Series 65 Licensing Exam

Which of these is a definition of inflation? A) A decrease in the value of the monetary unit B) A decrease in consumer demand C) An increase in purchasing power D) An increase in the value of the dollar

A) A decrease in the value of the monetary unit

The potential for the market price of common stock in the ABC Corporation to fluctuate due to its tendency to move with all securities of the same type represents what kind of risk? A) Market B) Inflation C) Business D) Interest rate

A) Market Changes in the market price of common stock due to movement in the market, rather than changes in the underlying business, is known as market risk. This is why it is a systematic risk. Inflation risk and interest rate risk are also systematic risks, but their effect is primarily on fixed income securities rather than common stock.

The type of analysis that attempts to value securities by examining general economic trends and the growth potential and productivity of individual companies is: A) credit analysis B) holding period analysis C) fundamental analysis D) technical analysis

C) fundamental analysis

Adoption

a social media term meaning that a securities firm links to a third-party site and indicates that it endorses the content on that site (not involved in creating the content, just using someone else's)

A farmer entered into a forward contract to sell his produce at $2.25 per bushel. At the expiration date of the contract, the price was $2.00 per bushel. The farmer would receive: A) $2.25 B) $2.125 per contract C) a price negotiated between the buyer and the seller D) $2.00

A) $2.25 *The point of a forward contract to hedge against a drop in price. Because the strike price was higher than the market price at expiration, the farmer made a good deal, while the buyer of the contract lost.

Which of the following equations correctly shows the relationship between the items on a company's balance sheet? A) Assets = liabilities + stockholders' equity. B) Assets = liabilities − net worth. C) Assets = stockholders' equity − liabilities. D) Assets + liabilities = net worth.

A) Assets = liabilities + stockholders' equity. The stockholders' equity, sometimes referred to as net worth, equals the difference between the company's assets and its liabilities (assets − liabilities = stockholders' equity). This formula is often restated as assets = liabilities + stockholders' equity.

An investor would have to pay the alternative minimum tax when: A) it exceeds the investor's regular income tax B) the investor has received income from a limited partnership C) there are tax-preference items reported on the tax return D) the investor's capital gains exceed 10% of total income

A) it exceeds the investor's regular income tax A taxpayer must pay the alternative minimum tax in any year that it exceeds regular tax liability. Tax-preference items are re-input in figuring AMT, but the AMT is paid only if that amount is higher than the regular income tax.

All of the following statements regarding convertible bonds are true EXCEPT: A) holders may share in the growth of the common stock B) holders have a fixed interest rate C) holders receive a higher interest rate D) the issuer pays a lower interest rate

C) holders receive a higher interest rate

GEMCO Manufacturing Company, traded on the NYSE, has announced that it will be issuing 10 million new shares of common stock to raise new capital for the purchase of new equipment. Your client owning 1,000 shares of GEMCO common stock would probably receive... A. an advance invitation to purchase some of the new shares B. options to purchase some of the new shares C. preemptive rights to purchase some of the new shares D. warrants to purchase some of the new shares

C. preemptive rights to purchase some of the new shares

Which of the following may an agent determine WITHOUT written discretionary authority? A) How many shares of a particular security should be purchased B) Which security should be purchased C) Whether to buy or sell a particular security D) The time or price at which to enter an order

D) The time or price at which to enter an order An agent must have written discretionary authority to determine which security, what action, and how many shares to purchase or sell; time and price decisions alone do not require discretionary authority.

One of your clients approaches you about setting up a trust. If your client assumes the role of grantor, what additional roles may be taken? A) As the grantor, no other roles may be taken B) Trustee C) Beneficiary D) Trustee and beneficiary

D) Trustee and beneficiary

When a brokerage firm sells stock from its own inventory, it is acting in the capacity of A) a principal, and charges a commission B) an agent, and charges a markup C) an agent, and charges a commission D) a principal, and charges a markup

D) a principal, and charges a markup A broker-dealer that purchases securities for, or sells securities from, its inventory is acting in the capacity of a principal. Principals charge markups on sales from inventory. When acting in the capacity of agent (facilitating a transaction between a buyer and seller), the broker-dealer receives a commission.

The sale of a life insurance policy in the secondary market by a terminally ill individual is known as: A) a trade in the OTC market B) a vertical settlement C) an unethical trade practice D) a viatical settlement

D) a viatical settlement

The bulk of "dark liquidity" represents trades A) where the identity of the participants is disclosed. B) engaged in by institutional traders and trading desks on the exchange markets. C) involving noninstitutional investors. D) engaged in by institutional traders and trading desks away from the exchange markets.

D) engaged in by institutional traders and trading desks away from the exchange markets. The trades are "dark" because they are not made on the exchange markets. The identity of the participants is usually unknown and the participants are almost exclusively institutional.

Static Content

refers to content that remains the same until changed by the person who established the account on the site (examples: company websites, profiles, backgrounds, or walls)

FNK Corporation reported earnings of $2.47 per share last year on its stock, currently trading at $9.42 per share. Dividends paid out during the year totalled $0.93 per share. FNK's dividend payout ratio is closest to A) 38% B) 67% C) 10% D) 27%

A) 38% The company earned $2.47 per share and paid a $0.93 dividend per share, which is just under 38% of the earnings ($0.93 ÷ $2.47 = 37.65%). Remember, the dividend payout ratio is dividends paid out of earnings made.

