Series 65 Questions 5

Under the Uniform Securities Act, which of the following are securities? I) Stock option contract II) Treasury stock II) Keogh plan A) I and II B) II and III C) I, II, and III D) I and III

A A stock option contract and treasury stock are securities under the USA. A Keogh plan is a vehicle for an investment, but it is not a security in and of itself. LO 8.a

Which of the following persons are excluded from the definition of, or exempt from registration as, a broker-dealer under the Uniform Securities Act? I) A broker-dealer with no office in the state that effects trades exclusively with other broker-dealers in the state II) A trust company with an office in the state that deals with the general public III) A broker-dealer with no office in the state that has no more than five retail clients resident in the state within the past year IV) A broker-dealer with no office in the state that effects securities trades exclusively with trust companies or other broker-dealers A) I, II, and IV B) I, II, III, and IV C) III and IV D) I and II

A As long as a broker-dealer does not have an office in the state, it is possible to qualify for exclusion from the definition. The primary requirement for the exclusion is that the broker-dealer confine trading to financial institutions or other broker-dealers. Unlike with investment advisers, there is no de minimis exemption for broker-dealers. Trust companies are excluded from the definition of broker-dealer. LO 11.b

As interest rates rise, the opportunity cost of holding cash A) increases. B) decreases. C) equals the risk-free rate. D) remains the same.

A At higher interest rates, the opportunity cost of holding cash increases, and firms and households will desire to hold less cash and more interest-bearing financial assets. LO 19.c

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

A Because an exchange-traded fund is purchased and sold on an exchange, the rules generally applying to all exchange products, such as purchasing them on margin, would apply. Leveraged funds use derivative products to generate the leverage, not bank borrowing. When it comes to suitability, they are for aggressive investors, but there is no requirement that they meet the accredited investor standard. However, the very nature of the product is that it is designed for short-term trading, not long-term trading. LO 5.c

Under the Uniform Securities Act, an individual does not meet the definition of an agent if he is employed by a broker-dealer and only: A) serves as a partner, officer, or director of the firm with full-time responsibilities in back office management. B) represents the broker-dealer in effecting transactions between the issuer and underwriter. C) trades for the firm's market-making account. D) accepts unsolicited orders.

A Broker-dealer employees who have only administrative or operational duties are not defined as agents under the USA. Any type of sales activity by an employee of a broker-dealer would require that individual to be registered as an agent. LO 11.d

A client calls her agent and very excitedly says, "I just received a confirmation for my recent purchase and notice that you didn't charge me any commission; thank you so much". What would be the appropriate response? A) If the confirmation states that the broker-dealer acted in a principal capacity, we charged you a markup instead of a commission. B) You probably misread the confirmation and didn't notice the commission. C) There must be an error and I'll make sure you receive a new confirmation with the proper commission charge. D) We like to do little favors periodically for our clients to keep them happy.

A Broker-dealers can act in the capacity of a broker (charging commissions) or a dealer (charging a markup or markdown). That capacity is always indicated on the confirmation, so the first thing to do is have the client look for the indication (firms use different methods to make the disclosure) of capacity. It will most likely show "principal" and that is why there is no commission; there is a markup on the purchase. LO 23.e

All of the following actions must be completed prior to customers entering their first option trade except A) receipt of a completed options agreement B) completion of the new account form C) approval by a designated options supervisor D) delivery of the options disclosure document (ODD)

A Customers do not have to complete (sign) the options agreement prior to entering an order; under current rules, the agreement must be signed and returned by the customer within 15 days of account approval. LO 16.a

An analyst would use the discounted cash flow method in an attempt to find A) the fair value of a security. B) the cash flow from operations. C) the current rate of return of a security. D) the current market price of a security.

A DCF uses the present value of future cash flows, based on a specified discount (interest) rate, to evaluate the price that a security should be selling for in the market. If the current market price of the security is less than this value, it has a positive net present value (NPV) and should be a good investment. The opposite is true if there is a negative NPV (the market price is higher than that computed under the DCF method). LO 20.c

A client is considering the purchase of American depositary receipts (ADRs). She is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle? A) They are not subject to exchange rate, or currency, risk. B) ADRs are traded on exchanges and the OTC markets. C) Information regarding the foreign company is easily attainable. D) ADRs are denominated and pay dividends in U.S. dollars

A Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk. In order to trade in the U.S. markets, information about the foreign company must be available to investors. ADRs representing the best-known companies typically trade on the NYSE or the Nasdaq stock market while lesser companies trade OTC. LO 1.f

The Administrator may require which of the following from a federal covered adviser? I) Copy of the IA's Form ADV Part 2A II) Filing of the IA's advertising in the state III) A copy of the IA's Form ADV Part 1B IV) A filing fee A) I and IV B) I, II, III, and IV C) I and II D) II and III

A Even though Administrators have limited jurisdiction over federal covered advisers, they can require filing of a copy of the information filed by that IA with the SEC (Form ADV), as well as a filing fee. However, Form ADV Part 1B is filed only by state-registered investment advisers. Federal covered IAs do not have to file advertising with the states. LO 9.e

An agent lives in Montana and is registered in Montana and Idaho. His broker-dealer is registered in every state west of the Mississippi River. The agent's client, who lives in Montana, decides to enroll in a 1-year resident MBA program in Philadelphia, Pennsylvania. During the 1-year period, when the client is in Philadelphia, the agent may A) conduct business with the client as usual. B) not conduct any business with the client. C) not deal with the client until the broker-dealer registers in Pennsylvania. D) only accept unsolicited orders.

A Even though the college program is called a resident program, that does not mean that the client has changed his state of residence. Although neither the firm nor the agent is registered in Pennsylvania, the agent may continue to conduct business with the client. This is because both the agent and his firm are properly registered in the client's state of permanent residence. Think about if you went to an out-of-state university after high school. Did you have to change your driver's license to that state's? Probably not. It' s the same concept here. LO 11.d

Which of the following would be included in the Uniform Securities Act's definition of sale? A) Transfers, for value, of unit trusts to a nontaxable organization B) Conveying, for value, precious metals to a jewelry distributor C) Donation of interests in rights, warrants, or options on a nonexempt security D) Sale of a large fixed annuity contract to a taxable institution

A For a security to be sold, it must be exchanged for value. Fixed annuities and precious metals are not securities, so no security sale took place. Donating a security does not qualify as a sale. LO 12.a

On last year's annual updating amendment filed with the SEC, Alpha Investment Advisers indicated that it had more than $140 million in assets under management. Due to a reduction in the size of the firm, this year's annual updating amendment shows that assets under management have fallen to the $75 million level and are expected to remain there. Which of the following actions is required for Alpha? A) Withdraw from SEC registration within 180 days of the adviser's fiscal year-end. B) Do nothing and continue as a federal covered adviser. C) Withdraw from SEC registration within 90 days of the adviser's fiscal year-end. D) Withdraw from SEC registration immediately.

