65 FINALS

A company's current assets double. Its current liabilities quadruple. The company's current ratio will: A increase by 50% B decrease by 50% C increase by 100% D decrease by 100%

The best answer is B. Assume that a company has $1 of current assets and $1 of current liabilities. The current ratio is $1 current assets / $1 current liabilities = 1. If the current assets double, they will now be $2. If the company's current liabilities quadruple, they will now be $4. The current ratio is $2 current assets / $4 current liabilities = .50. The current ratio has fallen from 1 to .50, a decline of 50%.

When short term interest rates are lower than long term interest rates, the yield curve is said to be: A flat B normal C inverted D bell shaped

The best answer is B. A normal yield curve is an ascending curve - with short term rates lower than long term rates. This occurs when credit conditions are not tight. If the Federal Reserve sharply tightens credit, the effect is felt mainly on short term rates, which can then rise above long term rates. This is an inverted or descending yield curve.

Which of the following would be defined as "earned income" under IRS regulations? I Social Security payments II Tips III Royalty payments IV Bonus payments

The best answer is C. Earned income includes wages, salaries, tips, bonuses, royalties for books and self-employment income. Social security payments are "transfer payments" that are taxed at the same rate as earned income, but they are not defined as such. (Note that starting in 2019, alimony payments are no longer taxable to the recipient, nor are they deductible to the payer.)

During which phase of the economic cycle would one most likely find monetary "deflation" starting to occur? A Expansion B Prosperity C Recession D Recovery

The best answer is C. During the recession phase of an economic cycle is when price deflation begins to occur. As output falls and there are fewer employed workers, pressure is put on employees for wage concessions. As output falls, decreased demand for goods and services also causes prices to fall. Thus, deflation tends to occur.

A corporation that has a market capitalization of $40,000,000 would be an appropriate investment for a: A Micro Cap Mutual Fund B Small Cap Mutual Fund C Mid Cap Mutual Fund D Large Cap Mutual Fund

The best answer is A. A "Micro Cap" stock is one with a market capitalization of up to $300 million. A "Small Cap" stock is one with a market capitalization between $300 million and $2 billion. A "Mid Cap" stock is one with a market capitalization between $2 billion and $10 billion. A "Large Cap" stock is one with a market capitalization over $10 billion.

Which of the following can accompany the delivery of a prospectus for a new issue offering to a customer? I A tombstone for that issue II An advertisement for that issue III A discount coupon for that issue

The best answer is A. A "tombstone" announcement is not legally considered to be an advertisement (which is prohibited in connection with a new issue offering) - the content is so limited that technically it is an "announcement." Advertisements or inducements (such as a discount coupon) to buy the issue are prohibited under the 1933 Act. The use of tombstone announcements, on the other hand, is permitted.

When short term interest rates are the same as long term interest rates, the yield curve is said to be: A flat B normal C inverted D bell shaped

The best answer is A. When short term rates are the same as long term rates, this is a flat yield curve. If the Federal Reserve tightens credit to a limited extent, the effect is felt mainly on short term rates, which can then rise to the same level as long term rates.

In order to protect a gain on a long stock position, a customer should place a: A sellstop order B selllimit order C not held order D fill or kill order

The best answer is A. A gain on a long stock position will be lost if the market falls. The sell order that is placed below the current market is a sell stop order (sell limits are placed above the current market). If the market begins to fall, the stop is triggered and the stock is sold out at the market price.

When the market is reaching an "oversold" condition, which of the following statements are TRUE? I Market price averages are decreasing daily II Market price averages are increasing daily III The number of declining issues is decreasing relative to the number of advancing issues IV The number of declining issues is rising relative to the number of advancing issues

The best answer is A. An oversold condition in the market occurs when the market price averages are decreasing daily, but the strength of the market decline (the number of issues declining versus the number of issues advancing) is weakening. The market is reaching an "oversold" condition, and is approaching a trough. Thus, the next market move is likely to be upwards.

In order to establish a retirement financial plan to meet a customer's goals, the most important consideration is: A capital needs B investment objective C current income level D financial experience

The best answer is A. A "capital needs analysis" determines the amount of capital that a person needs to have at retirement in order to meet their anticipated standard of living. Most people need less income in retirement than at other stages of life. A "typical" capital needs analysis might project that to retire comfortably in, say, 20 years, an individual will need 75% of his or her current income level. Then the plan looks at the sources of retirement income that the individual will have 20 years in the future (e.g., social security, retirement plan income, annuity income) and subtracts it from that need. The shortfall (if any) is the income that must be "made up." Then the plan looks at that individual's current investment holdings, house value, other asset holdings such as variable annuity or whole life policies, and projects their likely growth 20 years hence. After subtracting loans against these assets, the net equity is the asset base that can be used to generate income in retirement to meet any shortfall. Finally, the plan determines the additional investments, if any, that must be made over the next 20 years to offset the current shortfall. Thus, a capital needs analysis is really looking at the future value of a client's current asset holdings; versus what they will really need as an asset base at retirement at a future date; to support their retirement standard of living.

The process by which future value is determined is known as: A compounding B discounting C accreting D amortizing

The best answer is A. To find future value, the initial investment amount is compounded at the expected rate of return or interest rate, to find the ending value of that investment.

Net capital rules for broker-dealers under the Securities Exchange Act of 1934 set: I Minimum Net Worth amounts II Minimum Liquid Net Worth amounts III Maximum leverage ratios of Debt to Net Worth IV Maximum leverage ratios of Debt to Liquid Net Worth

The best answer is D. Broker-dealer net capital is the firm's liquid net worth (liquid assets minus all liabilities). It is the money that would be left over if all of the firm's liquid assets were converted to cash and this was used to pay off all liabilities. Minimum net capital amounts for broker-dealers are set under the Securities Exchange Act of 1934. The ratio of debt to net capital is a leverage measure for a broker-dealer, with maximum limits set under the 1934 Act.

A client invests in an equity indexed annuity that has a guaranteed 3% annual return, a 10% cap and an 80% participation rate. In a year when the reference index increases by 9%, the investor will be credited with interest at the rate of: A 2.4% B 3.0% C 7.2% D 9.0%

The best answer is C. Because of the 80% participation rate, the client will only be credited 80% of 9% = 7.2% for this year. Note that this is below the cap rate of 10%, which puts an absolute limit on the annual interest credit to the account.

A portfolio with a beta of +1 has: A systematic risk B non-systematic risk C both systematic and non-systematic risk D no risk

The best answer is A. A portfolio with a beta of +1 is one that moves in the same direction and at the same rate as the market. Thus, this portfolio only has market risk - which is also known as systematic risk. This is the risk that cannot be diversified away. high "alpha" moves faster than the average of the stocks in its grouping; a stock with a low "alpha" moves slower than the average of the stocks in its grouping

Which of the following items are included as deductible passive losses on the income tax returns of limited partnership investors? I Interest payments on secured debt II Principal payments on secured debt III Intangible drilling costs IV Depletion allowances

The best answer is C. Interest payments on loans, intangible drilling costs (the cost of drilling for oil and gas), and depletion allowances (the recovery of monies paid to buy the oil or gas reserve) are all tax deductible items under the Internal Revenue Code since they are "ordinary and necessary business expenses." Repayment of principal on a loan is not tax deductible.

All of the following persons are excluded from the definition of a broker-dealer or are exempt from registration as a broker-dealer under the Uniform Securities Act, EXCEPT a firm: A with an office in the State that effects trades exclusively with other broker-dealers B with no office in the State that effects trades exclusively with trust companies and other financial institutions C with no office in a State with a broker-dealer "de minimis" exemption that has a few clients in the State in the preceding 12 months D with an office in that State that is a trust company that deals with the public

The best answer is A. A firm is not defined as a broker-dealer if it has no place of business in the State and transacts solely with issuers, other broker-dealers, and financial institutions. However, if a firm that effects securities trades has an office in a State, it is defined as a broker-dealer and must register in the State. Thus, the broker-dealer in Choice A must register and the broker-dealer in Choice B is not required to register. The "de minimis" exemption for broker-dealers is only offered in a minority of States, and typically applies to out-of-state broker-dealers who only have 3 or fewer clients in that State. In Choice C, the State has a broker-dealer "de minimis" exemption and would not be required to register. Banks, S&L's, and trust companies are also excluded from the definition of a broker-dealer, so no registration as a broker-dealer is required in Choice D.

In what way are Class B mutual fund shares unique? A They convert to Class A shares after being held for a stated period of time B They charge neither an up-front sales load nor a redemption fee C They charge a level annual load regardless of how long the shares are held D They are subject to lowered sales charges (breakpoints) for larger dollar purchases

The best answer is A. Class A mutual fund shares charge a 1-time up-front sales charge reduced by breakpoints for larger dollar purchases. They also usually have no annual 12b-1 fees. Class B shares have no up-front sales charge. Instead, they charge a redemption fee if they are redeemed within the first 7 years, with the fee declining each year. Once the fee becomes "0," they typically convert to Class A shares. This is a benefit because they charge an annual 12b-1 fee of around .50%. Once they convert to Class A shares, no more annual 12b-1 fees are charged. Class C shares have no up front sales charge and no redemption fee. Instead, they charge a level annual 12b-1 fee, typically around .75%.

Changing the mix of a portfolio that has been structured to meet specific financial goals is called: A Strategic allocation B Tactical allocation C Rebalancing D Risk adjustment

The best answer is A. Strategic portfolio management is the determination of the percentage allocation to be given to each investment vehicle within an asset class - for example a portfolio might be strategically allocated as follows: Money Market Instruments10%Corporate Bonds30%Large Cap Equities50%Small Cap Equities10% Changing these percentages as conditions change is part of ongoing strategic asset management. Tactical asset management is the permitted variance within each allocation percentage. For example, Large Cap equities are allocated 50%, but the manager may be tactically allowed to lower this percentage to, say, 40% or raise it to 60%. Thus, if the manager believes that Large Cap equities will underperform the market, he or she can lower the allocation to 40%; and if the manager believes that they will outperform the market, he or she can raise the allocation to 60%. This gives the manager some ability to "time the market" when conditions are overbought or oversold. Portfolio rebalancing the reallocation of funds in an asset allocation model from overperforming asset classes to those that have underperformed. In this manner, the percentage allocations to each asset class are kept within the desired range.

Securities that are listed on a national stock exchange: A are subject to a State"blue chip" exemption from registration B are subject to a Federal "blue chip" exemption from registration C must be registered with both the State and the SEC D are subject to a "blue chip" exemption from both State and Federal registration

The best answer is A. The "Blue Chip" exemption is only given under the Uniform Securities Act - exchange listed or NASDAQ securities are exempt from State registration. Essentially, the State Administrator is not worried about the issuer of such securities being "shady." These are now classified as "federal covered securities," which are only required to be registered federally and which cannot be required to be registered in each state. Thus, the issues that must be registered in the State are the smaller "OTC: issues" - where there has been a history of frauds that have occurred. However, under the Securities Act of 1933, all of these securities must be registered (though the SEC gives a much easier registration process for the "listed" issues).

When making an investment decision using CAPM, the interest rate that would be used as the minimum hurdle rate is the: A 90 day Treasury Bill rate B 5 year Treasury Note rate C 10 year Treasury Note rate D 30 year Treasury Bond rate

The best answer is A. The Capital Asset Pricing Model (CAPM) finds the expected rate of return of an investment, based on the investment generating the risk-free rate of return plus a risk premium. The risk free rate of return would be the rate for a Treasury security with a maturity that approximates the life of the investment. This would be the minimum return necessary to make the investment (also called the "hurdle rate" - as in clearing a hurdle in racing) if it was deemed to be "risk-free." Because rates increase as maturity lengthens, the lowest interest rate risk free security given as a choice is the 90 day Treasury Bill rate. A very short term safe investment would have to give an expected return that is greater than the 90 day Treasury Bill "risk-free" rate of return in order to "clear the hurdle" and be chosen as an investment instead of the short-term Treasury Bill.

The purchaser of an immediate 15-year period certain annuity will receive payments for: A a 15-year time frame following annuitization, even if the purchaser dies before the end of the 15-year term B a minimum 15-year time frame, or the life of the annuitant, if this is shorter C the life of the annuitant, but will pay for a minimum of 15 years if the annuitant dies before this period elapses D any selected 15-year time frame, even if the purchaser dies before the end of the 15-year term

The best answer is A. The question is simply asking about an immediate 15-year period certain annuity. This would not be an annuity option in a variable annuity contract. It is only available as a fixed annuity. The purchaser makes a lump sum payment, which is immediately annuitized and which will then pay for 15 years. There is no life annuity feature associated with this. It is a type of annuity that can be purchased from an insurance company that only pays for a stated time period - in this case 15 years. These are used most often to bridge a gap between early retirement and when social security payments start. For example, if an individual retired at age 55 and full social security payments started at age 70, he or she could buy this contract to provide payments for that 15-year gap.

