65 #1
Which of the following is true regarding ETNs? A) Their value can be impacted by changes in the issuer's credit rating. B) They are suitable for conservative investors seeking income. C) As fixed-income investments, they do not have market risk. D) They are non-callable prior to maturity.
A) Their value can be impacted by changes in the issuer's credit rating. ETNs are unsecured debt obligations carrying credit risk based on the issuer's credit rating. Fixed-income investments have the market risk more commonly referred to as interest rate risk, and they are usually callable. These are sophisticated instruments that are not suitable for conservative investors.
When contrasting preemptive rights and warrants, it would be correct to state that, at issuance, A) rights have intrinsic and time value while warrants only have time value. B) rights have intrinsic and time value while warrants only have intrinsic value. C) rights have intrinsic value while warrants have intrinsic and time value. D) rights have time value while warrants have intrinsic and time value.
A) rights have intrinsic and time value while warrants only have time value. At the time of issuance, preemptive rights always offer the stock at a price below the current market thus creating intrinsic value. Although rights rarely are effective for longer than 45-60 days, that does represent time value. On the other hand, warrants are always issued with an exercise price above the current market (no intrinsic value) but do have time value.
If a publicly traded corporation was going to sell a wholly-owned subsidiary, the information would be made available through the filing of a Form A) 8-K B) 10-Q C) 13-F D) 10-K
B) 10-Q The Form 8-K is filed with the SEC within 4 business days of any one of a number of significant actions, including the sale of a significant asset such as a wholly-owned subsidiary.
Section 403 of the USA Act states that the Administrator may, by rule or order, require the filing of any sales and advertising literature addressed or intended for distribution to prospective investors, including clients or prospective clients of an investment adviser unless the security or transaction is exempted by Section 402 or is a federal covered security. This would include any circulars form letters investment adviser's website prospectus A) I, II, and III B) I, II, III, and IV C) III and IV D) I and II
B) I, II, III, and IV
Under the NASAA Model Rule on Business Continuity and Succession Planning, which of the following investment advisers should be most concerned about succession planning? A) Finest Financial Advisers, Incorporated B) Jeremy's Financial Planning and Advice, organized as a sole proprietorship C) The Four Partners Advisory Service D) Bob and Ted's Excellent Advice, LLC
B) Jeremy's Financial Planning and Advice, organized as a sole proprietorship
You have a client who is not covered under an employer-sponsored retirement plan and has been contributing the maximum to her traditional IRA. She has just informed you that she won $1 million in the lottery, plans to continue working, and would like to continue to contribute to her IRA. Which of the following statements is correct? A) She may continue to contribute, but her contribution will not be tax deductible. B) She may continue to contribute and her contribution will be tax deductible. C) Her income for the year exceeds the allowable limit for making a contribution. D) She may continue to contribute, but only a portion of her contribution will be tax deductible.
B) She may continue to contribute and her contribution will be tax deductible.
Which of the following items would be found on a family balance sheet? A) Income taxes paid B) Spouse's engagement ring C) Dividends and interest received D) Annual salary
B) Spouse's engagement ring A balance sheet, whether for a family or a business, shows assets and liabilities, not income and expenses. The ring is certainly an asset; the others are income or expenses.
An analyst uses the dividend growth model to assist in determining appropriate stocks to recommend. This analyst would consider all of the following factors EXCEPT A) current dividend B) market capitalization C) growth of the dividend D) required rate of return
B) market capitalization The classic definition of the dividend growth model is "a stock valuation model that deals with dividends and their growth, discounted to today." The market capitalization is the number of outstanding shares multiplied by the current market price per share and has nothing to do with the company's dividend policies. U12LO6
Under the Uniform Securities Act, prepaid advisory fees must be detailed in the advisory contract may not exceed 2% of the customer's deposited assets in excess of $500 for 6 months or more of service require the adviser's balance sheet to be included in the brochure may never be accepted A) I, II, III, and IV B) II and IV C) I and III D) I, II, and III
C) 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.
