Mastery Exam Missed Q's

Which of the following business structures is most appropriate for retaining money in the business? A) An LLC B) An S corporation C) A C corporation D) A sole proprietorship

A C corporation

A 57-year-old investor who earns $26,000 contributes $6,500 to an IRA for the year 2021. What amount of the contribution will be subject to the 6% penalty levied on excess contributions? A) $0 B) $500 C) $1,000 D) $6,500

A) $0

*An investor in the 15% income tax bracket is considering purchasing either a 5.5% municipal bond or an 8.5% corporate bond. Which of the following statements regarding the two bonds' after-tax yields is TRUE? A) The corporate after-tax yield is higher than the municipal yield. B) The municipal yield is higher than the corporate yield. C) The two bonds' yields are equivalent. D) The yield difference cannot be determined.

A) The corporate after-tax yield is higher than the municipal yield.

Use of a corporation's balance sheet and income statement would be of greater importance to an investment manager following which style? A) Value B) Contrarian C) Market capitalization D) Growth

A) Value Value managers focus their attention on the company's financial statements in an effort to undercover value.

A FinCEN Form 112 would need to be filed when a client A) makes a cash deposit in excess of $10,000 B) makes a cash deposit of $10,000 or more C) initiates a wire transfer in excess of $3,000 D) initiates a wire transfer of $3,000 or more

A) makes a cash deposit in excess of $10,000

*Publicly traded corporations are subject to an annual audit of their financial records. Those audits must comply with GAAP (Generally Accepted Accounting Principles). When preparing to recommend a stock to a customer, you would most likely want to see that the auditor gave A) a qualified opinion. B) an unqualified opinion. C) a comprehensive opinion. D) a certified opinion.

B) an unqualified opinion.

Which of the following debt instruments pays no interest? A) TIPS B) T-bonds C) T-bills D) T-notes

C) T-bills Treasury bills are always issued at a discount from their face value. At maturity, the investor receives par.

You have a client who is subject to the AMT. As a result, the client would not receive the full benefit of investing in A) ADRs B) cumulative preferred stock C) tax-exempt private purpose bonds D) nonqualified stock options

C) tax-exempt private purpose bonds

Which of the following are examples of unsystematic risk? Market risk Business risk Default risk Interest rate risk A) II, III, and IV B) I and IV C) I, II, III, and IV D) II and III

D) II and III Business risk Default risk

A popular strategy for income investors who wish to take advantage of potentially higher interest rates when reinvesting maturing securities is A) rebalancing B) bulleting C) barbelling D) laddering

D) laddering Laddering involves investing a sum at one time, but with different maturities. As each bond (or CD) matures, it is reinvested at current rates and then becomes the longest maturity in the portfolio.

Under the Investment Company Act of 1940, a closed-end management investment company is required to do all of the following EXCEPT A) redeem its shares upon request B) have a stated investment objective C) publish its management fees D) issue shares with voting privileges

A) redeem its shares upon request Closed-end management investment company shares trade in the open market (either listed or OTC) once the primary offering is done. The selling price is determined by supply and demand within the market. A redeemable share would be characteristic of an open-end management investment company (mutual fund).

*As the number of stocks in a portfolio increases, the portfolio's systematic risk A) decreases at a decreasing rate B) decreases at an increasing rate C) can increase or decrease depending on the beta of the added stocks D) increases at a decreasing rate

C) can increase or decrease depending on the beta of the added stocks

Averaging techniques would include all of the following EXCEPT A) dollar cost averaging B) reinvesting all distributions from an open-end investment management company C) maintaining a constant ratio plan D) maintaining a DRIP with a stock listed on the NYSE

C) maintaining a constant ratio plan Averaging techniques involve some form of regular investing; a constant ratio plan involves buying and selling different asset classes to keep the ratio between them at a static percentage.

Which of the following items will affect a corporation's cash flow? Cash Depreciation Net sales Accounts receivable A) I and IV B) I and II C) III and IV D) II and III

D) II and III Depreciation Net sales

*Discounted cash flow is commonly thought of as applying solely to fixed-income securities. However, forms of DCF used for the valuation of common stock also include the price-to-earnings ratio the dividend discount model the discounted book value model the dividend growth model A) II and III B) I and IV C) I and II D) II and IV

D) II and IV

An analyst viewing a corporate income statement will review all of the following EXCEPT A) current ratio B) pre-tax income C) operating expenses D) net sales or net revenues

A) current ratio Current ratio is a balance sheet computation involving current assets and current liabilities.

