Quiz 10
A client invested $100,000 in an Equity Indexed Annuity. The participation rate is 90% with a cap rate of 15%. In year one, the index increased by 20%. In year two, the index lost 5%. In year three, the index gained 10%. What is the value of the annuity after year three? a.$118,000 b.$115,000 c.$135,700 d.$125,350
In year one, the index increased by 20%. 90% of the gain is equal to 18%, but since the annuity can't be credited with more than the cap of 15%, the value of the annuity would be $115,000 (1.15 X $100,000). Many Equity Indexed Annuities have a floor of zero, thus a negative return in the index will not cause the value of the annuity to decline. Therefore, in year two, the value of the annuity would remain the same. In year three, the index increased by 10%. 90% of the gain is 9%, which is less than the cap rate, so the annuity would be credited with 9%, or $125,350 (1.09 X $115,000).
Which of the following investment advisers would most likely NOT be required to register with the Administrator? a. A firm that provides advice on fixed annuities b. A firm that provides advice on listed securities c. A firm that provides investment advice to a tollway authority d. A firm that provides investment advice to an employer's pension plan
a. A firm that provides advice on fixed annuities
A client who is willing to accept market risk should be advised to accept which of the following investment recommendations? a. Eliminating the unsystematic or diversifiable risk in his portfolio b. Creating a portfolio with a beta that is less than 1.0 c. Buying insurance contracts that would protect him against market losses d. Creating an emergency fund that is separate from his portfolio and consists of U.S. Treasury bonds
a. Eliminating the unsystematic or diversifiable risk in his portfolio
After occurrence of the event for which a filing is required, when must a Form 8-K be filed? a. Four days b. Seven days c. 90 days d. As determined by the SEC
a. Four days Unless otherwise specified, Form 8-K must be filed or furnished within four business days after the occurrence of the event for which the filing is made. Form 8-K is required by the SEC to announce certain significant changes in a public company, such as a merger or acquisition, a name or address change, bankruptcy, change of auditor or accountant, or any other information that may be reasonable for a potential investor to know.
Which types of investments have historically shown a great deal of exposure to regulatory risk? a. Limited partnerships b. Corporate bonds c. Common stocks d. Variable annuities
a. Limited partnerships
An agent of a broker-dealer is also employed as an investment adviser representative. A client asks the agent for assistance in placing the shares of his start-up company's initial public offering (IPO). Under what conditions may the agent accept the client's offer of commissions for completing the offering? a. Only with the written permission and supervision of the broker-dealer b. Only when the purchases are made by clients of another broker-dealer c. Only if a separate set of books and records is used to track these trades independently from the trades of other clients d. Only if disclosure is made to the clients that this investment will not appear on their statements
a. Only with the written permission and supervision of the broker-dealer
Jack is going through a divorce. He has an individual account managed on a discretionary basis by Trust and Worthy Advisers, Inc. The advisory firm receives a subpoena from the attorney for Jack's wife demanding the records for his account. Which of the following statements is TRUE? a. The advisory firm must provide the records demanded in the subpoena b. Trust and Worthy should advise the attorney that the release of records is permitted only to authorized governmental authorities, such as the IRS, SEC, or the state Administrator c. In cases of nongovernmental actions, the state Administrator is authorized under the Consent to Service of Process to be served with all legal papers and to order the release of Jack's records d. Before releasing any information, Trust and Worthy must notify its client
a. The advisory firm must provide the records demanded in the subpoena
Which of the following return calculations removes the distortions caused by the deposit and withdrawal of capital from an investment account over time? a. Time-weighted return b. Dollar-weighted return c. Expected return d. Current yield
a. Time-weighted return
Under Section 404(c) of ERISA, which of the following statements regarding fiduciaries is TRUE? a.Fiduciaries are not liable for investment losses if certain requirements are met. b.Fiduciaries are relieved of the responsibility for monitoring the plan since it is the obligation of the sponsoring employer. c.Fiduciaries are prohibited from buying stock in the sponsoring employer. d.Fiduciaries are treated in the same manner as the plan participants.
a.Fiduciaries are not liable for investment losses if certain requirements are met.
A 70-year-old retiree is very risk-averse, but needs to generate investment income. She is not wealthy and is in a low tax bracket. Which of the following investments will BEST meet her needs? a. A long-term municipal bond fund b. A growth mutual fund c. A certificate of deposit d. A diversified portfolio of stocks with covered calls written against them
b. A growth mutual fund
Which of the following transactions meets the definition of an exempt transaction under the Uniform Securities Act? a. An issuer transaction of a security filed under the Securities Exchange Act b. A nonissuer transaction of a security filed under the Investment Company Act c. An isolated issuer transaction d. Any sale of a security for which a registration statement has been filed with both the Administrator and the Securities and Exchange Commission
b. A nonissuer transaction of a security filed under the Investment Company Act .