A If an adviser reports on its annual updating amendment that it has less than $90 million under management and it is not otherwise eligible to register with the SEC, it must withdraw from SEC registration within 180 days of the adviser's fiscal year-end by filing Form ADV-W. The adviser could consult the securities departments of states in which it maintains offices or conducts business to determine the appropriate state registration requirements. LO 9.d

An investment advisory contract is considered assigned if an adviser formed as A) a partnership with two partners and adds five partners. B) a corporation with two officers and adds five officers. C) a corporation with five officers and adds two officers. D) a partnership with five partners and adds two partners.

A If an advisory firm is formed as a partnership and there is a change in the majority of partners, this is considered to be an involuntary assignment to the new partnership. In this case, client approval of the contract assignment (not the addition of the partners) is required. This rule applies to partnerships. In the case of a corporation, a change in the ownership of a majority of the stock (or a pledge of a majority interest in the stock) would be considered an assignment. LO 13.e

It would be least likely for dividends paid on which of the following investments to meet the requirements to be considered qualified? A) Bond mutual funds B) Common stock C) Preferred stock D) Equity mutual funds

A Qualified dividends are those eligible for reduced income tax rates. Those rates can be as low as 0% and as high as 23.8%, with most falling within the 15% to 20% bracket. We don't expect the exam to test on the requirements for a dividend to be considered qualified or how you reach that 23.8% rate. Dividends on bond funds and money market funds are not qualified because the majority of those dividends represent interest earned by the fund and the tax break does not apply to earnings from interest.

Mary Whiting has been a customer of yours for several years. Now that her oldest child is out of the house and living on his own, she wants to open a joint account with her son. If the account is opened tenants in common and Mary contributes 75% of the funding, it is correct to say that A) both Mary and her child have an undivided interest in the account. B) if Mary predeceases her child, her balance in the account passes to the child. C) Mary decides which of the securities in the account are part of her 75% interest in the account. D) when a security held in the account is sold, 75% of any cash disbursement is payable to Mary with the other 25% payable to the child.

A In a TIC account, each co-owner has an undivided interest in the portfolio. That means the assets are not allocated specifically to each owner; instead, each has a proportionate share of the entire portfolio. Anytime there is a sale of securities in a joint account, any cash disbursement must be in the names of all of the account owners. In a TIC account, the death of a co-tenant results in that individual's share passing to their estate, not to the survivor. LO 16.a

A U.S. citizen purchases a bond issued by the government of Sweden. The interest payments received are taxed at which of the following levels? I) Federal II) State III) Local A) I, II, and III B) II and III C) II only D) I only

A Interest on foreign bonds is taxed in the United States by federal, state, and local governments. LO 15.b

Under the Investment Company Act of 1940, the reporting requirements investment companies must comply with include which of these? I) Filing a report with the SEC annually, or more frequently if required II) Sending semiannual reports to shareholders III) Notifying shareholders of changes in the portfolio as those changes occur A) I and II B) I, II, and III C) II and III D) I and III

A Investment companies must file reports with the SEC at least annually (more frequently if required) and send at least semiannual reports to shareholders. They are not required to notify shareholders of changes in the portfolio as they occur. LO 3.a

A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclosing which of the following fees? A) Account closing fees B) Commissions C) Markups and markdowns D) Advisory fees

A It is very common for a broker-dealer to charge a fee for processing the closing of an account. There are three primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers. LO 13.b

Which of the following is not related to the variability of a portfolio's returns? A) Total return B) Security selection C) Market timing D) Asset allocation

A Let's analyze the question. A portfolio's future returns can vary, that is, fluctuate based on investment decisions made by the investor or adviser. The way the portfolio assets are allocated between different classes of securities will have an impact on the returns. The same is true with the timing of purchases or sales (buying stock when bad economic news is announced is probably not a good time). Finally, the specific securities selected will certainly impact the returns of the portfolio. That leaves total return. Total return is a measurement of the investor's past return on the portfolio. It measures what has happened and has no effect on future variability. LO 22.a

A state-registered investment adviser organized as a corporation is required to preserve a copy of its articles of incorporation A) for three years after the termination of the enterprise. B) where they are easily accessible for two years in the firm's principal office. C) for three years after the end of the fiscal year in which the most recent entry was made. D) for five years after the end of the fiscal year in which the most recent entry was made.

A NASAA's Model Rule on recordkeeping requires partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor to be maintained in the principal office of the investment adviser and preserved until at least three years after termination of the enterprise. LO 9.g

Your clients, a married couple, are trying to decide whether to open an account as joint tenants with right of survivorship or tenants by the entirety. You might point out to them that one of the differences to consider is that: A) a JBE account requires the consent of both parties to make a trade. B) any 2 people can open a JBE account, while JTWROS accounts are limited to married couples. C) only the JBE account avoids probate upon the death of the first tenant. D) a JTWROS account requires the consent of both parties to make a trade.

A One of the unique characteristics of the joint by the entirety (JBE) account is that the consent of the other party is necessary in order for one of the parties to enter a trade. With a JTWROS account, either party can enter trades independently. Both JTWROS and JBE avoid probate and the JBE is limited to married couples only. LO 16.a

Rule 144 applies to the sale of all of the following except A) registered securities by a nonaffiliated shareholder of the issuer. B) registered securities by an officer of the issuer. C) unregistered securities by an officer of the issuer. D) unregistered securities by a nonaffiliated shareholder of the issuer.

A Rule 144 applies to the sale of unregistered securities owned by affiliates or nonaffiliates and the sale of control stock. It does not apply to the sale of registered securities by nonaffiliated persons. LO 1.e

One major difference between the customer identification program (CIP) and the new account opening rules of the regulatory bodies is that A) the CIP requires date of birth while the regulators only require proof of legal age. B) the CIP requires a statement of the customer's goals while the regulators only require current financial information. C) the CIP only applies to individuals while the rules of the regulators apply to retail and institutional accounts. D) the CIP requires a residence address for individuals while the regulatory bodies will accept a PO Box.

A The CIP requires the actual date of birth, not just proof of legal age. The CIP has no interest in the goals of the investor, just the identity. In both cases, a PO Box may only be used after supplying a physical residence address and both the CIP and the rules of the regulators apply to retail and institutional accounts. LO 16.a

One measure of a corporation's liquidation value is its book value per share. When performing this computation, which of the following must be taken into consideration? I) Goodwill II) Long-term debt III) Retained earnings IV) Par value of the preferred stock A) I, II, III, and IV B) II, III, and IV C) II and III D) I and II

A The computation of book value per share is basically net tangible worth per share of common stock. Included in the net worth are all assets and liabilities (such as long-term debt), as well as the stockholders equity (par value of the preferred stock and par + paid in surplus of the common stock and retained earnings). Subtracted from this to get tangible book value would be the par value of the preferred stock and the value of intangible assets such as goodwill. LO 20.h

The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is A) the net change in the cash position of the firm for the reporting period. B) reported as cash income on the income statement. C) reported as a separate line item on the balance sheet. D) an integral part of the footnotes to the balance sheet required by generally accepted accounting principles.