*An advantage of being a bondholder compared to owning common stock is that A) income payments are more reliable B) there is limited liability C) common stock has priority over the bond in the event of liquidation D) the bondholder can select the optimum time to have the issuer redeem the bond, while common stock is not redeemable

A) income payments are more reliable

What does a bond's yield to maturity (YTM) indicate? A) Annual interest rate a bond purchaser receives B) Discounted rate that equates a bond's cash flow to its current price C) Interest an issuer pays on a bond issued at a premium D) Annual interest rate an issuer pays on a bond relative to the issuer's dividend

B) Discounted rate that equates a bond's cash flow to its current price

Investment advisers must disclose any material disciplinary action to all current and prospective clients. The broadest definition of material would include any actions taken against the firm or management persons by a court or regulatory authority within the past 10 years. Fines levied by any SRO require disclosure if they were in excess of A) $5,000. B) $10,000. C) $2,500. D) $1,000.

C) $2,500.

It would be most unusual to see which one of the following issued at a discount? A) Commercial paper B) Treasury bill C) Jumbo CD D) Zero coupon bond

C) 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.

An individual walks into the office of a broker-dealer wishing to open a new account. Which of the following information would NOT be required on the new account form? A) Physical address B) Name of employer C) Marital status D) Citizenship

C) Marital status

*The characteristics of an exchange-traded futures contract would include all of the following EXCEPT A) the location of delivery of the underlying asset B) the delivery price and month of delivery C) a high likelihood that the contract will be exercised D) the quantity and quality of the commodity

C) a high likelihood that the contract will be exercised

Reinvestment of mutual fund distributions has all of the following benefits EXCEPT A) reinvestment of capital gains at NAV B) tax deferral until the acquired shares are sold C) compounding of returns D) reinvestment of dividends at NAV

tax deferral until the acquired shares are sold

John purchased 100 shares of DEF common stock at a price of $25 per share on August 4, 2015. On December 1, 2017, with the stock selling for $29 per share, he passed away, leaving the stock to his daughter. She subsequently sold the stock nine months later for $32 per share. Her tax consequence is A) $300 short-term capital gain B) $700 long-term capital gain C) $700 short-term capital gain D) $300 long-term capital gain

D) $300 long-term capital gain The laws for inheriting stock are that the beneficiary will receive the stock with a stepped up basis. In this instance, the daughter's cost basis would be the market price at the time of death ($29). The holding period for inherited stock is always considered long-term. Therefore, a $300 ($32-$29) long-term capital gain results from the sale by the daughter.

An index annuity has no cap on gains, but guarantees a minimum return of 2.75% with a 75% participation rate. If the index being tracked increases by 12%, what is the rate of return to the investor? A) 12% B) 7.4% C) 2.06% D) 9%

D) 9%

Holders of which of the following securities would be most likely to receive preemptive rights? A) Preferred stock B) Secured bonds C) Treasury stock D) Common stock

D) Common stock It would be very rare for any security other than common stock to receive preemptive rights.

Economic indicators are used by analysts in an attempt to forecast future economic conditions. Which of the following would reveal an indication of a lowering of the inflation rate? A) A reduction in interest rates B) An increase in manufacturer's orders for durable goods C) Increased consumer demand D) High unemployment

D) High unemployment The unemployment figure is a leading indicator, a predictor of the future. With high unemployment, there is less money to go around in the economy tending to cause a decreased demand for goods and services. This demand is one of the leading causes of inflation. Changes to interest rates are a result of inflation, not a cause or a predictor.

Wanda Adams is 17 years old and is in the process of applying to colleges for next year. When completing the FAFSA Form, which of the following assets would be included at the highest percentage of actual value? A) UTMA B) 529 plan C) ESA D) QTP

A) UTMA

The method of computing long-term returns that takes into consideration time value of money is A) after-tax return B) real rate of return C) internal rate of return D) risk-adjusted return

C) internal rate of return One of the unique features of IRR is that it is a compounded rate using the time value of money.

Which of the following investors would be exempt from filing Form 144 when selling securities they own? A) An employee of the company selling unregistered shares. B) An employee of the company selling registered shares purchased in the open market. C) An investor selling shares acquired in a Regulation D private placement. D) An affiliated person selling unregistered shares.

B) An employee of the company selling registered shares purchased in the open market.

