Practice Exam Part 1
A client with a bearish outlook on a particular stock would be able to benefit from taking which of the following actions? A) Entering a market order to sell B) Selling the stock short C) Buying the stock on margin D) Entering a sell limit order
B Selling short is a technique used by investors who are of the opinion that the market price of a stock is going to fall.
Popular strategies used by bond investors to mitigate the effects of changes in interest rates include any of the following except A) the barbell strategy. B) the bullet strategy. C) the strategy of lengthening the maturities of their holdings. D) the laddering strategy.
C For those concerned about the effects of interest rate fluctuations on their portfolio, increasing the length of the maturities would increase, rather than decrease, the risk.
Which of the following are not exempt from the delivery requirements of the NASAA Model Brochure Rule Requirements for Investment Advisers? A) An adviser whose only clients are closed-end investment companies B) An adviser who provides only impersonal advisory services at an annual charge of less than $500 C) An adviser who deals with qualified clients only D) An adviser whose only clients are exchange-traded funds
C There are only two exemptions from NASAA's (and the SEC's) brochure delivery rule. They are when the client is a registered investment company and when the adviser's clients receive only impersonal advice and pay less than $500 in fees per year. Qualified clients, those with at least $1.1 million in assets with the investment adviser or a net worth of at least $2.2 million, may be charged performance fees, but that has nothing to do with brochure delivery.
A significant difference between an account for a trust and an account for an estate is A) the standard of prudent investing applies to trusts but not to executors. B) banks can be named as trustees for a trust but not as an executor. C) the trust account will generally be active for a much longer period of time. D) only the estate has beneficiaries.
C Trusts can be set up to run for many years; the executor's job is over once the estate has been settled.
A broker-dealer with no place of business in a state is not required to be registered in that state if the broker-dealer A) is a federal covered broker-dealer. B) is registered in the state where its principal office is located. C) is a member of the New York Stock Exchange. D) limits its clientele to employee benefit plans with assets of at least $1 million.
D A broker-dealer must be registered in every state in which it sells or offers to sell securities unless an exemption is available. If a broker-dealer has no office in a particular state and no business is done in that state other than with institutional clients, registration there is not required. There is no such term as federal covered broker-dealer. The term federal covered applies to certain investment advisers and securities.
The issuance of new common stock will affect which of the following balance sheet items? Total assets Current liabilities Retained earnings Net worth A) I and III B) II and IV C) II and III D) I and IV
D Issuing stock brings in new capital in the form of cash. This raises the assets and, since stock is equity, raises the net worth by the same amount.
When an investor who is reviewing a brokerage account asks what else she could have done with her money, the investor is asking about which risk? A) Credit risk B) Inflation risk C) Market risk D) Opportunity risk
D Opportunity risk arises when an investor makes a choice between two or more investments. To the extent that the chosen investment underperforms the rejected alternatives, the investor's loss is the opportunity cost of making a bad decision.
Jonah purchased 100 shares of DEF common stock at a price of $25 per share on August 4, 2020. On December 1, 2021, with the stock selling for $29 per share, he gifted the stock to his daughter. She subsequently sold the stock nine months later for $32 per share. Her tax consequence is A) $700 short-term capital gain. B) $300 long-term capital gain. C) $300 short-term capital gain. D) $700 long-term capital gain.
D Securities acquired as a gift carry the donor's cost basis and date of purchase. In this case, the cost is $25 and the holding period began in 2020. So the sale is long-term, and the profit is $7 per share.
If a portfolio manager wished to reduce inflation risk, which of the following would be most appropriate to add to the portfolio? A) AAA bonds B) Preferred stock C) Fixed annuities D) Tangible assets
D Tangible assets—such as real estate, precious metals, and other commodities—tend to keep pace with inflation. Fixed-dollar investments do not.
When comparing futures and forwards, it would be correct to state that A) forwards are exchangelisted, while futures are not. B) forwards are more likely to be closed out prior to expiration. C) futures are considered securities, while forwards are not. D) futures are more commonly used by speculators than forwards.
D The nature of futures—being standardized with a fluid secondary market—makes them more suitable than forwards for speculators. In fact, futures are almost always closed out prior to expiration.