An individual's registration as an agent would be denied under the Uniform Securities Act for all of the following reasons EXCEPT the individual was convicted: A of a drug misdemeanor 8 years ago B of a drunk driving felony 8 years ago C of a securities misdemeanor 8 years ago D in a lawsuit brought by the Securities and Exchange Commission 8 years ago

The best answer is A. An agent's registration will be denied if the agent was convicted of a misdemeanor involving securities or monies; or any felony; within the past 10 years. A conviction 8 years ago for a drunk driving felony, is another reason for denial of registration. A conviction 8 years ago for a drug misdemeanor, while not a good thing, is not a stated reason for denial of registration.

A broker-dealer located in State A makes an offer of securities to a customer whose principal residence is in State B. The customer has temporarily moved to State C and has asked the post office in State B to forward the mail to the customer's address in State C. Which State Administrator(s) has (have) jurisdiction over the offer? I State A II State B III State C

The best answer is A. Because the broker-dealer is located in State A, that State Administrator has jurisdiction. Normally, if an offer is received in a State (B in this case), then State B's Administrator would have jurisdiction. But the offer was never received in State B because it was forwarded by the post office on to State C. Thus, an offer was never made in State B and that State Administrator does not have jurisdiction. One would think that because the offer was ultimately received in State C, that it would have jurisdiction, but this is not the case either. In this situation, the Uniform Securities Act makes an exception. The issue here is that the broker-dealer had no idea that the mail was forwarded to State C and should not be subject to the law of State C on this offer. The intent is to make sure that an innocent broker-dealer is not "entrapped" by a State and made subject to that State's law when an offer of securities is forwarded into that State by a third party without the broker-dealer's knowledge.

The earliest that an American style option can be exercised is: A anytime before the expiration date of the contract B the business day preceding the expiration of the contract C the Wednesday preceding the third Friday of the month D the Saturday following the third Friday of the month

The best answer is A. European style options can only be exercised on the expiration of the contract. Contracts expire on the third Friday of the month. The last time to exercise is the third Friday of the month, up until 5:30 PM ET. In contrast, American style options can be exercised anytime prior to expiration. Stock options are American style; the vast majority of index options are European style.

Fundamental analysts would evaluate which of the following? A Liquidity ratios B Chart movements C Trading volumes D Advance-decline ratios

The best answer is A. Fundamental analysts select investments based on fundamentals such as earnings trends, balance sheet strength (liquidity ratios), management, etc. Technical analysts select investments based on chart movements, trading volumes, advance-decline ratios, etc.

If the balance of payments is running a deficit, which of the following statements are TRUE? I More U.S. dollars are being spent abroad than in the U.S. II Fewer U.S. dollars are being spent abroad than in the U.S. III There are increasing levels of net imports of foreign goods in the U.S .IV There are decreasing levels of net imports of foreign goods in the U.S. A I and III B I and IV C II and III D II and IV

The best answer is A. If the balance of payments is running a deficit, then more U.S. Dollars are being spent abroad for foreign goods and services than are being spent in the United States by foreigners for domestic goods and services. Increased levels of U.S. imports will cause more dollars to leave the U.S., widening the deficit.

A corporation has reported quarterly earnings of $3 per share. The corporation retained $9 of earnings at year end The corporation's dividend payout ratio is: A 25% B 33% C 66% D 75%

The best answer is A. If the company retained $9 of its $12 of earnings per share (4 quarters at $3 = $12 annual earnings), then it paid out the other $3. The dividend payout ratio is: $3 / $12 = 25%.

Which of the following investments is LEAST defensive during deflationary periods? A Common Stock B Preferred Stock C 10-Year Bonds D 30-Year Bonds

The best answer is A. In a deflationary period, interest rates will fall, raising the prices of fixed income securities. Thus, fixed income securities are defensive securities in times of deflation. Equity securities' price movements will depend on the state of the economy at the time deflation occurs, and thus would not be defensive.

Which of the following are NOT defined as securities under the Uniform Securities Act? I Individual Retirement Accounts II Keogh Plans III Commercial Paper IV Real Estate Condominium Investments

The best answer is A. Individual Retirement Accounts and Keogh Plans are specifically excluded from the definition of a security. Real Estate Condominium investments can be considered to be a security when the condominium is managed by a third party for profit. Commercial Paper is also defined as a security. However if it has a maturity of nine months or less, is issued in amounts of $50,000 or more, and is rated in one of the top 3 ratings categories, it is exempt from registration.

Market value per share x Outstanding Shares equals a corporation's: A Market capitalization B Net asset value C Total long term capital D Stockholders' Equity

The best answer is A. Market capitalization of a company is the current market price per share times the number of outstanding shares (issued stock minus treasury stock). The ratings agencies categorize companies by their market capitalization - e.g., micro-cap, small cap, mid-cap, and large cap.

Which of the following statements are TRUE regarding the actions of an investment adviser and its accounts? I The transfer of a customer account to another investment adviser due to the acquisition of the advisory firm must be approved by the customer of the acquired firm II The transfer of a customer account to another investment adviser due to the acquisition of the advisory firm does not have to be approved by the customer of the acquired firm III The transfer of a customer account due to the retirement of the investment adviser must be approved by the customer whose account is being transferred IV The transfer of a customer account due to the retirement of the investment adviser does not have to be approved by the customer whose account is being transferred

The best answer is A. The transfer of an investment adviser account to another investment adviser must be approved by the customer. If an investment adviser is "acquired" - its accounts are being transferred to another adviser and consent of each of the acquired adviser's clients is required. If the adviser is retiring and transferring his or her accounts to another firm - again, in this case, the clients must consent to the transfer.

Under NASAA rules, each Registered Investment Adviser must establish, implement and maintain a Business Continuity and Succession Plan that: A is based on the investment adviser's business model including the size of the firm, types of services provided, and number of business locations B ensures that key management personnel have been familiarized with the policies and procedures to be followed in the event of a significant business interruption C designates the investment adviser's independent outside accountant as the person to take responsibility in the event of a significant business interruption D announces to the public in local newspapers and on the internet the fact that a significant business interruption has occurred

The best answer is A. NASAA has a Model Rule covering "Business Continuity and Succession Planning for Investment Advisers" (Broker-Dealers are already covered under a similar FINRA rule). It states that every investment adviser must establish, implement and maintain a Business Continuity Plan based on the facts and circumstances of the RIA's business model including the size of the firm, types of services provided, and number of locations of the investment adviser. The plan must provide, at a minimum, for: The protection, backup, and recovery of books and records; Alternate means of communicating with customers, key personnel, employees, vendors, service providers and regulators, including providing notice to these persons of significant business interruption, cessation of business activities or death or unavailability of key personnel; Office relocation in the event of temporary or permanent loss of a principal place of business; Assignment of duties to qualified persons in the event of death or unavailability of key personnel; and Minimizing service disruptions and client harm that could result from a significant business disruption.

Which of the following statements concerning open-end investment companies are TRUE? I They may issue new shares continuously II They must redeem outstanding shares based on net asset value III Share prices are determined by the forces of supply and demand IV They are permitted to borrow up to 80% of the value of net equity to achieve their investment objectives A I and II only B III and IV only C I, II, and III only D I, II, III, and IV

The best answer is A. Open-end investment companies continuously issue shares as customers make purchases and redeem outstanding shares as customers make redemption requests. The issuance or redemption price is based on NAV as computed as of the next close of the U.S. securities markets after the order is received. Therefore, share prices are determined by the next calculation of net asset value, not by the forces of supply and demand.Open-end investment companies may borrow from banks, as long as they maintain asset coverage of 300%. This means that the fund must have at least $3 of net assets pledged for every $1 borrowed.

SEC Rule 12b-1 allows open-end investment companies to: A charge distribution fees against net assets B charge redemption fees against net assets C impose sales charges on new share purchases D impose management fees against net assets

The best answer is A. SEC Rule 12b-1 allows management companies to charge against net assets, an annual fee for the cost of soliciting new investors to the fund.

A fundamental analyst is likely to use technical analysis to determine: A transaction timing B investment selection C portfolio diversification D market volatility

The best answer is A. Technical analysis is valid for fathoming short term price trends and is very useful in determining the specific time to buy or sell. However, the actual buy or sell decision is best made through fundamental analysis.

The Administrator alleges that an agent of an out-of-state broker-dealer solicited the sale of an unregistered security within that State. The broker-dealer must: A provide evidence that the security was exempt from registration B prove that the transaction was unsolicited C terminate the agent D all of the above

The best answer is A. The Administrator is alleging that the broker-dealer solicited the sale of an unregistered security in that State. To solicit a transaction in the State, unless an exemption is available, the broker-dealer, agent, and security, must be registered in that State.

The measure of incremental return earned for taking on incremental risk is: A (Total Return - Risk Free Return) / Standard Deviation B (Sum of All Cash Flows / # of Years) / Investment Amount C (Annual Income + Annual Accretion - Annual Amortization) / Average Life D (Total Return - Risk Free Return) / Duration

The best answer is A. The Sharpe Ratio ((Total Return - Risk-Free Rate of Return) / Standard Deviation) measures incremental return earned for taking on incremental risk. Standard deviation is the statistical measure of risk, and what gives this question away is that only Choice A has "Standard Deviation" as part of the answer.

A corporation has issued 10%, $1,000 par convertible debentures, convertible at $100. The common stock is currently trading at $90. If the bond and the common are trading at parity, a customer purchasing 5M of the bonds will pay: A $4,500 B $5,000 C $5,225 D $5,500

The best answer is A. The bonds are convertible at $100, based on $1,000 par value. Therefore each bond converts into 10 shares ($1,000 par / $100 conversion price). If the common is trading at $90, the bond must be trading at 10 times this to be at parity. $90 x 10 = $900 parity price of one bond. The parity price of "5M" ($5,000 face amount, "M" is Latin for $1,000) is $900 x 5 = $4,500.

Which item would NOT be found on a corporation's income statement? A Dividends B Taxes C Sales D Expenses

The best answer is A. The income statement details all items of revenue and expense to arrive at net income after tax. This is the income figure that is used to compute earnings per share. Dividends are paid out of a corporation's net income after tax.The actual dividends paid are shown in a different smaller financial statement - the retained earnings statement. This starts with year prior retained earnings; then adds that year's net income after tax; then subtracts dividends paid; to arrive at the year-end retained earnings for that company.

The interest income earned on which of the following municipal bonds would be included in the alternative minimum tax computation I Industrial Revenue Bond II Convention Center Bond III Turnpike Revenue Bond IV School District Bond

The best answer is A. The interest income derived from "non-essential use" private purpose revenue bonds is included in the alternative minimum tax computation. Industrial Revenue Bonds, and convention center bond issues fall into this category. The other choices are public purpose bonds and public facility revenue issues - these are not subject to the alternative minimum tax (AMT).

Yield curve analysis is useful for an investor in debt securities for all of the following reasons EXCEPT: A the yield curve is used to compare the marketability risk of one issue to that of another B investors can compare rates of return relative to changing maturities C the yield of a specific security can be compared to the market expectation for similar securities D the curve shows market expectations for interest rates

The best answer is A. The yield curve is not used to compare the marketability risk of different issuers. This is the risk that the security will be difficult to sell. The yield curve shows market expectations for interest rates - depending on the shape of the curve. An ascending curve indicates that interest rates are likely to rise in the future; a descending curve indicates that interest rates are likely to fall in the future. Because the yield curve shows all the market interest rates for all maturities, investors can compare rates against differing maturities. The yield curve is an average for securities of a given risk class. An investor can compare the yield on a specific security to the curve for the risk class to evaluate the attractiveness of that investment. If there is a great demand for a specific maturity, the price will be pushed up and the yield lowered. One can pick this out in a yield curve since the curve would drop for that specific maturity.

A 5% coupon bond is being offered on a 6% basis. If interest rates for similar bonds rise above 6%, the basis for this bond will: A increase B decrease C be unaffected D be volatile

The best answer is A. This is pretty simple. A basis quote is a yield to maturity quote. If market yields are rising, the basis quote will rise, forcing the bond's price down. If market yields are falling, the basis quote will fall, forcing the bond's price up.

If a bond is purchased at a discount, which of the following statements are TRUE? I Yield to call is higher than the yield to maturity II Yield to call is lower than the yield to maturity III Yield to maturity is higher than the current yield IV Yield to maturity is lower than the current yield A I and III B I and IV C II and III D II and IV

The best answer is A. When a bond is purchased at a discount and called prior to its redemption date, the yield to call received will be higher than if the bond is held to maturity since the discount will be earned faster. Yield to maturity will always be higher than current yield for a discount bond because YTM includes the earning of the discount as part of the overall return received from the bond; while current yield ignores this component (it is simply Annual Income / Current Market Price).

During a period when the yield curve is flat: A short term rates are more volatile than long term rates B long term rates are more volatile than short term rates C short term and long term rates are equally volatile D no relationship exists between short term and long term rate volatility

The best answer is A. Whether the yield curve is ascending (normal), flat or descending, the true statement always is that short term rates are more volatile than long term rates. Short term rates are susceptible to Federal Reserve influence, and move much faster than do long term rates. Long term rates respond more slowly; and reflect longer term expectations for inflation and economic growth, among other factors.