*A fundamental analyst wishing to evaluate a corporation's ability to meet its short-term obligations under extreme conditions would probably wish to compute the A) current ratio B) quick ratio C) price to book ratio D) working capital

B) quick ratio

An investment adviser representative would be permitted to borrow money from which of the following clients? A) The XYZ Short-Term Bond Fund B) The investment adviser representative's father for graduate school tuition C) The Amalgamated Dock Workers Credit Union D) ABC Mortgage Brokers

C) The Amalgamated Dock Workers Credit Union Securities professionals are quite limited in their ability to borrow money from clients. The prime exception is when the client is in the money-lending business, such as a credit union. Mortgage brokers do not lend money—they put borrowers and lenders together.

A bond's duration is A) an explicit measure of the number of years to maturity B) equal to the maturity of the bond in most cases C) a measure of a bond's price sensitivity to a change in interest rates D) a time-weighted measure of a bond's sensitivity to credit and default risk

C) a measure of a bond's price sensitivity to a change in interest rates Duration measures the number of years it will take for the bond's interest payments to equal the investment in present value terms. It is also used to determine the volatility of a bond's price when interest rate changes. The longer the duration, the greater the volatility for that bond. Zero-coupon bonds have the longest duration for any given maturity date because there is no current receipt of interest payments.

*Two brothers are interested in forming a business together. They have three initial concerns: (1) maximizing their benefits despite the fact that the business is expected to lose money for at least the first year or so, (2) making sure that the business will be able to continue in the event one of the brothers dies, and (3) minimizing their personal liability for the obligations of the business. On the basis of the brother's concerns, which form of business is appropriate for the situation? A) Limited partnership B) C corporation C) General partnership D) LLC

D) LLC

For a profitable and rapidly growing firm, holders of preference shares are leastlikely to benefit from the firm's growth if the preference shares are A) convertible. B) common stock C) participating. D) cumulative.

D) cumulative.

A diversified open-end investment company's portfolio consists of holdings in U.S. equities, foreign equities, investment-grade U.S. corporate bonds, and U.S. Treasury bonds. An investor owning shares of this company would be subject to I. business or financial risk II. default or credit risk III. interest rate risk IV. systematic risk A) I and III B) I, II, III, and IV C) I, III, and IV D) I and IV

B) I, II, III, and IV

The NSMIA allows State Administrators to A) require registered open-end investment companies wishing to offer securities in their state to coordinate their registrations with the SEC B) accept filing fees on behalf of the SEC C) enforce their antifraud provisions against federal covered advisers D) impose state registrations and net capital requirements on federal covered investment advisers

C) enforce their antifraud provisions against federal covered advisers Antifraud provisions may be enforced by any regulatory agency or authority. If it has to do with securities, no one or nothing is exempt from the antifraud provisions. Registered investment companies do not register in the state, but may be required to notice file and pay fees.

*In the investment industry, the term "2&20%" most commonly refers to A) a strategy involving buying and selling options on the same underlying asset B) the fees charged by hedge fund managers C) the minimum acceptable return in a bull market D) the sales commission paid on an equity index annuity

B) the fees charged by hedge fund managers

*A client calls to discuss purchasing a specific security that he has been following. The agent handling the account recognizes that a potential conflict of interest exists. The best course of action to follow would be to A) disclose the conflict of interest and proceed if the client wishes B) turn the client over to another agent who is not conflicted C) disclose the conflict of interest and end the discussion promptly D) accept the client's order because it is clearly unsolicited

A) disclose the conflict of interest and proceed if the client wishes

John and Jane have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills totals $8,000, how much are their total liabilities? A) $130,000 B) $150,000 C) $138,000 D) $122,000

A) $130,000 The balance sheet formula is assets − liabilities = net worth. Therefore, $150,000 − liabilities = $20,000, where liabilities = $130,000. Did you answer $122,000? That is the amount of the liabilities other than the revolving credit, but that is not what the question is asking for.

The DEF Corporation's financial statements reveal the following information. Total current assets = $10 million Cash = $2 million Inventory = $4 million Building and land = $20 million Total current liabilities = $5 million Net worth = $18 million Based on this information, DEF's quick asset ratio is A) 1.6 : 1 B) 0.8 : 1 C) 1.2 : 1 D) 2.4 : 1

A) 1.6 : 1 The quick asset ratio is found by dividing the quick assets (current asset minus the inventory) by the current liabilities. In this question, total current assets are $10 million of which $4 million is inventory. That results in quick assets of $6 million divided by the total current liabilities of $5 million, or 1.2 : 1. The cash is included in the total of $10 million.