All of the following details regarding a Coverdell Education Savings Account are TRUE, EXCEPT: a. Contributions are limited to $2,000 annually b. Contributions are always tax-deductible c. Taxpayers whose income is above a stated level are not allowed to make contributions d. Withdrawals are generally tax-free if used for educational purposes
b. Contributions are always tax-deductible Contributions to a Coverdell Education Savings Account (CESA) are limited to $2,000 annually and are never tax-deductible. Additionally, contributions are not allowed if the contributor's income exceeds a certain amount. Withdrawals from the account are tax-free if used for qualified educational expenses.
In reference to storing customer books and records, an adviser is permitted to store records on: a. Microfilm or microfiche only b. Disks, provided the information cannot be altered c. The original format only d. Disks, provided they are password-protected
b. Disks, provided the information cannot be altered
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
Global Investments is a broker-dealer based in State A. It is currently registered as a broker-dealer is States B, C, and D. The firm is looking to expand its business to State E. Under the Uniform Securities Act, in which of the following situations would Global Investments NOT be required to register as a broker-dealer in State E? I. The firm transacts business only with other broker-dealers. II. The firm's sole business in State E is with four or fewer noninstitutional customers within a 12-month period. III. The firm's sole business in State E is limited to transactions in federal covered securities. IV. The firm transacts business only with institutional investors. a. I and III only b. I and IV only c. II and III only d. II and IV only
b. I and IV only
A mutual fund is planning to issue 10 million Class B shares. Five hundred thousand shares will be offered in the state of Rhode Island. Under the Uniform Securities Act, the Administrator of Rhode Island will require the fund to: I. Register the shares in Rhode Island II. Include a prospectus with its registration III. Pay a filing fee IV. Sign a Consent to Service of Process a. I and II only b. III and IV only c. I, II, and III only d. I, II, III, and IV
b. III and IV only Mutual funds are federal covered securities and, therefore, a state may not require registration or regulate any offering document. Except for securities that are listed on one of the exchanges (such as the NYSE or Nasdaq), the state may charge a filing fee. The state may also require issuers to submit a filing notice and sign a Consent to Service of Process.
Which of the following choices is NOT a benefit of discounted cash flow, fixed-income analysis? a. It makes it possible to determine the present value of a series of future payments b. It permits an adviser to minimize cash flow reinvestment risk c. It allows for a direct comparison between the present value and the market value of a bond d. It provides a means to measure and compare the value of investments that have different rates of return
b. It permits an adviser to minimize cash flow reinvestment risk
What type of order may a customer use to protect profits or limit losses in current positions? a. Price/time order b. Stop order c. Market order d. Limit order
b. Stop order Stop orders are entered to limit losses or to protect profits on current positions in an investor's account. If the market rises, buy stop orders may be used to protect short stock positions. If the market falls, sell stop orders may be used to protect long stock positions. Market and limit orders are typically used to enter the market, rather than to protect a current position.
All of the following statements are TRUE regarding forward contracts, EXCEPT: a. They are derivative securities b. They are standardized and traded on an exchange c. They are often used to hedge against currency or exchange-rate risk d. The buyer is obligated to accept delivery of the underlying commodity at a specified time and price
b. They are standardized and traded on an exchange Unlike future contracts, forwards are not standardized agreements and they are not exchange-traded. Forward contracts are not readily transferable--both the buyer and the seller need to agree if either party wants to assign the contract to a third party.
A client has terminated an investment advisory contract one week after signing the agreement. The adviser informs the client that a prorated portion of the advisory fee will be retained by the adviser, and the remainder will be sent to the client. Under the USA: a. This practice is considered unethical b. This practice is acceptable c. This practice is considered fraudulent d. The client may apply for a rescission
b. This practice is acceptable Investment advisers are allowed to charge a prorated fee for the time that a contract is in force.
