Attempt 1
Which of the following investments gives the investor the least exposure to reinvestment risk? A) Common stock in an electric utility B) Preferred stock in a growth company C) Treasury STRIPS/zero-coupon bonds D) Treasury notes
C) Treasury STRIPS/zero-coupon bonds Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) are zero-coupon bonds paying no interest. Thus, there is no income to reinvest during the holding period and therefore no reinvestment risk. U11LO1
When advising an investor on the purchase of mutual funds, the registered representative should instruct the client to compare open-end mutual funds with the same objective for all of the following EXCEPT A) costs B) services offered C) liquidity D) portfolio turnover
C) liquidity Shares in an open-end investment company (mutual fund) are liquid. U14LO10
Which ratio would be looked at to determine the liquidity of a corporation? A) Debt/equity B) Dividend payout C) Price/earnings D) Current
D) Current A company's current ratio is its current assets divided by its current liabilities. If their current ratio is strong, they have a highly liquid position. U10LO7
An interest in which of the following is a security under the Uniform Securities Act? I. Preorganization certificate II. Certificate of deposit for a security III. Oil and gas drilling program IV. Cattle feeding program A) I only B) II and III C) III only D) I, II, III, and IV
D) I, II, III, and IV The best strategy is to memorize the shortlist of things that are not securities rather than try to remember all of the things that are. U4LO1
The Investment Company Act of 1940 does which of the following? A) Prescribes procedures for the establishment of investment companies B) Sets rules for the registration of investment advisers C) Governs the issuance of new issues D) Regulates the secondary market
A) Prescribes procedures for the establishment of investment companies The Investment Company Act of 1940 requires all investment companies to register with the SEC as such and be regulated under the act. The companies are still subject to all the other applicable securities acts. However, the Investment Company Act of 1940 provides additional regulation to ensure that investors are fully informed and fairly treated by the management of investment companies. U14LO1
Which of the following statements regarding corporate zero-coupon bonds is TRUE? A) The discount is in lieu of periodic interest payments. B) They are beneficial for investors in higher tax brackets C) They have lower price volatility than other bonds D) Interest is paid semiannually.
A) The discount is in lieu of periodic interest payments. The investor in a corporate zero-coupon bond receives the return in the form of growth of the principal amount over the bond's life. The discount is accreted annually and the investor pays taxes yearly on the imputed interest creating "phantom income." U13LO8
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) an 11.1% premium to NAV. C) a 12.5% discount 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
If a client in the 30% marginal income tax bracket can earn an after-tax rate of return of 7% when the estimated inflation rate during the holding period of an investment is 4%, the client's real rate of return is A) more than 7% B) 10% C) 7% D) less than 7%
D) less than 7% Real return reduces nominal return by an inflation factor. Thus, the client's real return must be less than 7%. U23LO2
The term "sale" includes which of the following? I. A contract of sale II. A contract to sell III. The disposition for the value of an interest in a security IV. A warrant (for common stock of the issuer) given with the purchase of a bond A) I, II, III, and IV B) I, III, and IV C) I and III D) II and III
A) I, II, III, and IV "Sale," used interchangeably with "sell," is defined in the Uniform Securities Act as any contract of sale, any contract to sell, and any disposition of a security or interest in a security. Because the distribution of the warrant is conditional upon the purchase of the bond, the acquisition of the warrant is considered to be a sale. U5LO1
Under the USA, all of the following issues would be exempt from registration EXCEPT A) stock issued by an insurance company not offering policies in this state B) bonds issued by the city of New Orleans C) an investment contract issued in connection with an employee stock purchase plan D) stock issued by savings and loan association authorized to do business in this state
A) stock issued by an insurance company not offering policies in this state Had the insurance company been authorized to do business in this state, its securities offering would be exempt. U4LO3
A fraudulent transaction was initiated by an agent in Indiana by contacting a client residing in Iowa. After evaluating the offer, the client agreed to purchase the recommended security while vacationing in Florida. Which Administrator(s) has (have) jurisdiction? I. The Indiana Administrator II. The Iowa Administrator III. The Florida Administrator A) I only B) I, II, and III C) I and II D) II only
B) I, II, and III Activities that originate in a state, are directed into a state, or are accepted in a state fall under the jurisdiction of the Administrator of each of those states. U5LO1
All of the following positions expose a customer to unlimited risk EXCEPT A) Short 2 XYZ uncovered calls B) Short 200 shares of XYZ and short 2 XYZ puts C) Short 200 shares of XYZ D) Short 2 XYZ uncovered puts
D) Short 2 XYZ uncovered puts A put writer will lose money if the stock goes down, but the furthest it can drop is to zero. Therefore, the potential loss is not unlimited. All of the other positions expose the client to unlimited risk because a loss will occur if the stock price rises. U16LO5
