Missed questions practice test #2

Lena died at the age of 50 with $100,000 in her traditional IRA account. In addition to income taxes due on the distribution, her beneficiary, who is 52, will have to pay a premature distribution penalty tax of how much?

$0 The premature distribution penalty does not apply if the distribution is made after the death of the account owner, regardless of the age of the owner or the beneficiary. U24LO1

catch-up contributions

- allowed to participants who are age 50 and over U24LO1

A 35-year-old client purchases a variable life insurance policy. Under current regulations, the maximum sales charge permitted over the life of the policy is

A variable life insurance plan may charge a maximum sales charge of 9% over a period not to exceed 20 years.

Blue sky laws pertain to all of the following EXCEPT A) the registration of securities salespeople in a state B) the registration of securities within a state C) the regulation of securities trading in other countries D) the regulation of securities transactions in a state

Blue sky (USA) laws refer to state securities regulation in the state; they require new securities to be registered with the state and regulate trading of securities in a state

Current Ratio

Current Assets/Current Liabilities, a liquidity ratio. would also mean negative working capital (current assets - current liabilities)

Why is there no active secondary market for forwards contracts?

One of the disadvantages when investing in forward contracts is that there is no active secondary market. Because each contract is between one buyer and one seller and there is no standardization, no exchange trading is possible. U16LO4

Tax preference items are used for the purpose of computing the alternative minimum tax. They include all of the following except A) excess intangible drilling costs. B) certain incentive stock options. C) straight-line depreciation. D) accelerated 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. U21LO4

a manufacturer of soybean oil is concerned that the price of soybeans will increase over the next 6 months. The best strategy to employ would probably be A) a neutral hedge B) a long hedge C) a trimmed hedge D) a short hedge

The concern is that the price will go up. Just as with options, when we are concerned that the price of something will go up, we go long that item. With options, it would be a long call; with futures it is simply hedging by going long (buying) the soybean futures. The soybean farmer who would be concerned about decline in the price would go short soybean futures.

All of the following are advantages of mutual fund investment EXCEPT A) exchange privileges within a family of funds managed by the same management company B) investors retain personal control over the investments in the fund's portfolio C) the ability to invest in almost any amount whenever desired D) the ability to qualify for reduced sales loads based on accumulation of investment within the fund

The control of the investment is given over to the investment manager. Exchange privileges, the ability to invest any amount at any time, and reduced sales loads are all considered advantages

Of the following bonds, which has the greatest price volatility? A) Corporate bond fund B) Zero-coupon bond with 5 years to maturity C) AA corporate bond with 7 years to maturity D) Zero-coupon bond with 15 years to maturity

The longer the duration of the bond, the greater the volatility will be of its market price when interest rates change. Because zero-coupon bonds do not make interest payments but are priced at a deep discount to par value, they are more volatile than coupon-bearing bonds.

A margin account could be opened for which of the following? A) partnership B) IRA C) UTMA account D) Coverdell ESA

There is no legal reason why a partnership (or other business structure) cannot open a margin account. A margin account could never be opened for retirement accounts, Coverdell ESAs, and UTMA/UGMA accounts. U22LO1

Which of the following is NOT an appropriate product for retirement planning? A) Commodities B) bonds C) life insurance D) mutual funds

commodities are among the most speculative investments and not generally an element in retirement planning U19LO6

value investors

seek securities that are undervalued or selling for less than their intrinsic value, they tend to use fundamental analysis and do not determine value from charting

An IAR of a federal covered investment adviser registers with

the Administrator Registration of IARs is done on the state level only, so IARs register with the Admin of each state in which they are required to be registered

net income

the difference between total revenue and total expenses when total revenue is greater net income is only found on the income statement

Which of the following statements is correct in relation to the efficient frontier? A) it implies an inefficiency in stock valuations B) it represents the maximum return for a given level of risk C) it allows an investor to create a risk-free portfolio D) it identifies the required rate of return on a particular stock

the purpose of the efficient frontier is to plot the most efficient portfolios. An efficient portfolio is on that offers: - the most return for a given amount of risk or - the least risk for a given amount of return

Which of the following securities are the most interest rate sensitive? 1. Utility stocks 2. Growth stocks 3. Preferred stocks 4. common stocks

utility stocks are interest rate sensitive because they are highly leveraged; preferred stocks are interest rate sensitive because they have a set dividend and fluctuate in price like bonds when interest rates change