Under the Uniform Securities Act, which of the following are prohibited actions? A) A investment adviser selling securities as a principal to an advisory client without receiving consent of the client prior to the completion of the trade B) Agency cross transactions C) Disclosing the amount of commission on the confirmation when the broker-dealer is acting in an agency capacity D) An investment adviser representative being registered as an agent of a broker-dealer having no affiliation with the investment adviser

A) A investment adviser selling securities as a principal to an advisory client without receiving consent of the client prior to the completion of the trade The USA prohibits an investment adviser from acting as principal or agent in a transaction with an advisory client without approval prior to completion (settlement) of the trade. There is nothing wrong with agency cross transactions as long as disclosure is made and the trade is recommended to only one of the parties by the adviser. Anytime a broker-dealer acts in an agency capacity, the amount of the commission must be disclosed on the trade confirmation and there is no prohibition against an individual being an IAR of an investment adviser and an agent of a totally unrelated broker-dealer.

Although generally prohibited, there are conditions under which a state-registered investment adviser is permitted to charge performance-based fees. Which of the following meets the necessary criteria? A) Charging a performance-based fee to an elderly client whose net worth is $2.3 million, with only $150,000 under the adviser's management B) Charging a performance-based fee to an individual with a net worth in excess of $10 million without describing that there is an incentive for the adviser to take greater risks C) Charging a performance-based fee to an aggressive entrepreneur whose net worth is $1.8 million who has $500,000 under the adviser's management D) Charging a performance-based fee to an individual who meets the definition of an accredited investor

A) Charging a performance-based fee to an elderly client whose net worth is $2.3 million, with only $150,000 under the adviser's management

A technical analyst is LEAST likely to consider which of the following when selecting securities? A) Corporate earnings B) Trend lines C) Short interest ratio D) Advance/decline line

A) Corporate earnings

An investor is long stock in a cash account and does not expect the price to change in the immediate future. His best strategy to generate income may be to: A) sell a put. B) buy a call. C) sell a call. D) buy a put.

C) sell a call. *remember: buy protection, sell for income

Rights

Rights, sometimes referred to as preemptive rights, are a privilege extended to existing holders of a company's common stock. When the company is going to issue additional shares of common stock, to prevent dilution of ownership by the current owners, they are given the right to preempt (come ahead of) any members of the general public and have the first shot at the new stock. The right permits them to purchase enough shares to keep their proportionate interest in the company

Form 8-K

The report used by publicly traded companies to disclose any material event not previously reported that is important to investors. Examples of material events/changes include: change in management, change in the company's name, mergers or acquisitions, bankruptcy filings, and major new product introductions or sale of a product line.

Interactive Content

refers to content with input from both the creator AND the viewer (examples: Facebook, Twitter, Instagram, and LinkedIn)

Minnie's Uncle Bob would like to contribute to his one-year-old niece's education expenses. He is able to contribute a maximum of $1,200 per year. There is no other family member in a position to make a contribution. If minimizing the taxes at withdrawal and low cost investing, such as index mutual funds, is the objective, which of the following would you recommend? A) Coverdell ESA B) UTMA C) Dollar cost averaging D) Section 529 plan

A) Coverdell ESA When you see contribution levels at $2,000 per year or less, that is a signal that Coverdell is the proper recommendation. Higher levels would be the 529 plan. There are no specific tax benefits to the UTMA. In fact, tax rates on unearned income can be rather high. Although Uncle Bob might dollar cost average by investing $100 per month, that does not specifically answer the question.

The alternative minimum tax is designed to ensure that certain high-income taxpayers do not avoid all income tax through the use of various tax preference items. Those preference items are added back to the taxpayer's ordinary income on IRS Form 6251 and would include: A) interest received from specified private purpose municipal revenue bonds. B) straight-line depreciation taken on investment real estate. C) intangible drilling costs in connection with an oil drilling program. D) long-term capital gains in excess of $3,000 annually.

A) interest received from specified private purpose municipal revenue bonds. The Internal Revenue Code provides that interest on specified private activity bonds is an item of tax preference. Therefore, this interest must be added to a taxpayer's regular taxable income in order to compute the taxpayer's AMTI. Accelerated depreciation and excess intangible drilling costs are preference items. In the real world, it is not only those with high incomes that are caught by the AMT, but the exam is not likely to go that deep.

If the yield curve is positive (sloping upward), this means that long-term interest rates are: A) lower than short-term rates B) higher than short-term rates C) expected to decline D) the same as short-term rates

B) higher than short-term rates A yield curve shows the relationship between short-term and long-term interest rates. When the yield curve is positive, it slopes upward. This means that long-term interest rates are higher than short-term rates.

Ineligible investments in an IRA would include all of the following EXCEPT: A) stamps B) cash value life insurance C) Kruggerands D) American Silver Eagles

D) American Silver Eagles A limited group of coins, especially the "eagles" minted by the U.S. Treasury Department, are eligible for investment in an IRA. The South African Gold Krugerrand is the world's first modern bullion gold coin and remains one of the most popular gold coins ever minted, but is not eligible for investment in an IRA. No form of life insurance is, and collectibles, such as stamps, are also ineligible.

Louis owns an investment that is an unmanaged portfolio in which the money manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the investment portfolio terminates. This statement best describes which type of investment? A. Closed-end investment company B. Face-amount certificate company C. Open-end investment company D. Unit investment trust (UIT)

D; UIT UITs are non-actively managed

In the securities business, trades of _______ shares or more are known as block trades.

10,000

True or False: Municipal bonds are a covered security except in their state of issuance.

True

Form 10-K

A report containing a comprehensive overview of the company's business and financial condition. It includes financial statements that have been audited by an independent accountant.

Your client notices that the listing for the CDL $100 par common stock in the Wall Street Journal indicates that the current yield of the stock is 4%. If the last trade was at $40 per share, more than likely, CDL is paying quarterly dividends of: A) $.40 B) $1.60 C) $4.00 D) $1.00

A) $.40 $40 x 4% = $1.60 $1.60 / 4 quarters = $0.4 per quarter

Annual Report

An annual statement of the financial condition, progress, and expectations of an organization. Usually includes plans for the future.

