Practice exam (67%)

ABD Corporation's income statement reports net sales of $100 million; cost of goods sold, $60 million; administrative costs, $20 million; and interest on debt, $5 million. Based on this information, ABD's gross margin is

40% (100-60=40/100=40%)

Which of the following indicates a bond selling at a discount

7% coupon yielding 7.5% (whenever the yield is higher than the coupon, the bond is selling at a discount from the par value)

Which of the following would NOT be unlawful for an investment adviser under the Uniform Securities act? A) including in the contract a clause that if the contract is terminated ahead of the scheduled termination date they will be no refund of prepaid fees B) failing to notify the administrator that the adviser has custody of a clients securities or funds, even though the administrator has no rule that prohibits such custody C) pledging that stock as collateral to bank for personal loan

A

Which of the following is NOT a person as defined by the uniform securities act

A child prodigy for whom his mother, as custodian, opened an account at a major securities firm

Under the uniform securities act which of the following would be included in the definition of an investment adviser rep?

A solicitor for an investment advisory firm who is compensated for the service rendered

Which of the following are fiduciaries? I. Executor of an estate II. Administrator of a trust III. Custodian of an UGMA account IV. Investment adviser rep. granted with discretionary authority over the account

All of the above

Which of the following transactions would be included in the USAs definition of exempt transaction? I. A banker liquidating stock pledged as collateral for a loan that has gone into default II. An offer to purchase a new stock made to 5 individuals and 15 institutional investors in this star during the past 12 months III. An isolated nonissuer transaction IV. The sale of preorganization certificates to 10 individuals with no commission being paid

All of the above

An investment adviser who is discussing forward contracts with a client would MOST likely be referring to an investment in

An agricultural commodity

KAPCO has an outstanding 6% $100 par preferred stock issue as well as a $1 par common stock. If KAPCO's last reported earnings per share for the year were $3 and the market price of the preferred stock is $120 and the common is $45, it would be correct to state that A) the preferred stock is selling at a price above its book value B) the price-to-earnings ratio is 15:1 C) the price-to-earnings ratio is 40:1 D) the current yield on the common stock is greater than that of the preferred

B (P/E Ratio only calculated in common stock -Current Market price of COMMON (45) / EPS (earnings per share $3))

Which of the following statements is true: a) a growth company would be more likely to pay a cash dividend than a stock dividend b) dividends have a significant influence on the value of the corporations stock c) a corporation is required to pay a cash dividend to stockholders if the earnings are sufficient, especially if it is of preferred stock d) a stock split increases the owners proportionate share of the company

B) dividends have a significant influence on the value of a corporations stock

Charles wishes to preserve his capital and generate income with moderate risk by investing in mutual funds. Which of the following mutual fund types would probably LEAST meet these investment objectives? A) and income fund B) technology funds C) a bond fund D) a balanced fund

B) technology funds

Kurt expects a certain stock to significantly rise in value in the near future. He is expecting a bond to mature in two months and does not want to miss out on any appreciation on the stock while waiting for the funds to become available. Which of the following would be the best option strategy for Kurt?

Buy a call option (*CALL UP* if you think the stocks price is going up, buy a call)

Which of the following statements about equity securities is NOT true? A) preferred stock is usually nonvoting B) common stock is less sensitive to interest rate risk than preferred stock C) preferred stock is an equity security while common stock is a hybrid D) preferred stock pays a fixed dividend

C

A young customer who is a novice investor wishes to begin an investment program. He is eligible for his employers 401(k) plan to which the employer makes matching contributions but he does not participate in the plan. Your advice to the customer should be to begin

Contributions through elective deferral of his salary to the employers 401(k) plan at least to the employers matching level

Under the UTMA which of the following statements is NOT true? A) once a gift is given to a minor, it cannot be reclaimed B) an UTMA account may have only one custodian for only one minor C) only an adult can make a gift to a minor D) the maximum amount of money an adult can give to a minor in any one year is $17,000

