Series 65 Facts 2

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

C 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. LO 23.d

Which of the following statements regarding the alternative minimum tax is true? A) The lesser of the regular tax or the alternative tax is paid. B) The alternative minimum tax is added to the regular tax. C) The excess of the alternative tax over the regular tax is added to the regular tax. D) The tax bracket will determine whether the regular tax or the alternative tax is paid.

C The excess of the alternative tax over the regular tax is added to the regular tax amount. The taxpayer does not have the option of paying the alternative tax or the regular tax depending on his tax bracket. The purpose of the alternative minimum tax is to ensure that certain taxpayers pay a tax consistent with their wealth and income. LO 15.d

A 68-year-old individual, who purchased a single premium immediate fixed annuity, elected monthly payments for life with a 10-year certain settlement option. If the individual lives to the age of 80, A) monthly payments will remain fixed until age 78 and then reduce until death. B) monthly payments will continue to the beneficiary(s) for 10 years after the annuitant's death. C) monthly payments will continue until death. D) monthly payments will cease at age 78.

C When choosing the settlement option, life with 10 years certain, the annuitant will receive payments until the later of death or 10 years. LO 24.d

You have a client who is bullish on XYZ stock and currently owns 100 shares that last traded at $50. He has a CD coming due in March, six months from now, and is afraid that by the time those funds are available, XYZ will have shot up in price. How can he ensure that he'll be able to pick up the stock at today's price six months from now and not miss out on that market appreciation? A) Buy an XYZ March 50 call option. B) Sell an XYZ March 50 put option. C) Buy XYZ stock rights. D) Buy an XYZ March 50 put option.

A A call option gives the holder the right, but not the obligation, to purchase shares of the underlying stock at the exercise price until the expiration date. Owning a March 50 call means that any time between now and the expiration date in March, the investor could exercise the option and purchase 100 shares per contract at $50 per share. If the stock doesn't rise in price, the investor can allow the option to expire. Buying a put option would be a good choice if the question asked, "How can the client protect against a market decline?" Selling a put obligates the client to buy the stock at $50, but that would only be exercised if the stock's price fell; this is not something this client would want to do. Stock rights would never run as long as six months. LO 4.b

If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as A) a unit investment trust. B) a utilities fund. C) a growth fund. D) a closed-end company.

A A unit investment trust issues shares that represent units of a particular portfolio; management has no authority, or only limited authority, to change the portfolio. The portfolio is fixed; it is not traded. LO 3.f

An American depositary receipt (ADR) is A) a certificate representing ownership of a foreign security that is on deposit at a U.S. bank. B) a type of derivative used to speculate in foreign currencies. C) a certificate representing ownership of a U.S. security that is deposited in a foreign bank. D) a document used with interest rate swaps.

A An American depositary receipt (ADR) is a certificate representing ownership of foreign securities that are on deposit at a U.S. bank. ADRs can be traded on U.S. stock exchanges, are quoted and pay in dividends in U.S. dollars, and receive all the shareholder protections of U.S. securities. LO 1.f

Which of the following industries would tend to be the most cyclical? A) Appliance manufacturers B) Tobacco producers C) Food producers D) Supermarkets

A Cyclical refers to whether the industry is affected by business cycles of the economy. Items such as luxuries and large-ticket items (autos, homes, appliances) are normally cyclical. Food and tobacco are normally not cyclical. LO 6.a

Due to changes in market rates, a corporation is able to purchase some of its outstanding 20-year bonds at a discount. Which of the following is correct? I) Working capital is increased. II) Working capital is reduced. III) Net worth is increased. IV) Net worth is reduced. A) II and III B) II and IV C) I and IV D) I and III

A Even though the bonds are purchased for less than par value, working capital is reduced because the company is using a current asset—cash—to pay off a long-term liability. However, the fact that it is reducing its debt for less than the amount shown on the books will result in an increase to net worth. LO 7.b

Kurt expects a certain stock to significantly rise in value in the near future. He is expecting a bond to mature in two months and does not want to miss out on any appreciation on the stock while waiting for the funds to become available. Which of the following would be the best option strategy for Kurt? A) Buy a call option. B) Sell a put option. C) Sell a call option. D) Buy a put option.

A Kurt can lock in the price of the stock by purchasing a call option with an expiration date exceeding two months. Remember the phrase call up. If you think the stock's price is going up, buy a call. LO 4.b

An investor wishing to add some diversification to his portfolio wants to purchase 200 shares of an ADR for a Japanese electronics manufacturer. The ADR is listed on the NYSE. Which of the following risks should be of most concern to this investor? I) Business II) Currency III) Inflation IV) Liquidity A) I and II B) II and III C) III and IV D) I and IV

A Owning stock in any corporation always subjects the holder to business risk—the uncertainty that the entity might fail to meet its economic goals. Whenever one invests internationally, whether directly or through the vehicle of an ADR, one is subject to currency risk, sometimes called exchange rate risk. Inflation risk is of concern to those who purchase fixed-income investments, and any security listed on the NYSE has little or no liquidity risk. LO 1.f

Which of the following statements regarding both traditional and Roth IRAs is true? A) Contribution limits are the same. B) Distributions must begin in the year after the owner reaches age 59½. C) Withdrawals at retirement are tax free. D) Contributions are tax deductible.