Which of the following clients of a federal covered investment adviser are NOT exempt from the delivery requirements of the brochure rule? A) A closed-end investment company traded on the New York Stock Exchange B) An open-end investment company with less than $25 million in assets C) An employee benefit plan with assets of at least $5 million D) An individual investor purchasing the IA's newsletter with an annual subscription price of $410

C) An employee benefit plan with assets of at least $5 million The only exemptions from the IA brochure rule are registered investment companies (both open and closed-end) and impersonal advice costing less than $500 per year.

Whose SSN is used when establishing an UGMA or UTMA?

the minor beneficiary's

Churning

excessively trading securities in the account of a client primarily for the purpose of generating commissions for the agent

One of your customers purchased a TIPS bond three years ago. The bond's nominal yield is 4% and inflation has averaged 6% over the holding period. The interest payment at the end of the three years would be closest to: A) $23.88 B) $47.76 C) $21.60 D) $33.78

A) $23.88 With a TIPS bond, the principal is adjusted every six months by the inflation rate. When that rate is 6%, there is a 3% semiannual adjustment. Multiplying the $1,000 par value times 103% six times (there are six semiannual adjustments in three years, results in a principal value just over $1,194. Because the 4% coupon rate is paid semiannually, the payment at the end of three years will be the adjusted principal of $1,194 times 2% and that equals $23.88. For testing purposes, you can always arrive at the correct answer by using simple instead of compounded interest. That is, with a 6% annual inflation rate, the bond's principal will increase by $60 per year for three years. That would make the adjusted principal $1,180. Take 2% of that and the result is $21.60. The correct answer will always be the next greater number.

The SROs have instituted maintenance margin levels for those situations where the equity in a client's margin accounts is reduced to a dangerous level. Currently, those levels are: A) 25% for a long account. B) 25% for a short account. C) 50% for a long account. D) 30% for a long account.

A) 25% for a long account. The current minimum maintenance levels set by the SROs is 25% equity in a long margin account and 30% equity in a short margin account. The initial margin requirement under Reg. T is 50% for both long and short accounts.

An investor is concerned that interest rates will be volatile over the next few years. Which of the following would eliminate interest rate risk? A) Insured bank CDs B) TIPS C) Cumulative preferred stock D) Zero-coupon bonds

A) Insured bank CDs Any negotiable instrument that has a yield component will be subject to interest rate risk. The insured bank CD cannot be traded and, therefore, will not be affected by changes in market interest rates. TIPS protect against inflation, and zero-coupon bonds have the greatest interest rate risk.

Which of the following would you most likely consider characteristics of a growth stock? A) Low P/E and low dividend yield B) High P/E and low dividend yield C) High P/E and high dividend yield D) Low P/E and high dividend yield

B) High P/E and low dividend yield Growth stocks generally have high P/E ratios and low (or no) dividends. Value stocks normally have low P/E ratios with higher dividend payouts.

Which two of the following risks would be of greatest concern to the holder of an ADR? I. Currency II. Liquidity III. Market IV. Purchasing power A. I and II B. I and III C. II and IV D. III and IV

B. I and III ADRs represent ownership in a foreign security so there is always going to be currency risk, (I). These ADRs trade in the market and 264 Unit 12 Types and Characteristics of Equity Securities Including Methods Used to Determine Their Value have market risk (III). Because most ADRs are traded on the exchanges, there is little liquidity risk and, because they represent equity, they are usually a good hedge against inflation.

Which of the following would generally NOT result in any income tax liability? A) Qualified dividends from common stock B) Profits generated by a sole proprietorship C) Profits generated by an S corporation D) Death benefit proceeds from a life insurance policy

D) Death benefit proceeds from a life insurance policy As a rule, profits from flow-through businesses like S corporations and earnings from a sole proprietorship are subject to income tax. Qualified dividends are taxed at a lower rate than nonqualified ones; in fact, for taxpayers in the 10% or 15% tax bracket, the rate on these dividends is 0%. But don't choose that answer in a question like this (unless the question specifies the lowest tax bracket investors), because that is an exceptional case (there are not many people buying securities in those low tax brackets). Death benefits from life insurance policies are income tax free (but could be subject to estate taxes.

ADRs are used to facilitate which of the following: A. foreign trading of domestic securities B. foreign trading of U.S. government securities C. domestic trading of U.S. government securities D. domestic trading of foreign securities

D. domestic trading of foreign securities

Form 10-Q

Quarterly report filed by public companies with the SEC that contains additional unaudited financial information *Hint: Q = Quarterly

Which of the following statements regarding REITs are correct? I) Equity REITs offer possible income and capital appreciation. II) Investors receive interest and principal payments periodically. III) In order to receive favorable tax benefits, the REIT must pay out at least 90% of its taxable income in the form of dividends. IV) Interests in REITs offer the benefit of flow through of income or loss. A) I and III B) II and IV C) I and IV D) II and III

A) I and III REITs are pooled tangible real estate assets. Owning an equity REIT gives the investor beneficial ownership of tangible real estate with the possibility of both income and capital appreciation. Most REITs trade in the open market, and their price is determined by supply and demand; there is no redemption by the issuer. REITs will pay distributions in the form of dividends and not a pass-through of principal and interest, as is the case with a mortgage-backed security, such as those issued by GNMA. Although REITs pass through at least 90% of their taxable income, there is no flow-through of losses as is the case with direct participation programs (DPPs).

Which of the following activities might result in a positive yield curve in the bond market? A) Investors buying short-term bonds and selling long-term bonds B) Investors buying long-term bonds and selling short-term bonds C) A parallel downward shift in interest rates D) A parallel upward shift in interest rates

A) Investors buying short-term bonds and selling long-term bonds A positive yield curve is the normal condition and occurs when long-term rates are higher than short-term rates. Buying short-term bonds tends to drive their prices up and their yields down, while selling long-term bonds has the opposite effect.

