Final Exam 6
A bank customer deposits $9,000 in cash into his checking account. On the same day, he deposits $6,000 in cash into his savings account. The bank is required to file: A) A Currency Transaction Report (CTR) B) A Currency and Monetary Instrument Report (CMIR) C) A Suspicious Activity Report (SAR) D) Nothing since each deposit was less than $10,000
A) A Currency Transaction Report (CTR) **This is an example of layering or structuring which involves a customer attempting to avoid the reporting of cash transactions that exceed $10,000 on the same day. These types of transactions must be reported on the CTR (also referred to as FinCEN Form 104).**
If a client requests an unaudited financial statement from an IA, it must be made available within how many days? A) 3 B) 5 C) 7 D) 10
C) 7 **Any requests for materials from an IA must be met within seven days.**
The difference between the current ratio calculation and the quick asset ratio calculation is that the quick asset ratio excludes which of the following? A) Current assets B) All assets C) Inventories D) Money-market investments
C) Inventories **The quick ratio formula is (current assets - inventories) / current liabilities. **
Which TWO of the following are features of 401(k) plans? I) Mandatory employee contributions II) Mandatory employer contributions III) Voluntary employee contributions IV) Voluntary employer contributions A) I and II B) I and III C) II and III D) III and IV
D) III and IV **In a 401(k) plan, both employee and employer contributions are voluntary. **
Why would an investor use a dollar cost averaging strategy to purchase bonds? i) To ensure that the average cost per bond is less than the average of the prices at which the bonds were purchased II) To ensure a profit on the bonds when they are sold III) To reduce timing risk in volatile markets IV) To reduce systematic risk in markets that lack volatility A) I only B) I and III only C) II and IV only D) I, II, III, and IV
) I and III only **Dollar cost averaging produces a cost per bond that is less than the average of the prices at which the bonds were purchased, assuming there was some price fluctuation. This helps reduce timing risk in volatile markets. However, it does NOT guarantee a profit, since the eventual sale price of the bonds could be less than the investor's average cost.**
Under the Uniform Securities Act, what information would NOT need to be disclosed when filing a registration by qualification? A) A statement analyzing the issuer's profit margin over the last three years compared to the profit margins of its primary competitors B) The capitalization and long-term debt of the issuer and any significant subsidiary C) The general character and location of the issuer's business and a statement of the general competitive conditions within the industry or business in which it operates D) The estimated cash proceeds to be received by the issuer from the offering
A) A statement analyzing the issuer's profit margin over the last three years compared to the profit margins of its primary competitors **An analysis of the issuer's profit margin as compared to its competitors would not be required. All other items listed would be required when filing a registration by qualification. **
Which of the following statements is TRUE regarding Roth IRAs and Coverdell Education Savings Accounts? A) Both are only permitted for individuals whose income is below a certain amount. B) Both allow tax-deductible contributions. C) Both allow a catch-up provision if the contribution is made by a person who is over a certain age. D) Both have the same maximum annual contribution amount.
A) Both are only permitted for individuals whose income is below a certain amount. **Contributions that are made to either a Roth IRA or Coverdell Education Savings Account (ESA) are only permitted for persons whose income is below a certain level. Both allow for tax-free growth if certain conditions are met; however, the contributions are made in after-tax dollars (non-deductible). A Roth IRA allows a catch-up contribution if the person is age 50 or older. A Roth IRA allows for a maximum annual contribution of $6,000, while the maximum annual contribution for a Coverdell ESA is $2,000.**
Zemo, a new company engaged in green technologies, has announced its IPO will trade on the NYSE. Frank, an adviser with Einstein Advisory Services, plans to purchase a large block of the stock and allocate shares only to his largest discretionary clients. One regulatory concern would be: A) Breach of fiduciary duty B) Liquidity C) Diversification D) Front-running
A) Breach of fiduciary duty **A primary issue is hard to obtain in certain cases. Many clients desire IPOs that are greatly anticipated by the market. Providing only the largest clients with an allocation is unfair to smaller clients and represents a breach of the adviser's fiduciary duty to those clients. Liquidity is not a major issue as the stock will be listed on the NYSE. Plus, the additional stock allotment to clients would further diversify their investments. Since the shares purchased by Frank were reallocated to his clients, he is not front-running**
Which of the following is a benefit of forming a limited partnership? A) Ease of establishment B) Liquidity C) Continuity of life D) Ease of raising additional capital
