Poss. Test Questions

What's a call option?

A call is the option to buy the underlying stock at a predetermined price (the strike price) by a predetermined date (the expiry). The buyer of a call has the right to buy shares at the strike price until expiry. The seller of the call (also known as the call "writer") is the one with the obligation. If the call buyer decides to buy -- an act known as exercising the option -- the call writer is obliged to sell his/her shares to the call buyer at the strike price. So, say an investor bought a call option on Intel with a strike price at $20, expiring in two months. That call buyer has the right to exercise that option, paying $20 per share, and receiving the shares. The writer of the call would have the obligation to deliver those shares and be happy receiving $20 for them. We'll discuss the merits and motivations of each side of the trade momentarily.

Which items would change if a company declared a cash dividend? Working capital. Total assets. Total liabilities. Shareholders' equity. A) I, III and IV. B) I and IV. C) I only. D) I, II, III and IV.

A) I, III and IV. The key word is "declared". Liabilities increase when a dividend is declared, and total assets decrease when it is paid. A declared dividend (but not yet paid) would increase current liabilities (and would therefore decrease working capital). It would increase total liabilities (this is a pending obligation) and reduce shareholders' equity because retained earnings would be decreased by the dividend. Total assets would not be affected until the dividend is actually paid. Reference: 11.4.1.6 in the License Exam Manual

Under the brochure rule of the Investment Advisers Act of 1940: A) each client must be delivered a written disclosure statement no later than at the time of agreement to contract for the adviser's services. B) each client must be offered a written disclosure statement at the time of signing the contract. C) each client must be offered a written disclosure statement at least 48 hours before signing a contract. D) each client must be delivered a written disclosure statement no later than 48 hours after signing the contract.

A) each client must be delivered a written disclosure statement no later than at the time of agreement to contract for the adviser's services. Explanation No agreement between an investment adviser and a client may commence without delivery of the adviser's brochure. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent. Reference: 3.10 in the License Exam Manual

Under the USA, an individual would not be considered an agent while representing the issuer in any of the following transactions EXCEPT: A) nonexempt, initial public offerings. B) promissory notes, such as commercial paper, with a maturity of nine months or less. C) investment contracts issued in connection with an employee's stock purchases, savings, pension, profit-sharing, or similar employee benefit plan. D) issuers in exempt transactions.

A) nonexempt, initial public offerings. Persons who represent nonexempt issuers of new securities, are agents under the USA unless it is stated that the transaction is exempt. Representing issuers in exempt transactions excludes the person from the definition of agent. Reference: 2.3.2.2 in the License Exam Manual

A 68 year-old client of yours indicates that he is interested in changing the portfolio mix of his IRA to become largely invested in noninvestment grade bonds. You would probably infer from this that the client:

A) has insufficient retirement savings. Most studies have indicated that seniors with insufficient retirement savings attempt to compensate by being tempted to reach for higher yields to maximize retirement income without full consideration of the increased risk that comes along with the possibility of higher returns.

In order to compute an investor's real rate of return on a common stock holding, all of the following are necessary EXCEPT: A)marginal tax bracket. B)appreciation. C)inflation rate. D)dividends.

A)marginal tax bracket. The real rate of return is another term for inflation-adjusted return. It is the total return, which is appreciation plus income adjusted for the inflation rate as expressed by the CPI. Tax bracket is necessary to compute after-tax return.

A client's mixed margin account has the following positions: Long, 100 XYZ with a current market value of $5,000 Long, 300 ABC with a current market value of $16,000 Short, 200 DEF with a current market value of $10,000 Short, 100 GHI with a current market value of $8,000 The account has a debit balance of $8,000 and a credit balance of $22,000. What is the combined equity in the account?

Answer: A There are two ways to compute the combined equity in a mixed (long and short) margin account. One is to add the "positives" and subtract the "negatives". In this case, we are long (that is a "plus" for us) $21,000, and we have a credit balance (also a "plus" for us) of $22,000. That is a total of $43,000. Then, we owe (the debit balance) $8,000 against the long stock, and it will take us $18,000 to buy back the short stock. That is a total of $26,000. Subtracting that from the $43,000 gives us a +$17,000. The other way is to take each account separately. In the long account, what we own ($21,000), minus what we owe ($8,000), equals $13,000 of long equity. In the short account, what we "own" is the $22,000 credit balance, and what we owe is the $18,000 market value of the short. That comes out to $4,000. Now, add those two together, and you get the same $17,000.

An investor diversifying a corporate bond portfolio does NOT consider: A) domicile of the investor. B) issuer. C) quality. D) maturity.