A The common factor for both traditional and Roth IRAs is that contribution limits are identical. Roth contributions are made with after-tax dollars rather than pre-tax dollars (the usual case with a traditional IRA). On the other hand, it is only the Roth where, assuming the conditions are met, the withdrawals are tax-free. There are no RMDs for Roth IRAs. LO 18.a

An agent must obtain written verification of an investor's net worth for which of the following investments? A) Real estate investment trusts B) Direct participation programs C) Unit investment trusts D) Variable contracts

B DPPs require complete financial disclosure because of minimum suitability standards set by the states in which they are sold. REITs, unit investment trusts, and variable contracts do not have specific net worth suitability requirements for investors. LO 5.b

Which of the following acts requires publicly traded corporations to issue annual reports? A) Trust Indenture Act of 1939 B) Securities Exchange Act of 1934 C) Investment Company Act of 1940 D) Securities Act of 1933

B The Securities Exchange Act of 1934 mandates that public issuers file annual and quarterly reports with the SEC. LO 7.e

The SROs have instituted maintenance margin levels for those situations where the equity in a client's margin accounts is reduced to a dangerous level. Currently, those levels are A) 50% for a long account. B) 25% for a long account. C) 25% for a short account. D) 30% for a long account.

B The current minimum maintenance levels set by the SROs is 25% equity in a long margin account and 30% equity in a short margin account. The initial margin requirement under Reg. T is 50% for both long and short accounts. LO 23.b

All of the following would flow through as a loss to limited partners except A) interest payments on partnership debt. B) depletion. C) principal repayment on partnership debt. D) accelerated depreciation.

C Principal repayments are not an expense for tax purposes. The interest on the debt is an expense and, along with depletion and depreciation expenses, does flow through to the limited partners as passive loss. LO 5.a

Which of the following statements about the Consumer Price Index (CPI) is not true? A) The CPI measures the increase in the general price level of a basket of consumer goods. B) The CPI is computed monthly. C) The CPI measures the increase or decrease in the level of consumer prices with respect to the level of wholesale prices upon which consumer prices depend. D) The CPI measures the rate of increase or decrease in a broad range of prices, such as food, housing, medical care, and clothing.

C The CPI does not measure the increase or decrease in the level of consumer prices with respect to the level of wholesale prices. The CPI only measures retail prices, whether or not wholesale prices are passed through to the consumer. LO 6.d

In a scheduled premium variable life insurance policy, all of the following are guaranteed except A) the ability to borrow at least 75% of the cash value after the policy has been in force at least 3 years B) a minimum death benefit C) the right to exchange the policy for a permanent form of insurance, regardless of health, within the first 24 months D) a minimum cash value

D In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months allowing the conversion of the variable policy to a comparable form of permanent insurance and the 75% cash value loan minimum applies after the 3rd year of coverage. LO 24.g

Under the provisions of the Internal Revenue Code, which of the following business forms is not required to file a separate tax return? A) LLC B) Limited partnership C) S corporation D) Sole proprietorship

D In the case of a sole proprietorship, any tax consequences (income or loss) are reported on the owner's personal Form 1040, Schedule C. The other entities file either a Form 1065 (limited partnership and LLC) or a Form 1120S (S corporation). Although a one member LLC is treated like a sole proprietorship, unless that was stated as a choice, the LLC has multiple members. LO 16.c

Which of the following statements is not correct? A) Net present value analysis (NPV) is a commonly used time value of money technique employed by businesses and investors to evaluate the cash flows associated with capital projects and capital expenditures. B) Time-weighted returns show performance without the influences of additional investor deposits or withdrawals from the account. C) Internal rate of return (IRR) is a method of determining the exact discount rate to equalize cash inflows and outflows, thus allowing comparison of rates of return on alternative investments of unequal size and investment amounts. D) Net present value (NPV) is the difference between the initial cash outflow (investment) and the future value of discounted cash flows.

D Net present value (NPV) is the difference between the initial cash outflow (investment) and the present value of discounted cash flows (NPV = PV of CF − cost of investment). That is why it is called net present value instead of net future value. LO 20.a

The Uniform Securities Act gives the Administrator the authority to do all of the following except A) conduct hearings. B) examine the records of a broker-dealer, regardless of the state where those records are located. C) issue cease and desist orders. D) issue injunctions.

D Only a court of competent jurisdiction has the power to issue an injunction. The Administrator may go to the court to request the injunction but cannot issue it himself. The Administrator may issue a cease and desist order with or without a prior hearing. Records, no matter where they are located, may be subpoenaed by the Administrator. LO 12.b

When dealing with suitable recommendations to clients, it is important to distinguish between investment objectives and investment constraints. Which of the following would be an investment objective rather than a constraint? A) ESG investing B) Need for liquidity C) Tax considerations D) Current income

D The objective is the route you wish to take. The constraints are what might keep you from getting there. The client who has current income as an objective needs to consider the potential obstacles (constraints) in the way. ESG (environmental, social, and corporate governance) represent attitudes. The investor's personal attitude towards certain industries may limit the universe of potential investments. The same is true when the need for liquidity is high. Taxes are another potential roadblock to overcome. LO 17.c

An investment adviser would be most likely to be the contra-party to a trade when acting as A) a broker. B) a principal. C) an investment counsel. D) an agent.

