Finals (#1)

The best answer is C. 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.

A corporation that has a market capitalization of $4,000,000,000 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 C. As the deficit widens, more dollars are being spent abroad and fewer are being spent in the U.S. Increased levels of U.S. imports will cause more dollars to go outside the U.S., weakening the dollar and widening the deficit. Decreased sales of U.S. securities to foreign holders will decrease the value of the dollar (foreigners have to spend their currency to buy dollar-denominated securities and if demand is weakening, fewer dollars are being bought and fewer purchases in the United States are being made), widening the balance of payments deficit. Decreased levels of foreign tourists visiting the U.S. will widen the deficit, since fewer dollars are being spent in the U.S. by foreigners. Finally, decreased dividends paid to foreign holders of U.S. securities will cause more dollars to stay in the U.S., narrowing the deficit.

A balance of payments deficit would be widened by which of the following? I. Increased levels of U.S. imports II. Decreased sales of U.S. securities to foreign holders III. Decreased levels of foreign tourists visiting the United States IV. Decreased dividends paid to foreign holders of U.S. securities A) I and III only B) II and IV only C) I, II, III D) I, II, III, IV

The best answer is B. The question is defining Return on Common Equity. It is Earnings for Common divided by Common Equity. Common equity is all assets - all liabilities, as long as the corporation has not issued preferred stock. If the corporation has issued preferred stock, this must be deducted as well to arrive at common equity.

A corporation that has only issued common stock has income after tax. If this is divided by total assets - total liabilities, the result is: A) Earnings per common share B) Return on common equity C) Price to book value D) Return on assets

The best answer is B. The conversion price (and hence the conversion ratio) is fixed when the convertible security is issued and does not change. In this case, the bond is issued with a conversion price of $31.25, based upon converting each bond at par. $1,000 par / $31.25 conversion price = 32:1 conversion ratio. Thus, for every bond that is converted, the holder receives 32 shares.

A customer bought a $1,000 par convertible subordinated debenture at par, convertible into common at $31.25 per share. If the bond's market price increases by 20%, the conversion ratio will be: A) 31.25:1 B) 32.00:1 C) 37.50:1 D) 38.40:1

The best answer is D. There are 2 basic methods of accounting - cash or accrual. Under the cash method, transactions are recognized based on the date payment (cash) is received or paid out. Small businesses often use this method because it is simple. However, Generally Accepted Accounting Principles (GAAP) require that accrual accounting be used - and this is the case for larger businesses that are required to be audited. Accrual accounting recognizes revenue and expenses of the date of the transaction; not on the date actual payment is made. Because this business uses cash accounting, the $1,000 of revenue will not be shown on its income statement until the money is received (Choice II). Companies that use cash accounting do not have "accrued items" such as accounts payable and accounts receivable on their books. In contrast, if the firm used accrual accounting, the $1,000 of revenue would show on the income statement on the date of sale (which occurs 30 days before actual payment is received, making Choice IV correct) and would also be shown as an account receivable on the firm's balance sheet. Once the payment was received in 30 days, the firm would relieve the account receivable.

A customer buys $1,000 of goods from a business, which offers payment terms of "Net 30," which the customer uses. The firm is on the cash method of accounting. Which statements are TRUE? I. The $1,000 of sales revenue is recorded on the day the transaction occurs II. The $1,000 of sales revenue is recorded on the day payment is received III. The cash method of accounting allows the business to recognize its revenue earlier than if the accrual method of accounting was used IV. The accrual method of accounting would have allowed the business to recognize its revenue earlier than if the cash accounting method was used A) I and III B) I and IV C) II and III D) II and IV

The best answer is A. This one borders on being a trick question. Treasury Inflation Protection Securities (TIPS) give a fixed coupon rate (3½% in this example), but they also adjust the principal value of the bond up each year for inflation (4% per year in this example). At maturity, the investor gets the inflated principal amount. The Total Return on this TIPS would be 3½% annual income + 4% annual gain = 7½%. However, this question asks for inflation-adjusted rate of return (real rate of return), which subtracts out the inflation rate. So the real rate of return is simply 3½%. Also note that the coupon on a TIPS will always be the real rate of return.

A customer buys a TIPS at par with a 3½% coupon. Inflation stays at 4% over the life of the security. What is the inflation-adjusted yield? A) 3½% B) 4% C) 7½% D) This cannot be determined from the information presented

The best answer is C. There is no tax due when a stock dividend is paid; instead the investor gets more shares; with each share worth proportionately less. The payment of a stock dividend increases the number of shares held by the investor and the cost basis must be reduced accordingly, since each share is theoretically worth less after the stock dividend is paid. The customer will have 1,000 shares x 1.05 = 1,050 shares after the dividend. Each share originally had a cost basis of $31 ($30 price plus $1 commission). After the dividend is paid, the cost basis is adjusted to $31 / 1.05 = $29.52.

