Series 65 Practice Exam
An investor reviewing a corporation's balance sheet will be able to determine the company's A) owners' equity. B) dividend payout ratio. C) productivity. D) profitability.
A)
One form of commodity investing is the purchase of precious metals. An investor in precious metals would be least likely to purchase A) molybdenum. B) platinum. C) palladium. D) gold.
A) When the exam asks about precious metals, remember that there are only four. They are gold, silver, platinum, and palladium.
A significant difference between an account for a trust and an account for an estate is A) banks can be named as trustees for a trust but not as an executor. B) the trust account will generally be active for a much longer period of time. C) the standard of prudent investing applies to trusts but not to executors. D) only the estate has beneficiaries.
B)
The Uniform Securities Act provides for civil penalties in the event of illegal activities of broker-dealers and their agents. Under the act, a purchaser would not be entitled to claim A) court costs. B) the original consideration paid for the security or the current market value, whichever is greater. C) attorney's fees. D) interest at the state's legal rate less any income received on the security.
B) In the event of a civil judgment, the purchaser is able to claim for a return of the original investment, not current market value, plus interest at the state's legal rate. This interest is reduced, however, by any income received on that security. In addition, the broker-dealer or agent is liable for courts costs and attorney's fees.
Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A) JKL 4s of 2022 B) ABC 5s of 2050 C) GHI 7s of 2052 D) DEF 6s of 2051
B) The bond with the longest duration is generally going to have the greatest exposure to interest rate risk. Because there is very little difference between maturity dates of 2050 through 2052, the bond with the lowest coupon will have the longest duration. The 4s of 2022 have a relatively short duration, even though their coupon is low.
The discounted rate that equates a bond's cash flow to its current price is known as the bond's A) current yield. B) yield to maturity. C) duration. D) coupon rate.
B) The yield to maturity of a bond considers the accretion of any discount or amortization of any premium as well as the annual coupon rate, taking into consideration the time value of money.
An estate-planning technique often recommended for those with large, taxable estates is the use of A) the alternative valuation date. B) a testamentary trust. C) an irrevocable life insurance trust (ILIT). D) the capital needs analysis.
C) For those with large, taxable estates, the purchase of life insurance to cover the potential estate tax liability is frequently recommended. The use of the ILIT will generally keep the proceeds out of the estate. The alternative valuation date helps only if the value of the estate drops sometime during the six months after death. A testamentary trust does little, if anything, to reduce estate taxes. The capital needs analysis is used to determine the replacement value needed in the event of premature death—which is unlikely to be needed with this large of an estate.
The issuance of new common stock will affect which of the following balance sheet items? Total assets Current liabilities Retained earnings Net worth A) I and III B) II and IV C) I and IV D) II and III
C) Issuing stock brings in new capital in the form of cash. This raises the assets and, since stock is equity, raises the net worth by the same amount.
Under the provisions of Regulation SP, a person who has an investment advisory contract with a registered investment adviser is known as A) a client. B) a cohort. C) a customer. D) a consumer.
C) Regulation SP uses two terms: customer and consumer. The customer is one with an ongoing relationship, such as would be the case with an advisory contract. A consumer is basically a one-shot deal.
Listed options are also known as standardized options. Which of the following choices is not one of the standardized terms of a listed option? A) The exercise price B) The expiration date C) The premium D) The underlying asset
C) Supply and demand in the marketplace set the premium of a listed option. All of the other choices are standardized.
You have a client who is interested in a preferred stock with guaranteed dividends. What is likely the reason for using the term guaranteed? A) A previous investment adviser representative has improperly used that term in an effort to make a sale. B) The issuer has a AAA rating that is tantamount to dividend payments being a sure thing. C) As a fixed income security, the dividends are guaranteed to never increase. D) Someone other than the issuer has guaranteed the payment of those dividends.
D)
KAPCO, Inc., has 100 million shares of $1 par common stock outstanding. If the current market price of the KAPCO common stock is $33 per share, KAPCO would be considered a A) small-cap stock. B) micro-cap stock. C) large-cap stock. D) mid-cap stock.
D) By doing the arithmetic, we see that the market capitalization of KAPCO common stock is $3.3 billion. Stocks with a market cap in the range of $2 to $10 billion are considered mid cap.
When comparing futures and forwards, it would be correct to state that A) forwards are exchange listed, while futures are not. B) futures are considered securities, while forwards are not. C) forwards are more likely to be closed out prior to expiration. D) futures are more commonly used by speculators than forwards.
D) The nature of futures—being standardized with a fluid secondary market—makes them more suitable than forwards for speculators. In fact, futures are almost always closed out prior to expiration.