Which of the following clients of a federal covered investment adviser are not exempt from the delivery requirements of the brochure rule? A) An individual investor purchasing the investment adviser's newsletter with an annual subscription price of $410 B) An open-end investment company with less than $25 million in assets C) A closed-end investment company traded on the New York Stock Exchange D) An employee benefit plan with assets of at least $5 million
D The only exemptions from the investment adviser brochure rule are registered investment companies (both open- and closed-end) and impersonal advice costing less than $500 per year.
A technical analyst who has been charting the common stock of Kloud Information Storage Systems (KISS) would most likely sell KISS stock short when the market price of the stock is A) just above the support level. B) above the resistance level. C) just below the resistance level. D) below the support level.
D The support level of a stock is the historic repeating bottom. That is, whenever the stock gets that low, it brings out the buyers and pushes the price up. However, when a stock breaks through the support level, it is usually an indication that the support has dried up and there is going to be further decline. That is good for the shortseller.
Your client with a traditional IRA splits her annual $6,000 contribution into four quarterly investments of $1,500 into a broad market ETF. In so doing, she is taking advantage of the principle of A) dollar cost averaging. B) tactical investing. C) rebalancing. D) overfunding her IRA.
A Making regular periodic investments of a fixed amount is the principle of dollar cost averaging. There is no such concept as overfunding an IRA; excess contributions are penalized.
In order to make a quantitative evaluation using the present value computation, which of the following is not needed? A) Account value at the beginning of the period B) Time period involved C) Account value at the end of the period D) Anticipated rate of return of the portfolio
A Present value is calculated to determine the amount required now to have a specified value at some time in the future. It is what we are looking for, so we don't have it now.
Which of the following would probably be the best indicator of where the economy is headed? A) Number of permits for construction of new housing units B) Rate of industrial production C) Average duration of unemployment D) Average prime rate
A The question is looking for a leading indicator.Of those listed, only new building permits fits. Industrial production is a coincident indicator, while the other two choices are lagging indicators.
What is the term generally given by analysts to the number generated by the addition of a company's annual depreciation expense to its net income? A) Dividend payout ratio B) Cash flow C) Book value per share D) Working capital
B Cash flow from operations is the sum of net income plus nonexpended business expenses such as depreciation.
One form of commodity investing is the purchase of precious metals. An investor in precious metals would be least likely to purchase A) palladium. B) molybdenum. C) platinum. D) gold.
B When the exam asks about precious metals, remember that there are only four. They are gold, silver, platinum, and palladium.
One of your clients has a marginal tax rate of 32%. The 35% tax bracket begins in another $30,000 of income. Should the client receive a bonus of $50,000, the federal income tax due on that would be A) $16,900. B) $15,600. C) $16,600. D) $17,500.
C A taxpayer's marginal tax rate is the rate at which an additional dollar of income is taxed. If enough additional money is earned, it moves the taxpayer into the next bracket. In our question, the first $30,000 of the bonus is taxed at 32%, and the next $20,000 is taxed at the next bracket of 35%. The math is $30,000 times 32% = $9,600. To that we add $20,000 times 35% = $7,000. That gives us a total of $16,600 in tax.
Historically, common stock has been shown to protect against A) market risk. B) systematic risk. C) inflation risk. D) business risk.
C Over long periods of time, a diversified portfolio of common stock has been proven to be an effective hedge against inflation. However, ownership of stock does entail business and market risk. Systematic risk and market risk are synonymous.
When an investment adviser representative (IAR) terminates employment with a federal covered investment adviser and immediately accepts employment performing the same functions with a different federal covered investment adviser in the state where the individual resides, A) the investment adviser representative and the employing adviser must notify the Administrator promptly. B) the investment adviser representative and each of the federal covered advisers must notify the Administrator promptly. C) only the terminating investment adviser must notify the Administrator. D) only the investment adviser representative must notify the Administrator promptly.
D If an IAR is working for a registered investment adviser within a specific state, that state securities Administrator wants to know who the IAR is. The question is who is responsible for notifying the Administrator of the IAR's employment. A federal registered investment adviser is exempt from registration at the state level, and therefore, has very little contact with the state. If an IAR goes to work for a federal registered investment adviser, it becomes the duty of the IAR to notify the state securities Administrator of employment there, as well as the date of termination.