Answer: A Domicile, or geographic location of the investor, is not relevant in diversifying a corporate bond portfolio. For example, it is irrelevant if GM the client is located in Michigan or New Jersey. This could be a factor for municipal bond investors due to the possibility of avoiding state income tax. A corporate bond portfolio can be diversified by issuer, quality (rating), domicile of the issuer and maturity.

When using the process of registration by coordination under the Uniform Securities Act, issuers shall simultaneously submit to the state, the documents filed with the SEC under the: A) Securities Exchange Act of 1934. B) Investment Company Act of 1940. C) Securities Act of 1933. D) National Securities Markets Improvement Act (NSMIA).

Answer: C Under the Uniform Securities Act, an issuer registering its securities with the Securities and Exchange Commission (SEC) in accordance with the procedures found in the Securities Act of 1933 shall use the documents it submits to the SEC in its concurrent registration with states in which it plans to offer its securities.

An investor who chooses to use preferred stock as an income source instead of bonds would potentially incur which of the following risks? Loss of principal Price volatility of preferred stock is closely related to interest rates Preferred stock cannot be traded as readily as bonds If the stock is callable, the client's income can be suddenly lowered A) I, II, III, and IV B) I and II C) III and IV D) I, II, and IV

Answer: D Because bonds have seniority over any equity security, there is a greater risk of loss of principal with preferred stock than with bonds. The price volatility of preferred stocks, like bonds, is impacted by interest rate changes. Unlike bonds, however, preferred stock does not have a maturity date. This means that preferred shares may never return to their par value as bonds do at maturity date. Because the preferred stock may have a callable feature, the company can redeem its shares at any time after the call protection period (if any) is over. This usually happens when interest rates have declined so the client whose stock was called will not be able to reinvest the proceeds at the same rate and could, therefore, suffer an unexpected drop in income. Preferred shares, particularly those listed on the exchanges, are generally easier to trade than corporate bonds (and certainly no worse). Reference: 1.2.2.7 in the License Exam Manual.

Under Keogh plan provisions, a full-time employee is defined as one working at least how many hours per year? A)2000 B)1000 C) 500 D) 100

B) 1000 Full time employment is defined as 1,000 hours or more per year, regardless of the number of days, weeks, or months worked. Reference: 20.2.1.2 in the License Exam Manual

Which of the following strategies would most effectively protect an investor with a short stock position? A) Sell a call. B) Buy a call. C) Sell a put. D) Buy a put.

B) Buy a call. Explanation Purchasing a call on the security protects the customer from a loss in excess of the strike price plus the cost of the call should the security rise in price. Reference: 9.1.4.3 in the License Exam Manual

Which of the following are governed by the prudent investor rule? Trustee Executor Custodian Agent who has been granted discretionary authority A) I and II B) I, II, III, and IV C) III and IV D) I, II, and III

B) I, II, III, and IV The prudent investor rule applies to fiduciary accounts, or accounts in which someone is acting on someone else's behalf. In these accounts, the fiduciary must act prudently. An agent who has been granted discretionary authority is acting in a fiduciary capacity. Reference: 20.4.1.1 in the License Exam Manual

Which of the following statements relating to the general securities registration provisions of Section 305 of the Uniform Securities Act is most accurate? A) The registration statement may be amended to increase the number of shares in the offering as long as the share price is not raised by more than 10%. B) The registration is valid for 1 year from the effective date, unless the underwriter or issuer still has some unsold shares. C) The registration is valid for 1 year from the effective date. D) The registration is valid until the next December 31.

B) The registration is valid for 1 year from the effective date, unless the underwriter or issuer still has some unsold shares. Every registration statement is effective for 1 year from its effective date, or any longer period during which the security is being offered or distributed by any underwriter or broker-dealer who is still offering part of an unsold allotment or subscription taken by him as a participant in the distribution. Furthermore, a registration statement may be amended after its effective date so as to increase the securities specified to be offered and sold, if the public offering price and the underwriters' discounts and commissions are not changed from the respective amounts of which the Administrator was informed. Reference: 2.7.3.1 in the License Exam Manual

One method used by some analysts to estimate the future value of a stock is the dividend growth model. This model would probably be most useful in the case of a: A) cumulative preferred stock. B) large-cap stock. C) AAA corporate bond. D) small-cap stock.

B) large-cap stock.