Under SEC rules, an "access person" employed by an investment adviser has access to: A investment adviser accounting systems B nonpublic information on client transactions C investment adviser electronic software and hardware D nonpublic information on client portfolio performance

The best answer is B. An "access person" at an investment advisory firm has access to nonpublic information and is in a position to use it for personal profit (which is illegal, of course). Access persons at IAs include: officers and directors of the IA; all supervised employees that have access to nonpublic information on client transactions (this would mainly be institutional client activity such as mutual fund clients, which could be making large purchases and sales); portfolio managers employed by the IA (who could trade personally to take advantage of upcoming large portfolio trades that they place); and anyone making securities recommendations to clients or who has access to such recommendations that are nonpublic.

Dollar Weighted Average Return is the same as: A Annualized Rate of Return B Internal Rate of Return C Time Weighted Average Return D Expected Rate of Return

The best answer is B. Dollar weighted average return is most often used when evaluating a specific investor's mutual fund return. It is the return achieved, accounting for the timing of all cash flows (deposits) into the fund and all cash redemptions from the fund made by that investor. It is the same as the Internal Rate of Return, and will vary with the timing of each investor's deposits and withdrawals. Because investors often "chase" past performance, they will buy a fund "too late" (after the fund has posted its best performance and now enters a period of lesser performance) and will sell "too soon." Thus, for the individual investor, dollar weighted average return is often lower than time weighted average return. In contrast, time weighted average return is the measure used for mutual fund performance charts (Total Return, which shows dividends and capital gains as continually reinvested). It reflects the growth that would be achieved from a 1-time investment into the fund and then holding that investment over time - this is a buy and hold strategy. This method is consistent when comparing one fund's performance to another fund's performance.

When prices in an economy are adjusted with relation to a price index by force of contract, this is called: A hyper inflation B inertial inflation C loop inflation D stagflation

The best answer is B. Inertial inflation is inflation that is contractually embedded in the economy. For example, COLAs (Cost of Living Adjustments) in union and government employment contracts are tied to increases in the inflation rate. Inertial inflation can be "self-fulfilling" because as wages rise due to COLAs, this creates inflationary pressure on prices of goods and services, so their prices rise, which triggers another COLA increase, etc. In periods of sustained inflation, bonds do terribly because interest rates rise, and stocks don't fare well either. Tangible assets such as real estate are the best investments in periods of sustained inflation.

PDQ Company $10 par common stock is currently trading at $40. PDQ is currently paying a common dividend of $.20 per share quarterly. The current yield of PDQ stock is: A 0.5% B 2.0% C 5.0% D 8.0%

The best answer is B. Yields are based on annual return. The formula for current yield is: annual income/market price= CY $.80/$40 = 2.00%

Which statements are TRUE about the "burden of proof" needed to vacate a stop order entered by the Administrator in a securities registration? I If the issue is being registered by coordination, the burden of proof is on the Administrator to show that registration should not be allowed to proceed II If the issue is being registered by coordination, the burden of proof is on the applicant to show that registration should be allowed to proceed III If the issue is being registered by qualification, the burden of proof is on the Administrator to show that registration should not be allowed to proceed IV If the issue is being registered by qualification, the burden of proof is on the applicant to show that registration should be allowed to proceed

The best answer is B. Registration by Coordination in a State permits the applicant to coordinate an SEC registration with the registration requirement in each State. Essentially, the State accepts the SEC registration statement as the State filing document. Registration becomes effective in the State when the SEC registration is effective. In such a registration, the State Administrator can only issue a stop order if "it is in the public interest" and the Administrator can prove that the offering would be illegal in the State, is not complete, or required filing fees have not been paid (thus, the burden of proof is on the Administrator). On the other hand, in a Registration by Qualification or Filing, there is no concurrent SEC registration. The security is only being registered in the State. In such a case, the Administrator can issue a stop order "if it is in the public interest" and the applicant cannot prove that the offering would not be illegal in the State (the burden of proof is on the applicant).

A Debt/Equity Ratio of 1 means that: A the company will be able to pay all of its debts in the upcoming year B shareholders and creditors have an equal stake in the company's assets C the company has not used any leverage in its capital base D the company's interest payments to bondholders equals the company's dividend payments to shareholders

The best answer is B. The Debt/Equity ratio measures a company's leverage - the use of borrowed funds in the company's capital base. Companies borrow long-term funds for capital expenditures when it is cheaper to do so, meaning interest rates are low. Furthermore, the company can deduct the interest payments. The risk is a business decline, where the company might not be able to cover its fixed interest expense. If a company has borrowed $10,000,000 and it has $10,000,000 of stockholders' equity, it has long term capital of $20,000,000. Its Debt/Equity Ratio is $10,000,000 Debt / $10,000,000 Equity = 1. This means that both creditors and shareholders have an equal stake in the company. Notice that the ratio has nothing to do with interest payments or dividend payments made.

A portfolio of securities with a beta of 1.5 has produced an average annual return of 18%. Which investment should the portfolio manager consider adding? A A stock with an 6% growth rate and a beta of .6 B A stock with a 10% growth rate and a beta of .8 C A stock with a 12% growth rate and a beta of 1.5 D A stock with a 20% growth rate and a beta of 2

The best answer is B. The portfolio has generated a 18% return by taking on extra risk (beta of 1.5 is .5 above the market risk level of 1). If we divide the return by the beta, the market return for the portfolio would be 18% / 1.5 = 12%. Any investment that exceeds this amount (risk adjusted) is a good one for the portfolio. Choice A: 6% / .6 Beta = 10% risk adjusted return Choice B: 10% / .8 Beta = 12.50% risk adjusted return Choice C: 12% / 1.5 Beta = 8% risk adjusted return Choice D: 20% / 2 Beta = 10% risk adjusted return

The formula V = P (1 + r)n is used to compute an investment's: A present value B future value C internal rate of return D standard deviation

The best answer is B. This is the formula for compound interest - which determines the "future value" of an investment, compounded with interest over time. "P" is the "original" principal amount; "r" is the interest rate; "n" is the number of years. For example, $1,000 invested at 10% interest for 3 years has a future value of: $1,000 (1.10)3 = $1,000 x 1.331 = $1,331 at the end of the 3rd year.

Mutual fund performance charts show: I Time Weighted Average Return II Dollar Weighted Average Return III a return that is affected by investor cash inflows and outflows IV a return that is not affected by investor cash inflows and outflows

The best answer is B. Time Weighted Average Return is used by mutual funds on their performance charts to show average annual investment returns. It measures how well the fund manager performed in increasing the dollars that have been invested. Additional cash moving into the fund or out of the fund does not affect the computation. This is the average annual return that would be provided from a "buy and hold" strategy. Dollar Weighted Average Return is the same as the Internal Rate of Return. It is the discount rate that takes all of the cash flows from the investment. Dollar Weighted Return takes into account the impact of cash inflows and outflows from purchases and sales as well as growth in assets. The classic comparison of these 2 returns is where a fund receives a large cash inflow after a period of superior performance (which attracted the new investors to the fund) and then suffers a period of poor performance. Time Weighted Average Return shown over the following periods will be much higher than the Dollar Weighted Average Return experienced by the new investors. For example, $100 is invested in a fund at the beginning of the year with a $10 per share NAV = 10 shares purchased. After 6 months, the NAV per share increases to $20 per share and the happy customer invests another $100 (5 more shares). At the end of the year, the NAV falls back to $10 and the investor sells all 15 shares. In this example, the Time Weighted Average Return will be 0% (because the NAV per share was the same at year beginning and year end). However, this customer invested a total of $200 and sold the shares for $150 at year end, experiencing a $50 loss. This equals an annualized dollar weighted average return (IRR) of approximately -25%. If the investor did not make the additional cash deposit at mid year and did not sell the shares at year end, then the 2 measures would have been the same.

A trader purchased 100 shares of XYZ stock at $20 per share. Subsequently, XYZ stock goes to $25 per share and then to $22 per share. During the year, XYZ stock paid a $1 dividend. If the trader is in the 30% tax bracket, what is the total return? A 10.5% B 15% C 21% D 30%

The best answer is B. Total return is presented before tax - since each customer is in a different tax bracket, the after-tax total return would be different for each person. Income+Capital Gain/ Cost of Security=Total Return $1 Dividend + $2 Capital Gain$20 per share=15% Note that the relevant market price for the capital gain is the current market value of $22 per share versus the original cost of $20 per share - any interim price is irrelevant.

Under the Uniform Securities Act, a private placement is an offer where no commissions are paid, made to no more than: Incorrect answer A. You chose this answer. A 5 persons in a 12 month period B 10 persons in a 12 month period C 12 persons in a 10 month period D 15 persons in a 10 month period

The best answer is B. Under the Uniform Securities Act, a private placement is an offer to no more than 10 investors in a 12 month period, where no commissions are paid. Do not confuse this with private placement exemption available under Federal law (Regulation D) which defines a private placement as a sale to no more than 35 "non-accredited" investors and an unlimited number of "accredited" investors. There is no similar wording in State law for private placements.

Which of the following will affect a corporation's Operating Income? A An increase in the company's effective tax rate from 20% to 30% B An increase in depreciation expense due to the purchase of new equipment C An increase in the company's capital expenditures for a new plant facility D An increase in the company's interest expense due to the sale of a new bond issue

The best answer is B. A company's "Operating Income" is Gross Sales less all "Operating Expenses," which include Cost of Goods Sold, Shipping Depreciation and Administrative Expenses. Therefore, an increase in Depreciation Expense will reduce Operating Income.After Operating Income is computed, then Bond Interest is deducted to arrive at Net Income Before Tax. Then Taxes are deducted to arrive at Net Income After Tax.

A contractor for a city is developing a municipal sewer system. The city will issue a bond for the project that will be based on fees assessed on residents of the city that use the sewer system. Which statement is TRUE? A The contractor must register as a broker-dealer since he is in charge of the construction project financed by the bond issue B This is a municipal revenue bond issue C The statutory issuer is the contractor, not the city, and the contractor must register the bonds prior to sale D This is a general obligation bond issue

The best answer is B. A municipal bond backed by user fees is a revenue bond issue. In contrast, a general obligation bond is backed by the municipality's taxing power. The contractor is neither a broker-dealer nor the issuer of the bonds. Finally, municipal bonds are exempt from both Federal and State registration.

The Investment Advisers Act of 1940 requires that an independent public accountant: I conduct an annual surprise audit of registered investment advisers that take custody of customer funds and that send out account statements II conduct an annual surprise audit of registered investment advisers that charge fees for advice about securities III file a Form ADV-W with the SEC within 120 days of completing the exam IV file a Form ADV-E with the SEC within 120 days of completing the exam

The best answer is B. Advisers that take custody of client funds, and send out customer account statements, must submit to annual surprise audits by an independent public accountant. This audit must verify the funds and securities held in custody for customers. After completing the examination, the auditor must sign and file Form ADV-E (as in "Exam") with the SEC within 120 days.

A group of investors is capitalizing a business that is expected to show operating losses for the first 3 years. Which business form is the LEAST advantageous from a tax standpoint? A S Corporation B C Corporation C Limited liability company D General partnership

The best answer is B. C corporations do not allow for "flow through" of income and loss. Net income is computed at the corporate level and tax is paid on that income; or net loss is computed at the corporate level and the loss "stops" at this level and does not "flow through" to the owners of the corporation. General partnerships, limited liability companies and S corporations are not taxable - net income or loss flows through onto the owners' tax returns. Since this business will show losses for the first 3 years, any of these 3 business forms would allow the owners to deduct the losses from the personal tax returns.

In the same year, a customer has $14,000 of long-term capital losses on stock positions and $4,000 of short-term capital gains on options positions. Which statement is TRUE? A The capital losses can be netted against the capital gains and a $10,000 net capital loss is reported, all of which is deductible B The capital losses can be netted against the capital gains and a $10,000 net capital loss is reported, $3,000 of which is deductible C The $14,000 of capital losses on the stock positions must be reported separately from the $4,000 of capital gains on the options positions, with all $14,000 of capital losses being deductible and all $4,000 of capital gains being taxable D The $14,000 of capital losses on the stock positions must be reported separately from the $4,000 of capital gains on the options positions, with only $3,000 of capital losses being deductible and all $4,000 of capital gains being taxable

The best answer is B. Capital gains and capital losses on all assets are "netted" against each other. There is no segregation by type of asset. This customer had $14,000 of long term capital losses on stocks and $4,000 of short term capital gains on options. The customer has a net $10,000 long-term capital loss, of which only $3,000 is deductible in 1 year. The remaining $7,000 of unused net capital losses is carried forward to the next year.

Which of the following are taxable in the year of receipt? I Interest earned from investments II Cash dividends from investments III Stock dividends from investments IV Stock splits on investments

The best answer is B. Cash dividends and interest are taxable each year (unless the interest is exempt). Stock dividends and stock splits are treated as a "return of capital." The cost basis of the shares is reduced proportionately and the number of shares is increased for the stock dividend or stock split.