To assist broker-dealers with compliance, NASAA prepared a fee disclosure template. Based on the template, all of the following broker-dealer charges would be disclosed except: A) brokerage commissions. B) fees for issuance of stock certificates. C) account transfer fees. D) account maintenance fees.

A) brokerage commissions. Not included in the fee disclosure documents are commissions, markups and markdowns, and advisory fees.

The Uniform Securities Act defines a guaranteed security as one: A) where the payment of interest and principal (bond) or dividend (stock) is guaranteed by a party other than the issuer B) that may only be sold to institutional investors C) where a party other than the issuer offers a guarantee that investors are assured of never receiving less than their original investment D) involving a guarantee of a minimum profit by a party other than the issuer

A) where the payment of interest and principal (bond) or dividend (stock) is guaranteed by a party other than the issuer This is simply the definition of a guaranteed security. The one thing not guaranteed is a profit (capital gain).

Margin is borrowing money from a broker-dealer to buy a stock using the investment as collateral. In many cases, the brokerage firm then uses that collateral for a loan from a bank. Which of the following account documents authorizes the firm to pledge the customer's stock? A) The securities pledge agreement B) The hypothecation agreement C) The loan consent agreement D) The credit agreement

B) The hypothecation agreement

Using industry jargon, the tax on the last dollar of income is at: A) the final rate B) the marginal rate C) the effective rate D) the average rate

B) the marginal rate The IRS defines marginal tax rate as "the highest rate that you will pay on your income." Basically, as you make more money, you pay tax at a higher rate incrementally. The effective tax rate is the average that you pay on all of your income.

An individual has just received an inheritance of $15,000 and has the goals of preservation of capital and income. The client is in a low tax bracket. Which of the following would be the most suitable choice? A) Insured municipal bonds B) Public utility stocks C) Bank-insured CDs D) Newly issued U.S. Treasury bonds

C) Bank-insured CDs When preservation of capital is a goal and one of the choices is an insured bank CD, pick it. When the question refers to a low tax bracket, municipal bonds will never be the correct choice. Newly issued Treasury bonds have maturities of at least 10 years. During that time, changes to interest rates in the market place would cause the market price of those bonds to fluctuate. Although the public utilities will offer income frequently higher than the CD, there are no guarantees the principal will remain intact. (Some public utilities have gone bankrupt.)

With regard to nonqualified stock options (NSO) and incentive stock options (ISO), which of the following statements is incorrect? A) Board of director approval is required for both NSOs and ISOs. B) AMT is only an issue for those exercising ISOs. C) Capital gain treatment is only available with NSOs. D) A tax deduction for the employer is generally only available with NSOs.

C) Capital gain treatment is only available with NSOs. It is only the ISO where the employee can possibly receive capital gain treatment

Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of: I) the Securities Exchange Act of 1934 II) the Investment Company Act of 1940 III) the Investment Advisers Act of 1940 IV) the Uniform Securities Act A) I, II, and III B) II, III, and IV C) II and IV D) I and III

C) II and IV

When operating a Keogh plan, a self-employed individual must make contributions for: A) all employees scheduled to work for 1,000 hours per year or more B) all employees C) full-time employees who are at least 21 years old and have worked for the company for 1 or more years D) part-time employees who have worked for the company for 3 or more years

C) full-time employees who are at least 21 years old and have worked for the company for 1 or more years

Ways in which a Section 529 plan differs from a Coverdell ESA include I) tax-free distributions when the funds are used for qualifying educational expenses. II) higher contribution limits III) no earnings limitations IV) contributions that may be made by someone other than a parent or legal guardian A) I and IV B) I and II C) II and IV D) II and III

D) II and III Contributions to an ESA are limited to $2,000 per beneficiary per year, while the 529 limit is set by the plan sponsor, sometimes as high as $300,000. Unlike the ESA where there is a ceiling on the earnings for a contributor, there is no limit for someone setting up a 529. Both Section 529 plans and Coverdell ESAs enjoy tax-free distributions, and plans may be established by almost anyone.

Under the Uniform Securities Act, the sale of an unregistered nonexempt security I) is permissible if the order was unsolicited II) is permissible if the customer agrees not to pursue legal action III) is permissible if the security appreciates in value IV) may subject the agent to civil liability A) I and IV B) I and III C) II and IV D) II and III

A) I and IV If a security or the transaction in which a security is sold is not exempt, the security must be registered with the state. The sale of a security in violation of the act, such as the sale of an unregistered nonexempt security, exposes the broker-dealer and agent to civil liability. If a nonexempt security is sold through an exempt transaction, such as an unsolicited transaction, the security effectively becomes exempt for purposes of registration and, therefore, legal.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, requirements of advisory contracts include which of the following? I) They must be renewed on an annual basis. II) They must describe the amount of any prepaid fee that will be returned to the client in the event the contract is terminated. III) They must prohibit assignment of the contract without the client's consent. A) I, II and III B) II and III C) I and II D) I and III

B) II and III

Your client purchases 100 shares of XYZ Electric Auto Company on the assumption that rising fuel costs will create more interest in this more efficient means of transportation. If he is wrong, the resulting drop in the market price of that stock would be due to A) money-rate risk B) market risk C) business risk D) purchasing power risk

C) business risk This question refers to a client who is investing in the success of a specific company. The failure of this company does not mean that all securities will be affected; therefore, he is not subjected to market risk. The failure of XYZ would be due to the fundamentals of the company itself and considered business risk.

