series 65 Part 4

All of the following investments are eligible for a traditional IRA EXCEPT A) works of art B) covered call writing C) growth-oriented securities D) limited partnerships

A (Gems, intangibles, and works of art are ineligible investments for an IRA. Covered call writing is allowed, but speculative options strategies are not. Limited partnerships are permissible investments for an IRA. Growth-oriented securities, and securities in general, are appropriate investment vehicles for IRAs.)

Which of the following is not a market cap-weighted index? A) Dow Jones Industrial Average B) Morgan Stanley Capital International C) FTSE 100 and FTSE All-Share D) S&P 500

A (The Dow Jones Industrial Average is a price-weighted index. All other options are market cap-weighted indexes.)

A loss derived from a limited partnership may be offset against income from A) capital gains from municipal bonds B) other limited partnerships C) dividends received from common stocks D) bonuses received in addition to regular salary

B (A limited partner may use only passive income to offset the loss derived from a limited partnership. A passive loss cannot be used to offset dividends received from common stocks. Passive loss from partnerships may be used to offset passive gains from partnerships, not gains from municipal bonds.)

What is the latest date that an IRA participant may make a contribution based on the current year's income? A) December 31 of the current year B) July 15 of the following year, if extensions have been filed C) April 15 of the following year or the first business day following if the 15th is a Saturday or Sunday D) April 15 of the current year or the first business day following if the 15th is a Saturday or Sunday

C (Contributions to IRAs can be made up to April 15 of the year following the year for which the contribution is being made. If April 15 falls on a Saturday or Sunday, contributions can be made up to the 1st business day after the 15th. If the taxpayer has received an extension, that does not affect this deadline.)

High-tech Industries (HTI) went public 4 years ago by issuing 100 million shares of common stock at $1 per share. HTI's earnings have soared and the stock is now selling for $13 per share. HTI would be considered A) a micro-cap stock. B) a large-cap stock. C) a small-cap stock. D) a mid-cap stock.

C (It is only today's market price multiplied by the number of shares outstanding that determines a stock's market capitalization. With 100 million shares at $13 per share, HTI has a market cap of $1.3 billion. That puts it in the small-cap range. When the stock was first issued, its market cap was only $100 million. At that time, it was a micro-cap stock.)

Under ERISA, a fiduciary must act in all of the following ways EXCEPT A) solely in the interest of plan participants and beneficiaries B) with care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character C) confining investments to only those most likely to achieve growth D) in accordance with the governing plan documents unless they are not consistent with ERISA

C (Under ERISA, a fiduciary is not required to confine investments to only those most likely to achieve growth. The fiduciary is required to diversify investments so as to minimize the risk of losses, unless doing so is clearly not prudent under the circumstances.)

Which of the following is not a characteristic of a Monte Carlo simulation? A) The user gets a best-case scenario and a worst-case scenario. B) Large changes in the projected rate of return will make small differences in the outcome. C) It is a technique used to model uncertainty in retirement planning. D) It provides insight into the range of outcomes.

b (Small changes in the projected rate of return will make large differences in the outcome.)

An employee covered by a defined benefit pension plan would be least concerned with A) the age at which benefits can be taken. B) the lump sum available at retirement. C) the investment performance. D) the expected amount payable.

c (In a defined benefit plan, the payout is fixed. The employer must pay that benefit regardless of the investment performance. Investment performance is more of a concern for defined contribution plans.)

Which of the following statements about 401(k) plans are CORRECT? I. 401(k) plans are a type of defined benefit retirement plan. II. An employee's elective deferrals are made with pre-tax dollars. III. Earnings on the contributions to a 401(k) accumulate on a tax-deferred basis. A) I and II B) I and III C) I, II, and III D) II and III

D (A 401(k) plan is a type of defined contribution plan rather than a defined benefit plan. A participating employee is not guaranteed a specific retirement benefit from the plan; instead, the retirement benefits depend on how much is contributed to the plan and how much the contributions earn. A 401(k) plan allows employees to make elective deferrals from their pay which results in those funds being contributed on a pre-tax basis. Plan earnings accumulate on a tax-deferred basis. This means that plan participants do not pay income tax on the earnings until they are withdrawn.)