A customer has purchased 1,000 shares of ABC stock at $30 per share, paying a commission of $1 per share for the transaction. ABC stock declares a 5% stock dividend. When the dividend is paid, the tax status of the investment is: A) 1,000 shares held at a cost basis of $30 per share B) 1,000 shares held at a cost basis of $31 per share C) 1,050 shares held at a cost basis of $29.52 per share D) 1,050 shares held at a cost basis of $30 per share

The best answer is A. If a gift of securities is made to a family member, the recipient assumes the donor's cost basis in that security (in this case $50 per share). However, the donor must pay gift tax on the entire dollar amount of the gift, subject to an annual exclusion of "$10,000 indexed for inflation annually." The indexed amount for 2020 is $15,000.

A customer owns 200 shares of ABC, purchased 2 years ago at $50 per share. The current market value of ABC stock is $80 per share. If the customer gifts the stock to his son, the result is: I. The donor may have gift tax liability II. The recipient may have gift tax liability III. The cost basis to the gift recipient is $50 per share IV. The cost basis to the gift recipient is $80 per share A) I and III B) I and IV C) II and III D) II and IV

The best answer is A. American Depositary Receipts pay dividends in U.S. Dollars only. The dividends are declared and paid in the foreign currency by the issuer. The bank that issues the ADR exchanges the dividend that was received in the foreign currency into U.S. Dollars and pays this to the U.S. ADR holders.

American Depositary Receipts pay dividends in:I U.S. DollarsII EurodollarsIII European Currency UnitsIV Foreign Currency A) I only B) I and II C) III and IV D) I, II, III, IV

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.

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. Municipalities impose debt ceilings on the dollar amount of bonds that can be issued backed by ad valorem taxing power (G.O. bonds). To raise this limit requires a public referendum. Debt limits do not apply to self supporting debt such as revenue bonds. They also do not apply to moral obligation bonds, which the issuer does not legally have to pay (though the issuer is "morally" obligated to pay).

A municipality is at its constitutional debt limit. Voter approval would be required for a municipality to float a(n): A) revenue bond B) industrial revenue bond C) general obligation bond D) moral obligation bond

The best answer is D. This customer is past her life expectancy, so she is not insurable, making Choices B and C incorrect. She only has $36,000 of annual income, so she is in a low tax bracket, making tax-free municipal bonds an inappropriate investment. U.S. Government bonds give a higher (taxable) yield than municipals, but since she is in a low tax bracket, she will keep more of the return "after-tax." And they are a top credit, so there is minimum default risk.

A retired 81 year old customer has $36,000 of annual income from a pension and social security. She has no investments other than a fully-paid home worth $120,000. She has just inherited $75,000 that she would like to invest for supplemental monthly income with minimum default risk. The BEST recommendation is for the customer to purchase: A) AAA rated municipal bonds B) a variable annuity C) whole life insurance D) U.S. government bonds

The best answer is D. If a broker-dealer with no office in that State, effects an isolated non-recurring trade in that State, the transaction is exempt, and the security is not required to be registered in that State. This is an "isolated non-issuer transaction." Note that the broker-dealer still must be registered in the State.

A security is exempt from registration in a State if it is sold in a(n): A) issuer transaction B) non-issuer transaction C) isolated issuer transaction D) isolated non-issuer transaction

The best answer is C. An agent cannot borrow money personally from a customer - nor can an agent lend money personally to a customer. It makes no difference if the customer is a family member. Note, however, that the agent could borrow money from, or lend money to, family members that are NOT customers. Also note that NASAA has a different interpretation than FINRA on this matter. FINRA permits borrowing between a representative and a customer that is an immediate family member, as long as the loan is documented in writing and approved by the firm; NASAA takes the stance that some of the worst abuses occur when money is borrowed from a family member that is a customer and outright prohibits it! Wouldn't it be nice if they could come up with a consistent rule for both of them!

An agent of a broker-dealer maintains accounts for immediate family members, including an account for his brother-in-law. The agent is having a bad year, and his brother-in-law offers to lend him $20,000 until things get "better." Which statement is TRUE regarding this offer? A) As long as the loan amount is documented in writing and has a fixed repayment date and fixed interest rate, this is permitted B) As long as the terms of the loan are the same as would be offered in an arm's length transaction by an unaffiliated third party lender, this is permitted C) This offer cannot be accepted because borrowing money from a customer is an unethical business practice D) This offer cannot be accepted because borrowing money from family members that are customers is only permitted from direct family members - not from "in-laws"

The best answer is C. Income funds invest primarily in bonds and preferred stocks for a high level of current income. Common stocks are not typically a choice for investment because the dividend yields are comparatively low. Income bonds would not be chosen as an investment because they only pay interest if the corporation has enough income; otherwise no payment is made.

