Extra Series 65 Questions

A conservative investor decides to invest in high-quality corporate bonds paying 5% instead of investing in lower-quality bonds paying 9%. The additional 4% return the investor could have potentially earned on the lower-quality bonds represents A) opportunity cost. B) purchasing power costs. C) liquidity costs. D) marketability costs.

A

Which of the following offers the benefit of tax-deductible contributions? A) Health savings account (HSA) B) Coverdell Education Savings Account (ESA) C) Roth IRA D) Payroll deduction plan

A

Those individuals who are considered parties in interest due to handling the assets of a corporate retirement plans are A) not permitted to use those funds to acquire company assets in an amount beyond the allowable limits. B) not considered to have a fiduciary responsibility. C) encouraged to use plan funds to assist the employer when there is a cash flow crisis. D) able to sell personal securities to the plan if that will benefit plan participants.

A) not permitted to use those funds to acquire company assets in an amount beyond the allowable limits. The Employee Retirement Income Security Act of 1974 (ERISA) does permit an employee benefit plan to acquire certain company assets subject to statutory limits, generally a maximum of 10% of the plan's assets.

Each of the following could cause an investor to be subject to the alternative minimum tax except A) accelerated depreciation taken on certain property. B) interest received on private activity municipal bonds. C) interest received on school district GO bonds. D) excess intangible drilling costs.

C

Each of the following individuals is eligible to participate in a Keogh plan except A) a securities analyst employed by a major research organization who makes $2,000 giving lectures in his spare time. B) a self-employed doctor in private practice. C) an executive of a corporation who receives $5,000 in stock options from his company. D) an engineer employed by a corporation who earns $5,000 making public speeches in her spare time.

C

Only in the case of the Blank corporation are the income and losses of the investment account taxed at the corporate level rather than passed through to the owners.

C

Trading securities involves certain expenses. Which of the following is not considered to be one of them? A) Commissions B) Markdowns C) Advisory fees D) Markups

C

Which of the following cannot be purchased on margin? A) A listed bond B) A municipal bond C) A long call option traded on the CBOE D) An NYSE-listed stock

C

An investor has made the following purchases, all in the same calendar year: 100 ABC at $20 on January 15; 200 ABC at $25 on April 4; and 100 ABC at $30 on July 23. With ABC currently selling at $22, if this investor needed to sell 200 ABC, the best decision from a tax standpoint would probably be to A) use average cost. B) hold the stock until the price reaches $25. C) use LIFO. D) use FIFO.

C) Use LIFO

By viewing the bid and ask prices, which of the following OTC stocks is likely to be the most actively traded? A) 22-23 B) 17.95-18.25 C) 50-50.50 D) 43-43.05

D The general rule of thumb is that the more active the stock, the narrower the spread. That spread is the difference between the bid and ask prices. Our correct answer here has a very small spread of $0.05 and is likely to be the most actively traded of this group.

Gathering information about a prospective advisory client would probably not be done by A) use of a questionnaire. B) a chat over a lunch. C) a personal interview. D) using a third-party interviewer.

D) using a third-party interviewer.

You are working with a client who received her divorce earlier this year. She has two young children, ages four and seven, who both live with her. In general, it would be most advantageous for the client to file her federal income tax claiming what status?

Head of Household

Unlike Coverdell Education Savings Accounts (ESAs), the income level of the contributor will/ will not affect eligibility to contribute to a Section 529 plan.

Will not

safe harbor 401(k) with a nonelective formula

one in which the employer must contribute a minimum of 3% of each employee's earnings, whether or not the employee participates in the plan.

A savings incentive match plan for employees (SIMPLE) plan is a

qualified retirement plan designed for small businesses (100 or fewer employees).

An order to immediately buy or sell a security at the best available price is known as A) a market order. B) an immediate or cancel (IOC) order. C) a limit order. D) a stop order.

A

In many cases, the exceptions from the early-distribution tax penalty of 10% are the same for both IRAs and qualified plans. However, a specific exception granted to those with qualified plans that is not available to IRA owners is distributions A) under a QDRO. B) for certain medical expenses. C) for a first-time home purchase. D) used for higher education expenses.

