Final - Series 65

A client of Wall Street Wealth Management (WSWM), a federal covered investment adviser, calls the IAR handling the account and gives instructions to use some of the surplus cash in the account to purchase 500 shares of RMBM, a small-cap stock traded on the Nasdaq Stock Market. Prior to submitting the order, the IAR checks with a supervisor and learns that WSWM has 1,000 shares of RMBM in its proprietary account and is looking to halve the position. If, instead of forwarding the order to the broker-dealer who normally handles trade executions for this client, WSWM filled the order out of its own account, A) it would be permissible as long as consent was obtained and written disclosure of the firm's capacity was disclosed prior to the completion of the transaction. B) it would be permissible only if consent was obtained and written disclosure of the firm's capacity was disclosed prior to execution. C) WSWM would be engaging in a prohibited practice. D) because it was an unsolicited transaction, the only required disclosure would be the firm's capacity on the trade confirmation.

A

A federal covered investment adviser may enter into a contract with a client that provides for performance-based compensation under all of the following conditions except: A) disclosure that the performance compensation may create an incentive for the adviser to take greater risks. B) the client must meet certain minimum financial standards. C) the formula used to calculate compensation includes realized capital losses and unrealized depreciation. D) compensation is based on gains, less losses, for a period of no less than one year.

A

Among the differences between an investment in a limited partnership offering and in a corporation is that A) limited partnership offerings do not pay dividends; corporations do. B) only corporations issue securities. C) only corporations are organized to run a business. D) limited partners take a more active role in the management of the enterprise than do stockholders

A

If an investment adviser wishes to engage in an agency cross transaction involving advisory clients, it would be prohibited from A) recommending the trade to both sides. B) obtaining written consent from the parties prior to engaging in agency cross transactions. C) representing both the buyer and the seller. D) earning a commission on both the purchase and the

A

Kapco Advisers registers with the Administrator on April 1. Pete Patel, an IAR with Kapco, registers on the same day. Both of them file renewal papers, accompanied by the appropriate fees, on March 31 of the following year. Which of the following statements are true? Kapco's renewal was timely. Kapco's renewal was late. Patel's renewal was timely. Patel's renewal was late. A) II and IV B) I and III C) I and IV D) II and III

A

Which of the following best describes a global mutual fund? A) The portfolio consists of securities of companies domiciled throughout the world, including the United States. B) The investment adviser under contract to the fund uses a team of managers who are located at the various financial capitals around the globe. C) The portfolio consists of securities of companies domiciled throughout the world, excluding the United States. D) The portfolio consists of a global selection of asset classes, i

A

A mutual fund must redeem its tendered shares within how many days after receiving a request for their redemption? A) 7 B) 3 C) 5 D) 10

A)

Under the Investment Company Act of 1940, an investment company may initially retain the services of an investment adviser only with approval of the majority vote of A) the outstanding shares and a majority of that portion of the board of directors that is considered noninterested members. B) the board of directors. C) the noninterested directors. D) the outstanding shares.

A) This question asks about the initial contract. That contract is always for two years and requires the approval of a majority vote of the outstanding shares (the shareholders) and a majority vote of that group of board members who are noninterested. You should also know that, when it comes to renewal (done annually after the initial two-year contract), once again, a majority vote of that group of board members who are noninterested is required, along with either a majority of the total board or a majority of the outstanding shares. The one constant is the approval of the noninterested board members.

Under the Investment Company Act of 1940, which of the following qualify for a discount in a mutual fund's sales charge? Mr. and Mrs. Jones each purchase $5,000 worth of shares; the fund offers a volume discount for a single purchase of $10,000. Neighbors Jan, Mickey, and Lee form an investment club; Jan places an order for $10,000 worth of shares to be held in their three names. The fund offers a volume discount for a $10,000 purchase. Allen is the vice president of a firm under contract to pro

A) A husband and wife and all children under 21 qualify as a single person for the purposes of obtaining a quantity discount, as do corporations formed for a purpose other than obtaining such a discount and employee benefit plans. But other associations acting collectively, such as the members of an investment club, do not qualify as a single person for such a purpose. Discounts may also be made to directors, officers, partners, employees, or sales representatives of the fund, its investment adviser, or its principal underwriter.

Tamika is an investment adviser representative with Financial Engineers, LLC, a covered investment adviser. The firm uses an investment policy statement to help design financial plans for their clients. One of Tamika's current clients plans to purchase a new boat 7 months from now. When using the IPS, this would be considered A) an investment constraint B) an investment goal C) a capital need D) a financial objective

A) Investment constraints are obstacles or restrictions that must be met in order to meet objectives. In this case, we are dealing with a liquidity constraint—in 7 months, cash will be necessary to make the purchase.

Which of the following mutual fund share classes generally has a 1% CDSC that is eliminated once the shares have been held more than one year? A) Class C B) Class A C) Class B D) Class 1%

A) It is the Class C shares that have no front-end load, but they do have a 1% CDSC for a period of one year.

The capital asset pricing model (CAPM) is based on several limiting assumptions. Which of the following statements is correct regarding the CAPM? A) The CAPM assumes that the optimal portfolio should be the one with the highest Sharpe ratio of all possible portfolios. B) The CAPM does not assume that the expected excess returns for the market are known. C) The CAPM does not assume that investors have access to the same information. D) The CAPM assumes that investors' expectations regarding ris

A) The CAPM assumes that investors should construct a portfolio with the highest Sharpe ratio because that offers the highest risk-adjusted return. It also assumes that the expected excess returns for the market are assumed to be known in that investors have access to the same information. As well, it assumes that returns are normally distributed and investors' expectations for risk and return are identical.

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, a person who has violated the prohibition against insider trading is liable for a civil penalty of A) 3 times the amount of the profit gained or loss avoided on the transaction B) the amount of the profit gained or loss avoided on the transaction C) twice the amount of the profit gained or loss avoided on the transaction D) 10 times the amount of the profit gained or loss avoided on the transaction

A) The Insider Trading and Securities Fraud Enforcement Act of 1988 provides that the SEC may seek treble (triple) damages through the courts for violations of the insider trading rules. This means that the SEC may seek court action that imposes civil penalties of 3 times the profit gained or 3 times the loss avoided as a result of inside information.