Under IAA of 1940, an adviser who has custody of a client's funds must

- segregate a client's securities and keep them in a safe place - deposit funds in bank accounts, or a single bank account with complete records - report at least every 3 months with a statement - arrange annually for an unannounced audit by an independent accountant that will report the audit results to SEC - all clients must be notified in writing of the location of their securities - custodial agreement includes discretion and so it is not necessary to notify client before moving funds

Which of the following statements regarding S corporation owner and owner of an LLC are TRUE? 1. Creditors have very limited recourse rights to the owners 2. They may not be nonresident aliens. 3. They both are considered stockholders. 4. Both receive the tax benefit of owning flow-through entities

1 & 4 Creditors don't have recourse to the owners of either entity unless the owners have specifically allowed it. Both are flow-through or conduit entities. Owners of S corporations are stockholders, where as those in an LLC are members. Nonresident aliens may not own an S corporation.

It is generally accepted that agents and IARs will give greater consideration to which of the following when making recommendations to senior clients? 1. Age 2. Life stage 3. Retirement savings 4. Tax status

2 & 3 All of these are important suitability considerations for all customers. But when it comes to seniors, it is felt that life stage (including whether the customer is employed, retired, or nearing retirement) and current retirement savings relate particularly to seniors.

In which of the following funds would a buy-and-hold style most likely be used by the manager? A) options income fund B) information technology fund C) market timing fund D) equity index fund

A manager of an equity index fund would use a buy-and-hold style. As the composition of the index changes through stock distributions or recapitalizations, the fund manager would buy or sell the issues to keep them in proportion to their position in the index prior to the distribution or recapitalization. By its nature, an options fund would require the active purchase and sale of securities or options to take advantage of market conditions. A market timing fund must be prepared to buy or sell securities as perceptions of the market change. An information technology fund has to buy and sell shares actively in response to the development of new technologies.

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

A. 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. U24LO4

Which of the following circumstances may cause a person to be identified as a fiduciary? 1. Investment adviser representative who becomes a trustee 2. Investment adviser representative who becomes a member of the board of directors of a foundation 3. Investment adviser representative who holds himself out as a fiduciary for ERISA plans and pensions 4. Investment adviser representative who manages a discretionary account

All of these statements are correct. Trustees, board members of a foundation, IARs who exercise and those who hold themselves out as a fiduciary for an ERISA plan will generally find themselves being defined as a fiduciary. U24LO5

A client calls to say he has just read about a European option and doesn't know what it is. You would explain that it is a derivative because A) the currency used is generally something other than the U.S. dollar B) it can only be exercised on the expiration date C) its value is based on some underlying asset D) intrinsic value does not affect the premium

Although the unique characteristic of a European option is that it can only be exercised on its expiration date, that doesn't answer this question. It is a derivative like any other option because its value is based on the underlying asset. U16LO2

If a federal covered investment adviser wishes to sell his business to another advisory firm, which of the following statements is true? A) No approvals are required B) The sale must be approved by the SEC C) the sale must be approved by the administrator D) the sale must be approved by each customer of the selling advisor

An investment advisor does not need the approval of clients to sell the business. However, technically, the sale means that the advisory contracts will be assigned and that cannot be done without client consent. In an event such as this, the clients would be given the choice of having the new firm manage their assets or taking their accounts elsewhere.

Which of the following activities of an investment advisory firm would NOT require notification to and consent of the clients of the advisory firm? A) the retirement of a sole proprietor investment advisor who wishes to sell the practice to another IA B) an IA wishing to merge with a larger national advisory firm C) the COO of an investment advisory firm wishing to pledge her majority interest in the firm to a local bank for a loan to purchase an office building that will be leased to the advisory firm D) a minority partner resigning from the firm to start his own advisory firm

Any change in the controlling interest in an advisory firm, including pledging the controlling interest, is treated as an assignment of the contract and requires notification to and consent of the clients of the IA. The change in a minority interest is not considered an assignment, so only notification, but not consent, is required.