A) Ease of establishment **A partnership is one of the easiest business entities to form, especially when compared to establishing a corporation. However, limited partnership interests are illiquid, since a general partner's approval may be required to sell them. Another difficulty for partnerships is raising capital due to the fact that the general partner is often limited to selling to institutional and accredited investors only. In some cases, a partnership will disband due to the death of a partner; in other words, they don't have continuity of life.**
An investment adviser representative is considering a recommendation that a customer sell uncovered options. The recommendation is NOT suitable if the IAR: A) Failed to satisfy himself that the customer was aware of the risks involved and had the financial capacity to assume such risks B) Failed to receive written approval to make the recommendation by the firm's registered options principal C) Failed to receive written approval to make the recommendation by his branch manager D) Failed to satisfy himself that the customer had the financial capacity to assume such risks
A) Failed to satisfy himself that the customer was aware of the risks involved and had the financial capacity to assume such risks **The recommendation is not suitable if the IAR failed to satisfy himself that the customer was aware of the risks involved and had the financial capacity to assume such risks. Written approval from the firm's Registered Options Principal or branch manager is required to open an account. There is no requirement to receive written approval prior to making a recommendation to a client.**
Which TWO of the following items does the IRS consider earned income? I) Royalties II) Dividends III) Long-term disability benefits received prior to minimum retirement age IV) Social Security A) I and III B) I and IV C) II and III D) II and IV
A) I and III **The IRS defines earned income as compensation received for personal services actually rendered. Royalties and long-term disability benefits received prior to the minimum retirement age come under the IRS's definition. Dividends and Social Security are not considered earned income. They are still taxable, however.**
A client of an investment adviser representative has just died. If the client did not have a will, from whom may the investment adviser representative accept instructions? A) The intestate Administrator B) The deceased client's adult child C) Any person with a legally executed power of attorney D) The deceased client's spouse
A) The intestate Administrator **If an individual dies without a will and the assets of estate exceed the estate's liabilities, the estate is considered intestate. A probate court will appoint a person to act as the administrator of the estate and distribute the estate's assets to the beneficiaries. A power of attorney is void after a client dies.**
An investment adviser might create a portfolio in the following manner. She would assess conditions in the global economy at the present time and in the near future. With that in mind, industries are selected that would benefit most from the forecasted economic environment. The adviser would now look at selected companies within those industries and perhaps rate them according to various factors, such as management structure and fiscal health. It is from these companies that a portfolio manager might create or diversify a client portfolio. This approach would best be described as: A) Top-down B) Balloon structure C) Bottom-up D) Macro trend selection
A) Top-down **This is the philosophy of the top-down approach to investing. A broad analysis of the economy is first conducted, and then specific industries are identified that would seem to benefit from the economic analysis that was done. Then particular companies are chosen from within those industries and the adviser would make selections based on certain factors.**
The Uniform Securities Act outlines when an investment adviser must obtain its clients' permission before it may assign the clients' contracts. In which of the following circumstances is an investment adviser required to obtain its clients' permission before assigning their contracts? A) When the sole proprietor of an advisory firm decides to take on seven partners, but retains a 30% ownership stake B) When the owner of 80% of an advisory firm pledges his home as collateral for a loan he makes to the firm C) When an owner of 40% of an advisory firm dies D) When an owner of 25% of an advisory firm leaves to start another firm as a sole proprietorship
A) When the sole proprietor of an advisory firm decides to take on seven partners, but retains a 30% ownership stake **Under the Uniform Securities Act, assignment is considered the direct or indirect transfer of an advisory contract by the adviser or the transfer of a controlling block of the investment adviser's outstanding voting securities by a security holder of the advisory firm. If an adviser is a corporation, the acquisition of a controlling block (majority) of the adviser's shares by another entity is considered a change of control which would require client consent. Also, if an adviser is organized as a partnership, the death or resignation of a majority of the partners is considered a change of control and client consent is required. Client consent is required if a sole proprietor owns 100% of the business, but then takes on partners and changes 70% of the ownership (a majority change). If a 40% owner (minority) of an advisory firm dies or if a 25% owner (minority) of an advisory firm leaves, it doesn't constitute assignment since it's not majority change. It's important to realize that the owner of 80% of an advisory firm pledging his home as collateral for a loan doesn't relate to client contracts and is not considered assignment.**