With regard to a state-registered investment adviser using Form ADV, Part 2 as its brochure, it would be correct to state that A) it is filed through the IARD system. B) it must be delivered to all new clients. C) if requested by a client, it must be sent within 5 days of the request. D) it must be delivered not later than 48 hours after entering into an advisory agreement with a new client.

A) The Investment Adviser Registration Depository (IARD) is an electronic filing system that facilitates investment adviser registration, regulatory review, and the public disclosure information of investment adviser firms. The IARD is used for filing Form ADV, Parts 1 and 2. If the "brochure" is not delivered at least 48 hours before (not after) the signing of the agreement, the client has a five-day penalty-free withdrawal right. Annually, Part 2 (brochure), or a summary of material changes, must be delivered within 120 days of the end of the adviser's fiscal year (unless there have been no material changes). The brochure does not have to be delivered to all clients; those purchasing impersonal advice for less than $500 per year are exempt. There is also an exemption for delivery to investment company clients, but that would not apply here because if the adviser had any of those, it would have to be federal covered rather than state-registered.

A country decides to nationalize its sugar industry. This is an example of A) political risk. B) financial risk. C) business risk. D) sovereign risk.

A) The decision to take over private enterprise is a political one. The nationalization of the sugar industry happened in Cuba after the Castro regime took over. Business risk is generally related specifically to actions taken by the company, such as bad management decisions. Financial risk is also company related, such as when the company incurs more debt than it can handle. Sovereign risk is when the investment is made in the country itself (buying its bonds) not private enterprise.

A corporation calls in a portion of its long-term debt at 101. This will have the effect of decreasing working capital increasing working capital decreasing net worth increasing net worth A) I and III B) I and IV C) II and IV D) II and III

A) Working capital is computed by subtracting current liabilities from current assets. Using a current asset, like cash, to call in the bonds, reduces those assets with no corresponding reduction to current liabilities. Whenever a bond is called at a premium, net worth is reduced by that premium.

Which of the following best describes a Yankee bond? A) A U.S. dollar-denominated bond issued by a non-U.S. entity inside the United States B) A U.S. dollar-denominated bond issued by a U.S. entity inside the United States C) A U.S. dollar-denominated bond issued by a U.S. entity outside the United States D) A U.S. dollar-denominated bond issued by a non-U.S. entity outside the United States

A) Yankee bonds are issued by non-U.S. entities in marketplaces inside the United States. The bonds are issued in U.S. dollars, meaning these foreign issuers will have currency risk if the dollar drops in value against their local currency.

Which of the following is true of a zero-coupon bond? The rate of return is locked in. There is no reinvestment risk. The imputed interest is taxed as ordinary income on an annual basis. A check for the interest is paid at maturity. A) I, II, and III B) I only C) I, III, and IV D) I and IV

A) Zero-coupon bonds pay no periodic interest and are always issued at a discount from par. The appreciation of the zero from its discounted purchase price to its face value is thought of as interest to the bondholder, but this annual "phantom income," so named because you don't receive it, is taxed as ordinary income on an annual basis. When the bond is purchased, the investor locks in that yield, and with nothing to reinvest, there is no reinvestment risk. At maturity, the investor receives the face value ($1,000) rather than a check for the interest.

A state-registered investment adviser would like to employ the services of an individual as a solicitor to help bring in more business. The solicitor will be compensated by receiving a percentage on all assets placed under management. In order to do this, all of the following must be done except A) the solicitor must be registered as an IAR in order to receive compensation based upon assets under management. B) clients must sign the advisory contract at the same time as they receive the investment adviser's brochure. C) disclosure that compensation is being paid to the solicitor must be made to the client. D) the investment adviser is responsible for supervising the activities of this solicitor.

B

Arthur M. Munger is the sole owner of Munger's Meritorious Planning (MMP). MMP does full service financial planning, including investment securities. Arthur is registered as an agent with Fast Execution Brokers (FEB) and directs all client securities transactions to FEB. Arthur decided it is time to get registered as an investment adviser representative so that he can earn fees for giving advice. Arthur is a good friend of the manager of the local branch of National Investment Advisers, Inc. (NIAI), and decided to speak to his friend about becoming an IAR. Under the provisions of the Uniform Securities Act, Arthur would be told A) he cannot be an agent for one firm and an IAR for another; both registrations must be with the same firm. B) if he wishes to become an investment adviser representative, he must affiliate with a registered investment adviser. C) if he wishes to become an investment adviser representative, he must affiliate with a registered investment adviser and terminate his registration as an agent. D) if he wishes to become an investment adviser representative, he should affiliate with the broker-dealer where he is already an agent.

B

If an agent executes a transaction for a customer but uses the wrong account number, he should: A) inform the customer that the trade is binding but that the firm will compensate for any losses. B) report the mistake to the manager. C) transfer the shares into the correct customer account. D) delay sending the confirmation to the customer until the error is rectified.

B

The most common form of investment vehicle for venture capital is A) the venture capital fund of funds. B) the limited partnership. C) the corporate venture capital funds. D) the limited liability company.

B

When discussing employment and production, which of the following industries are typically more affected by a recession? Capital goods Consumer durable goods Consumer nondurable goods Services A) II and IV B) I and II C) III and IV D) I and III

B

Which of the following statements regarding the Sharpe ratio is most accurate? A) The lower the Sharpe ratio, the better the risk-return tradeoff. B) It measures the portfolio's return over and above the risk-free rate divided by the standard deviation of the portfolio's returns. C) It is not a risk-adjusted metric. D) It measures the portfolio's return over and above the 10-year corporate bonds rate.

