Practice Exam Pt 2
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.
If a client prefers owning an investment company whose portfolio consists primarily of companies that have a history of paying regular dividends rather than companies reinvesting their earnings for the purpose of generating capital appreciation, what type of mutual fund would you recommend? A) An index fund B) A government bond fund C) An income fund D) A growth fund
C) An income fund
The weak form of the efficient market hypothesis A) implies that inside traders cannot earn superior risk-adjusted returns. B) reinforces the value of technical analysis. C) implies that technical analysis is not worthwhile. D) implies that fundamental analysis is not worthwhile.
C) implies that technical analysis is not worthwhile.
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 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. D) is a federal covered broker-dealer.
C) limits its clientele to employee benefit plans with assets of at least $1 million.
Which of the following is required for annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser? A) Paying the state licensing fee B) Filling out Form U4 C) Filling out the consent to service of process D) Sending a renewal notice to the SEC
A) Paying the state licensing fee
Which of the following forms of joint ownership is most associated with ownership of real estate? A) Tenancy by the entirety B) Tenants in common C) Joint tenants with right of survivorship D) Totten trust
A) Tenancy by the entirety
One form of commodity investing is the purchase of precious metals. An investor in precious metals would be least likely to purchase A) molybdenum. B) platinum. C) gold. D) palladium.
A) molybdenum.
Popular strategies used by bond investors to mitigate the effects of changes in interest rates include any of the following except A) the strategy of lengthening the maturities of their holdings. B) the laddering strategy. C) the bullet strategy. D) the barbell strategy.
A) the strategy of lengthening the maturities of their holdings.
Low risk tolerance and high liquidity needs are typical characteristics of which type of institutional investor? A) Trusts B) Banks C) Foundations D) Defined benefit pension plans
B) Banks
Listed options are also known as standardized options. Which of the following choices is not one of the standardized terms of a listed option? A) The exercise price B) The premium C) The underlying asset D) The expiration date
B) The premium
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) $21.60. B) $47.76. C) $23.88. D) $33.78.
C) $23.88.
Plymouth Standard's common stock has an average return of 12%; its returns fall within a range of -2% to +26% approximately 68% of the time. Which one of the following numbers is closest to the standard deviation of returns of Plymouth Standard's stock? A) 8% B) 19% C) 14% D) 28%
C) 14%
An individual has just received an inheritance of $15,000 and has the goal of preservation of capital and income. The client is in a low tax bracket. Which of the following would be the most suitable choice? A) Public utility stocks B) Newly issued U.S. Treasury bonds C) Bank-insured CDs D) Insured municipal bonds
C) Bank-insured CDs
A corporation with a 6%, $25 par cumulative preferred paid $0.50 to preferred stockholders last year. This year, the company wants to pay common dividends. How much must it pay each preferred share? A) $1.50 B) $11.50 C) $0.50 D) $2.50
D) $2.50
An investor has many tax preference items. Computing the investor's income tax using the regular method results in a tax burden of $29,200 while computing the alternative minimum tax (AMT) results in a tax liability of $27,500. Based on this information, the investor's income tax liability for the year is A) $56,700. B) $30,900. C) $27,500. D) $29,200.
D) $29,200.
Arguably, determining a client's risk tolerance is the most critical step before making any recommendations. Methods of doing that would include knowing all of the following except A) the name of other firms where the client has or has had an account. B) how much of a loss the client can tolerate emotionally. C) the investment time horizon: short term or long term. D) the client's prior investment experience.
A) the name of other firms where the client has or has had an account.
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) the original consideration paid for the security or the current market value, whichever is greater. B) interest at the state's legal rate less any income received on the security. C) court costs. D) attorney's fees.
A) the original consideration paid for the security or the current market value, whichever is greater.
A 46-year-old investor wants to have retirement savings worth $1 million at age 70. If the investor can earn 9%, using the rule of 72, the present value needed today is closest to A) $250,000. B) $125,000. C) $90,000. D) $500,000.
B) $125,000.