The registration of an investment adviser would automatically register which of the following as investment adviser representatives? Directors Officers Partners A) I and III B) I and II C) I, II, and III D) II and III
C) I, II, and III Section 202 (a) of the Uniform Securities Act states, "Registration of an investment adviser automatically constitutes registration of any investment adviser representative who is a partner, officer, or director, or a person occupying a similar status or performing similar functions." I would have preferred that the question indicate that these individuals are acting in a capacity that would require their registration, but on the exam, it probably won't be that clear.
The Conference Board releases information about the economy on a periodic basis. Included are a number of different indicators. These indicators can be used to predict how the economy as a whole might change. Which of the following would be considered a leading indicator? A) Gross domestic product B) Industrial production C) Stock prices as measured by a broad index such as the S&P 500 D) CPI for services Explanation
C) Stock prices as measured by a broad index such as the S&P 500 The stock market, which anticipates economy activity, is a leading economic indicator. Industrial production is a coincident, or current, economic indicator. CPI for services is a lagging indicator. GDP is not included in the Conference Board's list of economic indicators.
Which of the following circumstances would require an investment adviser to notify all clients of the firm? A) The investment adviser opens a branch office in another state. B) The investment adviser acquires the accounts of another firm. C) The investment adviser hires another partner for the firm. D) A partner of the firm was disciplined by the firm.
C) The investment adviser hires another partner for the firm. The investment adviser must disclose to the client any change in the members of a partnership. The adviser must notify only those clients whose accounts were obtained. The adviser does not need to notify existing clients of the new accounts. Internal disciplinary actions generally do not have to be reported to clients.
An advantage of structuring a business operation as an S corporation rather than a C corporation would be A) simplicity when raising capital through a public offering B) limited liability C) avoiding double taxation D) the C corporation is limited to a maximum of 100 shareholders while no such limit exists for the S corporation
C) avoiding double taxation Because an S corporation is taxed like a partnership, all earnings (or losses) flow directly through to the shareholders. This avoids the double taxation inherent in receiving a share of the profits (through dividends) from a C corporation. It is the S corporation that is limited to 100 shareholders. That is why it is not suitable for raising capital through a public offering. The shareholders of both S and C corporations enjoy the benefit of limited liability.
A firm is registered as an investment adviser under the Investment Advisers Act of 1940. It has decided to raise its annual management fee from $1,500 to $1,800 and require that it be paid 1 year in advance instead of quarterly. The firm would A) be in violation of the law that prohibits pre-payments more than 6 months in advance B) need SEC permission to make this change C) now come under the requirement to include a balance sheet as part of its brochure D) continue doing business as before because the firm was already charging more than $1,200 per year
C) now come under the requirement to include a balance sheet as part of its brochure For federal covered investment advisers, a prepayment in excess of $1,200 and for periods of 6 months or more in advance (substantial prepayment) requires the adviser to submit an annual audited balance sheet as part of its ADV Part 2 (and brochure). Previously, even though the firm's fee was in excess of $1,200, because it was collected on a quarterly basis, the firm did not fall under the balance sheet rule. Had this been a state-registered IA, the answer would have been the same, even though the dollar limit is $500 rather than $1,200. That is for the reason given above—the former fee was charged quarterly and the substantial prepayment definition requires both exceeding a stated dollar amount ($500 or $1,200) and it being for 6 months or more in advance.
Which of the following is unlikely to be issued at a discount? A) Commercial paper B) Zero-coupon bond C) Treasury bill D) Jumbo CD
D) Jumbo CD Jumbo (negotiable) CDs are one of the few money market instruments issued at face value. Unlike those issued at a discount, they are interest bearing.
Which of the following factors has a direct relationship to a bond's duration? A) Rating B) Coupon rate C) Yield to maturity D) Time to maturity
D) Time to maturity The longer the time to maturity, the higher (longer) the duration. Yield to maturity and coupon rate have an inverse relationship. That is, the higher the YTM and the coupon, the lower (shorter) the duration. The bond's rating is irrelevant.