B The term contra-party means the other side of the trade. There are always two parties (the principals) to any transaction: the buyer and the seller. When an investment adviser is selling a security out of, or purchasing a security for its proprietary account, it is one of the principals. LO 13.b

The difference between present value and net present value represents A) the internal rate of return B) the initial cash outlay C) the credit risk premium D) the discounted cash flow

B When computing the net present value, we remember that the word net means that something must be subtracted. The number subtracted is the initial cost of the investment. LO 20.a

Which of the following is true regarding ETNs? A) As fixed-income investments, they do not have market risk. B) They are noncallable prior to maturity. C) Their value can be impacted by changes in the issuer's credit rating. D) They are suitable for conservative investors seeking income

C ETNs are unsecured debt obligations carrying credit risk based on the issuer's credit rating. Fixed-income investments have the market risk more commonly referred to as interest rate risk, and they are usually callable. These are sophisticated instruments that are not suitable for conservative investors. LO 5.c

Which of the following is not a market cap-weighted index? A) Morgan Stanley Capital International B) FTSE 100 and FTSE All-Share C) Dow Jones Industrial Average D) S&P 500

C The Dow Jones Industrial Average is a price-weighted index. All other options are market cap-weighted indexes. LO 22.b

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, which of the following are insiders for purposes of insider trading? I) Attorney who writes an offering circular for a company II) An investor holding 4% of the company's stock III) The next-door neighbor of a board member of a company IV) Brother of a company's president A) I and IV B) II and III C) I and III D) II and IV

A The Securities Exchange Act of 1934 defines an insider as an officer, director, or stockholder owning more than 10% of a company's outstanding voting equity. The definition also includes anyone else who has or could have access to insider information, such as immediate family members. Merely being someone's neighbor does not automatically classify someone as an insider. Any professional who takes part in preparing the registration statement is automatically considered to have insider information. LO 14.k

In order to achieve its goals, an inverse ETF uses A) derivatives and debt. B) preemptive rights. C) arbitrage. D) short selling.

A An inverse ETF will almost always use derivatives, such as options, and—in the case of a leveraged ETF—will use debt, primarily in the form of margin. Inverse ETFs do not engage in short selling; they are an alternative to selling short a specific index without the unlimited risk potential of the short sale. Arbitrage is used, typically by institutional investors, to take advantage of temporary imbalances between the ETF's net asset value and market price. LO 5.c

A well-diversified investor following a rebalancing portfolio strategy in a rising market will most likely A) write covered calls on the long stock currently in the portfolio B) sell all the stock in the portfolio C) sell part of the stock in the portfolio D) purchase additional stock

C Portfolio rebalancing is a strategy that seeks to maintain a constant ratio (percentage) of a portfolio's original investment allocation. If stock increases in value, some of it will be sold to maintain the proportion of stock in the portfolio. LO 21.c

An investor has bonds maturing in three weeks on the first day of the upcoming month. Since his purchase of the bonds five years ago, interest rates have fallen. To which one these risks are these bonds most likely to be subject? A) Default risk B) Interest rate risk C) Reinvestment risk D) Purchasing power risk

C Reinvestment risk is the risk associated with reinvesting interest and/or principal payments when interest rates have fallen. On the upcoming maturity date, the investor will receive the par value of the bonds plus the final interest payment. When looking to reinvest the proceeds, it will be at current market interest rates which, as the question states, are lower than what the bonds had been paying. LO 19.b

Owners of private activity municipal bonds might find themselves A) receiving less interest than with a similar GO bond. B) taking an extraordinarily high risk. C) subject to the alternative minimum tax. D) in violation of MSRB rules if proper disclosures are not made.

C The interest on private activity municipal bonds (used for things like airports, student housing, etc.) is exempt from federal taxation but is considered a preference item for the AMT. LO 15.d

An investor purchased a single payment, deferred non-qualified variable annuity. Each of the following statements is true except A) random withdrawals are handled under LIFO tax rules B) upon withdrawal, the amount exceeding the investor's cost basis is taxed as ordinary income C) taxes on earned dividends, interest, and capital gains are paid annually, until the owner withdraws money from the contract D) money invested in this annuity represents the investor's cost basis

C Taxes on earned dividends, interest, and capital gains are not paid annually. They are deferred and paid later, when the owner withdraws money from the contract. Money randomly withdrawn (not annuitized) is handled under LIFO tax rules; money invested in a non-qualified annuity represents the investor's cost basis; and on withdrawal, the amount exceeding the investor's cost basis is taxed as ordinary income. LO 24.e

Disregarding any potential redemption or CDSC fees, an investor tendering shares of an open-end investment company for redemption will receive A) the last computed net asset value. B) the next computed net asset value plus a portion of the sales load. C) the next computed net asset value. D) the next computed public offering price.

C When an investor redeems (or purchases) open-end investment company shares, the investor receives the next computed net asset value (NAV) of those shares. This is known as the forward pricing rule. LO 3.b

Which of the following would probably not be an attractive investment during periods of rising inflation? A) Corporate bonds B) Real estate C) Gold D) Oil stocks

A Interest rates tend to increase with inflation. Rising interest rates cause the values of all fixed-income securities to decline. That is why bonds are not an attractive investment during periods of inflation. Values of real estate, gold, and natural resources tend to rise with inflation. LO 6.b

A client is in the 28% marginal federal income tax bracket and the 3% state income tax bracket. Which of the following investments would produce the highest after-tax yield for the client? A) An A-rated corporate mortgage bond yielding 8% B) A public-purpose municipal bond yielding 6% C) A U.S. Treasury note yielding 7% D) A AAA rated debenture yielding 7.75%

B Because your client is in the 28% tax bracket, she has to earn more than the 6% on a taxable bond for the yield to be equal to, or higher than, the tax-free bond. That number can easily be calculated because 72% of the taxable amount must be equal to or greater than the 6% return (6% ÷ 72% = 8.33%). The 8.33% is higher than the return on the other bonds listed, so the public-purpose municipal bond would produce the highest retained return. This would be even more appropriate if the issue was tax exempt in the client's state. LO 2.h

