**MISSED QUIZ QUESTIONS

The long party to a put option contract has A) the right to sell the underlying asset. B) the obligation to sell the underlying asset. C) the right to buy the underlying asset. D) the obligation to buy the underlying asset.

A

When must an investment adviser disclose personal securities transactions to a client? 1) If the adviser makes trades in his own account that are inconsistent with advice given to a client 2) If the adviser makes trades that are designed to take advantage of the impact caused by recommendations to clients 3) Investment advisers must disclose all personal transactions to clients A) I and II B) I only C) II only D) III only

A

Your client in the 25% federal income tax bracket lives in a state where his earnings place him in the 6% bracket for state income tax purposes. If he were to purchase a 4% bond issued by a political subdivision of another state, his total tax-equivalent yield would be A) slightly less than 5.33% B) slightly more than 5.33% C) approximately 12.90% D) 4%

A .04 / .75 = .053333 paying the state income taxes would decrease the yield slightly.

As defined in the Uniform Securities Act, the term person would include 1 a limited partnership 2 a political subdivision 3 an unincorporated association 4 the executor of an estate for a deceased individual A) I, II, III, and IV B) I and IV C) I, II, and III D) II and III

A All of these would be included in the USA's definition of person. Not included are a minor, a deceased person, or someone judged mentally incompetent.

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) its value is based on some underlying asset B) the currency used is generally something other than the U.S. dollar C) intrinsic value does not affect the premium D) it can only be exercised on the expiration date

A 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.

Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include a charge when a client requests that a stock certificate be issued in his name a commission charge when a client buys a security on a listed exchange the interest charged by the firm on money owed by customers in their margin accounts fees for providing advisory services to high net worth individuals A) I and III B) III and IV C) II and III D) I and IV

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.

A company has 15 million shares of stock outstanding, and the price per share is $10. The company's market capitalization is A) $15 million B) $150 million C) $25 million D) $1.5 million

B 15m x $10 = 150mm

Which of the following forms of the efficient market hypothesis claims that technical analysis works? A) Semi-strong B) None of these C) Strong D) Weak

B The efficient market hypothesis is in direct contradiction to technical analysis because the efficient market hypothesis is founded on the notion that all historical price and volume data, which is used by technical analysts, is already accounted for in the current stock price. The weak form claims that fundamental analysis works and the semi-strong form claims that inside information works. True believers in EMH claim that none of these can outperform random selection.

Which of the following statements about bid and asked prices are TRUE? 1 The bid price is the price a dealer is willing to pay to buy a security. 2 The asked price is the price a dealer is willing to accept to sell a security. 3 The bid price for a security is higher than the asked price for the security. A) II and III B) I and III C) I and II D) I, II, and III

C The bid price is the price at which a dealer will buy a security, and the asked price is the price at which a dealer will sell. A dealer will always bid a lower price to buy a stock than to sell it.

The main benefit that variable life insurance has over whole life insurance is A) an adjustable premium B) a lower sales charge C) the availability of policy loans D) the potential for a higher cash value and death benefit

D

Which of the following would NOT constitute custody of a client's account under the Investment Advisers Act of 1940? 1 Client prepayment of $1,000 of advisory fees, 6 months in advance 2 Having temporary custody of a client's securities 3 Depositing client funds in bank accounts accessible by the investment adviser A) II only B) II and III C) I, II, and III D) I only

D "Custody" means possession (even temporarily) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement, but it does not include the acceptance by the adviser of prepaid advisory fees.

Under modern portfolio theory (MPT), all portfolios that can be constructed from a given set of stocks is referred to as A) the correlation coefficient B) the efficient set C) the capital market line D) the feasible set

D A feasible portfolio is defined as a portfolio that an investor can construct given the assets available. The feasible set is the collection of all feasible portfolios. Once we have the feasible set, we can select the efficient set (the most return for a given amount of risk, or the least risk for a given amount of return).

Under the Securities Exchange Act of 1934, a market maker is A) a security in high demand B) a marketplace to bring together buyers and sellers of securities C) any person who buys and sells securities for his own account or for the accounts of others D) a dealer who holds itself out as being ready at all times to buy or sell shares of a specified security at a quoted price

D A market maker is a dealer that holds itself out as being willing to buy or sell a security at a quoted price on a regular and continuous basis.