A market maker is quoting ABC common stock at $76.10 - $76.31. That means A) the market maker's commission is $.21 per share. B) the market maker is willing to pay $76.31 for the stock. C) the spread is probably excessive. D) the market maker is willing to pay $76.10 for the stock.

D (Marker makers provide a two-sided quote. Because market makers stand ready to buy and sell the specific security, they provide a bid price, the price the firm is willing to pay for the stock, and the offer price, the price they are asking to receive when selling the stock. Market makers do not earn a commission; they charge a markup or markdown. A $.21 spread on a stock at this price is certainly not excessive.)

A client is completing a new account form that contains questions about the investor's investing experience and knowledge. More than likely, what type of account is being opened? A) Discretionary B) Retirement C) Margin D) Options

D (One question asked on a new options account form that is not required on a normal brokerage account opening is investment experience and knowledge (e.g., number of years, size, frequency, and type of transactions) for options, stocks and bonds, commodities, and other financial instruments.)

Which of the following statements describing traditional IRAs is NOT true of 403(b) qualified plans? A) Distributions must begin by age 72. B) Contributions are tax deductible. C) Distributions after age 59½ are taxed as ordinary income. D) A self-employed person may participate.

D (Only employees of schools, church organizations, and nonprofit organizations are eligible to participate in 403(b) plans.)

One of your clients has named you as the trustee for a trust he has established. The beneficiary of the trust approaches you with a request for a disbursement that is contrary to the provisions of the trust document. In accordance with the provisions of the Uniform Prudent Investor Act, you should A) contact the grantor B) do nothing C) follow the wishes of the beneficiary D) follow the terms of the trust

D (Trust law requires that the trustee act in accordance with the terms of the trust document at all times.)

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

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

You have a client who has sold short 100 shares of RIF at $50 per share. If the client wished to use options to protect against unlimited loss, you would suggest the client A) buy 1 RIF 55 call B) sell 1 RIF 45 put C) sell 1 RIF 45 call D) buy 1 RIF 55 put

a (Buying a call option on stock where you have a short position will give you a guaranteed cost to cover the position, thus preventing against unlimited loss. This is the most common way to protect a short stock position.)

In the securities industry, the term contra party refers to A) the person on the other side of the trade B) the person on the other side of a civil suit C) a securities regulator who begins an investigation against a securities professional D) the person identified on the trade confirmation as a broker

a (Contra party is defined as the broker-dealer or customer to whom a person has sold securities or from whom a person has purchased securities—they are on the other side of the trade.)

A living will is used to A) express the author's end-of-life wishes. B) avoid the cost and time of probate. C) ensure that the author's assets are properly distributed after death. D) eliminate, or at least reduce, estate taxes.

a (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, "pulling the plug," and so forth. It has nothing to do with a last will and testament describing the distribution of assets after death.)

Gaston is a police officer and wishes to contribute to a retirement plan sponsored by the city. Gaston wants the flexibility of being able to have unfettered penalty-free access to his funds before reaching age 59½. This can only be accomplished if Gaston contributes to A) a 457 plan. B) a 403(b). C) a 401(k) plan. D) a SEP-IRA.

a (The 457 plan is unique in that it is the only tax-qualified retirement plan permitting withdrawals, for any reason, before reaching 59½ without penalty. All qualified plans have exceptions to the 10% penalty tax, but only the 457 allows the withdrawals for any reason.)

Your client turns in a buy limit order for 100 shares of ABC at $58. Following the entry of the order, trades occur at 59, 59, 58.80, 58.20, 58.40, 57.95, 57.85. At what price was this limit order triggered? A) The order was not triggered. B) $57.95. C) $57.85. D) $58.20.

a (This is a perfect example of how important it is to read the question. The subject of the question is a limit order and then it asks for the trigger price. Stop orders are the only orders that have triggers so there is no trigger for this limit order. If the question had asked about the execution price, a buy limit order will be executed at the limit price or better (lower). In this case, the first trade at $58 or lower is $57.95. When you have a question like this on your exam, don't say to yourself, "But what if there is stock ahead?" We never want to overcomplicate a question by looking for something that isn't mentioned.)