Which of the following is not an annuity purchase option? A) Single premium deferred annuity B) Periodic payment immediate annuity C) Periodic payment deferred annuity D) Single premium immediate annuity

B It is asking what doesn't exist With an immediate annuity, payout begins immediately (generally within 30-60 days). As such, the concept of making purchases while receiving payout is illogical and is, therefore, not permitted as an option. LO 24.d

An investor holding which of the following equity securities would not expect to have preemptive rights? A) Control stock B) Common stock C) Preferred stock D) Common stock acquired in a private placement

C Preferred stockholders do not have preemptive rights. Preemptive rights allow common stockholders to subscribe to additional issues of shares before they are offered to the public, to maintain their percentage ownership. LO 1.c

It would be least likely for dividends paid on which of the following investments to meet the requirements to be considered qualified? A) Common stock B) Equity mutual funds C) Bond mutual funds D) Preferred stock

C Qualified dividends are those eligible for reduced income tax rates. Those rates can be as low as 0% and as high as 23.8%, with most falling within the 15% to 20% bracket. We don't expect the exam to test on the requirements for a dividend to be considered qualified or how you reach that 23.8% rate. Dividends on bond funds and money market funds are not qualified because the majority of those dividends represent interest earned by the fund and the tax break does not apply to earnings from interest. LO 15.b

Which of the following is not a characteristic of hedge funds? A) Hedge funds invest in private securities, real assets, derivatives, and structured products. B) Hedge funds use leverage, short positions, and concentrated positions. C) Hedge funds are privately organized and generally unregistered. D) Hedge funds offer managers high fixed fees.

D Hedge funds attempt to attract the top managers because they offer performance-based fees, which vary based on fund performance. The typical fee structure is 2% + 20%, where 2% is the fixed fee and 20% of the profits is the performance portion. LO 3.e

Which of the following is indicative of the primary difference between variable life insurance and straight whole life insurance? A) Cost of the insurance B) Tax treatment of the death proceeds C) Amount of insurance that can be issued D) The way in which the cash values are invested

D Variable life insurance allows the policyowner to decide how the cash value is invested through a number of subaccounts. Death benefits from life insurance policies are always free of income tax regardless of the type of policy. LO 24.f

With regard to taxation of distributions from a REIT, which of these are true? I) In the majority of cases, dividends are taxed as ordinary income. II) In the majority of cases, dividends are considered qualified for the lower tax rate. III) Capital gains distributions are treated as long-term capital gains. IV) Capital gains distributions are taxed as ordinary income. A) II and III B) I and IV C) II and IV D) I and III

D Although there are some rare exceptions, you should consider any dividend paid to an investor in a REIT subject to taxation at ordinary income rates. Just as with mutual funds, capital gains distributions are treated as long-term capital gain. LO 3.h

News reports indicate that the wheat crop scheduled to be harvested in three months will be much larger than normal. To hedge, a wheat farmer would most likely A) take a long position in wheat futures. B) take a short position in wheat futures. C) sell wheat stock short. D) grow corn instead.

A - larger than normal so prices are going down A bumper crop means lower prices for the producers (farmers). The appropriate protection is a short hedge—selling wheat futures. Think of it this way: if you thought a stock's price was going to decline, you would sell that stock short. Here, believing that wheat prices will decline, you take a short position in that commodity futures contract. There is no such thing as wheat stock, and the wheat has already been planted; it is too late to switch crops. LO 4.d

A federal covered investment adviser registered with the SEC that has offices in five states must do which of the following? I) Pay state filing fees if required by the Administrator. II) Notify the Administrator within one business day if net worth falls below the required minimum. III) Notice file in any of those states where required by the Administrator. IV) Become licensed as a broker-dealer. A) II and III B) I and II C) I and III D) II and IV

C Although exempt from state registration, federal registered investment advisers must notice file and pay state filing fees (if required by the Administrator) to practice within a given state. Federal covered advisers do not come under the financial or recordkeeping requirements of the state, only the SEC. LO 9.e

A manufacturer of soybean oil is concerned that the price of soybeans will increase over the next six months. The best strategy to employ would probably be A) a short hedge. B) a trimmed hedge. C) a long hedge. D) a neutral hedge.

C The concern is that the price will go up. Just as with options, when we are concerned that the price of something will go up, we go long that item. With options, it would be a long call; with futures, it is simply hedging by going long (buying) the soybean futures. The soybean farmer who would be concerned about a decline in the price would go short soybean futures. LO 4.d

USATrade Securities, a FINRA member broker-dealer, is registered in 10 Midwest states. Regarding financial requirements, USATrade must meet those of A) FINRA. B) the state with the most stringent financial requirements. C) the state in which the principal office of the member is located. D) the SEC.

D It may be assumed that a broker-dealer member of FINRA is also registered with the SEC. As such, when it comes to financial requirements, bonding, recordkeeping, and so forth, the SEC's requirements always trump those of the states. LO 11.e

An investor owns a long-term U.S. Treasury bond with a 5% coupon and 15 years to maturity. The client wishes to sell and receives a quote from a dealer of 104.22. This number represents A) the premium B) the bid price C) the offer price D) the yield to maturity

B If you are looking to sell, the dealer will pay you his bid price. Had the question said the client wanted to buy, then the quote would have been the offer (ask) price. What does the 5% coupon and the 15 years to maturity have to do with the question? notHING. And, knowing that treasuries are quoted in 32nds has nothing to do with it either. And, one more thing. The price quote is above 100, so it is at a premium, BUT the better answer is bid price because the question is referring to the quote. LO 23.e

An investor has arranged with her bank to have $1,000 sent to the KAPCO Balanced Fund on the same day each month. For the first 4 months of this arrangement, the prices of the fund have been: Month 1 - $10.00 per share Month 2 - $12.50 per share Month 3 - $15.00 per share Month 4 - $13.25 per share What is the difference between the investor's average cost per share and average cost per transaction? A) The average price per transaction is approximately $0.27 less. B) The average cost per share is approximately $0.27 less. C) There is no difference. D) The average cost per share is approximately $0.19 less.