Who is eligible to enroll in a private 457 plan? a.All employees of a publicly traded company b.Employees who are members of a union c.New York City sanitation workers d.A librarian who works in the Philadelphia Public Library
b.Employees who are members of a union Private 457 plans are retirement plans for non-governmental employers and there are restrictions regarding participant eligibility. Participants in a private 457 plan may include members of a union, hospital workers, and employees of charitable organizations
Sales of viatical investments can only be made to suitable investors. Which TWO of the following are considered suitable? I. An accredited investor under regulation D II. Anyone who has been specifically approved by the state Administrator III. Anyone who is in the highest marginal tax bracket and is in need of liquidity IV. Anyone with a minimum net worth of $150,000 and gross income last year of at least $100,000, or a minimum net worth of $250,000 a.I and III b.I and IV c.II and III d.II and IV
b.I and IV A viatical investment involves the purchase of an interest in an insurance policy covering the life of an individual. The purchase may be for a whole or fractional interest in the policy at a price above the cash value. The investors pay the premiums on the policy until the death of the insured at which time the death benefit is paid to the investors. Since it is unknown when the insured will die and the funds are not readily assessable on demand, NASAA has specific suitability requirements
Bill is an investment adviser representative for an advisory firm that has satellite offices in Florida and California, but its principal office is in New York City. The adviser has assets under management of $63,000,000 and its largest client is the Aquarius SmallCap Growth Mutual Fund. Bill works in the New Jersey office and has clients that reside in Florida, New York, and New Jersey. In which of the following states must Bill register as an investment adviser representative? I. California II. New Jersey III. New York IV. Florida a.I, II, and III only b.II only c.II, III, and IV only d.I, II, III, and IV
b.II only Although Bill's advisory firm has less than $100 million under management, it is an adviser to a registered investment company. For that reason, the firm is considered a federal covered investment adviser and is only required to register with the SEC (i.e., it is exempt from registration at the state level). The IARs of federal covered advisers are required to register with the Administrator in any state in which they maintain an office. In this question, since Bill only maintains a place of business in New Jersey, he is required to register as an IAR in New Jersey.
Which of the following securities have no loan value? a.Preferred stocks that are listed on Nasdaq b.Options that have nine months or less until expiration c.Common stock that are listed on the NYSE d.Corporate bonds
b.Options that have nine months or less until expiration
A client wants to make a payment in perpetuity of $3,000 per year to a beneficiary. Assuming a 3% annual return, how much principal would your client need to deposit? a. $3,000 b. $30,000 c. $100,000 d. $250,000
c. $100,000 The client would need to deposit $100,000. To calculate the required principal, take the annual payment in perpetuity of $3,000 and divide it by the annual rate of return of 3% ($3,000 / .03 = $100,000). The phrase in perpetuity may also be referred to as a perpetual payment, meaning that payments will continue to be made forever.
When meeting with a potential customer for the very first time, which of the following would be a reasonable course of action? I. Prior to the meeting, informing the client to bring additional financial information. II. If necessary, an IAR may inform the client that he may not know the answer to one of her questions, but will find out and respond within a reasonable period. III. Inform the client that she needs to increase her risk tolerance to obtain her goals. IV. Discuss the customer's current financial situation and her goals for retirement. a. I and II only b. I, II, and III only c. I, II, and IV only d. I, II, III, and IV
c. I, II, and IV only
When opening a margin account, which TWO of the following MUST be signed? I. A loan consent form II. A hypothecation agreement III. A margin account form IV. Trading authorization a. I and III b. I and IV c. II and III d. II and IV
c. II and III When opening a margin account, a customer must sign both a hypothecation agreement and a margin account form. The loan consent form is used when a customer authorizes the member to lend his securities, and is not required. Trading authorization is also not required.
An investment adviser representative manages a portfolio for a client on a discretionary basis. The client's objective is conservative growth. According to prudent investor standards, which of the following statements is TRUE regarding the inclusion of options in his portfolio? a. Options, although generally not appropriate in a conservative portfolio, would be permitted with the prior written consent of the client b. Options would be appropriate only if the investor has had previous experience investing in options c. Options strategies may be appropriate as part of a conservative portfolio d. Options strategies may be appropriate for conservative portfolios, provided the strategy does not include the purchase of uncovered options
c. Options strategies may be appropriate as part of a conservative portfolio
In which of the following strategies would the risk level of the portfolio be the most stable? a. An initial strategic asset allocation followed by a buy/hold approach b. Strategic asset allocation with rebalancing after two or more asset classes change +/-25% from the initial allocation c. Strategic asset allocation followed by monthly rebalancing d. Tactical asset allocation
c. Strategic asset allocation followed by monthly rebalancing
If an adviser has custody of customer funds and securities, the submission of Form ADV-E must be performed by: a.The adviser within 120 days after the completion of an audit b.The adviser within 90 days after the completion of an audit c.An independent accountant within 120 days after the completion of an audit d.An independent accountant within 90 days after the completion of an audit
c.An independent accountant within 120 days after the completion of an audit
Which TWO of the following clients may enter into an advisory contract that includes a performance-based fee? I. A joint account with a net worth of $1,000,000 II. A partner of the investment adviser with annual income of more than $200,000 III. An IRA account with $2,000,000 under management IV. An individual account with $750,000 net worth a.I and III b.I and IV c.II and III d.II and IV
c.II and III Under the Investment Advisers Act of 1940, performance fees are generally prohibited. Exceptions include contracts for clients who have at least $1,000,000 under management with the adviser or who have a net worth in excess of $2,000,000. Performance-based fees may also be charged to a client who is an executive, a partner, or a knowledgeable employee of the adviser. The amount of funds under management is not a factor for these clients. The type of account (individual, joint, or IRA) is also not a factor.
