Series 66: Essential Info Dump

If you have custody of client funds or securities, you must maintain at all times a minimum net worth of $_______________. If you have discretionary authority over client funds or securities but do not have custody of client funds or securities, you must maintain at all times a minimum net worth of $_____________. If you accept prepayment of more than $500 per client and six or more months in advance, you must maintain at all times a positive net worth.

$35,000 - 10,000 https://dfpi.ca.gov/post-effective-requirements/

ABCs common stock trades at $24 and pays a .60 quarterly dividend. What is the yield?

10%

What percentage of premium paid to a Term insurance policy goes towards funding the death benefit?

100%

A 5% corp bond quoted at 108 5/8 has a current yield of _________________

4.6%50 / 1086.25 = 4.6%

Under the USA, all advisory contracts must be in writing and contain descriptions of how fees are determined. Contracts are valid upon signing, need not list all states in which an adviser is registered, and cannot be assigned without the client's approval. However, if the brochure is not delivered at least 48 hours before the signing of the contract, the client has the right to withdraw without penalty for _________ business days. Administrator approval is not required.

5 business days

A 5% corp bond quoted at 92 1/4 has a current yield of ____________

5.42%50 / 922.50 = 5.42

ABCs 6% debentures trading at 88 mature in 2030. What is the yield?

6.8%

Whole life insurance and variable life insurance allows the insured to borrow against the accumulated cash vale in the contract. What is the minimum percentage of the cash value that must be available for policy loans after the policy has been in force for 3 years?

75% of cash value must be available for a loan

Which of the following rates of return is used by investment professionals as the risk-free rate? A) 91-day Treasury bill rate B) Prime rate C) Discount rate D) Federal funds rate

A) 91-day Treasury bill rate The interest rate used as the basis for a risk-free rate of return is the 91-day Treasury bill rate. T-bills are U.S.-government guaranteed, the rate is short-term, and the market risk is minimal.

The separate account subaccounts chosen by the purchaser of a variable life insurance policy have had outstanding performance over the past 15 years. There would generally be no tax implications in which of the following situations? A) A loan is taken equal to 95% of the policy's cash value B) The policy is surrendered C) There is a cash withdrawal in excess of the cost basis D) The death benefit is paid

A) A loan is taken equal to 95% of the policy's cash value Funds obtained from a policy loan are not considered taxable income (same as any loan - you owe the money). If the amount received at policy surrender is greater than the cost basis, the excess is taxed as ordinary income. The same is true with the withdrawal. Although the death benefit will always be free of income tax, it could be subject to estate tax.

Under certain conditions, the Uniform Securities Act provides that an Administrator may require a minimum net worth standard be met by an investment adviser. Which of the following would be an allowable asset in the computation of an investment adviser's net worth? A) Accounts receivable B) Advances or loans to partners in the case of an IA organized as a partnership C) Copyrights D) Accounts payable

A) Accounts receivable For purposes of the USA, the term "net worth" means an excess of assets over liabilities, as determined by generally accepted accounting principles. Accounts receivable are a current asset, while accounts payable are a current liability. The USA specifically disallows intangibles, such as copyrights and goodwill, and advances or loans to partners (or officers if a corporation) are excluded as well.

An 8% corporate bond is offered on a 8.25 basis. Which of the following statements are TRUE? I. Nominal yield is higher than YTM. II. Current yield is higher than nominal yield. III. Nominal yield is lower than YTM. IV. Current yield is lower than nominal yield. A) II and III B) I and III C) I and IV D) II and IV

A) II and III A bond offered on an 8.25 basis is the same as at a YTM of 8.25%. Because the yield quoted is higher than the 8% coupon, the bond is trading at discount to par. For discount bonds, the nominal yield is lower than both the current yield and the yield to maturity.

What would likely happen to the market value of existing bonds during an inflationary period coupled with rising interest rates? A) The price of the bonds would decrease. B) The price of the bonds would stay the same. C) The price of the bonds would increase. D) The nominal yield of the bonds would increase.

A) The price of the bonds would decrease. Bond prices fall when interest rates rise because bond prices have an inverse relationship with interest rates.

The USA places a number of recordkeeping requirements on investment advisers. Records required to be kept by all state-registered investment advisers include all of the following EXCEPT A) a record by security showing each client's interest and location thereof B) a list of discretionary accounts C) emails D) bank records

A) a record by security showing each client's interest and location thereof The key to this question is the requirement for all advisers. A security record is only required for those advisers who have custody of client assets.

