NASAA followed the lead of the SEC and permitted performance-based compensation when the investor (or company) had at least $500,000 in AUM with the IA, or had a net worth in excess of $1 million. In 1998, the SEC raised the threshold to $750,000 and $1.5 million, respectively. Then, in July, 2011, the bar was raised again by the SEC to $1 million and $2 million. On April 15, 2013, NASAA caught up and the numbers were unified. Most recently, on August 16, 2016, the net worth requirement was raised to in excess of $2.1 million (the $1 million in AUM remained the same). By the way, this is not a registered investment company under the Investment Company Act of 1940—those need at least 100 investors. U7LO1
The Uniform Securities Act lists a number of securities that are exempt from both the registration and the advertising filing requirement of the Act. Included in that list would be all of the following except A) securities issued by the XYZ Industrial Loan Association organized and supervised under the laws of this state. B) common stock issued by the Bailey Brothers Building and Loan, organized under the laws of New York State and authorized to do business in this state. C) universal life insurance policies issued by insurance companies authorized to do business in the state. D) securities issued by the Podunk and Western Railroad, a regulated common carrier.
C) universal life insurance policies issued by insurance companies authorized to do business in the state. Universal life insurance policies are not exempt securities for one simple reason—they are not securities. Each of the other choices is included in the USA's listing of exempt securities. U4LO3
An investor owns a TIPS bond with an initial par value of $1,000. The coupon rate is 6% and, during the first year, the inflation rate is 9%. How much interest would be paid for the year? A) $65.40 B) $90.00 C) $60.00 D) $64.11
D) $64.11 TIPS bonds have a fixed coupon rate with a principal that varies each 6 months based on the inflation rate. With an annual inflation rate of 9%, each 6 months, the principal increases by 4.5% (half of the annual rate). Each semiannual coupon is half of the 6% rate times the new principal. The arithmetic is: $1,000 x 104.5% = $1,045 x 3% = $31.35 plus, $1,045 x 104.5% = $1,092 x 3% = $32.76. Adding the 2 interest payments together results in a total of $64.11 for the year. You should be able to "eyeball" this. Any bond with a 6% coupon will pay $60 in one year ($30 x 2). Because the TIPS bond increases the principal after the first 6 months, the second interest payment will be slightly higher than $30. There is only one choice slightly higher than $60.00 and it would be that way on the real exam. U13LO1
Mr. Adam Samuels suffers a massive heart attack and dies at the age of 62. As part of his estate, there is an IRA with a current value of $170,000. A review of the IRA documents reveals that Mrs. Eve Samuels, the wife, is the primary beneficiary and their 2 children have been named as contingent beneficiaries. Eve is 50 years old and does not need the income from the IRA and would like to preserve the IRA for her children to inherit. Which of the following steps would you recommend Mrs. Samuels take? A) Disclaim the IRA and let it pass to the contingent beneficiaries. B) Execute a rollover into an inherited IRA. C) Cash in the IRA because as a spouse of a deceased, she will avoid the 10% tax penalty. D) Execute a rollover into an IRA in her name.
D) Execute a rollover into an IRA in her name. This is a highly complicated question and there is room for disagreement. However, if a question similar to this were to appear on your exam, the answer selected is the one that NASAA would mark as the correct one on its test. The key to this question is the word "preserve." By executing a rollover into an IRA in her name, tax deferral of the assets continues and RMDs are not required until after Mrs. Samuels turns 72. Thus, the assets are preserved for at least 20+ years. If she took the distribution, she would not have to pay the penalty tax, but there would be ordinary income tax due and this would not meet her objective of preservation of the IRA. If she disclaimed, the assets would then go to the children, but they would have to begin taking RMDs over a 10-year period. Not a bad choice, but the assets are being distributed and taxed, not preserved. The benefit of rolling over into an inherited IRA (sometimes called a beneficiary IRA) instead of one in her own name is that she can begin taking distributions right now without the 10% penalty, even though she is only 50. However, the question stated that she did not need the income, and RMDs must begin at the time they would have been required for Mr. Samuels, 12 years earlier than if she chooses to rollover into her own IRA. U24LO1
Which of the following securities would most likely be included in the portfolio of a mid-cap manager? ABC, $12 per share, 100,000,000 shares outstanding DEF, $150 per share, 8,000,000 shares outstanding GHI, $40 per share, 75,000,000 shares outstanding JKL, $70 per share, 200,000,000 shares outstanding A) JKL B) ABC C) DEF D) GHI
D) GHI Mid-cap stocks are those with a market capitalization between $2 billion and $10 billion. GHI, with a market cap of $3 billion ($40 times 75 million), is the only company within that range. ABC's market cap is $1.2 billion ($12 times 100 million), DEF's is $1.2 billion ($150 times 8 million), and JKL's is $14 billion ($70 times 200 million). Two of these (ABC and GHI),are within the small-cap range, and JKL would be considered large-cap. U20LO6
Mary Huggins is the ex-wife of Charlie Huggins. They were married for 12 years and then finalized a divorce. Charlie is now 70 and has begun taking his Social Security benefits. Mary remarried last year. It would be correct to state that A) Mary is entitled to Charlie's Social Security benefits or those of her new husband, whichever is the greater. B) Mary is entitled to full spousal benefits because they were married for at least 10 years. C) Mary is entitled to Charlie's Social Security benefits only when she reaches full retirement age. D) Mary is not entitled to any of Charlie's Social Security benefit.
D) Mary is not entitled to any of Charlie's Social Security benefit. When a couple has been married for at least 10 years, the ex-spouse is entitled to full spousal Social Security benefits unless remarried. By remarrying, Mary no longer has any claim on Charlie's Social Security benefits. U19LO5
A client asks her investment adviser representative what footnotes to the financial statements are for. The best reply would be that footnotes A) are used to explain how the various ratios are computed because companies recognize that many shareholders do not have a financial background B) serve as a bibliography indicating where additional information may be obtained C) contain a detailed history of the enterprise and its products or services D) contain information that doesn't have a place in the main body of the financial statements
D) contain information that doesn't have a place in the main body of the financial statements There are many important financial details that cannot be properly placed in either the balance sheet or the income statement. Examples of these are the following: method of accounting used, collateral securing debt, pension liabilities and many others. Footnotes are an integral part of the financial statements and are usually found with this notation: "The accompanying footnotes to the financial statements are an integral part of these statements." U9LO1
Which of the following statements are generally TRUE of the buy-and-hold strategy? I. Equities would grow relative to fixed income II. Lower taxes and transactional costs III. Easy to manage IV. The portfolio would more accurately demonstrate the client's investment objectives and risk tolerance
I, II, and III Over the long run, using the buy-and-hold strategy with equity securities has outperformed the rate of return on fixed income investments. With few transactions, there are almost no commissions and capital gains taxes. Of all strategies, this is the easiest to follow. There is no way to determine the client's objectives or risk tolerance based on the decision to buy and hold. The portfolio might contain small-cap stocks or large-cap stocks. It might contain 90% equities or 75% debt securities. Investors with differing goals and risk tolerance can use this strategy. U20LO5