A The home purchase and higher education exception applies only to IRAs, and certain medical expenses qualify for the exemption under both.

Which of the following is not true concerning a Coverdell Education Savings Account (ESA)? A) In order for the withdrawal to be considered qualified, it may be used only for postsecondary education expenses. B) The maximum contribution is $2,000 per beneficiary. C) A beneficiary's unused balance may be rolled over to an ESA account for another child. D) The beneficiary may be the contributor's child or grandchild or the child of a friend of the contributor.

A) In order for the withdrawal to be considered qualified, it may be used only for postsecondary education expenses.

A client with a bullish outlook on a particular stock would be able to benefit most from taking which of the following actions? A) Selling the stock short B) Buying the stock on margin C) Entering a sell limit order D) Entering a buy stop

B

If a security trades in the over-the-counter (OTC) market, it means that the security A) cannot be purchased from a market maker. B) trades anywhere other than on an exchange. C) is traded on multiple stock exchanges. D) is available for sale only if the buyer picks it up in person.

B

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

B

If a new client has $200,000 to invest and wants to retire in 15 years, which of the following client information is least necessary for an adviser to recommend a suitable investment program? A) The projected annual income needed during those retirement years B) Current income and cash flow requirements C) The age of the client D) Tolerance toward risk

B) Current income and cash flow requirements

In almost all states, the Uniform Gift to Minors Act (UGMA) account has given way to the Uniform Transfers to Minors Act (UTMA) account. Although there are more similarities than differences between them, one of those differences is that A) the donor retains control over the investments with an UTMA account. B) some states permit transfer of ownership in UTMA accounts to be delayed beyond the age of majority. C) there is more investment flexibility in the UGMA account. D) the account is in the name of the minor in an UTMA account.

B) some states permit transfer of ownership in UTMA accounts to be delayed beyond the age of majority.

In a margin account, broker-dealers lend money to clients to enable them to leverage their investments. The account document that is evidence of the debtor-creditor relationship is A) the loan consent agreement. B) the hypothecation agreement. C) the credit agreement. D) the IOU agreement.

C

Which of the following portfolios would most likely be exposed to the most inflation risk? A) 34% diversified common stocks; 33% long-term convertible debentures; 33% noncumulative preferred stock B) 100% employer's company stock C) 50% U.S. Treasury bonds, average maturity 20 years; 30% U.S. Treasury notes, average maturity five years; 20% 90-day Treasury bills D) 75% S&P 500 Index ETF; 25% municipal bond UIT

C Inflation risk is the bane of fixed-income securities, especially those with longer maturities.

Many different investments offer the opportunity to reinvest income. If one were to compare the difference between interest-on-interest reinvestment plans and dividend and capital gain reinvestment plans, A) in both plans, all income is taxable in the year received, whether reinvested or not. B) in both cases, all income is deferred until liquidation. C) in the case of dividend and capital gains reinvestment plans, taxes are deferred until liquidation. D) in the case of interest-on-interest plans, taxes are deferred until liquidation.

C) in the case of dividend and capital gains reinvestment plans, taxes are deferred until liquidation.

When comparing the tax treatment of C corporations, S corporations, and LLCs, it would be correct to state that A) only the C and S corporations offer the benefit of flow-through. B) all three have the same tax filing date. C) the C corporation is the only one that pays taxes. D) registered personnel opening a brokerage account for any of these would follow similar suitability procedures.

C) the C corporation is the only one that pays taxes.

The president of a business entity opens an account in the name of the business. When determining the suitability of recommendations to the account, knowing the president's personal financial condition is necessary for each of the following forms of business structure except A) an S corporation. B) a sole proprietorship. C) a C corporation. D) an LLC.

C) C corp

The amount of federal income tax a U.S. citizen residing in the country will pay is dependent on all of these except A) age. B) state of residence. C) gender. D) filing status.