D (No limitation on size of gift however any gift in excess of $17,000 will be subject to a gift tax liability)

Inflation causes people living on fixed income to have

Declining purchasing power

When the compensation arrangements or incentives for the broker dealer or its agents could affect whether employees recommend or offer a particular security or transaction to a client, it is required that the firm

Disclose the potential conflict of interest

A third party post has made on a broker dealers Facebook page. If the firm has involved itself in the preparation of the content, this would be known as

Entanglement

To be defined as an investment adviser under the uniform securities act, which of the following must apply: I. Compensation must be received II. Advice is provided regarding securities III. Advice must be provided through direct written communication

I and II

An investment adviser must meet the net worth requirements of the administrator. When doing the computation, which of the following assets would be included? I. A sofa in the reception area II. The value of the copyright on an investment manual authored by the investment adviser III. The reputation of the investment adviser IV. Patents held by the investment adviser on a stock-tracking software program

I only

Under the investment advisers act of 1940 as amended by the marketing rule for investment advisers, advertising done by investment advisers prohibits which of these? I. The use of testimonials II. Reference only to specific past recommendations III. Untrue statements

II and III

The NASAA statement of policy on unethical or dishonest business practices of broker dealers and agents describes many actions considered by NASAA to be prohibited under the intent of the USA, as amended. Under that statement of policy, which of the following actions would be prohibited practice

II. Making unsuitable investment recommendations even when the client agrees with your assessment III. exercising discretion without previous written authority

Which of the following statements concerning market efficiency is NOT correct?

Investors who accept the efficient market hypothesis (EMH) usually adopt an active investment strategy

Treasury bills are

Issued in book-entry form

An investment adviser receives a favorable research report on a company he believes will increase substantially in value over the next few months. He places 100 shares in the account of each of his clients for whom he has written a discretionary authorization. This activity is;

Prohibited under the blanket recommendation rule

Bus lines Inc. serving most of the country had just been informed by the surface transportation board of the US that all of its buses must be retrofitted with expensive safety equipment. The effect of this will be a significant drop in their net income. If one was an investor in Bus lines Inc. this would be an example of

Regulatory risk (When an action by a regulatory agency, such as the STB, leads to increased costs and lower income we call that regulatory risk)

Which of the following is a multi-option strategy?

Straddle (A put and call on the same stock with the same strike price and expiration date)

A Motivation for creating structured products?

Structured products improve market completeness

The term used to describe the risk that affects all MARKETABLE SECURITIES is

Systematic risk

While managing a clients portfolio an investment adviser rep attempts to take advantage of perceived market inefficiencies. The IAR is not concerned with the clients long term goals; rather the interest lies in continuously charging the investment mix in an attempt to take advantage of overall investor sentiment. Based on this info what type of portfolio management style is the investment adviser rep using to manage the clients money

Tactical asset allocation

Those investors wishing to examine a document that would probably give them the most info about a corporations current and planned operations would seek out

The annual report

The common stock of companies within which industry sector would be most adversely affected by anincrease in the general level of interest rates?

The utilities industry (Very heavily funded with debt)

Which of the following best describes the economic phase in which unemployment increases and businesses operate at their lowest capacity levels?

Trough

Which of the following is the most appropriate action for an agent to take after receiving a written complaint letter from a client

Turn the letter over to the agents supervisor

Which of the following best describes a yankee bond

U.S. dollar-denominated bond issued by a non-U.S. entity inside the United States

When an individual registered with a broker dealer has a change of residence, an amended form U4 must be filed

Within 30 days

An American depositary receipt (ADR) is

certificate representing ownership of a foreign security that is on deposit at a U.S. bank

A federal covered IA files a petition for bankruptcy. The firm must

notify the SEC immediately

Your 55-year old client owns a nonqualified variable annuity. He originally invested $50,000 4 years ago. The annuity has grown to a value of $60,000. If the client, who is in a 30% tax bracket, makes a random withdrawal of $15,000 what will he pay to the IRS?

