STC 65 Exam 8
Under the Uniform Securities Act, the statute of limitations for criminal violations of the Act is:
5 YEARS
Five years ago, a registered representative sold a variable annuity to a 65-year-old client. The annuity carries a seven-year surrender fee. The client made a lump-sum investment of $100,000 into a growth-oriented separate account which has grown to $150,000. The RR expects a major market correction in the near future and recommends that the client conduct a 1035 Exchange into a fixed annuity. The RR explains to the client that the surrender fee will be less than the anticipated decrease in account value. This recommendation is:
A 1035 Exchange permits the direct transfer of funds in a life insurance policy, endowment policy, or annuity into another policy, without creating a taxable event. However, incurring a surrender fee and then signing a new, long-term contract is not an appropriate recommendation. Since the separate account of a variable annuity will offer numerous investment objectives, the client could move her investment to another offering within the separate account without incurring surrender charges. (89085) Unsuitable, since there is no benefit in surrendering the annuity due to the other investment options that are available in the separate account.
Manny is an active septuagenarian who would like to create a living trust. This trust is referred to as
A living (inter vivos) trust is established during the donor's lifetime.
The following persons would be allowed to trade the account of an incapacitated individual, EXCEPT:
A relative named in a living will
If a client is interested in purchasing a stock that has a low P/E ratio, a high dividend payout ratio, and wants the issuer to have a large amount of cash reserves, what type of stock should an IAR recommend?
A value stock
Jake purchased a corn futures contract at $1.20 per bushel. At the end of the contract, if the price of corn has fallen to $1.10 per bushel, which of the following statements is TRUE?
As the purchaser of the contract, Jake has an obligation to take delivery.
Bryce Dunne is long 300 shares of YYZ, a company specializing in radio broadcasting. Bryce also is long 3 YYZ Aug calls. What is the purpose of this strategy?
Bryce is making a very speculative trade with YYZ stock and YYZ call options. He is extremely bullish on the stock. This is demonstrated by the fact that he purchased both the stock and the call options. If the stock's price appreciates, he will make money on both trades. Conversely, if the stock's price goes down, he will lose money on the stock trade and the call options will expire worthless, which will mean a complete loss of the premiums paid when he purchased them.
Which of the following factors is a disadvantage of a buy/hold strategy?
Changing portfolio risk levels
Regarding the possession of funds held by investment advisers (IAs), which of the following is FALSE?
Clients must receive a statement at least annually that discloses certain details of the funds held by the firm Client account statements are sent on a quarterly basis and must include the amount of funds in the firm's possession, a list of securities held in custody, a record of transactions, and all fees charged. If a custodian holds the assets (i.e., not the IA), the IA must have a reasonable belief that the statements are being provided. (67660)
Which TWO of the following statements are TRUE regarding a bond's current yield? Current yield measures the investor's total return Current yield does not consider the price appreciation of a discount bond held to maturity or the price depreciation of a premium bond held to maturity Current yield measures the interest the investor receives in relation to the current market price Current yield is more important than the yield to maturity as investors always want to know how their investment is currently performing
Current yield measures the interest the investor receives in relation to the current market price Current yield does not consider the price appreciation of a discount bond held to maturity or the price depreciation of a premium bond held to maturity
From what is an exchange-traded note (ETN) derived?
Exchange-traded notes (ETNs) are unsecured bonds that promise to pay a rate of return that mirrors the return of a portfolio of securities. This means that ETNs are created based on the creditworthiness of the issuer.
Which of the following distribution methods will ensure that each branch of family receives an equal share of an estate?
Per stirpes
An OTC market maker would justify the amount of its markup based on all of the following, EXCEPT:
The amount of markup should be based on the current market price of the security, not the market maker's cost
A client purchases a TIPS with a 2% coupon and, over the course of the year, the CPI increases by 1%. Which of the following statements is TRUE?
The client will earn 2% on an adjusted principal amount.
What does a debt-to-equity ratio of 1-to-1 signify?
The debt-to-equity ratio measures the leverage of a company. A normal debt-to-equity ratio can vary depending on the industry; however, a ratio of 1-to-1 or more typically signifies that the company is highly leveraged.