B When investing $1,000 per month, the investor acquired 100 shares the first month, 80 shares the second month, 66.667 shares the third month, and 75.472 shares the fourth month. That is a total of 322.139 shares purchased for a total cost of $4,000. That is an average cost per share of $12.42 per share. The average of the four transaction prices ($10, $12.50, $15, and $13.25) is $12.69. That is $0.27 higher than the cost per share. This demonstrates the advantage of dollar cost averaging. LO 21.j

A customer in the 25% tax bracket bought 200 shares of ABC at $93 per share plus commission of $50. Considering the customer's cost basis, when she sold 100 shares six months later at $96 per share, less commission of $50, her after-tax net was A) $168.75. B) $300.00. C) $56.25. D) $150.00.

A Because the purchase and sale were of different lots, you must compute the net proceeds on a per share basis. Dividing the cost of $93 + commission of $0.25 ($50 ÷ 200 shares) gives you a total per share cost of $93.25. Selling for $96.00 - $0.50 ($50 ÷ 100 shares) = $95.50 proceeds per share. $95.50 - $93.25 = $2.25. $2.25 multiplied by 100 shares sold = $225.00. In a 25% tax bracket, this is a taxable short-term gain and 25% of $225.00 = $56.25. Therefore, her after-tax net was $168.75 ($225.00 - 56.25). LO 15.c

The donor to a 529 plan has decided to move the existing plan to one offered by another state. Which of the following statements is not true? A) Even though these plans are generally under state control, the rollover rules are federal law. B) This may be done, but only if the entire account is rolled over. C) Unless a change of beneficiary is involved, only one rollover is permitted in a 12 month period. D) If there is a distribution of the assets, the rollover must be completed within 60 days.

B Partial rollovers are permitted. LO 18.h

Which of the following statements regarding REITs are not true? I) Investors receive flow-through benefits of income as well as loss. II) Hybrid REITs own properties, as well as make loans on others. III) Equity REITs are prohibited from using leverage to acquire properties. IV) REITs are easily traded in the secondary market. A) I and III B) II and IV C) II and III D) I and IV

A It is not true that REITs offer flow-through of losses; they are not DPPs. As with most real estate purchasers, leverage, usually in the form of a mortgage, is used to acquire property. A hybrid REIT contains the features of both an equity REIT and a mortgage (debt) REIT, and most REITs trade on the exchanges or Nasdaq. Note: Even though there has been an increase in the number of non-traded REITS, unless something in the question indicates that, the question will be dealing with publicly traded REITS. LO 3.i

Under the Securities Exchange Act of 1934, which of the following would not be considered associated with XYZ Corp., a broker-dealer? A) Paula, who is on XYZ's board of directors but who has no other connection with the firm B) Robert, a client who owns 1,000 shares of XYZ's voting stock C) Brian, an XYZ vice president D) Arvin, one of XYZ's agents

B An associated person of a broker-dealer includes any partner, branch manager, officer, or director of a broker-dealer, including outside directors. It also includes employees such as account executives or sales representatives who are not clerks or ministerial personnel, and anyone who controls, is controlled by, or is under common control with the broker-dealer. Being a client of a broker-dealer or owning shares of the firm's stock does not make one an associated person, unless something in the choice indicated that this ownership put Robert into a position of control. LO 11.c

Rank the following securities from the same issuer from most suitable to least suitable for a client whose primary objective is income. I) Cumulative preferred stock II) Convertible preferred stock III) Common stock IV) Warrant A) I, III, II, IV B) I, II, III, IV C) II, III, IV, I D) III, I, IV, II

B For a client seeking income, preferred stock, especially one that is cumulative, would likely be the most suitable of the choices given. Convertible preferred stock generally pays a lower dividend rate than other preferred stocks. This is because of the attractiveness of the convertibility. Although there are some categories of common stock (e.g., utility stocks that pay liberal dividends), unless specifically mentioned, you can assume that preferred stock dividends are higher than those for common stock of the same issuer. Warrants never provide any income. LO 4.c

When shares of a closed-end investment company are purchased by an investor, the price paid is based upon A) the current bid price. B) the net asset value plus commission. C) the current asking price. D) the net asset value.

C Closed-end investment company shares are priced based on supply and demand. The ask is the price that investors will pay for purchasing shares, and the bid is what investors receive when selling. Investors will also pay a commission because this is what the broker charges for executing the transaction. Shares of open-end investment companies are bought and redeemed based on NAV, but that is not so of closed-end companies. LO 3.b

One of your clients invested $10,000 into a mutual fund. The client elected to reinvest all dividends. As a consequence of this, A) taxes are deferred until those shares are redeemed. B) the dividends will be taxed as capital gains once the shares are liquidated. C) the reinvestments will purchase shares at a discount from the NAV. D) the investor's basis is increased by the amount of the reinvested dividends.