Which of the following best describes the voting rights associated with variable life insurance polices? A. Contract holders receive one vote per $100 of cash value B. Contract holders receive one vote per $100 of death benefit C. Contract holders receive one vote per unit in the separate account D. Contract holders do not have voting rights

A. Contract holders receive one vote per $100 of cash value

Which type of life insurance should the following individual use?: Bob has little discretionary income, but wants to protect his insurability and get the highest death benefit possible A. Term B. Whole life C.Universal life D. Variable life E. Variable Universal life

A. Term (little discretionary income)

All of the following types of life insurance include a guaranteed minimum death benefit except: A. Variable universal life B. Variable life C. Universal life D. Whole life

A. Variable universal life

Under IA rules and regulations, a Qualified Client is defined as a client whose Assets under management with IA must be at least $_______ MillionOrNet worth excluding, primary residence must be more than $_________ Million

Assets under management with IA must be at least $1 Million Or Net worth excluding, primary residence must be more than $2.1 Million (these client are eligible for performance fees)

ABC Combination Fund has dual objectives of capital appreciation and current income. Last year, the fund paid quarterly dividends of $0.25 per share and capital gains of $0.10 per share. The annualized growth rate of the fund was 15%. The current net asset value (NAV) of the fund is $28.50, and the current public offering price (POP) is $30. Advertising and sales literature of the fund may report the fund's current yield to be A) 83% B) 3.33% C) 3.85% D) 27.20%

B) 3.33% The current yield on mutual funds is calculated by dividing the annualized yield ($0.25 × 4 = $1) by the POP. In this case, $1 ÷ $30 = 0.0333 × 100 = 3.33%. In calculating the current yield, the law prohibits the inclusion of capital gains and growth.

The current yield on a bond with a coupon rate of 5.5% selling at 110 is A) 5.5% B) 5% C) 2% D) 6%

B) 5% The current yield of any security, equity, or debt is always the income return (dividend or interest) divided by the current market price. In this case, it is the annual interest of $55 ($1,000 x 5.5%) divided by $1,100 and that equals 5%.

Five years ago, an investor purchased an ABC Corporation BBB-rated debenture with a coupon of 6% maturing in 2037. Currently, new BBB-rated debentures maturing in 2037 are being issued with coupons of 7%. Based on the discounted cash flow method, one could say that the present value of the investor's security is A) more than the par value B) less than the par value C) negative D) equal to the par value

B) less than the par value The discounted cash flow method is just a technical way of computing the value of a security that demonstrates the inverse relationship between interest rates and bond prices. The discount rate here is the current market rate of 7%. Because this investor's debenture is paying at a rate of 6%, its cash flow is less valuable than a 7% bond; therefore, it will sell at a discount (below par).

The yield to maturity is A) determined by dividing the coupon rate by the current market price of the bond B) the annualized return of a bond if it is held to maturity C) the annualized return of a bond if it is held to call date D) set at issuance and printed on the face of the bond

B) the annualized return of a bond if it is held to maturity The yield to maturity reflects the annualized return of a bond if it is held to its maturity. The computation reflects internal rate of return and is frequently referred to as the market required rate of return for a debt security. The rate set at issuance and printed on the face of the bond is the nominal or coupon rate. Dividing the coupon rate by the current market price of the bond provides the current yield. The return of a bond if it is held to the call date is the yield to call.

If a client wished to run a discounted cash flow on a portfolio of mortgage-backed securities, which element would be most important? A. The zip codes of the properties B. The average maturities of the mortgages C. The number of first-time homebuyers in the pool

B. The average maturities of the mortgages

How does cash value grow for Universal insurance?

Based on interest rates(Hard J own Universal and love Interest rates)

Although generally prohibited, there are conditions under which a state-registered investment adviser is permitted to charge performance-based fees. Which of the following meets the necessary criteria? A) Charging a performance-based fee to an individual who meets the definition of an accredited investor B) Charging a performance-based fee to an individual with a net worth in excess of $10 million without describing that there is an incentive for the adviser to take greater risks C) Charging a performance-based fee to an elderly client whose net worth is $2.2 million, with only $150,000 under the adviser's management D) Charging a performance-based fee to an aggressive entrepreneur whose net worth is $1.8 million who has $500,000 under the adviser's management

C) Charging a performance-based fee to an elderly client whose net worth is $2.2 million, with only $150,000 under the adviser's management Performance fees may be charged, regardless of the client's age, to anyone with a net worth in excess of $2.1 million or with at least $1 million under management with the firm. An individual reaches accredited investor status with a net worth of $1 million - not enough to qualify and one way in which the states differ from federal law is the requirement to disclose the incentive to take greater risks.