If an investor were to purchase several general obligation and revenue bonds issued by the state of New York, the investor could have diversification in all of the following, EXCEPT:
There would be no geographical diversification for the customer
A 30-year-old client needs protection for his family in the event of his death. Currently, his income is low, but he does want to develop cash value. As he moves forward in his career, he may want access to his cash value and have the ability to adjust the policy as his insurance needs change. Which insurance recommendation is the MOST appropriate?
Universal life insurance produces cash value which is able to be accessed by a client, while also offering flexibility in regard to premium payment. Unlike whole life, a universal policy's death benefit can be increased or decreased as the insured's needs change. Considering the client's income, a variable policy has too much risk. Although term life insurance is likely the most affordable policy, it doesn't generate any cash value.
A whole life insurance policy may be referred to as: Permanent life Term life Ordinary life Straight life
Whole life insurance may be called permanent, ordinary, or straight life insurance.
Which of the following statements is TRUE in relation to the buyer of a call option?
A purchaser of a call option would have limited risk with the potential for unlimited profit.
Under the Uniform Securities Act, amendments to an investment adviser's Form ADV must be filed promptly. On August 31, an investment adviser closes one of its branch offices and must therefore file an amendment. What constitutes a prompt filing with the IARD?
Amendments to Form ADV are required to be filed promptly with the Investment Adviser Registration Depository. Under the Uniform Securities Act, a filing is done promptly if it is done within 30 days of the event that caused the filing requirement, which in this question is September 30. (67234)
Your clients have a sizable estate, which they wish to leave to their children upon their death. Which of the following trusts would remove assets from their estate and potentially reduce their estate tax?
An irrevocable trust must be established by the grantors in order to remove their assets from the estate thus avoiding estate taxes. (
A semi-retired IAR works for an investment adviser that is located in State A, but she intends to spend the winter months in her second home in State B. The IAR put the addresses of both her office in State A and her home address in State B on her business cards since she intends to continue servicing her clients that reside in State A over the winter months. If the investment adviser does not have an office in State B, which of the following statements is TRUE?
Both the IAR and the investment adviser need to be registered in State B since the IAR's residence in State B is considered an office and it is listed on her business card.
If an investor is attempting to maximize her portfolio growth over a long period, what is her strategy called?
Capital appreciation would best fit the strategy being described. Capital appreciation involves buying and selling equities in an attempt to obtain as much growth as possible and is generally considered a risky strategy.
An issuer includes warrants with a bond offering that it's conducting. This is done to
Decrease the coupon rate on the bonds
Which feature of a deferred compensation plan is generally considered to be a disadvantage?
Deferred compensation is not deductible to the employer.
A project manager is evaluating a project and determines that she needs an internal rate of return of 10%. Currently, the project has a positive net present value (NPV). Based on this information, the project's estimated internal rate of return (IRR) must be
Greater than 10%
In determining whether a particular type of options trading is suitable, an adviser will consider the customer's: Understanding of strategies being employed Ability to calculate maximum profit or loss Ability to assume risk Ability to meet a margin call
I, II, III, and IV
Jack has a substantial amount of cash value built up in his variable life insurance policy. He would like to use some of it for a home renovation project. Which TWO of the following choices would be used to explain to Jack his options for accessing his cash value? If he withdraws some of his cash value, it will be treated as taxable earnings first, then a tax-free return of premiums (LIFO). If he withdraws some of his cash value, it will be treated as a tax-free return of premiums first, then taxable earnings (FIFO). If he takes a loan against the cash value, it will be taxed as earnings first, then treated as a tax-free return of premiums (LIFO). If he takes a loan against the cash value, it will be tax-free.
If he takes a loan against the cash value, it will be tax-free. If he withdraws some of his cash value, it will be treated as a tax-free return of premiums first, then taxable earnings (FIFO). Any withdrawal of cash value from a life insurance policy is considered a return of premiums first, which would be tax-free. Withdrawals above the amount of premiums paid will be considered interest and, therefore, taxable as income. Policyholders usually prefer to borrow against their cash value, since this would be tax-free. The loan does not need to be repaid, but any amount still outstanding upon the death of the insured will be subtracted from the death benefit
If an investment increases in value, which of the following statements would be TRUE?