C) Gender

A Schedule K-1 would not be used for tax reporting to the owners by which of the following business entities? A) LLC B) Limited partnership C) Sole proprietorship D) S corporation and what do they use

C) Sole Proprietorship Schedule C

What is the net worth of a customer with the following personal balance sheet? Cash $20,000 Municipal bonds $75,000 401(k) account value $150,000 Salary $80,000 per year Cars $30,000 Home $250,000 Miscellaneous (jewelry, etc.) $50,000 Personal loan $10,000 Car loan $20,000 Mortgage $150,000 Monthly mortgage payment $1,500 A) $245,000 B) $473,500 C) $95,000 D) $395,000

D A customer's net worth equals assets minus all liabilities ($575,000 − $180,000 = $395,000). Salary and mortgage payments are income, and expense items are not part of net worth.

When opening an account for a trust, which of the following sets of terms are synonymous? A) Trustee/settlor B) Grantor/trustee C) Beneficiary/trustee D) Settlor/grantor

D) Settlor/grantor

All of the following statements regarding 529 plans are true except A) earnings accumulate tax free if the money is used for qualified educational purposes. B) the beneficiary of a 529 plan may also be the beneficiary of a Coverdell Education Savings Account. C) anyone can make a contribution on behalf of a beneficiary. D) contributions are made with pretax dollars at the federal level.

D) contributions are made with pretax dollars at the federal level.

A deceased individual with two surviving children and a spouse had established a trust for his family. The trust document appointed both children as cotrustees. The surviving spouse is to receive current income, and his two children will receive equal shares of the remaining principal upon the spouse's death. As the adviser to the account, you A) focus on generating income for the spouse. B) follow the instructions of the trustees. C) focus on increasing principal for the children. D) attempt to generate reasonable income while keeping the principal intact for the children.

B

A new customer of your broker-dealer calls after her first stock purchase. She comments that she did not see a commission charged on the trade confirmation and wants to thank you for the good deal. It would be incumbent on you to A) explain that your firm does that on the first trade to help build the relationship. B) explain that the firm acted as a principal and included a markup in the price. C) reply with a thank you and tell her you're looking forward to more trades. D) report this to your supervisor promptly.

B

Martha passed away in November 2020 at the age of 87. Among the assets in her estate was an IRA with a value of $150,000. Martha's son, Jerome, a successful 52-year-old surgeon and a client of yours, was named as the beneficiary of the IRA. From a tax standpoint, which of the following options would you recommend to Jerome? A) Jerome should use the five-year cash-out option. B) Jerome should use the 10-year cash-out option. C) Jerome should take the cash now and use a Section 1035 exchange into an annuity. D) Jerome should take the cash now and use the money to fund a new IRA.

B

When a security purchased on margin suffers a decline in market value, it may cause the equity in the account to fall to a level such that additional funds are required under the terms of the margin agreement between the client and the broker-dealer. The term that describes the request by a broker-dealer rather than an SRO for more money is A) margin call. B) house call. C) Regulation T call. D) sell-out.

B

Which of the following indices or averages is based on the prices of only 65 stocks (30 industrial, 20 transportation, and 15 utility)? A) S&P Composite B) Dow Jones Composite Average C) Wilshire 5000 D) Value Line Index

B

If your client is primarily concerned about the rising cost of living but wishes to limit his exposure to business risk, which of the following securities is most appropriate? A) Small-cap stock fund B) S&P 500 Index fund C) Tax-free municipal bond fund D) AAA intermediate-term corporate bond fund

B) S&P 500 Index fund

If a trust has been established under which the father is to receive income for life and his son is to receive the trust principal on the father's death, which of the following statements is true? A) The trustee can withhold income distributions to the father to preserve principal to the son. B) The trustee is not required to notify the son when an income distribution is made to the father. C) The trustee does not need to keep records of the income distributions to the father. D) The trustee must notify the son each time an income distribution is made to the father.

B) The trustee is not required to notify the son when an income distribution is made to the father.

All of these are reasons a corporation might choose to establish a nonqualified plan rather than a qualified plan except A) a nonqualified plan has more design flexibility than a qualified plan. B) the employer can take a tax deduction at the time the contribution is made to the plan. C) the corporation can exclude rank-and-file employees from a nonqualified plan. D) a nonqualified plan typically has lower administrative costs.

B) the employer can take a tax deduction at the time the contribution is made to the plan.