D Because the reported dividends are taxed each year, when the shares are ultimately liquidated, they have already been taxed. So, the investor's cost basis is increased by the amount of the reinvestment. LO 15.b

A broker-dealer receives a request from a client to purchase an OTC stock. When the broker-dealer's trading department contacts the market maker in the stock, she receives a quote of 35 − 35.25, 7 by 9. Based on this information, the spread is A) within the allowable range of NASAA's 5% markup policy. B) $2 C) $0.25 D) $0.63

C The spread is the difference between the bid (35) and the ask (35.25) prices. In this question, that is 25 cents ($0.25). The 7 by 9 means that the market maker is willing to buy up to 700 shares at the $35 bid and sell up to 900 shares at the $35.25 ask. NASAA does not have a markup policy; the 5% Policy is FINRA's. LO 23.e

News reports indicate that the wheat crop scheduled to be harvested in three months will be much larger than normal. To hedge, a wheat farmer would most likely A) take a long position in wheat futures. B) sell wheat stock short. C) take a short position in wheat futures. D) grow corn instead.

C A bumper crop means lower prices for the producers (farmers). The appropriate protection is a short hedge—selling wheat futures. Think of it this way: if you thought a stock's price was going to decline, you would sell that stock short. Here, believing that wheat prices will decline, you take a short position in that commodity futures contract. There is no such thing as wheat stock, and the wheat has already been planted; it is too late to switch crops. LO 4.d

One of your customers would like to be able to reduce current taxable income. Contributions to which of the following would be an appropriate recommendation? A) A Section 529 plan for grandchildren B) A Roth IRA C) A donor advised fund D) A deferred annuity

C A donor-advised fund operates as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code. As such, contributions to the fund will generate a current tax deduction for the customer. Section 529 plans offer tax-deferred growth but not a current tax deduction. Roth IRAs offer the potential of tax-free income, but current contributions are not tax-deductible. A deferred annuity means the earnings in the account are deferred until the money is withdrawn. Once again, there is no current tax benefit. Remember, every annuity on the exam is nonqualified unless something in the question indicates otherwise. LO 16.f

Which of the following transactions are prohibited? I) Borrowing money or securities from a high-net-worth customer II) Selling speculative or hot issues to a retired couple of modest means on a fixed income III) Failing to follow a customer's orders to prevent investment in a security not adequately covered by well-known securities analysts IV) Backdating confirmations for the benefit of the client's tax reporting A) II and III B) I, II, and III C) I, II, III, and IV D) I and II

C An agent may not borrow money or securities from a customer unless that customer is a bank or broker-dealer in the business of lending money and/or securities. Selling speculative or hot issues to a retired couple of modest means is an unsuitable transaction because it is not consistent with the client's objectives. An agent must follow legal orders of the customer, even if the agent believes the order is unwise. An agent may not backdate confirmations for the benefit of the client. LO 14.i

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

C Prepaid expenses, such as rent, insurance, and postage, are considered current assets and are shown as such, sometimes under the listing "other assets." The amounts paid for those expenses will not appear on the income statement until the specific item is actually used. For example, if a company pays its property insurance premiums six months in advance, it isn't until the next premium is paid that the prepaid expense comes off the balance sheet and is reflected as an actual expense. LO 7.a

All of the following securities are exempt from registration under the USA except A) stock issued by an insurance company traded on the Nasdaq Stock Market. B) bonds traded on the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]). C) bonds issued by the City of Winnipeg. D) stock of a bank holding company traded on the OTC Link.

D Bank securities are exempt from state registration, but those of nonexempt bank holding companies are not. Securities issued by an insurance company authorized to do business in the state are exempt, even if not listed on a national stock exchange. Securities listed on the NYSE, the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]), and the Nasdaq Stock Market, whether stocks or bonds, are exempt as federal covered securities. City of Winnipeg bonds are municipal issues and are exempt from registration. LO 8.c

Each of these would be considered an advantage of using a 529 plan rather than a Coverdell ESA to fund a child's future education except A) the 529 plan has no earnings limitation on the donor. B) the 529 plan allows for higher contribution levels. C) the 529 plan has no age limits. D) the 529 plan is counted at a lower percentage of assets when applying for financial aid.

D Funds in both plans are counted as assets of parents at 5.64% if owner is a parent or dependent student, so there is no difference. The 529 plan allows for far greater contribution levels and there is no income limitation on the donor as exists with the Coverdell ESA. The funds in the ESA must be used by the time the beneficiary is 30; no such age restrictions apply to the 529 plan. LO 18.h

Howard is an investment adviser representative with Hughes & Company, a state-registered investment adviser having its principal office in State O and offices in States P and D. Howard works out of an office in State P and has 4 retail clients there. In addition, Howard has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Howard would be required to register as an investment adviser representative in A) States P, D, M, and O. B) States D and M. C) State P. D) States P, D, and M.

D Individuals working as IARs for state-registered investment advisers must register in any state in which they (the IAR) maintain a place of business, as well as any other state in which they serve more than five retail clients (the de minimis exemption). With an office in State P, registration is required there, regardless of the number of clients. In both States D and M, the de minimis has been exceeded, so registration is required there. The fact that the IA's principal office is in State O has no bearing on Howard, and with only one retail client there, he qualifies for the de minimis exemption. LO 10.b

Registration of an investment adviser automatically confers registration on whom? I) Officers, partners, and directors of the firm who are functioning as IARs II) Any employee who is functioning as an IAR III) Clerical employees handling back-office operations IV) An employee who will be soliciting clients for the adviser A) I, II, and III B) I and III C) I, II, III, and IV D) I only

D Under Section 202(a) of the Uniform Securities Act, registration of an investment adviser automatically constitutes registration of any investment adviser representative who is a partner, officer, or director, or a person occupying a similar status or performing similar functions. This only applies to those individuals who are listed on else doing that type of job, regardless of what this investment adviser has chosen to use as the title. LO 10.c

An investor invests $25,000 into the KAPCO Balanced fund. It would be unlikely for this investor to be required to pay a CDSC when redeeming A) Class A shares. B) Class C shares. C) any shares, regardless of class. D) Class B shares.