XYZ Aircraft Manufacturing Corporation, based in the United States, announces a multibillion dollar order for its new jumbo jet from Fly Airlines, a Japanese-based carrier. When the sale is completed, there will be A) a credit to the current account of Japan B) no effect on the balance of trade C) a debit to the current account of the United States D) a credit to the current account of the United States
D) a credit to the current account of the United States Whenever money from a foreign source enters the United States, it becomes a credit item in the U.S. balance of payments.
Broker-dealers are required to furnish clients with a fee disclosure document. All of the following are true statements about that document except A) it must be up-to-date. B) changes to the fee schedule must be announced in advance. C) changes to the fee schedule may be shown on the firm's website. D) it must be filed with the Administrator of the state in which the broker-dealer's principal office is located.
D) it must be filed with the Administrator of the state in which the broker-dealer's principal office is located.
When an investment adviser chooses to use a solicitor, the Investment Advisers Act of 1940 requires all of the following conditions EXCEPT A) the solicitor must not be subject to disciplinary actions involving finance or dishonesty B) the solicitor must provide the customer with a copy of the investment adviser's brochure C) either the solicitor or the adviser must disclose to the customer any additional costs of providing advisory services due to solicitor involvement D) the solicitor must register with the SEC as an investment adviser
D) the solicitor must register with the SEC as an investment adviser
An investor begins contributing $600 on the third day of each month to a purchase plan for the KAPCO Total Return Fund. For the first six months, the per share prices were: $10 $12 $15 $20 $12 $8 What is this investor's breakeven point? A) $11.80 per share B) $12.50 per share C) $8.00 per share D) $12.83 per share
A) $11.80 per share This is a dollar cost averaging question. This investor has purchased a total of 305 shares with a total cost of $3,600. That makes the average cost per share $11.80. A sale of the shares at that price will cause the investor to break even.
A client has a TIPS with a coupon rate of 3.5%. The inflation rate has been 4% for the last year. What is the inflation-adjusted return? A) -0.50% B) 4.00% C) 3.50% D) 7.50%
C) 3.50% Treasury Inflation Protected Securities (TIPS) adjust the principal value each 6 months to account for the inflation rate. Therefore, the real rate of return will always be the coupon.
Which of the following would be considered unethical under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers? A) An investment adviser discloses in its brochure that, from time to time, it may sell securities recommended to clients directly out of the firm's inventory. B) An investment adviser representative receives an order to buy XYZ stock from an advisory client and simultaneously recommends that another advisory client sell that stock in an agency cross transaction. C) A loan is made to an investment adviser representative by one of her clients who happens to be the chief loan officer where she maintains her principal banking relationship. D) An investment adviser varies the annual fee based upon each client's assets under management, charging less for those with higher balances and more for those meeting the account minimum.
C) A loan is made to an investment adviser representative by one of her clients who happens to be the chief loan officer where she maintains her principal banking relationship. It is an unethical and prohibited business practice for investment advisers and their representatives to borrow money from clients who are not in the business of lending money. In this case, the loan officer is the one who is doing the lending, not the bank. IAs are permitted to base their fees on the amount of assets under management, generally charging a lower percentage to those with higher balances. IAs are permitted to act as principals in recommended trades, but appropriate disclosure must be made. In an agency cross transaction, a recommendation may be made to either, but not both, parties to the trade.
A portfolio manager whose universe of stocks is those with market caps of $4 - $6 billion would most likely be graded against A) Dow Jones Composite Average. B) S&P 500. C) S&P 400. D) Nasdaq 100.
C) S&P 400.
A 50-year-old client with modest means wants to construct an investment program. He has no investment experience, his major consideration is saving for retirement, and he has limited risk tolerance. Which of the following would you recommend? A) Call options on the S&P 500 Index B) Aggressive growth mutual funds C) High-grade bond fund D) Growth and income mutual funds
D) Growth and income mutual funds Mutual funds that offer growth and income best meet the client's needs, offering growth for retirement and current income. A high-grade bond fund would not offer the growth that the client needs for retirement, although the fund would supplement the modest income of the client. A client of modest means may not be able to sustain the risk of principal that accompanies an aggressive growth fund; in addition, this alternative is unsuitable because the client has limited risk tolerance. Index options are a speculative investment.