A The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is the net change in the cash position of the firm for the reporting period. The sum total, or the net change in cash, is not reported on either the balance sheet or the income statement. It is the sum total of the entries on the statement of cash flows, which is a separate financial statement. LO 7.d

An IAR is viewing the balance sheet of a corporation. Included in the computation of the company's working capital are all of the following except A) total par value of the convertible bonds it has issued B) cash C) accounts receivable D) marketable securities of other companies

A The working capital of a corporation is equal to its current assets minus its current liabilities (a current liability is payable within 12 months). Because all bonds, convertible or not, issued by the corporation are long-term liabilities, they are not included in the working capital computation. Accounts receivable, marketable securities, and cash are short-term assets included in the calculation of working capital. LO 20.h

It is often said that the backbone of the over-the-counter market is the market maker. A good description of a market maker would be A) a broker-dealer who stands ready to buy or sell at least the standard unit of a specific stock traded in the over-the-counter market B) an investment banker who participates in a firm underwriting C) a broker-dealer who stands ready to buy or sell at least the standard unit of a specific stock traded on a listed exchange D) a member of FINRA

A This is the basic definition of a market maker. Specialists perform essentially the same service on the listed exchanges. Although all OTC market makers are members of FINRA, being a FINRA member does not define a broker-dealer as a market maker. LO 23.c

Which of the following documents must an existing customer sign to establish a discretionary account? A) Trading authorization B) Customer's agreement C) Options agreement D) New account application

A To establish a discretionary account, the agent must receive written authorization from the customer(s) in whose name(s) the account has been established. An existing customer has already completed the new account application and signed any required customer agreements. LO 14.f

A corporation has issued a 4% $60 par convertible stock with a conversion price of $20. With the preferred stock selling at $66 per share, an investor holding 100 shares of this stock will benefit by converting if the price of the common stock is A) above $22.00 per share. B) above $20.00 per share. C) above $18.20 per share. D) below $22.00 per share.

A With a conversion price of $20 and a par value of $60, this preferred stock is convertible into three shares of the company's common stock. We divide the current price of the preferred ($66) by the three shares to arrive at the parity price of $22. If the common stock is selling for more than the parity price, the investor can benefit by converting and selling the stock in the marketplace. LO 2.d

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) a specialist B) a market maker C) an investment company D) a secondary market

B 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). LO 23.d

Greater Wealth Managers (GWM) is an investment adviser registered in States A, B, C, and D. An individual was recently hired to solicit new advisory accounts for the firm. This person will not be engaged in giving advice of any kind, and all activities will be closely supervised by senior personnel of the firm. Under Section 201 of the Uniform Securities Act, A) registration as an investment adviser representative and as an agent is required for this individual. B) registration as an investment adviser representative is required for this individual. C) no registration is required, because this individual is not rendering investment advice and is being closely supervised. D) no registration is required, because this individual is not rendering investment advice.

B Because GWM is registered on the state level, it comes under the provisions of the Uniform Securities Act. Under the USA, the definition of investment adviser representative (IAR) includes, among others, those who solicit for the services of the investment adviser. Therefore, these individuals must register as IARs. LO 10.a

All of the following are considered to be equity securities EXCEPT A) exchange-traded funds B) equity-linked notes C) warrants D) unit investment trusts

B Even though the term "equity" appears in the name, equity-linked notes (ELNs) or exchange-traded notes (ETNs) are technically debt securities. LO 5.c

A customer wishes to open a new account but refuses to provide suitability information. Under NASAA rules, the agent A) may open the account but must limit recommendations to U.S. government securities. B) may open the account but may not make any recommendations. C) must not open the account. D) may open the account but must limit recommendations to investment-grade securities.

B If a customer fails to provide suitability information, the account may be opened, but the member may not make any recommendations; the only trades permitted are those that are unsolicited. LO 14.i

An employee is offered a nonqualified stock option with an exercise price of $20 per share. If the option is exercised when the current market value of the stock is $30, the employee A) has a capital gain of $10 per share. B) is taxed on $10 per share as if it were salary. C) is taxed on $30 per share as if it were salary. D) is taxed on $20 per share as if it were salary.

B In the case of NSOs, the difference between the exercise (or strike) price and the current market value is considered salary to the employee. LO 1.d

Which of the following securities is the least suitable recommendation for a qualified money purchase plan account? A) A-rated corporate bond B) Investment-grade municipal bond C) Treasury bond D) Large-cap common stock

B Investment-grade municipal bonds bear low yields that are federally tax exempt. Because money in a qualified retirement plan account grows tax deferred regardless of the investment instrument, tax-exempt securities are unsuitable. In addition, when the money is withdrawn, it is taxable as ordinary income, so in effect, tax-free income has been converted into taxable income. Although the interest on Treasury bonds is exempt from state income tax, that rate is invariably considerably less than the federal income tax rate. LO 18.g

To assist broker-dealers with compliance, NASAA prepared a fee disclosure template. Based on the template, all of the following broker-dealer charges would be disclosed except A) account transfer fees. B) brokerage commissions. C) account maintenance fees. D) fees for issuance of stock certificates.

B Not included in the fee disclosure documents are commissions, markups and markdowns, and advisory fees. LO 13.b

An individual is currently registered as an agent with a broker-dealer. If the agent would like to offer wrap fee programs through the firm, all of the following statements are correct except A) the agent would now come under a greater fiduciary responsibility. B) the agent would be defined as an investment adviser. C) the agent would be defined as an investment adviser representative. D) A broker-dealer acting as a principal in a trade would A) must disclose to clients the amount of earnings he made on principal transactions in excess of the amount he would have made had he charged a commission B) add a markup to the bid price when offering shares to a client C) add a markup to the offering price when selling shares to a client D) must always disclose the amount of markup on a client's confirmation statementthe broker-dealer would have to be registered as an investment adviser.

B Once the broker-dealer decides to offer wrap fee programs, it is no longer excluded from the definition of an investment adviser and would be required to register on either the state or federal level. The agent would now have to register as an IAR of the firm and, as such, would carry the additional fiduciary responsibility incurred in the advisory business. LO 10.a

Under the Uniform Securities Act, the Administrator has the power to do all of the following except A) issue a subpoena for the production of documents. B) cite a witness in contempt for refusing to appear at a hearing. C) investigate a complaint against a broker-dealer with no office in his state. D) issue a cease and desist order without a prior hearing.

B Only a court can cite an individual as being in contempt of court. As long as the broker-dealer is doing business in the state, the Administrator can investigate complaints against the firm. A cease and desist order may be issued with or without a prior hearing. LO 12.b

An individual who has passed the NASAA examination for registration as an investment adviser representative may begin soliciting advisory clients A) immediately. B) when informed by the investment adviser that the representative's registration is effective. C) within 48 hours. D) when informed by the Administrator that the representative's registration is effective.

B Passing the exams does not automatically give one an effective investment adviser representative's license. Notice is received by the investment adviser from the appropriate state and/or federal authorities, and then, in accordance with that firm's procedures, advisory activity may start. The Administrator does not have direct contact with the individual. LO 10.c

Myla is retiring in two years and will need income. Which of the following mutual fund types would most likely be the least desirable for her? A) A bond fund B) A special situation fund C) A balanced fund D) A growth and income fund

B Special situation mutual funds are risky and would not usually be considered suitable for a potential retiree. First of all, the nature of those funds is such that they generally do not produce regular income (one of Myla's stated objectives). Secondly, with a relatively short time horizon, recommended investments should be those that tend to have greater price stability. LO 17.d

Standardized equity options are issued by A) the issuer of the underlying security. B) the Options Clearing Corporation (OCC). C) the Chicago Board Options Exchange (CBOE). D) all of these.