B

Being concerned about price volatility, a bond investor wishes to compute the duration of a bond being considered for her portfolio. Which of the following is not a necessary component of that calculation? A) Current market price B) Rating of the bond C) Time until maturity D) Coupon rate

B)

Which of the following is most likely to be regarded as a defensive stock? A) A stock selling at an extremely high PE ratio B) A food company stock C) A stock with a strong cash position and little debt D) An aerospace stock

B) A defensive stock maintains future earnings that are likely to withstand an economic downturn. Typical examples are stocks of those firms that supply basic consumer necessities such as foodstuffs. A stock selling at an extremely high PE ratio is indicative of a speculative company or one that can decline in value rapidly.

Each of the following statements about postregistration provisions is true except A) a correcting amendment to the Form ADV must be filed with the Administrator if any information filed becomes inaccurate or incomplete. B) the securities Administrator does not have the authority to conduct an onsite examination of an investment adviser registered in his state if the adviser does not have an office in that state. C) investment advisers must comply with recordkeeping rules. D) a registered investment adviser may be required to file advertisements.

B) Administrators have the authority to conduct an onsite examination of a registered investment adviser, even if there is no place of business maintained in the Administrator's state. Under the act, Administrators may require the filing of advertising used by broker-dealers and investment advisers, who must also comply with certain recordkeeping requirements and file correcting amendments.

An investment policy statement would likely include expected returns of the recommended strategy and the expected range of these returns recommended allocations among differing asset classes strategies used for selecting specific stocks in the equity portion of the portfolio disclosure of the fees that the adviser will earn for implementing the recommended strategy A) II, III, and IV B) I, II, and III C) I only D) I and II

B) An investment policy statement prepared for clients delineates the allocation percentages for each asset class and the expected returns from each class, and outlines strategies that may be used for timing the market and choosing specific investments within each class, but fees the adviser may earn are not included in the policy statement; they are disclosed separately

One of your customers notices that the short interest on KAPCO common stock is high. When she asks you for an interpretation, you should tell her that this signals A) that a change in interest rates is coming B) a bullish outlook C) a shortage of enough stock to go around D) a bearish outlook

B) Even though short interest represents the number of share sold short (typically by bearish investors), technical analysts believe that when it gets high, it is a bullish indicator. Each share that has been sold short must be replaced (covered) at some point. To replace the stock, an investor must go into the market to buy that stock. When all of those short sellers have to buy back the stock they shorted, it puts upward pressure on the price of that stock.

XYZ Corporation's A-rated convertible debenture is currently selling for 90. If the bond's conversion price is $40, what is the parity price of the stock? A) $40.00 per share B) $36.00 per share C) $22.50 per share D) $44.00 per share

B) If the bond's conversion price is $40, it means the bond is convertible into 25 shares ($1,000 par value divided by the $40 conversion price). Parity means equal, so what does each share have to be worth so that 25 of them are equal to $900? Remember, bonds are quoted as a percentage of the $1,000 par value, so a price of 90 means $900. Dividing $900 by 25 shares results in a parity price of $36. That does not mean the stock is selling for $36 per share (probably a bit less), but at $36, holding the bond, or converting into the stock, gives the investor equal value. Some students quickly see that the bond is 10% below its par value, so the stock—to be equal—must be 10% below the conversion price. Take 10% off $40 and the result is $36. Either way works.

According to the Uniform Securities Act, each of the following is a security except A) a limited partnership in an oil and gas exploration program. B) a contract in soybean futures. C) an interest in a condominium project with a rental pool. D) a U.S. Treasury bill.

B) Interests in a condominium complex that has a rental pool feature, U.S. Treasury bills, and limited partnership interests in oil and gas exploration programs are securities under the USA. The USA excludes certain financial instruments from the term security, such as term and whole insurance policies, commodity futures contracts, and collectibles.

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? A) Once a broker-dealer's trade blotter has been posted, it may be discarded. B) A broker-dealer's website is considered advertising. C) A firm registered in more than one state must meet the recordkeeping requirements of the state where its principal office is located, even if those requirements are less comprehensive than those of some of the other states where it is registered. D) A firm must maintain records of every email sent from the office by agents.

B) Personal email sent by agents that is not business related does not have to be retained. Any broker-dealer registered in more than one state is also registered with the SEC. Remember, unlike investment advisers who register either with the SEC or the state(s) unless classified as an intrastate broker-dealer, BDs register with both. In that case, it is the recordkeeping requirements of the SEC that must be met. This broker-dealer's trade blotter must be kept for at least six years. In the case of an intrastate BD, the requirement is three years. In any case, it is not discarded shortly after posting.

Which of the following statements regarding preemptive rights is true? A) Both common and preferred stockholders have the right to subscribe to a rights offering. B) Preferred stockholders do not have the right to subscribe to a rights offering. C) Common stockholders do not have the right to subscribe to a rights offering. D) Neither common nor preferred stockholders have the right to subscribe to a rights offering.

B) Preferred stockholders have a preference as to liquidation and distribution of dividends, but the right to maintain a proportionate interest in the company only applies to common stock.

An IAR is doing some research on a company. When viewing the corporation's financial statements, prepaid expenses would most likely be found as A) a fixed asset on the balance sheet. B) a current asset on the balance sheet. C) a current liability on the balance sheet. D) an expense on the income statement.

B) Prepaid expenses, such as rent, insurance, and postage, are considered current assets and are shown as such, sometimes under the listing "other assets." The amounts paid for those expenses will not appear on the income statement until the specific item is actually used. For example, if a company pays its property insurance premiums six months in advance, it isn't until the next premium is paid that the prepaid expense comes off the balance sheet and is reflected as an actual expense.

An analyst is reviewing the financial statements of Penta, Ltd. Over the period shown, Penta has sales of $5 million, a net profit of $1.5 million, annual bond interest charges of $500,000, and total assets of $2 million. Penta's net profit margin is A) 25%. B) 30%. C) 35%. D) 20%.