$4,000.00 (Pays taxes only on the growth portion bc this is a nonqualified annuity (10,000), 30%=3,000 /since he is not 59 1/2 he also pays the 10% tax penalty=1,000)

If the Administrator has summarily suspended an investment adviser representative's registration, the registrant may request a hearing by written request and the hearing will be granted within

15 days

Which of the following investment advisers would be permitted to use the term investment counsel?

A firm whose exclusive business is placing clients' assets into model portfolios

An investor purchased 500 shares of stock on January 10, 2020 at $50 per share and sold it on August 4 of the following year for $40 per share. As a result, the investor realized

A long term capital loss (Holding period was more than a year and a half)

Which of the following statements best describes a preemptive right?

A privilege extended to existing holders of a company's common stock enabling them to maintain their proportionate interest in the company when additional shares are issued

Which of the following must register as an agent under the uniform securities act?

A sales assistant who takes orders on behalf of agents in a branch office. (Remember, a broker-dealer is excluded from the definition of an agent under the Uniform securities act)

Which of the following financial instruments is NOT a derivative

A share of stock

Investing in which of the following would maximize after-tax income and diversify the portfolio for a high-tax-bracket investor?

A unit investment trust whose portfolio consists of municipal bonds

A common measurement used to evaluate attitudes regarding future economic conditions is the difference in yields btwn US treasury bonds and corporate bonds. This is known as

A yield spread

The process of determining how a portfolios funds will be apportioned among different categories of investments is known as

Asset allocation

Under the uniform securities act, the term guaranteed, when used to describe a security, refers to all these except: capital gains, dividends, principal, interest

Capital gains (Guaranteed meaning someone other than the issuer has guaranteed a timely payment of interest and principal on a debt security, or the payment of dividend on an equity security)

One respect in which an investment adviser differs from a broker dealer is that of fiduciary responsibility to the client. Therefore the investment adviser will have greater concerns about various non financial needs and attitudes of the client when making recommendations. Included in those concerns would be all of these EXCEPT: clients retire plan vested balance, clients environment attitudes, clients marital status, clients time horizon number and age of dependents

Clients retirement plan vested balance

An analyst complied the following correlation coefficient matrix relating to Funds A, B, C, and D. (Table) On the basis of these findings, combining which funds would provide the highest level of diversification?

Combining the funds with the lowest correlation coefficient would create the greater diversification. The quickest way to answer a question like this on the exam is to look for the largest negative number.

All of the major equity indexes have been making new highs. A portfolio manager employing which of the following management styles would be the most likely to have significant short positions?

Contrarian (This style of portfolio management is to do the opposite of the rest of the market, when prices are reaching new highs, it is an indication that the preponderance of investors are buying, contrarians would be bearish and that would lead to shorting stocks)

An investor is considering purchasing an equity exchange traded fund to further diversify his portfolio. All of the following are reasons for him to purchase this investment except

ETFs offer tax benefits similar to a limited partnership

According to NASAA's statement of policy on dishonest or unethical business practices of broker dealers and agents, an agent may

Exercise discretionary investment authority over an account provided the client provides written discretionary authority

Municipal bonds are often called tax-exempts. This refers to the exemption of their income from

Federal income taxes (Although municipal bonds are sometimes exempt from state income tax (if issued in the state of residence of the taxpayer), all references to tax exemption refer to their exemption from federal income taxes)

A client is interested in purchasing a REIT and asks you what the differences are between a listed REIT and an unlisted REIT. You could respond that all of the following are differences EXCEPT

Fees and expenses

In an investor wished to compute the mean return of her portfolio, she is going to

Find the arithmetic mean

Sales made under the provisions of Rule 506(b) regulation D must be reported on

Form D (Must be filed electronically with the SEC no later than 15 days after the first sale of securities in the offering)

An agent omits facts that a prudent investor requires to make informed decisions. Under the uniform securities act, this action is