B Standardized equity options are issued and guaranteed by the OCC. They are traded on the CBOE and other exchanges. The issuer of the underlying stock is not involved in any way. LO 4.a

Traders in stock index options are exposed to A) call risk. B) systematic risk. C) redemption risk. D) credit risk.

B Systematic risk is the possibility that an overall decline in the market will cause a loss in an investment. With index options, investors are exposed to the risk that market movement will cause the option positions to move adversely. LO 4.e

All of the following statements regarding technical analysis are correct except A) technical analysts use terms such as trendline, support, and resistance in analyzing stocks. B) technical analysts rely heavily on financial ratios in their analysis of stocks. C) technical analysts rely on charts to predict the future prices of stocks. D) technical analysts attempt to predict the future movement of stock prices based on past trends.

B Technical analysts do not rely on financial ratios in their analysis of stocks. Instead, they rely on charts of past price history and volume to predict future price movements. It is fundamental analysis where financial ratios are important. LO 21.d

The Uniform Securities Act defines all of the following as securities except A) fixed-premium variable life insurance policies. B) term life insurance. C) common stock. D) unlisted options.

B Term life insurance is an insurance contract, not a security. Remember the short list of those items that are not securities. LO 8.a

A customer has contributed $1,000 a year for 10 years to his tax-deferred nonqualified variable annuity. The value of the separate account is now $30,000. If the customer takes a withdrawal of $10,000, what are the tax consequences? A) Any tax due is deferred. B) The entire $10,000 is taxable as ordinary income. C) Two-thirds of the withdrawal is taxable as ordinary income. D) There is no tax because the withdrawal is considered return of capital.

B The $30,000 contract value represents $10,000 ($1,000 per year for 10 years) of contributions and $20,000 of earnings. When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or LIFO). Therefore, ordinary income taxes will apply to the entire $10,000. In addition, if the customer is not at least 59½, there will be a tax penalty of an additional 10%.

One of the major changes incorporated into the Uniform Prudent Investors Act of 1994 was the ability of a trustee to delegate certain responsibilities to qualified third parties. However, a fiduciary would not be able to delegate A) which investment style to be used for managing the portfolio B) the amount and timing of distributions C) the selection of different managers for different asset classes D) the ability to decide on the specific securities to be acquired

B The UPIA allows a fiduciary to delegate the investment decisions to a qualified third party. Determining distribution amounts and timing is not part of portfolio management and can only be done by the fiduciary (trustee). LO 18.g

Under the Uniform Securities Act, an offer and sale does not exist if it is which of these? I) The result of a class vote by stockholders regarding a merger or consolidation II) A bona fide pledge or loan III) An act incident to a judicially approved reorganization in which a security is issued in exchange for one or more outstanding shares IV) A gift of nonassessable securities A) II and IV B) I, II, III, and IV C) I and II D) I, II, and III

B The Uniform Securities Act specifically excludes all four choices from the definitions of an offer and a sale. LO 12.a

A manufacturer of soybean oil is concerned that the price of soybeans will increase over the next six months. The best strategy to employ would probably be A) a neutral hedge. B) a long hedge. C) a trimmed hedge. D) a short hedge.

B The concern is that the price will go up. Just as with options, when we are concerned that the price of something will go up, we go long that item. With options, it would be a long call; with futures, it is simply hedging by going long (buying) the soybean futures. The soybean farmer who would be concerned about a decline in the price would go short soybean futures. LO 4.d

Which of the following statements regarding a traditional IRA is true? A) Because contributions to a traditional IRA are not currently tax deductible, all qualifying withdrawals are tax free. B) The income and capital gains earned in the account are tax deferred until the funds are withdrawn. C) Distributions before age of 59½ are subject to a 10% penalty in lieu of income taxes. D) Distributions without penalty may begin after the age of 59½ and must begin by April 1 of the year before an individual turns 73.

B The income and capital gains earned in the account are tax deferred until the funds are withdrawn. It is the Roth IRA that can have tax-free withdrawals. Based on the SECURE Act 2.0, distributions must begin by April 1 of the year after an individual turns 73, not before. If a distribution is taken before reaching age 59 1/2, it is subject to income tax plus a 10% penalty, not instead of (in lieu of) the taxes. If the question does not indicate an exception to the penalty, such as death or disability, there isn't one. LO 18.b

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 A) suitability requirements. B) fees and expenses. C) liquidity. D) regulatory oversight.

B The internal operating costs of a REIT, such as management fees and administrative expenses, have nothing to do with where units of the REIT are traded. One of the major risks inherent in an unlisted REIT is lack of liquidity. As a result, there is a greater stringency when it comes to suitability, and this leads to stronger oversight by the regulators. LO 3.i

Which of the following municipal bonds would be most subject to interest rate risk? A) 7s '28 on a 7½% basis B) 8s '40 on a 7.8% basis C) 7.5s '29 on a 7.2% basis D) 7.8s '35 on a 7.4% basis

B The longer the duration of a bond, the greater the interest rate risk. The 8s '40 on a 7.8% basis, (YTM), is a bond with a 2040 maturity, which is the longest maturity (without a substantially higher coupon) of the choices available. Remember, duration is a function of coupon and length to maturity. If the coupons are relatively close, the longest maturity is the one with the longest duration (and greatest sensitivity to changes in interest rates). There is a giveaway to this answer if you look carefully. The greater the risk, the greater the reward and the 8s '40 have the highest yield, indicating that investors are demanding a higher return for the greater risk. LO 20.b

Gail's minimum required distribution this year from her IRA is $5,000. If she takes $8,000, the penalty will be A) $1,500 B) $0 C) $2,000 D) $2,500

B There is no penalty if a participant withdraws more than the required minimum distribution. LO 18.b

In general, the most passive investment style for a portfolio would be A) buy and hold. B) value. C) indexing. D) contrarian.