Present value is a computation frequently used to determine the amount of deposit needed now to meet a future need, such as a college education. If an investor uses an expected return of 8%, but the actual return over the period is 6%, A) the accumulated value will meet the objectives B) the yield to maturity will be lower than anticipated C) the present value was insufficient to meet the objective D) the future value will not be able to be computed

C) the present value was insufficient to meet the objective Explanation Present value is the amount deposited to meet a future goal based on an expected rate of return. If the return is lower than expected, the amount deposited will not grow to the required amount (a bad thing). Reference: 12.1.1.2 in the License Exam Manual

Which items change when a company pays a cash dividend? Working capital. Total assets. Total liabilities. Shareholders' equity. A) I and IV. B) I, II and III. C) II, III and IV. D) II and III.

D) II and III. Explanation When a dividend is paid, total assets are decreased as are total liabilities. The liabilities were increased at declaration time and are now decreased to reflect the payout. The two accounts affected would be decrease cash and decrease dividend payable. Reference: 11.4.1.6 in the License Exam Manual

An investor regularly reads financial blogs on the Internet and they are filled with articles suggesting that the economy is headed for a slump. Some are even saying that there will be price deflation. If these projections are accurate, the best place for the investor to place funds would probably be: A) common stock. B) commercial real estate. C) gold. D) U.S. treasury bonds.

D) U.S. treasury bonds. When the economy is headed downward, safety is the imperative and nothing is as safe (at least for exam purposes) as U.S. Treasuries. Gold, and most other commodities, are a hedge against inflation, not deflation. In "down" times, real estate, both residential and commercial, usually underperforms. Reference: 11.1.2.3 in the License Exam Manual

Trade confirmations sent by broker-dealers to their customers must always include A) the tax identification number of the customer B) the amount of markup or markdown charged C) the current market price of the security traded D) the amount of commission charged

D) the amount of commission charged Commissions must always be disclosed. Markup or markdown has to be disclosed under certain, but not all, situations. The trade price, not the current market price, is always disclosed. Reference: 2.3.1.4 in the License Exam Manual

Which of the following illustrates an example of positive margin? A) The stock purchase is being paid for in full rather than by using borrowed funds. B) The interest rate being charged on borrowings is less than the rate of inflation. C) The investment purchased on margin is sold for a price above its original purchase price. D) The rate of return on the investment exceeds the interest cost on the borrowed money.

D) The rate of return on the investment exceeds the interest cost on the borrowed money. Positive margin means that you were successful in your use of the leverage afforded by using margin (borrowed money). That means that the investor's total return exceeds the cost of the borrowed money. It is possible to actually sell the security for a price above its original purchase price, but not more than the total of the cost plus the interest. That would result in negative margin. Reference: 18.1.2.6 in the License Exam Manual

There are many different legal ways to structure a new business entity. One of these is the general partnership. Among the benefits of using this structure would be: A) taxation at a lower rate than a corporation. B) limited liability. C) substantial capital can be raised with little effort and low cost. D) ease of formation. Your answer, taxation at a lower rate than a corporation., was incorrect. The correct answer was: ease of formation.

D) ease of formation. Compared to a corporation, it is generally easier to form (and dissolve) a partnership. General partners have full liability and there is no tax - it is passed on to the partners, to be taxed at a rate that might exceed the corporate tax rate. Corporations are the entity for raising a lot of capital. Reference: 6.1.5.2 in the License Exam Manual.

Under current tax law (2017), how much can a married couple give to their adult son and his wife without incurring a gift tax obligation? A)$14,000 B)Unlimited C)$28,000 D)$56,000

D)$56,000 The current gift tax exclusion (2017) is $14,000 per donor to each recipient. A married couple can give $28,000 to a single individual and qualify for the exclusion. In this case, the married couple can give $28,000 to their son and $28,000 to their daughter-in-law without paying any gift tax.

One element of the formula used to compute the Sharpe ratio is: A)net present value. B)alpha. C)beta. D)standard deviation.

D)standard deviation. Standard deviation is used as the denominator in the formula used to compute the Sharpe ratio, a risk-adjusted rate of return. Standard deviation generally reflects the variability of portfolios that are not well diversified, while beta generally reflects the volatility of portfolios that are well diversified. Net present value measures the theoretical intrinsic value of an investment having uneven cash flows.

When analyzing a preferred stock, an investment adviser would give the most credence to: A)earnings per share. B)the company's short-term debt obligations. C)book value per share. D)the ability of the company to pay the stated dividend.

D)the ability of the company to pay the stated dividend. Preferred stock is purchased primarily as an income security based on its fixed dividend. Therefore, any analysis would tend to place the ability of the issuer to meet that dividend paramount. Earnings per share and book value per share are computations relevant to common stock only.

In order to calculate an investor's holding period return, it is necessary to know: I. value of the portfolio at the beginning of the period. II. value of the portfolio at the end of the period. III. income received during the period. IV. capital appreciation or depreciation over the period.