Which of the following would probably be the best indicator of where the economy is headed? A) Average prime rate B) Number of permits for construction of new housing units C) Average duration of unemployment D) Rate of industrial production
B) Number of permits for construction of new housing units
When preparing recommendations for clients, nonfinancial considerations can often be as important, or even more important, than financial ones. For example, clients who want to avoid investing in fossil fuels would be expressing their A) educational background. B) values. C) investment experience. D) demographics.
B) values.
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) 2.66:1. B) 3.0:1. C) 1.5:1. D) 2.33:1.
C) 1.5:1.
As defined in the Uniform Securities Act (USA), which of the following would be considered an exempt transaction? A) A purchase of bonds by a trustee of an irrevocable trust B) A purchase of stock by an accredited investor under Rule 506(b) C) A sale of stock by an administrator of an estate D) A sale of U.S. Treasury bonds to a retail investor
C) A sale of stock by an administrator of an estate
Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A) DEF 6s of 2051 B) JKL 4s of 2022 C) ABC 5s of 2050 D) GHI 7s of 2052
C) ABC 5s of 2050
In order to make a quantitative evaluation using the present value computation, which of the following is not needed? A) Time period involved B) Anticipated rate of return of the portfolio C) Account value at the beginning of the period D) Account value at the end of the period
C) Account value at the beginning of the period
In order to comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must do which of the following? Offer plan participants at least three different investment alternatives Ensure that plan participants are insulated from control over their portfolios Allow plan participants to change their investment options no less frequently than quarterly Permit immediate vesting of employer contributions A) II and IV B) I and IV C) I and III D) II and III
C) I and III
What is the tax-equivalent yield of a 7% municipal bond to an investor in the 35% federal income tax bracket? A) 9.45% B) 4.55% C) 20.00% D) 10.77%
D) 10.77%
An investment adviser representative (IAR) is meeting with a potential advisory client. Which of the following are among the items of information the IAR needs to obtain about the prospect in order to develop the proper plan? Anticipated number of years until retirement Location of current bank and brokerage accounts Current savings and investments College alma mater A) II and IV B) III and IV C) I and II D) I and III
D) I and III
You are explaining to an advisory client that the U.S. economy goes through somewhat repeatable phases over a period of time. Which of these terms does not describe one of those business cycles? A) Expansion B) Peak C) Contraction D) Inflation
D) Inflation
You have a client who is interested in a preferred stock with guaranteed dividends. What is likely the reason for using the term guaranteed? A) Someone other than the issuer has guaranteed the payment of those dividends. B) As a fixed income security, the dividends are guaranteed to never increase. C) A previous investment adviser representative has improperly used that term in an effort to make a sale. D) The issuer has a AAA rating that is tantamount to dividend payments being a sure thing.
A) Someone other than the issuer has guaranteed the payment of those dividends.
A life insurance policy with benefits tied to the performance of a separate account that allows the policyholder to skip premium payments is called A) a flexible premium variable life insurance policy. B) a universal life insurance policy. C) a fixed premium variable life insurance policy. D) a scheduled premium variable life insurance policy.
A) a flexible premium variable life insurance policy.
An investment adviser wishes to advertise a proprietary charting system used to time the market. In order to be in compliance with the Investment Advisers Act of 1940, A) a statement reflecting the limitations and difficulties of using the system must be included in the ad. B) the advertisement must be filed with the appropriate SRO within 10 business days of first use. C) results obtained by using the system must be shown using a time period of no less than 12 months. D) authorship of the system must be prominently disclosed.
A) a statement reflecting the limitations and difficulties of using the system must be included in the ad.
In order to come under the SEC's requirement to file a Form 13F, an institutional manager must have discretion over A) an equity portfolio of at least $100 million in 13(f) securities. B) an equity portfolio of at least $50 million in 13(f) securities. C) an equity portfolio of at least $100 million. D) more than 10% of the outstanding voting securities of a reporting company.
A) an equity portfolio of at least $100 million in 13(f) securities.