B This is a close call between indexing and buy and hold. We believe that the NASAA philosophy on this would be that buy and hold does require some management after the portfolio is set up. That is, some companies go out of business or are merged into other entities or go private and that requires making new decisions. The same can happen with the companies in an index, but the investor doesn't have to make the changes. When you invest in an index, it is sort of like (with credit to Ron Popeil) "set it and forget it". Clearly, the other two choices are not passive in the same way. LO 21.e

The Wrights live in Texas, where Maria Wright has had an extremely successful cattle business for a number of years. As a very generous person, how much money can Maria give to her spouse, a Canadian citizen, in 2022 without incurring gift tax consequences? A) Unlimited B) A limited amount because her spouse is not a U.S. citizen C) $100,000 D) $16,000

B Under current tax regulations, there is a limit to the amount of a gift that may be made to a noncitizen spouse. For 2022, that limit is $164,000, (the amount is never tested). LO 16.g

Kapco Investment Advisers currently has $18 million in assets under management and has offices in Colorado and Utah. Kapco's only clients in Utah are two insurance companies domiciled in that state. Kapco has no office in Washington but does service the accounts of three middle-class individuals. Kapco recently opened an advisory account for a pension plan for a corporation located in Montana. Under the Uniform Securities Act, Kapco would have to register with the Administrator in which states? I) Colorado II) Montana III) Utah IV) Washington A) I and IV B) I and III C) III and IV D) I and II

B With less than $100 million in assets under management and no investment company clients, Kapco cannot qualify as a federal covered adviser. Therefore, the firm must register in each state in which it maintains an office, regardless of the nature of its clientele in that state. Registration would not be required in Washington because there is no office and Kapco qualifies for the de minimis exemption. Kapco would not be required to register in Montana because there is no office and its only client is an institution. LO 9.d

Delta Advisers is registered in Alabama, Mississippi, and Louisiana. Billy Joe works for Delta Advisers rendering investment advice to individual clients. He works out of Delta's Jackson, MS office and has 3 clients in Mississippi, 6 clients in Alabama and 4 in Louisiana. Billy's friend, Bobby Ray, works for Biloxi Investments, a federal covered adviser with offices in several cities in Mississippi. Bobby Ray works out of the Tupelo, MS office and has 45 retail clients in Tennessee, 4 in Georgia, and 6 in Alabama. With regards to registration as an IAR, which of the following statements is TRUE? A) Billy Joe and Bobby Ray must register in MS only. B) Billy Joe must register in MS and AL and Bobby Ray must register in MS. C) Billy Joe must register in AL and Bobby Ray must register in MS, TN, and AL. D) Billy Joe must register in MS and AL and Bobby Ray must register in MS, TN, and AL.

B Working for a state registered investment adviser, Billy Joe must register in the state in which he maintains a place of business (MS) and any other state in which his clients exceed the de minimis limit of 5 (AL in this case). Working for a federal covered investment adviser, Bobby Ray needs to only register in those states in which he maintains a place of business, regardless of the number of clients. That means he is only required to register in MS. LO 10.c

Which of the following strategies would be considered most risky in a bull market? A) Writing naked puts B) Writing naked calls C) Buying calls D) Buying a put

B Writing naked calls provides unlimited liability and the most risk. Buying a call would be an attractive strategy in a bull market with risk limited to calls paid. Writing naked puts risks only the difference between the strike price and zero, less any premium received. Buying a put is a bearish strategy with risk limited to the amount paid for the put. LO 4.e

In general, from the choices given, the type of security offering the greatest degree of safety to an investor is A) preferred stock. B) a mortgage bond. C) a debenture. D) common stock.

B mortgage bonds are secured and debentures are unsecured Debt securities, because they are an obligation of the issuer, are generally considered safer than equity securities. Secured debt is safer than unsecured debt. The only one of these debt obligations with pledged assets as security for the loan is the mortgage bond. Debentures are unsecured corporate debt obligations. LO 2.g

On a scheduled premium variable life insurance policy, the insured is guaranteed: A) nothing. B) that premiums may be reduced due to better than projected performance in the separate account. C) at least 100% of the stated death benefit. D) at least 100% of the stated cash value.

C Scheduled, or fixed, premium variable life insurance has a minimum guaranteed death benefit equal to 100% of the original face amount. There are no guarantees to the cash value and, as a fixed premium policy, no changes are made as a result of performance of the separate account. LO 24.f

It is generally accepted that agents and IARs will give greater consideration to which of the following when making recommendations to their senior clients? I) Age II) Life stage III). Retirement savings IV) Tax status A) I and II B) III and IV C) II and III D) I and IV

C All of these are important suitability considerations for all customers. But when it comes to seniors, it is felt that life stage (including whether the customer is employed, retired, or nearing retirement) and current retirement savings relate particularly to seniors. LO 17.c

All the following securities are issued at a discount except A) zero-coupon bonds. B) commercial paper. C) CDs. D) Treasury bills.

C CDs are interest-bearing debt instruments issued by banks at their face value. All of the others are issued at a discount. In truth, only about 85% of commercial paper is, but that's good enough for NASAA. LO 2.k

Which of the following statements regarding Coverdell Education Savings Accounts are true? I) After-tax contributions of up to an indexed maximum per student per year are allowed. II) Unless a special needs beneficiary, contributions may not be made for students past their 18th birthday. III) If the account value is not used for educational purposes, it can be rolled over into a traditional IRA. IV) Distributions are always taxable. A) III and IV B) II and IV C) I and II D) I and III

C Coverdell Education Savings Accounts allow after-tax contributions of up to $2,000 per student, per year, for children until their 18th birthday. If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty, or rolled over into a different Coverdell ESA for another family member. When the beneficiary is a special needs beneficiary (an individual who because of a physical, mental, or emotional condition requires additional time to complete their education), there are no age restrictions. Furthermore, unless something in the question refers to this beneficiary, always use the age 18 and 30 restrictions. LO 18.h

The current yield of a callable bond selling at a premium is calculated A) as a percentage of its par value. B) to its maturity date. C) as a percentage of its market value. D) as a percentage of its call price.

C Current yield for any security is always computed on the basis of the current market value. LO 2.e

Which of these industries would be considered defensive in the face of a recession? A) Trucking B) Automobile manufacturing C) Food producer D) Real estate construction

C Defensive industries are least affected by normal business cycles. Companies in defensive industries generally produce nondurable consumer goods, such as food, pharmaceuticals, tobacco, and energy. Public consumption of such goods remains fairly steady throughout the business cycle. During recessions and bear markets, stocks in defensive industries generally decline less than stocks in other industries. LO 6.a

A client is considering the purchase of American depositary receipts (ADRs). The client is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle? A) Information regarding the foreign company is more easily attainable than if directly purchased. B) ADRs are both liquid and marketable. C) They are not subject to exchange rate, or currency, risk. D) ADRs are denominated and pay dividends in U.S. dollars.

C Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk. The bank furnishes information about the underlying security in English rather than the foreign language and ADRs are traded like any domestic stock. LO 1.f

An investor purchased stock for $50 per share at the beginning of the year. In December, the investor liquidated his stock for $55 per share, while also receiving dividends of $2 per share during the year. Assuming an inflation rate of 3%, what is the investor's real rate of return? A) 14% B) 4% C) 11% D) 10%

C Given the fact the client liquidated his shares at a price of $55, we can conclude that he attained a 10% ($5 profit ÷ $50 initial investment) return based on capital appreciation of the stock. He also received dividends of $2 per share giving him an additional return of 4% ($2 ÷ $50). By adding these 2 percentages together, we can conclude that his total return is 14%, less an inflation rate of 3%, which would give a real rate of return of 11%. LO 22.a

Currently, a company issues 5% Aaa/AAA debentures at par. Two years ago, the corporation issued 4% AAA rated debentures at par. Which of the following statements regarding the outstanding 4% issue are true? I) The dollar price per bond will be higher than par. II) The dollar price per bond will be lower than par. III) The current yield on the issue will be higher than the coupon. IV) The current yield on the issue will be lower than the coupon. A) I and III B) I and IV C) II and III D) II and IV