An income fund would likely invest in which of the following securities? I. Common stocks II. Preferred stocks III. Debentures IV. Income bonds A) I and II only B) III and IV only C) II and III only D) I and IV only

The best answer is B. A monthly lease payment consists of 2 components - the monthly depreciation amount and the cost of the money borrowed to finance the lease. Since the borrowing charge is the interest rate on a loan, based on the number of years that the car will be leased, this computation uses the "time value of money" to compute the compound interest paid on the financed amount. The Rule of 72 is an oversimplified rule that states that if one takes the interest rate being earned on an investment and divides it into 72, then the result is the number of years that it will take for the investment to double in value. For example, if an investment earns 10%, then it will take 72 / 10 years = 7.2 years for the investment value to double. Net present value takes future cash flows and discounts them by today's interest rate to arrive at today's "net present value" (essentially, this is the opposite of compound interest). Internal rate of return is the interest rate needed to discount future cash flows to "0" - it is the true yield to maturity of an investment.

An individual is considering leasing a new automobile. Which quantitative method is used to calculate the monthly payment? A) Rule of 72 B) Time value of money C) Net present value D) Internal rate of return

The best answer is B. If a broker-dealer is registered with the SEC, and its representatives are registered with the SEC, and if the broker-dealer does not charge separately for advice, then it is excluded from the definition of an "investment adviser" and need not register as such with the SEC. However, if the broker-dealer were to charge separately for a financial plan, then it would have to register with the SEC as an investment adviser; and its sales persons would have to register as "investment adviser representatives".

An individual who is a registered representative with a broker-dealer prepares financial plans for customers under the supervision of the broker-dealer and does not charge for the plans. The individual takes commissions on transactions that result from the implementation of the recommendations included in the plans. Under SEC Release IA-1092: A) both the individual and the broker-dealer must register with the SEC as an investment adviser representative and an investment adviser, respectively B) neither the individual nor the broker-dealer need register with the SEC as an investment adviser representative and an investment adviser, respectively C) the individual must register with the SEC as an investment adviser representative; the broker-dealer is not required to register with the SEC as an investment adviser D) the individual need not register with the SEC as an investment adviser representative; the broker-dealer is required to register with the SEC as an investment adviser

The best answer is B. The Uniform Securities Act states that if an adviser complies with the provisions of the Act as adopted in the State where the adviser has its principal office, then other States cannot impose more stringent recordkeeping requirements or minimum net worth requirements on that investment adviser, even if the adviser has offices in those States.

An investment adviser has 1 main office and 3 branch offices, all located in different States. Which statement is TRUE about recordkeeping requirement for the adviser under the Uniform Securities Act? A) The adviser must keep separate records in each State based on that State's requirements B) The adviser must keep its records based on the rules of the State where its main office is located C) The adviser must keep its records based on the rules of the State where it has the greatest number of customers D) The adviser must keep its records based on the rules of the State where it has the greatest dollar amount of customer assets

The best answer is A. If an adviser wishes to recommend a transaction to a customer, the customer must agree to do the transaction prior to execution (this assumes that the adviser does not have discretion). This is usually done verbally. Written authorization is needed only to take account instructions from someone other than that customer.

An investment adviser has determined that ABCD stock would be an appropriate investment for his client, but only if the price falls from the current level of $50 per share to $35 per share. What MUST the adviser do prior to placing an order to buy ABCD stock for the client's account? A) Obtain verbal authority for that specific transaction B) Obtain verbal authority to exercise discretion over the account C) Obtain verbal authority to exercise discretion only over price and time of execution in the account D) Secure an appointment as trustee over the account to formalize the fiduciary relationship

The best answer is C. The investment policy statement prepared for a client for whom a portfolio is to be constructed details the allocation percentages for each chosen asset class; and the expected returns from each class along with the possible variance of these returns. In addition, it can detail any strategies used for "tactically" timing the market when choosing specific investments within each class. Thus, the customer has a written statement detailing the major aspects of how the portfolio will be constructed and managed. The statement does not include the fees that the adviser will earn. These would be disclosed separately to the customer. It does not include past performance of the adviser; nor does it include the adviser's educational and business background.