Under the Uniform Securities Act, which of the following investment advisers would be required to include a balance sheet in their brochures? I. An adviser who exercises discretion in client accounts II. An adviser who maintains custody over client funds and securities III. An adviser who maintains less than $35,000 in net worth IV. An adviser who, 6 or more months in advance, collects prepaid fees of more than $500

II and IV

Form 13F

Must be filled out by any institutional investment manager that exercises investment discretion over an equity portfolio with a market value on the last trading day in any of the preceding 12 months of $100 million or more in 13(f) securities. Must be filed with the SEC quarterly, within 45 days of the end of each quarter.

Under the Investment Advisers Act of 1940, which of the following statements regarding custody of a client's funds is (are) TRUE? I) Funds may be deposited in any account as long as the adviser is named as trustee for the client and adequate records are maintained. II) Clients must be kept informed in writing of the location of their funds and securities and of any changes. III) Clients must receive quarterly statements from the adviser itemizing the funds and securities in custody and all transactions on the account during the period. A) I only B) II and III C) I and III D) I and II

B) II and III The specifications for the account are such that using the term "any account" is incorrect. When advisers have custody, they must (1) ensure the safekeeping of client securities through segregation and identification by client; (2) deposit client funds into bank accounts containing only client funds, naming the adviser as trustee; (3) keep adequate records of all funds, securities, and transactions; (4) provide written notification of the location of securities and funds and changes in the same; (5) report quarterly to the client, itemizing the funds or securities in possession and any transactions that have taken place; and (6) arrange for an annual surprise audit by an independent public accountant that reports the results to the SEC.

Which of the following statements regarding the economics of fixed-income securities are TRUE? I) Short-term interest rates are more volatile than long-term rates. II) Long-term interest rates are more volatile than short-term rates. III) Short-term bond prices react more than long-term bond prices given a change in interest rates. IV) Long-term bond prices react more than short-term bond prices given a change in interest rates. A) I and IV B) II and III C) I and III D) II and IV

A) I and IV

If an index annuity has a participation rate of 80%, it means... A) the investor's account will be charged with 80% of the amount lost by the index. B) the investor's account will never be less than 80% of the initial investment. C) the investor's account will participate in 80% of the gains and losses of the index. D) the investor's account will be credited with 80% of the growth of the index.

D) the investor's account will be credited with 80% of the growth of the index.

Which of the following individuals does NOT come under the supervisory regimen of an investment adviser? - An individual in the mailroom who has fewer than 6 retail advisory clients - A CFA® preparing the firm's research reports - The CPA engaged to perform the annual audit - A financial planner registered with the firm as an IAR, but maintaining a separate financial planning practice as an independent contractor

*The CPA engaged to perform the annual audit* Explanation: The annual audit must be performed by an independent accountant (think L.A.T.E.). Therefore, this CPA would have no advisory responsibilities requiring supervision. Independent contractors registered as IARs are supervised just as would be any other IAR. Research reports carry the name of both the firm and the preparer and need adequate supervision. If the mailroom person has clients (the number isn't relevant because there is obviously an office in the state), registration as an IAR is required. (refer to U1LO6)

Sharon Smith is an investment adviser representative with Highwater Advisers, a federal covered investment adviser with its principal office in State X. Sharon provides advisory services to a bank located in State X, a state in which she has no place of business. Under current regulations, A) because Highwater's principal office is in State X, Sharon would be required to register as an IAR in State X. B) because Sharon has a client in State X, registration as an IAR would be required in State X. C) because Sharon has no place of business in State X, she does not have to register as an IAR in State X. D) because Sharon's client is a bank, she does not have to register as an IAR in State X.

C) because Sharon has no place of business in State X, she does not have to register as an IAR in State X. *The key is that Sharon is an IAR for a covered IA. When that is the case, the IAR is only required to register in states where she (the IAR) maintains a place of business. Sharon does not have a place of business in State X so no registration is required there. The fact that the client is a bank is of no relevance nor is the location of her employer's principal office.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, an investment adviser must register with the SEC if it... - has $35 million in client assets invested in cash or money market funds and $75 million of client assets invested in long-term bonds under management - its only place of business is outside of the United States, deals with fewer than 15 U.S.-based clients, and has less than $25 million in AUM in the United States - limited its clients to insurance companies only - would be required to register in 15 or more states

*has $35 million in client assets invested in cash or money market funds and $75 million of client assets invested in long-term bonds under management* An adviser with $110 million or more in assets under management, regardless of the asset class, must register with the SEC. Advisers whose only clients are insurance companies are exempt from registration with the SEC. There is an exemption for foreign advisers who have fewer than 15 clients in the United States, and their AUM in the United States is less than $25 million. When an investment adviser is required to register in 15 or more states, it is eligible, but not required to register with the SEC.

If an agent thinks that a technology stock is undervalued and actively solicits all customers, which of the following is TRUE of the agent? A) He did not violate the Uniform Securities Act if all material facts are disclosed. B) He committed the unethical business practice of blanket recommendations. C) He committed an unethical sales practice because the firm has not recommended this technology stock. D) He did not commit a violation if all clients are accurately informed of the price of the stock.

B) He committed the unethical business practice of blanket recommendations. An investment cannot be suitable for all your clients; therefore, the practice of blanket recommendation is unethical.

The gross domestic product (GDP) for the United States is composed of: A) the sum of all goods and services, imports, and foreign investment B) the national debt C) the sum of all consumer goods, capital goods, and services produced in the United States and net exports to other countries D) the balance of payments

C) the sum of all consumer goods, capital goods, and services produced in the United States and net exports to other countries

An investor holding which of the following equity securities would NOT expect to have preemptive rights? A) Common stock acquired in a private placement B) Control stock C) Common stock D) Preferred stock

D) Preferred stock

A money market mutual fund would be least likely to invest in which of the following assets? A) Newly issued ​U.S. Treasury notes B) Repurchase agreements C) Newly issued ​U.S. Treasury bills D) Jumbo CDs

A) Newly issued ​U.S. Treasury notes A money market mutual fund typically invests in money market instruments, those with a maturity date not exceeding 397 days. Treasury notes are issued with maturity dates of 2-10 years.