When is an IA or IAR permitted to publish a testimonial regarding the adviser? a.Never b.If the permission of the author of the testimonial is obtained c.If the testimonial appeared on an independent social media site over which the IA or IAR has no control d.If the testimonial is from a former client
c.If the testimonial appeared on an independent social media site over which the IA or IAR has no control
According to the Investment Advisers Act of 1940, when is an investment adviser required to provide an audited balance sheet to its clients? a.When the adviser requires the prepayment of a fee that is greater than $500, six months or more in advance of providing service b.When the adviser requires the prepayment of a $500 initial advisory fee c.When the adviser requires the prepayment of a fee that is greater than $1,200, six months or more in advance of providing service d.When the adviser has limited discretion over the account
c.When the adviser requires the prepayment of a fee that is greater than $1,200, six months or more in advance of providing service. Since state and federal laws overlap regarding the concept of providing an audited balance sheet, it is important to identify which regulator is asking the question. According to the Investment Advisers Act of 1940 (federal law) an adviser is required to provide clients with an audited balance sheet if it collects prepaid fees of more than $1,200, six months or more in advance of providing advisory services. However, according to the Uniform Securities Act (state law), an adviser is required to provide clients with an audited balance sheet if 1) the firm collects/solicits prepaid fees of more than $500, six months or more in advance of the service, or 2) the firm maintains custody or discretionary control of clients' assets. (
What is a mid-cap stock called if it has a P/E ratio of 29, while stocks of other similar companies are selling with a P/E ratio of only 19? a. A blue-chip stock b. A consumer goods stock c. A value stock d. A growth stock
d. A growth stock Growth stocks tend to have higher P/E ratios due to the premium investors are willing to pay for the potential future growth in earnings. On the other hand, value companies tend to have lower P/E ratios than other similar companies.
According to the Investment Advisers Act of 1940, when advertising the performance of its managed accounts, an investment adviser must deduct which of the following? a. The management fees, but not expenses b. The expenses, but not the management fee c. The management fees and a small percentage of the expenses d. All management fees and expenses
d. All management fees and expenses
Gary and Mary were recently divorced. Mary has been ordered to pay child support to Gary, who has custody of their two children. Which of the following statements is TRUE regarding child support payments? I. Child support is not tax-deductible for the payer. II. Child support is tax-deductible for the payer. III. Child support is taxable for the receiver. IV. Child support is not taxable to the receiver. a. I and II only b. II and III only c. II and IV only d. I and IV only
d. I and IV only Child support payments are not tax-deductible for the payer and not taxable for the recipient
A broker-dealer would be required to register in Pennsylvania if the broker-dealer: I. Has an office in Pennsylvania and executes nonissuer transactions of securities listed on a national securities exchange II. Has no office in Pennsylvania and executes nonissuer transactions of securities listed on a national securities exchange with clients that are residents of Pennsylvania III. Has an office in Pennsylvania and executes transactions of municipal securities with clients that are not residents of Pennsylvania IV. Has no office in Pennsylvania and executes transactions of municipal securities with clients that are residents of Pennsylvania a. I and II only b. I and III only c. III and IV only d. I, II, III, and IV
d. I, II, III, and IV In all four choices, the broker-dealer would be required to register in Pennsylvania. A nonissuer transaction of a security listed on a national securities exchange is an exempt transaction and a municipal security is an exempt security. A broker-dealer executing a transaction in an exempt security or exempt transaction is required to register, unless it is exempt from the definition of a broker-dealer in that state. Since the broker-dealer either has an office in Pennsylvania or is transacting business with residents of that state, it would be required to register.