Ralph has purchased 4.0% TIPS with an original principal amount of $1,000. If the adjusted principal amount is $1,020, how much interest will Ralph receive on his next payment? A) $20.00 B) $20.40 C) $40.00 D) $40.80
B) $20.40 **Treasury Inflation-Protected Securities (TIPS) pay a fixed rate of interest, based on inflation-adjusted principal. The adjustment to principal is based on the Consumer Price Index. TIPS pay interest semiannually, based on a fixed rate applied to the adjusted principal. Interest payments are calculated by multiplying the adjusted principal by 1/2 of the annual interest payment. In this question, the 4.0% rate of interest is multiplied against the principal of $1,020 for an annual interest amount of $40.80. Each payment during the year will equal $20.40. **
A multi-state adviser must file a Form ADV-W to withdraw from federal registration if the number of states in which it is required to register is less than: A) 5 B) 15 C) 20 D) 30
B) 15 **A person, who is required to register as an investment adviser based on the laws of 15 or mores states, is considered a multi-state adviser and, therefore, must register with the SEC. If the number of states in which the adviser is required to register falls below 15, the adviser is required to file Form ADV-W indicating a partial withdrawal at the time of filing its annual updating amendments.**
Which of the following securities would likely have the highest beta coefficient? A) An electric utility company's common stock B) A biotechnology company's common stock C) A zero-coupon, 30-year U.S. Treasury bond D) A zero-coupon, 10-year U.S. Treasury bond
B) A biotechnology company's common stock **Beta is a measurement of a security's volatility as compared to an index such as the S&P 500 Stock Index. A high beta (greater than one) indicates that a company is more volatile than the benchmark index. Utilities and other defensive industry stocks tend to have low betas**
Which of the following choices would be considered an offer or an offer to sell under the Uniform Securities Act? A) A group of creditors receives stock in a bankrupt company as part of a court-approved reorganization plan B) A corporation's current shareholders receive the right to purchase additional shares at a predetermined price C) A corporation's current shareholders receive stock instead of a cash dividend D) A used car dealer offers a free savings bond with every car
B) A corporation's current shareholders receive the right to purchase additional shares at a predetermined price **An issuer offering additional shares of common stock at a set price is considered an offering of stock rights and is defined as an "offer or offer to sell" under the USA. A stock dividend is not considered an offer or offer to sell under the USA. Any securities that are received as a result of a reorganization plan approved by the bankruptcy courts are not part of an offer or offer to sell.**
An investor is interested in finding a pass-through investment in which the investors are able to take an active role in the company as members and the company is able to raise an unlimited amount of capital. What investment would meet these requirements? A) A real estate investment trust B) A limited liability company C) A Subchapter S corporation D) A master limited partnership
B) A limited liability company **A limited liability company is a pass-through investment that is similar to the structure of a limited partnership. A limited liability company is able to raise an unlimited amount of capital and the capital is provided by members who may take an active role. **
A client of an IA has over 20% of his assets invested in a coal mining company's stock. The IA recommends greater diversification and indicates that stocks in this sector have been continually declining in value over the last 10 years. The client believes that the stock will eventually recover and refuses to sell it. The client's behavior may be described as: A) Regret aversion B) Anchoring C) Conservationism D) Overconfidence
B) Anchoring **This is an example of anchoring. Anchoring involves a client being attached to the belief in an investment's potential upside despite indications to the contrary.**
The original asset allocation of an investment portfolio was 10% cash, 40% bonds, and 50% stocks. A recent bear market, however, has altered this allocation to 10% cash, 50% bonds, and 40% stocks. The client's investment objectives and risk tolerance have not changed. The adviser recommends that the portfolio be systematically rebalanced by selling: A) Stocks and buying bonds with the proceeds B) Bonds and buying stocks with the proceeds C) Stocks and bonds and placing the proceeds in cash until market conditions stabilize D) Stocks and bonds and allocating 10% of the portfolio to alternative investments