If it was held for less than one year, the annualized rate of return would be greater than the holding period return
A U.S. portfolio manager that anticipates receiving an interest payment in a foreign currency would be concerned that the currency might:
If the foreign currency weakens against the dollar, then the interest payment will be worth less in U.S. dollars than expected.
A portfolio contains fixed-income instruments and common stock. At the beginning, the value of the portfolio was $240,000. Over the next two years, the portfolio received a total of $20,000 in interest and dividends. At the end of the second year, the portfolio was valued at $280,000. What is the annualized yield on the portfolio?
In this question, the gain is $40,000 ($280,000 - $240,000) and the income is $20,000, for a total of $60,000. The $60,000 is then divided by the starting value of $240,000, which equals a total return of 25%. However, the 25% return is for two years of investing. Since the question is asking for the annualized return, the 25% return must be divided by the two years that the portfolio was invested, which equals an annualized return of 12.5%
According to Modern Portfolio Theory, the expected return of an investment is the:
Possible returns on the investment weighted by the likelihood that returns will occur
A broker-dealer agent enters an order ticket for a customer. The order ticket must contain all of the following information, EXCEPT the:
Price of the security at the time of receipt
A client considering an investment in a real estate investment trust would benefit from all of the following advantages, EXCEPT:
Protection against rising interest rates Real estate investment trusts offer investors a stable dividend based on the income produced by owning a diversified portfolio of properties and/or mortgages. Most REITs trade on an exchange offering investors liquidity. Since investors usually purchase REITs for their high dividend yield, if interest rates increase, the value of their shares will usually decrease as other newly issued income-earning securities become more attractive
When analyzing strategic and tactical asset allocation, all of the following statements are TRUE, EXCEPT:
Sector rotation is a form of strategic asset allocation, while buy-and-hold is a form of tactical asset allocation. Sector rotation is a form of tactical asset allocation, not strategic, in which investors shift assets from one sector to another based on economic changes. Buy-and-hold is a form of strategic asset allocation.
The Investment Advisers Act of 1940 would consider an individual to be in the business of providing investment advice if:
She provides mutual fund timing and sector rotation advice to her clients
When interest rates are fluctuating, which bonds are safer investments?
Short-term bonds
A technical analyst will consider which of the following?
Supply and demand figures
Currency values in a floating-rate system are established by:
Supply and demand for the currency
A customer buys 200 shares of Giant stock at $63 a share. The client writes 2 call options with a $75 strike price and receives a premium of $4. What is the customer's breakeven point?
The breakeven point is $59. It is determined by subtracting the premium from the cost basis of the stock ($63 - $4)
A client has a traditional IRA and she just turned 75. She must take the required minimum distribution (RMD) no later than:
The first Required Minimum Distribution (RMD) must be taken by April 1 after the IRA owner turns 72. Subsequent RMDs must be withdrawn by December 31 each year. Since the client is 75, she has already taken the initial RMD, so her deadline for the current year is December 31st.
For an investor in the 35% federal tax bracket who is looking to minimize tax liabilities, what would be of LEAST interest?
The investment ideas and methodologies of a prospective mutual fund manager
A corporation has $7,000,000 in income after paying preferred dividends of $500,000. The company has 1,000,000 shares of common stock outstanding. The market price of the stock is $56. What is the price-earnings ratio?
The price-earnings ratio is the market price of the stock ($56) divided by the earnings per share ($7) which equals eight times. (74456)
A market maker gives a firm quote of 15 - 15.50 for a stock. If the party on the other side decides to buy 800 shares, how many shares is the market maker obligated to sell at 15.50?
When a market maker gives a firm quote with no size indicated, the market maker is obligated to buy or sell at least 100 shares of the stock. The market maker has the option to sell more at that price if requested
If the dollar is increasing against foreign currencies, which TWO of the following results would most likely occur? An improvement in the U.S. balance of trade A worsening of the U.S. balance of trade An increase in imports into the U.S. Increased exports by the U.S.
if the U.S. dollar is rising against foreign currencies, U.S. goods will be more expensive to foreigners. This should lead to decreased U.S. exports and increased imports into the U.S. These events would worsen the U.S. balance of trade.