Gary and Mary were recently divorced. Mary has been ordered by the court to pay alimony to Gary. How are these monthly payments treated for tax purposes? I. Alimony payments are deductible to Mary. II. Alimony payments are taxable to Gary. III. Alimony payments are taxed as earned income. IV. Alimony payments are not taxed as earned income. a. I only b. I and II only c. I, II, and III only d. I, II, and IV only
d. I, II, and IV only Alimony is deductible for tax purposes by the payer and taxable to the recipient. It is not taxed as earned income, but is taxed as unearned ordinary income.
According to NASAA's Statement of Policy on Unethical Business Practices, which TWO of the following statements are TRUE concerning information to be included in an investment advisory contract? I. The fee for managing equity securities may not be higher than for fixed-income securities. II. An assignment of the contract can be made only by the investment adviser with the consent of the client. III. There is disclosure explaining that no prepaid fees will be returned if the contract is terminated. IV. There is disclosure as to whether the contract grants discretionary power to the adviser. a. I and II b. I and III c. II and III d. II and IV
d. II and IV NASAA's Statement of Policy on Unethical Business Practices provides that the entering into, or renewal of, an investment advisory contract would need to include disclosure of: • All fees and services provided • The term of the contract • A formula for computing the advisory fee • The amount of prepaid fees to be returned in the event of an early termination of the contract • The fact that no assignment of the contract will be made without the consent of the client • Whether the contract grants discretionary power to the adviser • The fee for managing equity securities may be higher than for fixed-income securities
All of the following are considered securities, EXCEPT: a.Equity options b.Real estate investment trusts c.Options on futures d.Options on real estate
d. Options on real estate
An investment adviser is registered in 10 states. The firm wants to transact business with three clients in a state in which it is not registered. According to the Uniform Securities Act, which of the following statements is TRUE? a. The firm would be required to register in the new state if the clients were not accredited investors b. The firm would be required to register in the new state if the clients were employee benefit plans with assets greater than $1,000,000 c. The firm would be required to register as an investment adviser with the SEC since it is now doing business in more than 10 states and is defined as a federal covered adviser d. The firm would not be required to register as an investment adviser if it did not lease an office in the state in which it is not registered
d. The firm would not be required to register as an investment adviser if it did not lease an office in the state in which it is not registered. According to the Uniform Securities Act, if a firm has five or fewer clients in a state (during a 12-month period) in which it has no office, it is exempt from registration in that state. Also, if all the clients, regardless of their number, are banks, trust companies, insurance companies, or employee benefit plans, the firm is exempt from state registration. (
An IAR is calculating the internal rate of return (IRR) of a client's investment. While performing the calculation, the IAR assumes that the reinvestment rate of cash flows will equal: a. The nominal interest rate b. The fed funds rate c. The inflation rate d. The internal rate of return (IRR)
d. The internal rate of return (IRR) The internal rate of return (IRR) assumes all cash flows are invested at the internal rate of return. The IRR is the rate that makes the discounted value of cash inflows and outflows equal to zero. If an investor is choosing between two investments, she should choose the one with the higher IRR.
Howie is both a registered investment adviser and a licensed real estate agent. He recently prepared a financial plan for Bob. In this plan, Howie recommended that Bob increase his life insurance coverage and also consider putting a portion of his portfolio in hard assets, such as real estate. Howie knew of a property called Blackacre that was currently for sale and told Bob about it. Bob eventually purchased Blackacre using Howie as his real estate agent and Howie received a commission for the purchase. Would Howie's commission for selling Blackacre be considered compensation under the Investment Advisers Act? a. Yes, but only if Howie did not fully disclose that he was receiving a commission from the sale of Blackacre b. No, since the commission was not connected with the purchase or sale of a security c. No, real estate transactions are governed by state regulation d. Yes, Howie's commission for Blackacre would be considered part of his compensation as an investment adviser
d. Yes, Howie's commission for Blackacre would be considered part of his compensation as an investment adviser
Which of the following is a characteristic of a Money Purchase Plan? a.Employees must make mandatory contributions b.Employer contributions are discretionary c.Employees and the employer must make mandatory contributions d.Employers must make mandatory contributions
d.Employers must make mandatory contributions A Money Purchase Plan is a type of defined contribution plan to which an employer makes mandatory contributions, regardless of the company's profitability. For tax purposes, the employer is able to deduct the contributions.
A pension fund manager wants to protect the fund's diversified stock portfolio against a market downturn. To best meet this objective, she should purchase: a.Call Options on the stocks in the portfolio b.Covered puts on the stocks in the portfolio c.Calls on a comparable index d.Puts on a comparable index
d.Puts on a comparable index Index options would move in the same direction as the market as a whole and, therefore, provide a better hedge for a diversified portfolio than individual stock options.