I., II., & III. (when you know the beginning and ending values, that tells you the capital appreciation or depreciation.)

Which of the following are key assumptions of the Capital Asset Pricing Model (CAPM)? I. Investors hold diversified portfolios II. Income tax rates are stable III. Investors can borrow and lend at the risk-free rate IV. There is a perfect capital market

I., III., IV

What's a put option?

If a call is the right to buy, then perhaps unsurprisingly, a put is the option to sell the underlying stock at a predetermined strike price until a fixed expiry date. The put buyer has the right to sell shares at the strike price, and if he/she decides to sell, the put writer is obliged to buy at that price. Investors who bought shares of Hewlett-Packard at the ouster of former CEO Carly Fiorina are sitting on some sweet gains over the past two years. And while they may believe that the company will continue to do well, perhaps, in the face of a potential economic slowdown, they're concerned about the company sliding with the rest of the market, and so buy a put option at the $40 strike to "protect" their gains. Buyers of the put have the right, until expiry, to sell their shares for $40. Sellers of the put have the obligation to purchase the shares for $40 (which could hurt, in the event that HP were to decline in price from here).

Which of the following investment analysis tools can be used most efficiently to predict the probability of outcomes of portfolio performance recognizing that variables such as holding periods and rates of return are generally uncertain? A)Technical analysis. B)Monte Carlo analysis. C)Efficient market hypothesis. D)Fundamental analysis.

Monte Carlo analysis uses simulations to predict the probability of portfolio performance in light of multiple and uncertain variable conditions. Technical analysis focuses on price patterns. Fundamental analysis focuses on economic, industry, and business conditions. The efficient market hypothesis argues that analysis itself has little, if any, value. Reference: 16.5.4 in the License Exam Manual

An employee is offered a non-qualified stock option with an exercise price of $20 per share. If the option is exercised when the current market value of the stock is $30, the employee: A) is taxed on $20 per share as if it were salary. B) has a capital gain of $10 per share. C) is taxed on $10 per share as if it were salary. D) is taxed on $30 per share as if it were salary.

The correct answer was: is taxed on $10 per share as if it were salary. In the case of NSOs, the difference between the exercise (or strike) price and the current market value is considered salary to the employee. Reference: 1.1.9.1 in the License Exam Manual.

Which of the following are required in order to be in compliance with the recordkeeping requirements of the Uniform Securities Act? Broker/dealers must maintain customer ledgers for three years. Investment advisers must keep partnership records for three years after the partnership is terminated. Agents must keep customer records for three years. Investment adviser representatives must maintain records for five years A) III and IV B) II and IV C) I, II, III, and IV D) I and II Your answer, I, II, III, and IV, was incorrect. The correct answer was: I and II

3 YEARS record keeping requirements for customer ledgers, 3 YEARS for PARTNERSHIP DISSOLUTION for BD! Recordkeeping requirements for broker/dealers are three years and partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of an investment adviser and of any predecessor, shall be maintained in the principal office of the investment adviser and preserved until at least three years after termination of the enterprise. There are no recordkeeping requirements for agents or IARs. Reference: 10.8 in the License Exam Manual.

A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees EXCEPT A) account inactivity fee B) charges for late payments C) advisory fees D) issuance of a stock certificate

advisory fees There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: 1.commissions; 2.markups and markdowns; and 3.advisory fees for those firms that are also registered as investment advisers.

An agent lives in Montana and is registered in Montana and Idaho. His broker-dealer is registered in every state west of the Mississippi River. The agent's client, who lives in Montana, decides to enroll in a 1-year resident MBA program in Philadelphia, Pennsylvania. During the 1-year period, when the client is in Philadelphia, the agent may A) conduct business with the client as usual B) not conduct any business with the client C) only accept unsolicited orders D) not deal with the client until the broker-dealer registers in Pennsylvania

in Montana and Idaho. His broker-dealer is registered in every state west of the Mississippi River. The agent's client, who lives in Montana, decides to enroll in a 1-year resident MBA program in Philadelphia, Pennsylvania. During the 1-year period, when the client is in Philadelphia, the agent may A) conduct business with the client as usual B) not conduct any business with the client C) only accept unsolicited orders D) not deal with the client until the broker-dealer registers in Pennsylvania A) Even though the college program is referred to as a resident program, that does not mean that the client has changed his state of residence. Although neither the firm nor the agent is registered in Pennsylvania, the agent may continue to conduct business with the client. This is because both the agent and his firm are properly registered in the client's state of permanent residence.