A client investing $50,000 into the KAPCO Growth Fund would most likely be eligible for a breakpoint if purchasing A) the Class B shares B) the closed-end shares C) the Class C shares D) the Class A shares

D Breakpoints for quantity purchases are available on shares that carry a front-end load. Those are Class A shares. Class B shares have a back-end load, Class C shares are considered level load, and when one purchases shares of a closed-end company, commissions are charged, as would be on any stock purchase.

Among the characteristics of leveraged exchange-traded funds is that A) they are generally suitable for investors with a long time horizon B) leveraged ETFs generally obtain the leverage through bank borrowing C) they can only be sold to accredited investors D) leveraged ETFs may be purchased on margin

D

A REIT and a direct participation program are similar because they both A) are operated by a centralized management B) pass through losses to investors C) are traded actively in the secondary market D) can be described as a limited partnership

A Both a REIT and a DPP are run by centralized management. A REIT may not pass through losses to its investors, and it is not a limited partnership. A DPP cannot be easily traded in the secondary market.

A fundamental analyst would be interested in all of the following EXCEPT A) daily trading volumes on the NYSE B) statistics of the U.S. Department of Commerce on disposable income C) corporate annual reports D) innovations within the automotive industry

A Trading volume interests the technical analyst, who looks at fluctuations in the market, not at fundamental economic values.

John owns a nonqualified, tax-deferred annuity. When he retires, what will be the tax consequences of his annuity payments? A) His annuity payments are all taxable as ordinary income. B) His annuity payments are partly taxable and partly tax-free return of capital. C) His annuity payments are tax free. D) His annuity payments are partly taxable as capital gain and partly taxable as ordinary income.

B

The most common way in which to distinguish whether social media content is static or interactive is A) the ability for others to comment on it B) the ability for others to change it C) the ability for others to link to it D) the ability for others to like it

B Static content can only be changed by the originator (or someone under that person's control).

An investment adviser runs an advertisement in the business section of the local newspaper. The ad describes the nature of the firm's model portfolio and indicates that it has outperformed the overall market by 800% over the past 10 years, and the firm therefore guarantees that clients will more than keep pace with inflation. At the bottom of the ad, in smaller print, is the following statement: "Results are not guaranteed. Past performance is not indicative of future results. These results are not normal and cannot be expected to be repeated." This is an example of A) a properly worded disclaimer B) an improper hedge clause C) a violation of an investment adviser's fiduciary responsibility D) a wrap fee account

B Hedge clauses may not be used to disclaim statements that are inherently misleading.

A company's working capital equals its A) fixed assets minus its fixed liabilities B) current assets minus its current liabilities C) cash flow minus its retained earnings D) current liabilities minus its current assets

B Working capital is a measure of how well a company can meet its current obligations. It is the amount that is left free and clear if all current debts are paid off. Working capital is calculated by subtracting current liabilities from current assets.

Securities analysts would agree that it makes sense to purchase a fixed-income security when its net present value (NPV) is A) zero B) variable C) positive D) negative

C A positive NPV means the security is available for a price below its present value—it is a good buy. With a negative NPV, the price is too high. With a zero NPV, it is accurately priced.

XYZ stock has a beta of 0.92. The risk-free rate of return is 3% and the market's rate of return is 8%. Using the capital asset pricing model (CAPM), what is the expected rate of return of this stock? A) 7.60% B) 10.12% C) 6.85% D) 5.06%

Use the CAPM to calculate the expected rate of return. Expected (required) return = 0.03 + [0.92 (0.08 − 0.03)] = 0.0760, or 7.60%.

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) 4.32% B) 1.68% C) 7.68% D) 6.00%

A 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.

If the Administrator were examining the actions of a particular agent to determine whether the agent engaged in churning a client's account, focus would be placed upon A) the client's objectives, financial resources, and the character of the account B) the number of complaints received relating to that agent C) the amount of profits generated in the client's account D) the length of time the account had been opened

A Churning is the practice of generating commissions through excessive trading in a client's account. To determine what is excessive, the regulators will look at the client's investment objectives, financial resources, and the character of the account.