An investment policy statement is a document that details the: A) fees, from all sources, that an investment adviser will earn for managing a portfolio B) investment returns that the adviser has achieved for clients over the previous 10 years (or shorter period, if the adviser was not in business for that length of time) C) portfolio balance chosen for the client; along with expected returns and variance of returns D) educational and business background of each of the managers who will be making investment decisions on behalf of the customer

The best answer is B. The basic measure of economic output in the United States is GDP - Gross Domestic Product, which is measured in real terms so that the effect of price inflation is removed from the calculation. It consists of total consumer, investment and government spending plus exports and minus imports. The "real" interest rate factors out inflation. The "real" interest rate is the nominal rate minus the inflation rate. Example: if a U.S. Government Bond is yielding 3%, and the rate of inflation is 2%, then the "real" interest rate is 1%.

Economic output in the United States is measured: I by changes in GDPII by changes in CPIIII in nominal termsIV in real terms A) I and III B) I and IV C) II and III D) II and IV

Weak Form Semi-Strong Form Strong Form (Most people subscribe to the "semi-strong" version of this theory.)

Efficient market theory basically states that markets are efficient at pricing stocks, and that over a long time frame, an investor cannot outperform the market. It is the economic argument used for index funds. There are 3 "forms" of efficient market theory: ___ Form: States that prices reflect all past publicly available information, but that this has no validity for predicting future price movements. It essentially states that price movements are random. This implies that technical analysis is basically useless to improve returns, but fundamental analysis still has potential value. ___ Form: States that prices respond rapidly to publicly available information, so that no potential gains can be made by trading on that information. This implies that anyone with inside information has an inherent advantage and can profit by trading on it. ___ Form: States that prices respond rapidly to both publicly available and private information, so that no one can profit by trading on this information.

The best answer is D. Family limited partnerships are set up primarily to protect family assets (e.g., a family business or family farm) from creditors and to protect the assets from being sold to someone outside the family. There is a general partner (typically a parent) and limited partners (typically children). The main benefit is that these family assets can be transferred over time to the children at a lower tax basis, since, in theory, they have "lost" value (because they are no longer marketable). This structure can allow parents to gift assets to children yearly with minimal or no gift tax. The beneficiary of such a family limited partnership will be each limited partner (meaning each child). Beneficiaries can be designated to get only income from the partnership; or can be designated to get remaining assets when the partnership is terminated; or can be designated to receive both. The "termination benefit" refers to the distribution of remaining partnership assets when the partnership is dissolved. This can be set up as the date of death of the parent(s); a specified future date; or by majority vote of the partners.

For a family limited partnership account, who gets the termination benefits? A) Grantor B) Trustee C) Income beneficiary D) Remainder beneficiary

The best answer is B. The Federal Reserve sets the rules for payment of customer securities purchases in both cash and margin accounts. Payment is required "promptly," but no later than the 4th business day past trade date. If payment is not received, the unpaid position must be sold and the account must be frozen for 90 days. Many firms call this "putting a CUF" on the account - with CUF standing for Cash Up Front. A customer can make purchases in a frozen account, but must deposit the cash amount in advance. If the customer behaves for 90 days, the freeze comes off the account, and the customer is again expected to pay for purchases "promptly," but no later than 4 business days from trade date.

If a customer of a broker-dealer fails to pay for a securities purchase by the 4th business day from trade date, the customer's account must be: A) restricted B) frozen C) liquidated D) terminated

The best answer is A. If a representative of a federal covered adviser that transacts business in a State terminates employment, it is the responsibility of the representative to notify the State promptly. Remember that in this case, the advisory firm is not registered with the State; only the representative is registered with the State. Thus, it cannot be the responsibility of the advisory firm to notify the State since it is not registered there. Only the registered representative must notify the State since only the representative is registered in the State.

If a representative that transacts business in a State terminates employment with a federal covered adviser: A) notice must be given to the Administrator by the representative only B) notice must be given to the Administrator by the federal covered adviser only C) notice must be given to the Administrator by both the federal covered adviser and the representative D) no notice is required to be given to the Administrator

The best answer is C. In times of inflation, interest rate levels rise, so bond prices fall; and stock prices fall as well, since companies typically cannot raise prices to consumers fast enough to cover their increasing costs, causing profits to suffer. In times of inflation, any security that gives a fixed return, such as fixed annuities and certificates of deposit, are a bad bet. The payout on these instruments remains fixed over time, yet costs are rising. Tangible assets, such as real estate, collectibles, etc. tend to keep pace with inflation; as overall prices inflate, their prices inflate as well. This is the best choice of the ones offered.

