S62 (Practice test 2)

adoption

firm has endorsed or approved of the post but played no part in its preparation. LO 13.h

A fiduciary of an ERISA plan is preparing an investment policy statement. Included would probably be specific security selection methods of performance measurement determination for meeting future cash flow needs the Summary Plan Description A) II and III B) II and IV C) III and IV D) I, II, and III

A) II and III The IPS will include methods of performance measurement (if it is meeting objectives) and a way to determine how future cash flow needs will be met (based on expected numbers of retirees). It will not include the specific securities to be purchased, but will include the types that may be placed in the portfolio. The Summary Plan Description (SPD) is a Department of Labor (DOL)-required document that gives employees a summary of the plan and its features. It has nothing to do with determining how the money is invested. LO 18.g

One of your clients is facing mandatory retirement in six years. He can't see himself being inactive and would like to go back to college after the employment ends to complete his degree. You would probably recommend that he save for those college costs by A) opening a Section 529 plan. B) opening a Coverdell ESA. C) investing in a zero-coupon corporate bond maturing in six years. D) purchasing a single premium deferred variable annuity.

A) opening a Section 529 plan. There is a reason why the Section 529 plan is usually referred to as a college savings program. Most agree that it is the best way to save for college, (and the exam tends to agree). We can quickly eliminate the ESA, because funds cannot be contributed after the 18th birthday. The 529 plan has no age limitations, and if the proceeds are used for qualified expenses, any earnings are tax free. There are two negatives to the annuity. First is that many annuities have surrender charges lasting as long as 10 years and with college beginning in six or seven years, those charges could have an impact. The second is that any earnings that have been deferred will be taxed as ordinary income when withdrawn. As far as the corporate zero-coupon bond, each year, while the client is working, there will be phantom income on which income taxes must be paid. LO 18.h

When using the process of registration by coordination under the Uniform Securities Act, issuers shall simultaneously submit to the state the documents filed with the SEC under A) the Securities Act of 1933. B) the National Securities Markets Improvement Act (NSMIA). C) the Investment Company Act of 1940. D) the Securities Exchange Act of 1934.

A) the Securities Act of 1933 Under the Uniform Securities Act, an issuer registering its securities with the Securities and Exchange Commission (SEC) in accordance with the procedures found in the Securities Act of 1933 shall use the documents it submits to the SEC in its concurrent registration with states in which it plans to offer its securities. LO 8.g

Which of the following financial statement entries is eliminated when calculating the quick ratio? A) Notes payable B) Accounts receivable C) Inventory D) Cost of goods sold

C) Inventory The quick ratio (sometime referred to as the quick asset ratio or the acid test ratio) is calculated by subtracting the current liabilities from the quick assets. The quick assets are all of the current assets with the exception of the inventory. Cost of goods sold is an income statement item and is irrelevant here. LO 20.g

Which of the following statements concerning universal life insurance are correct? Universal life has flexible premiums. Universal life is based on the assumption that level annual premiums are to be paid throughout the insured's life. The death benefit can fluctuate, but never below the guaranteed minimum face amount. Cash values can fluctuate and may even fall to zero. A) I and II B) I and IV C) III and IV D) II and III

B) I and IV Universal life features flexible premiums that add to the cash value account, although there are no guarantees and the cash value can disappear if insufficient premiums are paid. There is no guaranteed minimum death benefit as there is with fixed (scheduled) premium variable life. The assumption that level annual premiums are to be paid throughout the insured's life is associated only with ordinary whole life and scheduled premium variable life policies. LO 24.f

An investment adviser registered with the SEC could have all of the following as advisory clients except A) the DEF Life Insurance Company. B) the ABC Unit Investment Trust. C) Mildred, an accredited investor. D) the XYZ Growth Fund.

B) the ABC Unit Investment Trust Be careful. Unit investment trusts (UITs) do not have investment advisers. Any of the other choices could have advisory accounts. LO 3.f

A firm declares a $3.00 cash dividend to its shareholders. The firm has issued dividends of only $.07 per share for each of the last 15 quarters, and market analysts had anticipated a similar dividend this quarter. In an efficient market, one would expect A) a price decrease after the announcement. B) no price change before or after the announcement. C) a price change upon the announcement. D) a price increase before the announcement.