Which of the following investments would be permitted in a client's IRA? A) Variable life insurance B) Term life insurance C) Municipal bonds D) Art

C) Municipal bonds Although not generally recommended for a retirement plan, municipal bonds are permitted. The other choices are not.

Duration is A) the deviation of a bond's returns from its average returns B) identical to a bond's maturity C) a measure of a bond's price sensitivity with respect to a change in interest rates D) equivalent to the yield to maturity

C) a measure of a bond's price sensitivity with respect to a change in interest rates Duration measures a bond's sensitivity to a change in interest rates. The longer the duration, the greater the change in a bond's price with respect to interest rate changes.

Which of the following best describes the voting rights associated with variable annuity contracts? A. Contract holders receive one vote per $100 of cash value B. Contract holders receive one vote for each $100 of units in the separate account C. Contract holders receive one vote per unit in the separate account D. Contract holders do not have voting rights

C. Contract holders receive one vote per unit in the separate account

In building a financial plan for a young family, which should be the first priority? A. Planning for a secure retirement income B. Funding college education for all the children C. Ensuring sufficient life insurance is in place D. Paying off all debt

C. Ensuring sufficient life insurance is in place

_______________________ = Dividend Per Share / Stock Price

Current Yield

Which of the following indicates a bond selling at a discount? A) 10% coupon yielding 9% B) 7% coupon yielding 6.5% C) 5% coupon yielding 5% D) 7% coupon yielding 7.5%

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

Which of the following has the highest real return? A) A bond that yields 10% when inflation is 7% B) A bond that yields 8% when inflation is 5% C) A bond that yields 6% when inflation is 4% D) A bond that yields 5% when inflation is 1%

D) A bond that yields 5% when inflation is 1% Subtracting the inflation rate from the bond yield will result in a real return of 4% on the 5% bond, the highest of the choices offered.

Which of the following compensation arrangements is typically NOT allowed under the Investment Advisers Act of 1940? A) An adviser varies fees according to the time spent managing the account. B) An adviser charges clients a percentage of assets under management. C) An adviser charges all clients a set fee, regardless of how long it takes to generate a recommendation or a recommendation's results. D) An adviser waives a client's fee if the client experiences a loss for the year.

D) An adviser waives a client's fee if the client experiences a loss for the year. A fee in which payment is contingent on investment results is prohibited unless the client meets certain financial standards; advisers are permitted to charge by the hour.

The Sharpe ratio is the average annual return of a security A) divided by the expected return of the market B) plus the risk-free rate divided by the security's beta C) divided by the risk-free rate D) minus the risk-free rate for the period divided by the security's standard deviation

D) minus the risk-free rate for the period divided by the security's standard deviation The Sharpe ratio is the average annual return of a security less the risk-free rate divided by the security's standard deviation. In other words, the Sharpe ratio is a risk-adjusted return because it measures the amount of return per unit of risk taken; the most common risk-free rate is that paid by 91-day U.S. Treasury bills.

If you were using the discounted cash flow method to determine the appropriate value of a security, you would want to purchase that security when A) the rating of the security has just been upgraded B) the current market price equals the PV C) the current market price is above the PV D) the current market price is below the PV

D) the current market price is below the PV Those who use the DCF to value a security would recommend purchasing when the current market price is below the PV—that is, when the NPV is positive.

A client owns a permanent life insurance policy and inquires about accessing cash from the policy prior to her death. Which of the following would permit her to access cash today from her policy? A. A policy loan B. Surrendering the policy C. A viatical settlement D. All of the above

D. All of the above

Policy holders may access the accumulated cash value in a life insurance policy in which of the following ways?A. Policy loanB. Partial withdrawalC. Policy surrenderD. All of the above

D. All of the above

How often is Separate account value calculated in a variable life insurance policy?

Daily

____________________ - is a model or method of valuation in which future cash flows are discounted back to a present value using the the time-value of money. An investments worth is equal to the present value of all projected future cash flows.

Discounted Cash Flow (DCF)

Which Fundamental Analysis model will yield a higher valuation?Dividend Discount Model or Dividend Growth Model

Dividend Growth Model

How does cash value grow for Whole life insurance?