A Class B shares are known for their back-end load. Class C shares usually only have one for a year, but if the investor redeems within that period, there will be a CDSC. Class A shares do not carry a back-end load, except under conditions that are beyond the scope of this exam. LO 3.c

An investor would enter a buy stop order to hedge against a loss in A) a short stock position B) a variable annuity wrapper C) a margin account D) a long stock position

A When an investor sells short, stock is borrowed and sold with the anticipation that it will later be replaced at a lower price. However, the investor will lose money if the stock goes up instead of down. Because there is no limit to how high the stock's price can go, one can protect against that unlimited loss by entering a buy stop order at a specified price above the current market. It is true that all short sales must be made in margin accounts, but that is not nearly a descriptive enough answer because there are both long and short margin accounts and a long position cannot be hedged with a buy stop order. LO 23.f

Under UTMA, which of the following are allowable distributions for the benefit of the minor? A) A percentage of housing expenses, such as the utilities for his bedroom B) The cost to attend a summer camp C) Clothing expense for a child who has gone through a growth spurt D) A percentage of food expense

B You cannot use UTMA (or UGMA) money for the basics: food, clothing, and shelter; those are the responsibility of the parent. An optional expense, such as summer camp, vacation, and sports league registration, would be permitted. LO 18.i

An investor wishes to be able to obtain the right, but not the obligation, to purchase 100 shares of KAPCO common stock at $50 per share for the next six months. KAPCO is currently selling for $52 per share. This investor's wishes could be met by A) the purchase of a call option. B) the purchase of a forward contract. C) the purchase of a preemptive right. D) the sale of a put option.

A A call option gives the holder the right, but not the obligation, to buy an asset at a specific price during a specific period. Although it would be possible to purchase a stock right in the open market, it is unlikely to ever find one with an expiration date more than 45 days from issuance. Selling a put creates an obligation on the seller to buy the stock if the option is exercised and there are no forward contracts on stock. LO 4.b

Which of the following individuals employed by an investment adviser would be required to be registered as an IAR? A) A chief compliance officer (CCO) who has no sales duties B) The vice president of human resources C) The night watchman D) An intern who receives no compensation whatsoever

A Any individual performing the functions of an investment adviser representative (IAR) must be so registered. Among those duties is supervisory responsibility, and the CCO has the job of ensuring that the firm and all of its employees follow the rules. Although executive officers are generally automatically registered as IARs, that is only the case when the job function is one involving activities relevant to IARs (and human resources is not one of them). LO 10.b

An upward-sloping yield curve represents all of the following except A) foreign interest rate differentials. B) increased risk of default over time. C) inflation expectations. D) time value of money.

A Foreign interest rate differentials are not reflected in an upward-sloping yield curve. Interest rate differentials between countries reflect differences in domestic monetary and fiscal conditions. The time value of money is reflected in the upward-sloping yield curve. Longer-term rates require higher rates to compensate for loss of current buying power and liquidity. Longer-term funds bear a higher risk of default than do shorter-term funds and, as a result, command higher rates. Increasing inflation expectations cause the yield curve to slope upward to compensate lenders for the loss of future buying power. This is an example of how you get a question correct by process of elimination. LO 6.b

A client is in the 28% marginal federal income tax bracket and the 3% state income tax bracket. Which of the following investments would produce the highest after-tax yield for the client? A) A U.S. Treasury note yielding 7% B) A public-purpose municipal bond yielding 6% C) A AAA rated debenture yielding 7.75% D) An A-rated corporate mortgage bond yielding 8%

B Because your client is in the 28% tax bracket, she has to earn more than the 6% on a taxable bond for the yield to be equal to, or higher than, the tax-free bond. That number can easily be calculated because 72% of the taxable amount must be equal to or greater than the 6% return (6% ÷ 72% = 8.33%). The 8.33% is higher than the return on the other bonds listed, so the public-purpose municipal bond would produce the highest retained return. This would be even more appropriate if the issue was tax exempt in the client's state. LO 2.h

Which of the following statements regarding foreign investing is (are) true? I) Foreign financial markets are more efficient than the U.S. market. II) Most foreign investment entails foreign exchange or currency risk. III) Adding foreign-issued securities to a portfolio provides the greatest diversification when the foreign stock market has a 1.0 correlation relative to the U.S. market. IV) Foreign securities markets are more highly regulated than the U.S. market A) II and IV B) II only C) I and II D) I, II, III, and IV

B Foreign markets entail foreign exchange risk (currency risk). It's possible that the foreign market value of the investment increases while the value of that currency decreases against the U.S. currency. Most foreign markets are not more efficient than the U.S. market. The U.S. market is among the most highly regulated markets in the world. A 1.0 correlation offers no diversification. LO 1.f

Which of the following must register as an agent? A) An individual representing a broker-dealer who sells commercial paper B) An employee of the Fed whose job is selling Treasury bonds to the public C) An individual who is paid a commission to sell certificates of deposit for ABC National Bank D) An individual who sells commercial paper for ABC National Bank

A An individual who represents a broker-dealer selling commercial paper must register under the USA. Though the securities (commercial paper) are exempt, the representative must be registered as an agent of the broker-dealer. The only exceptions from the definition of agent apply to those who sell on behalf of issuers either of exempt securities or in exempt transactions. The commercial paper and Treasury bonds are exempt securities, and the bank CDs referred to here are not of the negotiable, jumbo variety sold in the money market and are not securities, so no registration is required. LO 11.d

A firm is registered as an investment adviser under the Investment Advisers Act of 1940. It has decided to raise its annual management fee from $1,500 to $1,800 and require that it be paid one year in advance instead of quarterly. The firm would A) now come under the requirement to include a balance sheet as part of its brochure. B) be in violation of the law that prohibits prepayments more than six months in advance. C) continue doing business as before because the firm was already charging more than $1,200 per year. D) need SEC permission to make this change.