An advisory client of yours dies in 2019, and you transfer the $1.4 million of securities in the individual's name to the estate account. You will A) continue to manage the account unless the advisory contract called for termination upon death or informed otherwise by the executor B) notify the executor of the estate that he is able to do any trades to rebalance the account, and that taxes will be of no consideration C) inform the executor that you need to keep sufficient liquid funds in the account because estate taxes will be due in 6 months D) tell the executor that he will be receiving a Form 1099 for tax purposes, representing the transfer of account over to the estate account

a (Unless the advisory contract has a termination upon death provision or the executor wishes to assume management of the account, the investor adviser may continue to manage the account of the estate. Trades made in the account must take into consideration tax implications as with any other account. Estate taxes are due 9 months after death, and unless there are other assets not listed here, no tax is due because this estate is less than $11.4 million (the amount exempt from taxation for 2019).)

Mrs. Beech, age 52, as the sole survivor of her mother, recently inherited, among other assets, an IRA. After receiving a distribution of the account's assets, she dutifully rolled over 100% of the account value into a new rollover IRA. As a result, Mrs. Beech A) will have to declare the entire IRA value as ordinary income B) will be able to avoid taxation on the distribution until she begins to take distributions from the rollover IRA C) should have left the funds in her mother's IRA, because she is not yet 59½ D) will only be liable for the 10% premature distribution penalty tax

a (When an IRA is inherited, other than from a spouse, the only way to avoid a reportable distribution is to do a trustee-to-trustee transfer. Because Mrs. Beech received the distribution, the normal rollover rules do not apply. However, Mrs. Beech will not have to pay the 10% penalty tax.)

All of the following statements regarding qualified corporate retirement plans are true EXCEPT A) with defined benefit plans, the employee bears the investment risk B) all qualified retirement plans are either defined contribution or defined benefit plans C) all corporate pension and profit-sharing plans must be established under a trust agreement D) they are covered under ERISA

a (With defined benefit plans, the employer (not the employee) bears the investment risk. The employer must fund the defined benefits, regardless of the investment performance of funds set aside for this purpose. The retiree receives a defined benefit regardless of investment performance. All corporate pension and profit-sharing plans must be established under a trust agreement. All qualified retirement plans are either defined contribution or defined benefit plans.)

An individual works for an accounting firm that does not have a retirement fund. She is paid $18,000 per year. During her spare time, she is a commercial artist and earned $16,000 doing this work last year. What is the basis for her contribution under a Keogh plan (HR-10)? A) $16,000.00 B) $0.00 C) $18,000.00 D) $34,000.00

a (contributions to a Keog must be on self-employed income)

A firm declares a $3.00 cash dividend to its shareholders. The firm has issued dividends of only $.07 per share for each of the last 15 quarters, and market analysts had anticipated a similar dividend this quarter. In an efficient market, one would expect A) no price change before or after the announcement. B) a price change upon the announcement. C) a price decrease after the announcement. D) a price increase before the announcement.

b (In an efficient market, the price of the stock will represent all information that is public. Because the increase in the dividend was not public knowledge until it was declared, no price change would take place before the announcement. A price change, representing the increase in dividends, would be expected immediately after the information became public.)

One of the situations that investment adviser representatives may encounter is the death of a client. When that happens, orders may be accepted from A) the deceased client's spouse. B) the trustee in intestacy. C) the deceased client's children. D) an individual with a durable power of attorney.

b (In most cases, your clients will have a will. (Editorial comment - not on the exam, but you are acting in your clients' best interest when you strongly urge them to prepare a proper will.) When the deceased has not written a will, he is considered to have died intestate. The appointment of the person who will administer the estate is based on state law. That person may be called the administrator of the estate or the trustee in intestacy. The spouse may be appointed to that role, but would be acting as the trustee, not as the spouse and same is true of the children. A durable power of attorney is dissolved upon the death of either principal to the power.)