Which of the following statements regarding REITs are true? Equity REITs offer possible income and capital appreciation. Investors receive interest and principal payments periodically. In order to receive favorable tax benefits, the REIT must pay out at least 90% of its taxable income in the form of dividends. Interests in REITs offer the benefit of flow-through of income or loss.
1 and 3) 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 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).
One of the purposes of filing the annual updating amendment to the Form ADV Part 1A is to A) verify that the investment adviser still qualifies for SEC registration. B) disclose the amount and location of securities or funds of clients that are being held by the adviser or a qualified custodian. C) provide updated information on those associated persons who are in charge of giving investment advice. D) ensure that full disclosure has been made in the adviser's brochure.
A) In order to maintain SEC registration, an investment adviser must maintain assets under management of no less than $90 million. The annual updating amendment is used to disclose this information.
The technical market theory that measures the breadth of the market is A) the advance/decline theory. B) the short-interest theory. C) the support/resistance theory. D) the odd-lot theory.
A) The advance/decline theory compares the number of stocks advancing versus those declining, generally on the New York Stock Exchange. Because it uses such a large sample, it is used as an example of the breadth of the market.
Under the Uniform Securities Act, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) selling shares from its proprietary account to an advisory client. B) the trade was being executed by an officer or partner of the firm. C) engaging in an agency cross transaction. D) directing a securities transaction to an affiliated broker-dealer.
A) There are two principals in every securities trade: the buyer and the seller. In this case, selling shares directly to the client from its own account places the investment adviser in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. In an agency cross transaction, the firm is acting as an agent rather than a principal; that's the reason for the term. LO 13.a
An investor indicates that her objective is long-term growth. Income is of secondary importance. While she is basically quite conservative, she feels her time horizon is long enough to give her a bit more risk tolerance. Which of the following common stock mutual fund selections would probably be most suitable? A) 50% large cap, 25% small cap, 25% investment-grade bonds B) 75% large cap, 25% small cap C) 100% small cap D) 100% large cap
B) The large-cap stocks are generally the most conservative when looking for growth. Adding 25% small-cap stocks to the mix adds the small extra risk the investor indicated she was willing to assume. Although the mix with the investment-grade bonds might be a good one, please note that the question specifically asks about common stock funds.
A technical analyst who has been charting the common stock of Kloud Information Storage Systems (KISS) would most likely sell KISS stock short when the market price of the stock is A) just below the resistance level. B) above the resistance level. C) below the support level. D) just above the support level.
C) The support level of a stock is the historic repeating bottom. That is, whenever the stock gets that low, it brings out the buyers and pushes the price up. However, when a stock breaks through the support level, it is usually an indication that the support has dried up and there is going to be further decline. That is good for the short seller.
Investors seeking current income would benefit from A) buying U.S. Treasury STRIPS. B) buying LEAPS. C) selling call options. D) buying periodic payment variable annuities.
C) When an investor sells an option, put, or call, the premium is received, generating immediate income. LEAPS are long-term options and, like all long options positions, do not generate any income. A periodic payment variable annuity will not begin any payout until the end of the deferral period. A commonsense way to answer this question is to ask yourself, "How do many people generate their income?" They do so by selling something.
Your client with a traditional IRA splits her annual $6,000 contribution into four quarterly investments of $1,500 into a broad market ETF. In so doing, she is taking advantage of the principle of A) tactical investing. B) overfunding her IRA. C) rebalancing. D) dollar cost averaging.
D)
Which of the following activities might result in a positive yield curve in the bond market? A) A parallel downward shift in interest rates B) Investors buying long-term bonds and selling short-term bonds C) A parallel upward shift in interest rates D) Investors buying short-term bonds and selling long-term bonds
D) 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.
Daphna works for Automated Asset Allocators (AAA), an investment adviser that has offices in States D, E, and F and is registered with the SEC. Daphna spends most of her time in an office in State D, but once every other week, she goes to the branch in State E. Daphna would be exempt from registration as an investment adviser representative (IAR) in which of the following states? A) Daphna would be exempt in States E and F. B) Daphna would have to register in all three states. C) Daphna would be
D) As an IAR with a federal covered investment adviser, Daphna has to register only in those states in which she maintains a place of business. That means registering in States D and E. The number of clients is irrelevant.
Which of the following items does not fall within the Section 28(e) safe harbor? A) Software used to analyze clients' portfolios B) Proprietary research reports analyzing the performance of a specific industry C) Research reports prepared by a third party other than the broker-dealer D) Software used to simplify the investment adviser's preparation of its tax returns
D) Research reports, whether prepared by the firm or by a third party, fall within the safe harbor provisions of Section 28(e). Software used to analyze securities is also permissible since that benefits the client. Tax preparation software benefits the adviser but not the client.
