Series 66 SE - 1/6
Under UTMA, the custodian must be A) appointed by the court. B) an adult. C) a member of the minor's family. D) a trustee.
B) an adult. The only requirement to be the custodian of an UTMA (or UGMA) account is being of legal age (an adult). U24LO7
In order to compute the real rate of return for a security, it would be necessary to know all the following EXCEPT A) the annual dividend B) the beta of the security C) the purchase price D) the CPI
B) the beta of the security The real rate of return is the actual return less the inflation rate as measured by the CPI. U23LO2
The current yield of a callable bond selling at a premium is calculated A) as a percentage of its par value B) as a percentage of its call price C) as a percentage of its market value D) to its maturity date
C) as a percentage of its market value Current yield for any security is always computed on the basis of the current market value. U13LO10
The shares of the LMN closed-end management investment company are selling at $45, while LMN's net asset value is $40. It would be most accurate to say that LMN's shares are trading at A) an 11.1% discount to NAV. B) a 12.5% discount to NAV. C) an 11.1% premium to NAV. D) a 12.5% premium to NAV.
D) a 12.5% premium to NAV. The shares are selling at a $5 premium to the NAV. Mathematically, this is $5 divided by the $40 NAV, or a 12.5% premium. U14LO3
Washington, Adams, and Jefferson, Inc. (WAJI) is an investment adviser whose principal and only office is in Alexandria, VA. WAJI's sole business is advising institutional investors. Rutherford Buchanan is employed by the firm in the main office and has the responsibility of servicing the firm's bank and insurance company clients. Which of the following statements is correct regarding Rutherford's licensing requirements? A) Rutherford must register as an IAR of WAJI with the state of Virginia. B) Rutherford is exempt from registration because his only clients are institutions. C) Rutherford is exempt from registration because he has fewer than 6 retail clients. D) Rutherford cannot register as an IAR of WAJI because providing advice exclusively to institutions exempts the firm from registration.
A) Rutherford must register as an IAR of WAJI with the state of Virginia. Regardless of whom the clients are, Rutherford has a place of business in Virginia and that requires registration with the Administrator as an IAR. If WAJI does business in other states where it does not have a place of business, it is exempt from registration because the only clients are institutions. If WAJI is not registered in the state, Rutherford can't register as their IAR. The de minimis exemption for fewer than 6 retail clients only applies when there is no place of business in the state. U2LO2
Your client is 75 years old and has $100,000 to invest. He enjoys a relatively high income and is not concerned with immediate liquidity, although he is risk averse. The most suitable asset allocation strategies listed below would be A) a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund B) a 50% municipal bond fund, 50% large-cap common stock fund C) a 50% municipal bond fund, 40% money market fund, 10% large-cap common stock fund D) a 50% municipal bond fund, 40% government bond fund, 10% money market fund
A) a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund The allocation of 50% municipal bond fund, 40% government bond fund, and 10% large-cap common stock is appropriate for a high-income person of age 75 who is not concerned with liquidity. The 10% large-cap fund provides some inflation protection with very moderate downside risk. U19LO6
Under the brochure rule of the Investment Advisers Act of 1940 A) each client must be delivered a written disclosure statement no later than at the time of agreement to contract for the adviser's services B) each client must be offered a written disclosure statement at least 48 hours before signing a contract C) each client must be delivered a written disclosure statement no later than 48 hours after signing the contract D) each client must be offered a written disclosure statement at the time of signing the contract
A) each client must be delivered a written disclosure statement no later than at the time of agreement to contract for the adviser's services No agreement between an investment adviser and a client may commence without delivery of the adviser's brochure. SEC rules require that a brochure, or summary of material changes, if any, must 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. U6LO4
One of the exemptions from registration under state and federal law applies to investment advisers to private funds. One characteristic of all private funds is that A) they are not registered as investment companies B) their advisers are exempt from filing reports on Form ADV C) they have no more than 100 investors D) they have assets of less than $150 million
A) they are not registered as investment companies Private funds lose that distinction if they become registered as investment companies under the Investment Company Act of 1940. It is the adviser to a private fund who has a limitation on the amount of AUM, not the fund. In some cases, specifically when using the 3(c)(7) exemption, there is no limit to the number of investors. In many cases, the advisers to these funds, although exempt from registration, are considered exempt reporting advisers and must file a Form ADV Part 1 answering most of the questions on the Form. U1LO5
A wealthy individual has set up a GRAT. Should she die during the time the trust is active, how are the remaining assets in the trust taxed? A) The original value plus any appreciation passes to the beneficiaries and is taxed as ordinary income. B) The original value plus any appreciation is taxed as part of the grantor's estate. C) The original value plus any appreciation passes to the beneficiaries but is subject to gift tax. D) No tax is due if the grantor should die during the term of the trust.
B) The original value plus any appreciation is taxed as part of the grantor's estate. One of the risks in setting up a GRAT is that if the grantor dies during the term of the trust (usually 3-10 years), the assets put in the GRAT, plus any appreciation, are included in her estate. U18LO5
Current market interest rates are 6%. A bond with an 8% coupon would be most likely to have a net present value of zero when the bond is A) selling at a discount. B) selling at a premium. C) selling at par. D) called for redemption.