One way in which universal life and variable life are similar is that both A) are considered securities B) permit loans against the cash value C) have flexible premiums D) have a fixed minimum cash value

As long as the policy has cash value, loans are permitted. Neither of these has a fixed minimum cash value, and only universal life has flexible premiums. Only variable life is considered a security. U15LO6

A retired person seeking to maximize income with reasonable safety and liquidity should most likely consider investing in A) a long-term government bond fund B) a large-cap growth fund C) an intermediate-term, high-grade corporate bond fund D) an intermediate-term government bond fund

C. In all of these cases, liquidity should not be a problem because mutual funds have a 7 day redemption requirement. However, interest rate risk increases as the maturities lengthen, so the intermediate-term portfolio offers that benefit, albeit at a slight reduction in income. The high-grade corporate bonds will offer a greater return with slightly more risk than the government bonds. If the question had said the investor wished to minimize risk, then the government bond fund would have been a better selection. 19LO6

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

Cancellation is nonpunitive—nothing wrong was done. But when the Administrator is unable to locate the registrant, or the registrant is declared mentally incompetent or is deceased, registration is canceled. U5LO2

When does a customer have to receive the OCC Options Disclosure Document? A) With the confirmation of the first options transaction B) Within 5 business days of the first options trade C) Within 15 days of account approval by the firm's designated options supervisor D) Before accepting the customer's first order to trade options covered by ODD

D. When opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document titled Understanding the Risks and Uses of Options, the broker-dealer satisfies the risk disclosure requirements. There are 2 alternatives for meeting the delivery requirement. It may be done before or at the time the broker-dealer approves that customer's options account or accepts the customer's first order to trade the listed options covered by the ODD. U18LO2

Which of the following statements is an accurate description of dollar cost averaging? A) An investor buys the same number of shares each interval, averaging out his purchase prices over time. B) An investor sells shares when the market rises and buys shares when the market declines in order to average his costs. C) An investor invests a set amount of money each interval to buy more shares when the prices are low and fewer shares when prices are high. D) An investor averages the costs of his shares purchased and then enters limit orders to purchase additional shares at the average price.

Dollar cost averaging involves investing a set amount of money each interval. If the market fluctuates, this will cause the client to buy more shares when the prices are low and fewer shares when prices are high. The result of this is a lower average cost per share than average price paid. An investor who sells shares when the market rises and buys shares when the market declines is not dollar cost averaging, but is attempting to time the market. An investor who averages the cost of the shares purchased and then enters limit orders to purchase additional shares at the average price is not engaged in a dollar cost averaging program. In dollar cost averaging, the same dollar amount is invested each interval. U20LO11

A premature distribution from an IRA would be exempt from the premature distribution penalty under all of the following circumstances EXCEPT A) as a result of hardship B) upon the death of IRA owner C) to correct an excessive contribution to the IRA D) to pay for qualifying medical expenses

Hardship withdrawals are not permitted from IRAs. They are a feature permitted in 401(k) plans.

An employee is offered a nonqualified stock option (NSO) with an exercise price of $20 per share. If the option is exercised when the current market of the stock is $30, the employee A) is taxed on $20 per share as if it were salary B) is taxed on $10 per share as if it were salary C) is taxed on $30 per share as if it were salary D) has a capital gain of $10 per share

In the case of NSOs, the difference between the exercise (or strike) price and the current market value is considered salary to the employee

Jon, an agent with Johnson-Bayer Securities, was reacting to peer pressure to use email as a prospecting tool. He decided to highlight the exciting new process for drug delivery that was covered in the new offering prospectus when explaining why he felt the issuer found the next "aspirin." He summed up the email by stating potential investors needed to act quickly to get in on the ground floor. His decision to do so fell into the category of which of the following? A) Advertising B) Unethical business practice C) Fraud D) Phishing

NASAA considers it to be an unethical business practice to use any advertising or sales presentation in such a fashion as to be deceptive or misleading. Examples of such practices would be a distribution of any nonfactual data; any material or presentation based on conjecture; unfounded or unrealistic claims in any brochure, flyer, or display by words, pictures, or graphs; or anything otherwise designed to supplement, detract from, supersede, or defeat the purpose or effect of any prospectus or disclosure. U6LO5

An individual purchased a variable life insurance policy 10 years ago with a guaranteed death benefit of $100,000. The annual premium for this policy was $2,000 per year. The individual dies and, due to outstanding performance of the separate account, leaves a death benefit to the beneficiary of $121,000. What are the income tax consequences to that beneficiary? A) No tax is due. B) Ordinary income tax is due on $21,000. C) Ordinary income tax is due on the $1,000 that exceeds the original cost. D) There is a long-term capital gain of $1,000.