C Interest rates in general have risen since the issuance of the 4% bonds, so the bond's price will be discounted to produce a higher current yield on the bonds. Remember that as interest rates go up, the price of outstanding debt securities goes down. LO 2.e

Mark's company, which is located in Oregon, makes unfinished wood furniture. His company sells this furniture directly to the public from a large warehouse. Theresa's company, which is located in southern Georgia, grows cotton for t-shirt manufacturers. Which of the following statements correctly identify hedging strategies for Mark and Theresa? I) Mark should buy lumber futures. II) Theresa should sell cotton futures. III) Mark should sell lumber futures. IV) Theresa should buy cotton futures. A) I and IV B) III and IV C) I and II D) II and III

C Mark is short lumber because he needs lumber to produce his products. A hedge position for Mark would be to go long lumber futures—that is, to purchase lumber futures. Theresa is long cotton because she owns cotton for manufacturing purposes. A hedge position for Theresa is to go short—that is, to sell cotton futures. LO 4.d

A TIPS bond with a par value of $1,000 has a coupon rate of 6%. During Year 1, the inflation rate was 8%. How does this affect the TIPS bond in Year 2? A) The coupon increases to 8%. B) There is no effect until the third year. C) The interest payment will be approximately $65. D) The market price increases to approximately $1,080.

C On a semiannual basis, the principal value of a TIPS bond is increased by that year's inflation rate. A TIPS bond adjusts principal every six months based on the inflation rate. With an annual rate of 8%, the first semiannual adjustment was half of that, or 4%. That increased the principal value to $1,040. The next six months added 4% to the $1,040, bringing the end-of-year value to $1,081.60. The 6% coupon rate will be applied to the new principal, giving us approximately $65 in interest paid during the second year. Technically, we would also have to know the inflation rate for the first six months of Year 2 because that will impact the amount of interest paid on the second semiannual payment date. If that information is not given, just go with it as we have it here. As noted in the solution, the principal value has increased to a bit over $1,081, but the market price is determined by supply and demand and could be higher or lower. LO 22.a

A state-registered investment adviser would be permitted to A) use Part 1 of Form ADV to satisfy the brochure requirement. B) make annual delivery of the brochure within 150 days of the end of the fiscal year. C) use Part 2 of Form ADV to satisfy the brochure requirement. D) deliver the brochure to a new client no later than 48 hours after entering into the contract.

C Part 2, but not Part 1, of Form ADV may be used in lieu of a fancy brochure. The brochure must be delivered to a new client no later than the entry of the contract—the 48 hours is a "prior to" entry requirement in order to avoid having to offer a penalty-free withdrawal. That rule applies only to state-registered investment advisers. The annual delivery must be made within 120 days under both state and federal law, not 150. LO 13.f

An individual has been hired by a person to assist in the selling of securities it is issuing to residents of State A. The individual would be defined as an agent under the Uniform Securities Act if the issuer is A) issuing commercial paper in minimum denominations of $100,000 with a AA rating and a six-month maturity. B) the city of Saskatoon, Saskatchewan (Canada). C) a credit union organized and supervised under the laws of State A. D) a trust company organized and supervised under the laws of State B.

C Please remember the broad definition of person—it does not mean an individual unless preceded by the word natural. When an individual represents the issuer of certain exempt securities in the sale of those securities to the public, that individual is not included in the USA's definition of agent. Credit unions are not in that list, so those individuals are agents and must be registered as such. Individuals representing banks, including savings institutions and trust companies when organized and supervised under the laws of any state (not necessarily the state in which the securities will be sold), are not agents. If the agent represents the issuer of commercial paper meeting the exemption requirements of the USA ($50,000 minimum denomination, top three grades, and maximum nine-month maturity), that individual is not an agent. Finally, representing the United States or Canadian federal government, or any of their political subdivisions, excludes one from the definition of agent. LO 11.d

The Sharpe ratio measures a stock's A) excess return earned compared to its systematic risk. B) return earned compared to its total risk. C) excess return earned compared to its total risk. D) excess return earned compared to its unsystematic risk.

C The Sharpe ratio is defined as a fund's excess return (fund's return exceeding the risk-free rate) divided by the total risk (standard deviation). LO 22.a

Which of the following best describes the death benefit provision of a variable annuity? A) Upon death, the proceeds pass to the beneficiary free of federal income tax. B) Upon death, the beneficiary will receive the benefit as a lump sum. C) The principal amount at death is the greater of the total of premium payments or the current market value. D) If death should occur before age 59½, the 10% early withdrawal penalty does not apply.

C The death benefit insures that the investor will never receive back less than the original amount contributed to the account. Unlike life insurance proceeds, with annuities, anything above the cost basis is taxed as ordinary income. Receiving the benefit as a lump sum is only one of the options available to a beneficiary of a variable annuity death benefit. There are others, such as annuitizing the benefit. Although it is true that the 10% penalty for withdrawal before reaching age 59½ does not apply when the contract owner dies, that does not describe the death benefit. This is a case, as so often happens, when there is a second choice that looks good but doesn't "hit the nail on the head" as does the correct answer. LO 24.b

Risk-adjusted return is calculated by A) dividing the security's price by its beta B) multiplying the return of an investment by its standard deviation C) dividing the security's return in excess of the risk-free rate by its standard deviation D) dividing the price of the stock by the standard deviation

C The return from a security can be adjusted for the risk by dividing the security's return in excess of the risk-free rate by its standard deviation. This is the Sharpe ratio. LO 22.a

The Equity Protective Life Insurance Company (EPLIC) is authorized to do business in State K. As such, which of the following securities would be exempt from registration with the State K Administrator? A) Variable life insurance policies issued by EPLIC B) Fixed index annuities issued by EPLIC C) The issuance of three million shares of the company's $100 par value preferred stock D) Variable annuities issued by EPLIC with a guaranteed income rider

C When an insurance company is authorized to do business (sell its policies) in a state, any securities it issues (such as stock or bonds) are exempt from registration under the Uniform Securities Act. That exemption does not apply to products sold by the insurance company; it applies solely to securities issued for the purpose of raising capital. Aren't fixed index annuities exempt from registration? Well, they are excluded from the definition of a security, and the question specifically asks about securities being exempt. LO 8.c

A broker-dealer acting as a principal in a trade would A) must disclose to clients the amount of earnings he made on principal transactions in excess of the amount he would have made had he charged a commission B) add a markup to the bid price when offering shares to a client C) add a markup to the offering price when selling shares to a client D) must always disclose the amount of markup on a client's confirmation statement

C When selling a security to a public customer, the broker-dealer adds his markup to the ask price (offer price), not the bid price. A broker does not add a markup to the bid price when buying shares from a client; the broker-dealer would mark down the bid price. Unlike commissions, which are always disclosed on the trade confirmations, only for certain categories of securities is the markup or markdown shown. LO 23.d

An individual is deciding between a flexible premium variable life contract and a scheduled premium variable life contract. If she is concerned about maintaining a minimum death benefit for estate liquidity needs, she should choose A) the flexible premium policy because the contract's face amount cannot be less than a predetermined percentage of cash value B) the scheduled premium policy because earnings do not affect the contract's face amount C) the flexible premium policy because earnings of the contract directly affect the face value of the policy and earnings can never be negative D) the scheduled premium policy because the contract is issued with a minimum guaranteed face amount