Fraudulent for both exempt and nonexempt securities

Which of these are true regarding a federal covered investment adviser? I. He has $110 million or more in assets under management II. He manages an investment company registered under the investment company act of 1940 III. He limits his advice to securities listed on the NYSE IV. he is affiliated with a federally chartered bank

I and II

To calculate the future value of an investment, which of the following must be known: I. Assumed earnings rate II. The future sum required III. Duration of investment IV. Risk tolerance of the investor

I and III

Violations of the investment advisers act of 1940 are punishable by which of these: I. A fine of up to $10,000 II. A prison term of up to 20 years III. Suspension of registration

I and III

Which of the following regarding corporate debentures are true? I. They are certificates of indebtedness II. They give the bondholder ownership in the corporation III. They are unsecured bonds issued to finance capital expenditures or to raise working capital IV. They are the most senior security a corporation can issue

I and III

If an investor receives a lump sum distribution from a 401 (k) plane when he left his job, he may I. Roll over his account into an IRA within 60 days II. Transfer his account without taking possession of the money III. Keep the funds and pay ordinary income tax IV. Invest in a tax exempt municipal bond fund to avoid paying tax

I and III (A direct custodian-to-custodian transfer is not permitted because the client has already received the distribution)

During the past year the market price of Kapco common stock has increased from $47 to $50 per share. Over that period, kapcos earnings per share have increased from $2.00 to $2.50 per share, and their dividend payout ratio has decreased from 50% to 40%. Based on this info, I. P/E ratio has decreased II. P/E ratio has increased III. An investor holding Kapco over this period would notice a decrease in income received IV. ^ would have noticed no change in income received

I and IV

Which of the following statements regarding email communications are correct? I. They are sometimes referred to as electronic communications II. Customer complaints received by email are not considered to be in writing III. Once received and reviewed they may be discarded IV. They must be retained in the same fashion as any other record

I and IV

The securities exchange act of 1934 requires written authority for a discretionary account, unless the securities professionals discretionary authority is limited to determining which of these? I. The price of the stock II. The amount of the stock III. the time of the order

I or III

True of a discretionary account at a broker dealer?

I. It must be approved by a designated supervisory individual of the firm II. It must be reviewed frequently to minimize the chances that the account has been churned

A portfolio that has a negative correlation coefficient relative to the market will: I. Decrease in value as the market declines II. Increase in value as the market declines III. Decrease in value as the market goes up IV. Increase in value as the market goes up

II and III

Due to changes in market rates, a corporation is able to purchase some of its outstanding 20-year bonds at a discount. Which of the following is CORRECT?I. Working capital is increased II. Working capital is reduced III. Net worth is increased IV. Net worth is reduced

II and III

In the secondary market, US treasury bond prices are MOST influenced by

Inflation rate

Which of the following describes unsystematic risk?

It is specific to an investment and can be diversified away (Unsystematic risk=diversifiable, only systematic risk deals with the overall market)

Your firms market analyst believes the current bullish market in equities will continue. Which of the following would be most suitable for a growth oriented investor?

Large cap stock fund

One of your clients is 10 years away from retirement and is trying to decide what would be a suitable investment for this year's IRA contribution. You wold probably NOT recommend

Leveraged ETFs

A deceased clients trust account has over 90% of its value invested in a single common stock whose recent performance has been outstanding, resulting in a very large unrealized capital gain at the time of death. What action would most likely be taken by the investment adviser handling this account?

Liquidating a portion of that stock to take advantage of the tax savings offered by the stepped up basis at death

Which of the following characteristics best exemplifies a VALUE STOCK?