Although many advisers to private funds are exempt from registration, larger ones generally register with the SEC. SEC-registered investment advisers with at least $150 million in private fund assets under management use which form to report information about the private funds that they manage? - Form 13F - Form ADV Part 1A - Form PF - Form D

*Form PF* Logically enough, the letters, PF stand for private fund and that is the form used. The ADV Part 1A is used by any investment adviser registering with the SEC (or the states); it is not unique to private funds. Form 13F applies to any institutional investor with discretion over $100 million or more in certain equity securities. Those are on a list published by the SEC and are called, "13F securities". Form D is used under Rule 506 for private placements and has nothing to do with investment advisers.

Incentive Stock Options (ISOs)

A type of employee stock option. As long as stock purchased through exercise of an ISO is held at least two years after the date of grant and one year after the date of exercise, any profits are reported as long-term capital gains. If these time limits are broached, the ISO is taxed like an NSO. ISOs are limited to employees only (unlike NSOs, which can be offered to those on a organization's board of directors and suppliers)

Kapco Advisers, a federal covered investment adviser operating on a calendar-year basis, published a list of recommended securities in January 2015. A copy of this must be maintained until at least: A) December 31, 2020 B) January 31, 2017 C) January 31, 2020 D) December 31, 2017

A) December 31, 2020 Investment adviser records, including copies of advertisements, must be kept for at least 5 years from the *end of the fiscal year in which the record originated*—in this case, 5 years from the end of 2015.

Which of the following is TRUE of GNMA securities? I. Interest is subject to federal income tax. II. Interest is exempt from federal income tax. III. They are backed by farm mortgages. IV. They are backed by residential mortgages. A) I and IV B) I and III C) II and III D) II and IV

A) I and IV

An employee wishing to obtain long-term capital gain treatment would prefer the employer to offer: A) incentive stock options B) listed stock options C) non-qualified stock options D) portable stock options

A) incentive stock options Assuming the time limit conditions are met, exercise of an ISO can result in long-term capital gains while non-qualified options are always treated as ordinary income.

Under both federal and state law, the concept of a discretionary account is defined. It would be considered discretion when an agent A) picks the specific security that is the subject of a transaction B) can decide the specific price C) can decide the specific time at which the transaction will be made D) makes the decisions in the account once the client assures the agent that the proper authorizations are in the mail

A) picks the specific security that is the subject of a transaction Discretion is the ability to pick the Asset (the specific security), the Action (buy or sell) or the Amount (the number of shares or bonds). Time and price are not discretionary and nothing can take place until the proper papers have been received and documented.

The real interest rate of a fixed income investment is: A) the interest earned after inflation B) interest earned after taxes C) the coupon interest payment D) interest earned adjusted for the investment's premium or discount price

A) the interest earned after inflation

A man owns 15% of the stock of a company. His wife owns 5% of the stock of the same company. If the wife wishes to sell the stock she owns, which of the following statements are TRUE? I. Both the husband and the wife are control persons. II. He is a control person, but she is not. III. She must file a Form 144. IV. She does not have to file a Form 144. A. I and III B. I and IV C. II and III D. II and IV

A. I and III His 15% ownership is control. Her 5% is not, but the fact that she is the spouse of a control person, makes her one as well, causing this to be a sale of control stock. All sales of control stock (unless an exemption applies) must be accompanied by a Rule 144 filing on Form 144.

Which of the following is the form of portfolio management that rotates between sectors based on changes to the business cycle? A) Cyclical rotation B) Segment rotation C) Tactical portfolio management D) Strategic portfolio management

B) Segment rotation

Which of the following offers the opportunity to realize a capital gain rather than ordinary income? A) Cash dividends B) Stock dividends C) Section 529 plans D) Deferred annuities

B) Stock dividends *Deferred annuities never generate anything but ordinary income, and qualified withdrawals from Section 529 plans result in no taxation on the earnings.

Which of the following would best describe a Yankee bond? A) A U.S. dollar-denominated bond issued by a U.S. entity inside the United States. B) A U.S. dollar-denominated bond issued by a non-U.S. entity inside the United States C) A U.S. dollar-denominated bond issued by a non-U.S. entity outside the United States. D) A U.S. dollar-denominated bond issued by a U.S. entity outside the United States.

B) A U.S. dollar-denominated bond issued by a non-U.S. entity inside the United States

As referred to in the NSMIA, the term "covered security" would apply to I) preferred stock in the XYZ Corporation whose common stock is listed on the NYSE II) common stock in ABCD, Inc., a stock traded on the OTC Link III) Springfield, Illinois, municipal bonds sold to a resident of Springfield, Illinois IV) Springfield, Illinois, municipal bonds sold to a resident of Springfield, Missouri A) I and II B) I and IV C) III and IV D) II and III

B) I and IV Any security equal or senior to one listed on the NYSE is a covered security. Municipal bonds are a covered security except in their state of issuance.

An investor is looking to add some bonds to her portfolio. One of the bonds she is analyzing has a 3% coupon and the other a 6% coupon. Assuming both bonds have the same maturity date, a change in interest rates will have a more profound effect upon the market price of which bond? A) The bond with the lower rating B) The 3% coupon C) The 6% coupon D) Changes in interest rates affect both bonds equally

B) The 3% coupon The longer a bond's duration, the more its price is affected by changes to interest rate. When bonds have the same maturity, the one with the lowest coupon has the longest duration. Ratings have little or nothing to do with price changes caused by interest rate changes.