An investor reviewing a corporation's balance sheet will be able to determine the company's A) owners' equity. B) dividend payout ratio. C) profitability. D) productivity.
A) owners' equity.
An investor concerned about liquidity would be least likely to invest in A) stock subject to Rule 144. B) cumulative preferred stock. C) ADRs. D) common stock listed on the New York Stock Exchange.
A) stock subject to Rule 144.
The fiduciary handling a qualified retirement plan usually provides a written document that sets forth the objectives and constraints on a managed portfolio. This document is called A) the investment policy statement. B) the legal opinion. C) the management agreement. D) the statement of fiduciary responsibility.
A) the investment policy statement.
In the over-the-counter market, the person who performs the dealer function that a DMM is responsible for on an exchange is A) the market maker. B) the broker-dealer. C) the floor broker. D) the OTC trader.
A) the market maker
One of your clients has a marginal tax rate of 32%. The 35% tax bracket begins in another $30,000 of income. Should the client receive a bonus of $50,000, the federal income tax due on that would be A) $15,600. B) $16,600. C) $17,500. D) $16,900.
B) $16,600.
The head of marketing for a regional broker-dealer spots an article in the local newspaper that is an excellent presentation of an investment strategy the firm recommends. If the firm posts a link to the article on its website, it would be known as A) entanglement. B) adoption. C) endorsement. D) plagiarizing.
B) adoption.
NASAA's Model Rule on Business Continuity and Succession Planning (BCP) requires that investment advisers (IA) establish a plan that provides for each of the following except A) assignment of duties to qualified persons in the event of unavailability of key personnel. B) assurance of continued profitability. C) minimizing service disruptions and client harm. D) office relocation in the event of a temporary loss of a place of business.
B) assurance of continued profitability.
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) micro-cap stock. B) mid-cap stock. C) large-cap stock. D) small-cap stock.
B) mid-cap stock.
With regard to an SEC-registered investment adviser employing the services of a promoter to solicit on its behalf, it would be correct to state that A) cash referral fees may be paid pursuant to a written or oral agreement to which the investment adviser is a party. B) the investment adviser may not compensate a solicitor who is subject to a statutory disqualification. C) referral fees may be paid only if the promoter is also registered with the SEC. D) delivery of the solicitor's brochure must take place within five days after the entry into the advisory contract.
B) the investment adviser may not compensate a solicitor who is subject to a statutory disqualification.
A client with a bearish outlook on a particular stock would be able to benefit from taking which of the following actions? A) Entering a market order to sell B) Entering a sell limit order C) Selling the stock short D) Buying the stock on margin
C) Selling the stock short
A company with no operations that is formed to raise capital through an initial public offering for the purpose of acquiring a private company or business to be identified after the IPO is A) a direct participation program. B) an open-end investment company. C) a special purpose acquisition company. D) a sponsored investment company.
C) a special purpose acquisition company.
You have a 45-year-old client wishing to save for retirement. The client does not have a great deal of investment sophistication and inquires about the risks you have exposed him to by placing the majority of his portfolio in listed common stocks. You would respond that one risk he should not concern himself with is A) business risk. B) inflation risk. C) liquidity risk. D) systematic risk.
C) liquidity risk.
Which of the following statements regarding REITs are true? Equity REITs offer possible income and capital appreciation. Investors receive interest and principal payments periodically. In order to receive favorable tax benefits, the REIT must pay out at least 90% of its taxable income in the form of dividends. Interests in REITs offer the benefit of flow-through of income or loss. A) I and IV B) II and IV C) II and III D) I and III
D) I and III
An options strategy that would be most useful for an investor with a long position in a stock who is concerned that a proposed management change will negatively impact the stock's price would be to A) buy a call on that stock. B) sell a put on that stock. C) sell a call on that stock. D) buy a put on that stock.
D) buy a put on that stock.
When comparing futures and forwards, it would be correct to state that A) forwards are exchange listed, while futures are not. B) futures are considered securities, while forwards are not. C) forwards are more likely to be closed out prior to expiration. D) futures are more commonly used by speculators than forwards.