B) Profit margin = net profit ÷ sales = $1.5 million ÷ $5 million = 30%. Profit margin is based on operating costs. Because interest on bonds is a fixed expense, it is not included in the computation. As is often the case, there is more information supplied than needed.

Those investors wishing to examine a document that would probably give them the most information about a corporation's current and planned operations would seek out A) Form 10-K. B) the annual report. C) the investor's brochure. D) the balance sheet.

B) The annual report to shareholders contains not only a complete financial report of the prior year's operations but also a statement from key personnel dealing with the company's future plans. Form 10-K does not include discussion of future business plans—it is a report of what happened over the previous fiscal year.

One measure of a corporation's liquidation value is its book value per share. When performing this computation, the value of which of the following would normally be subtracted from the corporation's net worth? Cash Wages payable Patents Preferred stock A) I and II B) III and IV C) I and IV D) II and III

B) The computation of book value per share is basically net tangible worth per share of common stock. Therefore, we subtract both the par value of the preferred stock and the value listed on the balance sheet for the intangible assets, such as patents.

In which of the following does registration of an issue become effective when ordered by the Administrator? A) Coordination B) Qualification C) Integration D) Notice filing

B) The effective date of registration by qualification is set by the Administrator. The effective date under registration by coordination is set by the SEC, and notice filing is merely the filing of certain documents in order for the registrant to be able to offer securities in that state.

Which of the following are subject to the holding period requirements of Rule 144 of the Securities Exchange Act of 1934? Registered securities held by a control person Unregistered securities held by a noncontrol person Registered securities held by a noncontrol person Unregistered securities held by a control person A) II and III B) II and IV C) I and IV D) I and III

B) The holding period requirement of Rule 144 applies to unregistered securities, no matter who the owner is.

A 64-year-old woman wishes to withdraw funds from her nonqualified single premium deferred variable annuity purchased a number of years ago. The withdrawal would be: A) subject to a 10% penalty unless annuitized. B) taxed as capital gain. C) taxed as ordinary income. D) subject to the required minimum distribution rules.

C

All of the following are characteristics of a rights offering except A) the rights are marketable. B) the subscription price is below the current market value. C) the subscription period is up to two years. D) it is issued to current stockholders.

C

Phocine and Ursus, LLC, a covered investment adviser, has a client with a large short position in PQR common stock. Their chief analyst believes that PQR is an attractive target for an acquisition. Based on this information, it might be wise for the firm to suggest this client A) take a long position in PQR. B) sell call options on PQR. C) purchase call options on PQR. D) purchase put options on PQR.

C

On a balance sheet, dividends payable would fall under the category of A) stockholders' equity. B) assets. C) current liabilities. D) fixed liabilities.

C)

Under the NASAA Model Rule on Custody Requirements for Investment Advisers, which of the following are violations of the requirements for advisers who have custody of client securities or funds? An adviser deposits client funds into its own bank account, making a careful record of the amount of funds belonging to each client. An adviser allows a CPA to make an unscheduled audit of all client securities and funds in the adviser's custody. Once a year, an adviser sends each client a report on the

C)

Rachel is an agent registered with a broker-dealer in this state. It would be prohibited for her to A) disclose to a client that a transaction in a thinly traded stock will result in a higher-than-normal commission. B) share in the profits and losses in a client account without a financial contribution to the account. C) solicit sales of a nonexempt security whose registration is not yet effective. D) execute a transaction in a discretionary account after having received the necessary documentat

C) A nonexempt security is one that is required to register. Until that security's registration is effective, no soliciting may take place. Once the proper documents have been received, discretionary trading may begin. In general, transactions in thinly traded stocks (those with little market activity) will involve higher-than-normal commissions to cover the higher costs. As long as consent has been granted by the client and the employing broker-dealer, an agent may share in the profits and losses in the client's account without the need to make a financial contribution to the account. You will notice that this is different from the FINRA rule; remember, this is a NASAA exam.

When reviewing potential securities to select for an investor's portfolio, a technical analyst would be most likely to evaluate A) the price-to-book ratio B) the management tenure C) the daily trading volume D) the price-to-earnings ratio

C) A technical analyst charts price and volume over time. The other choices are of interest to a fundamental analyst.

Which of the following statements regarding ADRs are true? The securities are vehicles used to facilitate U.S. trading of foreign securities. Dividends are received in the foreign currency. Holders have foreign currency risk. The receipts are issued by a foreign branch of a domestic bank. A) II and IV B) I, II, and III C) I and III D) I, III, and IV

C) ADRs are vehicles that facilitate U.S. trading of foreign securities. They are issued in English in the United States by domestic banks. Dividends are declared in the foreign currency but are payable to holders in U.S. dollars, which means that ADR holders are subject to foreign currency risk.

Which of the following is not a type of life insurance policy? A) Endowment policy B) Term to 65 policy C) Variable annuity policy D) Universal life policy

C) Although a variable annuity may have a death benefit provision, it is not considered a life insurance policy. One key to that is, among other things, there is no health questionnaire when purchasing an annuity. Perhaps you have never heard of an endowment policy (it is not mentioned in the LEM). This type of situation may come up on the actual exam where one of the choices is something unfamiliar to you. Don't let that cause you to lose your focus. Annuities are issued by life insurance companies, but they are not life insurance policies, so select the correct answer and move on.

Which of the following practices is prohibited under the Uniform Securities Act? A) Actively trading a security in which an unusually high trading volume has occurred B) Failing to inform the firm's principal of frequent oral customer complaints C) Offering services that an agent cannot realistically perform because of his broker-dealer's limitations D) Altering the customer's order prior to execution at the request of a customer, which subsequently results in a substantial loss

C) An agent may not offer services that he cannot perform. An agent may participate actively in trading a security in which an unusually high trading volume has occurred, provided the trading is not designed to create a false appearance of high volume. At the client's request, an agent can alter a client's order, even if the change results in a loss. An agent is only required to report written complaints to his employing principal, although it would be wise to report repeated oral complaints.