B) Bonds and buying stocks with the proceeds **Systematic rebalancing is the process of buying and selling securities within a portfolio to restore its original asset allocation. Systematic rebalancing may be done either periodically (annually, quarterly, or monthly) or whenever market forces or different rates of return cause a significant change in the original asset allocation. In this case, a bear market has caused the value of the stocks in the portfolio to shrink so that this asset class now represents only 40% of the total portfolio. The adviser would rebalance the portfolio by selling bonds and buying stocks with the proceeds. **
All of the following would be considered an investment adviser representative under the Uniform Securities Act, EXCEPT a(n): A) Portfolio manager for Winners Asset Management Co B) Broker-dealer offering wrap accounts to its clients C) A partner of Winners Asset Management Co. who supervises investment adviser reps D) An accountant who works for Winners Asset Management Co., who provides financial plans for clients
B) Broker-dealer offering wrap accounts to its clients **An investment adviser representative is any person who is associated with an investment adviser and makes recommendations, manages accounts, provides advice, solicits advisory services, negotiates the sale of advisory services, or supervises persons engaged in these activities. A broker-dealer offering wrap accounts would be considered an investment adviser, not an investment adviser representative.**
Which of the following terms relates to the graph of optimal portfolios resulting from a comparison of risk and return? A) CAPM B) Efficient frontier C) Duration D) Alpha
B) Efficient frontier **According to modern portfolio theory, a graph of optimal portfolios may be created known as an efficient frontier. **
The manager of a value fund will look for securities that have which of the following characteristics? A) High P/E ratios B) High dividend yields C) High market-to-book ratios D) High betas
B) High dividend yields **Value investors are looking for stocks that are undervalued (i.e., they are bargain hunters). Value stocks are characterized by LOW P/E (price/earnings) ratios, high dividend yields, and low market-to-book values (often referred to as price-to-book ratios). On the other hand, beta is a measure of a stock's volatility.**
In which of the following situations is an adviser required to provide a customer with an annual audited balance sheet? I) The IA has custody of client assets II) The IA receives substantial prepayment of advisory fees III) The IA has limited discretionary authorization over a client's account A) I only B) I and II only C) II and III only D) I, II, and III
B) I and II only **An investment adviser is required to provide a customer with an annual audited balance sheet if it has custody of the client's assets or if it receives substantial prepayment of advisory fees. Under the USA (state law), substantial prepayment of fees is considered more than $500 dollars, six months or more in advance. However, under the Investment Advisers Act of 1940 (federal law), substantial prepayment of fees is considered more than $1,200 dollars, six months or more in advance. **
A group of investors are forming a start-up company. The business will have approximately five investors. The investors want the most tax efficient business structure and to avoid paying taxes twice on company profits. Which business structure would allow them to protect their personal assets and also avoid double taxation? I) An S Corporation II) A C Corporation III) A limited liability company IV) A closed corporation A) I only B) I and III only C) II and III only D) I, II, III, and IV
B) I and III only **S Corporations and limited liability companies (LLCs) are flow-through entities. Therefore, profits are passed through to the owners and reported on their individual tax returns. C Corporations, however, are subject to two levels of taxation, since they are considered separate entities for tax purposes. They must pay corporate income taxes and their shareholders must also pay individual income taxes on dividends that they receive. Closed corporations (also termed privately held corporations) are companies whose shares do not trade publicly. A closed corporation could be organized as either an S Corporation or a C Corporation. (Note, however, that S Corporations are almost always closed corporations since they may only have a maximum of 100 shareholders.)**
Your client has decided that he is ready to make some speculative moves with a small portion of his portfolio. His suitability profile supports this move. Which of the following recommendations could you make to meet his new goal? I) Purchase an asset allocation fund with a growth objective II) Buy a biotechnology fund III) Buy calls and puts IV) Invest in utility stocks A) I and II only B) II and III only C) II, III, and IV only D) I, II, III, and IV
B) II and III only **This question is a bit tricky, due to its wording. We know that the investor wishes to make some speculative moves, and most of the choices in this question could be viewed as aggressive. When evaluating choices (I) and (IV), the key point to focus on is the word speculative. Speculation involves a high degree of risk and volatility. Options clearly have both. A biotechnology fund would also fit in this category. Typically, any sort of sector play would be considered speculative. An asset allocation fund with a growth objective is not speculative. Growth and speculation are two different investment objectives. Utility stocks are purchased for their dividends and, therefore, are not considered speculative.**