B) selling at a premium. A bond's NPV is most likely to be zero when its IRR is equal to the current market interest rate. In this case, that would be 6%. The only way for a bond with an 8% coupon to have a yield to maturity of 6% is if the bond is selling at a premium.
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 residence address for individuals while the regulatory bodies will accept a PO Box B) the CIP requires date of birth while the regulators only require proof of legal age C) the CIP only applies to individuals while the rules of the regulators apply to retail and institutional accounts D) the CIP requires a statement of the customer's goals while the regulators only require current financial information
B) 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. U18LO2
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. U20LO7
Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A) DEF 6s of 2041 B) JKL 4s of 2020 C) ABC 5s of 2040 D) GHI 7s of 2042
C) ABC 5s of 2040 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 2040 through 2042, the bond with the lowest coupon will have the longest duration. The 4s of 2020 have a relatively short duration, even though their coupon is low. U13LO11
Under the provisions of the Securities Exchange Act of 1934, the SEC may suspend trading on a national exchange by notifying A) the chairperson of a joint House/Senate committee on banking. B) the president of that exchange. C) the president of the United States. D) the Board of Governors of the Federal Reserve Bank.
C) the president of the United States. The SEC may suspend all trading on a specific exchange for up to 90 days with prior notification to the president of the United States and may summarily suspend securities trading in a registered security that is listed on a stock exchange for up to 10 days if it believes such action to be in the public interest. U22LO3
All of the following statements regarding an investment's internal rate of return (IRR) are true EXCEPT A) IRR is most often used with growth stocks B) IRR is the one rate of return that results in an investment having a net present value (NPV) of 0 C) investments are acceptable when their internal rates of return exceed the investor's required rate of return D) IRR expresses the rate of interest that matches the initial investment with the present value of future cash flows
A) IRR is most often used with growth stocks It is possible, although very difficult, to calculate IRR for investments with uneven cash flows such as growth stocks where dividends are generally not reliable. IRR is the rate of interest that equates the initial investment with the present value of future cash flows; it is the rate of return that results in an investment having a net present value of 0. U10LO1
An individual is employed by a federal covered investment adviser for the sole purpose of giving advice related to monitoring investment portfolios, but only to qualified employee benefit plans. Under the Uniform Securities Act, this individual is A) not defined as an IAR because the plan is considered an institutional client B) not defined as an IAR because the individual works for a federal covered investment adviser C) defined as an IAR because the plan is qualified D) defined as an IAR because the individual is rendering investment advice
D) defined as an IAR because the individual is rendering investment advice Regardless of whom the advice is given to, unless there is some kind of exemption involved, individuals working for IAs (state or federal) must register as IARs in at least one state. It makes no difference if the plan is qualified or not. U2LO1
Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include a charge when a client requests that a stock certificate be issued in his name II. a commission charge when a client buys a security on a listed exchange III. the interest charged by the firm on money owed by customers in their margin accounts IV. fees for providing advisory services to high-net-worth individuals
I and III If we know what charges are not included in the fee disclosure, it is easy to recognize those that are. There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers. U6LO1
Which of the following situations would require registration as an investment adviser? I. A broker-dealer provided investment research services to a customer and charged a fee for the service. II. An agent of a broker-dealer recommends the purchase of ABC securities to a customer, who then purchases 100 shares, and the agent earns a commission. III. A broker-dealer has its agents prepare complete financial plans for customers for a nominal fee. The plans recommend specific securities transactions, and when the customers place orders, the agents earn commissions on those securities transactions. IV. A broker-dealer charges its customers for collecting dividends and maintaining their accounts in addition to commission charges for transactions executed.
I and III Under the Uniform Securities Act, broker-dealers and their agents are not defined as investment advisers if their performance is solely incidental to the conduct of a brokerage business, and no special compensation is received for the advisory services. A broker-dealer charging for research advice is charging for advisory services, which would require registration as an investment adviser. Preparing a complete financial plan for a customer goes beyond being solely incidental to conducting a brokerage business and would require registration as an investment adviser because a fee was charged, even if only a nominal one. Although not asked in this question, those agents would also have to register as IARs. Recommendations of securities purchases are incidental to conducting a brokerage business and would not require registration as an investment adviser if no fees are charged for the advice. Broker-dealers may charge for clerical services provided to customers, but clerical services are not considered investment advisory services. U1LO3
Under the Uniform Securities Act, prepaid advisory fees I. must be detailed in the advisory contract II. may not exceed 2% of the customer's deposited assets III. in excess of $500 for 6 months or more of service require the adviser's balance sheet to be included in the brochure IV. may never be accepted
I and III Under the Uniform Securities Act, prepaid fees are permitted if they are detailed in the advisory contract and there is a refund of the fees if the contract is canceled prematurely. If an adviser accepts more than $500 in prepaid fees, 6 months or more in advance of services, a balance sheet must be included in the brochure (Part 2 of Form ADV) given to customers. U6LO4