C) a price change upon the announcement. In an efficient market, the price of the stock will represent all information that is public. Because the increase in the dividend was not public knowledge until it was declared, no price change would take place before the announcement. A price change, representing the increase in dividends, would be expected immediately after the information became public. LO 21.i

Which of the following is responsible for administration of the Bank Secrecy Act? A) Financial Crimes Enforcement Network B) Securities and Exchange Commission C) Security Services D) Department of Health and Human Services

A) Financial Crimes Enforcement Network FinCEN is responsible for administration of the Bank Secrecy Act. LO 14.f

Under modern portfolio theory, MPT, which of the following types of risk cannot be eliminated through diversification? A) Business risk B) Systematic risk C) Liquidity risk D) Credit risk

B) Systematic risk Market risk, sometimes referred to as systematic risk, cannot be diversified away. The risk of investing in a single industry or sector can be diversified away by investing in several industries with returns not correlated to each other. Credit risk can be diversified away by investing in a number of bonds rather than just one or two. The same is true with business risk - a broad portfolio survives the "death" of a single company. A general downturn in the market, however, cannot be eliminated through diversification.

The semi-strong form of the efficient market hypothesis (EMH) is most accurately described as asserting that security prices fully reflect all A) relevant information, including information not publicly available. B) publicly available information. C) market prices for the foreseeable future D) historical price and volume information.

B) publicly available information. The semi-strong form of the EMH asserts that security prices fully reflect all publicly available information. In addition to financial statement information, this includes all historical price and volume information, which the weak form of the EMH asserts is fully reflected in security prices. The strong form of the EMH asserts that security prices fully reflect all public and private information. No form of EMH can reflect the future market prices. LO 21.i

Under the Investment Advisers Act of 1940, an adviser who has custody of a client's funds must do which of these? Notify a client when the client's funds are moved to another location. Segregate client's funds and keep them identified by client. They must not move the client's funds without prior notification and specific written authority from the client. A) I and II B) I and III C) I, II, and III D) II and III

A) I and II Advisers who have custody must segregate a client's securities and keep them in a safe place, deposit client funds in bank accounts that contain only client funds (may be combined in one account, but complete records must be kept), report to clients at least every three months with a statement, and annually arrange for an unannounced audit by an independent accountant that will report the audit results to the SEC. All clients must be notified in writing of the location of their securities or funds and of any changes to the location. It is not necessary to notify the client before the move to obtain the client's specific written authority to move the fund. The original custodial agreement includes that authority at the discretion of the adviser. LO 14.e

Under the Uniform Securities Act, which of the following is responsible for notifying the Administrator when an agent changes his place of employment from one broker-dealer to another? A) Agent B) The agent, the former employer, and the new employer C) New broker-dealer D) Former broker-dealer

B) The agent, the former employer, and the new employer LO 11.f

Which of the following is not among the powers granted to the Administrator under the Uniform Securities Act (USA)? A) The power to audit the books of a federal covered adviser with clients in his state if he suspects fraudulent business behavior B) The power to require individuals associated with federal covered advisers in the capacity of investment adviser representatives to register as such in his state as long as the investment adviser has a place of business in the state C) The power to pe

B) The power to require individuals associated with federal covered advisers in the capacity of investment adviser representatives to register as such in his state as long as the investment adviser has a place of business in the state IARs associated with federal covered advisers are only required to register in a state in which they (the IAR) have a place of business. Although federal covered advisers are generally exempt from state regulation, the USA does give the Administrator the power to investigate when there is a suspicion of fraud. Even though the USA sets certain standards for performance-based fees, there is a provision that grants the Administrator the authority to waive those limits when deemed appropriate. Unless the federal covered adviser has no office in the state and only deals with institutional clients or other federal covered advisers, the Administrator has the power to demand to see relevant information that has been filed with the SEC. LO 14.c

A significant increase in the importing of goods into the United States would likely have what effect on the strength of the U.S. dollar? A) No effect B) Weaken C) Strengthen D) Fluctuation both ways