In determining the loan value of marginable securities, the agent should: A) Use the 20% Rule under the Uniform Securities Act B) Multiply the market value by 50% C) Refer to ADV Part 2 D) Use the percentage allowed by the state Administrator
B) Multiply the market value by 50% **The loan value of most marginable securities is determined by multiplying the market value of the securities by Regulation T of the Federal Reserve Board, which is 50%. There is no provision in the Uniform Securities Act that discusses the margin requirement on securities. The percentage is set forth by either the FRB or by certain self-regulatory organizations (SROs) such as the NYSE or FINRA. **
Bryce Dunne is long 300 shares of YYZ, a company specializing in radio broadcasting. Bryce also is long 3 YYZ Aug calls. What is the purpose of this strategy? A) Mitigation of risk B) Speculation C) Protection against a downside move D) Generation of income
B) Speculation **Bryce is making a very speculative trade with YYZ stock and YYZ call options. He is extremely bullish on the stock. This is demonstrated by the fact that he purchased both the stock and the call options. If the stock's price appreciates, he will make money on both trades. Conversely, if the stock's price goes down, he will lose money on the stock trade and the call options will expire worthless, which will mean a complete loss of the premiums paid when he purchased them. **
When acting as the trustee for a family trust, who does an investment adviser consider for termination benefits? A) The grantor B) An income beneficiary C) A contingent remainder beneficiary D) The trustee
C) A contingent remainder beneficiary **Trust accounts can have different types of beneficiaries. An income beneficiary is one who only has claims on the income, but not the property (i.e., corpus) in the trust. Remainder beneficiaries have the right to receive property if a trust is being dissolved (i.e., terminated). Typically, primary beneficiaries have the first claim to assets if a trust is broken up. Contingent beneficiaries are given property only after the primary beneficiary cannot accept the assets (e.g., the primary beneficiary passed away). Since this question didn't mention a primary beneficiary, the best answer is a contingent remainder beneficiary.**
What are the advantages of a limited liability company (LLC) compared to an S Corporation? A) Limited liability B) Lower corporate tax rates C) A simpler managerial structure D) Continuity of life
C) A simpler managerial structure **Owners of S Corporations and limited liability companies have limited liability. Both entities also have a flow-through tax structure. Income, capital gains, and capital losses are passed directly on to the investors and reported on their personal income tax returns. Neither entity pays federal corporate taxes on income earned. The advantage of a limited liability company is that its managerial structure is much simpler. There is no need for a board of directors or annual meetings or the other formalities of a corporation. However, unlike an S Corporation that has continuity of life, LLCs are dissolved after an event (e.g., owner dies) or a specific period passes.**
An Administrator receives a written notice indicating that an IA has just violated the net capital rule and is currently below the minimum requirement. Which of the following reports would the Administrator demand? I) A current balance sheet II) Contact information for the qualified custodian that handles the clients' funds III) A client ledger IV) A list of all client-owned securities and nonsegregated funds A) I and II only B) I, II, and III only C) I, III, and IV only D) I, II, III, and IV
C) I, III, and IV only **According to NASAA rules, if an IA violates the net capital rule, the Administrator may require the adviser to provide its balance sheet, client ledger, and a list of all customer-owned securities and nonsegregated funds. However, the Administrator would not require the qualified custodian's name since that information is already disclosed in the investment adviser's Form ADV. **
According to the Uniform Securities Act, if the Administrator wishes to revoke a firm's registration, which of the following statements is/are TRUE? I) Revocation may not be started until the firm has had a hearing with the Administrator and the State's Ethics and Procedures Panel (SEPP). II)The firm may request a hearing with the Administrator within 15 days of the revocation. III) The firm may apply for judicial review of the Administrator's actions within 60 days. IV) All employees of the firm must requalify by examination. A) I only B) I and IV only C) II and III only D) I, III, and IV only
C) II and III only **The Administrator may revoke a registration without providing the opportunity for a prior hearing but, if requested, the Administrator will grant a hearing within 15 days. The firm has 60 days to apply for legal (judicial) review of the Administrator's action. Registrations of all persons associated with the firm will become inactive during this period, but they will not need to requalify solely because their employer's registration has been revoked. **