Guaranteed fixed return

What is the preferred method to measure the return on a Direct Participation Program?

IRR(so cash flow dependent)

___________________ - The discount rate that sets the net present value of an investment equal to zero

Internal Rate of Return (IRR) (The internal rate of return compounds returns and takes into consideration the time value of money)

How does cash value grow in a variable insurance policy?

Investor selects the sub accounts

How often is Cash Value calculated in a variable life insurance policy?

Monthly

The _______________________ calculates the difference between present value and cost

Net Present Value (NPV)(This is expressed in dollars; not as a rate of return)

Jay has net worth of $1.7 million, including a $300 primary residence. If he deposits $100,000 into a new advisory account, can he pay a performance fee?

No (Assets under management with IA must be at least $1 Million Or Net worth excluding, primary residence must be more than $2.1 Million to be considered a Qualified Client (these clients are eligible for performance fees))

How are distributions from a life insurance policy taxed if the insured has not yet died?Client has outstanding policy loan at the time of death

Non-taxable

How are distributions from a life insurance policy taxed if the insured has not yet died?Client takes a policy loan

Non-taxable(not income and not taxable because it is just a loan)

The ______________________ is the average annual return of a security less the risk-free rate divided by the security's standard deviation. In other words, the Sharpe ratio is a risk-adjusted return because it measures the amount of return per unit of risk taken; the most common risk-free rate is that paid by 91-day U.S. Treasury bills.

Sharpe Ratio

How are distributions from a life insurance policy taxed if the insured has not yet died?Client withdraws cash value

Taxable as ordinary income(taxed on the amount withdrawn greater then the basis, FIFO, so you can withdraw your basis without being taxed first )

Whole life insurance and variable life insurance allows the insured to borrow against the accumulated cash vale in the contract. If an insured surrenders a contract while a policy loan is outstanding what will happen?

The cash value is reduced by loan amount

What does it mean if a company has a debt to equity ratio of 1.0

The companies equity is equal to its debt

Whole life insurance and variable life insurance allows the insured to borrow against the accumulated cash vale in the contract. If the insured dies while a policy loan is outstanding what will happen?

The death benefit is reduced by loan amount

Internal Rate of Return (IRR), what is it and how is it calculated

The internal rate of return compounds returns and takes into consideration the time value of money. Real rate of return considers the inflation rate. https://www.investopedia.com/terms/i/irr.asp

Does IRR take into consideration the time value of money?

True(assumes that earlier cash flows are reinvested and compounded)

Is a bonds yield to maturity its IRR?

True(assumes you reinvest the interest payments at the coupon rate)

Can Whole life insurance be described as "permanent life insurance" or "cash value life insurance"

Yes

Advisers who have ________________ must segregate client securities and funds and keep them in a safe place. Client funds must be deposited in bank accounts containing only the client's funds, and unless using a qualified custodian, the adviser must be named as agent or trustee. The adviser is required to report quarterly with a written, itemized statement indicating the funds and/or securities in the adviser's possession and all transactions in the account. Annually, the adviser must arrange for an independent audit of the client's account and the results must be forwarded to the SEC. Thus, the adviser reports every 3 months, not every 6 months.

custody

The ________________________ method is just a technical way of computing the value of a security that demonstrates the inverse relationship between interest rates and bond prices - https://www.investopedia.com/terms/d/dcf.asp

discounted cash flow

According to the ethical guidelines set forth in the NASAA Statements of Policy and Model Rules, which of the following statements regarding discretion is CORRECT? I. An agent of a broker-dealer must have written prior discretionary authorization prior to effecting discretion in a client's account. II. An agent of a broker-dealer must receive written discretionary authorization within 10 business days of the first discretionary transaction in the account. III. An investment adviser representative must have written prior discretionary authorization before effecting discretion in a client's account. IV. An investment adviser representative must receive written discretionary authorization within 10 business days of the first discretionary transaction in the account. A) I and IV B) I and III C) II and IV D) II and III

A) I and IV One way in which the use of discretionary authority differs between agents and IARs is that agents may never exercise discretion without prior written authority. IARs must receive the written consent no later than 10 business days after the first discretionary transaction in the account.