Which statement is true regarding dollar cost averaging? A If market prices remain constant, the plan will produce a lower average per share cost B If market prices are fluctuating, the plan will produce a lower average per share cost C If prices rise, smaller dollar purchases must be made; while if prices fall, larger dollar purchases must be made D The plan requires that a constant dollar amount be maintained in equity securities, with any excess invested in debt

The best answer is B. Dollar cost averaging requires that an investor make periodic payments (say monthly) of a fixed dollar amount (say $100 per month) to buy a given security. If the price of the security is fluctuating, the average purchase cost per share will be lower for the investor than the simple mathematical average price of the shares over the same period. Dollar cost averaging does not work if the price of the stock remains fixed, nor does it protect against loss in a falling market.

Which statements are TRUE about ECNs? I ECNs only trade listed stocks II ECNs trade listed and OTC stocks III ECN trades are not reported to the tape IV ECN trades occur away from exchange trading floors A I and III B I and IV C II and III D II and IV

The best answer is B. ECNs (Electronic Communications Networks) only trade listed stocks (NYSE, AMEX and NASDAQ). They do this as an institutional matching service, getting a small fee for each match. These trades occur OTC in the "Fourth Market." ECNs do not trade OTC issues (OTCBB and Pink Sheets), because the market is illiquid. ECN trades are reported to the appropriate Network A, B, or C Tape by a system called TRACS.

All of the following statements are true regarding equipment trust certificates ("ETCs") EXCEPT: A Equipment trust certificates are secured by specified corporate assets B Default of ETCs is common during recessionary periods C Equipment trust certificates are commonly issued by transportation companies D Equipment trust certificates are issued in serial maturities

The best answer is B. ETCs are issued by transportation companies (railroads, airlines, truckers, etc). The collateral for the certificates is specified "rolling stock" of the issuer. For example, Delta Airlines might finance the purchase of a new jetliner by selling an ETC issue. That jetliner is the collateral for the certificates. The serial number of that jetliner will be printed on the ETCs to show that it is pledged as collateral to the certificate holders. ETCs are issued in serial maturities, so that a portion of the debt is repaid each year. This is the typical structure for ETC issues, since the plane is a depreciating asset. Thus, as the plane depreciates each year, part of the issue is being retired. Therefore, the outstanding debt never exceeds the collateral value. Default on ETCs has been rare. Even if there is a default, certificate holders have collateral (in this case, the plane), that they may sell to obtain the funds to repay the outstanding debt balance.

All of the following are "preference" items included in the alternative minimum tax computation EXCEPT: A Excess intangible drilling costs B Straight line depreciation C Excess depletion D Excess depreciation

The best answer is B. Excess intangible drilling cost deductions, excess depletion, and excess depreciation (amounts over straight line) are all tax preference items included in the Alternative Minimum Tax (AMT). Straight line depreciation is not included, nor are tax credits.

A customer bought ABC stock at $10. Many years later when the stock is worth $50, the customer wills the stock to his daughter. The daughter sells the shares when they are worth $45. The tax consequence to the daughter is: A No capital gain or loss B $5 per share capital loss C $35 per share capital gain D $40 per share capital gain

The best answer is B. For estate tax purposes, securities are valued at the current market value at the date of death. Estate tax is due based upon the market value of all assets held at this date - with the tax paid by the estate. The beneficiary of the estate receives the asset at this market value - $50 per share in this case. Since the stock was later sold for $45 per share, there is a $5 per share capital loss.

Changes in the economic cycle of the United States are measured by changes in the: A CPI B GDP C Money Supply D DJIA

The best answer is B. Gross Domestic Product (GDP) is the economic measure of all goods and services produced in the U.S. in a year. It consists of total consumer, investment and government spending plus exports and minus imports. The CPI - Consumer Price Index, measures changes in prices, which means it measures inflation. The money supply is controlled by Federal Reserve actions and is a "price" measures - not a measure of economic output. Finally, the DJIA is the Dow Jones Industrial Average, which is a measure of prices for stocks.

Under the Uniform Securities Act, the threshold where a State-registered adviser is considered to have taken custody of client funds if it charges prepaid advisory fees, is: A $200, 6 months or more in advance of rendering services B $500, 6 months or more in advance of rendering services C $1,000, 6 months or more in advance of rendering services D $1,200, 6 months or more in advance of rendering services

The best answer is B. If a State-registered investment adviser accepts $500 of prepaid advisory fees (or more), 6 months or more in advance of rendering services, then the adviser is considered to have taken custody of client funds under NASAA's interpretation. (Also note, in contrast, that the Investment Advisers Act of 1940 sets this limit at $1,200 for Federal Covered Advisers, but this is not the rule for State-registered advisers).

An agent of a broker-dealer who effects securities transactions that are not recorded on the books of the broker-dealer is defined as a(n): A agent B broker-dealer C issuer D investment adviser

The best answer is B. If an agent of a broker-dealer engages in a securities transaction that is not known to the broker-dealer (a so-called "private securities transaction"), a prohibited practice has occurred. All securities transactions effected by agents must be known to the broker-dealer; must be recorded on the books of the broker-dealer; and must be supervised by the broker-dealer. If the agent performs a "private securities transaction" that is not known to the broker-dealer, then that agent has, himself, become a broker-dealer under this definition. As such, he would have to register in the State as a "statutory" broker-dealer before effecting such a transaction.

In a money purchase retirement plan, which statements are true? I Employer contributions are mandatory II Employer contributions are voluntary III Employees are permitted to make matching contributions IV Employees cannot make matching contributions

The best answer is B. In a money purchase retirement plan, which is a qualified plan under ERISA, the employer sets up the plan and contributes a fixed percentage of each employee's income annually capped at 25% (statutory rate; 20% effective rate), up to $58,000 maximum in 2021). Regardless of whether the employer is profitable or not, it must make the annual contribution - and this is deductible to the employer. The benefit to the employee is knowing the exact amount that will be contributed each year. This is really a variation of a defined contribution plan under ERISA - and there are no employee contributions to this type of plan.

The final responsibility for the debt service on industrial revenue bonds rests with the: A issuing municipality B corporate lessee of the facility C bond trustee D bond underwriter

The best answer is B. Industrial development bonds are backed by the rental revenues paid by the corporate lessee as well as by the guarantee of the corporate lessee. These bonds, therefore, take on the credit rating of the corporation leasing the facility.

If a technical analyst sees stock prices rise repeatedly to a certain level, from which they start falling again, then a market: A "bottom" has been formed and stock prices can be expected to fall over the long-term B "bottom" has been formed and stock prices can be expected to rise over the long-term C "top" has been formed and stock prices can be expected to fall over the long-term D "top" has been formed and stock prices can be expected to rise over the long-term

The best answer is C. A top formation is bearish since the market has topped out and is trending down. It is an uptrend that has reversed itself.

Which statements are TRUE about an adviser offering discounted rates? I An investment adviser is permitted to offer a discount from standard rates to selected categories of customers II An investment adviser is permitted to offer a discount from standard rates only if all customers are given the discount III The investment adviser can offer the discount as long as charges to all of the investment adviser's customers are fair and reasonable IV The investment adviser can offer the discount as long as the fact that discounts are offered is disclosed in the Form ADV Part 2A

The best answer is B. Investment advisers do not have to offer the same rates to all their customers - they are permitted to pursue additional business by offering defined groups a discounted rate. However they must offer these discounts to all customers that qualify for the terms of the discount - for example, the discounted fee might apply only to members of a local Rotary Club; or the discount might only apply to customers that invest at least $200,000 with the adviser. The adviser must disclose the existence and terms of the discounts in the Form ADV Part 2A ("the Brochure") that is given to clients.

Monte Carlo simulation is used to assess a portfolio's: A expected rate of return on investment B probability of achieving investment returns under varying conditions C standard deviation of returns under varying conditions D minimum and maximum rate of return

The best answer is B. Monte Carlo simulation is a computer-driven "decision-tree" analysis of possible portfolio returns that can be achieved based on varying factors, such as differing future interest rate levels; equity return levels; inflation rate levels, etc. It assesses the probability of getting the desired portfolio return over a long time horizon, during which these variables can change thousands of times.

The Federal Reserve will loan funds at the discount rate to which of the following? I Savings and Loans II Commercial Banks III Investment Banks IV Insurance Companies

The best answer is B. Only commercial banks are members of the Federal Reserve System. Member banks can borrow reserves from the Fed at the discount rate.

Pension funds are prohibited from using which investment strategy? A Purchase government and agency securities B Sell short government and agency securities C Sell covered call contracts D Buy puts on stock positions

The best answer is B. Pension funds and all retirement plans cannot trade on margin; only cash accounts (fully paid positions) are permitted. They can buy securities fully paid, can buy puts on fully paid positions and can sell calls against fully paid positions for premium income. They cannot buy securities on margin, cannot sell short and cannot sell naked calls or puts, because all these are margin transactions.

Private Fund Advisers must register with the SEC if their assets under management are at least: A $100 million B $150 million C $200 million D $250 million

The best answer is B. Regular investment advisers must register with the SEC as "Federal Covered Advisers" once assets under management reach $100 million. Private Fund Advisers, who only advise pooled investment vehicles like hedge funds, were exempt from SEC registration until 2012. At that point, they were required to register with the SEC once their assets under management reached $150 million. The intent was to make sure that there was public disclosure about the world of hedge funds.

A customer invests $1,000 in an investment that is expected to generate $100 in the first year, $200 in the second year, and $300 in the third year, at which time the original $1,000 investment will be returned. What is the Return on Investment (ROI)? A 10% B 20% C 30% D 60%

The best answer is B. Return on Investment is a simple measure that takes an initial investment and shows how well it performs. The annual cash flows generated by the investment are averaged, and divided by the original investment amount. In this example, $1,000 is invested, and that investment is expected to generate cash flow of $100 in the first year, $200 in the second year, and $300 in the third year, at which point the $1,000 original investment will be returned. The average annual cash flow is $100 + $200 + $300 = $600/3 years = $200 per year. Since $1,000 was invested, the ROI is $200 / $1,000 = 20%.

Which of the following is defined as an investment adviser under the Investment Advisers Act of 1940? A Dealers in U.S. minted gold coins B Pension consultants C Broker-dealers in securities D Managed commodity fund advisers

The best answer is B. SEC Release IA-1092 specifically includes pension consultants and advisers to professional athletes and entertainers as "investment advisers" that must register with the SEC (this action was taken because of past abuses by such advisers). A person who renders advice about U.S. minted gold coins is not rendering advice about a security, and hence is not defined as an investment adviser. Broker-dealers are excluded from the definition of an investment adviser, as long as they do not charge separately for such advice. Commodities are not securities, so a managed commodity fund adviser is not defined as an investment adviser. Again, to fall under the definition of an investment adviser, one must be rendering advice about securities.

A customer buys a new issue inflation-adjusted government bond with a 4% coupon at par. After the first year, the inflation rate as measured by the CPI has increased by 5%. For the second year of holding the security, the customer will receive: A interest of $40 B interest of $42 C interest of $50 D interest of $40 and a principal adjustment of $50

The best answer is B. TIPS (Treasury Inflation Protection Securities) are issued with a fixed coupon that does not change. In the first year, this bond will pay 4% of $1,000 par = $40. At the end of year 1, because inflation was 5%, the principal amount of the bond is adjusted to $1,050 and in year 2, the investor will receive 4% of $1,050 = $42 of interest.

The "Monetary Environment" is a reflection of all of the following EXCEPT: A money supply levels B stock price levels C monetary policy D fiscal policy

The best answer is B. The "Monetary Environment" is a reflection of whether credit is easy or tight, as shown by interest rate levels, money supply levels, and current economic policies of the Government - that is, fiscal policy.

A customer invests $50,000. 10 years later, the investment is worth $100,000. The customer's annual compounded rate of return is: A 5.00% B 7.20% C 10.00% D 12.50%

The best answer is B. The "Rule of 72" can be used here. To find the number of years that it takes to double an investment's value, divide the yield into 72. Since the question gives 4 answers, one way to get the answer is to take each choice and divide it into 72. Taking 72 / 7.20 = 10 years to double the investment value - which is the number of years given in the question.

A broker-dealer and its agent are registered in State A. The agent tells a customer in State A that he is prohibited from making an offer of a security in that State because the security is not registered in State A and the security is non-exempt. However, he tells the customer that he can accept an offer to buy that security from the client because then the transaction would be exempt. Which statement is TRUE? A There is no violation of Uniform State Law because the transaction will qualify for an unsolicited customer order exemption B There is a violation of Uniform State Law because the agent has made an offer to sell an unregistered non-exempt security in that State C There is no violation of Uniform State Law because the broker-dealer is registered in the State D There is no violation of Uniform State Law because the agent is registered in the State

The best answer is B. The agent and the broker-dealer are both registered in State A, so there is no problem with their making an offer of securities to customers in State A. However, the agent knows that he is prohibited from offering or selling unregistered non-exempt securities in the State. Non-exempt securities (such as common stock) must be registered to be offered or sold in the State. The agent cannot attempt to get around this by having the customer make an offer to buy those securities, calling the transaction "unsolicited" and therefore exempt. The way the law reads is that making an offer to sell, or soliciting an offer to buy, both constitute an "offer to sell" securities under the Uniform Securities Act.