D A scheduled premium variable life contract is issued with a guaranteed minimum death benefit. If the individual is concerned about having the minimum guarantee, you should recommend the scheduled contract. LO 24.g

According to the Uniform Securities Act, which of the following is an investment adviser representative? I) A clerical employee of the AAA Investment Management Company, an investment advisory firm registered in the state that offers investment portfolio services to the public II) An employee of AAA Investment Management Company who is properly registered under the USA and supervises analysts who provide research to clients III) An employee of a federal covered adviser with an office in the state who offers investment advice to the public IV) An agent of a broker-dealer with strong investment opinions who sells securities only on a commission basis A) I and IV B) III and IV C) I and II D) II and III

D An investment adviser representative means any partner, officer, director, or other individual, except clerical or administrative personnel, who is employed by an investment adviser that is registered or required to be registered. Therefore, unregistered personnel are not investment adviser representatives. An employee who supervises analysts who deal with the public must be an investment adviser representative. The employee of the federal covered adviser with an office in the state is also an investment adviser representative. The agent is an agent of a broker-dealer, not an investment adviser representative. LO 10.b

All of the following statements about short sales are true except A) in a short sale, an investor sells securities she does not own. B) in a short sale, an investor hopes that the price of a security will go down. C) the potential loss to the investor is unlimited D) risks can be minimized by confining short sales to cash accounts rather than margin accounts.

D Because borrowing is involved, all short sales must take place in a margin account, never in a cash account. In a short sale, an investor sells securities she does not own. The investor must later purchase securities to cover the short sale. If the price of the securities drops, the investor profits by being able to buy back (cover) the short position for less than the sale proceeds. The investor realizes a loss if the price of the securities goes up. And, that loss is potentially unlimited because there is no ceiling on the upper limit of a stock's price. LO 23.f

Calvin has the following securities in his portfolio: ABC common stock, XYZ common stock, PQR mutual fund (domestic small cap), DEZ mutual fund (foreign small cap), 30-year Treasury bond, and 5-year Treasury note. Which of the following risks should not concern Calvin? A) Systematic risk B) Business risk C) Reinvestment rate risk D) Default risk

D Default risk applies only to debt securities. That is, one can default only on a debt (failure to pay the interest when due and/or the principal). For exam purposes, there is one category of debt securities that has no default risk: securities issued by the U.S. Treasury. Therefore, with a portfolio consisting of nothing but equity securities and Treasuries, default risk would not be a concern to Calvin. Business risk is the uncertainty that a corporation will underperform, either due to management failures or some other event unique to that company or industry. That is certainly a concern with the investments in ABC and XYZ common stock. To a lesser degree (because of the diversification), business risk also applies to ownership of mutual funds. Reinvestment rate risk is the risk that as cash flows are received they will be reinvested at lower rates of return than the investment that generated the cash flows and applies largely to any debt security. Systematic risk is the risk that all securities are subject to and typically cannot be eliminated through diversification. LO 19.b

If a bond has a long duration, it will A) continue paying interest into perpetuity B) be less sensitive to small changes in interest rates than a bond with a shorter duration C) be relatively unaffected by small changes in interest rates D) be more sensitive to small changes in interest rates than a bond with a shorter duration

D Duration measures how sensitive a bond will be to a small change in interest rates. The longer the duration of a bond, the more volatile (sensitive to interest rate changes) it will be. LO 20.b

An investor owns a long-term U.S. Treasury bond with a 5% coupon and 15 years to maturity. The client wishes to sell and receives a quote from a dealer of 104.22. This number represents A) the offer price B) the yield to maturity C) the premium D) the bid price

D If you are looking to sell, the dealer will pay you his bid price. Had the question said the client wanted to buy, then the quote would have been the offer (ask) price. What does the 5% coupon and the 15 years to maturity have to do with the question? notHING. And, knowing that treasuries are quoted in 32nds has nothing to do with it either. And, one more thing. The price quote is above 100, so it is at a premium, BUT the better answer is bid price because the question is referring to the quote. LO 23.e

In an account opened by 2 individuals as joint tenants with rights of survivorship, all of the following are true except A) in the event of death, the other party assumes full ownership of the account B) orders may be entered by either party C) mail may be directed to the joint owner agreed upon by both parties to the account D) stock certificates may be delivered in the name of either party

D In a JTWROS account, each party has an equal, undivided interest in the account. Upon the death of 1 party in a 2-party account, the other party assumes full ownership of the account. Orders may be entered by either party, and mail may be directed to either party. However, disbursements of cash or securities must be in the name of all parties to the account. LO 16.a

If an employed client has $12,000 of capital gains and $15,000 of capital losses in the most recent taxable year, how much unused loss, if any, is carried forward by the client to the following tax year? A) $12,000 B) $15,000 C) $3,000 D) $0

D In this question, the client had $12,000 of capital gains and $15,000 of capital losses. Step 1: Offset the capital gains with the capital losses ($15,000 - $12,000). This leaves $3,000 remaining in capital losses. Step 2: Note that the client can apply up to a maximum of $3,000 of any remaining losses against ordinary income. Once all $3,000 in remaining losses is used to reduce ordinary income, this would leave $0 to carry forward to the next year. Therefore, the reason you would not carry $3,000 to the next year is that it would be used to reduce ordinary income for the current year. It can be safely assumed than an employed client of a broker-dealer makes at least $3,000 per year. LO 15.c

Increases in which of the following indicators are regarded as predictors of the level of business activity? A) Corporate profits B) Levels of inventories C) Personal incomes D) Building permits

D Increases in building permits are indicative of increased future business activity and therefore are considered a leading economic indicator. Increases in personal income reflect current, not future, activity and are therefore considered a coincident indicator. Increases in inventories indicate that goods are not being sold in anticipated quantities, so they function as a disincentive to manufacturing. Buildup in inventories is a lagging economic indicator. Corporate profits are not included in the Conference Board's list of economic indicators. LO 6.d

Investors looking to minimize the effects of taxation on their investments would probably receive the least benefit from A) a growth stock. B) an S&P 500 Index fund. C) an apartment building. D) a corporate bond.

D Investors receive interest income from corporate bonds. That income is fully taxable at ordinary income rates. Real estate ownership has certain tax benefits, such as depreciation and a deduction for operating expenses. Index funds are known for their high tax efficiency, and investors in growth stocks anticipate long-term capital gains, which are taxed at a lower rate than ordinary income. LO 15.b

Which of the following firms in the business of rendering investment advice for compensation would be considered a federal covered adviser? A) JKL Pension Consultants, a management firm providing services to employee benefit plans, which currently has $179 million under management B) DEF Fund Managers, a corporation managing an unregistered hedge fund with $10 million in assets C) GHI Consultants, a sole proprietorship managing $82 million belonging to high-net-worth individuals D) ABC Money Managers, a partnership with $115 million under management

D It makes no difference what the structure of the adviser is. As long as the assets under management are $110 million or more, SEC registration is required. If the investment company is registered under the Investment Company Act of 1940, the adviser must be registered, regardless of size. The hedge fund is an unregistered fund, so the rule does not apply to it. Pension consultants are not eligible for SEC registration until their AUM reaches $200 million. LO 9.d

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) Margin B) Retirement C) Discretionary 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. LO 16.a

Under the Uniform Securities Act, which of the following statements regarding private placements is true? A) Being an exempt transaction, the antifraud provisions do not apply. B) The offering must be made to fewer than 15 noninstitutional persons. C) A prospectus must be provided before the offering. D) The security ​that is the subject of the private placement ​need not be registered.