If an investor believes that inflation rates will be rising in the foreseeable future, he might rebalance his portfolio to include: A) Fixed annuities B) 5 year certificates of deposit C) Tangible assets D) U.S. Government bonds

The best answer is B. If any portion of the loan is not repaid, the unpaid amount becomes taxable income, and if the account owner is under age 59 1/2, then the 10% penalty tax applies as well.

If the owner of a 401(k), age 50, borrows $50,000 from the account to pay for unexpected expenses. After 5 years, the unpaid loan balance is $20,000. The tax consequence will be: A) $20,000 taxable ordinary income B) $20,000 taxable ordinary income plus a 10% penalty tax C) $30,000 taxable ordinary income D) $30,000 taxable ordinary income plus a 10% penalty tax

The best answer is A. The formula for yield to maturity for a premium bond is: Annual Interest- Annual Capital Loss / (Bond Cost + Redemption Price)/2 = Yield to Maturity for a Premium Bond $80 - ($100 premium / 15 years to maturity) = 73.333 ($1,100 + $1,000) / 2 = 1,050 73.333 / 1,050 = .0698 (6.98%)

In 2020, a customer buys 1 GE 8%, $1,000 par debenture, M '35, at 110. The interest payment dates are Jan 1st and Jul 1st. The yield to maturity on the bond is: A) 6.98% B) 7.58% C) 8.00% D) 8.24%

The best answer is D. Delivery of prospectuses cannot be accompanied by promotional material of any type. The only information that can accompany a prospectus would be a "tombstone;" or information that has been filed with the SEC - such as audited financial reports.

In connection with a new issue offering, a broker-dealer would be permitted to send which of the following to a customer if it were accompanied by a copy of the final prospectus? A) An internal report prepared by the issuer that projects increasing product line market share over the next 3 years B) Copies of advertisements used by the issuer to promote its products during the past year C) An advance copy of the broker-dealer's research report on that issuer that will be released after the restriction period ends D) Copies of the issuer's audited financial statements showing performance over the prior year

Current Ratio (Current Liabilities are all the bills due within 1 year. This includes all the current payables, but does not include the bank loan due 2025, for total Current Liabilities of $5,000,000.)

Liquidity - Current Ratio Components: The ___ Ratio is: Current Assets / Current Liabilities. It is a measure of liquidity, because it looks at whether the company can pay its current bills as they come due. Cash, Accounts Receivable and Inventory are the primary "Current Assets." Accounts Payable, Wages Payable, Taxes Payable and Interest Payable are the primary "Current Liabilities."

Quick Ratio

Liquidity - Quick Ratio The formula for the Quick Ratio, is: This is a measure of the corporation's liquidity; and is a more stringent test than the Current Ratio. Current Assets are all assets that will become cash within 1 year; to find the current assets that are "quickly convertible" into cash, inventories and prepaid expenses must be excluded since these can be hard to turn into cash, leaving only cash, marketable securities and accounts receivable. Current Liabilities are all bills that must be paid within 1 year. The Quick Ratio should be about 1, showing that there are sufficient "quick" current assets to pay current liabilities.

The best answer is C. Whenever a customer has a stock position, and the customer wishes to generate extra income by selling an option against that position, the market sentiment is neutral. This is a covered call writer - a call writer who owns the underlying stock position. He sells the call contract to generate extra income from the stock during periods when the market is expected to be stable. If he expects the market to rise, he would not write the call against the stock position because the stock will be "called away" in a rising market. If he expects the market to fall, he would sell the stock or buy a put as a hedge.

Long the stock and short the call is an appropriate strategy in a: A) declining market B) rising market C) stable market D) fluctuating market

The best answer is B. On the day prior to yesterday, 1326 issues advanced against 1,327 issues declined, for a ratio of advances to declines of 1 : 1.

NYSE MARKET DIARY Yesterday Prev. Day Advanced 866 1326 Declined 1577 1327 Unchanged 455 292 Total Issues 2898 2945 New Highs 121 98 New Lows 724 433 The ratio of advances to declines that occurred on the day prior to yesterday (rounded) is : A) .50 : 1 B) 1.0 : 1 C) 1.5 : 1 D) 2.0 : 1

1 year

Registration statements for securities are effective for ___ year(s). If the issuer cancels the sale of the issue, that registration becomes void. If a stop order is entered, the registration ceases to be effective and sale of the issue must stop.

The best answer is B. A special assessment bond is one which is used to fund an improvement that benefits only a segment of the population; and only those people are charged taxes to pay for that improvement. Such taxes cannot exceed the value of the benefit received. This makes them totally different from general tax collections, such as ad valorem taxes, which have no such "tie-in."