Ford Motor Company has issued 8% convertible debentures, convertible at a 10:1 ratio. Currently the debenture is trading at 102. The stock is trading at 98. Which statements are TRUE? I The conversion price is $100 II The conversion price is $102 III The parity price of the common stock is 98 IV The parity price of the common stock is 102

The best answer is B. The conversion price is found by taking par and dividing it by the conversion ratio. $1,000 / 10 = $100 conversion price. Thus, each bond is convertible into 10 shares of common stock at $100 each. If the bond is now trading at 102, or $1,020, the common stock's parity price is $1,020 / 10 shares per bond = $102. Since the common stock is trading at $98 per share, it is trading below parity.

If the reader of corporation's financial statements wishes to get additional detail on items presented, this can be found in the: A prospectus B footnotes C correcting amendment D operations overview

The best answer is B. The footnotes to a company's financial statements details the company's accounting policies (for example, when revenue is "booked," how inventories are valued) and give additional supporting detail that adds "color" to the numbers presented in the income statement and balance sheet. For example, the balance sheet might show "capitalized leases" as a simple number in liabilities, but the footnotes will give the year-by-year upcoming lease payment obligations.

Which statement is TRUE? A The current yield of a bond is the same as the bond's yield to maturity B The yield to maturity of a bond is the same as the internal rate of return C The nominal yield of a bond is the same as net present value D The yield to call of a bond is the same as the yield to maturity

The best answer is B. The internal rate of return on a bond is the interest rate that will discount the bond's cash flows to the purchase price of the bond. It is the same as the bond's yield to maturity.

The maximum permitted annual contribution to a Coverdell Education Savings Account for a single beneficiary is: A $2,000 in a single account B $2,000 total in any number of accounts C $4,000 in a single account D $4,000 total in any number of accounts

The best answer is B. The maximum permitted annual contribution is $2,000 per beneficiary per year for Coverdell Education Savings Accounts.

ABC Corporation has declared a cash dividend to stockholders of record on Monday, November 21st. The last day to buy ABC shares BEFORE they go ex dividend is? A Wednesday, November 16th B Thursday, November 17th C Friday, November 18th D Sunday, November 20th

The best answer is B. The regular way ex date is 1 business days prior to the record date. The record date is Monday, November 21st, therefore the ex date is Friday, November 18th. To buy the shares before they go ex dividend, the shares must be purchased before Friday, November 18th, meaning they must be purchased on Thursday, November 17th. Ex date the day on which the price of the stock is reduced by the dividend amount and anyone purchasing the stock will no longer be eligible to receive the dividend. FINRA sets the ex dividend date for cash dividends at 1 business day prior to the Record date (since regular way settlement takes 2 business days, anyone who buys 2 business days or more prior to the Record date will settle on, or before, the Record date and will receive the dividend). The ex date for non-cash distributions such as stock splits, stock dividends, and rights is set at the business day following the Payable date. (see Payable date)

A person who is in the business of giving advice about which of the following is defined as an "investment adviser" under SEC Release IA-770? I Stocks II Corporate bonds III Commodities IV Real Estate A I only B I and II C III and IV D I, II, III, IV

The best answer is B. To be defined as an investment adviser that must register with the SEC, one must be giving advice about securities. Stocks and bonds are securities. Commodities and real estate are not securities. If one gives advice about commodities or real estate, that person is NOT an investment adviser.

To register a successor firm with the State Administrator for the unexpired portion of the current license year, which statement is NOT true? A The predecessor firm must have ceased business operations and can only conduct winding down transactions B The successor firm must continue business operations through the end of that license year C The successor firm must file a Form BD or ADV amendment with the Administrator D The filing becomes effective on the date designated by the licensee

The best answer is B. Uniform State law does not require the filing of a new registration application for a successor firm. The successor firm files a registration amendment with the State, that takes its registration through the end of that year, without having to pay a new filing fee. The effective date of the successor firm's registration is the date indicated on the amendment. The "old" firm must have ceased business operations for the "new" firm to be registered in the State. Whether or not the successor firm continues in operation through the rest of that year is irrelevant.

All of the following statements are true about ADRs EXCEPT: A ADRs trade on national stock exchanges B ADR holders receive dividends C ADR holders can vote for the Board of Directors D ADR holders receive the cash value of pre-emptive rights

The best answer is C. ADRs do not vote. The bank that actually owns the shares votes. The bank passes through dividends to receipt holders and sells off pre-emptive rights, sending the cash to the receipt holders. ADRs are listed on stock exchanges and trade like any other stock.

Which of the following is NOT an advantage of owning a variable annuity? A Separate account accumulation units allow for participation in the equity markets B The costs and fees associated with owning the contract are lower than making direct investments in mutual funds C The separate account growth is tax-deferred until distributions commence D There are no limits on the amount that an individual can invest

The best answer is B. Variable annuity contracts have 2 layers of fees. One is the cost of running the mutual fund held in the separate account. The second is the insurance company's mortality and expense fees that are added to the contract. It is not uncommon for the total of these fees to exceed 2% per year. The high annual cost of the contract is the disadvantage of owning a variable annuity. The other 3 choices are advantages. Any individual can contribute to a variable annuity - there are no income limits. The separate account can be invested in an underlying equity mutual fund, allowing for participation in the equity markets. And reinvested dividends and capital gains grow tax deferred - tax is due only when distributions commence.

A broker-dealer is offering an IPO to the public that is "hot." The broker-dealer withholds 15% of the shares to set aside for its future use. This action is: A permitted because broker-dealers have discretion over IPO allocations B prohibited because the broker-dealer is "free riding and withholding" C permitted because the broker-dealer takes financial liability when performing an underwriting D prohibited because the broker-dealer is not allowed to own stock in companies that go public

The best answer is B. Whether a new stock issue is "hot" is actually irrelevant to the question. Broker-dealers and their employees are prohibited from buying IPO shares at the offering price in the underwriting. They can, however, purchase the shares in the secondary market. A broker-dealer buying IPO shares for its own or for employee accounts is "withholding the issue from sale to the public" with the intention of taking a "free ride" on the likely upward price movement once the issue opens for trading in the market. This is a violation called "free riding and withholding."

During a period when the yield curve is flat: A short term bond prices are more volatile than long term bond prices B long term bond prices are more volatile than short term bond prices C short term and long term bond prices are equally volatile D no relationship exists between short term and long term bond price changes

The best answer is B. Whether the yield curve is ascending (normal), flat or descending, long term bond prices always move faster than short term bond prices, as interest rates change. This is due to the compounding effect on the bond's price that occurs, which increases with longer maturities. Inverted yield curve a graph of the yields of fixed income securities of the same type (e.g., U.S. Governments or Corporates or Municipals) by maturity. As the maturity lengthens, the yield decreases, so the curve "descends." This is an unusual yield curve shape, that occurs when the Federal Reserve Board has tightened credit to slow down the economy. The Fed exerts its influence over short term rates, so its actions to tighten credit have increased short term rates above long term rates.

A Federal Covered Adviser can be audited by the State Administrator: A any time the Administrator believes it is in the public interest B in the event the Administrator suspects fraud C no more than once per year after the updated Form ADV is filed D only if a complaint is lodged against the Adviser by a customer in the State

The best answer is B. While NSMIA (National Securities Markets Improvements Act of 1996) partitioned responsibility for investment adviser supervision between the Federal government (Federal Covered Advisers) and the States (State-registered advisers), it retained State jurisdiction to investigate and enforce any violation of State law with respect to fraud or deceit, covering all advisers, whether State-registered or Federal Covered.

Which of the following accounts avoid probate upon death of an owner? I Totten trust II JTWROS III Transfer On Death IV Tenants in Common A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is C. A Totten trust is a bank account, not a securities account. It allows the depositor to name a beneficiary, to whom the funds go upon death, bypassing the estate and probate. If an account is opened as Joint Tenants with Rights of Survivorship, each tenant 100% owns the account - when one dies, the other 100% owns the account, bypassing the estate and probate. Opening an Individual account-TOD (Transfer on Death) permits the transfer of assets directly to the named beneficiary upon death of the account owner, bypassing the estate and probate. If an account is opened as a Joint Account with Tenants in Common, there is a specified ownership percentage for each tenant. Upon death of 1 tenant, that person's percentage goes to his or her estate, is passed by will and must go through probate (where someone could contest the transfer).

All of the following accounts avoid probate upon death of an owner EXCEPT: A Totten trust B JTWROS C Tenants in Common D Payable on Death

The best answer is C. A Totten trust is a bank account, not a securities account. It allows the depositor to name a beneficiary, to whom the funds go upon death, bypassing the estate and probate. If an account is opened as Joint Tenants with Rights of Survivorship, each tenant 100% owns the account - when one dies, the other 100% owns the account, bypassing the estate and probate. Opening an Individual account-TOD (Transfer on Death, also called Payable on Death) permits the transfer of assets directly to the named beneficiary upon death of the account owner, bypassing the estate and probate. If an account is opened as a Joint Account with Tenants in Common, there is a specified ownership percentage for each tenant. Upon death of 1 tenant, that person's percentage goes to his or her estate, is passed by will and must go through probate (where someone could contest the transfer).

The Current Account and the Capital Account are part of a: A corporate balance sheet formula B customer's personal financial statement C nation's balance of payments D municipality's flow of funds

The best answer is C. A nation's balance of payments shows whether the nation is a net importer or a net exporter. If a nation has a balance of payments surplus, it is a net exporter; if it has a balance of payments deficit, it is a net importer. Because this is a "balance of payments" calculation, it compares spending by foreigners in that country versus spending by that nation's citizens outside that country. The calculation looks at the nation's "Current Account" and "Capital Account." The Current Account looks at spending on goods and services that are used up quickly. The Capital Account looks at spending (and borrowing) for long-term assets such as equipment and real estate.

Which of the following statements describe Freddie Mac? I Freddie Mac buys conventional mortgages from financial institutions II Freddie Mac is an issuer of mortgage backed pass-through certificates III Freddie Mac is a corporation that is publicly traded IV Freddie Mac debt issues are directly guaranteed by the U.S. Government A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is C. Freddie Mac - Federal Home Loan Mortgage Corporation - buys conventional mortgages from financial institutions and packages them into pass through certificates. This agency has been partially sold off to the public as a corporation that was listed on the NYSE. Freddie is now bankrupt due to excessive purchases of bad "sub prime" mortgages and has been placed in government conservatorship. Its shares have been delisted from the NYSE and now trade OTC in the Pink Sheets. Freddie Mac buys conventional mortgages from financial institutions and packages them into pass through certificates. These pass through certificates are not guaranteed by the U.S. Government (unlike GNMA pass through certificates).

In order for an investment adviser to charge a "performance fee" under the Investment Advisers Act of 1940, the customer must have: I at least $1,100,000 of assets to invest II a net worth of at least $1,100,000 III at least $2,200,000 of assets to invest IV a net worth of at least $2,200,000 A I and II only B III and IV only C I and IV only D II and III only

The best answer is C. The Investment Advisers Act of 1940 prohibits a performance fee unless the customer has at least $1,100,000 invested with the adviser; or has a net worth of at least $2,200,000.

All of the following are needed to calculate the Sharpe Ratio EXCEPT: A Risk measured by variability of return B Actual rate of return on an investment C Compound value of a sum D Rate of return on an investment with zero risk

The best answer is C. The Sharpe Ratio is: Rate of return-risk free ror/standard Deviation Since standard deviation is a risk measure of variability of return, Choice A is the denominator in the equation. Choices B and D, the actual rate of return on an investment and the rate of return on an investment with zero risk, are in the numerator of the ratio. Choice C - the compound value of a sum, has nothing to do with the Sharpe Ratio.

A municipal dealer quotes a 2 year, 6% term revenue bond at 99. The yield to maturity is: A 5.92% B 6.00% C 6.53% D 6.85%

The best answer is C. The formula for yield to maturity is: Annual income+annual capital gain (discount bond)/Average bond value= YTM This bond has a coupon rate of 6% = 6% of $1,000 par = $60 of annual income. The bond is purchased at 99% of $1,000 par = $990; and will mature at $1,000 in 2 years, Thus, the $10 capital gain is earned over 2 years for an annual gain of $10 / 2 = $5 per year. The bond is purchased at $990 and matures at $1,000, for an average value of $990 + $1,000 / 2 = $995. The YTM is: $60 + $5/ $995 = 6.53%

Which statement is TRUE about a rollover from one State's 529 Plan to another State's 529 Plan? A State to state rollovers are prohibited B A rollover is permitted only once every 6 months without tax penalty C A rollover is permitted only once every 12 months without tax penalty D A rollover is permitted only once every 24 months without tax penalty

The best answer is C. 529 rollovers are permitted every 12 months without any tax penalty. This is similar to the rule for IRA rollovers.

