Practice Exam
A U.S. Treasury bond's price moved from 96.18 to 96.22. An investor's account holding 10 of these bonds would show an increase of A) $12.50. B) $4.00. C) $1.25. D) $0.40.
A) $12.50. U.S. Treasury bonds are quoted in 32nds, where the difference between 96.22 and 96.18 represents an increase of 4/32 per bond. That is ⅛, or $1.25, times 10 bonds, or $12.50.
Which of the following is required for annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser? A) Filling out Form U4 B) Paying the state licensing fee C) Filling out the consent to service of process D) Sending a renewal notice to the SEC
B) Paying the state licensing fee All investment adviser representatives are registered with their respective states, not with the SEC. Renewal requires the payment of the annual renewal registration or licensing fee. The consent to service of process is a permanent document submitted with the initial application for registration.
Which of the following forms of joint ownership is most associated with ownership of real estate? A) Tenants in common B) Tenancy by the entirety C) Joint tenants with right of survivorship D) Totten trust
B) Tenancy by the entirety Tenancy by the entirety is most commonly used for ownership of real property (real estate).
KAPCO, Inc., has 100 million shares of $1 par common stock outstanding. If the current market price of the KAPCO common stock is $33 per share, KAPCO would be considered a A) large-cap stock. B) mid-cap stock. C) small-cap stock. D) micro-cap stock.
B) mid-cap stock. By doing the arithmetic, we see that the market capitalization of KAPCO common stock is $3.3 billion. Stocks with a market cap in the range of $2 to $10 billion are considered midcap.
While reviewing the financial statements of the ABC Corporation, you notice that the company has $5 million in cash on hand and $6 million in inventory. If the current assets total $15 million, the total assets are $22 million, and the current liabilities are $6 million, the quick asset ratio is A) 3.0:1. B) 2.66:1. C) 1.5:1. D) 2.33:1.
C) 1.5:1. The quick asset ratio is current assets minus inventory divided by the current liabilities. In this question, it is $15 million - $6 million = $9 million ÷ $6 million = 1.5:1.
An investor indicates that her objective is long-term growth. Income is of secondary importance. While she is basically quite conservative, she feels her time horizon is long enough to give her a bit more risk tolerance. Which of the following common stock mutual fund selections would probably be most suitable? A) 100% smallcap B) 50% largecap, 25% smallcap, 25% investment-grade bonds C) 75% largecap, 25% smallcap D) 100% largecap
C) 75% largecap, 25% smallcap The large-cap stocks are generally the most conservative when looking for growth. Adding 25% small-cap stocks to the mix adds the small extra risk the investor indicated she was willing to assume. Although the mix with the investment-grade bonds might be a good one, please note that the question specifically asks about common stock funds.
One of the differences between state and federal laws involving an investment adviser maintaining custody of customer funds and/or securities relates to the handling of client checks made payable to third parties such as broker-dealers. Which of the following properly expresses that difference? A) Under state law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within 24 hours of receipt. B) Under federal law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within three business days of receipt. C) Under state law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within three business days of receipt.
C) Under state law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within three business days of receipt. Under the Uniform Securities Act, if an investment adviser receives a check made payable to an unrelated third party, it will be considered custody unless forwarded within three business days of receipt. Third-party checks are never considered custody under federal law.
The Uniform Securities Act provides for civil penalties in the event of illegal activities of broker-dealers and their agents. Under the act, a purchaser would not be entitled to claim A) interest at the state's legal rate less any income received on the security. B) attorney's fees. C) the original consideration paid for the security or the current market value, whichever is greater. D) court costs.
C) the original consideration paid for the security or the current market value, whichever is greater. In the event of a civil judgment, the purchaser is able to claim for a return of the original investment, not current market value, plus interest at the state's legal rate. This interest is reduced, however, by any income received on that security. In addition, the broker-dealer or agent is liable for courts costs and attorney's fees.
Jonah purchased 100 shares of DEF common stock at a price of $25 per share on August 4, 2020. On December 1, 2021, with the stock selling for $29 per share, he gifted the stock to his daughter. She subsequently sold the stock nine months later for $32 per share. Her tax consequence is A) $300 short-term capital gain. B) $300 long-term capital gain. C) $700 short-term capital gain. D) $700 long-term capital gain.