It would be correct to state that I. the specialist stands ready to buy or sell stock on the floor of an exchange in an effort to keep an orderly market II. the specialist stands ready to buy or sell stock on the over-the-counter market in an effort to keep an orderly market III. the market maker stands ready to buy or sell stock on the floor of an exchange in an effort to keep an orderly market IV. the market maker stands ready to buy or sell stock on the over-the-counter market in an effort to keep an orderly market
I and IV The specialist performs his activities on the floor of an exchange, while the market maker performs a similar function in the OTC market. Note: The term specialist has been replaced by designated market maker (DMM), but specialists might still appear on the exam. U22LO3
Under the Uniform Securities Act, broker-dealers are required to prepare and maintain certain records. Which of the following statements reflects the position of the act? I. A firm registered in more than one state must meet the record-keeping requirements of the state where its principal office is located, even if those are less comprehensive than those of some of the other states where it is registered. II. A firm must maintain records of every email sent from the office by agents. III. A broker-dealer's website is considered advertising. IV. Once a broker-dealer's trade blotter has been posted, it may be discarded. A) I and III B) I and II C) II and IV D) III and IV
A) I and III Regardless of the recordkeeping requirements of other states, the only requirements that must be met are those of the state where the principal office is located. Among the items of advertising requiring maintenance of records is a firm's website (personal emails aren't business-related and doesn't need to be retained). Please note that in most cases, broker-dealers are registered with the SEC in addition to the states in which they do business. In that case, the recordkeeping requirements of the SEC trump those of any state. U3LO5
Under state law, the registration of an agent of a broker-dealer is in effect until A) the last day of his employer's fiscal year B) December 31, unless renewed C) withdrawn by the agent or revoked by the Administrator D) the anniversary of initial registration
B) December 31, unless renewed Under state law, registrations for broker-dealers, agents, investment advisers, and investment adviser representatives expire on December 31 of each year, unless renewed. U3LO5
The price of which of the following will fluctuate most with a change in interest rates? A) Money market instruments B) Long-term bonds C) Short-term bonds D) Common stock
B) Long-term bonds Long-term debt prices fluctuate more than short-term debt prices as interest rates rise and fall. U13LO10
Alex Alexander is planning on registering as an agent for a broker-dealer. Which of the following would be the least likely requirement for a successful application? A) Taking and passing an examination B) Submitting fingerprints C) Filing an application for registration D) Paying the filing fees
B) Submitting fingerprints Fingerprints are not a specific requirement of the Uniform Securities Act. U3LO5
If a bond has a long duration, it will A) be less sensitive to small changes in interest rates than a bond with a shorter duration B) be more sensitive to small changes in interest rates than a bond with a shorter duration C) be relatively unaffected by small changes in interest rates D) continue paying interest into perpetuity
B) be more sensitive to small changes in interest rates than a bond with a shorter duration Duration measures how sensitive a bond will be to a small change in interest rates. The longer the duration of a bond, the more volatile (sensitive to interest rate changes) it will be. U13LO11
As used in the Uniform Securities Act, the term institutional investor would NOT include A) savings institutions B) individuals qualifying as accredited investors C) investment companies D) employee benefit plans with assets of no less than $1 million
B) individuals qualifying as accredited investors Institutional investors include banks, savings institutions, insurance, and investment companies, and employee benefit plans. Although each of these is included in the term accredited investor, that term, as used in federal law (the term is not found in the USA), also includes certain individuals, and they would never be considered institutional investors under the USA. U4LO3
The first of the federal securities acts was the Securities Act of 1933. This act requires persons selling a new offering to their clients to A) deliver a preliminary (red herring) prospectus prior to the sale B) deliver a copy of the registration statement no later than with confirmation of the sale C) deliver an effective (final) prospectus no later than with confirmation of the sale D) be properly registered prior to making the offer
C) deliver an effective (final) prospectus no later than with confirmation of the sale The Securities Act of 1933, sometimes referred to as the "paper act," requires that an effective, or final, prospectus be delivered to all purchasers of a new offering no later than with confirmation of the sale. It is not required that purchasers receive a red herring prospectus, and only the SEC gets copies of the registration statement. U4LO3
Jim Thomas contracts with XYZ Advisory Services for the design of a financial plan and investment advice. He pays an up-front fee when the contract is signed and receives XYZ's disclosure brochure at that time. After 3 days, Jim decides to cancel the investment advisory service with XYZ. According to the Uniform Securities Act, which of the following statements is TRUE? A) The contract is binding, and XYZ has no obligation to return any fees collected. B) The advisory firm must cancel the contract but may keep all fees collected. C) The advisory firm must cancel the contract and return all fees collected. D) The advisory firm must cancel the contract but can keep a proportionate amount of the fee as compensation for services performed by the cancellation date.