The stock market has reacted negatively to the release of strongly negative economic indicators and has fallen by 15% over a 2 week time window. An investor that believes that this is a buying opportunity would be called a(n): A opportunist B fundamentalist C contrarian D technician

The best answer is C. A "contrarian" is a person that goes against the conventional wisdom. Thus, when the market is rising rapidly, the contrarian believes that it is ready for a fall and will sell; and when the market has declined precipitously, the contrarian believes that the market will rise, and will buy.

A head and shoulders "top" formation is: I bullish II bearish III a reverse upward trend IV a reverse downward trend A I and III B I and IV C II and III D II and IV

The best answer is C. A head and shoulders top formation is bearish since the market has topped out and is trending down. It is an uptrend that has reversed itself.

A "market maker," as defined under the Securities Exchange Act of 1934: A effects securities trades for the account of others on an agency basis B effects securities trades for the account of others on a principal basis C effects trades with others out of his or her own account D effects trades on a discretionary basis for the account of customers

The best answer is C. A market maker is a firm that sells securities out of its own account or buys securities into its own account. Broker-dealers effect trades for the account of customers. Broker-dealers can effect trades either on an agency basis, where the firm acts as a middleman, charging a commission to the customer; or on a principal basis, where the firm sells a security from its inventory to the customer with a markup.

The investment approach that analyzes the entire economic outlook to sort out the areas for higher growth potential, prior to deciding the specific investments to be made, is known as the: A resistance level B support level C top down approach D bottom up approach

The best answer is C. A portfolio manager that uses a "top down" approach would look at the overall economy to identify those sectors that appear to have the best growth potential; and then would emphasize investments in that sector.

During extended periods of high inflation, it can be expected that which of the following will happen? I Interest rates will fall II Interest rates will rise III Stock prices will fall IV Stock prices will rise

The best answer is C. A rising inflation rate is a "lose-lose" situation for both the stock and long term bond markets. If the inflation rate rises, then interest rates are likely to rise, with short term rates rising more than long term rates (the yield curve "flattens" as the Fed tightens credit to tame inflation, with short term rates rising more than long term rates). If interest rates rise, then long term bond prices will fall fastest, and long bondholders will have large losses on their positions. Furthermore, during periods of inflation, corporate earnings tend to fall, because companies are not able to keep raising prices at the same pace as their costs rise. This lowered earnings outlook depresses stock prices. Thus, both stock and long bond prices tend to fall in inflationary periods. Instead, during these periods of high inflation, investors "flee to safety" - they abandon the stock and long term bond markets, and put money in short term money market instruments, which offer safety and relatively high interest rates during inflationary periods; and they also put money into real estate and other "hard" assets that tend to keep pace with inflation.

A Chinese Wall must be maintained by a broker-dealer between investment banking and which of the following departments? I Research II Trading III Retail Sales IV Mergers and Acquisitions

The best answer is C. Chinese Walls to stop information flow must be maintained between: Investment Banking and Trading; Investment Banking and Research; and Investment Banking and Sales (Retail and Institutional). The intent is to stop the flow of information on upcoming underwritings, mergers or takeover deals being done by the underwriting department to others that might trade on the information for a profit before the public knows about the upcoming deal. Regarding the Chinese Wall required between investment banking and research, the intent is to make sure that research is truly independent and not influenced by the investment bankers at that firm that might demand a "favorable" research report on an issuer so that they can curry favor with that issuer to get future underwriting business. The M & A (Mergers and Acquisitions) department and the underwriting department are usually one and the same at investment banking firms. There are no barriers required between these two groups.

All of the following are included in the taxable income of a corporation EXCEPT: A Dividends received from foreign investments B Gain on the sale of a capital asset C Proceeds received from the issuance of debt securities D Interest received from domestic investments

The best answer is C. Dividends received from any investments (domestic or foreign), and gains on any asset held for investment are taxable. Please note, however, that part of dividends received by corporate investors are subject to an exclusion from tax. Any interest income received (unless it is municipal interest income) is subject to Federal tax. The proceeds received by a corporation from issuing debt or stock are not taxable. (Are you taxed on the amount borrowed if you take out a loan to buy a car or house? NO!)

An insurance company that sells an Equity Indexed Annuity (EIA) could use which of the following methods to credit the change in investment value? I Annual reset II Point-to-point III High-water mark IV Moving average

The best answer is C. EIAs base the annuity payments on the performance of a broad-based index, such as the S&P 500 Index. However, the return is capped and there is a minimum guaranteed return, regardless of the performance of the index. The most common methods of measuring index performance are the: Point-to-point method; Annual reset method; and High-water-mark method. Assume that a client buys an EIA that is based on a 7-year return. The "point-to-point" method compares the index value at purchase date to the value at the end date, 7 years later. Any value fluctuations that occur in-between the 2 measurement dates are irrelevant. Another common valuation method is the "annual reset" method, which would measure the return achieved each year over a 7-year life and add interest to the annuity based on the annual reset. The annual interest credit is based on the difference between the year-beginning index value and the year-ending index value. This risk here is that the market dumps at year end, so that the credit only equals the floor amount. The "high water mark" method avoids the "bad timing risk" that you can have with the "annual reset" method. Instead of basing the annual interest credit on year-beginning and year-ending index value, it bases the credit on year-beginning index value and the highest value that it had during that year.

Which of the following securities are likely to be on a State's "Legal List"? A CCC rated corporate bonds B C rated municipal bonds C U.S. Government agency bonds D Pink Sheet stocks

The best answer is C. Each State usually has a "prudent man rule" that applies to fiduciaries that manage assets for beneficiaries. However, many States go beyond this and establish a "Legal List" of permitted investments for fiduciaries. The legal list typically consists of ultra-safe securities - generally U.S. Government bonds, government agency bonds, and AAA rated corporate and municipal securities. The CCC rated corporate and C rated municipal bonds listed are all below investment grade; and Pink Sheet stocks are highly speculative.

Which of the following persons is defined as an "investment adviser" under SEC Release IA-770? A A professor who teaches a class open to the general public on investment strategy B An insurance agent that sells insurance products to customers for compensation C A financial planner who charges no fee for a financial plan and who takes commissions on recommended securities transactions D A broker-dealer that recommends securities transactions to clients but does not charge for the recommendations

The best answer is C. If a financial planner claims to charge "no fee;" but then receives payment (from anyone) based upon transactions recommended to customers, then the adviser really is being paid for rendering such services and is being "compensated" under the IA-770 compensation test. Professors who teach classes about investing are specifically excluded from the definition of an investment adviser; insurance agents who only sell insurance are not recommending securities, so they are excluded; and broker-dealers who do not charge separately for advice are excluded.

A representative at a member firm is approached by a person outside that firm to sell promissory notes through that member's branch office. Which statement is TRUE? A The representative is prohibited from selling the promissory notes B The representative may only sell the promissory notes after receiving verbal permission of the member firm C The representative may only sell the promissory notes after receiving written permission of the member firm D The representative may sell the promissory notes without restriction

The best answer is C. If a representative were to sell these promissory notes offered by an outside individual, then the rep would be "selling away" from his firm - that is selling securities to a customer that are not being offered by that firm. This is a violation of NASAA rules (since the customer thinks he is buying the securities from the broker-dealer and not from some other person!). The only way that a representative can "sell away" is if the representative asks the firm's permission in writing; receives written permission of the firm; and the firm records the transaction on its books and records and supervises it as if it were its own transaction (like that would ever happen!).

A corporation reports Earnings Per Common Share of $8.00, of which $2.00 was retained by the company. The dividend payout ratio is: A 25% B 50% C 75% D 100%

The best answer is C. If the company retained $2 of its $8 of earnings per share, then it paid out the other $6. The dividend payout ratio is: $6 / $8 = 75%.

Under the Uniform Securities Act, which transaction is allowed for exempt unregistered securities? A Primary offerings B Secondary offerings C Both primary and secondary offerings D Neither primary nor secondary offerings

The best answer is C. In a nutshell, since it is an EXEMPT unregistered security, both primary and secondary offerings are allowed without filing a registration statement in the state. If the security were non-exempt, then to offer that security in the state, registration would be required.

Under the Investment Advisers Act of 1940, an SEC registration application as an investment adviser must be granted; or a proceeding must be initiated denying registration, within: Incorrect answer A. You did not choose this answer. A 10 days B 30 days C 45 days D 60 days

The best answer is C. Investment adviser registration applications filed with the Securities and Exchange Commission must be granted; or a proceeding started to deny registration; within 45 days of filing.

A money manager that employs momentum investing makes investment decisions based on the: A fundamental value of the company as determined by analysis of the company B earnings growth of the company C reported earnings of the company as compared to the "whisper" number D efficient market theory

The best answer is C. Momentum investors believe that stocks that show positive earnings momentum (e.g., higher than expected earnings) are more likely to continue to surprise investors (in a good way) and that will lead to a stock price rise. Conversely, they believe that stocks that show negative earnings momentum (e.g., lower than expected earnings) are more likely to continue to surprise investors (in a bad way) and that will lead to a stock price fall. Note that the "whisper number" is the market's expectation for reported earnings of the company. This is really a "following the herd" theory, since investors tend to buy stocks on good earnings news and sell stocks on bad earnings news.

Strategic portfolio management is the selection of the: A securities in which to invest B asset classes in which to invest C target asset allocation for each asset class selected for investment D variation permitted in target asset allocation for each asset class selected for investment

The best answer is C. Strategic asset allocation is the determination of the target percentage to be allocated to each asset class (e.g., 50% Debt; 50% Equities) and then to the investment vehicles within that asset class (e.g., the 50% Debt allocation might be invested 25% in Treasury Bonds and 25% in Corporate Bonds). Tactical asset allocation is the permitted variation around each of the chosen percentages - for example, even though Equities are targeted at 50%, this might be allowed to be dropped to as low as 40% or as high as 60%, depending on market conditions.

A Registered Investment Adviser uses a solicitor to refer clients and pays the solicitor for each client referred. Under the Uniform Securities Act of 1956 as amended, the solicitor: A must register as an agent in the State B is not required to register as an agent in the State C must register as an investment adviser representative in the State D is not required to register as an investment adviser representative in the State

The best answer is C. The Act defines an "investment adviser representative" as any partner, officer, director, or other individual employed by an investment adviser, who: Makes recommendations or renders advice regarding securities; Manages accounts or portfolios of clients; Determines which recommendations or advice regarding securities should be given; Solicits, offers, or negotiates for the sale of investment advisory services; or Supervises employees who perform any of the functions listed above. This individual is selling advisory services for the investment adviser and must register in the State as an IAR (Investment Adviser Representative).

A convertible debenture is convertible into common at $40 per share. If the market price of the bond rises to a 10 point premium over par, which statements are true? I The conversion ratio is 20:1 II The conversion ratio is 25:1 III The parity price of the stock is $44 IV The parity price of the stock is $50 A I and III B I and IV C II and III D II and IV

The best answer is C. The conversion ratio is established when the bond is issued, and is: par value divided by the conversion price. In this case, the conversion price is set at $40 per share, so the conversion ratio is $1,000 par / $40 conversion price = 25:1 (25 shares per bond). If the bond moves to a 10 point premium over par, its new price will be 110, or $1,100 per bond. For the common stock to be valued at parity to the bond, the price per share must be $1,100 / 25 shares per bond = $44 per share parity price.

A Registered Investment Adviser has been retained by a trustee to develop an investment plan for the trust. Such a plan would consider all of the following EXCEPT: A inflation forecast B investment objectives C will for the trustee D liquidity needs

The best answer is C. The investment plan for a trust must consider the trust's investment objectives, which must be in accordance with the grantor's or settlor's wishes; the liquidity needs (what needs to be paid out of the trust currently to meet the needs of the beneficiaries); and also must take into account any projected inflation (which will influence the investment to be made and the needed payouts in the future). The will of the trustee has nothing to do with this. Remember that the trustee is the fiduciary who oversees the management of trust so that it meets the needs of the beneficiaries. What the trustee does in his or her own will has no bearing on the management of the trust (also, if the trustee dies before the trust is terminated, the trust document will provide for a successor trustee).

To compute the interest rate that will discount the present value of cash flows to be received in upcoming years to "0," the method to be used is called: A Black-Scholes B Monte Carlo Simulation C Internal Rate of Return D Macaulay Duration

The best answer is C. The present value method that finds the interest rate that discounts the value of cash flows to be received in the future to "0" is the Internal Rate of Return. This is the true yield to maturity of an investment. Black-Scholes is a sophisticated options pricing model. Monte Carlo simulation tests expected outcomes by varying the assumptions used to find best/worst case scenarios for likely investment outcomes; and Macaulay duration measures bond price volatility as market interest rates move.

Given the set of the following numbers: 5, 5, 7, 18, 12, 9, 23, what is the range, to the nearest 10th? A 5.00 B 11.30 C 18.00 D 23.00

The best answer is C. The range is the difference between the highest and lowest numbers in the set. The highest number is 23 and the lowest number is 5, so the difference is 18. The numbers in the set "range" from a low of 5 to a high of 23.