D) $700 long-term capital gain. Securities acquired as a gift carry the donor's cost basis and date of purchase. In this case, the cost is $25 and the holding period began in 2020. So the sale is long-term, and the profit is $7 per share.
As specified in the Dodd-Frank Act of 2010, which of the following would not qualify for the private fund exemption? A) An investment adviser who limits her advisory services to venture capital funds B) An investment adviser who limits her advisory services to private funds with less than $150 million in assets under management in the United States C) A non-U.S.-based investment adviser with no place of business in the United States and less than $25 million in assets under management belonging to U.S. clients D) An investment adviser who limits her advisory services to insurance companies
D) An investment adviser who limits her advisory services to insurance companies The Dodd-Frank Act tells us that we're referring to federal law. Although investment advisers dealing solely with insurance companies are exempt from registration under the Investment Advisers Act of 1940, that is not the private fund exemption found in the Dodd-Frank Act of 2010 the question is asking about.
Which of the following activities might result in a positive yield curve in the bond market? A) Investors buying long-term bonds and selling short-term bonds B) A parallel upward shift in interest rates C) A parallel downward shift in interest rates D) Investors buying short-term bonds and selling long-term bonds
D) Investors buying short-term bonds and selling long-term bonds A positive yield curve is the normal condition and occurs when long-term rates are higher than short-term rates. Buying short-term bonds tends to drive their prices up and their yields down, while selling long-term bonds has the opposite effect.
One of the purposes of filing the annual updating amendment to the Form ADV Part 1A is to A) ensure that full disclosure has been made in the adviser's brochure. B) disclose the amount and location of securities or funds of clients that are being held by the adviser or a qualified custodian. C) provide updated information on those associated persons who are in charge of giving investment advice. D) verify that the investment adviser still qualifies for SEC registration.
D) verify that the investment adviser still qualifies for SEC registration. In order to maintain SEC registration, an investment adviser must maintain assets under management of no less than $90 million. The annual updating amendment is used to disclose this information.
As defined in the Uniform Securities Act (USA), which of the following would be considered an exempt transaction? A) A sale of stock by an administrator of an estate B) A sale of U.S. Treasury bonds to a retail investor C) A purchase of stock by an accredited investor under Rule 506(b) D) A purchase of bonds by a trustee of an irrevocable trust
A) A sale of stock by an administrator of an estate A sale by certain fiduciaries, such as an executor or administrator of an estate, is an exempt transaction under the USA. Even though the Treasury bonds are an exempt security, the sale to an individual is not an exempt transaction. Rule 506(b) is the federal transaction exemption not found in the USA, and only a trustee in bankruptcy is considered for the exemption.
Both state-registered and federal covered investment advisers have brochure delivery requirements. One significant difference between the two is that A) state-registered advisers who do not deliver the brochure at least 48 hours prior to contract signing must offer a five-day, penalty-free withdrawal. B) state-registered advisers must deliver the brochure within 90 days of the end of their fiscal year while covered advisers have 120 days. C) federal covered advisers are exempt from the brochure delivery requirements to investment company clients while state-registered advisers are not. D) state-registered advisers who do not deliver the brochure at least five days prior to contract signing must offer a 48-hour, penalty-free withdrawal.
A) state-registered advisers who do not deliver the brochure at least 48 hours prior to contract signing must offer a five-day, penalty-free withdrawal. State-registered investment advisers who do not deliver the brochure at least 48 hours prior to entering the contract must offer a penalty-free withdrawal of five days. There is nothing comparable to that in the federal law. Both have the 120-day delivery requirement, and state-registered investment advisers cannot have investment companies as clients.
An investor contacts you to say he is somewhat puzzled over the fact that he saw a newspaper listing for the KAPLOW Fund where the net asset value per share was $10.27 and the asking price was $14.14 per share. He wants to know why the difference between the two is so great. You would respond, saying A) the KAPLOW Fund is a closed-end company with a selling price based not on NAV, as is the case with an open-end fund. B) there is probably a misprint in the paper, and more than likely, the asking price is $11.22, making the sales charge 8.5%. C) the KAPLOW Fund is being investigated by the SEC for being sold with a sales charge in excess of the 8.5% maximum limit. D) that this is probably an unregistered hedge fund not subject to SEC rules.