There are many sources of taxable income to an individual. Included might be money received from which of the following? Sole proprietorship Subchapter S corporation Investments Life insurance death benefit A) I, II, and III B) II and III C) I, II, III, and IV D) I and II

C) An individual can generate income from running a sole proprietorship or being a shareholder in an S corporation (the exam will possibly use the obsolete term Subchapter S). Of course, taxable income can be generated by investments in the form of dividends, interest, and capital gains. The death benefit from a life insurance policy is not subject to income tax.

Some registered investment advisers (IAs) are federal covered, while others register on a state-by-state basis. In the case of a state-registered investment adviser having its only office in Oregon with no offices in any other state, the authority of the office of the Administrator would include A) the Idaho Administrator requiring registration of IARs who make telephone calls to residents of Idaho. B) requiring the IA to renew its consent to service of process when paying the annual fee. C) requiring IARs to pass a qualification exam. D) requiring each IAR to provide a statement of financial condition.

C) As you know from being here right now, this test is required by the Administrator. What about the Idaho Administrator? Well, maybe the IARs are making five or fewer calls in any 12-month period. Maybe they are calling institutional clients domiciled in Idaho. In any event, if you have to choose between an answer that is 100% right all of the time (qualification exams) and one that is right only some of the time, go for the 100%.

Bob, age 60, has invested $17,000 in his nonqualified variable annuity over the years. The total value has reached $26,000. He wishes to withdraw $15,000 to send his son to college. What is his tax consequence on the withdrawal? A) The entire amount is taxable. B) The entire amount is nontaxable. C) $9,000 is taxable; $6,000 is nontaxable. D) $6,500 is nontaxable; $8,500 is taxable.

C) Because this is a nonqualified annuity, the $17,000 invested is after-tax dollars. Under the tax code, the taxable portion is considered to be withdrawn first in any lump-sum distribution. Therefore, the first dollars withdrawn are all taxable until the amount of withdrawal meets or exceeds the growth in the account. Because Bob is over 59½, there is no 10% tax penalty on his withdrawals

An investment adviser receives a favorable research report on a company he believes will increase substantially in value over the next few months. He places 100 shares in the account of each of his clients for whom he has written discretionary authorization. This activity is: A) permitted without restriction. B) permitted if disclosed to the clients. C) a prohibited action under the blanket recommendation rule. D) a breach of fiduciary duty.

C) Blanket recommendations are prohibited because they are unlikely to be suitable for all accounts.

Which of the following statements concerning international direct investing is correct? A) Foreign markets are usually mature and offer no growth advantages. B) Information is not as readily available on foreign investments as on domestic ones. C) The addition of foreign securities to a portfolio may result in increased portfolio risk due to the different movements of foreign markets and U.S. markets. D) The rates of return on foreign securities are generally less than those available from U.S.

C) In general, foreign investments don't have the transparency of domestic ones. Rather than directly investing in the foreign security, trading the ADR has the advantage of the full disclosure requirements of the SEC. Investors may earn higher returns in foreign markets, and including foreign securities in an investment portfolio may lower risk through greater diversification. This is because there may be a low correlation with U.S. markets. Although securities markets in most developed economies are mature, that doesn't mean they can't grow, and the markets in emerging economies offer great potential growth commensurate with their greater risk.

If the current risk-free rate is 3% and the expected market risk premium is 6%, what return should we expect from a security that has a beta of 2? A) 18% B) 12% C) 15% D) 9%

C) In most questions of this type, we are given the market return. Here, there is a trick. We are told there is a market risk premium of 6%. That means that the market return must be 6% above the risk-free rate, or 9%. Now, we can plug in the formula. Expected return = 3% + ([9% -3%] × 2) = 3% + (6% x 2) = 3% + 12% = 15%. In this question, because we're already given the risk premium, we can avoid the first step. That would be 3% + (6% x 2) = 3% + 12% = 15%.

Which school of economists encourages a government to spend money to move the economy into an expansionary phase? A) Monetarist B) Classical C) Keynesian D) Supply side

C) Keynesians advocate government intervention in the workings of the economy through increased government spending, which in turn increases aggregate demand.

All of the following statements concerning the types of risk are correct except A) business risk is the uncertainty regarding operating income. B) default risk is the potential inability of a debt issuer to make timely interest and principal repayments. C) reinvestment rate risk is the risk that proceeds available for reinvestment must be reinvested at a higher rate than that of the investment vehicle that generated the proceeds. D) financial risk is the risk that a firm's financial structure

C) Reinvestment rate risk is the risk that proceeds available for reinvestment might be reinvested at a lower rate than that of the investment vehicle that generated the proceeds. The computation of a bond's yield to maturity assumes that the coupon interest will be reinvested at the coupon rate. Reinvestment risk is the uncertainty of that happening.

Transparent Investment Advisers, Inc. (TIA), is registered in three states and has $55 million in assets under management. TIA maintains custody of customer securities. TIA's chief financial officer reports that the net worth of the firm has suddenly fallen to $28,000. This requires TIA to A) obtain a surety bond in the amount of $7,000. B) borrow $7,000 from the owners. C) obtain a surety bond in the amount of $10,000. D) issue $7,000 of stock.

C) State-registered investment advisers who maintain custody of customer funds or securities must have a minimum net worth of $35,000. If the net worth should fall below that amount, the firm must immediately obtain a surety bond rounded to the next $5,000 to meet that level. In this case, the firm's deficiency is $7,000, and the next $5,000 that will cover that is a bond for $10,000. Borrowing money does not increase net worth, and even though TIA is a corporation, it would probably take too long to issue additional stock.