If a broker-dealer has written procedures that allow for the borrowing and lending of money between agents and customers, in which of the following situations is an agent NOT allowed to borrow money from a customer? A) If the customer and the agent are both registered with the same firm B) If the customer is a member of the agents immediate family C) If a loan is based on a written agreement with the customer and the agent repays the loan in full plus interest D) If the lending arrangement is based on a business relationship that exists outside of the agent-customer relationship
C) If a loan is based on a written agreement with the customer and the agent repays the loan in full plus interest **An agent is allowed to borrow money from or loan money to a client, if the agent's broker-dealer has written procedures in place allowing for the arrangement, plus one of the following situations. The customer and agent are both registered with the same firm, The customer is a member of the agent's immediate family The customer and the agent have either a business or personal relationship that exists outside the brokerage relationship To loan money to a client based on a written agreement is not allowed. **
A wealthy, married couple, who are both in their 40s, have money that they would like to invest. If their objective is long-term growth with minimum tax liability upon liquidation in 25 years, which of the following investments is the most appropriate? A) Municipal bonds B) A variable annuity C) Individual equity securities D) An equity-indexed annuity
C) Individual equity securities **Of the given choices, investing in individual equities is likely the most appropriate. If the equities rise in value and are then, years later, liquidated, the gains will be taxed at the long-term capital gains rate. Historically, the long-term capital gains tax rate is lower than the highest rate at which ordinary income is taxed. Municipal bonds provide tax-free income, but they offer limited growth potential. A variable annuity and an equity-indexed annuity may provide growth potential, but that growth is taxed as ordinary income when it is withdrawn from the annuity.**
An advisory firm is evaluating an investment opportunity for a client. Current projections show that the net present value (NPV) is equal to zero and the client requires an internal rate of return of 6%. Based on this given information, what is the investment's internal rate of return (IRR)? A) The IRR is greater than 6% B) The IRR is less than 6% C) The IRR is equal to 6% D) The IRR is 0%
C) The IRR is equal to 6% **When using net present value (NPV) to evaluate a project, the value of the cash inflow is compared to the cash outflows returned by the project. If the NPV is zero, then the project is assumed to return all of the cash inflow plus the required rate of return.**
A broker-dealer owns 100 shares of ABCO stock which it purchased at 28. If the stock is sold to a customer, the broker-dealer will base the markup on: A) The inventory cost of 28 B) The highest bid on the Nasdaq system C) The lowest offer on the Nasdaq system D) A price that is fair and reasonable
C) The lowest offer on the Nasdaq system **When selling stock to a customer, a markup should be based on the lowest offer on the Nasdaq system, not the price the dealer paid to purchase the stock (dealer's inventory cost). **
According to the Investment Advisers Act of 1940, if an investment adviser utilizes a solicitor, the solicitor must provide clients with written disclosure of all of the following, EXCEPT: A) Contract terms between itself and the IA B) Compensation agreements between itself and the IA C) The name of the broker-dealer that will be executing client trades D) The name of the investment adviser providing the advisory services
C) The name of the broker-dealer that will be executing client trades **Under the Investment Advisers Act of 1940, a solicitor must disclose the name of the adviser for whom it is soliciting as well as the contract terms and compensation agreement. There is no requirement for a solicitor to disclose the name of the broker-dealer executing the trades. However, before a client signs an advisory contract, the investment adviser (not the solicitor) must disclose the executing broker-dealer's name.**
Bill and Jean would like to contribute to a 529 plan for their only child. They figure they can afford to contribute $5,000 per year for the next 15 years. If they are able to maintain their annual contribution, and earn at least 5% on their contributions, what would the future value of the 529 plan be in five years? A) $10,762.50 B) $16,550.63 C) $22,628.15 D) $29,009.56
D) $29,009.56 **$29,009.56. One method of determining the future value of a series of investments, is the compounded growth rate. For each year, determine the amount of principal that is invested. Remember to add any additional payments ($5,000 per year in this example) and then increase the new principal value by the stated rate of return each year. Year Principal Rate of Return Future Value at End of Year 1 $5,000.00 x .05 = $5,250.00 2 $10,250.00 x .05 = $10,762.50 3 $15,762.50 x .05 = $16,550.63 4 $21,550.63 x .05 = $22,628.16 5 $27,628.16 x .05 = $29,009.56**
A brokerage client buys stock worth $40,000 and sells it three years later for $60,000. If his long-term capital gains rate is 10%, what is his after-tax total return? A) 30% B) 33% C) 40% D) 45%