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 employee benefit plan with assets of at least $5 million C) An open-end investment company with less than $25 million in assets D) An individual investor purchasing the investment adviser's newsletter with an annual subscription price of $410
B) The only exemptions from the investment adviser brochure rule are registered investment companies (both open- and closed-end) and impersonal advice costing less than $500 per year.
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) account transfer fees. B) account maintenance fees. C) fees for issuance of stock certificates. D) brokerage commissions.
D) Not included in the fee disclosure documents are commissions, markups and markdowns, and advisory fees.
With regard to nonqualified stock options (NQSOs) and incentive stock options (ISOs), which of the following statements is not correct? A) A tax deduction for the employer is generally available only with NQSOs. B) AMT is an issue only for those exercising ISOs. C) Board of director approval is required for both NQSOs and ISOs. D) Capital gain treatment is available only with NQSOs.
D) Only the ISO offers the employee a capital gain treatment.
A 46-year-old investor wants to have retirement savings worth $1 million at age 70. If the investor can earn 9%, using the rule of 72, the present value needed today is closest to A) $90,000. B) $125,000. C) $250,000. D) $500,000.
B) The rule of 72 can be used to determine how long it takes for a specific sum to double in value. If you know the rate of return (9% in this question), you divide 72 by that rate (72 divided by 9) to learn that money will double every 8 years. A 46-year-old looking ahead to age 70 has 24 years (70 - 46) for the money to grow. If the IRA earning 9% will double in value every 8 years, in 24 years, it will have doubled 3 times. If a number doubles 3 times, its value is 8 times the original amount (1 doubled is 2, doubled is 4, doubled is 8): $1 million ÷ 8 = $125,000. Another way to get the answer on the exam is to start with the answer choices and see which one when doubled 3 times reaches $1 million. If you have $125,000 presently, the first doubling takes it to $250,000, the second to $500,000, and the third to $1 million.
When is an investment adviser representative (IAR) required to make disclosure to the client? When the IAR, in preparing a recommendation, uses research provided by a third party with whom the IAR is not affiliated When the IAR recommends a specific insurance policy for the client's overall financial plan where a commission will be received on that sale When transactions recommended to a specific client are inconsistent with those for other clients with objectives that are similar to that partic
2 and 4) An investment adviser must provide full disclosure to his client if there would be even a hint of conflict of interest. This includes the case where a recommended product will generate a commission or other source of income to the adviser as well as full disclosure if a recommendation is not consistent with the adviser's activity in his own account. The adviser can use any source of information to create his own analysis, with disclosure of the source being required only if the adviser uses the product of a third party as the presentation to the client. It would be unusual that all clients with the same or similar objectives would purchase or have recommended for purchase the same securities.
A portfolio manager looking to create alpha would most likely use which of the following? A) Tactical asset allocation B) Strategic asset allocation C) Indexing D) Buy and hold
A) Alpha is the extent to which a portfolio outperforms its expected returns. Expected returns are based on the systematic risk of the portfolio (its beta). In order to exceed those returns, one must generally construct a portfolio that deviates from the market allocations. With tactical asset allocation, the manager either overweights or underweights the portfolio allocations based on near-term expectations of returns on those assets classes. The other choices are all basically the same, with little or no attempt to time the market's ups and downs.
A life insurance policy with benefits tied to the performance of a separate account that allows the policyholder to skip premium payments is called A) a flexible premium variable life insurance policy. B) a universal life insurance policy. C) a fixed premium variable life insurance policy. D) a scheduled premium variable life insurance policy.
A) Flexible premium means that the policyholder can elect to skip premium payments. This is a feature of all universal life policies, but only in the case of universal variable life insurance does the performance of the separate account impact benefits.
Current market interest rates are 6%. Using the discounted cash flow method of valuation, you would expect to arrive at the highest valuation for which of the following? A) 10% coupon maturing in 10 years B) 5% coupon maturing in 20 years C) 7% coupon maturing in 9 years D) Zero-coupon bond maturing in 11 years
A) The discounted cash flow method considers the future expected free cash flow (the interest payments plus the eventual return of the principal) and discounts it to arrive at a present value. In its simplest iteration, this is nothing more than taking all the money you are scheduled to receive over a given future period and adjusting that for the time value of money. In general, bonds with higher coupons will have the greatest value because they will clearly produce the most cash flow, and zero-coupon bonds will produce the lowest because they have no cash flow other than the return of the face value at maturity.