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

A) I only For purposes of this Rule, the term "net worth" means an excess of assets over liabilities. But net worth does not include the following as assets: goodwill, franchise rights, patents, copyrights, marketing rights, and all other assets of intangible nature; home, home furnishings, automobile(s), and any other personal items not readily marketable in the case of an individual; advances or loans to stockholders and officers in the case of a corporation; and advances or loans to partners in the case of a partnership. So, what's the deal with the sofa? Because the choice specifically says that it is in the reception area, we must assume that it is not a "home" furnishing, rather one in the office and those are not excluded assets.

Under the Uniform Securities Act, when may an investment adviser legally have custody of money or securities belonging to a client? I. When the adviser has a net worth of at least $25,000 II. When the Administrator has not prohibited custodial arrangements III. When the adviser does not have discretionary authority over the account IV. When the adviser has notified the Administrator that he has custody A) II and IV B) I and III C) II and III D) I and IV

A) II and IV The Administrator may prohibit advisers from having custody of client funds or securities. If no such prohibition applies, the Administrator must be notified in writing if an adviser has custody. In almost all jurisdictions, a surety bond or sufficient net worth ($35,000) is required to maintain custody. Discretionary authority does not affect an adviser's ability to have custody.

An individual purchased a variable life insurance policy 10 years ago with a guaranteed death benefit of $100,000. The annual premium for this policy was $2,000 per year. The individual dies and, due to outstanding performance of the separate account, leaves a death benefit to the beneficiary of $121,000. What are the income tax consequences to that beneficiary? A) No tax is due. B) There is a long-term capital gain of $1,000. C) Ordinary income tax is due on $21,000. D) Ordinary income tax is due on the $1,000 that exceeds the original cost.

A) No tax is due. One of the nice things about life insurance proceeds is that even when the death benefit is increased due to separate account performance, it is still free of income tax.

A bond is selling at a premium over par value. Therefore, its A) current yield is less than its nominal yield B) none of the above C) nominal yield is less than its current yield D) yield to maturity is greater than its current yield

A) current yield is less than its nominal yield Any bond selling at a premium will yield less than the coupon rate (nominal yield). Conversely, of course, a bond trading at a discount will certainly yield more. Remember, there is an inverse relationship between bond prices and bond yields.

One of the tasks of an investment adviser representative is gathering information to complete a client financial profile. Among the sources of this information would be all of the following except A) the client's social media accounts. B) the client's tax returns. C) the client's bank and brokerage statements. D) the client's life insurance policies.

A) the client's social media accounts. Although there are some people who divulge a great deal of personal information on their social media accounts, those are not the most reliable sources of the financial numbers an IAR needs to properly evaluate a client's financial position. Tax returns, bank and brokerage account statements, and life insurance policies (especially those with cash value) are a window to the client's assets.

A bonds yeild-to-maturity is most accurately described by which fo the following? A. The internal rate of return representing the discount rate that equates the discounted value of the future cash flows to the bonds current price B. The standard deviation representing the spread of possible returns an investor might receive if the bond is held to maturity C. The average of the bonds nominal yield, current yield, and yield-to-call D. The sum of the bonds future cash flows, assumed to be reinvested at the coupon rate, plus the principal to be return to the investor at maturity divided by the purchase price

A. The internal rate of return representing the discount rate that equates the discounted value of the future cash flows to the bonds current price

Net present value is best described as the difference between A. a clients subjective present value calculation of an investment and that investments current market price B. a clients subjective future value calculation of an investment and that investments current market price C. A clients subjective present value calculation of an investment and that investments future value

A. a clients subjective present value calculation of an investment and that investments current market price

A client seeks advice on an investment with an IRR of 6%. The future cash flows are estimated to be worth $1,200 and their discounted present value is $1,050. Purchasing the investment will cost $1,000. the client should A. invest, because the NPV is positive B. not invest, because the NPV is negative C. Be indifferent to this investment *Bonus Point: What is the NPV of the investment?

A. invest, because the NPV is positive(NPV = + 50)

How often is Death Benefit calculated in a variable life insurance policy?

Annually

Which of the following Debt to Equity Ratios indicates that a company is highly leveraged? A) 0.1 B) 6 C) 3 D) 1.0

B) 6 (Total Assets / Equity of those assets) 120k in assets - 100k in liabilities = 20k in equity 100 / 20 = Debt to Equity Ratio of 5 1 dollar of equity for every 5 dollars of debt

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 5 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 and II B) I, II, and IV C) I, II, III, and IV D) III and IV

B) I, II, and IV 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.