One of the nice things about life insurance proceeds is that even when the death benefit is increased due to separate account performance, it is still free of income tax. U21LO5

Washington, Adams, and Jefferson, Inc. (WAJI) is an investment adviser whose principal and only office is Alexandria, VA. WAJI's sole business is advising institutional investors. Rutherford Buchanan is employed by the firm in the main office and has the responsibility of servicing the firm's bank and insurance company clients. Which of the following statements is CORRECT regarding Rutherford's licensing requirements? A) exempt from registration because he has fewer than 6 retail clients B) exempt from registration because his only clients are institutions C) must register as an IAR of WAJI with the state of Virginia D) cannot register as an IAR of WAJI because providing advice exclusively to institutions exempts the firm from registration

Regardless of whom clients are, Rutherford has a place of business in Virginia and that requires registration with the Administrator as IAR. If WAJI does business in other states where it does not have a place of business, it is exempt from registration because the only clients are institutions. If WAJI is not registered in the state, Rutherford can't register as their IAR. The de minimis exemption for fewer than 6 retail clients only applies when there is no place of business in the state.

An investor is long stock in a cash account and does not expect the price to change in the immediate future. His best strategy to generate income may be to A) sell a put B) buy a call C) buy a put D) sell a call

Selling a call against a security will generate additional income (the premium). An investor who writes a put receives additional income from the position, but must also be willing to increase the position should the put be exercised. An investor who buys a call is speculating that the stock will soon rise dramatically. An investor who buys a put is speculating the stock will soon fall, not stay steady in price.

With regard to the state registration requirements of agents of registered broker-dealers, all of the following statements are correct except A) registration is required in each state in which the employing broker-dealer has a place of business B) registration is not required in a state where the agent has no place of business and only deals with existing clients who are vacationing in that state C) registration is required if they solicit the sale of securities by telephone to fewer than 6 individuals residing in that state D) registration is required when they limit their activity to the sale of exempt securities

The fact that the broker-dealer does business in a state has nothing to do with a specific agent. Many broker-dealers are registered in all states; very few agents are. Agents must register in each state where they are selling or offering securities, even if the security or the transaction is exempt. That exemption only applies to the need for the security to be registered, not the agent. Soliciting the sale of securities by telephone is considered making an offer, and there is no de minimis exemption available. Finally, registration is not required when making use of the "snowbird" exemption. U3LO4

Your 30-year-old client has $100,000 to invest and willing to assume a moderate amount of risk, but she would also like to have $10,000 available for a down payment on a home in 6 months. Which of the following asset allocation strategies would best suit her situation? A) 50% government bond fund, 50% large-cap fund B) 50% large-cap stock fund, 40% municipal bond fund, 10% money market fund C) 70% high-yield corporate bond fund, 20% growth fund, 10% government bond fund D) 70% large-cap stock fund, 20% balanced fund, 10% money market fund

This question is dealing with 2 different time horizons. First we have the short-term of 6 months for the home down payment, so she'll need capital preservation and liquidity. That is accomplished with the money market fund. Then, being 30 years old, she has a long-term time horizon that necessitates investing for growth and inflation protection. That is where the 70% in large-cap securities is the most appropriate asset allocation for her. The 20% in the balanced fund helps keep the overall risk level on the moderate side. One point to remember is that municipal bonds (or municipal bond funds) will never be the correct investment choice unless the question states that the client is in a high tax bracket or is looking for tax-free income. U19LO6

A securities trade is made. Under normal circumstances, all of the following would be noted on the order of the ticket EXCEPT A) the account number B) the time stamp of the time order submission C) the name of the individual who transmitted the order D) the registered agent who accepted the order

Transmitting an order is a clerical function, and we don't put that on an order ticket. A typical ticket will include account number for which the trade is being made, the registered individual placing the order for the client, time stamps for entering and execution (or cancellation), execution price, and terms and conditions of the order (market, limit, etc.)