To counter rapidly rising inflation rates, the Federal Reserve would: A decrease reserve requirements B decrease the discount rate C sell securities in open market operations D sell bonds to the public

The best answer is C. To counter rising inflation, the Fed must decrease money supply levels and slow down economic activity. To do this, the Fed could tighten reserve requirements; increase the discount rate; or engage in "reverse repurchase" agreements with government dealers (mainly large commercial banks). In a reverse repurchase, the Fed sells Government securities to the dealers with an agreement to buy them back at a later date. This drains cash from the dealers and tightens credit. The Fed does not sell bonds directly to the public.

All of the following statements are true about Treasury Receipts EXCEPT the: A investor "locks in" a rate of return that is free from reinvestment risk if the Receipt is held to maturity B underlying bonds are held by a trustee for the beneficial owners C interest income on the Receipts is exempt from Federal income tax if the Receipt is held to maturity D Receipts are issued by broker-dealers, who maintain a secondary market in these securities

The best answer is C. Treasury Receipts represent an undivided interest in a portfolio of U.S. Government securities held by a trustee. The portfolio is assembled by a broker-dealer, who sells "receipts" representing ownership of the interest. Each receipt is, essentially, a zero-coupon obligation, that is purchased at a discount, and which is redeemable at par at a pre-set date. Thus, there is no reinvestment risk, since semi-annual interest payments are not received. The implicit rate of return is locked-in when the security is purchased, and the customer will earn that rate of return if the security is held to maturity.Like all original issue discount obligations, the Internal Revenue Code requires that the discount be accreted over the life of the receipt. The annual accretion is taxable, since the underlying securities are U.S. Governments. At maturity, the receipt will have an adjusted cost basis of par, and will be redeemed at par, for no capital gain or loss. Broker-dealers that issue the Receipts make a market in the units. If a customer wishes to sell prior to maturity, the broker will buy back the Receipt at its current market value (which will vary, depending on interest rate movements). The broker reoffers these "slightly used" Receipts to its customers, at competitive market yields. There are no new T-Receipt issues coming to market. Once the Treasury started issuing STRIPS in 1986, there was no need for the "middleman" anymore. However, T-Receipts still trade until they all mature.

Under the Securities Exchange Act of 1934, the SEC: A has the power to suspend trading on an exchange floor B has the power to suspend trading on an electronic market C has the power to suspend trading in any market located in the United States D does not have the power to suspend trading of securities

The best answer is C. Under the Securities Exchange Act of 1934, the SEC can suspend trading in any or all securities markets in the United States if it gives prior notice to the President of the United States of this action; and if the President does not disagree with this action.

A value investor would consider all of the following EXCEPT a company's: A Price / Earnings ratio B Price / Book Value ratio C Stock price growth rate D Market share

The best answer is C. Value investors invest in undervalued companies - as measured by low Price / Earnings ratios and low Price / Book Value ratios - that have good market prospects - thus they also consider product line, market share, management, etc. Growth investors select investments based simply on growth in earnings or market price; on the assumption that these will always be the best performing investments.

Three individuals wish to open a joint account as "tenants in common." If one of the individuals dies, which statement is TRUE? A The account is liquidated and the proceeds divided into 3 equal parts, shared among the 2 survivors and the decedent's estate B Trading must be halted in the account until the executor is named as the replacement for the decedent C The 2 survivors continue as co-tenants in the account, along with the estate of the decedent D The 2 survivors remain as joint tenants in the account; with the estate opening a separate account representing its interest

The best answer is C. When a joint account is opened as "tenants in common," each tenant specifies a percentage ownership interest. If one of the tenants dies, his share of the account belongs to his estate, and the estate assumes the position that the deceased person had in the account. The executor of the estate must present the proper papers to the brokerage firm before it is permitted to assume this position. There is no requirement to liquidate the account; nor to stop trading in the account, since each of the joint owners is separately authorized to trade that account.

A single individual buys a house for $150,000. After living in the house for 10 years, he sells it for $750,000. The taxable gain is: A $100,000 B $250,000 C $350,000 D $500,000

The best answer is C. When a residence is sold, the first $250,000 of gain (for an individual) is excluded from tax ($500,000 is excluded for a married couple). The sale of this residence resulted in a capital gain of $600,000 ($750,000 sale proceeds - $150,000 cost basis). Since $250,000 of the gain is excluded from tax, $350,000 is taxable.

Bid and ask quotes in a dark pools are: I publicly displayed II not publicly displayed III for 100 share round lots IV for 10,000 share or greater block trades

The best answer is D. Dark pools are operated by the larger broker-dealers (e.g., Goldman Sachs) and there are some that are independent companies (e.g., Liquidnet). They allow institutions to buy or sell very large blocks without displaying their orders in a display system such as NASDAQ. They are called dark pools because the size of the trade and the identity of the institution are not displayed. This avoids the problem that could occur where the display of a very large order in such a system, by itself, could move the market. If there is a match in a dark pool and a trade results, it still must be reported to the appropriate tape. The hours of operation of a dark pool are the same as those for the public exchanges since their pricing is usually tied to the market price on the exchange at that moment.

Dollar Weighted Average Return: I is the return measure used for mutual fund performance charts II takes into account the timing of investment inflows and outflows III is the same as Time Weighted Average Return IV measures the performance achieved by a specific investor in a fund as opposed to the overall performance of that fund

The best answer is D. Dollar weighted average return is most often used when evaluating a specific investor's mutual fund return. It is the return achieved, accounting for the timing of all cash flows (deposits) into the fund and all cash redemptions from the fund made by that investor. It is the same as the Internal Rate of Return, and will vary with the timing of each investor's deposits and withdrawals. Because investors often "chase" past performance, they will buy a fund "too late" (after the fund has posted its best performance and now enters a period of lesser performance) and will sell "too soon." Thus, for the individual investor, dollar weighted average return is often lower than time weighted average return. In contrast, time weighted average return is the measure used for mutual fund performance charts (Total Return, which shows dividends and capital gains as continually reinvested). It reflects the growth that would be achieved from a 1-time investment into the fund and then holding that investment over time - this is a buy and hold strategy. This method is consistent when comparing one fund's performance to another fund's performance.

A director of a broker-dealer that is registering for the first time in a State: A is not permitted to register as an agent in that State B must apply separately for registration as an agent C must request that the broker-dealer file a registration for the individual to be agent D will be automatically registered as an agent at the time that the broker-dealer is registered

The best answer is D. Included in a State registration application are the names, addresses and background of the officers of the broker-dealer, and these individuals become automatically registered when the broker-dealer entity becomes registered in the State. This is part of State law because the qualifications and business history of the officers and directors is disclosed in the application for the BD registration, so there is no need to have the same information filed twice with a separate registration for these persons to be agents of the BD. The way that most States handle this is when the registration application for the BD is processed, the officers are automatically registered as agents at the same time in CRD (Central Registration Depository); the fees for registration as an agent in the State are automatically deducted; and a window is opened for them to take the appropriate exams as needed (e.g., #63 or #66). Thus, the State gets its money up front! If the officer or director will not be acting as an agent of the BD (e.g., that person has no sales responsibility), he or she can "opt out" of automatic registration (which happens after the fact) and the BD will be refunded the fee.

NASAA Model Rule 502 (c) applies to: A State registered advisers B Federal Covered advisers C Both State and Federal Covered advisers D State registered advisers and Federal Covered advisers only to the extent that the conduct is fraudulent or deceptive

The best answer is D. NASAA Rule 502 (c) sets the rules for investment advisory contracts. As a NASAA rule, it only covers State-registered advisers. Federal covered advisers are subject the rules of the Investment Advisers Act of 1940, however the rule says that it applies to Federal covered advisers to the extent that the alleged conduct is fraudulent or deceptive. The rule requires that advisory contracts provide in writing: The services to be provided, the term of the contract, the fee formula, the amount of prepaid fee to be returned for early termination and any grant of discretionary power; That no direct or indirect assignment or transfer of the contract is permitted without consent of the client; That the investment adviser shall not be compensated based on capital gains (unless the client is wealthy, with either $1MM of assets under management or $2.1MM of net worth - this is set under the Investment Advisers Act of 1940); and That if the investment adviser is a partnership, the adviser will notify the client within a reasonable time of any change in the membership of the partnership. The rule also prohibits any provision that waives compliance with the rule or with the Investment Advisers Act of 1940; and prohibits an advisory contract that is contrary to Section 205 of the Investment Advisers Act of 1940 (Section 205 prohibits compensation based on gain or loss).

Non-traded REITs must be shown on account statements at appraised value after how much time elapses from the closing of the Initial Public Offering? A 3 months B 6 months C 12 months D 18 months

The best answer is D. Non-traded REITs are registered with the SEC and are initially sold with a prospectus. However, they are not listed on and exchange and they do not trade nor are they redeemable securities like mutual funds. Instead, they have fixed lives of anywhere from 7-10 years, at which point the underlying assets are liquidated, the proceeds are distributed to the unit holders, and the trust is terminated. So these are illiquid, long term investments. They are promoted to investors as long-term vehicles to provide safe and consistent income. Because they are not traded, they do not show at market value on account statements. The initial value shown once the offering is completed is the proceeds per unit that were invested (net of offering and organization expenses). Then, after 18 months, the assets must be appraised and the investment is shown on account statement at appraised value, and an annual reappraisal thereafter is required. (Note: The rule for the first appraisal has changed from 18 months after the closing of the deal to "150 days after the 2nd anniversary of the closing of the deal." This has not yet shown on the test. If the new rule does show, the old rule is no longer available as a possible answer.)

"Persons," as defined under the Uniform Securities Act, include which of the following? I Joint Ventures II Individuals III Unincorporated businesses IV Municipalities A I and III only B II and III only C I, II, and IV D I, II, III, IV

The best answer is D. "Persons," as defined under the Uniform Securities Act, include Joint Ventures, Individuals, Unincorporated Businesses, and Municipalities. It is important to know who are defined as "persons," since these entities may then be further defined as "agents" (which can only be individuals), "broker-dealers" (which can be incorporated or unincorporated businesses); or "issuers" (which can be incorporated or unincorporated businesses, joint ventures, municipalities etc.).

In order for an investment adviser to be compensated with a performance fee, all of the following must be disclosed in writing EXCEPT: A that the fee arrangement may create an incentive for the adviser to make investments that are riskier B that the fee arrangement is based on both unrealized appreciation and realized capital gains C the nature and significance of any index used as a comparative measure and the reason why the adviser believes that any comparative index used is appropriate D that the fee computation can be based on periods ending no earlier than the last day of each calendar quarter

The best answer is D. Before entering into an advisory contract that charges a performance fee, the adviser must disclose in writing: that the fee arrangement may create an incentive for the adviser to make investments that are riskier; that the investment adviser will get compensation based on both unrealized appreciation and realized capital gains; the basis for valuing any illiquid investments used in computing unrealized appreciation; the periods that will be used to measure performance and their significance to the computation of the fee; and the nature of any index used as a comparison of investment performance, the significance of the index, and the reason why the adviser believes the index is appropriate. Any fee calculation must cover minimum periods of 1 year; the fee cannot be computed and charged quarterly.

Stellar Advisers has a large base of sophisticated customers, including deposit taking institutions. One of these customers - Security Savings and Loan, offers to lend the adviser $500,000 at Prime less 3%. This is a very attractive interest rate. Under the Uniform Securities Act, which statement is TRUE about Stellar Advisers accepting this offer? A This is prohibited because investment advisers cannot borrow at lower than market rates of interest B This is prohibited because investment advisers are prohibited from borrowing funds to run their businesses C This is permitted only if Stellar Advisers and Security Savings and Loan are under common ownership D This is permitted as long as the loan is not conditioned upon Stellar Advisers providing services to Security Savings and Loan that it is not offering to other unaffiliated third parties

The best answer is D. Broker-dealers and investment advisers cannot borrow from customers unless the customer is in the business of making loans - which is the case with a savings and loan. In this case, the investment adviser is being offered a "good deal" by the savings and loan and can accept it! Note, however, that the "good deal" cannot be conditioned on the investment adviser providing the savings and loan some other give-back.

To smooth out cash flow, a corporation will issue: A TANs B RANs C BANs D Commercial paper

The best answer is D. Commercial paper is a short term unsecured IOU issued by corporations. TANs (Tax Anticipation Notes), RANs (Revenue Anticipation Notes) and TRANs (Tax and Revenue Anticipation Notes) are municipal short term notes.

A sales representative who sells unregistered securities to customers in non-exempt transactions: I has committed a felony II has committed a misleading Act III is subject to fines and imprisonment IV is subject to buying back the security at the purchase price plus interest at the legal rate in that State, less any dividend or interest income received on that security A I and III only B I and IV only C II and III only D II and IV only

The best answer is D. If a sales representative sells unregistered securities in a non-exempt transaction (these securities should have been registered in the State), he or she is subject to civil liability (this is not serious enough for criminal penalties). In this case, the individual is subject to buying back the security at the original price, plus interest and attorney's costs; less any income received from the security during the period it was held.