A client interested in fixed income is viewing different bonds with the same rating and a coupon of 5%. Using the discounted cash flow method, which bond should have the lowest market value? A) 12 year maturity when the discount rate is 7% B) 6 year maturity when the discount rate is 7% C) 6 year maturity when the discount rate is 3% D) 12 year maturity when the discount rate is 3%

A) 12 year maturity when the discount rate is 7% Remember, the discount rate is just another way of stating the current interest rate in the marketplace. If the discount rate is higher than the coupon rate, the present value, the expected market price, will be below par. Conversely, if the discount rate is lower than the coupon rate, the present value will be above the par value. As learned with duration, when interest rates change, the longer the time to maturity, the greater the effect on the market price of a bond.

A publicly traded corporation changing its name would disclose this first by filing a A) Form 8-K B) Form 10-Q C) Form 10-K D) Form 13F

A) Form 8-K The Form 8-K is used to announce important company events such as a name change, a change in management, or a merger or acquisition. The Form 8-K is filed with the SEC within 4 business days of the event and is available for the public on Edgar.

The dictator of a foreign nation, with whom the United States barely maintains diplomatic relations, has just placed an order for 25 armor plated limousines to be manufactured in Detroit. Upon completion and payment for this order there will be a credit to the foreign account balance of the United States debit to the foreign account balance of the United States positive impact on the U.S. GDP negative impact on the U.S. GDP A) I and III B) II and IV C) II and III D) I and IV

A) I and III credit to the foreign account balance of the United States positive impact on the U.S. GDP

Under the Uniform Securities Act, which of the following is considered a place of business of a registered investment adviser representative? I. An office from which the representative regularly provides advisory services to clients II. A location published in a professional directory, indicated on business cards, or telephone book listing that identifies it as a place where the representative will be available to meet or communicate with clients III. A hotel or auditorium at which the representative has advertised to the public that he will be available to conduct advisory business at that site IV. A hotel meeting room identified only to current clients as a place the representative will be available to conduct advisory business A) I, II, and III B) I, II, III, and IV C) I only D) I and II

A) I, II, and III The Uniform Securities Act defines a place of business as one where the IAR regularly provides investment advisory services, solicits, meets with, or otherwise communicates with clients, or any other location held out to the public as a location where the representative will do any of these activities. The frequency of use is not a factor. Publicly advertising a hotel location only used once makes it a place of business that year and will probably subject the representative to regulation by the Administrator of the state in which the hotel is located. A hotel room is not included when it is not advertised and only used with existing clients, presumably when the adviser is traveling through his state.

*Which of the following statements regarding a mutual fund are TRUE? Class A shares have no front-end sales charge and no 12b-1 fee. Class B shares have a contingent deferred sales charge and a 12b-1 fee. Class A shares are generally not eligible for breakpoint reductions. Class C shares are generally referred to as level load. A) II and IV B) I and III C) I and II D) III and IV

A) II and IV Class B shares have a contingent deferred sales charge and a 12b-1 fee. Class C shares are generally referred to as level load.

Which of the following statements regarding a Roth IRA is TRUE? A) Nonqualified distributions of earnings before the age of 59½ are subject to both penalty and taxation. B) The income and capital gains earned in the account are always taxed when withdrawn. C) Distributions without tax obligation must begin by the age of 72. D) For the tax year 2021, a Roth IRA allows a maximum tax-deductible annual contribution of $6,000 per individual or $12,000 per couple as long as neither has reached the age of 50.

A) Nonqualified distributions of earnings before the age of 59½ are subject to both penalty and taxation. Unless qualifying for an exception (death, disability, and so forth), distributions representing earnings taken from a Roth IRA before the age of 59½ are subject to both penalties and taxation. Contributions to a Roth IRA are never deductible and there are no RMDs at any age.

The assumptions underlying the efficient market hypothesis (EMH) lead its proponents to believe that stock market prices react rapidly to newly released information and, therefore, limit the ability of the investor to achieve abnormal gains. Which of the forms of EMH concludes that an investor cannot achieve abnormal gains using fundamental analysis? A) Semi-strong form B) Weak form C) Strong form D) Spring form

A) Semi-strong form The semi-strong form of the EMH holds that security prices rapidly adjust to the arrival of all new public information. As such, current security prices fully reflect all publicly available information. The semi-strong form says security prices include all security market (price, volume) and non-market (financial statements) information to the public.

A GTC order is entered to buy 500 LMN at 24.35. By the close, the firm has acquired 100 shares at 24.25 and 200 at 24.35. The remainder is unfilled. What is the outcome? A) The customer must accept the execution for 300 shares and the remainder of the order remains open until filled or canceled. B) The customer may reject the incomplete order unless the broker-dealer can guarantee filling the remainder by the end of the day. C) The customer may demand that the firm deliver the remaining shares at 24.35. D) The customer may reject the incomplete order unless the remainder can be filled within two business days.