Under the Uniform Securities Act, an investment adviser may legally have custody of money or securities belonging to a client if the investment adviser has insufficient net worth or is not appropriately bonded Administrator has not issued a rule prohibiting custody investment adviser does not also have discretionary authority over the account investment adviser has notified the Administrator that custody is maintained A) II, III and IV only B) II and IV C) I and III D) II only

B) II and IV The Administrator may, by rule, prohibit advisers from having custody of client funds or securities. If no such prohibition applies, the Administrator must be notified in writing if an adviser has custody. In almost all jurisdictions, a bond or sufficient net worth is required to maintain custody. Discretionary authority does not affect an adviser's ability to have custody.

Which of the following statements regarding the Sharpe ratio is TRUE? A) The Sharpe ratio cannot be used to measure risk-adjusted performance for a single security. B) The Sharpe ratio is often used to measure risk-adjusted return of an entire portfolio. C) Portfolios with lower Sharpe ratios provided higher excess returns per unit of risk assumed than those with higher Sharpe ratios. D) The Sharpe ratio uses beta in its formula.

B) The Sharpe ratio is often used to measure risk-adjusted return of an entire portfolio. The Sharpe ratio is used to measure risk-adjusted performance of either a portfolio or an individual security. The Sharpe ratio uses standard deviation as the denominator in its formula: the higher the Sharpe ratio, the better the portfolio or security has performed on a risk-adjusted basis.

One way in which internal rate of return (IRR) differs from most return computations is that A) it takes into consideration the rate of inflation B) it takes into consideration the time value of money C) its application to debt securities is limited D) it is always an annualized rate of return

B) it takes into consideration the time value of money The internal rate of return compounds returns and takes into consideration the time value of money. Real rate of return considers the inflation rate.

Under the Investment Advisers Act of 1940, in which of the following cases has an investment adviser acted improperly by not making appropriate disclosures to clients? I. An adviser that requires prepayment of $1,000 in fees, 9 months in advance, has liabilities that exceed its assets and does not disclose this fact to clients. II. An adviser that has investment discretion over client accounts cannot meet its financial obligations as they come due and does not disclose this fact to clients. III. An adviser that does not require prepayment of fees and does not have discretion over accounts or custody of client securities or funds has just been found by a state court to have violated a rule issued by the SEC and does not disclose this fact to clients. A) I and II B) I, II, and III C) II and III D) I and III

C) II and III An adviser's financial impairment must be disclosed to clients if the adviser has discretion or has custody or requires prepayment of more than $1,200 in fees, 6 or more months in advance. Legal or disciplinary action taken against an adviser by a court or a regulatory authority within the past 10 years must be disclosed to clients in any case. Note also that by requiring prepayment of over $1,200 in fees, 6 or more months in advance, an adviser is required to include an audited balance sheet with Part 2 of Form ADV, which must be filed with the SEC and made part of the adviser's disclosure brochure.

If XYZ is a registered broker-dealer with its lone office located in State T, under which of the following circumstances must it also register in State L? I. XYZ's only dealings in State L are directly with issuers of securities in State L. II. XYZ engages in extensive transactions with the largest insurance company in State L. III. XYZ routinely sells nonexempt securities to extremely high net-worth residents of State L. IV. XYZ purchases exempt securities from extremely high net-worth residents of State L for resale to residents of State T. A) II, III, and IV B) I only C) III and IV D) I and II

C) III and IV Under the Uniform Securities Act, broker-dealers must register in any state where they engage in securities transactions with individual investors. The net worth of the individual is irrelevant. Broker-dealers with no offices in the state who engage in transactions in the state with certain institutional investors, such as insurance companies or investment companies, need not register in that state. Transactions between the issuer and a broker-dealer are exempt transactions.

If a customer is in the 15% federal income tax bracket and his main investment objective is current income, which of the following securities should the agent recommend? A) Zero-coupon bond. B) City of Milwaukee GO bond. C) Investment-grade corporate bond. D) U.S. government bond.

C) Investment-grade corporate bond. The investor is in a low tax bracket, so the tax-exempt municipal bond is not a suitable investment. To maximize income, the best recommendation is the corporate bond which offers a higher yield than a government bond with a similar maturity.