B) Weaken Currency rates tend to ebb and flow as the balance of payments shift from positive to negative. A significant increase in imports represents a large outflow of U.S. dollars, which results in a negative trade balance. As this builds, the value of the dollar falls against those currencies that have a positive trade balance. LO 6.c

An advisory client of yours discusses a business project she is involved with where the partnership is using accelerated depreciation to maximize losses in the early years. It would be prudent of you to inform the client that A) a maximum of $3,000 in losses can be taken against ordinary income in any year. B) accelerated depreciation could trigger the alternative minimum tax. C) accelerated depreciation leads to a reduction in the partnership's cash flow. D) a maximum of $3,000 in losses can

B) accelerated depreciation could trigger the alternative minimum tax. Accelerated depreciation is a tax preference item and could result in requiring this client to pay the AMT. These would be passive losses, and they can only be taken against passive income. There is no limit to the amount of passive loss that can be deducted against passive income. Because the most common way for a company to compute cash flow is net income plus depreciation, the reduction to net income is zeroed out by the increased depreciation added back in. LO 15.d

An investor plans to fund the college education for her newborn child by purchasing $5,000 of investment-grade bonds on an annual basis. She is most likely using A) the laddering strategy. B) the bullet strategy. C) the 529 plan strategy. D) the barbell strategy.

B) the bullet strategy The bullet strategy is used when aiming at a target. In this case, the target is having sufficient funds about 18 years from now. This strategy involves buying bonds at different intervals, but all with approximately the same maturity date. The barbell strategy has all bonds purchased at the same time with two different sets of maturities - half of the bonds mature near term and half mature intermediate term. Laddering requires purchasing bonds on a regular basis, but not with new funds as this investor is doing. As bonds mature, the proceeds are rolled-over into new bonds. She may be doing this in a 529 plan, but the plan is not a strategy, it is a type of account. LO 21.f

Under Keogh plan provisions, a full-time employee is defined as one working at least how many hours per year? A) 2,000 B) 100 C) 1,000 D) 500

C) 1,000 Full-time employment is defined as 1,000 hours or more per year, regardless of the number of days, weeks, or months worked. LO 18.c

According to both the Investment Advisers Act of 1940 and the Uniform Securities Act, under which of the following circumstances is an investment adviser required to make disclosure to the client? The adviser intends to recommend the use of the broker-dealer with whom he is affiliated. The transactions recommended to the client are inconsistent with those for the adviser's own account. The investment adviser intends to sell the client the insurance policy recommended for his financial plan. The

C) I, II, III, and IV All of the situations listed involve some potential conflict of interest. Although such transactions are not prohibited, proper disclosure is required. LO 13.b

Under the Investment Advisers Act of 1940, a registered investment adviser who provides investment advisory services to individuals must A) have a net worth of $100,000. B) sell only listed securities. C) provide each client with a disclosure statement or brochure no later than when entering into the advisory agreement. D) avoid the control or custody of client funds and securities.

C) provide each client with a disclosure statement or brochure no later than when entering into the advisory agreement. The brochure rule requires that each client be given a written disclosure statement by the adviser no later than the time of entering into the advisory agreement. It may consist of a copy of Parts 2A and 2B of Form ADV or another document providing similar information. SEC rules require that a brochure—or summary of material changes, if any—be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent. LO 13.g

MaryBeth is the CEO of MBW Software Associates. MBW is having an offering of common stock to investors on an intrastate basis. Williamson has been telling potential investors that the registration of the stock indicates approval by the state. Under the Uniform Securities Act, she is committing misrepresentation of A) authorization. B) qualification. C) registration. D) material information.

C) registration Stating that a securities offering has been approved by a regulatory body is misrepresentation of the registration of the security. As an intrastate offering, the registration format would be qualification, but that is not the misrepresentation here. LO 13.c

Defalcator Investment Advisers (DIA), registered in States A, K, and R, would be required to provide a balance sheet as part of its brochure if it charged fees of A) $1,000 for the next three months of advisory service. B) $500 for the next six months of advisory service. C) $500 for the next three months of advisory service. D) $1,000 for the next year's advisory service.