D) The advisory firm must cancel the contract but can keep a proportionate amount of the fee as compensation for services performed by the cancellation date. Because the brochure was delivered at the time of the signing of the contract, the client may cancel without penalty within 5 business days. The firm must return all the up-front fees collected except for an amount that is proportionate to the time advisory services were rendered. This is commonly known as the 48-hour rule because anytime the client does not receive the adviser's brochure at least 48 hours prior to entering into the contract, this refund right is in effect. U6LO4
According to the ethical guidelines set forth in the NASAA Statements of Policy and Model Rules, which of the following statements regarding discretion is CORRECT? I. An agent of a broker-dealer must have written prior discretionary authorization prior to effecting discretion in a client's account. II. An agent of a broker-dealer must receive written discretionary authorization within 10 business days of the first discretionary transaction in the account. III. An investment adviser representative must have written prior discretionary authorization before effecting discretion in a client's account. IV. An investment adviser representative must receive written discretionary authorization within 10 business days of the first discretionary transaction in the account.
I and IV One way in which the use of discretionary authority differs between agents and IARs is that agents may never exercise discretion without prior written authority. IARs must receive the written consent no later than 10 business days after the first discretionary transaction in the account. U7LO2
Which of the following statements regarding the handling of discretionary accounts are TRUE? I. Discretionary accounts must be reviewed frequently by the designated supervisory person. II. An investment adviser representative may decide, without discretionary authority, the security to buy or sell and the amount to buy or sell. III. A husband or wife may at any time exercise discretionary authority in the spouse's account without specific written authorization. IV. An investment adviser representative may decide, without discretionary authority, the time at which to execute a trade. A) II and IV B) I and IV C) I and III D) II and III
B) I and IV Discretionary accounts must be reviewed frequently by the designated supervisory person, and an investment adviser representative may decide both the time and the price at which to execute a trade without discretionary authority. Only if he is to decide action (whether to buy or sell), asset (what to buy or sell), or amount (how much to buy or sell) is discretionary authority required. U7LO2
Under the Investment Advisers Act of 1940, which of the following statements regarding custody of a client's funds is (are) TRUE? I. Funds may be deposited in any account as long as the adviser is named as trustee for the client and adequate records are maintained. II. Clients must be kept informed in writing of the location of their funds and securities and of any changes. III. Clients must receive quarterly statements from the adviser itemizing the funds and securities in custody and all transactions on the account during the period. A) I and II B) II and III C) I and III D) I only
B) II and III The specifications for the account are such that using the term "any account" is incorrect. When advisers have custody, they must (1) ensure the safekeeping of client securities through segregation and identification by client; (2) deposit client funds into bank accounts containing only client funds, naming the adviser as trustee; (3) keep adequate records of all funds, securities, and transactions; (4) provide written notification of the location of securities and funds and changes in the same; (5) report quarterly to the client, itemizing the funds or securities in possession and any transactions that have taken place; and (6) arrange for an annual surprise audit by an independent public accountant that reports the results to the SEC. U7LO2
Which of the following statements about capital gains are TRUE? I. The minimum holding period required to qualify for long-term capital gains treatment is 1 day longer than 12 months. II. The highest federal income tax rate on long-term capital gains is less than the highest federal income tax rate on ordinary income. III. If an investor holds the stock for 12 months or less and has no other transactions, any gain on the sale of the stock is taxed at the same rate as ordinary income. A) I and III B) II and III C) I, II, and III D) I and II
C) I, II, and III If an investor holds stock for more than 12 months and sells it for a gain, the gain will be treated as a long-term capital gain. The advantage of long-term capital gains is that the maximum tax rate on long-term capital gains is lower than the maximum rate on ordinary income. If an investor holds stock for 12 months or less, though, any gain will be considered a short-term capital gain and will be taxed at the same rate as ordinary income. U21LO3