Jack, who is proficient in both fundamental and technical analysis, would like to become an investment adviser. Although Jack is fairly new to the securities business, he worked in the commodities business for many years. Five years ago, Jack's Commodity Pool Operator's license was suspended by the Commodity Futures Trading Commission for having willfully violated or willfully failing to comply with any provision of the Commodity Exchange Act. Which of the following best describes how Jack's application to open an investment advisory business will be handled under the Investment Advisers Act of 1940? A) Jack's application will likely be accepted because he has not violated any securities law. B) Jack's application will likely be denied because he has little experience in the securities industry. C) Jack's application will likely be denied because he violated the Commodity Exchange Act within the 10-year period prior to his application. D) Jack's application will likely be accepted because his violation of investment-oriented regulations occurred 5 years prior to his application.

C) Jack's application will likely be denied because he violated the Commodity Exchange Act within the 10-year period prior to his application. Jack's application will probably be denied because he was found guilty of violating the Commodity Exchange Act within the 10-year period prior to his application. Registration as an investment adviser will be denied to any party that has been convicted, within the 10-year period prior to application, of a violation of federal securities acts or the Commodity Exchange Act. Such statutory denial will also impact those enjoined under domestic or foreign court orders from engaging in the business of investing, presuming such orders were made in the 10-year period prior to the application date.

A customer purchased new issue bonds at par 2 years ago. Since then, the CPI has declined by almost half and the current yield on his bonds has also declined. Which of the following best describes the value of the bonds he purchased? A) This cannot be determined from the information presented. B) Their market price has declined. C) Their market price has increased. D) Their market price has remained unchanged.

C) Their market price has increased. Because inflation is down and bond yields have declined, the bonds are selling for a premium due to an increase in value.

When, as per the Sharpe ratio, a stock exhibits superior performance, it implies A) a high beta. B) a negative alpha. C) a positive alpha. D) a low beta.

C) a positive alpha. The higher the Sharpe ratio, the higher the risk-adjusted return. In other words, the stock is returning significantly more than the risk-free rate. That will result in a positive alpha. Beta is not part of the Sharpe ratio.

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

C) dividing the remainder of the risk-free rate subtracted from the security's actual return by its standard deviation The return from a security can be adjusted for the risk associated with it by subtracting the risk-free rate from the security's actual return and then dividing that by its standard deviation, the basic measure of unsystematic risk. This is commonly known as the Sharpe ratio.

When an investor notices that a bond's coupon yield is lower than its current yield, that is an indication that the bond A) is in danger of going into default B) is probably rated investment grade C) is selling at a discount D) is selling at a premium

C) is selling at a discount The coupon yield, or nominal yield, is the rate stated on the face of the bond. It never changes. However, because the current yield is computed by dividing the coupon rate by the current market price, this return will constantly be in flux. Anytime the price of the bond is below par (selling at a discount), its current yield will be higher than the coupon.

Under the Uniform Securities Act, investment advisory contracts A) are cancelable without penalty for 48 hours after the customer signs B) cannot be assigned without the Administrator's approval C) must contain a description of fees D) must list each state in which the adviser is registered

C) must contain a description of fees Under the USA, all advisory contracts must be in writing and contain descriptions of how fees are determined. Contracts are valid upon signing, need not list all states in which an adviser is registered, and cannot be assigned without the client's approval. However, if the brochure is not delivered at least 48 hours before the signing of the contract, the client has the right to withdraw without penalty for 5 business days. Administrator approval is not required.

An investor with a lower discount rate will most likely have which of the following views about an investment? A. Lower present value and higher NPV B. Lower present value and lower NPV C. Higher present value and higher NPV D. Higher present value and lower NPV

C. Higher present value and higher NPV

If a public customer plans to purchase stock in a company that has been listed on a stock exchange for the past year in a regular-way secondary transaction, when must the customer receive the prospectus? A) Before the order entry B) Before the settlement date C) No later than 3 days from the settlement date D) Are no prospectus delivery requirements for this transaction

D) Are no prospectus delivery requirements for this transaction Because this is a secondary market transaction in a listed stock, there is no requirement that a prospectus be delivered to the customer.

Under the Uniform Securities Act, which of the following statements is (are) TRUE regarding civil liability of advisers and broker-dealers? I. The statute of limitations for civil liability is five years. II. A lawsuit against a broker-dealer or adviser can be avoided if restitution, costs, and interest are paid to a client. III. If restitution is made to a client by a broker-dealer, the Administrator may not prosecute the securities violation. A) I and II B) II and III C) I only D) II only

D) II only Do not confuse the statute of limitations for criminal prosecution (5 years) with the statute of limitations for civil liability (3 years from the date of the event or 2 years from discovery, whichever occurs first). Because civil liability under the act is limited to restitution, costs, and reasonable interest, a lawsuit could be avoided by a return of the investor's funds plus interest. Payment of restitution to a client does not prevent the Administrator from prosecution for violating the provisions of the act.