D) $1,000 for the next year's advisory service. State-registered investment advisers, who charge substantial prepayment of advisory fees, must include a balance sheet with their brochure. The definition of a substantial prepayment is more than $500, six or more months in advance. The correct choice is the only one meeting both requirements. Remember, it isn't $500 or more, it is more than $500 and it must be for at least six months of service to count. LO 9.e

When must an investment adviser disclose personal securities transactions to a client? If the adviser makes trades in his own account that are inconsistent with advice given to a client If the adviser makes trades that are designed to take advantage of the impact caused by recommendations to clients Investment advisers must disclose all personal transactions to clients A) I only B) II only C) III only D) I and II [SEC Release 1A-1092]

D) I and II SEC Release 1A-1092 requires certain disclosures under the antifraud provisions of the Investment Advisers Act. An adviser must disclose an affiliation with a securities broker-dealer if the advisory service is independent of the broker-dealer, the adviser only recommends products offered by the broker-dealer, the adviser will be compensated by the broker-dealer for the transaction, or the products recommended by the adviser are available from other broker-dealers. The adviser must also disclose personal securities transactions if they are designed to take advantage of the market impact caused by recommendations to clients or if personal transactions are inconsistent with the advice given to clients. Advisers must disclose the amount of compensation received from transactions through any broker-dealer, from any issuer, and from sales of nonsecurities products. They are not required to disclose all personal transactions. LO 14.g

A bond with a par value of $1,000 and a coupon rate of 5%, paid semiannually, is currently selling for $1,200. The bond matures in 10 years and is callable in six years at 103. In the computation of the bond's yield to call, which of the following would be a factor? A) Present value of $1,030 B) Future value of $1,200 C) 20 payment periods D) Interest payments of $25

D) Interest payments of $25 The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. A bond with a 5% coupon will make $25 semiannual interest payments. With a six-year call, there are only 12 payment periods, not 20. The present value is $1,200 and the future value is $1,030, the reverse of the numbers indicated in the answer choices. LO 2.e

A banner on a broker-dealer's website is considered A) entanglement. B) interactive content. C) adoption. D) static content.

D) static content. In most cases, a broker-dealer's website is static. That is, only the firm can make changes, and those changes are infrequent. Certainly, a banner ad on the website fits that description. Entanglement and adoption are terms applying to a securities professional making use of third-party information on social media. LO 13.h

One major difference between the customer identification program (CIP) and the new account opening rules of the regulatory bodies is that A) the CIP requires a statement of the customer's goals while the regulators only require current financial information. B) the CIP only applies to individuals while the rules of the regulators apply to retail and institutional accounts. C) the CIP requires a residence address for individuals while the regulatory bodies will accept a PO Box. D) the CIP requi

D) the CIP requires date of birth while the regulators only require proof of legal age. The CIP requires the actual date of birth, not just proof of legal age. The CIP has no interest in the goals of the investor, just the identity. In both cases, a PO Box may only be used after supplying a physical residence address and both the CIP and the rules of the regulators apply to retail and institutional accounts. LO 16.a

The DERP Corporation has an outstanding convertible bond issue that is convertible into eight shares of stock. If the current market price of the bond is 80, the parity price of the stock is A) $100 per share. B) $125 per share. C) $80 per share. D) $64 per share.

A) $100 per share. Parity means equal. With a conversion ratio of eight shares per bond, the investor can convert the bond into eight shares. If the bond is currently selling for $800, then, to be of equal value (parity), the eight shares must be selling at $100 each. LO 2.d

Your client has $10,000 to invest and expects to earn an after-tax return of 8% to send his daughter to college in 12 years. Which of the following items will help determine whether the investment is likely to satisfy the client's goal? A) Expected cost of college B) Client's marginal federal income tax bracket C) Consumer Price Index D) Present value

A) Expected cost of college To determine whether the investment will satisfy the goal, the investment adviser representative needs to know the amount needed to pay for college. While the investment will be worth $25,181.70, this may not be enough to pay for even one year of college 12 years from now. LO 20.a

A client has 100 shares of GHI when the stock undergoes a split. After the split, the client has A) no effective change in the value of the position. B) a proportionately increased interest in the company. C) a proportionately decreased interest in the company. D) greater exposure.