Special assessment bond issues are paid from: A) taxes levied upon all taxable property within the municipality, without limitation as to rate or amount B) taxes levied upon all taxable property within a particular locality, not to exceed the benefit derived from the improvement C) revenues pledged from the operation of a facility built with the proceeds of the issue D) excise taxes placed upon the sale of either alcohol, tobacco, or fuel

The best answer is D. The Administrator can require the passing of an exam (written or oral) as a condition of registration; can require the filing of any advertising; and can require that an opening announcement be published in the local newspapers.

The Administrator may require a new investment adviser who files a registration application in a State to: I. Announce the opening of the advisory firm in the local newspapers II. Pass an oral qualification examination III. File with the Administrator any advertising or communications to be disseminated to the public A) I only B) II only C) II and III D) I, II, III

The best answer is C. The Uniform Securities Act provides for civil liability, criminal liability, and criminal penalties. There are no civil penalties under the Act. Under the Act's civil liability provisions, a full refund of monies must be made to investors; no penalties are imposed. Civil penalties may be imposed only if action has been taken in civil court, and the court has imposed penalties.

The Uniform Securities Act provides for: I. Civil liability II. Criminal liability III. Civil penalties IV. Criminal penalties A) I and II only B) III and IV only C) I, II, and IV D) I, II, III, IV

The best answer is A. Securities issued by banks (but NOT bank holding companies) are exempt from both Federal and State registration. Remember, banks are already extensively regulated at both the Federal and State level, so to require registration of their securities is considered to be overkill.

The sale of a new issue of securities by a State chartered bank is: I. exempt from registration with the SEC II. subject to registration with the SEC III. exempt from registration in the State IV. subject to registration with the State A) I and III B) I and IV C) II and III D) II and IV

The best answer is B. Treasury stock consists of issued shares that have been repurchased by the corporation. Repurchased shares are no longer "outstanding", so the definition of Treasury Stock is issued shares minus outstanding shares.

The definition of Treasury Stock is: A) issued stock minus authorized stock B) issued stock minus outstanding stock C) authorized stock minus outstanding stock D) outstanding stock minus authorized stock

The best answer is A. "Alpha" measures the portion of an investment's return arising from "stock specific" risk - that is, the portion that of the return that is not variable with the market as a whole. It takes the risk level assumed by that investment for the return achieved and compares it to the benchmark index return, which is "beta-adjusted" to the same risk level. If the portfolio manager achieved an excess return, this is a "positive" alpha and the portfolio manager added value. If the portfolio achieved a lower return, this is a "negative alpha" and the portfolio manager produced an inferior return as compared to the beta-adjusted benchmark return.

The measure of a stock's return arising from stock specific (non-systematic) risk is: A) alpha B) beta C) delta D) sigma

The best answer is C. The definition of "discretion," where a written power of attorney is needed from the customer, is if the agent is selecting either the security to be traded or the size of the trade. No written power of attorney is needed for an agent to select either price of execution or time of execution in a transaction. For example, if a customer says "Buy me 100 shares of ABCD when you think the time is right," the agent can choose the price and time of that trade execution without needing a written power of attorney.

Under the NASAA Statement of Policy, discretion may be exercised in a customer account without first receiving a written power of attorney from that customer: A) under no circumstances B) if it relates only to the size of the trade or the security to be traded C) if it relates only to the price of the trade or the time of the trade D) if the trade is for an institutional customer or another broker-dealer

The best answer is C. Under Regulation D of the Securities Act of 1933, and accredited investor in a private placement is a person who earns at least $200,000 per year; or who has a net worth of at least $1,000,000 exclusive of residence; or is an institution; or is an officer or director of the issuer. A private placement may be sold to an unlimited number of accredited investors under Federal law; but can only be sold to 35 non-accredited investors (also, please note that the State definition of a private placement is very different).

Under the provisions of Regulation D, which of the following are accredited investors? I. Bank II. Individual with a $100,000 annual income III. Individual with $1,000,000 net worth exclusive of residence IV. Investment company A) I and IV B) II and III C) I, III, IV D) I, II, III, IV

The best answer is A. General partnerships are not taxable entities. Items of income and loss flow through onto the general partners' tax returns and are not taxed at the partnership level. Single level taxation is a benefit for this business structure. Each general partner has unlimited liability, so this is a disadvantage. Each partner can have a different ownership percentage, making Choice C incorrect. Finally, partnership dissolution only occurs if the composition of the partnership changes - e.g., new partners are admitted or existing partners leave. If this occurs, the old partnership is dissolved and a new partnership is formed.