Early in the year, an investor purchased 100 shares of KAP common stock for $60 per share. Just prior to the end of the year, after receiving three quarterly dividends of $1, the investor liquidated all of the KAP at a price of $59 per share. If the Consumer Price Index (CPI) increased by 3%, the investor's total return over the holding period was A) 3.33%. B) 5.00%. C) 0.33%. D) 2.00%.
A An investor's total return percentage is calculated by adding together income plus capital gain (or loss) and dividing that total by the initial cost. The math looks like this. Three quarterly dividends of $1 each is $300. Selling the stock at $59 per share represents a loss of $1 per share or $100. The net positive return is $200 that, when divided by the original cost of $60 per share, results in a total return of 3.33% Even though the CPI is given, the question is not asking for the inflation-adjusted or real rate of return; it is just another example of a question containing unnecessary information.
An investor purchased a 2x leveraged ETF at a price of $100 per share. On the first day, the index was up 10%. On the next day, it was down 10%. The investor's share value is now A) $96. B) $99. C) $100. D) $101.
A On the first day, the value increased by twice the 10% the ETF gained (20% × 100 = 20). That makes the share value $120. On the second day, the value decreased by twice the 10% the ETF lost (20% × 120 = 24). That makes the current value $96.
Which of the following is most commonly used when the author wants to express end-of-life wishes? A) A living will B) A living trust C) A testamentary trust D) A revocable trust
A 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 plans, desired medical treatment, and so forth.
Upon reaching the age of 72, required minimum distributions (RMDs) must be taken by retired individuals who were participants in all of the following except A) Roth IRAs. B) SEP IRAs. C) Keogh plans. D) traditional IRAs.
A The Roth IRA is the only one of these for which there are no required minimum distributions beginning at age 72. If the individual is still employed by the sponsor of a qualified plan, RMDs are not required from that plan, but the question would have to state that.
You are explaining to an advisory client that the U.S. economy goes through somewhat repeatable phases over a period of time. Which of these terms does not describe one of those business cycles? A) Inflation B) Contraction C) Peak D) Expansion
A The four phases of the business cycle are expansion, peak, contraction, and trough. Although inflation typically increases during expansion and reduces during contraction, inflation is not a term used to describe one of the phases.
Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of which of the following? The Securities Exchange Act of 1934 The Investment Company Act of 1940 The Investment Advisers Act of 1940 The Uniform Securities Act A) II and IV B) II, III, and IV C) I, II, and III D) I and III
A The requirement for written advisory contracts is found in both the Investment Company Act of 1940 for those advising registered investment companies and the Uniform Securities Act for state-registered advisers. Oddly, there is no mention made of this requirement in the Investment Advisers Act of 1940. Sure, it makes good sense, but it is not required. Nothing in the Securities Exchange Act of 1934 relates to investment advisers, much less their contracts with clients.
When discussing the suitability of investing in direct participation programs, particular attention should be focused on which risks? Legislative Liquidity Market Purchasing power A) I and II B) I and IV C) II and III D) III and IV
A Two of the major risks faced by direct participation program (DPP) investors are the lack of liquidity and the possibility of legislative change.
One of the differences between state and federal laws involving an investment adviser maintaining custody of customer funds and/or securities relates to the handling of client checks made payable to third parties such as broker-dealers. Which of the following properly expresses that difference? A) Under state law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within three business days of receipt. B) Under federal law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within three business days of receipt. C) Under state law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within 24 hours of receipt. D) Under federal law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within 24 hours of receipt.
A Under the Uniform Securities Act, if an investment adviser receives a check made payable to an unrelated third party, it will be considered custody unless forwarded within three business days of receipt. Third-party checks are never considered custody under federal law.
Investors seeking current income would benefit from A) selling call options. B) buying U.S. Treasury STRIPS. C) buying LEAPS. D) buying periodic payment variable annuities.
A When an investor sells an option, put, or call, the premium is received, generating immediate income. LEAPS are long-term options and, like all long options positions, do not generate any income. A periodic payment variable annuity will not begin any payout until the end of the deferral period. A commonsense way to answer this question is to ask yourself, "How do many people generate their income?" They do so by selling something.