An IAR intends to recommend speculative debt offerings to some of her more aggressive accounts. Since the IAR specializes in equity investments, she plans to use an outside fixed-income expert to help in the selection process. In this situation, which of the following statements is TRUE under the UPIA?
the IAR may delegate her investment decision-making authority.
Which of the following choices would be considered a prohibited transaction under ERISA?
A loan to the plan's trustee from the plan these prohibited transactions include: the sale, exchange, or lease of property, lending money or extending credit, furnishing goods, services, or facilities, and transferring or using plan assets for plan fiduciaries' own benefit.
If a member firm has written procedures which allow for the borrowing and lending of funds between agents and customers, in which of the following situations is an agent NOT allowed to borrow from a customer?
A person who is associated with a member firm in any registered capacity may NOT borrow money from or lend money to a customer of the firm unless the firm has an existing written policy which allows the practice and one of the following criteria is met: The customer is a registered person with the same firm The customer is an immediate family member The loan is based on a business relationship that exists outside of the broker-customer relationship The customer is a financial institution that regularly engages in the business of providing credit, financing, or loans
All of the following statements are TRUE about zero-coupon bonds, EXCEPT:
A zero-coupon bond is purchased at a discount and does not pay periodic interest. All interest is paid at maturity (the difference between cost and par value). The discount must be accreted each year and is treated as ordinary income even though it was not actually received. Since interest is not paid each year, a zero-coupon bond would not satisfy an investor's need for cash flow. (63036)
An investor purchased a new issue municipal bond at 101. Which of the following statements would be TRUE if the investor held the bond to maturity? The premium must be amortized over the life of the bond The investor may not claim a capital loss at maturity The cost basis of the bond will be adjusted annually to reflect the amortization The annual amortization will be deducted from ordinary income for tax purposes
All premium bonds must be amortized annually, that is, the cost basis is reduced each year until maturity. If held to maturity, the investor's basis will equal par value. There will be no capital loss. Although the amortization of the premium may be deducted against interest income in the cases of corporate and U.S. Treasury instruments, amortization is NOT deductible for municipal bonds.
If an investment adviser representative is reviewing a client's IRA portfolio, she would be most concerned with the inclusion of which of the following investments?
Although it is not prohibited to place municipal bonds in an IRA, a review of the appropriateness must be performed. Since an IRA is a tax-deferred account, the tax-exempt nature of the municipal bond loses its effectiveness. Instead, the placement of a higher yielding investment is more suitable.
Which of the following investments would NOT be appropriate for an estate account?
An estate is only expected to exist for a limited amount of time (i.e., one or two years at the most). By this time, the executor should have distributed all of the assets to the heirs and completed the estate's affairs. Treasury bonds are long-term investments with maturities exceeding 10 years. All of the other choices represent short-term investments, which are suitable for an estate. Treasury bills mature in one year or less and commercial paper matures in 270 days oR LESS
If the U.S. economy was experiencing tough times with slow or negative growth, creating an extreme lack of demand for consumer goods, the result might be:
Deflation occurs when the prices of goods and services fall. This is a rare occurrence. It would be caused by slow or negative growth, which would lead to extremely small demand for consumer goods in relation to the supply of those goods.
Mary and John are both investment adviser representatives with Everyman Investment Advisers. Mary leaves Everyman to join another firm and her accounts are reassigned to John. What is Everyman required to do under the Investment Advisers Act?
Everyman does not need to do anything in this situation. According to the Investment Advisers Act, an advisory contract may not be unilaterally assigned to another investment adviser without the client's consent. However, the contract is between the client and the investment advisory firm (Everyman in this case), not the individual investment adviser representative.
Which of the following measures the volatility of an option's premium?