An individual has a substantial vested interest in his 401(k) plan at work. Which of the following is not an exception to the premature distribution penalty tax? A) Distribution to pay certain medical expenses B) Distribution because of an employee's death or disability C) Distribution of up to $10,000 made to purchase a principal residence D) Distribution made pursuant to a qualified domestic relations order

C

The MNO Manufacturing Company, headquartered in Springfield, has just filed for bankruptcy. Under federal bankruptcy law, holders of which of the following would have highest priority with the bankruptcy trustee? A) First lien, senior preferred stock B) Guaranteed bonds C) Class A common stock D) Mortgage bonds

D

If your customer works as a nurse in a public school and wants to know more about participating in the school's 403(b) plan, it would be accurate to make each of the following statements except A) distributions before age 59½are typically subject to penalty. B) contributions are made with pretax dollars. C) mutual funds and annuities are available investment vehicles. D) she is not eligible to participate.

D) she is not eligible to participate.

An investor buys 100 shares of KAPCO stock for $120 per share. During the year, he receives $260 in dividends, and at the end of the year, the stock is worth $13,000. The investor's holding period return is A) 10.50%. B) 8.33%. C) 9.69%. D) 2.17%.

A

A number of corporations offer dividend reinvestment plans (DRIPs) where the client's dividends are automatically reinvested in additional shares of the issuer. In the case of a company that pays dividends with some degree of regularity, if the market price per share has declined over the year and assuming no splits, an investor participating in one of these plans would find which of the following to be true? A) There are more shares in the investor's account. B) The value of the investor's account has gone down. C) The value of the investor's account has gone up. D) There are fewer shares in the investor's account.

A With the dividends reinvested, there will be more shares. Although the market price per share has declined, we don't know the aggregate account value (with the additional shares), so we don't have enough information to tell if the overall value has risen or declined.

Which of the following is not an example of a nonqualified retirement plan? A) A deferred compensation plan B) A SIMPLE plan C) A SERP D) A payroll deduction plan

B

Which of the following will be the most likely risk that you will face during the first year after purchasing a corporate AA bond that matures in 15 years? A) Liquidity B) Interest rate C) Credit D) Market

B) With 15 years to maturity, even an investment-grade bond is subject to interest rate risk. This is particularly true during the early years because price fluctuations are greater when duration is longer. Credit risk is not a concern with AA bonds over a period of only one year, and AA bonds generally possess better than average liquidity. For this exam, market risk usually applies to equity securities rather than debt.

Which of the following statements about stop orders is not true? A) A stop order will become a market order once a security trades at or through a specified price. B) A sell stop order is always placed at a price that is below the current market price. C) A sell stop order is used to protect a short sale. D) A stop order to buy is always set at a price that is higher than the current market price.

C

Your firm's market analyst believes the current bullish market in equities will continue. Your moderately conservative clients should consider investing in an exchange-traded fund (ETF) or index fund tracking the A) Russell 2000® Index. B) Dow Jones 15 utilities. C) MSCI EAFE Index. D) S&P 500.

D

A customer places an order to sell 100 MS 52.25 STOP. After placing the order, MS trades as follows: 53, 52.60, 52.20, 52.10, 52.25. Which trade triggers the order? A) 52.10 B) 52.60 C) 52.20 D) 52.25

C Sell stop orders are triggered as soon as the stock trades at or through the stop price. The trade at 52.20 represents the first such transaction after the order is placed. Once triggered at 52.20, the stop order becomes a market order.

An investor purchases 100 shares of ABCE common stock at $70 per share. Thirteen months later, the stock is sold when the market price is $50 per share. Which of the following activities made 20 days after the sale of the stock at $50 per share would not violate the wash sale rule? A) Purchasing 100 shares of ABCE common stock B) Purchasing an ABCE call option C) Purchasing an ABCE put option D) Purchasing five ABCE convertible bonds with a conversion price of $50

C The wash sale rule applies when the same or substantially identical security as a stock sold at a loss is acquired within the 30-day period prior to and after the sale. Buying a put is not a problem because the put allows the holder only to sell the stock, not to buy it. Please note that a bond convertible at $50 is convertible into 20 shares, so five bonds will enable the investor to convert into 100 shares.