Grandpa bought 100 shares of XYZ common stock 10 years ago for $10 per share. The stock split 2 for 1 several years ago and grandpa gave all of the stock to his grandson when the price per share was $20. Three months ago, grandpa passed away and left the grandson another 100 shares of XYZ that had been purchased one month earlier at $25 per share. At the date of death, the XYZ stock had already climbed to $30 per share. If the grandson sells the XYZ stock for $35 per share, the taxable consequences would be A) $6,500 long-term capital gain. B) $4,000 long-term capital gain. C) $2,500 long-term capital gain plus $1,000 short-term capital gain. D) $6,000 long-term capital gain plus $500 short-term capital gain.

A Gifted stock carries the donor's cost basis. In this case, 100 shares at $10 per share is $1,000. The stock split means there are now 200 shares, but that doesn't change the total cost basis. When that stock is sold at $35 per shares, the proceeds of $7,000 exceed the cost basis by $6,000, all of which is long-term capital gain. Inherited stock receives a stepped-up basis. That is, the cost basis is at date of death. In this case, the cost per share is $30. When that 100 shares is sold at $35 per share, a $500 profit is realized. In one of the quirks in the Internal Revenue Code, stock received as an inheritance always has a long-term holding period, even when, as in this question, the actual holding period was short-term. Adding the $6,000 of gain from the gift and the $500 of gain from the inheritance gives a total of $6,500 long-term capital gain.

The Conference Board releases information about the economy on a monthly basis. Included are a number of different indicators. Economic indicators can be leading, lagging, or coincidental, which indicates the timing of their changes relative to how the economy as a whole changes. Which of the following is a coincident economic indicator? A) Industrial production B) Agricultural employment C) Stock market prices as measured by the S&P 500 D) Machine tool orders

A Industrial production is a coincident indicator. The stock indices and manufacturing orders are leading indicators; economists do not use agricultural employment as an indicator.

One of the benefits of adding precious metals to an investor's portfolio is A) a potential inflation hedge. B) low transaction costs. C) a high correlation to the stock market. D) generous income.

A Precious metals are traditionally viewed as a hedge against inflation. One of their benefits is that they have a low correlation with the stock market. Transaction costs for precious metals tend to be higher than securities—the dealer spreads can be relatively high. One significant negative is that these investments generate no income.

A technical analyst (chartist) with a long position in a particular stock would most likely enter a sell stop order below that stock's A) support level B) 200-day moving average C) previous high D) resistance level

A 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 theoretical levels 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 below a support level in order to sell out if the support level is breached. A breakthrough of a support level is believed to forecast a major market price decline.

The capital asset pricing model (CAPM) is most commonly used to determine an investor's A) expected return B) holding period return C) time-weighted return D) risk-adjusted return

A The CAPM suggests that we can determine the expected return of any security (or portfolio) by using the following mathematical formula: Er = Rf + Beta(expected return on the market − Rf). Er stands for expected return, Rf is the risk-free return. Remember, expected return is a form of risk-adjusted return and is the more specific answer to this question.

A fiduciary of an ERISA plan is preparing an investment policy statement. Included would probably be 1 specific security selection 2 methods of performance measurement 3 determination for meeting future cash flow needs 4 the Summary Plan Description A) II and III B) II and IV C) III and IV D) I, II, and III

A The IPS will include methods of performance measurement (if it is meeting objectives) and a way to determine how future cash flow needs will be met (based on expected numbers of retirees). It will not include the specific securities to be purchased, but will include the types that may be placed in the portfolio. The Summary Plan Description (SPD) is a Department of Labor (DOL)-required document that gives employees a summary of the plan and its features. It has nothing to do with determining how the money is invested.

A customer purchases stock for $40 per share and holds it for 1 year, selling it for $50 per share exactly 12 months after the date of purchase. Four quarterly qualifying dividends of $.50 were paid during the year. If the customer's tax bracket is 30%, what is the after-tax rate of return? A) 21.75% B) 21% C) 17.5% D) 18.40%

A The customer's return on the stock includes the $10 per share short-term capital gain ($50 − $40) plus the $2 qualifying dividend (quarterly dividend of $0.50 × 4). Remember, an asset must be held for more than 12 months for the gain to be long-term. After-tax rate of return is found by computing the total after-tax earnings. Short-term gains are taxed at the same rate as ordinary income, and qualifying dividends are taxed at a maximum rate of 15% (except for very high income earners—not tested). The tax on the $10 gain is $3 ($10 × 30%), and the tax on the $2 qualifying dividend is $0.30 ($2 × 15%). The investor's total return is the $12 total minus the $3.30 in taxes, or $8.70; $8.70 divided by the original investment of $40 results in an after-tax return of 21.75%.