D) futures are more commonly used by speculators than forwards.
Most states have replaced the Uniform Gift to Minors Act (UGMA) with the Uniform Transfers to Minors Act (UTMA). One of the major advantages of UTMA is A) the beneficiary has access to the account at an earlier age. B) reduced fiduciary exposure to the custodian. C) better tax benefits. D) greater flexibility in the choice of investments.
D) greater flexibility in the choice of investments.
Both state-registered and federal covered investment advisers have brochure delivery requirements. One significant difference between the two is that A) state-registered advisers must deliver the brochure within 90 days of the end of their fiscal year while covered advisers have 120 days. B) 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. 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 48 hours prior to contract signing must offer a five-day, penalty-free withdrawal.
D) 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.
Which of these forms of business structure carries the greatest personal liability? A) LLC B) Sole proprietorship C) Limited partnership D) S corporation
B) Sole proprietorship
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? Commercial banks offering comprehensive financial planning for their high net worth clients 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 Persons being compensated for assisting employee benefit plan administrators in selecting investment managers for the plan's assets Lawyers who prepare trust agreements for clients with large securities holdings, with a goal of minimizing estate taxes A) I and IV B) I and II C) II and III D) II and IV
C) II and III
Which of the following statements regarding an agent's registration is correct? A) If the broker-dealer with which that agent is registered should have its registration revoked, the agent's license will be held by the administrator and the agent will be required to register with an active broker-dealer no later than 30 days following the revocation. B) Individuals whose only securities activity with a broker-dealer is trading for the firm's proprietary account are not required to register as agents. C) Revocation of the registration of an agent's broker-dealer will result in placing that agent's effective registration in suspense. D) Agents may be licensed in a state even if their broker-dealer is not.
C) Revocation of the registration of an agent's broker-dealer will result in placing that agent's effective registration in suspense.
As defined in the Uniform Securities Act (USA), the term person would include which of the following? A limited partnership A political subdivision An unincorporated association The executor of an estate for a deceased individual A) I and IV B) II and III C) I, II, and III D) I, II, III, and IV
D) I, II, III, and IV
Which of the following is the primary advantage to the employer who offers a nonqualified plan when compared to one that offers a qualified plan? A) The nonqualified plan allows for an immediate employer deduction for contributions. B) The qualified plan costs less to administer than the nonqualified plan. C) The qualified plan is permitted to discriminate in favor of key employees. D) The nonqualified plan is permitted to discriminate in favor of highly compensated employees.
D) The nonqualified plan is permitted to discriminate in favor of highly compensated employees.
Under the Uniform Securities Act, all of the following persons with no place of business in the state are exempt from registration as an investment adviser except A) advisers who deal exclusively with savings banks located in the state. B) advisers who deal exclusively with investment companies registered under the Investment Company Act of 1940. C) advisers who deal exclusively with federal covered investment advisers located in the state. D) advisers who have conducted business with no more than six clients, other than institutions, in the state within the past 12 months.
D) advisers who have conducted business with no more than six clients, other than institutions, in the state within the past 12 months.
An investor has returns of 4%, 5%, and 9% over a three-year period. What is the investor's arithmetic mean? A) 6% B) 7% C) 5% D) 18%
A) 6%
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 insurance companies 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 private funds with less than $150 million in assets under management in the United States
B) An investment adviser who limits her advisory services to insurance companies
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 have to register in all three states. B) Daphna would be exempt in State F, where she has 227 retail clients. C) Daphna would be exempt in State E, where she has no retail clients. D) Daphna would be exempt in States E and F.
B) Daphna would be exempt in State F, where she has 227 retail clients.