Esther Watson has recently been hired by RICH, an investment adviser registered with the SEC. RICH has offices in 17 states and Esther works in the branch located in State A. If no exemption is available, Esther will have to register as an IAR with A) the Administrator of State A B) the SEC because RICH operates in more than 15 states C) the FINRA D) the Administrator of each of the 17 states

Unless qualifying for an exemption, employees of investment advisors must register as an IAR in any state in which they have a place of business. This is a state-level registration so the SEC or FINRA are not involved in any way. (The exclusions for an IAR are clerical duty, incidental duties | exemptions: de minimis, snowbird, and working under federal covered advisers only register in states where IAR has place of business)

As a client's only child is about to complete her college education, it is obvious that the 529 Plan used to accumulate funds has been overfunded. Which of the following might be suggested to minimize tax consequences? 1. Encourage the daughter to go to graduate school and use the money for qualified expenses there. 2. Roll over the funds to a member of the beneficiary's family. 3. Roll over the funds to a Coverdell ESA. 4. Roll over the funds to the donor's IRA.

When there is money remaining in a Section 529 plan after a student has completed college, withdrawal of that excess will result in the portion representing earnings being taxed at ordinary income tax rates plus a 10% penalty. Those taxes and penalties can be avoided if the funds are properly used, such as graduate school for the original beneficiary or designating a new beneficiary who is an immediate family member (as defined in the law) and rolling over the funds. There is no such thing as a rollover to a Coverdell ESA and money in a 529 plan is not part of a qualified plan, so rolling over to an IRA is out of the question. U24LO6

Minnie's Uncle Bob would like to contribute to his one year old niece's education expenses. He is able to contribute a maximum of $1,200 per year. There is no other family member in a position to make a contribution. If minimizing the taxes at withdrawal and low cost investing, such as index mutual funds, is the objective, which of the following would you recommend? A) Coverdell ESA B) UTMA C) Section 529 plan D) Dollar cost averaging

When you see contribution levels at $2,000 per year or less, that is a signal that Coverdell is the proper recommendation. Higher levels would be the 529 plan. There are no specific tax benefits to the UTMA. In fact, tax rates on unearned income can be rather high. Although Uncle Bob might dollar cost average by investing $100 per month, that doesn't specifically answer the question.

Under the Uniform Securities Act, as a result of a hearing, the Administrator may take what disciplinary actions? 1. Permanent revocation of a registration 2. Bar from employment with any registration 3. Restriction on a registrant's performance of any activity in the advisory or brokerage business

all 3

Bond duration calculation

duration is the weighted average of the cash flows an investor will receive over time, discounted to the bond's present value. these cash flows come from the coupon and the return of the par value at maturity. the market price represents the present value of those future cash flows.

Net asset value per share for a mutual fund can be expected to decrease if A) the fund has made dividend distributions to shareholders B) the fund has experienced net redemptions of shares C) the securities in the portfolio have appreciated in value D) the issuers of securities in the portfolio have made dividend distributions

if dividends are distributed to shareholders, the fund's assets will decrease and value per share will fall accordingly. Appreciation of the portfolio and dividends paid to the portfolio will increase the NAV per share. If issuers have made distributions to the portfolio, NAV will increase. Net redemptions have no effect on the NAV because the money paid out is offset by a reduced number of shares outstanding.

joint accounts and minors

joint account owners share ownership of an account and must be adults; a minor cannot legally exercise control over an account and may may not be an owner of record of an account; joint account is owned by two or more persons and under state and fed law, a minor is not a person

major indexes/averages and weights

price-weighted: DJIA ($/share) cap-weighted: Russell 2000, Wilshire 5000, S & P 500 (# common shares * $/share)

Real Return Calculation

real return = bond yield (%) - inflation rate (%)

technical analysts entering into sell stop orders

sell stops are entered below the market. they are used to turn an order into a market order if the current market value falls below the stop level. in technical analysis, support levels are where the market supports the stock price (keeps it from falling below the stated level). A technical analyst who makes investment decisions by watching the technical graphs and numbers would enter a sell stop order below a support level in order to sell out if the support level is breached since a breakthrough of a support level is believed to forecast a major market price decline.

the purpose of the investment advisers act of 1940 is to provide A) standards among the various states for the regulation of investment advisers B) regulation for investment companies and their operations C) minimum standards of performance for those registered as investment advisers D) standards at the federal level for the regulation of investment advisers

standards at the federal level for the regulation of investment advisers standards among the states is the purpose of the USA providing regulation for investment companies and their operations is the purpose of the Investment Company Act of 1940

Record keeping

state-registered IAs: 5 years, first 2 in principal office