A) the KAPLOW Fund is a closed-end company with a selling price based not on NAV, as is the case with an open-end fund. Closed-end investment company shares trade like any other stock on the exchanges or Nasdaq. That is, the price is determined by supply and demand, not by NAV.
One of your customers purchased a TIPS bond three years ago. The bond's nominal yield is 4%, and inflation has averaged 6% over the holding period. The interest payment at the end of the three years would be closest to A) $33.78. B) $23.88. C) $47.76. D) $21.60.
B) $23.88. With a TIPS bond, the principal is adjusted every six months by the inflation rate. When that rate is 6%, there is a 3% semiannual adjustment. Multiplying the $1,000 par value times 103% six times (there are six semiannual adjustments in three years) results in a principal value just over $1,194. Because the 4% coupon rate is paid semiannually, the payment at the end of three years will be the adjusted principal of $1,194 times 2%, and that equals $23.88. For testing purposes, you can always arrive at the correct answer by using simple interest instead of compounded interest. That is, with a 6% annual inflation rate, the bond's principal will increase by $60 per year for three years. That would make the adjusted principal $1,180. Take 2% of that, and the result is $23.60. The correct answer will always be the next greater number.
Which of the following is most commonly used when the author wants to express end-of-life wishes? A) A testamentary trust B) A living will C) A revocable trust D) A living trust
B) A living will 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 plans, desired medical treatment, and so forth.
Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A) DEF 6s of 2051 B) ABC 5s of 2050 C) GHI 7s of 2052 D) JKL 4s of 2022
B) ABC 5s of 2050 The bond with the longest duration is generally going to have the greatest exposure to interest rate risk. Because there is very little difference between maturity dates of 2050 through 2052, the bond with the lowest coupon will have the longest duration. The 4s of 2022 have a relatively short duration, even though their coupon is low.
Which of the following are not exempt from the delivery requirements of the NASAA Model Brochure Rule Requirements for Investment Advisers? A) An adviser whose only clients are exchange-traded funds B) An adviser who deals with qualified clients only C) An adviser whose only clients are closed-end investment companies D) An adviser who provides only impersonal advisory services at an annual charge of less than $500
B) An adviser who deals with qualified clients only There are only two exemptions from NASAA's (and the SEC's) brochure delivery rule. They are when the client is a registered investment company and when the adviser's clients receive only impersonal advice and pay less than $500 in fees per year. Qualified clients, those with at least $1.1 million in assets with the investment adviser or a net worth of at least $2.2 million, may be charged performance fees, but that has nothing to do with brochure delivery.
Which of the following clients of a federal covered investment adviser are not exempt from the delivery requirements of the brochure rule? A) A closed-end investment company traded on the New York Stock Exchange B) An employee benefit plan with assets of at least $5 million C) An open-end investment company with less than $25 million in assets D) An individual investor purchasing the investment adviser's newsletter with an annual subscription price of $410
B) An employee benefit plan with assets of at least $5 million The only exemptions from the investment adviser brochure rule are registered investment companies (both open- and closed-end) and impersonal advice costing less than $500 per year.
Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of which of the following? 1. The Securities Exchange Act of 1934 2. The Investment Company Act of 1940 3. The Investment Advisers Act of 1940 4. The Uniform Securities Act A) I and III B) II and IV C) I, II, and III D) II, III, and IV
B) II and IV The requirement for written advisory contracts is found in both the Investment Company Act of 1940 for those advising registered investment companies and the Uniform Securities Act for state-registered advisers. Oddly, there is no mention made of this requirement in the Investment Advisers Act of 1940. Sure, it makes good sense, but it is not required. Nothing in the Securities Exchange Act of 1934 relates to investment advisers, much less their contracts with clients.
Each of the following would be exempt from the definition of an agent under the Uniform Securities Act except A) Beatrice, who was appointed by the other members of her investment club to make the portfolio decisions for the next quarter. B) Violet, an employee of the Widget Spinners Corporation, who is paid a commission on sales of the company stock to fellow employees. C) Katrina, the administrator of the Widget Spinners Corporation pension plan, who is paid for making investment decisions for the portfolio. D) Florence, an employee of the First Fidelity Trust Company, who buys and sells securities to meet the needs of her trust clients.