An analyst is viewing a subject company's financial statements. She notices that the company has current assets of $20 million, fixed assets of $50 million, and total liabilities of $45 million (of which $10 million is considered long-term). This company's debt-to-equity ratio is A) 64.3% B) 22.2% C) 28.6% D) 40%

C) The debt-to-equity ratio is computed by dividing the issuer's long-term debt by their total capitalization. Total capitalization is the company's net worth (assets minus liabilities) plus the long-term debt. In this example, the net worth is $70 million minus $45 million, or $25 million. Adding the long-term debt of $10 million results in total capital of $35 million. Divide the $10 million by that $35 million to arrive at 28.57%. As we point out in the LEM, this is really a misnomer—it should be called the debt-to-total-capital ratio, but probably will not be shown that way on the exam.

A stock analyst viewing a corporation's income statement would not be able to determine the company's A) income. B) expenses. C) cash on hand. D) revenues.

C) The income statement reflects the firm's revenues (sales), expenses, and income. Assets, such as cash, are found on the balance sheet.

What is the name of the bond document that states the issuer's obligation to pay back a specific amount of money on a specific date? A) The bond coupon B) The bond agreement C) The indenture D) The debenture

C) The indenture is the contract that sets forth the promises of the issuer of the bond and the rights of the lenders (the investors). A debenture is an unsecured long-term debt security (that has an indenture). One of the details in the indenture is the coupon (interest) rate that will be paid on the loan.

A similarity between the capitalization of closed-end and open-end management investment companies is that both A) raise capital through a continuous public offering of shares. B) are traded on listed exchanges or in the over-the-counter market. C) compute net asset value per share. D) can issue common and preferred stock.

C) The only similarity here is that both kinds of management investment companies compute NAV. Open-ends must do it daily and closed-ends can compute daily or even weekly. It is only the open-end company where the capital is raised through a continuous offering of new shares. Closed-end funds generally have a single IPO of common stock and may, if they wish, also have a preferred stock issue. Open-end funds are limited to one class of equity security (not to be confused with different classes for sales charge purposes). There is no secondary market trading in open-end funds, only closed-ends.

Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative can A) have funds withdrawn from the account at the direction of the beneficiary. B) arrange to have the trust's funds pledged to support a loan for the trustee. C) have a check drawn on the account payable to the trustee for expenses. D) place the securities in the trust fund in a noncustodial brokerage account.

C) The trustee can be reimbursed for expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can withdraw funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial or trust accounts, not in noncustodial accounts.

A support level is the price range at which a technical analyst would expect the A) demand for a stock to decrease substantially B) supply of a stock to increase substantially C) demand for a stock to increase substantially D) demand for a stock to remain constant

C) This question is about comparing support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down within a narrow range. The lower limit to these fluctuations is called a support level - the price point where a stock appears cheap and attracts buyers. The upper limit is called a resistance level - the price point where a stock appears expensive and initiates selling. Generally, a support level will develop after a stock has experienced a steady decline from a higher price level. Technicians believe that, at some price below the recent peak, other investors will buy who did not buy prior to the first price increase and have been waiting for a small reversal to get into the stock. When the price reaches this support level, demand surges and price and volume begin to increase again.

The Federal Reserve Board has just taken action leading to an increase in interest rates. Which of the following industries is most likely to be affected adversely by this action? A) Defensive industries B) Utilities C) Cyclical industries D) Heavy industries such as steel

C) Utility stocks tend to be interest rate sensitive for two reasons. First, they are typically bought for income portfolios, and, as such, changes to interest rates impact their price. Second, because utilities are typically the most highly leveraged of all industries, an increase in interest rates could substantially increase their debt service costs and thus reduce earnings

Which of the following are characteristics of newly issued warrants? A) Intrinsic value but no time value B) Time value and intrinsic value C) Time value but no intrinsic value D) No intrinsic value and no time value

C) Warrants can be thought of as call options with a long expiration period. They are always issued with a strike price in excess of the current market value, so there is no intrinsic value. One could say that, on issuance, they are always out of the money. The only value is in the time to expiration—usually several years or longer.

If Wallace resigned his position as an agent with Rockland Securities to work for Gibraltar Securities, which of the following parties must notify the Administrator of Wallace's move? A) Wallace and Rockland B) Rockland and Gibraltar C) Rockland, Gibraltar, and Wallace D) Gibraltar and Wallace

C) When an agent with one broker-dealer resigns and affiliates with another, both broker-dealers and the agent must notify the Administrator of the change in registration. Notification is accomplished by filing Forms U5 and U4 with FINRA's CRD.

Life insurance is generally purchased to replace the lost income of the insured. A client wishing to purchase a policy with a level death benefit and level premium for as long as the premiums are paid would choose A) a decreasing term policy. B) a 5-year renewable term policy. C) a whole life policy. D) a universal life policy.

C) Whole life insurance is permanent insurance with a level premium and a level death benefit. The renewable term policy may have a level death benefit, but every 5 years, the premium will increase. Universal life has flexible premiums and, depending on the option chosen, the death benefit can increase. Decreasing term insurance, which is often called mortgage life insurance, reduces the death benefit over the life of the policy, as the name implies.

An interest in which of the following is a security under the Uniform Securities Act? Evidence of indebtedness Certificate of deposit for a security Oil and gas drilling program Cattle feeding program A) II and III B) III only C) I only D) I, II, III, and IV

D

An investor purchases zero-coupon bonds issued by the U.S. Treasury due to mature in 18 years at $100,000. Which of the following might describe the primary reason for selecting that investment vehicle? The investor is 65 years old and needs the reliability of current income. The investor is 45 years old and has purchased these in an IRA rollover account and wants the assurance of funds for retirement. The investor is 30 years old and has a newborn child and wishes to assure funds for a college education. The investor is 20 years old, has just received an inheritance, and wishes to shelter income for as long as possible. A) I and II B) I and IV C) III and IV D) II and III

D

Under the Uniform Securities Act, the definition of person includes which of the following? An unincorporated investment club An individual who buys and sells securities only for his own account Associations and partnerships, whether or not they issue certificates The U.S. government

D

When an agent transfers employment from a broker-dealer registered with the SEC to a broker-dealer registered solely in this state, A) only the agent and the state-registered broker-dealer must notify the Administrator. B) only the agent must notify the Administrator promptly. C) only the agent and the SEC-registered broker-dealer must notify the Administrator promptly. D) the agent, the former broker-dealer, and the current broker-dealer must all notify the Administrator.