As defined in the Uniform Securities Act (USA), which of the following would be considered an exempt transaction? A) A purchase of bonds by a trustee of an irrevocable trust B) A sale of stock by an administrator of an estate C) A purchase of stock by an accredited investor under Rule 506(b) D) A sale of U.S. Treasury bonds to a retail investor
B A sale by certain fiduciaries, such as an executor or administrator of an estate, is an exempt transaction under the USA. Even though the Treasury bonds are an exempt security, the sale to an individual is not an exempt transaction. Rule 506(b) is the federal transaction exemption not found in the USA, and only a trustee in bankruptcy is considered for the exemption.
NASAA's Model Rule on Business Continuity and Succession Planning (BCP) requires that investment advisers (IA) establish a plan that provides for each of the following except A) minimizing service disruptions and client harm. B) assurance of continued profitability. C) assignment of duties to qualified persons in the event of unavailability of key personnel. D) office relocation in the event of a temporary loss of a place of business.
B Although NASAA would like to see registered IAs be financially successful, the BCP is not designed to assure profits.
The fiduciary handling a qualified retirement plan usually provides a written document that sets forth the objectives and constraints on a managed portfolio. This document is called A) the legal opinion. B) the investment policy statement. C) the statement of fiduciary responsibility. D) the management agreement.
B An investment policy statement (IPS) is designed to describe the plan's investment goals and investment strategies. It typically identifies levels of risk acceptable in the construction of a portfolio. An IPS establishes the strategic framework utilized by the fiduciary to manage a portfolio.
Low risk tolerance and high liquidity needs are typical characteristics of which type of institutional investor? A) Trusts B) Banks C) Defined benefit pension plans D) Foundations
B As with so many suitability questions, students frequently have to sit back and try to find a logical answer. Although the risk tolerance for all of these choices tends to be on the lower end of the scale, banks are different when it comes to liquidity needs. Banks tend to have high liquidity needs because they must be ready to meet the withdrawals of depositors at any time. The nature of foundations, trusts, and defined benefit pension plans is such that it is usually easier to predict their liquidity needs. Pension funds have a pretty good idea when participants will be retiring. Trusts and foundations generally schedule their distributions well in advance.
Irving Wilson works for Wall Street Limited (WSL), a registered investment adviser. He limits his advice exclusively to equity securities listed on the NYSE. Under the Uniform Securities Act, Irving A) is not covered by the antifraud rules, as these are federal covered securities. B) must register as an IAR. C) would need registration as a federal covered IAR. D) need not register as an IAR.
B Because Irving works for a registered investment adviser and provides advice on securities (where they are traded is irrelevant), he must register as an investment adviser representative (IAR), regardless of the nature of the securities that are the subject of his advice. There is no such thing as a federal covered IAR, only a federal covered investment adviser. If the advice relates to securities, no one is exempt from the antifraud rules.
Which of the following are reasons an investor might purchase an ETF tracking a broad market index instead of selecting individual securities? A) Historically, a broad-based index offers greater potential for abnormal gains than that offered by the purchasing of individual securities. B) It is the best way to be fully diversified against unsystematic risk. C) It is a simple way to hedge the investor's existing stock portfolio against a market decline. D) It reduces the level of systematic risk.
B Buying an exchange-traded fund (ETF) that tracks a broad-based index avoids the risk associated with any one company (business risk). A disadvantage of investing in a broad-based index is that it virtually eliminates the opportunity for outsized gains. The performance of one or two highfliers is subsumed by the large portfolio. If one wants to hedge, you take the opposite position. Buying an index ETF or fund is essentially doubling down on the bullish bet the investor has already made. Diversification reduces unsystematic risk, not systematic risk.
One of the purposes of filing the annual updating amendment to the Form ADV Part 1A is to A) ensure that full disclosure has been made in the adviser's brochure. B) verify that the investment adviser still qualifies for SEC registration. C) disclose the amount and location of securities or funds of clients that are being held by the adviser or a qualified custodian. D) provide updated information on those associated persons who are in charge of giving investment advice.
B In order to maintain SEC registration, an investment adviser must maintain assets under management of no less than $90 million. The annual updating amendment is used to disclose this information.
A state-registered investment adviser maintaining custody of customer funds and securities discovers that the firm's net worth is $32,000. Which of the following steps would not be required? A) Notifying the administrator of the deficiency by the close of business on the next business day B) Returning the customer funds and securities within three business days of the discovery C) Reporting to the administrator the number of client accounts being served by the investment adviser D) Filing a financial report with the administrator by the close of business on the next business day following notice
B Once the firm's net worth is below $35,000, notifications and reports must be sent to the administrator. Unless ordered by the administrator, there is no requirement to return client assets to clients.