Which of the following statements are TRUE regarding non-revocable trusts? I Income is taxed at the rate scheduled for the grantor II Income is taxed at the rate scheduled for the trusts III The grantor has the right to reassume control over the assets of the trust IV The trustee has the right to manage the assets of the trust A I and III B I and IV C II and III D II and IV

The best answer is D. Income in a non-revocable trust is taxed at the rates scheduled for trusts - these are the similar to the rates as for individuals but the brackets "ratchet up" faster to a maximum rate of 40% (in 2021). In contrast, income in a revocable trust is taxed at the grantor's tax bracket (since the grantor has the right to take back the assets that generate the income). Contributions cannot be taken out of the trust by the grantor (as the gifts were irrevocable).

Insurers generally give a variable life insurance owner investment choices including which of the following investments? I Common stock funds II Bond funds III Money market funds

The best answer is D. Insurers generally offer a variety of investment choices in each separate sub-account, including equity funds, bond funds, and money market funds. Insurers may offer other types of funds as well.

The use of which tool of the Federal Reserve has the smallest impact on money supply levels? A Open market operations B Discount rate C Reserve requirements D Margin on securities

The best answer is D. Monetary policy tools of the Fed include setting reserve requirements, open market operations, setting the discount rate, and setting margin rates on securities. Changing margin rates on securities has the smallest impact on money supply levels, since the securities market is not that large relative to the government bond and credit markets.

All of the following are true statements regarding short term negotiable certificates of deposit EXCEPT: A Trading occurs in the secondary market B Short term negotiable CDs are non-callable C They are issued by banks D The minimum denomination is $10,000

The best answer is D. Short term negotiable CDs are issued by banks in minimum $100,000 denominations. They are non-callable and trade in the secondary market. Note, in contrast, that banks also issue long term negotiable CDs that can be callable.

A 61-year old client wishes to place money with an RIA to plan for retirement. He is still working and expects to retire at age 65. The investment time horizon to be used for the account should be: A 4 years B 9½ years C estimated life expectancy D estimated life expectancy minus current age

The best answer is D. Since this person is setting up an investment account to provide for income in retirement, the money should last for the person's expected life. Assume that this person expects to live to age 86. Because he is currently 61, the investment time horizon to be used in the account should be 25 years.

All of the following are defined as "investment advisers" who must register under SEC Release IA-1092 EXCEPT a person who: A only advises on asset allocation B only creates overall financial plans but who does not effect recommended transactions C creates overall financial plans and who effects recommended transactions D only gives advice on U.S. Government securities

The best answer is D. Specifically excluded from the definition of an investment adviser under the Investment Advisers Act of 1940 is anyone who gives advice about U.S. Government securities. Persons who advise on asset allocation are defined as investment advisers who must register; as are those that create overall financial plans. For those creating overall financial plans - whether or not they take commissions on recommended transactions is irrelevant to whether they are defined as an "investment adviser." What is relevant in this situation is that if commissions are taken, this is a potential conflict of interest that must be disclosed to customers at the time of entering the advisory contract.

Which of the following is NOT found in the IPS? A Investment objectives B Investment time horizon C Asset allocation percentages D Portfolio holding list

The best answer is D. The "IPS" is the Investment Policy Statement that an Investment adviser prepares for a new client. The purpose of the IPS is to lay out for the customer the investment objectives, risk tolerance, investment time horizon and policies that apply to the customer's investment portfolio. It details the basic investment structure including permitted asset classes, normal allocation percentages (strategic asset allocation) and permitted variations in these percentages (tactical asset allocation). It is signed by both the client and the adviser so that there is a written record that there was a "meeting of minds" between the customer and the adviser about how the adviser will manage the customer's assets. The specific investments that will be made by the adviser are not known at this point and are not part of the IPS.

An adviser to a mutual fund foresees an economic slowdown and believes that sit-down chain restaurants are going to underperform. The adviser sells those stocks out of the fund's portfolio and holds the proceeds as cash, pending reinvestment. This is an example: A strategic asset allocation B rebalancing C diversification D tactical asset allocation

The best answer is D. The adviser is "tactically" selling the restaurant stocks that he or she expects to be poor performers and will use the proceeds to buy another investment that is likely to perform better. Strategic asset allocation is the setting of the overall investment strategy and asset allocations to each asset class. Within the overall strategy, the manager can "tactically" change investments to overweight or underweight allocations set in the strategy, within stated limits.

A customer makes the following purchases of ABC stock: February$200 Purchase Stock Price: $25 March$200 Purchase Stock Price: $16 April$200 Purchase Stock Price: $27 The average price of the stock over this time period and the average purchase price per share for this customer are: A Average Price: $16.00; Average Purchase Price Per Share: $16.00 B Average Price: $22.67; Average Purchase Price Per Share: $16.00 C Average Price: $16.00; Average Purchase Price Per Share: $22.67 D Average Price: $22.67; Average Purchase Price Per Share: $21.50

The best answer is D. The average price per share is: $25 + $16 + $27 = $68/3 = $22.67 The average purchase price per share is calculated as follow: February Purchase:$200 / $25 per share =8 shares March Purchase:$200 / $16 per share =12.5 shares April Purchase:$200 / $27 per share =7.41 sharesTotal:27.91 shares A total of $600 was spent to purchase 27.91 shares = $600 / 27.91 = $21.50 average purchase price per share.

If appreciated securities are inherited, the tax basis to the beneficiary is: A cost of the securities B fair market value at the date of death C fair market value 6 months after death if values have fallen D either Choice B or C above

The best answer is D. The basic rule for inherited securities is that they are transferred to the beneficiary at fair market value at the date of death. However, the tax code allows an exception for estates that require a federal filing (those with over $11,700,000 of assets in 2021). In this case, the estate can choose to use an "alternate valuation date" that is set 6 months after death. It would choose to do this if the securities have depreciated, resulting in a lower estate tax liability.

An investment adviser has managed a portfolio that has averaged an annual total 12% rate of return. Of the 12% total return, 3% was from dividends and interest earned and 9% was from capital gains on appreciated securities positions sold. During the investment time horizon, inflation averaged 3% per year. The investment adviser's real "total" return is: A 0% B 3% C 6% D 9%

The best answer is D. The investment adviser produced an annualized total return of 12%, but because the inflation rate over that time period was 3%, the real rate of return was 12% - 3% = 9%.

All of the following can be the same person in a trust EXCEPT: A grantor B trustee C beneficiary D executor

The best answer is D. The parties to a trust are the: Grantor: The person who owns property that is to be managed, controlled, protected and ultimately transferred to heirs by a trust. Trustee: The legal administrator of the trust and the holder to the title of the property of the trust. Beneficiary: The individual(s) to receive benefits or income from the trust property and ultimately to receive the trust property itself. In a "living trust," the grantor holds all 3 positions. Living trusts are most often used to make sure that assets can be passed to heirs upon death without having to go through probate. The grantor is also the trustee, thus this individual maintains control over the trust assets. During the life of the grantor, the grantor is the trustee and also the beneficiary. When the grantor/trustee/beneficiary dies, then the assets are passed to the other named beneficiaries of the trust without going through probate court. An executor is the person who oversees the distribution of assets of a person that is deceased, based on that person's will. The term has nothing to do with trusts.

A customer that is short ABC stock in his portfolio buys put options on that stock. Why would the customer do this? A To protect the ABC stock position from an adverse market move B To derive additional income from the ABC stock position C To speculate on the price of the stock going up D To lock in a price at which the short position can be increased in the portfolio

The best answer is D. The purchase of a put gives the customer the right to sell shares at the strike price. The only reason why a person who is already short that stock would buy puts on the stock would be to give the customer the ability to sell more shares at the strike price if the market price of the stock should move down.

A customer buys a corporate bond with a 5% coupon priced to yield 9%. If the inflation rate is currently 3%, the customer's real rate of return on this investment is: A 2% B 3% C 5% D 6%

The best answer is D. The real rate of return is the yield to maturity of the investment adjusted for inflation. This investment is yielding 9%. Since inflation is running at 3%, the real rate of return on this investment is 6%. Note that the nominal yield, which is a percentage of par value, is irrelevant, since the customer bought the bond at a discount price to yield 9%.

All of the following are defined as investment advisers that are EXEMPT from registration in a State EXCEPT an adviser with no place of business in the State that: A gives advice to no more than 5 clients in the State in the past 12 months B gives advice solely to broker-dealers C gives advice solely to registered investment companies D distributes financial reports not based on specific client situations

The best answer is D. This is a very picky question that sees if you know the difference between an exclusion and an exemption. Exempt from registration as an investment adviser (meaning these are defined as investment advisers but they do not have to register in the State) is any person with no place of business in the State whose only clients are other advisers; federal covered advisers; broker-dealers; deposit taking institutions; insurance companies; investment companies; employee benefit plans with assets of at least $1,000,000; and governmental agencies. Also exempt from registration as an investment adviser is any person that has no place of business in the State that has 5 or fewer clients in the State in the past 12 months.Excluded from the definition of an investment adviser are investment adviser representatives; depository institutions; broker-dealers; professionals who only give incidental advice; publishers of general circulation periodicals that do not give investment advice about specific client situations; and federal covered advisers.

A corporation listed on the American Stock Exchange (NYSE American) wishes to distribute a stock dividend to its shareholders. Which statement is TRUE? A The issuer must register the shares in the State by Filing B The issuer must register the shares in the State by Coordination C The issuer must register the shares in the State by Qualification D The transaction is exempt and the shares do not have to be registered in the State

The best answer is D. This transaction falls under 2 exemption provisions - and the issuer could rely on either one. Because the company is American Stock Exchange listed (the AMEX has been renamed the NYSE American, but this is unlikely to show on the exam), its shares are exempt from registration in the State (the "blue chip" exemption). Because no commissions or other remuneration are paid when a stock dividend is distributed to shareholders, the issuer could rely on this exemption provision as well.

If the FOMC directs the Federal Reserve trading desk to tighten credit, which of the following will happen? I The trading desk will engage in repurchase agreements with banks II The trading desk will engage in reverse repurchase agreements with banks III Cash reserves will be injected into the banking system IV Cash reserves will be drained from the banking system

The best answer is D. To increase interest rates, the Federal Open Market Committee (FOMC) would direct a tightening of the money supply. In a reverse repurchase agreement, the Fed sells government securities to the bank dealers, with an agreement to buy them back (usually the next day). For that day, the bank is drained of cash and credit is tightened. In contrast, in a repurchase agreement, the Fed buys government securities from the bank dealers, with an agreement to sell them back (usually the next day). For that day, the bank is injected with cash and credit is loosened.

The person who sets up a trust as a legal business entity is the: A Trustee B Grantor C Beneficiary D Trust Attorney

The best answer is D. To open a Trust Account, there must be a trust agreement prepared by a trust attorney. The trust attorney will also apply for a tax identification number for the trust, since these are legally taxable entities. The trust agreement will name the grantor (the person donating the assets into the trust); the beneficiary (the person who get the income from the trust's assets); and the trustee (the fiduciary who must oversee the operations of the trust). Often, the trust attorney acts as the trustee, but this is not a requirement.

Which of the following individuals would NOT be defined as an investment adviser representative? A An independent contractor hired by the advisory firm that is not an employee of the adviser who is being paid to solicit clients for the adviser B A partner in the advisory firm that has no role in the management of customer accounts, but who heads up research at the firm and regularly meets with sales employees to discuss the firm's latest recommendations that could be made to clients C A compliance officer of the investment adviser who is responsible for supervising the legal aspects of the sales activities of the firm's representatives D A supervising financial officer of the investment adviser that is responsible for supervising the preparation of the firm's financial statements and the firm's customer account statements

The best answer is D. Under the Uniform Securities Act, an investment adviser representative is any partner, officer, director or other individual employed by an investment adviser who: Makes recommendations or renders advice regarding securities; Manages accounts or portfolios of clients; Determines which recommendations or advice regarding securities should be given; Solicits, offers, or negotiates for the sale of investment advisory services; or Supervises employees who perform any of the functions listed above. Note that it makes no difference if the individual employed is an "employee" or an "independent contractor." Clearly, both Choices A and B fit the definition. Choice D clearly does not meet the definition - the financial officer does not perform any of the functions listed - and is the correct answer. Choice C is "iffy" but since the compliance officer is supervising the legal aspects of sales activities, we will include him or her in the definition of investment adviser representative (though a good argument can be made that this person is not included). However, Choice D is clearly the best of the choices offered.

A broker-dealer in State A has a customer who lives in State A, whose account is managed by an agent who is registered in State A. The customer moves to State B, a State where the broker-dealer is registered but the agent is not. In order to continue doing business with the customer in State B, the agent: A is not required to be registered in State B B must notify State A C must notify State B D must register in State B

The best answer is D. When a customer moves to a new State, given that the broker-dealer is already registered in the State, then the agent who services that customer, if not registered in the State already, must register in the State where the customer has moved. Some States require this within 30 days of the customer moving; others give 60 days. The actual number of days is not specified in the Uniform Securities Act and thus cannot be tested.