D

ABC Furniture Company wishes to raise capital by issuing some securities in its home state. The CEO of the company feels that registration with the Administrator is unnecessary because the issue is exempt. Should ABC be ordered to appear at a hearing, the burden of proving its issue is exempt is on A) the CEO. B) the hearing panel. C) the Administrator. D) the company.

D)

If an investment adviser representative of a federal covered adviser that transacts business in a state terminates employment with that investment adviser, which of the following statements is true? A) The investment adviser must notify the Administrator. B) Both the representative and the investment adviser must notify the Administrator. C) No notice to the Administrator is required. D) The representative must notify the Administrator.

D)

RISA regulation does not apply to public school district retirement plans publicly traded utility company retirement plans federal government employee retirement plans A) I and II only B) I, II, and III C) I only D) I and III only

D)

Which of the following employer-sponsored plans would never be covered by ERISA? A) 401(k) B) 403(b) C) Defined benefit pension D) Deferred compensation

D)

Which of the following statements are true of a variable annuity? The number of annuity units is fixed when payout begins. The value of accumulation units is fixed at purchase. The monthly annuity payment is a variable amount. The annuity payments are not subject to income taxes. A) I and II B) III and IV C) II and III D) I and III

D)

Covered call writing is a strategy where an investor A) buys two calls on the same security he owns to leverage the position. B) sells a call on an index that contains some of the securities that he has in his portfolio. C) buys a call on a security he has sold short. D) sells a call on a security he owns to reduce the volatility of the stock's returns and to generate income with the premium.

D) A covered call is simply defined as an investor owning 100 shares of the underlying stock for each option written (sold). The premium received is not only a source of income but also serves to provide downside protection to the extent of the amount received.

Alvin's spouse is a trustee of a trust established by Henrietta Flood, which directs income from the trust be paid to Alvin, for as long as he lives. Alvin's son, Floyd, will receive the principal upon Alvin's death. Floyd would like to receive some of the principal before Alvin's death, and Alvin does not object. How should his spouse, the trustee, act in this situation? A) Distribute part of the principal to Floyd. B) Distribute all of the principal to Floyd. C) Distribute part of the income to Floyd. D) Follow the trust terms, continuing to distribute the income to Alvin and the principal to Floyd upon Alvin's death.

D) A trustee must follow the terms of the trust. Nothing in the question implies that the trustee has any discretionary powers.

Treasury bills are A) callable. B) issued at par. C) issued in bearer form. D) issued in book-entry form.

D) All Treasury securities are issued in book-entry form. Treasury bills are always issued at a discount and are never callable.

A registrant's registration may be canceled by the Administrator A) if the Administrator is unable to locate the registrant. B) as long as there is opportunity for a hearing. C) upon the order of a court of competent jurisdiction. D) when the registrant has been found in violation of the Uniform Securities Act.

D) Cancellation is nonpunitive—nothing wrong was done. But when the Administrator is unable to locate the registrant, or the registrant is declared mentally incompetent or is deceased, registration is canceled.

All of the following actions must be completed prior to customers entering their first option trade except A) delivery of the options disclosure document (ODD) B) approval by a designated options supervisor C) completion of the new account form D) receipt of a completed options agreement

D) Customers do not have to complete (sign) the options agreement prior to entering an order; under current rules, the agreement must be signed and returned by the customer within 15 days of account approval.

If a customer purchases a food company stock and a utility stock, the customer's portfolio is A) diversified. B) defensive. C) balanced. D) cyclical.

D) Food company stocks and utilities are defensive investments. Defensive investments are those that tend to hold up well in economic downturns.

GNMA mortgage-backed securities are A) available to investors through a minimum purchase of $5,000. B) backed exclusively by a pool of mortgages. C) exempt from federal income tax for the interest payments received by the bondholders. D) a direct obligation of the U.S. government.

D) GNMA securities are a direct obligation of the U.S. government and are backed by a pool of mortgages (which is why the choice "backed exclusively by a pool of mortgages" is not the best choice). The monthly payments are partially a return of principal and partially taxable interest, which is subject to state and federal income tax. GNMA pass-through securities are available to investors with a minimum issue price of $1,000

On retirement, if your customer who is a corporate executive will receive retirement income equaling a percentage of the average of his last 5 years of compensation, this is which type of plan? A) TSA B) Keogh C) Defined contribution D) Defined benefit

D) In a defined benefit plan, the retiree receives a specified amount, with the sponsor bearing the investment risk. Keogh plans are not corporate plans. In a defined contribution plan, the employee contributes a defined amount each period, bears the investment risk, and does not receive a defined amount upon retirement. TSAs (tax-sheltered annuity plans, a common name for 403(b) plans) are defined contribution plans, not defined benefit plans.

In a scheduled premium variable life insurance policy, which of the following are guaranteed? A) The ability to borrow a maximum of 75% of the cash value once the policy has been in force at least 3 years B) The right to exchange the policy for a permanent form of insurance with comparable benefits within the first 24 months of issue, as long as the insured passes a new physical examination C) A minimum cash value D) A minimum death benefit

D) In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months allowing the conversion of the variable policy to a comparable form of permanent insurance, but no physical is required. The 75% cash value loan is a minimum, not a maximum, and applies after the 3rd year of coverage.

Among the reasons to consider investing in a variable annuity would be all of the following except A) basically, no limit on the amount that can be contributed B) avoiding probate upon the death of the investor C) a guaranteed death benefit for death before annuitization D) capital gains treatment on any realized gains upon withdrawal

D) In return for granting tax deferral on all gains in the account, the IRS taxes everything over the investor's cost basis as ordinary income. There is never a capital gain with a variable annuity. Some insurance companies will place a limit on the amount that may be invested, especially for older clients, but unlike IRS rules on retirement plans, this is strictly a company-by-company decision, not a law. Variable annuities are generally sold with a death benefit provision guaranteeing that the beneficiary will receive the higher of the amount invested or the current value of the account. Because there is a specifically named beneficiary, annuities do not go through the probate process.