When would an individual employed by an issuer to sell its stock to the public have to register as an agent? A) When the employer is a savings institution B) When the employer is an insurance company C) When the transaction is exempt D) When the employer is the U.S. Treasury

B) When the employer is an insurance company

When using the dividend discount model, A) ​​​the degree of accuracy in forecasting the price of preferred stock is less​ than​ that ​obtained by using the dividend growth model B) future expected dividends are discounted to compute the present value of the stock C) best results are obtained from stocks that pay irregular dividends D) the discount rate is generally lower than the expected rate of return

B) future expected dividends are discounted to compute the present value of the stock

An adviser wishes to use in its advertising the testimonial of a client who is a famous sports figure. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, this action is permitted A) if the client is compensated for the testimonial B) if the sports figure is a client and disclosure is made regarding any compensation paid for the testimonial C) if the information in the testimonial is correct D) if the client is not compensated for the testimonial

B) if the sports figure is a client and disclosure is made regarding any compensation paid for the testimonial Under the SEC Model Marketing Rule for investment advisers, testimonials are limited to clients. Non-clients may give endorsements. There is no requirement to compensate the client for giving the testimonial, but if any compensation is paid, it must be disclosed.

One way in which internal rate of return (IRR) differs from most return computations is that: A) it takes into consideration the rate of inflation B) it takes into consideration the time value of money C) its application to debt securities is limited D) it is always an annualized rate of return

B) it takes into consideration the time value of money *the real rate of return is the one that takes into consideration inflation

MaryBeth Williamson 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) material information. B) registration. C) qualification. D) authorization.

B) registration.

Kurt expects a certain stock to significantly rise in value in the near future. He is expecting a bond to mature in 2 months and does not want to miss out on any appreciation on the stock while waiting for the funds to become available. Which of the following would be the best option strategy for Kurt? A) Sell a call option B) Buy a put option C) Buy a call option D) Sell a put option

C) Buy a call option Kurt can lock in the price of the stock by purchasing a call option with an expiration date exceeding 2 months. Remember the phrase "call up". If you think the stock's price is going up, buy a call.

It is generally accepted that agents and IARs will give greater consideration to which of the following when making recommendations to their senior clients? I) Age II) Life stage III) Retirement savings IV) Tax status A) I and II B) I and IV C) II and III D) III and IV

C) II and III

An investor holding which of the following equity securities would NOT expect to have preemptive rights? A) Common stock B) Common stock acquired in a private placement C) Preferred stock D) Control stock

C) Preferred stock

In the field of securities analysis, there are many tools available. Which of the following would most likely be used by an analyst to approximate a reasonable price for a common stock? A) Book value per share B) Par value C) The dividend discount model D) Yield to maturity

C) The dividend discount model The simplest model for valuing equity is the dividend discount model—the value of a stock is the present value of expected dividends on it. Yield to maturity only applies to debt securities with a fixed maturity date. The par value of a common stock has nothing to do with its market price. Although fundamental analysts will examine a company's book value per share, it generally has little or no bearing on the current market price of the stock.

Duration is A) identical to a bond's maturity B) the deviation of a bond's returns from its average returns C) a measure of a bond's volatility with respect to a change in interest rates D) equivalent to the yield to maturity

C) a measure of a bond's volatility with respect to a change in interest rates

An investor would write a call option to... A) protect the premium B) fix the purchase price to add stock to his portfolio C) obtain income D) seek long-term capital gain

C) obtain income *remember: buy protection, sell for income

A popular tool used by analysts is discounted cash flow (DCF). Most use this tool to evaluate: A) the future value of present cash flows to determine an appropriate current value. B) the future value of future cash flows to determine the value at a specified date in the future. C) the present value of future cash flows to determine an appropriate current value. D) the present value of future cash flows to determine the value at a specified date in the future.

C) the present value of future cash flows to determine an appropriate current value.

All of the following are characteristics of a rights offering EXCEPT: A) it is issued to current stockholders B) the rights are marketable C) the subscription period is up to 2 years D) the subscription price is below the current market value

C) the subscription period is up to 2 years *Rights offerings are usually very short-lived (30 to 45 days).

Which of the following is not included in the definition of broker-dealer as found in the Uniform Securities Act? A) Investment advisers B) Credit unions C) Attorneys D) Banks

D) Banks In the Uniform Securities Act, it specifically states: "Broker-dealer" means any person engaged in the business of effecting transactions in securities for the account of others or for his own account. "Broker-dealer" does not include (1) an agent, (2) an issuer, (3) a bank, savings institution, or trust company. Attorneys are excluded from the definition of investment adviser, as long as their advice is incidental to their legal practice, but that exclusion does not apply to the term "broker-dealer". Even though credit unions engage in banking activity, they are not included in the exclusion. Being an investment adviser does not exclude a person from the need to register as a broker-dealer if that person is performing the functions of a BD.

Which of the following is a method for determining the internal rate of return to an investor based on cash flow in and out of the portfolio? A) Discounted cash flow B) Time-weighted return C) Dollar cost averaging D) Dollar-weighted return

D) Dollar-weighted return

Which of the following is a direct obligation of the U.S. government? A) Fannie Maes B) Bank for Cooperatives bonds C) Government bond mutual funds D) Ginnie Maes

D) Ginnie Maes

Which of the following are nonissuer transactions? I) An investment manager purchases 100,000 shares of XYZ on the NYSE. II) An investment adviser sells a block of YYY Corp. shares to an overseas investor in a private transaction. III) The president of Dot.com, Inc., sells his personal shares of Dot.com on the NYSE. IV) Dot.com purchases its own shares on the open market in order to place them in treasury. A) I and II B) III and IV C) I only D) I, II, III, and IV

D) I, II, III, and IV A nonissuer transaction is a transaction in which the proceeds do not directly or indirectly go to the issuer, as in a secondary transaction. When the investment manager purchases XYZ shares on the NYSE, the proceeds of the sale do not go to XYZ Corp. but to the investors who sold the stock. When an investment adviser sells YYY Corp. shares to an overseas private investment group, YYY Corp. does not benefit directly or indirectly because the proceeds go to the investment adviser, not to YYY Corp. When Dot.com purchases its own shares on the open market, the proceeds go to outside investors, not to Dot.com as the purchaser. However, if Dot.com resold its shares, the transaction would be an issuer transaction.