B) Violet, an employee of the Widget Spinners Corporation, who is paid a commission on sales of the company stock to fellow employees. When an individual receives compensation for selling employer stock to employees, that person is defined as an agent and must register as such. Managing a pension plan (and getting paid for it, naturally) does not make one an agent; she is not being compensated for the trades. Because banks and trust companies are excluded from the definition of a broker-dealer, their employees cannot be considered agents.
A balance sheet shows that a corporation builds its capital structure with all of the following except A) long-term debt. B) cash. C) retained earnings. D) capital stock.
B) cash. A corporation's capital structure consists of the capital raised through the issuance of long-term debt securities (bonds), equity securities (stocks), and money reinvested in the business (retained earnings).
When comparing futures and forwards, it would be correct to state that A) forwards are more likely to be closed out prior to expiration. B) futures are more commonly used by speculators than forwards. C) forwards are exchangelisted, while futures are not. D) futures are considered securities, while forwards are not.
B) futures are more commonly used by speculators than forwards. The nature of futures—being standardized with a fluid secondary market—makes them more suitable than forwards for speculators. In fact, futures are almost always closed out prior to expiration.
An investment adviser's model portfolio consists of stocks with a market cap ranging from $500 million to $1.3 billion. If a potential client wanted to see if the adviser was generating positive alpha, the most likely benchmark for comparison would be A) the Nasdaq 100. B) the Russell 2000. C) the Wilshire 5000. D) the Dow Jones 30 Industrials.
B) the Russell 2000. When a portfolio outperforms its benchmark, it generates positive alpha. Stocks with a market cap of $300 million to $2 billion are considered small-cap stocks. Therefore, this adviser's performance would be measured by comparing it to the Russell 2000. The Wilshire 5000 includes every listed stock (many of which are large-cap stocks). The Nasdaq 100 contains many stocks with market caps in the hundreds of billions and even some with a market cap in excess of $1 trillion. As of the date this question was written, the lowest market cap of any stock in the Dow 30 was more than $30 billion, so that certainly wouldn't match up with this adviser's concentration on small-cap stocks.
While searching for a suitable investment for your client, you narrow the choices to the following four companies: Company A with returns over the past four years of 12%, 4%, 8%, 6% Company B with returns over the past four years of 7%, 8%, 9%, 6% Company C with returns over the past four years of 10%, 12%, −2%, 10% Company D with returns over the past four years of 15%, 20%, −8%, 3% Which of these choices has the highest midrange? A) Company B B) Company C C) Company A D) Company D
C) Company A The midrange of a series of returns is, as the name implies, that point in the middle of the range of returns. It is solved by adding together the two extreme returns (the highest and lowest returns) and dividing by two. Company A's lowest return is 4% and the highest is 12%. Adding them together is 16%, which is then divided by 2 resulting in a midrange of 8%. In this case, the range and midrange just happen to be the same. For Company B, the lowest return is 6% and the highest is 9%. That is a total of 15%, which divided by 2 gives us a midrange of 7.5%. For Company C, the numbers are −2% and 12%. That total of 10% divided by 2 equals 5%. For Company D, −8% plus 20% is 12%, which divided by 2 equals 6%.
Daphna works for Automated Asset Allocators (AAA), an investment adviser that has offices in States D, E, and F and is registered with the SEC. Daphna spends most of her time in an office in State D, but once every other week, she goes to the branch in State E. Daphna would be exempt from registration as an investment adviser representative (IAR) in which of the following states? A) Daphna would be exempt in State E, where she has no retail clients. B) Daphna would be exempt in States E and F. C) Daphna would be exempt in State F, where she has 227 retail clients. D) Daphna would have to register in all three states.
C) Daphna would be exempt in State F, where she has 227 retail clients. As an IAR with a federal covered investment adviser, Daphna has to register only in those states in which she maintains a place of business. That means registering in States D and E. The number of clients is irrelevant.