What is the benefit of forming a business venture as a general partnership? A) Reduced tax liability B) No liability for investors C) Partners share pro-rata in income and loss D) Dissolution of the entity occurs at a pre-set date

The best answer is B. A buy stop limit order is triggered in a rising market. It is most often used to stop a loss on an existing short stock position. Once the market trades up to 50 or higher, the order is triggered and becomes a limit order to buy at $50, meaning buy at $50 or lower. The very first reported trade of $51 elects the order because the market moved from $48 to $51 and went right through the stop price of $50. The order now becomes a limit order to buy at $50, meaning that the customer does not want to pay more than $50 to buy. The next trade of $52 is too high; the following trade of $53 is too high; and the next trade of $49 is the first one that meets the customer's limit (buy at $50 or lower). This is the first trade where the order could be filled.

When the market price of ABCD stock is at $48, a customer places a buy stop limit order at $50. The next trades in the stock occur in sequence at: 51...52....53....49....48 The first trade where execution could occur is : A) 48 B) 49 C) 52 D) 53

The best answer is A. When the yield curve is inverted, short term interest rates are higher than long term interest rates. This occurs when the Federal Reserve pursues a "tight" money policy, forcing up short term rates, mainly through open market operations. When short term rates are high, investors are likely to shift funds into money market instruments. If demand for long term securities greatly exceeds the demand for short term securities, then long term prices will rise, causing interest rates to drop (often below short term rates), creating an inverted yield curve.

When the yield curve is inverted, all of the following statements are true EXCEPT: A) yields on long term securities are higher than those of short term securities B) demand for long term debt greatly exceeds demand for short term money market securities C) the Federal Reserve is pursuing a "tight money" policy D) investors are more likely to shift funds out of equity investments into money market instruments

The best answer is C. Proceeds distributed from a variable life insurance policy are taxable income if there is a distribution of benefits above the amount invested (tax basis) in the separate account. This would include a cash surrender (surrender of the entire policy for its current cash value, terminating the policy) or making a partial withdrawal from the policy. The payment of a death benefit from the policy, while not taxable income to the recipient, is included in the taxable estate of the deceased individual. If the aggregate value of the estate exceeds the estate tax exclusion, there will be estate tax liability. The only way to get cash out of a variable policy without a potential tax consequence is to borrow against the policy. In general, most "cash value" policies only permit a loan of up to 75% of cash value; but if the policy is fully paid, often the loan amount is raised to 95%.

Which action taken regarding a universal variable life insurance policy will NOT result in tax liability? A) Cash surrender B) Partial withdrawal C) Loan of up to 95% D) Payout of death benefit

The best answer is D. Consider this to be a learning question. The ADV includes the adviser compensation; disclosure of adviser conflicts of interest; whether the adviser has discretionary authority and the firm's business history (among a myriad of other information).

Which of the following are included in the Form ADV filed to register as an investment adviser with the SEC? I. Compensation to be received II. Conflict of interest disclosure III. Whether the adviser has discretion IV. The firm's business history A) I and II only B) III and IV only C) I, II, III only D) I, II, III, IV

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.

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 D. The records required to be retained by an investment adviser that takes custody include:Cash receipts and disbursements ledger and general ledgerSecurities received and delivered ledgerPurchase and sales ledger (trade ledger)Securities record (a record of each aggregate security position held, broken down by each customer owning part of the position and the physical location of that position)Confirmation copies of all customer tradesCustomer account statements showing all purchases, sales, securities positions, and cash debits and credits to the account

Which of the following records of an investment adviser that takes custody of customer funds are required to be retained under the provisions of the Investment Advisers Act of 1940? I. Cash receipts and disbursements journal II. Customer trade confirmations III. Customer account statements IV. Purchase and sales blotter A) I and III B) I and IV C) II and III D) I, II, III, IV

The best answer is C. U.S. Government bonds and municipal bonds are traded "over-the-counter" (there is no trading of these on exchanges). There is no trading of U.S. Government savings bonds because these are non-negotiable. There is no trading of mutual fund shares either - these are redeemable securities, that are redeemable with the sponsor.

Which of the following securities are traded in the secondary market? I. U.S. Government bonds II. U.S. Government savings bonds III. Municipal bonds IV. Municipal bond funds A) I and II only B) III and IV only C) I and III only D) I, II, III, IV

The best answer is B. NASAA rules require that State-registered advisers keep, in their principal office, records of: -customer purchases and sales; and -customer securities positions (account statements). The rule requires that the records be kept for 5 years, with the prior 2 years immediately accessible. (Also note that the SEC rule for these records, which applies to broker-dealers and Federal covered advisers, is that these records be kept for 6 years. This rule would not apply to State-registered advisers.) NASAA has an extensive list of other records that advisers must keep, but does not specify the location where they should be kept or the time period they should be kept - so this is left to each State Administrator.