With regard to nonqualified stock options (NQSOs) and incentive stock options (ISOs), which of the following statements is notcorrect? A) Board of director approval is required for both NQSOs and ISOs. B) Capital gain treatment is available only with NQSOs. C) A tax deduction for the employer is generally available only with NQSOs. D) AMT is an issue only for those exercising ISOs.
B Only the ISO offers the employee a capital gain treatment.
John was convicted five years ago of failure to pay child support—a misdemeanor in his home state. John would now like to register as an investment adviser representative in a neighboring state where that crime is considered a felony. Under the Uniform Securities Act, the administrator of the neighboring state A) will determine John's status based upon the extent to which his child support payments are being paid. B) will disregard that conviction when determining John's qualifications for registration. C) will consider John to be statutorily disqualified since in this state, his crime is a felony. D) will consider granting registration to John but only if he receives heightened supervision.
B The conviction on John's record is for a misdemeanor. The fact that the same crime is a felony in another state is not relevant to his application for registration in that state.
Under the Uniform Securities Act, all of the following persons with no place of business in the state are exempt from registration as an investment adviser except A) advisers who deal exclusively with federal covered investment advisers located in the state. B) advisers who have conducted business with no more than six clients, other than institutions, in the state within the past 12 months. C) advisers who deal exclusively with savings banks located in the state. D) advisers who deal exclusively with investment companies registered under the Investment Company Act of 1940.
B The de minimis rule for a registered investment adviser who has no place of business in the state is fewer than six retail clients. Doing business with six clients within the past 12 months exceeds this de minimis amount, and therefore, the exemption from registration does not exist. All others listed as possible answers are institutional- or professional-type investment clients. If a registered investment adviser works with only this type of client, an exemption from registration in that state exists as long as the registered investment adviser has no place of business in that state. In fact, if the investment adviser deals exclusively with registered investment companies, the adviser is federal covered and must register with the SEC rather than with any states.
In order to comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must do which of the following? Offer plan participants at least three different investment alternatives Ensure that plan participants are insulated from control over their portfolios Allow plan participants to change their investment options no less frequently than quarterly Permit immediate vesting of employer contributions A) II and III B) I and III C) I and IV D) II and IV
B The safe harbor requirements of ERISA Section 404(c) relieve the trustee of a 401(k) plan of liability if the plan participants have the ability to select from at least three different investments and are allowed to make selection changes no less frequently than quarterly. Immediate vesting is required in a safe harbor 401(k), which is one that is safe from top-heavy testing.
The weak form of the efficient market hypothesis A) implies that fundamental analysis is not worthwhile. B) implies that technical analysis is not worthwhile. C) reinforces the value of technical analysis. D) implies that inside traders cannot earn superior risk-adjusted returns.
B The weak form implies that information contained in historical stock prices is fully incorporated into current stock prices; therefore, technical analysis (the study of historical prices and volume) is not worthwhile in predicting future prices. This form neither refutes fundamental analysis nor implies that traders using insider information cannot earn superior profits.
The discounted rate that equates a bond's cash flow to its current price is known as the bond's A) duration. B) yield to maturity. C) current yield. D) coupon rate.
B The yield to maturity of a bond considers the accretion of any discount or amortization of any premium as well as the annual coupon rate, taking into consideration the time value of money.
An individual has just received an inheritance of $15,000 and has the goal of preservation of capital and income. The client is in a low tax bracket. Which of the following would be the most suitable choice? A) Newly issued U.S. Treasury bonds B) Bank-insured CDs C) Public utility stocks D) Insured municipal bonds
B When preservation of capital is a goal and one of the choices is an insured bank CD, choose that answer. When the question refers to a low tax bracket, municipal bonds will never be the correct choice. Newly issued Treasury bonds have maturities of at least 10 years. During that time, changes to interest rates in the marketplace would cause the market price of those bonds to fluctuate. Although the public utilities will offer income frequently higher than the CD, there are no guarantees the principal will remain intact. (Some public utilities have gone bankrupt.)