When preparing a client's personal profile, it is generally accepted that there both financial and nonfinancial considerations are evaluated in order to issue appropriately suitable recommendations. Which of the following would not be included in the list of financial considerations? A) Vested interest in the employer's 401(k) plan B) The client's marginal tax bracket C) Income from rental properties D) Risk tolerance

D It is not a financial consideration, it is an attitude

Which of the following best describes the determination of a client's risk tolerance? A) The client's willingness to take risk B) The client's ability to take risk C) The client's ability and willingness to take risk D) The client's net worth

C

For individual public investors, dark pools of liquidity A) lessen the transparency of the overall market as volume, quote and price information, and market participant identity are unknown. B) prevent them from having their own orders entered on exchanges for execution. C) allow them to enter orders that are sent directly to the trading floors of stock exchanges. D) allow them to give an order to their broker-dealer to buy or sell securities while only referencing an account known by a number and not their name.

A

Using the following information, compute the inflation-adjusted rate of return for an investor holding the ABC Corporation's 20-year bond: Coupon rate 5%, paid semiannually Rating Aa Maturity date December 1, 2046 CPI 2% Par value $1,000 Purchase price 90 Call date December 1, 2033 Call price 101 A) 3.56% B) 2.50% C) 5.56% D) 4.50%

A

Your client recently sold his business for $5 million. He is 55 and feels that he is too young to retire. He plans to start a new business venture and will be funding the $250,000 start-up costs with his own funds. With substantial personal assets, he could limit his personal exposure by using any of the following business structures except A) a sole proprietorship. B) an S corporation. C) a C corporation. D) a limited liability company.

A

Your client, who has not yet attained the age of 59½, wants to take a withdrawal from his traditional IRA. Since the client is not disabled and does not meet any other qualifying reason allowing for an early withdrawal, you explain that the amount taken will be subject to a penalty of A) 10%. B) 6%. C) 50%. D) 15%.

A

All of the following statements regarding qualified corporate retirement plans are true except A) with defined benefit plans, the employee bears the investment risk. B) all corporate pension and profit-sharing plans must be established under a trust agreement. C) all qualified retirement plans are either defined contribution or defined benefit plans. D) defined contribution plans have the same contribution limits as Keogh plans.

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

A Nasdaq market maker buys 1,000 shares of stock from a customer at its bid to satisfy a customer order. This is an example of A) an agency trade. B) a principal trade. C) a block trade. D) a market order.

B The market maker is acting in a principal (dealer) capacity. You should remember that a block order is a minimum of 10,000 shares, not 1,000.

A 45-year-old investor wants the greatest possible monthly income with the preservation and stability of capital as secondary objectives. Which of the following investments would you recommend? A) Money market mutual fund B) Long-term bond fund C) Growth mutual fund D) Growth and income fund

B The only choice that provides stability of capital is the money market fund, but that is not the investor's primary objective and the monthly income is quite low. Although the two other funds don't offer stability, they certainly don't provide a high income (even the growth and income fund). If you want income, you invest in bonds, especially those with longer maturities.

An individual opens an account with your firm. She tells you that upon her death, she wants any assets in the account to be divided equally among her three children. She also wants the ability to change the allocation in the event that conditions change and one of the children is in greater need than the others, but she does not want to incur any significant legal expense. You would suggest that the account be opened A) as a joint account with right of survivorship. B) as an individual TOD account. C) as a joint account with tenants in common. D) under a discretionary power.

B) as an individual TOD account.

Jill's bank, where she has her traditional deductible contributory IRA, is recommending that she roll over her IRA into a Roth IRA to benefit from the tax-free status of the withdrawals when she retires. (Jill is now 32 years old.) Which of the following is a consequence if Jill follows the bank's recommendations? A) No tax will occur, provided the rollover is completed within 60 days. B) Rolling over a traditional IRA to a Roth IRA will negate the tax-free status of future withdrawals. C) The entire amount rolled over must be declared as income. D) The amount attributable to growth must be declared as income.

C A traditional IRA may be rolled over into a Roth IRA, and the 10% penalty may be avoided if the rollover is accomplished in 60 calendar days. However, there will be an immediate tax consequence regarding any sum that exceeds the participant's cost basis. Because Jill was taking deductions for her IRA contributions, she has a zero basis, and the entire amount will be treated as taxable ordinary income in the year rolled over.