A corporation with a 6%, $25 par cumulative preferred paid $0.50 to preferred stockholders last year. This year, the company wants to pay common dividends. How much must it pay each preferred share? A) $1.50 B) $2.50 C) $11.50 D) $0.50
B) A 6% cumulative preferred stock with a $25 par value would pay an annual dividend of $1.50 ($25 × 6%). Cumulative preferred stock requires payment of all dividends that have previously been skipped before any dividends can be paid to common stock. The $0.50 that was paid last year left $1 in dividends in arrears. Therefore, this year requires a $2.50 dividend to be paid to the preferred shareholders before any common dividend can be paid to common shareholders.
A company with no operations that is formed to raise capital through an initial public offering for the purpose of acquiring a private company or business to be identified after the IPO is A) a special purpose acquisition company. B) a direct participation program. C) an open-end investment company. D) a sponsored investment company.
B) Special purpose acquisition companies (SPACs) are usually shell companies. Rule 405 of the Securities Act of 1933 (not tested) defines a shell company as a registrant that has no or nominal operations and assets. The SPAC has an initial public offering and, under the direction of the SPAC's sponsor, determines the private company or companies to be acquired. If the acquisition is successful, the formerly private company is now publicly owned and investors can buy and sell interest in the company through shares of the SPAC.
A broker-dealer with no place of business in a state is not required to be registered in that state if the broker-dealer A) is a federal covered broker-dealer. B) is registered in the state where its principal office is located. C) limits its clientele to employee benefit plans with assets of at least $1 million. D) is a member of the New York Stock Exchange.
C) A broker-dealer must be registered in every state in which it sells or offers to sell securities unless an exemption is available. If a broker-dealer has no office in a particular state and no business is done in that state other than with institutional clients, registration there is not required. There is no such term as federal covered broker-dealer. The term federal covered applies to certain investment advisers and securities.
As defined in the Uniform Securities Act (USA), which of the following would be considered an exempt transaction? A) A purchase of stock by an accredited investor under Rule 506(b) B) A sale of U.S. Treasury bonds to a retail investor C) A sale of stock by an administrator of an estate D) A purchase of bonds by a trustee of an irrevocable trust
C) A sale by certain fiduciaries, such as an executor or administrator of an estate, is an exempt transaction under the USA. Even though the Treasury bonds are an exempt security, the sale to an individual is not an exempt transaction. Rule 506(b) is the federal transaction exemption not found in the USA, and only a trustee in bankruptcy is considered for the exemption.
which two of the following statements are correct regarding a registered investment adviser's relationship with promoters engaged to solicit for advisory business? An individual who is subject to statutory disqualification from registration as an investment adviser representative may be compensated to solicit clients for the adviser when employed by a third-party promoter. If the compensation exceeds a de miminis amount, there must be a written agreement between the investment adviser and the so
C) All relationships between registered investment advisers and a promoter where compensation is involved must be in writing. It is important to note that compensation is defined as more than $1,000 over a 12-month period. Making sure that the content of any scripts is fair and balanced is the responsibility of the investment adviser, regardless of who prepared them. Those subject to statutory disqualification (bad actors) may not be used as solicitors if compensation is to be received. Cash referral fees to promoters are not restricted to impersonal advisory services.
Section 15 of the Investment Company Act spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that A)the contract should be in writing. B)the initial contract is for a maximum of one year and then may be renewed on either an annual or a biannual basis. C) no contract may be terminated with more than 60 days' written notice. D) the fund may not engage in margin trading unless a specific exem
C) Contracts between funds and their advisers may not be terminated with more than 60 days' written notice, and these contracts must—not should—be in writing. The initial contract is for a two-year period after which the contract is renewed on an annual basis. Whether or not the fund can trade on margin is not a function of the management contract.
Prudent Asset Construction Enterprises (PACE) has offices in States X, Y, and Z. On their last annual updating amendment, they reported assets under management (AUM) of $218 million. In which of the following instances would PACE be receiving a substantial prepayment of fees? A) $1,600, paid at the first of each quarter B) $10,000, paid monthly C) $1,600, paid one year in advance D) $600, paid six or more months in advance
C) First of all, this is an SEC-registered investment adviser, so we have to go by the federal numbers. Those are more than $1,200, six or more months in advance. The $600 would have been substantial if PACE was state registered. Although the other two choices are above $1,200, they are not prepaid for at least six months.
One of the differences between state and federal laws involving an investment adviser maintaining custody of customer funds and/or securities relates to the handling of client checks made payable to third parties such as broker-dealers. Which of the following properly expresses that difference? A) Under federal law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within three business days of receipt. B) Under state law, rece
C) Under the Uniform Securities Act, if an investment adviser receives a check made payable to an unrelated third party, it will be considered custody unless forwarded within three business days of receipt. Third-party checks are never considered custody under federal law.