An investment adviser wishes to advertise a proprietary charting system used to time the market. In order to be in compliance with the Investment Advisers Act of 1940, A) results obtained by using the system must be shown using a time period of no less than 12 months. B) the advertisement must be filed with the appropriate SRO within 10 business days of first use. C) a statement reflecting the limitations and difficulties of using the system must be included in the ad. D) authorship of the system must be prominently disclosed.
C An advertisement describing a charting system or any type of formula must always state that there are limitations and difficulties to using the system.
During your initial interview with a couple who are potential advisory clients, you obtain the following information. He is 58, and she is 56. They both plan to continue working until she reaches 65 and is eligible for Medicare. As you begin to develop a plan for this couple, you would probably project their time horizon as
C An investor's time horizon is the length of time the planned investment strategy is designed to serve. In the case of a couple looking ahead to retirement, the time horizon is their life expectancy.
A life insurance policy with benefits tied to the performance of a separate account that allows the policyholder to skip premium payments is called A) a fixed premium variable life insurance policy. B) a scheduled premium variable life insurance policy. C) a flexible premium variable life insurance policy. D) a universal life insurance policy.
C Flexible premium means that the policyholder can elect to skip premium payments. This is a feature of all universal life policies, but only in the case of universal variable life insurance does the performance of the separate account impact benefits.
The Uniform Securities Act provides for civil penalties in the event of illegal activities of broker-dealers and their agents. Under the act, a purchaser would not be entitled to claim A) interest at the state's legal rate less any income received on the security. B) court costs. C) the original consideration paid for the security or the current market value, whichever is greater. D) attorney's fees.
C In the event of a civil judgment, the purchaser is able to claim for a return of the original investment, not current market value, plus interest at the state's legal rate. This interest is reduced, however, by any income received on that security. In addition, the broker-dealer or agent is liable for courts costs and attorney's fees.
In the over-the-counter market, the person who performs the dealer function that a DMM is responsible for on an exchange is A) the floor broker. B) the broker-dealer. C) the market maker. D) the OTC trader.
C On an exchange, the specialist (now called the DMM or designated market maker) performs both an agency and a dealer function. That action of buying and selling from inventory is performed by market makers in the over-the-counter (OTC) market.
With regard to an SEC-registered investment adviser employing the services of a promoter to solicit on its behalf, it would be correct to state that A) delivery of the solicitor's brochure must take place within five days after the entry into the advisory contract. B) cash referral fees may be paid pursuant to a written or oral agreement to which the investment adviser is a party. C) the investment adviser may not compensate a solicitor who is subject to a statutory disqualification. D) referral fees may be paid only if the promoter is also registered with the SEC.
C One of the important requirements when hiring a promoter to solicit advisory business for compensation is making sure the person is not statutorily disqualified from registration. That is, any person who would be unable to register as a securities professional because of prior conduct cannot act as a solicitor for a registered investment adviser. The industry refers to this person as a bad actor. Compensation, defined as more than a de miminis amount (more than $1,000 over the previous 12 months), requires a written (not oral) agreement. One of the changes made by the SEC's Investment Adviser Marketing Rule in 2020 was the elimination of the requirement to deliver a solicitor's brochure.
In which of the following instances would an investment adviser representative (IAR) be exempt from the antifraud rules of the Uniform Securities Act (USA)? A) Since the IAR understands how nervous a particular client is, he never admits a loss in the account to that client. B) In an effort to avoid possible conflicts of interest, the IAR only does personal trades through an account set up with a fictitious name. C) The IAR makes a presentation at a seminar where the only topic discussed is fixed annuities. D) The IAR is also an agent of a broker-dealer and, in that capacity, makes a recommendation to a nonadvisory client.
C Since fixed annuities are not securities, a presentation dealing solely with that topic is not covered under the antifraud statutes of the USA.
Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A) JKL 4s of 2022 B) GHI 7s of 2052 C) ABC 5s of 2050 D) DEF 6s of 2051
C The bond with the longest duration is generally going to have the greatest exposure to interest rate risk. Because there is very little difference between maturity dates of 2050 through 2052, the bond with the lowest coupon will have the longest duration. The 4s of 2022 have a relatively short duration, even though their coupon is low.