D) 45% **Calculating after-tax total return starts with determining the capital gain, which is $20,000 ($60,000 - $40,000). If capital gains are taxed at a rate of 10%, then the tax is $2,000 ($20,000 x 10%). The after-tax gain is $18,000 ($20,000 - $2,000). Therefore, the after-tax total return is 45% ($18,000 after-tax gain / $40,000 original investment).**
Which of the following transactions would NOT be considered exempt under the Securities Act of 1933? A) A private placement B) An intrastate offering C) An unsolicited brokerage transaction D) An initial public offering of an investment company's common stock
D) An initial public offering of an investment company's common stock **With the exception of the public offering of investment company shares, all of the transactions listed are exempt from the Securities Act of 1933. Generally, when investment company shares are offered to the public, they must be registered and sold with a prospectus.**
A client is primarily concerned with having enough money to retire in 20 years. All of the following are considerations when making recommendations to the client, EXCEPT: A) The approximate inflation rate B) The current amount of available funds C) The expected return on the client's investments D) Current interest rates
D) Current interest rates **Of the available choices, current interest rates is not a factor when making recommendations to a client with a long-term investment objective. Important considerations include the current amount of available funds and the expected return on the client's investments. Additionally, the approximate rate of inflation is a factor in determining how much the client will need based on the cost of living. **
Which of the following factors would be important when determining a person's tax status? I) The person's age II) The person's place or state of residence III) The person's tax status at the end of the prior year IV) The person's country of citizenship A) I and II only B) I, II, and III only C) I, II, and IV only D) I, II, III, and IV
D) I, II, III, and IV **All of the items listed may have an effect on a person's tax status. For example, a person's age may affect her property taxes since many states offer homestead exemptions, while a person's country or state of residency may affect the rate at which her income is taxed.**
Which of the following are characteristics of zero-coupon bonds? I) They can be purchased at a deep discount II) There is no reinvestment risk III) Tax consequences occur only at maturity IV) The investor is taxed annually A) I and III only B) I and II only C) I, II, and III only D) I, II, and IV only
D) I, II, and IV only **Zero-coupon bonds are issued at a deep discount and mature at par value; therefore, they require a minimal capital outlay. Also, due to the fact that zeros do not pay interest on a semiannual basis, they have no reinvestment risk (there is nothing to reinvest). For tax purposes, the IRS requires zero coupon investors to accrete (upwardly adjust) their basis. The result of accretion is that each year a portion of the discount is reported as taxable interest income.**
ABC Investment Adviser is a federal covered adviser and requires its IARs to have an MBA degree before they are able to provide advice to its clients. For any of the firm's IARs who provides advice, in what document(s) must their education be disclosed? I) ADV Part 1 II) ADV Part 2 III) Schedule E IV) The adviser's brochure A) I only B) I and II only C) II and III only D) II and IV only
D) II and IV only **If an investment adviser requires a specific level of education or business experience for its IARs to be able to provide advice, it must be disclosed in its ADV Part 2, which may also be used as the adviser's brochure.**
Which of the following risks would have the greatest impact on a U.S. Treasury zero-coupon bond with an 18-year maturity? A) Liquidity risk B) Market risk C) Reinvestment risk D) Inflationary risk
D) Inflationary risk **Since a bond's return may not keep pace with the rate of inflation, Treasury securities with long maturities are subject to inflationary risk. This may cause the real rate of return to be less than anticipated over a long period. The Treasury market is very liquid and stable. Zero-coupon bonds protect investors from reinvestment risk, since they do not provide interest payments. Reinvestment risk is defined as the risk that a bond's future coupons will not be reinvested at the same interest rate as when the bond was initially purchased.**
Paul works as a registered representative for Broker-Dealer X and also works as a financial planner under Broker-Dealer X's control. Paul's only source of compensation are commissions for trades that are executed. According to the Investment Advisers Act: A) Paul must be registered as an investment adviser B) Broker-Dealer X must be registered as an investment adviser C) Paul does not need to be registered as an investment adviser D) Neither Paul nor Broker-Dealer X are required to registration as an investment adviser
D) Neither Paul nor Broker-Dealer X are required to registration as an investment adviser **According to SEC Release 1092, broker-dealers are not required to register as investment advisers if their advisory service is solely incidental to the conduct of their business as broker-dealers and if they do not receive any special compensation for their advice. This exclusion is also available to a registered representative who acts as a financial planner under the knowledge and control of his broker-dealer.**