Gamma and theta are both measures of the volatility of an option's premium. Gamma is used to measure the option's delta sensitivity to changes in the underlying stock price, while an option's delta measures the amount by which an option's premium will change when the underlying stock price changes. Theta is a measure of how quickly an option's time value decreases. Duration and convexity are measures of a bond's volatility.
A person who considers herself a contrarian investor would follow the:
In a contrarian investment style, investments are made in the opposite direction of conventional wisdom. The short interest theory proposes that when open short interest (uncovered short sales) increases, it is a bullish indicator. The short sellers will have depressed the price of the stock and at some point they must all reenter the market as buyers, causing the price of the stock to rise. (74490) Short Interest Theory
Which of the following choices BEST describes accredited investors under SEC Regulation D?
Institutions—banks, brokerage firms, insurance companies, investment companies, certain pension plans, businesses, and non-profits with at least $5 million in assets, and venture capital firms Key employees of the issuer—directors, executive officers, and general partners Wealthy individuals with at least $1 million in assets, excluding the value of their primary residence, or an annual income of $200,000 (or $300,000 together with a spouse). The investor's income must have been this high for at least the past two years and must be expected to continue at this level. The value of a person's primary residence cannot be included as an asset in order to qualify as an accredited investor based on her net worth.
Which TWO of the following statements are TRUE regarding a time-weighted rate of return? It may be used to compare the performance of two money managers. It is a way of calculating an investor's internal rate of return. It does not consider the inflows and outflows of cash. It measures the average return that a client's investment earned.
It may be used to compare the performance of two money managers.. It does not consider the inflows and outflows of cash.
An investor in the 28% tax bracket buys a 12% corporate bond at par. After taxes, what would be the net yield?
The after-tax yield is calculated by multiplying the taxable yield of the investment by 100% minus the tax bracket. In this case 12% x (100% - 28%) = 12% x 72% = 8.64%. Another way of viewing this is that for this investor, a municipal bond would have to yield more than 8.64% to be competitive with this 12% corporate bond. (74651)
A broker-dealer owns 100 shares of ABCO stock which it purchased at 28. If the stock is sold to a customer, the broker-dealer will base the markup on:
The lowest offer on the Nasdaq system
An investor buys a two-year U.S. Treasury note that has a 6% coupon. If the note is purchased at par and held to maturity, what is the real rate of return over the holding period, assuming the CPI is 3%?
The method used to calculate the note's real rate of return (or inflation adjusted return), is to subtract the rate of inflation as measured by the CPI, from the note's coupon. Therefore, the real rate of return is 3% (6% coupon less the CPI of 3%).
A broker-dealer has filed an application to withdraw its registration. Which of the following statements is TRUE?
The withdrawal will become effective when the Administrator determines whether there is an action for revocation of the firm's license pending at the time the application was filed
Which of the following choices does not meet the definition of a security under the Uniform Securities Act?
Whole life insurance policies
Schedule 13D is required to be filed with the SEC by any person, or those acting together, who acquire more than 5% of the voting stock of a public corporation. Which of the following statements is NOT TRUE regarding Schedule 13D?
a copy does need to be given to current shareholders
Which one of the following statements regarding variable annuities is FALSE?
On average, variable annuities have lower fees and expenses than mutual funds
One of the most common uses for a bypass trust is to:
Pass assets from the second deceased parent to his children
Which of the following statements BEST describes active portfolio management
The adviser attempts to exceed the performance of the market
Ten years ago a client transferred her 401(k), worth $80,000, into an IRA. Her account has grown to $120,000 and she takes a distribution of $10,000 at age 52. The tax consequences of her actions would be:
$10,000 of taxable ordinary income plus a $1,000 penalty Withdrawals from an IRA prior to age 59 1/2 will result in a 10% penalty and be added to income for tax purposes. The penalty will not be incurred if the withdrawal is made due to physical disability or death. Additionally, under specific circumstances, withdrawals used to pay medical expenses and qualified educational expenses, may be made penalty-free prior to the attainment of age 59 1/2.
The most appropriate buyer(s) for a variable life insurance policy is/are:
A person with an understanding of investments who can tolerate risk because stocks and bonds are the foundation of the policy.