A) The customer must accept the execution for 300 shares and the remainder of the order remains open until filled or canceled.

*Which of the following offenses are grounds for the denial, suspension, or revocation of an issuer's registration? A) The registration statement was filed without the appropriate fees. B) The registrant's underwriting fees are considered reasonable by the Administrator. C) Persons filing the registration statement engaged a third party to assist in the preparation of the registration statement. D) The registrant engaged in business operations outside of the United States.

A) The registration statement was filed without the appropriate fees.

Which of the following securities would be most likely to have the longest expiration date? A) Warrant B) Right C) Call option D) Put option

A) Warrant Warrants can have an expiration date of many years. Rights are always short term, options, whether puts or calls, expire in 9 months or less (unless the choice said LEAPs).

*A corporation may benefit by attaching warrants to a new issue of debt securities from A) a decrease in the company's interest costs B) a decrease in the earnings per share C) a decrease in the company's amount of debt service coverage D) a decrease in the bond's rating

A) a decrease in the company's interest costs

Relatively high portfolio volatility is least appropriate for investors with A) a short-term time horizon B) a long-term time horizon C) an indefinite time horizon D) an intermediate-term time horizon

A) a short-term time horizon Time horizon is one of the most often tested investment constraints. Remember that the longer the time horizon, the more risk that can be taken and vice versa. A person with a short-term investment horizon should not invest in volatile securities. Longer-term investors can sustain volatility because they have sufficient time to sit out highs and lows.

While passing by the water cooler, you hear one of the experienced representatives in your office talking to a client on the phone about money in a DDA. Having never heard the term and being a willing student, after the phone call is completed, you summon up the nerve to ask the definition of those initials. Proud of you for asking, this top producer informs you that they stand for A) demand deposit account B) donor directed account C) digital deposit account D) direct deposit account

A) demand deposit account In the banking business, a checking account (and sometimes a savings account) is referred to as a demand deposit account (DDA) because the funds are accessible on demand.

If a customer enters a market order to buy 100 shares of GFT, the trade will be executed at the A) lowest offer B) lowest bid C) highest ask D) highest bid

A) lowest offer A market order mandates that a trade must be executed at the best execution (price) that can be attained for the client. This question is meant to find out your knowledge of the difference between a bid and an offer and what an inside market is. The inside bid is the highest price a dealer is willing to pay to someone who wants to sell this stock. The inside offer, usually referred to as the ask, is the lowest price made available by a dealer to those wishing to buy this stock.

A registration statement has been filed using the process known as Qualification. Under normal circumstances, this registration will become effective A) when the Administrator says so B) once the appropriate filing fees have been paid, accompanied by a consent to service of process C) when the SEC says so D) at noon of the 30th day after filing

A) when the Administrator says so A unique characteristic of registration by Qualification is that it is the only method where the effective date is declared by the Administrator.

With regard to advisory clients, under the NASAA Brochure Rule Requirements for Investment Advisers, an investment adviser, unless qualifying for an exemption, must deliver A) within 120 days of the end of its fiscal year a free, updated brochure and related brochure supplements which include or are accompanied by a summary of material changes. B) a free, updated brochure and related brochure supplements every year even when there are no material changes. C) at least 48 hours in advance of entering into the advisory contract, a copy of the adviser's brochure. D) within 90 days of the end of its fiscal year a free, updated brochure and related brochure supplements which include or are accompanied by a summary of material changes.

A) within 120 days of the end of its fiscal year a free, updated brochure and related brochure supplements which include or are accompanied by a summary of material changes.

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) $12.50 per share. B) $11.80 per share. C) $8.00 per share. D) $12.83 per share.

B) $11.80 per share. This is a dollar cost averaging question. Let's do the math. The first month, with the price at $10 per share, the $600 investment purchased 60 shares ($600 ÷ $10). The next month, the price was $12 per share, and the investor was able to purchase only $50 shares ($600 ÷ $12). Continuing on, at $15 per share, the investor acquired 40 shares; at $20 per share, 30 shares; at $12, 50 shares; and the final month, at $8 per share, the $600 purchase bought 75 shares ($600 ÷ $8) Add up all of the purchases. This investor has purchased a total of 305 shares with a total cost of $3,600 (six months times $600). That makes the average cost per share $11.80 ($3,600 ÷ 305). A sale of the shares at an investor's average cost per share will cause the investor to break even. Anything above is a profit while anything less is a loss.