A feature of which of the following business entities is limited liability for owners, as well as flow-through of income? A) C corporation B) Sole proprietorship C) General partnership D) Limited partnership

D) Limited partnership interests offer both flow-through of income (or loss) along with limited liability. The general partnership has full liability, as does the sole proprietorship. C corporations have limited liability, but no flow-through.

The long party is a futures contract that has entered the contract as: A) a market maker. B) a liquidity provider. C) a seller. D) a buyer.

D) Long is the industry term describing the buyer of a futures contract. The long is committed to buying the underlying asset at the pre-agreed-upon price on the specified future date.

he RIF Corporation would not be able to issue A) RIF rights. B) RIF warrants. C) RIF common stock. D) RIF call options.

D) Options contracts are not issued by the underlying asset. Technically, listed options (the only type that will be on the exam) are issued by the Options Clearing Corporation (OCC). A corporation issues common stock and can issue rights (preemptive rights) and/or warrants.

A living will is used to A) ensure that the author's assets are properly distributed after death. B) avoid the cost and time of probate. C) eliminate, or at least reduce, estate taxes. D) express the author's end-of-life wishes.

D) Sometimes referred to as a medical directive or advanced care directive, a living will is used to express the author's end-of-life wishes, such as organ donation, when to end life-prolonging efforts, and so forth. It has nothing to do with a last will and testament describing the distribution of assets after death.

Options are a popular tool for reducing investment risk. Which risk is hedged when a corporation buys call options on its own common stock? A) Inflation risk B) Business risk C) Currency risk D) Market risk

D) The company is hedging against a future increase in the company's stock. But isn't hedging designed to protect against loss? Yes, and here the loss is the higher price a company will have to pay for its stock in the open market. Many companies engage in stock buy-back programs. If the company knows it will be executing a buy-back in, let's say, six months, it can buy call options with an exercise price close to today's market price. Then, if the price of the stock is higher in six months, the company can exercise the call options to buy at the lower price. Business risk means the company's fortunes will decline because of bad business decisions. The call option won't be of any help there. Unless we're talking about a non-domestic company (and the question would have to state that), there is no currency or exchange rate risk. Inflation risk is tied to fixed income investments, not common stock.

2016: 13%, 2017: 11%, 2018: 2%, 2019: 6%, 2020: 5%, 2021: 8%, 2022: 6%. Using the range measure would indicate that the seven-year returns from the fund had a mid-range of A) 2%. B) 4%. C) 11%. D) 7.5%.

D) The midrange of any group of numbers occurs between the highest and lowest in the group. In this example, the highest number is 13% and the lowest is 2%. The number in the middle of those two is 7.5%. That is slightly higher than the mean (the average of the returns).

The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is A) the net change in the cash position of the firm for the reporting period. B) reported as a separate line item on the balance sheet. C) an integral part of the footnotes to the balance sheet required by generally accepted accounting principles. D) reported as cash income on the income statement.

D) The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is the net change in the cash position of the firm for the reporting period. The sum total, or the net change in cash, is not reported on either the balance sheet or the income statement. It is the sum total of the entries on the statement of cash flows, which is a separate financial statement.

Among the options available to replace the lost income of an employed individual who becomes unable to work due to a disability would be any of these except A) Social Security disability payments B) workers' compensation C) disability income insurance D) proceeds of a life insurance policy

D) Those injured on the job are usually eligible for workers' compensation. Those who have enough eligible credits may apply for Social Security disability benefits. If the individual owns private disability insurance and/or is covered under an employer-sponsored policy, he may claim benefits. Although there is a trend toward making life insurance benefits available for use in certain instances, for test purposes the proceeds are generally only available upon the death of the insured.

Purchasers of options can have a number of different objectives. One of your clients who is a soft-drink fan already has a long position in KO. What would be a possible reason for this client to go long a KO call option? A) This would generate additional income. B) Owning a long call on stock you already own offers a hedge against a market decline. C) It completes the other side of a spread. D) It fixes the cost of acquiring additional stock for the portfolio.

D) Those who are bullish on a stock but don't have sufficient funds at this time to purchase the stock can lock in their future cost by going long a call. Income is generated only through selling options. Because a long call is on the same side of the market as long stock, there is no hedge. A spread involves a long and short option.

An investor has $50,000 to invest in bonds. Currently, 10-year bonds are offering very attractive yields, but the client is concerned that in a few years, rates will be even higher. What would you suggest? A) Bullet strategy B) Laddering C) Diversifying D) Barbell strategy

D) With the barbell strategy, the investor would place $25,000 into bonds maturing in 10 years and the other half into bonds maturing in two years. This makes $25,000 available for reinvestment in two years enabling the investor to take advantage of the higher rates (if they materialize).

Foster Advisers, based in New Jersey, manages $135 million in funds for New Jersey-based clients. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which of the following statements best describes the registration requirement for Foster Advisers?: A) Foster Advisers is required to register as an adviser with the SEC and has no requirement to notify the Administrator of the New Jersey Department of Securities. B) Foster Advisers is required to register with both the SEC and the Administrator of the New Jersey Department of Securities. C) Foster Advisers is required to register as an adviser with the SEC and notify the Administrator of the New Jersey Department of Securities of its operation. D) Foster Advisers is required to register with the Administrator of the New Jersey Department of Securities.

c

Which of the following statements about plan fiduciaries under ERISA are true? Plan fiduciaries sometimes have conflicting obligations to plan participants and other parties in interest. Plan fiduciaries must ordinarily diversify plan investments. Plan fiduciaries are personally liable for fines if they violate their fiduciary duties. A) I, II, and III B) I and II C) II and III D) I and III

c

Inertial inflation

persistent rate of inflation that continues at the same rate until an economic shock leads to a change