Section 529 plans differ from Coverdell ESAs in that Section 529 plans offer which of the following? Tax-free distributions when the funds are used for qualifying educational expenses Higher contribution limits No earnings limitations Contributions that may be made by someone other than a parent or legal guardian A) I and II B) II and III C) II and IV D) I and IV
B) II and III
To be in compliance with the rules under the Investment Advisers Act of 1940, which two of the following statements are correct regarding a registered investment adviser's relationship with promoters engaged to solicit for advisory business? An individual who is subject to statutory disqualification from registration as an investment adviser representative may be compensated to solicit clients for the adviser when employed by a third-party promoter. If the compensation exceeds a de miminis amount, there must be a written agreement between the investment adviser and the solicitor. Although the sales script used may be written by the promoter, making sure that its content is fair and reasonable is the responsibility of the investment adviser. Cash referral fees to promoters hired to solicit may be paid only in the case of impersonal advisory services. A) I and II B) II and III C) III and IV D) I and IV
B) II and III
When an investor who is reviewing a brokerage account asks what else she could have done with her money, the investor is asking about which risk? A) Market risk B) Opportunity risk C) Inflation risk D) Credit risk
B) Opportunity risk
If a portfolio manager wished to reduce inflation risk, which of the following would be most appropriate to add to the portfolio? A) AAA bonds B) Tangible assets C) Fixed annuities D) Preferred stock
B) Tangible assets
Which of the following statements is accurate when describing preferred stock? Owners of convertible preferred stock have an opportunity to participate in the growth of the company. Unlike any other securities the company may issue, the return on preferred stock is fixed. Issuing preferred stock confers certain tax benefits to the company. In general, preferred stock does not have a maturity date. A) II and III B) III and IV C) I and II D) I and IV
D) I and IV
Which of the following activities might result in a positive yield curve in the bond market? A) A parallel upward shift in interest rates B) Investors buying long-term bonds and selling short-term bonds 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
An investment adviser representative (IAR) is attempting to develop an investment plan for a client. The IAR decides to use two different mutual funds in an effort to provide appropriate diversification. Of the four pairs given below, which one would offer the most diversification? A) Portfolio 3 and 4, with a correlation coefficient of +0.20 B) Portfolio 1 and 2, with a correlation coefficient of +0.90 C) Portfolio 5 and 6, with a correlation coefficient of -0.05 D) Portfolio 7 and 8, with a correlation coefficient of -0.20
D) Portfolio 7 and 8, with a correlation coefficient of -0.20
An estate-planning technique often recommended for those with large, taxable estates is the use of A) an irrevocable life insurance trust (ILIT). B) a testamentary trust. C) the alternative valuation date. D) the capital needs analysis.
A) an irrevocable life insurance trust (ILIT).
Under the provisions of the Uniform Securities Act, which of the following statements about unsolicited orders is true? A) A client may not purchase, at his own initiative, securities trading in the secondary market if the agent is otherwise prohibited from soliciting the order. B) Under certain conditions, an administrator may prohibit a broker-dealer registered in the state from accepting any unsolicited orders. C) An unsolicited order from a noninstitutional client for an unregistered, nonexempt security is considered a transaction exempt from the registration and advertising filing requirements of the act. D) If the order ticket is appropriately marked, the administrator may not challenge a broker-dealer's assertion that the order was unsolicited.
C) An unsolicited order from a noninstitutional client for an unregistered, nonexempt security is considered a transaction exempt from the registration and advertising filing requirements of the act.
Which of the following actions by an agent would be an unethical practice under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents? A) Telling a customer that the investment being recommended will be sold from the inventory of the broker-dealer and indicating on the trade confirmation that the firm acted in a principal capacity B) Recommending securities that result in major losses in the customer's account C) Splitting commissions with a customer service representative who is not registered but works for the same firm D) Entering a buy order, with discretionary authority, for a security when its price is rising
C) Splitting commissions with a customer service representative who is not registered but works for the same firm
All of the following would decrease the U.S. balance of payments deficit except A) a decrease in dividend payments by U.S. companies to foreign investors. B) a decrease in imports of foreign goods into the U.S. C) an increase in exports of domestic goods from the U.S. D) a decrease in purchases of U.S. securities by foreign investors.
D) a decrease in purchases of U.S. securities by foreign investors.