Under the NASAA Model Rule on Custody Requirements for Investment Advisers, an investment adviser would be permitted to maintain custody of customer cash and/or securities if A) the IA maintained net worth of at least $10,000 B) permission was obtained from the Administrator and custody was not prohibited by that state's rules C) customer permission was obtained prior to entering into the contract D) notification was given to the Administrator and custody was not prohibited by that state's rules

D) notification was given to the Administrator and custody was not prohibited by that state's rules In order to maintain custody, notification must be given to the Administrator and, obviously, the state must not have a rule forbidding custody. Does the customer have to approve of the custody arrangement? Yes, but that is done AT the time of entering into the contract, not before. What about net worth? Under the USA, in order to maintain custody, an IA must have net worth in the amount of no less than $35,000, or provide a suitable surety bond.

All of the following factors have an inverse relationship to a bond's duration except A) coupon rate. B) current yield. C) yield to maturity. D) time to maturity.

D) time to maturity. The relationship between the time to maturity (length) and duration is a linear one. That is, the longer the time until the bond matures, the higher (longer) the duration - it is a direct relationship. Yields, on the other hand, have an inverse relationship with duration. That is, the higher the yield, the lower (shorter) the duration.

A client purchased a variable life insurance policy but is concerned with the market volatility and would now prefer a more permanent form of insurance. Which of the following statements regarding making such an exchange is FALSE? A. The contract exchange provisions must be available for a minimum of two years B. The exchange must be offered without any medical underwriting or evidence of insurability C. The new policy will be issued on a retroactive basis to the contract date of the original VLI policy for the purposes of premium calculations D. At the time of the exchange the insured may increase, decrease, or keep the same death benefits as the minimum guaranteed in the VLI contract

D. At the time of the exchange the insured may increase, decrease, or keep the same death benefits as the minimum guaranteed in the VLI contract(death benefit is the same upon conversion and cannot be adjusted)

A young family breadwinner wished to protect his family form his premature death until his young children have completed their college education. The most economical option to meet this goal is A. Universal life B. Whole life C. Variable universal life D. Term life

D. Term life

All of the following statements regarding insurance-based products are true except? A. A fixed annuity offers tax-deferred guaranteed rate of return for the contract holders entire life B. A variable annuity offers tax deferred participation in equity markets but at a higher cost than similar investments made through mutual fund holdings C. Whole life insurance may be described as "permanent life insurance" or "cash value life insurance" D. The death benefit in a universal life insurance policy is the greater of the cash value or the sum of the premiums contributed

D. The death benefit in a universal life insurance policy is the greater of the cash value or the sum of the premiums contributed(death benefit is the policys face amount and may include the value of the cash account)

Which of the following characteristics of Variable Life Insurance is guaranteed? Premiums Cash Value Death Benefit

Death Benefit

How frequently are the following calculated in a variable life insurance policy? Death benefits Cash value Separate account unit values

Death benefits = Annually Cash value = Monthly Separate account unit values = Daily

A _________________________ values a bond by discounting the expected free cash flows to their present value

Discounted Cash Flow (DCF)

What takes priority between wills, TOD accounts and Beneficiaries

TOD Account Supersedes a Will A TOD account skips the probate process and takes precedence over a will. If you will all of your money and property to your children, but have a TOD account naming your brother the beneficiary, he will receive what's in the account and your children will get everything else. During probate, designated beneficiaries take priority over your Will. ... If you fail to designate any beneficiaries or if your designated beneficiary predeceases you and you do not have a contingent beneficiary, your retirement account will likely be subject to probate. (You cant have a beneficiary and a TOD on the same account, TOD and Beneficiary takes priority over Wills. This is mainly done to avoid the probate process)

How are distributions from a life insurance policy taxed if the insured has not yet died?Client surrenders policy

Taxable(taxed on the amount withdrawn greater then the basis)

The Sharpe Ratio is the average annual return of a security less the risk-free rate divided by the security's _________________________. In other words, the Sharpe ratio is a risk-adjusted return because it measures the amount of return per unit of risk taken; the most common risk-free rate is that paid by 91-day U.S. Treasury bills.

standard deviation