What is the tax-equivalent yield of a 7% municipal bond to an investor in the 35% federal income tax bracket? A) 9.45% B) 4.55% C) 10.77% D) 20.00%
C The computation for tax-equivalent yield is found by dividing the municipal bond's coupon rate (7%) by (100% - tax bracket) or (100% - 35%). When dividing 7% by 0.65, the result is closest to 10.77%. In other words, an investor would have to receive a taxable return in excess of 10.77% to put more money in the pocket than owning this 7% municipal bond.
While reviewing the financial statements of the ABC Corporation, you notice that the company has $5 million in cash on hand and $6 million in inventory. If the current assets total $15 million, the total assets are $22 million, and the current liabilities are $6 million, the quick asset ratio is A) 2.33:1. B) 3.0:1. C) 1.5:1. D) 2.66:1.
C The quick asset ratio is current assets minus inventory divided by the current liabilities. In this question, it is $15 million - $6 million = $9 million ÷ $6 million = 1.5:1.
An investor purchased one ABC October 50 call at 3 and one ABC October 50 put at 2. This position is A) a combination. B) an iron condor. C) a straddle. D) a spread.
C When an investor is not sure which direction the market will move but has a strong opinion that there will be dynamic movement, a strategy that might be employed is the purchase of a straddle. This is the combining of a put and a call on the same stock with the same exercise price and expiration date.
Under the provisions of the Uniform Securities Act, which of the following statements about unsolicited orders is true? A) If the order ticket is appropriately marked, the administrator may not challenge a broker-dealer's assertion that the order was unsolicited. B) Under certain conditions, an administrator may prohibit a broker-dealer registered in the state from accepting any unsolicited orders. C) A client may not purchase, at his own initiative, securities trading in the secondary market if the agent is otherwise prohibited from soliciting the order. D) An unsolicited order from a noninstitutional client for an unregistered, nonexempt security is considered a transaction exempt from the registration and advertising filing requirements of the act.
D Clients have the right to buy or sell whatever they desire. The issue becomes a question of who initiates the trade. An unsolicited transaction may be executed by an agent if it is the client who asks for the trade. The trade ticket should be marked as unsolicited. The state securities administrator has the right to seek verification from the client that the trade was, in fact, unsolicited. The security involved in the trade can be one that is nonexempt and unregistered in the state.
Section 15 of the Investment Company Act of 1940 spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that A) the initial contract is for a maximum of one year and then may be renewed on either an annual or a biannual basis. B) the fund may not engage in margin trading unless a specific exemption applies. C) the contract should be in writing. D) no contract may be terminated with more than 60 days' written notice.
D Contracts between funds and their advisers may not be terminated with more than 60 days' written notice, and these contracts must—not should—be in writing. The initial contract is for a two-year period after which the contract is renewed on an annual basis. Whether or not the fund can trade on margin is not a function of the management contract.
Prudent Asset Construction Enterprises (PACE) has offices in States X, Y, and Z. On their last annual updating amendment, they reportedassets under management (AUM) of $218 million. In which of the following instances would PACE be receiving a substantial prepayment of fees? A) $10,000, paid monthly B) $1,600, paid at the first of each quarter C) $600, paid six or more months in advance D) $1,600, paid one year in advance
D First of all, this is an SEC-registered investment adviser, so we have to go by the federal numbers. Those are more than $1,200, six or more months in advance. The $600 would have been substantial if PACE was stateregistered. Although the other two choices are above $1,200, they are not prepaid for at least six months.
Which of the following statements regarding an agent's registration is correct? A) Agents may be licensed in a state even if their broker-dealer is not. B) If the broker-dealer with which that agent is registered should have its registration revoked, the agent's license will be held by the administrator and the agent will be required to register with an active broker-dealer no later than 30 days following the revocation. C) Individuals whose only securities activity with a broker-dealer is trading for the firm's proprietary account are not required to register as agents. D) Revocation of the registration of an agent's broker-dealer will result in placing that agent's effective registration in suspense.
D The registration of an agent is not effective during any period when he is not associated with a particular broker-dealer registered under the Uniform Securities Act or a particular issuer.
The dividend discount model is A) a method of determining the appropriate relationship between the price of the corporation's common stock and its preferred stock. B) a function of the price-to-earnings ratio. C) the complement of the dividend payout ratio. D) an analytical tool used to project the current value of a common stock using projected dividends.
D There are two widely accepted forms of common stock price valuations using dividends: the dividend discount model and the dividend growth model.