Under the Securities Act of 1933, all of the following must sign a registration statement for a new issue of nonexempt securities EXCEPT A) the managing underwriter of the issuer B) a majority of the members of the board of directors C) the chief executive officer of the issuer D) the chief financial officer of the issuer

A The registration statement, which is an issuer document, must be signed by members of the board, as well as by the CEO and the CFO. It is also signed by the lawyers and accountants representing the issuer who express their opinions on the legal and accounting aspects of the proposed new issue.

A) 60.06 B) 61 C) 59.95 D) 60

A This is really two orders. The first is to "stop" at 60. That is, once the stock trades at 60 or lower, enter my order. That second order is a sell, but with a limit of 60. So the first time the stock hits 60 (or less) is the trade at 60. That triggers the sell limit. The next trade is a 59.95. Because the limit order is saying, "Get me 60 or higher, the 59.95 is not an acceptable price." But, the next trade, 60.06 will meet the client's goal of receiving no less than 60.

Under modern portfolio theory (MPT), the optimal portfolio has A) the most return for a given amount of risk B) no risk for a given amount of return C) the least return for a given amount of risk D) the most return for the most amount of risk

A Under modern portfolio theory (MPT), the optimal portfolio is one that has the most return for a given amount of risk.

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

A 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.

Potential investment company clients should be advised to investigate a fund by looking at which of the following? Investment policy Number of shares outstanding Custodian bank Portfolio A) I and IV B) II and IV C) II and III D) I and III

A Investment policy, track record, portfolio, and sales load should all be researched when assessing a fund. The identity of the custodian bank for the fund, or number of shares outstanding, does not bear on its performance or suitability.

A trust document's investment policy emphasizes that the fiduciary must follow SRI. When you are asked by the trustee to explain what that means, you would reply, A) socially responsible investing. B) sustainable reasonable investing. C) systemic responsible investing. D) safe responsible investing.

A Socially responsible investing (SRI) is an impact investment strategy which seeks to consider both financial return and social good. In general, socially responsible investors encourage corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity. You might also see SRI referred to as sustainable responsible (not reasonable) investing.

Which of the following is a NOT a leading economic indicator? A) Duration of unemployment B) Orders for durable goods C) New housing permits D) Money supply

A The average amount of time it takes for an unemployed person to find a new job is a lagging indicator, not a leading one. Employment is usually one of the last things to pick up as the economy enters a period of expansion. Layoffs are one of the last resorts for companies when the economy turns down.

Starflier Mutual Fund, regulated under the Investment Company Act of 1940, wishes to change its investment policy. It may do so with approval of A) the fund's investment adviser B) a majority of the outstanding shares C) no one because they do not need approval D) a majority of the board of directors

B

Wealth Funders and Associates (WFA) is a state-registered investment adviser organized as a partnership. The firm has had 5 equal partners since its inception. However, with the retirement of 1 of the partners and the need for additional capital, WFA has added 3 new partners. As a result of this activity, WFA A) is considered to have assigned client contracts and must obtain their consent B) shall notify clients of the change to the partnership within a reasonable time C) will now be required to register with the SEC D) shall renew its registration promptly

B

Which of the following statements regarding investment risk is NOT correct? A) The beta coefficient measures an individual stock's relative volatility to the market. B) Systematic risk may be reduced or eliminated by effective portfolio diversification. C) Investors expect to earn a higher rate of return for assuming a higher level of risk. D) A stock's level of risk is a combination of market risk and diversifiable risk.

B

Under the USA, which of the following statements regarding the withdrawal of an IAR's registration is TRUE? The withdrawal automatically becomes effective 90 days after filing. If disciplinary action is initiated within 30 days after filing, the automatic effective date may be delayed. The Administrator may institute disciplinary proceedings within one year after the effective date of the withdrawal. A) I and II B) II and III C) I, II, and III D) I and III

B A registered person may apply to withdraw the registration. The withdrawal is effective in 30 days, unless the person is under investigation in connection with pending disciplinary action or an investigation is instigated during the 30 days after filing the application to withdraw. If there is an investigation underway, the Administrator will determine when the withdrawal will become effective. The Administrator has one year from the effective date of withdrawal to begin disciplinary actions for violations of the act.