If FINRA issues an order against a broker-dealer, what actions may be taken by the Administrator according to the Uniform Securities Act? A) The Administrator may not take action against the firm since it has not been convicted B) The Administrator must suspend the broker-dealer C) The Administrator may only take action if a law in its state has been violated D) The Administrator may suspend a registration if a broker-dealer is subject to a FINRA action
D) The Administrator may suspend a registration if a broker-dealer is subject to a FINRA action **The Administrator may suspend a broker-dealer's registration if it has violated a law, is about to violate a law, or if the firm is subject to a FINRA order. The Administrator is not required to take action, but will instead decide on the appropriate course on a case-by-case basis. **
While meeting with a client, an investment adviser representative (IAR) is asked if she is registered. The client also questions the IAR as to whether being registered indicates that she is qualified to be an IAR. According to the Uniform Securities Act, how should the IAR respond? A) The IAR should tell the client that only qualified representatives may use the IAR designation B) The IAR should tell the client that if she was unqualified the state would have revoked her registration C) The IAR should tell the client that she will always act in an ethical and honest manner because she is an IAR D) The IAR should tell her client that being registered does not equate to the Administrator considering her to be capable or qualified to act as an IAR
D) The IAR should tell her client that being registered does not equate to the Administrator considering her to be capable or qualified to act as an IAR **Being registered does not signify that an individual has all of the necessary skills to be an effective agent or investment adviser representative (IAR). The Administrator has no qualification requirements and being registered does not guarantee that an individual will act ethically.**
Six months ago, an investor purchased shares of a mutual fund and he recently received a long-term capital gain distribution from the fund. What is the tax implication of the distribution? A) The distribution is taxed as a short-term capital gain since he has owned the shares for less than one year B) The distribution is not taxed since it represents a return of the investor's capital C) The capital gain distribution is taxed in the same manner as dividend distributions D) The distribution is taxed as a long-term capital gain regardless of the fact that the investor has owned the shares for less than one year
D) The distribution is taxed as a long-term capital gain regardless of the fact that the investor has owned the shares for less than one year **When a mutual fund distributes a capital gain, the tax implication is based on the fund's holding period, NOT the shareholder's holding period. The question indicates that the distribution was a long-term capital gain; therefore, it is both reported and taxed as a long-term capital gain.**
In the past year, a client reported earnings of $3,000 in dividends, $6,000 in long-term capital gains, and salary of $190,000. The client also had a loss of $8,000 from a limited partnership investment. For tax purposes, how is the limited partnership loss treated? A) The partnership loss is only deductible against the $6,000 long-term capital gain B) The partnership loss is only deductible against the salary of $190,000 C) The partnership loss is only deductible against other income, up to $3,000 D) The partnership loss is only deductible against passive income
D) The partnership loss is only deductible against passive income **A limited partner's share of profits from a limited partnership are considered a form of passive income and taxed as ordinary income. A partner's share of the partnership's losses are considered passive losses (not capital losses), which are deductible against passive income only. Since the client did not report any passive income, the loss is suspended and carried forward. **
According to the Uniform Securities Act, is an agent of a broker-dealer required to provide its clients with disclosure of a material public fact about an issuer? A) No, since the fact has already been made public and is in the news B) No, since the agent's broker-dealer must check the fact first and preapprove any disclosure C) Yes, firms must provide clients with a written disclosure of all facts for decision-making purposes D) Yes, as the disclosure of material facts is necessary for the client to make an informed investment decision, although the information may be public
D) Yes, as the disclosure of material facts is necessary for the client to make an informed investment decision, although the information may be public **Material facts are the facts that investors need in order to make informed investment decisions. Agents should make a good faith effort to fully and fairly disclose all material facts during sales presentations. While it may not be possible to disclose every fact, omitting a material fact in order to make an investment appear more attractive is a violation. **