Growth stocks would typically have which TWO of the following characteristics? High price/earnings ratios High dividend-payout ratios Low price/earnings ratios Low dividend-payout ratios
Low dividend-payout ratios High price/earnings ratios
Investors often use financial futures to hedge portfolios against which of the following types of risk?
Market risk
Rate the following bonds in terms of yield from lowest to highest: Treasury bonds Municipal bonds Corporate bonds
Municipal securities will have the lowest nominal yield because the interest is federally-tax free. After municipal bonds come Treasury bonds because of safety of principal. The bonds with the highest nominal yield are corporate bonds. (74412)
What type of investment company sells its securities exclusively in the primary market, is open-ended, and issues redeemable shares?
Mutual funds
The original asset allocation of an investment portfolio was 10% cash, 40% bonds, and 50% stocks. A recent bear market, however, has altered this allocation to 10% cash, 50% bonds, and 40% stocks. The client's investment objectives and risk tolerance have not changed. The adviser recommends that the portfolio be systematically rebalanced by selling:
Systematic rebalancing is the process of buying and selling securities within a portfolio to restore its original asset allocation. Systematic rebalancing may be done either periodically (annually, quarterly, or monthly) or whenever market forces or different rates of return cause a significant change in the original asset allocation.
An investor has a total of $350,000 to invest, but he wants to invest $150,000 in a manner that will follow the business cycle. This type of investing is referred to as:
Tactical asset allocation shifts assets based on market timing, trends, and the business cycle.
An investment adviser who believes that securities markets are efficient and that high transaction costs can substantially reduce returns would most likely favor which of the following portfolio management strategies?
Those who think market timing is ineffective (i.e., markets are efficient) often favor passive strategies such as indexing. An indexed portfolio attempts to mirror the composition of a benchmark index, such as the S&P 500 or the Russell 2000. Since buying or selling occurs only when funds are added to or withdrawn from the portfolio, transaction costs are kept low.
What may an Administrator require from a broker-dealer on annual basis?
Under the Uniform Securities Act, broker-dealers are required to register with the Administrator on an annual basis. The registration process includes the annual payment of a registration or filing fee. Surety bonds are posted once - when a broker-dealer first registers - and must be maintained over the life of the firm. Capital requirements need to be updated monthly. Broker-dealers must update their supervisory procedures on an ongoing basis (i.e., whenever it's appropriate)
Which of the following insurance contracts have the elements of term insurance, a cash value that is not market-based, and a flexible death benefit?
Universal life is an insurance contract that allows the customer to select the amount of coverage and the size of the premium. Additionally, it has a cash value that grows at a minimum guaranteed rate. However, the performance of the cash value is not market-based. (63142)
Which TWO of the following types of insurance have fixed premiums? Whole life insurance Universal life insurance Variable life insurance Variable universal life insurance
Variable life insurance Whole life insurance Universal life policies, including variable universal life, have flexible premiums
A customer opens an options trading account and purchases one STC call option with a strike price of 40. She pays a premium of 3.22. Which of the following statements is/are TRUE? The customer's breakeven point is 43.22 per share The customer is bullish on STC The customer is bearish on STC The customer's breakeven point is 36.78 per share
When buying a call option, the breakeven formula is the strike price + the premium. The customer's breakeven point is 43.22 (40 + 3.22). When an investor buys a call option, she is bullish
According to the Investment Advisers Act of 1940, when is an investment adviser required to provide a balance sheet to its clients?
When the adviser requires the prepayment of a fee that is greater than $1,200, six months or more in advance of providing service At the state level, a balance sheet is provided for collecting/soliciting a prepaid fee of greater than $500, and also for maintaining custody or discretionary control of clients' assets. However, at the federal level, a balance sheet is provided only if the adviser is collecting/soliciting a prepaid fee of greater than $1,200. (67751)
When should a federal covered adviser (FCA) file an amendment to its registration?
Within 90 days of the end of its fiscal year Within 90 days after an adviser's fiscal year end, it must file an "Annual Updating Amendment." This amendment to the adviser's Form ADV reaffirms the eligibility information contained in the form and updates the responses to any other item for which the information is no longer accurate.