There are many sources of taxable income to an individual. Included might be money received from which of the following? 1 Sole proprietorship 2 Subchapter S corporation 3 Investments 4 Life insurance death benefit A) II and III B) I, II, and III C) I, II, III, and IV D) I and II

B An individual can generate income from running a sole proprietorship or being a shareholder in an S corporation (the exam will possibly use the obsolete term, Subchapter S). Of course, taxable income can be generated by investments in the form of dividends, interest and capital gains. The assumption here must be that the death benefits are from a life insurance policy because those, unlike the death benefit from an annuity, are not subject to income tax.

In which of the following third-party transactions would an investment adviser be required to make disclosure to the client of compensation received? 1 An investment adviser recommends an affiliated realtor to a client and receives compensation from the realtor. 2 An investment adviser, who is also an agent for an insurance company, sells policies from the company to his clients. 3 An adviser who is affiliated with a broker-dealer receives commissions on sales recommended to clients through the broker-dealer. A) II only B) I, II, and III C) I only D) I and III

B Investment advisers must disclose the amount of compensation received, or to be received, from any third party in connection with recommendations made to a client. This would include compensation from any broker-dealer, issuer, and nonsecurities entity (e.g., insurance companies, realtors, coin dealers).

Among the effects of a country devaluating its currency is that there will probably be 1 a credit to that nation's trade account balance 2 a debit to that nation's trade account balance 3 an increase in that nation's exports 4 an increase in that nation's imports A) I and IV B) I and III C) II and IV D) II and III

B When a currency is devalued by a country, it means that foreigners will find their money has more buying power in that country. Therefore, it would be expected that foreigners would buy more goods produced in that country causing an increase in exports. Those exports result in a credit to the country's trade account balance.

An investor interested in obtaining the benefit of professional portfolio management has been tracking a particular investment company for the past several months. In so doing, it becomes obvious that the market price of the shares moves in direct relation to the computed NAV. This investor must be following A) a money market fund B) a balanced fund C) an open-end fund D) a closed-end fund

C Because closed-end funds trade in the secondary markets, their price is determined by supply and demand. On the other hand, open-end investment companies (mutual funds) always trade based on their NAV. Although money market funds are open-end, the market price of their shares doesn't move. Additionally, when the exam uses an adjective to describe a fund (balanced, common stock, etc.), it is always an open-end company (mutual fund).

Which of the following statements are TRUE about both an individual Roth IRA and a Roth 401(k) plan? 1 Contributions are made with after-tax dollars. 2 One must have AGI below a certain level in order to maintain either Roth. 3 If all the conditions are met, withdrawals are tax free. 4 There are no RMDs at age 72. A) III and IV B) II and IV C) I and III D) I and II

C In any Roth plan, contributions are made with after-tax dollars, and assuming all conditions are met, withdrawals are tax-free. However, unlike the individual Roth IRA, there are no earnings restrictions on participants in a Roth 401(k) plan and RMDs must begin at age 72.

Under the Investment Company Act of 1940, the reporting requirements investment companies must comply with include 1 filing a report with the SEC annually, or more frequently if required 2 sending semiannual reports to shareholders 3 notifying shareholders of changes in the portfolio as those changes occur A) II and III B) I, II, and III C) I and II D) I and III

C Investment companies must file reports with the SEC at least annually (more frequently if required) and send at least semiannual reports to shareholders. They are not required to notify shareholders of changes in the portfolio as they occur.

An investment adviser representative has uncovered an unusual investment opportunity that she believes is perfect for one of her clients. When presenting the recommendation to the client, it becomes clear that the client is concerned about the potential of loss. To alleviate that concern, the IAR tells the client that she agrees to repurchase the security from the client anytime within the next 60 days at the original purchase price. In so doing, the IAR A) has committed the unethical business practice of recommending a wash sale. B) has committed the unethical business practice of guaranteeing against loss. C) has acted ethically because her actions are in the client's best interest, not her own. D) has acted ethically because she has not guaranteed a profit to the client.

C The unethical business practice of guaranteeing against loss can take several forms. This is one of them - offering to buy back a security at the purchase price. A wash sale involves an investor repurchasing a security sold at a loss and has no relevance to this question - it is a tax issue. The prohibition against guarantees does not require that the client be assured a profit, only that there is no loss. Even when an IAR is confident that an investment is in the client's best interest, a guarantee may not be offered.