Your client has a long position in a security that has had considerable appreciation since the date of purchase. The client is concerned that speculation that the company's CEO may retire could have negative implications for the stock. Wishing to protect those unrealized gains, which of the following orders would be appropriate? A) Buy stop B) Buy limit C) Sell limit D) Sell stop
D) Sell stop orders are frequently referred to as stop loss orders and are used either when a security is purchased to offer downside protection or, as in this case, to preserve a gain that has not yet been realized. Buy stops are used to protect against loss or to preserve the gain on a short position.
state-registered & federal covered investment advisers have brochure delivery requirements. A difference between the 2 is A) federal covered advisers are exempt from the brochure delivery requirements to investment company clients while state-registered advisers are not. B) state-registered advisers must deliver the brochure within 90 days of the end of their fiscal year while covered advisers have 120 days. C) state-registered advisers who do not deliver the brochure at least five days prior t
D) State-registered investment advisers who do not deliver the brochure at least 48 hours prior to entering the contract must offer a penalty-free withdrawal of five days. There is nothing comparable to that in the federal law. Both have the 120-day delivery requirement, and state-registered investment advisers cannot have investment companies as clients.
Which of the following forms of joint ownership is most associated with ownership of real estate? A) Joint tenants with right of survivorship B) Tenants in common C) Totten trust D) Tenancy by the entirety
D) Tenancy by the entirety is most commonly used for ownership of real property (real estate).
Your client noticed that the listing for the CDL $100 par common stock in the Wall Street Journal indicated that the current yield of the stock was 4%. If the last trade was at $40 per share, more than likely, CDL is paying quarterly dividends of A) $1.00. B) $1.60. C) $4.00. D) $0.40.
D) The par value of the common stock is irrelevant to this question. In order for a stock selling at $40 to have a current yield of 4%, the annual dividend must be $1.60. Because common stock dividends are typically paid quarterly, more than likely, the quarterly dividend is $0.40 per share.
In order to comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must do which of the following? Offer plan participants at least three different investment alternatives Ensure that plan participants are insulated from control over their portfolios Allow plan participants to change their investment options no less frequently than quarterly Permit immediate vesting of employer contributions A) II and IV B) I and IV C) II and III D) I and III
D) The safe harbor requirements of ERISA Section 404(c) relieve the trustee of a 401(k) plan of liability if the plan participants have the ability to select from at least three different investments and are allowed to make selection changes no less frequently than quarterly. Immediate vesting is required in a safe harbor 401(k), which is one that is safe from top-heavy testing.
Which of the following statements regarding agent registration under the Uniform Securities Act is true? A)The administrator may request that the agent furnish a statement of assets and liabilities. B)If, before the effective date of the registration, the administrator requires amendments to the application, the registration will be considered to have first been filed as of the original filing date. C)The administrator may initiate a disciplinary action within two years of an agent's withdrawal
D) Typically, registration of persons becomes effective at noon on the 30th day following filing. If the administrator requires the filing of amendments, the clock starts over again with the filing of those amendments. Agents do not have financial requirements, and the administrator has a maximum of one year after termination to initiate any actions.
Each of the following would be exempt from the definition of an agent under the Uniform Securities Act except A) Katrina, the administrator of the Widget Spinners Corporation pension plan, who is paid for making investment decisions for the portfolio. B) Florence, an employee of the First Fidelity Trust Company, who buys and sells securities to meet the needs of her trust clients. C) Beatrice, who was appointed by the other members of her investment club to make the portfolio decisions for the n
D) When an individual receives compensation for selling employer stock to employees, that person is defined as an agent and must register as such. Managing a pension plan (and getting paid for it, naturally) does not make one an agent; she is not being compensated for the trades. Because banks and trust companies are excluded from the definition of a broker-dealer, their employees cannot be considered agents.
One respect in which advertising by investment advisers differs from that of broker-dealers is that A) investment advisers are permitted to conduct seminars while broker-dealers cannot. B) investment advisers are not permitted to use the internet while broker-dealers can. C) investment advisers are permitted to refer to charting systems in their advertisements while broker-dealers cannot. D) investment adviser advertising is regulated by federal law while advertising by broker-dealers is regulat
D) When it comes to investment advisers, state registered or federal covered, any advertisement that does not comply with the SEC's Investment Adviser Marketing Rule as found in the Investment Advisers Act of 1940 (federal law) would be prohibited. On the other hand, broker-dealers must comply with FINRA's rule on communication with the public as well as the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents.