A) no effective change in the value of the position. When a stock splits, the number of shares each stockholder has either increases or decreases (in the case of a reverse split). The customer experiences no effective change in position because the proportionate interest in the company remains the same. LO 1.b

.A registered investment adviser recommends a stock that will be sold to his client in a principal transaction. The broker-dealer that will sell the stock is also registered as an investment adviser and employs the investment adviser as an agent. This transaction A) requires both written disclosure to and the consent of the client prior to the completion of the transaction. B) requires written disclosure to the client. C) is prohibited. D) requires the consent of the client.

A) requires both written disclosure to and the consent of the client prior to the completion of the transaction. Under normal circumstances, when a broker-dealer acts as a principal in a trade, that fact is noted on the confirmation. However, in this case, because it is an investment adviser who is recommending the transaction, both written disclosure by the adviser and consent by the client are required prior to completion of the transaction, even when an adviser sells securities through an affiliated firm in a principal transaction. LO 13.a

One of your clients owns 2 different 6% corporate bonds maturing in 15 years. The first bond is callable in 5 years, while the second has 10 years of call protection. If interest rates begin to fall, which bond is likely to show a greater change in price? A) Both will increase by the same amount B) Bond with the 5-year call C) Both will decrease by the same amount D) Bond with the 10-year call

As interest rates fall, the investor benefits from having the highest interest rate for as long as possible. The price change will not be the same for both bonds. The greater the call protection, the more likely a bond will appreciate if rates fall. That additional call protection in essence lengthens the duration of the bond and, as we know, the longer the duration, the greater sensitivity to interest rate changes. In this case, with declining rates, bond prices will rise. LO 20.b

Which of the following would be included in the Uniform Securities Act definition of sale? An offer of common stock in a new issue properly registered or exempt from registration in the state A gift of assessable stock An investor exercising warrants attached to a convertible bond purchased five years ago An investor pledging stock she owns to a bank as collateral for a loan A) I and II B) II and III C) I and IV D) III and IV

B) II and III A gift of assessable stock is always considered a sale. Exercise of warrants is a sale of the underlying stock. Pledging stock as collateral is never a sale. LO 12.a

According to the USA, under what circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent? A) The transaction is exempt. B) Under no circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent. C) The securities are federal covered securities. D) The employee is not paid any commission or salary.

B) Under no circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent. Whether the securities are exempt from registration or not, it is unlawful for a person to transact business on behalf of a broker-dealer unless that person is registered as an agent in the state. Only individuals selling on behalf of the issuer may qualify to be exempt from registration as an agent. LO 11.d

When an analyst adds back the current year's depreciation to the net income, she is computing the company's A) cash flow from investments. B) earnings per share. C) cash flow from operations. D) net value of fixed assets.

C) cash flow from operations. Cash flow from operations is computed by adding the year's depreciation deduction to the net income. LO 7.d

An investor may expect to receive dividends from A) a put option. B) a call option. C) a warrant. D) an ADR.

D) an ADR. An American depositary receipt (ADR) represents ownership in a foreign corporation, and dividends declared by the corporation are paid to the ADR owner. The currency conversion is performed by the issuing domestic bank. Options and warrants do not grant the holder the right to receive dividends on the underlying stock; one must own the security itself to be entitled to the dividend. LO 1.f

When a stock has a beta of less than 1, this indicates that A) it will have a high level of unsystematic risk B) it will have a high level of systematic risk C) it will, on average, give a return in excess of that of a stock with a beta of greater than 1 D) it will, on average, give a return below that of the market

D) it will, on average, give a return below that of the market Beta tracks a stocks co-movement with the overall market. Because the "market" has a beta of 1.0, any stock with a lower beta will generally not have price movement equal to the market. Beta is a measurement of systematic risk, and low-beta stocks have less than high beta ones. Beta has no relationship to unsystematic risk. LO 20.e

Entanglement

term used to describe material posted to a securities professional's social media site by a third party, where the securities professional has taken part in the preparation of the material.