A technical analyst who has been charting the common stock of Kloud Information Storage Systems (KISS) would most likely sell KISS stock short when the market price of the stock is A) just below the resistance level. B) above the resistance level. C) below the support level. D) just above the support level.
C) below the support level. The support level of a stock is the historic repeating bottom. That is, whenever the stock gets that low, it brings out the buyers and pushes the price up. However, when a stock breaks through the support level, it is usually an indication that the support has dried up and there is going to be further decline. That is good for the shortseller.
A broker-dealer with no place of business in a state is not required to be registered in that state if the broker-dealer A) is a member of the New York Stock Exchange. B) is a federal covered broker-dealer. C) limits its clientele to employee benefit plans with assets of at least $1 million. D) is registered in the state where its principal office is located.
C) limits its clientele to employee benefit plans with assets of at least $1 million. A broker-dealer must be registered in every state in which it sells or offers to sell securities unless an exemption is available. If a broker-dealer has no office in a particular state and no business is done in that state other than with institutional clients, registration there is not required. There is no such term as federal covered broker-dealer. The term federal covered applies to certain investment advisers and securities.
Form ADV-E A) may be used to amend any information included in an investment adviser's registration statement (e.g., business address) B) is used to claim an exemption from registration C) must be completed by investment advisers that have custody of client funds or securities D) is only used by those advisers not subject to an annual surprise examination
C) must be completed by investment advisers that have custody of client funds or securities Form ADV-E is the form used by advisers for advisers that have custody of client funds or securities in order to be in compliance with SEC rule 206(4)-2 or similar state rules.
Prudent Asset Construction Enterprises (PACE) has offices in States X, Y, and Z. On their last annual updating amendment, they reportedassets under management (AUM) of $218 million. In which of the following instances would PACE be receiving a substantial prepayment of fees? A) $1,600, paid at the first of each quarter B) $600, paid six or more months in advance C) $10,000, paid monthly D) $1,600, paid one year in advance
D) $1,600, paid one year in advance First of all, this is an SEC-registered investment adviser, so we have to go by the federal numbers. Those are more than $1,200, six or more months in advance. The $600 would have been substantial if PACE was stateregistered. Although the other two choices are above $1,200, they are not prepaid for at least six months.
In October 1987, the SEC promulgated Release IA-1092, which had the effect of broadening the definition of investment adviser. As a result of the release, which of the following is included in the definition? 1. Commercial banks offering comprehensive financial planning for their highnetworth clients 2. Entertainment agents earning a fee for negotiating contracts for their clients and then placing a portion of the client's royalties into investment-grade bonds or large-cap stocks as market conditions dictate 3. Persons being compensated for assisting employee benefit plan administrators in selecting investment managers for the plan's assets 4. Lawyers who prepare trust agreements for clients with large securities holdings, with a goal of minimizing estate taxes A) II and IV B) I and IV C) I and II D) II and III
D) II and III Once the entertainment agent makes investment decisions for a client who is paying fees for overall services rendered, that agent comes under the IA-1092 definition of investment adviser (IA). In a like manner, any person who is compensated for giving investment-related advice to employee benefit plans is considered a pension consultant, requiring registration under IA-1092. Banks are never IAs, and the lawyer is merely doing legal and tax work.
When is an investment adviser representative (IAR) required to make disclosure to the client? 1. When the IAR, in preparing a recommendation, uses research provided by a third party with whom the IAR is not affiliated 2. When the IAR recommends a specific insurance policy for the client's overall financial plan where a commission will be received on that sale 3. When transactions recommended to a specific client are inconsistent with those for other clients with objectives that are similar to that particular client 4. When transactions recommended to the client are inconsistent with those for the IAR's own account A) II, III, and IV B) I, II, and III C) I and III D) II and IV
D) II and IV An investment adviser must provide full disclosure to his client if there would be even a hint of conflict of interest. This includes the case where a recommended product will generate a commission or other source of income to the adviser as well as full disclosure if a recommendation is not consistent with the adviser's activity in his own account. The adviser can use any source of information to create his own analysis, with disclosure of the source being required only if the adviser uses the product of a third party as the presentation to the client. It would be unusual that all clients with the same or similar objectives would purchase or have recommended for purchase the same securities.