Which of the following concerning a money purchase pension plan are TRUE? I) All employees must contribute to the plan. II) Voluntary employee contributions are optional. III) Employer contributions are required. IV) Employer contributions are optional. A) I and IV B) I and III C) II and IV D) II and III

D) II and III

A form of business organization that offers flow-through of income and loss while providing the owner(s) with limited liability is: I) a sole proprietorship II) an LLC III) a C corporation IV) an S corporation A) I and IV B) I and III C) II and III D) II and IV

D) II and IV *Only an LLC or an S corporation allows for direct participation in the income or losses of the business while offering limited liability. The sole proprietorship has flow-through, but unlimited liability. The C corporation limits liability but has no flow-through.

Which of the following statements regarding an agent's registration is CORRECT? A) If the broker-dealer with which that agent is registered should have its registration revoked, the agent may continue to do business only with existing clients and may not acquire any new ones until registered with an active broker-dealer. B) Agents may be licensed in a state even if their broker-dealer is not. C) If the broker-dealer with which that agent is registered should have its registration revoked, the agent's license will be held by the Administrator and the agent will be required to register with an active broker-dealer within 30 days. D) Revocation of the registration of that agent's broker-dealer will result in that agent's effective registration being put "on hold."

D) Revocation of the registration of that agent's broker-dealer will result in that agent's effective registration being put "on hold." An agent of a broker-dealer is active only when that broker-dealer's registration is in force. The exam may refer to the agent's registration being placed into suspense or canceled; any of these has the same effect.

Construction of an investment policy statement (IPS) requires identifying the client's objectives and constraints. Which of the following would not be in the list of constraints? A) Taxes B) Liquidity C) Time horizon D) Risk tolerance

D) Risk tolerance When constructing an investment policy statement (IPS) risk tolerance is an objective, not a constraint. Time horizon, taxes, and liquidity are all constraints. An easy way to remember the five constraints is TTLLU (time horizon, taxes, liquidity, laws, unique).

George owns XYZ stock. Based on recent analyst projections and George's own research, he believes XYZ's price will remain flat over the next few months. Accordingly, which strategy would George most likely employ? A) Sell a put option B) Buy a call option C) Buy a warrant D) Sell a call option

D) Sell a call option When the price is expected to stay flat, selling an option is a way to profit with little risk of the option being exercised. Why sell the call instead of the put? Because George owns the XYZ stock, this is a covered call and entails no downside risk. Selling the put would expose George to potentially significant loss if the price of XYZ should suffer a large decline.

One of the primary benefits of dark pools of liquidity is: A) insiders are able to trade without being recognized. B) market transparency is reduced. C) trading is not limited to daylight hours, a major advantage for international investors. D) institutional traders are able to execute large block trades without impact to public quotes or prices.

D) institutional traders are able to execute large block trades without impact to public quotes or prices. One of the major concerns of institutional traders and fund managers is having their trading patterns observed by others. Using the dark pool, trading volume that occurs, or liquidity that is not openly available to the public, enables the privacy that many of these traders desire. This reduces overall market transparency, but that is not considered a benefit to the general investing public.

Which of the following are examples of non-securities? A) Commodities B) Collectibles (coins, stamps, art) C) Precious metals (gold, silver) D) Real estate E) All of the above

E) All of the above

True or False: A REIT is a derivative.

False A REITs are not derivatives

Which of the following investments would NOT be considered an exchange-traded derivative? A) Warrants B) Forwards C) Options D) Futures

Forwards All are derivatives, but forwards are NOT exchange-traded

Government National Mortgage Association (Ginnie Mae or GNMA)

Ginnie Maes are known as modified pass-through certificates. They represent an interest in pools of FHA-insured mortgages or Veterans-Administration-guaranteed mortgages. The term pass-through is used because, as the homeowners make their monthly mortgage payments, those payments are collected in the pool and proportionately passes through to the investor. Because payments on home mortgages consist of interest and some principal and, because that money goes into the pool for all the investors, as it is paid out monthly, some of each monthly payment to the investor represents principal, and the balance of each payment represents interest. The portion of each monthly payment representing interest is subject to state, local, and federal income tax. The minimum initial investment is $25,000.

Under the Uniform Securities Act, which of the following persons is responsible for proving that a securities issue is exempt from registration? A) Issuer B) State Administrator C) Underwriter D) No need to prove eligibility for an exemption

The burden of proof for claiming eligibility for an exemption falls to the person claiming the exemption. In the event the registration statement was filed by someone other than the issuer, such as selling stockholders or a broker-dealer, that person must prove the claim.

True or False: Commodities are considered high-risk investments.

True

True or False: Consent to service of process does not have to be renewed.

True

Entanglement

a social media term meaning that a securities firm has participated in the development of content on a third-party site to which it publishes links (involved in creating the content)

One of the rights of being a stockholder is the ability to vote on important corporate matters, such as the election of members to the board of directors. The date that determines which shareholders are eligible to votes is: A) the ex-dividend date. B) the last day of the company's fiscal year. C) the record date. D) the election date.

the record date the record date is a date announced by the company as the official date you must be an owner on the company's records in order to participate in the annual meeting and corporate election