Which of the following offers the opportunity to realize a capital gain rather than ordinary income? A) Cash dividends B) Stock dividends C) Deferred annuities D) Section 529 plans

b (Stock dividends, unlike cash dividends, are not taxable in the year of receipt. Instead, they reduce the owner's cost basis and, when sold at a price above that cost basis, are treated as capital gain rather than ordinary income. Deferred annuities never generate anything but ordinary income, and qualified withdrawals from Section 529 plans result in no taxation on the earnings. If they are not qualified, there is ordinary income tax plus a penalty.)

A 61-year-old wanting to take a lump-sum distribution from his Keogh will A) incur a 10% penalty tax B) be taxed at ordinary income rates C) incur a 50% penalty tax D) be taxed at long-term capital gains rates

b (The distribution described here would be taxed as ordinary income. A 10% penalty tax would apply if the individual were under age 59½.)

Which of the following statements about 401(k) plans are CORRECT? I. 401(k) plans are a type of defined benefit retirement plan. II. An employee's elective deferrals are made with pre-tax dollars. III. Earnings on the contributions to a 401(k) accumulate on a tax-deferred basis. A) I, II, and III B) I and II C) II and III D) I and III

c

Which of the following statements about 401(k) plans are CORRECT? I. 401(k) plans are a type of defined benefit retirement plan. II. An employee's elective deferrals are made with pre-tax dollars. III. Earnings on the contributions to a 401(k) accumulate on a tax-deferred basis. A) I, II, and III B) I and II C) II and III D) I and III

c (A 401(k) plan is a type of defined contribution plan rather than a defined benefit plan. A participating employee is not guaranteed a specific retirement benefit from the plan; instead, the retirement benefits depend on how much is contributed to the plan and how much the contributions earn. A 401(k) plan allows employees to make elective deferrals from their pay which results in those funds being contributed on a pre-tax basis. Plan earnings accumulate on a tax-deferred basis. This means that plan participants do not pay income tax on the earnings until they are withdrawn.)

Nite Capital Group is a registered broker-dealer whose primary business model is providing quotations for OTC stocks in which they position trade. Nite would be known as A) an investment company B) a secondary market C) a market maker D) a specialist

c (A market maker is a firm that stands ready to buy and sell a particular stock on a regular and continuous basis at a publicly quoted price. The term is most often used in the context of the over-the-counter (OTC) markets. Market makers trade for their own inventory (position trade). The term specialist historically referred to the person on the floor of a stock exchange who performed a similar function; the current term is designated market maker (DMM).)

Which of the following characteristics best exemplifies a value stock? A) Low earnings-per-share growth, high profitability B) Low price-to-book, high price-to-earnings ratio C) Low price-to-book, low price-to-earnings ratio D) High earnings-per-share growth, high profitability

c (A value investor focuses on share price in anticipation of a market correction and improving company fundamentals. Therefore, such an investor tends to select a stock featuring lower price-to-earnings and price-to-book value ratios. A growth investor focuses on high earnings-per-share, growth, and high profitability.)

A customer who follows a strict dollar cost averaging program to acquire shares in a diversified common stock mutual fund should achieve A) significant reduction of market risk due to enhanced diversification B) reasonable assurance against loss of principal, presuming the customer dollar cost averages over an extended period C) lower average cost to acquire fund shares relative to the fund's average price over the buying period D) allocation among various funds within a single investment company's family of funds

c (By investing a constant amount of dollars at regular intervals, the investor buys fewer shares when the fund's price rises and more shares when the share price drops, thereby lowering the average cost.)

A 45-year-old employment counselor has a Keogh plan for himself and 3 full-time employees who have been working for him for the past 4 years. If he earns $150,000 this year and contributes the maximum amount allowed to his Keogh plan, how much may he invest in an IRA? A) He may not have an IRA. B) He may have an IRA but may not make a contribution for this year. C) He may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less. D) He may invest any amount up to 100% of his earned income.

c (Regardless of how much is invested in a Keogh plan, an investor may still invest in an IRA if he has earned income. The maximum contribution to an IRA is 100% of earned income or the maximum allowable limit, whichever is less. In this individual's case, however, the contribution would probably be nondeductible.)