A corporation with a 10%, $100 par cumulative preferred paid $5 to preferred stockholders last year. This year the company wants to pay common dividends. How much must it pay each preferred share outstanding before paying common shareholders? A) $5 B) $15 C) $10 D) $0

B) $15 A 10% cumulative preferred stock with a $100 par value would pay an annual dividend of $10 ($100 × 10%). Cumulative preferred requires all dividends that have previously been skipped be paid before any dividends paid to common stock. The $5 that was paid last year left $5 in dividends in arrears. Therefore, this year requires that a $15 dividend be paid to the preferred shareholders before any common dividend paid to common shareholders.

During the past year, the market price of KAPCO common stock has increased from $47 to $50 per share. Over that period, KAPCO's earnings per share (EPS) have increased from $2.00 to $2.50 per share, and their dividend payout ratio has decreased from 50% to 40%. Based on this information, the current yield on KAPCO common stock is A) 2.13 B) 2.00% C) 4.26% D) 6.34%

B) 2.00% The current yield on a stock is computed by dividing the annual dividend rate by the current market price. With EPS of $2.50 and a 40% payout ratio, the annual dividend is $1.00. This dollar divided by the current market price of $50 results in a current return of 2%.

A corporate bond with an A rating is currently selling for 105. If the bond has a coupon of 6% and matures in 10 years, its yield to maturity is closest to A) 5.71% B) 5.37% C) 6.34% D) 6.19%

B) 5.37% Any time a bond is selling at a premium above par, the yield must be lower than the coupon rate. In this case, the correct answer must be less than 6%. The current yield is 5.71% ($60 divided by $1,050), and because the yield to maturity on a bond purchased at a premium is always less than the current yield, by process of elimination, the answer must be 5.37%. It is calculated by taking the coupon of $60, subtracting the average loss per year of $5 ($50 premium divided by 10 years), and then dividing that $55 result by the average of today's price and par ($1,025).

Which of the following pooled investment vehicles would not generally be considered an alternative investment? A) An exchange traded note (ETN) B) An ETF tracking an index C) A 2x leveraged ETF tracking an index D) An inverse ETF tracking an index

B) An ETF tracking an index The "plain vanilla" exchange traded fund tracking an index is not considered an alternative investment while the others are.

Which of the following statements is NOT true of Regulation S-P? A) Consumers must be given an initial privacy notice. B) Customers must be given annual privacy disclosures on a separate piece of paper. C) Consumers need not be given an annual privacy notice. D) Customers may be provided privacy information on internet web pages.

B) Customers must be given annual privacy disclosures on a separate piece of paper. A customer with an ongoing relationship with a member must receive both an initial and an annual privacy notice. It may be included in other documents but must be clear and conspicuous. Consumers have a one-off relationship, so there is no requirement to provide them or former customers with annual disclosures.

*An investment adviser with custody of customer funds and securities discovers that its net worth has dropped below the required minimum under the rules of the State Administrator. Under NASAA rules, the adviser must notify the administrator by the close of business the day after discovery file a report of its financial condition with the Administrator no later than the close of business 1 day after notification including a statement as to the number of client accounts cease doing business notify all clients and make plans for the return of the funds and securities A) I, II, and IV B) I and II C) I, II, and III D) I, II, III, and IV

B) I and II notify the administrator by the close of business the day after discovery file a report of its financial condition with the Administrator no later than the close of business 1 day after notification including a statement as to the number of client accounts

Which of the following statements regarding REITs are TRUE? Investors receive flow-through benefits of income as well as loss. Hybrid REITs own properties as well as making loans on others. Equity REITs are prohibited from using leverage to acquire properties. Most REITs are easily traded in the secondary market. A) I and III B) II and IV C) I and IV D) III and IV

B) II and IV Hybrid REITs own properties as well as making loans on others. Most REITs are easily traded in the secondary market.

*Which of the following statements is TRUE regarding Social Security retirement benefits? A) Under current tax law, a couple will not have to pay federal income taxes on benefits received until their base income exceeds $50,000. B) Social Security rewards people who wait to claim with an 8% annual increase for every year beyond full retirement age they delay receiving benefits. C) Spousal benefits can be paid to an ex-spouse as long as the marriage lasted at least 15 years. D) Social Security retirement benefits are only taxable when they exceed the individual's cost basis.

B) Social Security rewards people who wait to claim with an 8% annual increase for every year beyond full retirement age they delay receiving benefits.