Which records MUST be retained in a state-registered investment adviser's principal office? I. Customer securities positions II. Correspondence with customers III. Investment adviser's bank statements IV. Records of customer purchase and sales orders A) I and III B) I and IV C) II and III D) II and IV

The best answer is B. Non-systematic risk is stock-specific risk in a portfolio. As more and more stocks are added to a portfolio, that portfolio begins to resemble the market as a whole. Thus, non-systematic risk can be diversified away. Once a portfolio is fully diversified, it is left with systematic - which is the same as market risk. This risk cannot be diversified away, but it can be hedged against. Another term for systematic risk is non-diversifiable risk - since further diversification does nothing to reduce this risk. Systemic risk is the risk of a financial catastrophe that takes down the entire financial system. This is another risk that cannot be diversified away.

Which risk CAN be diversified away? A) Systematic risk B) Non-systematic risk C) Systemic risk D) Non-diversifiable risk

The best answer is A. Duration is a measure of a bond's price volatility in response to changes in market interest rates. The bonds that are least volatile are those with short maturities and higher coupons; the bonds that are most volatile are those with long maturities and low coupons.

Which security would be expected to have the smallest duration? A) 5 year; 5% coupon bond B) 5 year; zero-coupon bond C)20 year; 6% coupon bond D) 20 year; zero-coupon bond

The best answer is D. To qualify as a regulated investment company, 75% of REIT income must be real estate related. This income includes rents, mortgage interest earned, gains on property sales, income from foreclosed properties, and real estate tax refunds received (as a source of income, an REIT can buy a property and attempt to get its tax assessment lowered - any resulting tax refund is income to the REIT).

Which sources of REIT income are counted towards the 75% test required by Subchapter M? I. Property rentals II. Interest from mortgages III. Capital gains on property sales IV. Real estate tax refunds 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 loan can be taken from a 401(k) or 403(b) account for any reason. The maximum amount that can be borrowed is $10,000 or 50% of the account asset value, whichever is greater, capped at a $50,000 maximum loan. The loan must have an interest rate that is based on current market rates, and must be repaid within 5 years. Repayment must be made in quarterly installments of "substantially equal amounts." If any portion of the loan is not repaid, the unpaid amount becomes taxable income, and if the account owner is under age 59 1/2, then the 10% penalty tax applies as well.

Which statement is TRUE about taking a loan from a 401(k) account? A) The investments in the account must be held for at least 5 years before a loan can be taken B) The loan can only be taken for an emergency need or for school tuition C) The loan must be repaid in equal quarterly installments within 5 years D) The loan must be guaranteed by PBGC

The best answer is A. This one is worded in a tricky manner. For discount bonds, the relationship of yields from highest to lowest is: Yield to Maturity (Highest) Current Yield Nominal Yield (Lowest) Therefore, nominal yield is lower than current yield (Choice I) and current yield is lower than yield to maturity (Choice III). Yield to maturity is highest for a discount bond because it reflects both the fact that the bond was purchased for less than par and that the discount will be earned over the life of the bond. Current yield only reflects the fact that the bond was purchased for less than par; it does not include the annual earning of the discount. Finally, nominal yield is the yield based on purchasing the bond at its original par value - it is the lowest yield of the choices offered because it neither reflects the discount price nor the annual accretion of that discount.

Which statements are TRUE when a bond sells at a discount? I. The nominal yield is less than the yield to maturity II. The nominal yield is more than the yield to maturity III. The current yield is less than the yield to maturity IV. The current yield is more than the yield to maturity A) I and III B) I and IV C) II and III D) II and IV

1) Registration by Qualification 2) Registration by Coordination 3) Registration by Filing

______ is a method of registering securities in a State, this is used by new companies that have never previously registered securities with the State. This is the most rigorous method of registering securities, since there are no previous filings on which the Administrator can rely. Registration becomes effective when the Administrator so determines. ______ is a method of registering securities in a State, this is used by a new company that is also registering the securities with the SEC. This is a somewhat more rigorous registration method than Registration by Filing (which can only be used by "seasoned" companies). The State allows the SEC filed prospectus to be the principal filing document in the State. Registration becomes effective when the SEC registration becomes effective. _____ is a method of registering securities in a State, this is used by "seasoned" companies that have previously registered securities with the SEC. The State allows the latest SEC filed prospectus (for a previous securities offering) to be the principal filing document in the State. Registration becomes effective on the 5th business day after filing (but no earlier than when the SEC registration becomes effective).