Which of the following bond strategies would be considered passive? A) Bullet B) Laddering C) Buy and hold D) Barbell

c (Regardless of the investment, buy and hold is always a passive strategy. All of the others involve some degree of periodic activity on behalf of the investor.)

Which of the following indices or averages is based on the prices of only 65 stocks (30 industrial, 20 transportation, and 15 utility)? A) Value Line B) S&P Composite C) Dow Jones Composite Average D) Wilshire 5,000

c (The most widely quoted and oldest measures of changes in stock prices are the Dow Jones averages. They are also the smallest in terms of the number of stocks included in the averages with only 65 stocks.)

When Felicity died, she left her estate, including her IRA, to her daughter, Courtney. Because of her financial circumstances, Courtney decided to abjure the inheritance. This would lead to her A) becoming the executrix of the estate B) contesting the estate C) disclaiming the IRA D) accepting the estate

c (When one wishes to refuse the receipt of an IRA, the procedure is known as disclaiming the IRA.)

An investor wishes to use funds in his IRA to purchase a condominium for personal use. Under current regulations, A) real estate, like life insurance, cannot be purchased in an IRA. B) this would not be a prohibited transaction unless the investor personally used the property more than 14 days per year. C) real estate, such as a personal condominium, would be a permitted investment. D) this would be a prohibited transaction.

d (An IRA may invest in real estate if it is for business purposes only. If done improperly, serious problems with the IRS can result. If it is done as a truly hands-off investment, it is unlikely that there will be an issue. However, the moment the participant derives any personal benefit from the property, it becomes a prohibited transaction. We have not heard of it being tested at this level, but here is how serious this is. Generally, if an IRA owner or his or her beneficiaries engage in a prohibited transaction in connection with an IRA account at any time during the year, the account stops being an IRA as of the first day of that year. The effect of this is the account is treated as distributing all its assets to the IRA owner at their fair market values on the first day of the year. If the total of those values is more than the basis in the IRA (usually zero if the contributions were tax deductible), the IRA owner will have a taxable gain that is includible in his or her ordinary income.)

An investment adviser who believes that we are in the early recovery portion of the business cycle would most likely recommend A) defensive stocks. B) long-term bonds. C) value stocks. D) cyclical stocks.

d (Cyclical stocks have a high correlation to the swings in the economy as reflected in the business cycle. The ideal time to purchase stocks that are affected by economic cycles is right as the recovery begins from a trough (or recession). Defensive stocks are good to hold when the economy is in the early contraction period of the cycle. During a recovery, interest rates usually rise and that is not good for holders of long-term bonds because as interest rates go up, bond prices fall. Value stocks might also perform well, but many studies have shown that they offer better relative performance in periods of contraction rather than expansion.)

A self-employed CPA has earned $38,000 from his practice; he also earned $2,300 interest on his savings. What is the basis for his deposit into his defined contribution Keogh (HR-10) account this year? A) $40,300 B) $35,700 C) $2,300 D) $38,000

d (Only earned income may be included in determining the income eligible for Keogh contributions. Dividends and interest are classed as portfolio income and are not included.)

All of the following statements concerning the EMH are correct except A) the efficient market hypothesis states that securities markets are efficient, with the prices of securities reflecting their current economic value. B) an efficient market is one in which the prices of securities quickly and fully reflect all currently-available security market information. C) the weak form of market efficiency involves market data, whereas the semi-strong and strong form involve the assimilation of all public and private information, respectively. D) investors usually react slowly to new and random information pertaining to all currently-available security market information.

d (The efficient market hypothesis (EMH) posits that an efficient market is one in which the prices of securities quickly and fully reflect all currently-available security market information. Therefore, there is little chance that an investor can "beat the market". The weak form uses historical market data, such as price and volume movements; semi-strong involves financial information which is publicly available; strong involves inside information. But, according to adherents, none of that really helps.)