The Federal Reserve Board has just taken action leading to an increase in interest rates. Which of the following industries is most likely to be affected adversely by this action? A) Defensive industries B) Heavy industries such as steel C) Utilities D) Cyclical industries

C Utility stocks tend to be interest rate sensitive for two reasons. First, they are typically bought for income portfolios, and, as such, changes to interest rates impact their price. Second, because utilities are typically the most highly leveraged of all industries, an increase in interest rates could substantially increase their debt service costs and thus reduce earnings.

KAPCO Securities is a broker-dealer registered with the SEC doing business throughout the Midwest. KAPCO must meet the net capital requirements of A) each state in which they do business B) the state with highest net capital requirements of the states in which it does business C) the SEC, even if one or more of the states in which they are registered has a higher net capital standard D) the state in which its principal office is located

C SEC rules preempt those of the states. As long as the broker-dealer complies with the SEC's net capital rule, all state requirements are satisfied. It is state-registered investment advisers who must meet the net worth (or capital) requirements of the state in which their principal office is located.

Which of the following statements is most accurate when describing equity straddle options? The option buyer is looking for market volatility. The option buyer is looking for market stability. The option seller is looking for market volatility. The option seller is looking for market stability.

D A straddle is the combination of a put and a call on the same stock with the same strike prices and expiration dates. The solution to the question is the same for any option position in that option buyers need price movement and option sellers make money from stability. In the case of a straddle, a buyer is expecting sharp movement but does not know the direction of the move. The seller of the straddle will benefit if there is no significant price movement.

Under the Investment Company Act of 1940, which of the following would be considered an affiliated person? Persons who control, are controlled by, or share common control with the company Any officer, director, or employee of the company Persons who own or control 5% or more of the voting shares of the company A) III only B) I and III C) II and III D) I, II, and III

D Affiliated persons are any investment company directors, officers, employees, or owners of 5% or more of the voting shares of stock, and/or any persons controlling or controlled by such persons.

Which of the following orders would be most likely to add fuel to a bullish stock market? A) Sell limit B) Buy limit C Sell stop D)Buy stop

D Buy stop orders are placed above the current market price and are usually used by those with short positions. As prices increase, these stop orders are triggered, sending more buy orders to the trading floors.

A client with limited assets seeking additional income in retirement would probably find which of the following investment choices to be the least suitable? A) Insured bank CDs B) ETFs C) Treasury bonds D) ETNs

D The question describes an individual with a low risk tolerance, so the Treasury bonds and CDs would certainly be considered appropriate. Because ETNs are a debt security backed solely by a single issuer while an ETF based on a specific index of debt securities represents a large group of issuers, they are only suitable for those who can understand and take the risks involved.

Which of the following statements regarding the economics of fixed-income securities are TRUE? Short-term interest rates are more volatile than long-term rates. Long-term interest rates are more volatile than short-term rates. Short-term bond prices react more than long-term bond prices given a change in interest rates. Long-term bond prices react more than short-term bond prices given a change in interest rates. A) II and III B) I and III C) II and IV D) I and IV

D There are two separate issues in this question: the volatility of rates and the volatility of bond prices. Short-term rates are more volatile than long-term rates and move more quickly than long-term rates. Often the most volatile interest rate is the federal funds rate, which is an overnight rate of interest. Given a change in rates, long-term bond prices move more than short-term bond prices because of the compounding effect over a much longer period.

According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment advisory contract must describe all of the following EXCEPT A) any record of securities industry violations by the investment adviser B) that assignment of the contract cannot occur without client consent C) whether or not the contract grants discretionary authority D) the amount of prepaid fee to be returned if the contract is terminated

D An investment advisory contract is not required to disclose securities industry violations by the investment adviser. These must be disclosed, however, in Form ADV. The investment advisory contract must include the amount of prepaid fee to be returned if the contract is terminated, the fact that assignment of the contract cannot occur without client consent, and the fact that the agreement does or does not contain discretionary authority

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) $64.11 B) $65.40 C) $60.00 D) $90.00

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 × 104.5% = $1,045 × 3% = $31.35 plus, $1,045 × 104.5% = $1,092 × 3% = $32.76. Adding the 2 interest payments together results in a total of $64.11 for the year.