J.B. Rich founded Rich, Inc., and he owns a substantial block of stock with a very low cost basis. Which of the following statements are true regarding the disposition of J.B.'s stock? If it is given away, the recipient of the gift assumes J.B.'s cost basis. If it is given away, the recipient of the gift receives a stepped-up basis to the market value as of the date of the gift. If it is inherited, the beneficiary assumes J.B.'s cost basis. If it is inherited, the beneficiary receives a stepped-up basis to the market value as of the date of J.B.'s death. A) I and IV B) II and IV C) I and III D) II and III

A

Which of the following is a benefit to an employee of a business offering a safe harbor 401(k) using a nonelective formula? A) The employer is required to contribute on the employee's behalf even if the employee does not contribute to the plan. B) The plan is free from the top-heavy testing requirements. C) The employees are guaranteed the ability to consult an investment adviser. D) It guarantees that highly compensated employees do not get more of an employer match than employees who are not highly compensated.

A

With regard to margin accounts, all of the following are accurate statements except A) margin accounts employ less leverage than cash accounts. B) initial margin is the amount required under Regulation T when a security is purchased on margin. C) a mixed margin account is an account with a broker-dealer in which there are both long and short positions. D) maintenance margin is the amount required under SRO rules when the equity in a margin account falls below a predetermined level.

A

Many corporations make available dividend reinvestment plans (DRIPs) for their shareholders. Which of the following are among the benefits of using DRIPs? Allowing the investment to compound Discounts from the current market price Reduced taxation The ability to accept the dividend in cash or in additional shares of stock A) I and IV B) I and II C) II and IV D) I and III

B DRIPs, like any other plan involving dividend reinvestment, offer the opportunity to have the investment compound. In most cases, shares are available at a slight discount from the current market and/or the commissions are reduced or eliminated. Many plans allow investors to add thousands of dollars to the reinvested dividend, taking advantage of the previous two benefits. However, there is no tax advantage. This is merely reinvesting a cash dividend, not receiving a stock dividend.

One measure of an investor's total return is called holding period return. The computation includes both income and appreciation and is used for both debt and equity securities. An investor's holding period return would exceed the bond's yield to maturity if A) the coupons were reinvested at a rate exceeding the yield to maturity. B) the bond was called at a premium. C) the bond was redeemed at a discount. D) the investor purchased a put option on the bond.

A

One of your customers purchased a variable life insurance contract through your firm. After 14 years, he had deposited $15,000 in premiums, and his death benefit had grown to $80,000. Shortly after taking out a loan against cash value of $10,000, he was killed in an automobile accident. What will be the tax consequences of this situation to the death benefit? A) His beneficiary need not pay taxes on the death benefit. B) His beneficiary must pay taxes on the amount of the death benefit that is over and above the cost base of $15,000. C) His beneficiary must pay taxes on the amount of the death benefit that is over and above the cost base of $15,000 plus the unpaid loan. D) The first $15,000 is tax free with the excess being treated as a long-term capital gain.

A

A client's mixed margin account has the following positions: Long, 100 XYZ with a current market value of $5,000 Long, 300 ABC with a current market value of $16,000 Short, 200 DEF with a current market value of $10,000 Short, 100 GHI with a current market value of $8,000 The account has a debit balance of $8,000 and a credit balance of $22,000. What is the combined equity in the account? A) $31,000 B) $9,000 C) $17,000 D) $11,000

C There are two ways to compute the combined equity in a mixed (long and short) margin account. One is to add the positives and subtract the negatives. In this case, we are long (that is a plus for us) $21,000, and we have a credit balance (also a plus for us) of $22,000. That is a total of $43,000. We also owe (the debit balance) $8,000 against the long stock, and it will cost us $18,000 to buy back the short stock. That is a total of $26,000. Subtracting that $26,000 from the $43,000 gives us +$17,000. The other way is to take each account separately. In the long account, what we own ($21,000) minus what we owe ($8,000) equals $13,000 of long equity. In the short account, what we own is the $22,000 credit balance, and what we owe is the $18,000 market value of the short. That comes out to $4,000. Now add those two together, and you get the same $17,000.