Providential Asset Allocation Services (PAAS) is a covered investment adviser offering wrap free programs. As a result, PAAS must provide new clients with A) Form ADV Part 2A no later than entering into the advisory agreement B) appendix 1 of Form ADV Part 2A no later than entering into the advisory agreement C) appendix 1 of Form ADV Part 2A within 120 days after entering into the advisory agreement D) Form ADV Part 2A unless there have been no material changes since the last brochure

B) appendix 1 of Form ADV Part 2A no later than entering into the advisory agreement

*It would be considered an unethical business practice for an agent of a broker-dealer to A) offer registered nonexempt securities to clients B) fail to disclose the amount of commission being charged on an exempt transaction involving an exempt security C) accept unsolicited orders from individual clients for unregistered nonexempt securities D) sell unregistered exempt securities

B) fail to disclose the amount of commission being charged on an exempt transaction involving an exempt security

Sven Johannson purchased an American depository receipt (ADR) on a Swedish corporation. Based on the current price of the company's stock, the dividend yield is 2.5%. Johannson hopes to hold the stock for several years and experience a capital gain. It would be true to state that Johannson will A) not pay foreign taxes on the dividend income, and the investment is subject to exchange rate risk. B) pay foreign taxes on the dividend income, and the investment is subject to exchange rate risk. C) pay foreign taxes on the dividend income, and the investment is not subject to exchange rate risk. D) not pay foreign taxes on the dividend income, and the investment is not subject to exchange rate risk.

B) pay foreign taxes on the dividend income, and the investment is subject to exchange rate risk.

For those following the Capital Asset Pricing Model (CAPM), the Security Market Line (SML) uses all of the following EXCEPT A) the beta of the asset. B) the standard deviation of the asset. C) the expected return of the asset. D) the risk-free rate.

B) the standard deviation of the asset. Unlike the Capital Market Line, the SML does not include the standard deviation of the asset.

Under the Uniform Securities Act, the State Administrator has the authority to deny an investment adviser's registration for A) being charged with for a securities-related felony 8 years ago B) violation of another state's securities law within the previous 5 years C) lack of experience as a broker-dealer D) conviction for a nonsecurities-related misdemeanor 5 years ago

B) violation of another state's securities law within the previous 5 years Statutory disqualification will be put into place if you have been found to be convicted of a securities-related misdemeanor or any felony within the past 10 years. If you were convicted over 10 years ago there is no longer a statutory disqualification even though the State Securities Commissioner could still deny the registration. However, being charged with a felony means nothing unless the charge was followed with a conviction. A nonsecurities-related misdemeanor (e.g., a traffic ticket) will not create a statutory disqualification.

Which of the following is a direct commitment between one buyer and one seller? A) Settlement contract B) Option contract C) Forward contract D) Futures contract

C) Forward contract A forward contract is a direct commitment between one buyer and one seller. The forward seller is obligated to make delivery; the forward buyer is obligated to take delivery. Unlike futures or options where parties other than the two who originated the contract may take the role of the "other side," with a forward contract it is only the two originators who are involved.

When an agent is recommending an investment in an emerging market foreign security, disclosure must be made to the client that the investment is subject to market risk political risk currency risk liquidity risk A) I, II, and III B) I and II C) I, II, III, and IV D) II, III, and IV

C) I, II, III, and IV

The SEC has determined that sales literature regarding past recommendations made by investment advisers is misleading if results reflect the maximum deduction of fees actual market conditions during the referenced period are not disclosed the sales literature reflects performance for a minimum period of only 1 year the sales literature did not disclose that it applies to only a specific group of clients A) II, III, and IV B) I and II C) II and IV D) I, II, III, and IV.

C) II and IV II. actual market conditions during the referenced period are not disclosed IV. the sales literature did not disclose that it applies to only a specific group of clients

Parker and Mary have recently divorced. For Mary to receive Social Security benefits based on Parker's earnings, which of the following conditions must exist? A) Parker must already be at full retirement age. B) Mary must have worked at least 40 quarters to be eligible for benefits. C) The marriage must have lasted at least 10 years. D) Parker must not be remarried.

C) The marriage must have lasted at least 10 years.

*The Investment Advisers Act of 1940 as further modified by SEC Release IA-1092, includes all of the following in the definition of an investment adviser EXCEPT A) a financial representative for a professional athlete B) a financial representative for a celebrity C) an adviser who only gives advice on U.S. government securities D) a pension consultant offering advisory services to employee benefit plans

C) an adviser who only gives advice on U.S. government securities

When investors tend to increase their investments in debt securities into those on the long end of the spectrum rather than those with short-term maturities, it generally leads to A) a positive yield curve B) long-term yields that greatly exceed short-term yields C) an inverted yield curve D) a flat yield curve

C) an inverted yield curve Investors buying long-term debt rather than short-term debt will have the effect of driving the prices of long-term instruments up and, as a result, their yields down. This will give us the inverted or negative yield curve.