Low price-to-book, low price-to-earnings ratio

A 68 year old individual who purchased a single premium immediate fixed annuity, elected monthly payments for life with a 10 year certain settlement option. If the individual lives to the age of 80

Monthly payments will continue until death

An individual established an irrevocable trust. The individuals two adult children were named equal beneficiaries of the trust. Several years after the death of the grantor, one of the children fell upon hard times and asked the trustee for a greater share of the trusts income. Under trust law, the trustee

Must be i partial when following the terms of the trust

The securities act of 1933 regulates

Offerings of new securities

A broker dealer makes a market in XYZ stock and places large orders for it on the open market either at or slightly above its current price with the aim of stabilizing the price. This unethical practice is best described as

Pegging (Entering buy orders for the purpose of supporting a stock price (keep it from falling))

An investment adviser who is affiliated with a broker-dealer recommends only products that are provided through that broker-dealer. This is

Permitted following disclosure of the potential conflict of interest

You are an agent for a fully licensed broker dealer and one of your clients is the chairman of a drug company who that the gov will shortly disapprove a patent for a new drug. According to the uniform securities act you should

Promptly inform your supervisor

Which of the following statements describes the federal funds rate?

Rate charged on reserves traded among commercial banks for overnight use in amounts of $1 million or more

Which of the following investments could be found in an UTMA but not an UGMA?

Real estate

All of the following actions must be completed prior to customers entering their first option trade except

Receipt of a completed options agreement

An analyst computing a stocks Sharpe ratio would need to know the stocks

Standard deviation

Broker dealers provide a bid and offer price when functioning as market makers. In this context,

The bid price represents the price the market maker is willing to pay for the stock and the offer price is the market makers selling price

If the net present value of a series of discounted cash flows is less than zero, one could conclude that

The discounted cash flows are lower than the investment outlay (A negative net present value of a series of discounted cash flows means the investment outlay exceeds the discounted cash flows)

In the field of securities analysis there are many tools available. Which of the following would most likely be used by an analyst to approximate a reasonable price for common stock?

The dividend discount model (Simplest model for valuing equity)

The purpose of portfolio rebalancing is used to make sure that

The percentage of the portfolio invested in various asset classes remains constant

If a customer owns 7% of a publicly-traded company's stock and his spouse owns 6% and wants to sell her shares, which of the following statements is true?

The spouse is an affiliate and Rule 144 applies

Under the investment company act of 1940 which of the following qualify for a discount in a mutual funds sales charge? I) Mr and Mrs jones each purchase $5,000 worth of shares, the fund offers a volume discount for a single purchase of $10,000 II) neighbors Jan, Mickey, and Lee form an investment club, Jan places an order for 10,000 worth of shares to be held in their three names. The fund offers a volume discount for a $10,000 purchase III) Allen is the vice president of a firm under contract

To provide investment advice to a mutual fund. He buys shares of that fund. ALL OF THE ABOVE

Max is interested in using the options market to create "insurance" against a severe drop in the value of a stock portfolio that he owns. How could he best accomplish this goal and what is this type of strategy called?

Type of option: buy put options Strategy: protective put (An investor who is long securities can obtain portfolio insurance by purchasing put options/Losses in the underlying portfolio are offset by gains in the put position)

One of the ways in which US gov agency issues differ from those ordered directly by the US treasury is that agency issues

Typically carry higher returns than treasury issues because of the lack of direct gov backing

When analyzing a business cycle you would expect which phase to occur before reaching the trough?

contraction

One of your clients has a margin account. There is a drop in the value of the stock owned in the account and additional funds are required based on the terms of the firms margin agreement. This would be known as

house call

If your clients spouses both age 50 are interested in long term growth and are willing to accept a moderate amount of risk you should recommend

large-cap stock fund (Large-cap common stock has relatively moderate risk with likely growth potential)

In general a broker dealer is required to register with the SEC. An exception to that requirement would apply to a broker-dealer who

maintains a place of business in a single state, only deals with residents of that states, and does not execute transactions in securities traded on a national exchange (Only exemption from SEC registration applies to broker-dealers functioning strictly on an intrastate basis)

Which of the following is NOT a characteristic of owning a limited partnership?

tax free income (The income from limited partnerships is not tax exempt)

Publicly traded corporations are generally required to have an annual independent audit of their financial records. What is the highest opinion offered under GAAP?

unqualified opinion ("Clean opinion")