D Private placements are offers to no more than 10 noninstitutional persons in a 12-month period for investment purposes (not immediate resale), where no commissions are paid, directly or indirectly. Such transactions are exempt from registration requirements. The fraud provisions apply to any person involved with the purchase or sale of a security, whether registered or exempt, and the prospectus delivery requirements apply to registered securities. Please note that when it comes to institutional clients, there are no numerical limitations on offers, no required holding periods, and no restrictions on payment of commissions. LO 8.d

Which of the following statements regarding the Uniform Securities Act (USA) are true? I) State securities Administrators may deny, by rule or order, an exemption to an exempt transaction under the USA, if the security involved is not covered by federal exemption. II) State securities Administrators may not deny, by rule or order, an exemption to an exempt transaction under the USA if the security involved is not covered by federal exemption. III) State securities Administrators may deny, by rule or order, an exemption to a federal covered security. IV) State securities Administrators may not deny, by rule or order, an exemption to a federal covered security. A) II and IV B) II and III C) III and IV D) I and IV

D State securities Administrators may deny, by rule or order, an exemption to an exempt transaction under the USA unless the security involved is covered by a federal exemption. State securities Administrators may not, however, deny an exemption provided to a federal covered security. Federal covered securities are granted exemption from state registration by federal law, so the state Administrator has no authority to deny the exemption granted by the federal government. LO 8.d

Maria, age 49, was discussing with some coworkers the recent family vacation she took. She commented that she was able to afford it by taking a penalty-free withdrawal from her retirement plan. Based on that statement, Maria must be covered under A) a 401(k) plan. B) a defined benefit plan. C) a 403(b) plan. D) a 457 Plan.

D The 457 is a nonqualified but tax-advantaged retirement plan. The 457 Plan is unique in that it is the only retirement plan permitting withdrawals, for any reason, before reaching age 59½ without penalty. All other retirement plans have exceptions to the 10% penalty tax, but only the 457 allows the withdrawals for any reason. Even though there is no early distribution tax, Maria will still owe ordinary income tax on the amount withdrawn; the 457 benefit is only that there is no additional 10% tax. LO 18.d

If you overheard an analyst referring to an investment's indicative value, the discussion would most likely be about A) ETFs. B) REITs. C) TIPS. D) ETNs.

D The calculated value, called the indicative value or closing indicative value for ETNs, is calculated and published at the end of each day by the ETN issuer. LO 5.c

An investor purchases $10,000 of A-rated debentures in early January. At the end of the year, $500 in interest has been received and the value of the investment is $9,500. If the investor is in the 25% tax bracket, the after-tax yield is A) 0.0%. B) 5.0%. C) -1.25%. D) 3.75%.

D The only return (as far as yield is concerned) is the $500 of interest. Subtracting 25% for taxes leaves $375 which, when divided by the $10,000 initial cost, is an after-tax yield of 3.75%. If the question had asked about total return, then the $500 unrealized loss would have been included, although there would have been no tax benefit to it because it is only a "paper" loss. LO 22.a

An investor purchases a TIPS bond with a 4% coupon. If, during the first year, the inflation rate is 9%, the approximate principal value of the security at the end of that year will be A) $1,045. B) $1,040. C) $1,090. D) $1,092.

D The principal value of a TIPS bond is adjusted semiannually by the inflation rate. The exact calculation would be $1,000 × 104.5% × 104.5%, which equals $1,092.025. Each six months, the interest is paid on that adjusted principal, and that is why the security keeps pace with inflation. Obviously, the answer must be something a bit higher than $1,090 because of the semiannual compounding. LO 2.f

Liam died with the following assets and liabilities: $200,000 in securities left to his wife, a $650,000 home left to his wife (the home cost $150,000), a $250,000 life insurance policy with his daughter as beneficiary, and $75,000 in debts and estate expenses. What is Liam's gross estate? A) $600,000. B) $1,025,000. C) $250,000. D) $1,100,000.

D The question asks for the gross estate, not the adjusted gross estate or taxable estate. The market value of all assets in which Liam possessed an incident of ownership at the time of death are included in the gross estate. The amount is therefore $1,100,000. The adjusted gross estate would be less the $75,000 of debt and expenses. LO 16.g

The Jones family has scheduled an initial visit with a financial planner. Mr. Jones has an annual salary of $70,000, and this is their first attempt at financial planning. Which of the following should be the first step taken by the financial planner? A) Pay off credit card debt B) Determine a reasonable fee for designing the plan C) Set goals and dates for reaching them D) Establish an emergency fund

D There are many questions on the exam where you will be forced to choose between two possible answers, only one of which is correct. In many cases, it is strictly a matter of opinion, but only NASAA's opinion counts. This is one of them. Goal setting is important, but the regulators feel that the first step in any plan is making sure that there is a "rainy day" fund. We can argue about that because some will say that a good plan can be used to establish that fund where none has existed before. But, please go with the right choice. LO 17.a

An investor has her agent enter a sell stop order at 60, limit 60. Following the order entry, trades occur at 62.12, 60, 59.95, 60.06, 61. More than likely, the investor received A) 61 B) 60 C) 59.95 D) 60.06

D This is really two orders. The first is to "stop" at 60. That is, once the stock trades at 60 or lower, enter my order. That second order is a sell, but with a limit of 60. So the first time the stock hits 60 (or less) is the trade at 60. That triggers the sell limit. The next trade is a 59.95. Because the limit order is saying, "Get me 60 or higher, the 59.95 is not an acceptable price." But, the next trade, 60.06 will meet the client's goal of receiving no less than 60. LO 23.f

Mr. and Mrs. Rose, advisory clients of yours, request a meeting with you to discuss the options available if they wish to deposit a lump sum to save for college tuition for their child. All of these would be factors to consider except A) the expected inflation rate B) the age of the child C) current college costs D) the Roses' salaries

D When making a lump sum investment, salary is not a factor. The funds will have to come out of savings or investments. This is basically a present value computation. In order to project how much will be needed, we need to know what the current tuition is, the rate at which it is expected to inflate, and the number of years we have until the child starts college. That will give us the three components of present value: total amount needed, earnings rate, and length of investment. LO 20.a

If you had expectations of high inflation, you would A) increase fixed-income exposure and reduce commodity exposure B) increase fixed-income exposure and reduce tangible asset exposure C) increase fixed-income exposure and reduce equity exposure D) increase equity exposure and reduce fixed income exposure

D high inflation = expansion low inflation = trough Rising inflation will reduce real returns on fixed-income investments, so you would want to reduce that exposure. Equities, tangible assets, and commodities tend to increase along with the inflation rate. LO 19.a