ABC Securities, Inc. is a broker-dealer providing services to a number of investment advisers in exchange for directed brokerage business. If any of those investment advisers are offered the opportunity to attend several cybersecurity fora held in various parts of the United States, under Section 28(e) of the Securities Exchange Act of 1934, it would A) be permitted only if the investment adviser paid all of the costs of attendance B) be permitted as long as the only payment made by the broker-dealer was travel and transportation costs C) be permitted as long as the only payment made by the broker-dealer was the registration costs D) not be permitted unless the broker-dealer was also registered as an investment adviser

C) be permitted as long as the only payment made by the broker-dealer was the registration costs The safe harbor provisions of Section 28(e) permit the payment of registration fees for seminars, but not any other associated costs.

*An investor has 1,000 shares of a JNS, Inc., a large-cap value stock purchased 5 years ago at $40 per share. It is currently trading at $52 per share. The investor believes that the current market for this stock is going to remain stable for the next 9 to 12 months. To increase his return on this investment, the representative should recommend that the customer A) buy 10 JNS 40 puts B) sell 10 JNS 40 puts C) sell 10 JNS 55 calls D) buy 10 JNS 55 calls

C) sell 10 JNS 55 calls

Which of the following statements regarding investment companies is TRUE? A) When investors sell or redeem their open-end fund shares, they receive the net asset value (NAV) as of the previous day's close. B) An investment company can offer investors 2 ways of participating in the fund under management through the purchase of closed-end shares, or, if the investor prefers, open-end redeemable shares. C) The only 2 types of investment companies provided for in the Investment Company Act of 1940 are open-end and closed-end management investment companies. D) It is generally prohibited for an investment company registered under the Investment Company Act of 1940 to acquire more than 3% of the outstanding voting shares of another investment company

D) It is generally prohibited for an investment company registered under the Investment Company Act of 1940 to acquire more than 3% of the outstanding voting shares of another investment company

Active government manipulation of the economy through tax and budget policies is referred to as A) classical economics B) monetarist C) supply side D) Keynesian

D) Keynesian Keynesian economics is the body of economic thought that believes that active government intervention in the marketplace is the only method of insuring economic growth and stability, and that the government should manipulate the economy through adjusting levels of government expenditure and taxation.

Which of the following stocks would be the least suitable for an aggressive risk tolerant investor? A) Large-cap international manufacturing company B) Small-cap pharmaceutical company C) Large-cap in a counter-cyclical industry D) Mid-cap utility company

D) Mid-cap utility company An aggressive investor with high risk tolerance would not be interested in a mid-cap utility company.

Which of the following items would be found on a family balance sheet? A) Dividends and interest received B) Income taxes paid C) Annual salary D) Spouse's engagement ring

D) 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.

*When analyzing a company's financial position, an investor could determine which of the following from the company's balance sheet? A) The amount of cash and cash equivalents expended during the first half of the fiscal year as opposed to the second half B) The average number of days it takes for inventory turnover C) Gross revenues for the year D) The net worth of the firm at the end of the reporting period

D) The net worth of the firm at the end of the reporting period

An early distribution from a traditional IRA can avoid the 10% tax penalty in all of the following cases EXCEPT A) death B) reaching age 59½ C) payments made under IRS Rule 72(t) D) a QDRO

D) a QDRO The 10% early distribution tax penalty is avoided through use of a qualified domestic relations order (QDRO) only in the case of a qualified plan, not an IRA.

A transaction in which an investment adviser acts on behalf of both the advisory client and another person on the other side of the transaction is known as A) a discretionary trade B) an illegal and unethical activity C) an exempt transaction D) an agency cross transaction

D) an agency cross transaction

*An investor interested in obtaining the benefit of professional portfolio management, has been tracking a particular investment company for the past several months. In so doing, it becomes obvious that the market price of the shares moves independently from the computed NAV. This investor must be following a A) balanced fund B) common stock fund C) special situations fund D) closed-end fund

D) closed-end fund

The standard deviation of returns is the measure of the A) volatility of a security with respect to the overall market B) relationship of the co-movement of two securities with respect to each other C) degree to which the returns of securities are correlated D) dispersion of a security's returns from its average return

D) dispersion of a security's returns from its average return

*All of the following are required to compute the total return of a common stock EXCEPT A) purchase price of the stock B) price of stock at the end of the holding period C) amount of dividends paid during the holding period D) dividend yield as of the pricing date

D) dividend yield as of the pricing date