A For federal covered investment advisers, a prepayment in excess of $1,200 and for periods of six months or more in advance (substantial prepayment) requires the adviser to submit an annual audited balance sheet as part of its Form ADV Part 2 (and brochure). Previously, even though the firm's fee was in excess of $1,200, because it was collected on a quarterly basis, the firm did not fall under the balance sheet rule. Had this been a state-registered investment adviser, the answer would have been the same, even though the dollar limit is $500 rather than $1,200. That is for the reason given above—the former fee was charged quarterly and the substantial prepayment definition requires both exceeding a stated dollar amount ($500 or $1,200) and it being for six months or more in advance. LO 9.e

Which of the following statements regarding the differences between Rule 506(b) and Rule 506(c) of Regulation D of the Securities Act of 1933 are true? I) Rule 506(c) offerings can be advertised, while Rule 506(b) offerings cannot. II) Rule 506(c) offerings are limited to 35 nonaccredited investors, while Rule 506(b) offerings do not have a limit. III) The bad actor provisions only apply to Rule 506(c) offerings. IV) Rule 506(c) offerings are limited exclusively to accredited investors, while nonaccredited investors can participate in Rule 506(b) offerings. A) I and II B) III and IV C) I and IV D) II and III

C As long as the offering is limited exclusively to accredited investors, Rule 506(c) offerings may be publicly advertised; Rule 506(b) offerings can never be advertised. The limit of 35 nonaccredited investors applies to Rule 506(b); there is no limit on the number of accredited investors for either rule. Both rules are subject to the bad actor provisions. LO 8.d

It is agreed by most investment advisers that diversifying an investment portfolio can reduce the overall risk. Benefits of diversification would include all of the following except A) lowering trading costs. B) lowering the volatility of the portfolio. C) increasing risk-adjusted returns. D) mitigating the effects of a bankruptcy of a security held in the portfolio.

A If anything, diversifying a portfolio will increase the trading costs. Those higher costs are outweighed by the benefits in risk reduction and potential higher returns. With a well-diversified portfolio, a single company going bankrupt will have a much smaller impact than if that security was the only asset held by the investor. It is the old theory of "don't put all of your eggs in one basket". Broad diversification, which includes different asset classes, has the effect of reducing the overall volatility of the portfolio and by holding assets that tend to rise while others decline, the risk-adjusted returns may well be increased. LO 21.b

If a customer owns 7% of a publicly traded company's stock and his spouse owns 6% and wants to sell her shares, which of the following statements is true? A) The spouse is an affiliate and Rule 144 does not apply. B) The spouse is an affiliate and Rule 144 applies. C) The spouse is not an affiliate and Rule 144 applies. D) The spouse is not an affiliate and Rule 144 does not apply.

B Together, the client and spouse own 13% of the company's stock, so the spouse is considered an affiliate and is bound by Rule 144. If there is a 10% or more ownership interest among members of an immediate family living at the same residence, then all members are considered control persons (affiliates) subject to Rule 144. For exam purposes, assume that spouses share the same residence. LO 1.e

Grandpa bought 100 shares of XYZ common stock 10 years ago for $10 per share. The stock split 2 for 1 several years ago and grandpa gave all of the stock to his grandson when the price per share was $20. Three months ago, grandpa passed away and left the grandson another 100 shares of XYZ that had been purchased one month earlier at $25 per share. At the date of death, the XYZ stock had already climbed to $30 per share. If the grandson sells the XYZ stock for $35 per share, the taxable consequences would be A) $2,500 long-term capital gain plus $1,000 short-term capital gain. B) $6,000 long-term capital gain plus $500 short-term capital gain. C) $6,500 long-term capital gain. D) $4,000 long-term capital gain.

C Gifted stock carries the donor's cost basis. In this case, 100 shares at $10 per share is $1,000. The stock split means there are now 200 shares, but that doesn't change the total cost basis. When that stock is sold at $35 per shares, the proceeds of $7,000 exceed the cost basis by $6,000, all of which is long-term capital gain. Inherited stock receives a stepped-up basis. That is, the cost basis is at date of death. In this case, the cost per share is $30. When that 100 shares is sold at $35 per share, a $500 profit is realized. In one of the quirks in the Internal Revenue Code, stock received as an inheritance always has a long-term holding period, even when, as in this question, the actual holding period was short-term. Adding the $6,000 of gain from the gift and the $500 of gain from the inheritance gives a total of $6,500 long-term capital gain. LO 16.g

Which of the following is required to register in a state under the Uniform Securities Act? A) An investment adviser who has no place of business in the state and communicates with only five advisory clients in the state for the year B) A broker-dealer who has no place of business in the state and whose only clients in the state are limited to insurance companies, banks, and broker-dealers C) ABC State Bank, which provides investment advice in its branches throughout the state D) An investment adviser who has a place of business in the state and whose only clients in the state are insurance companies, banks, and broker-dealers

D Because the investment adviser has a place of business within the state and is acting as investment adviser in the state, it must register, regardless of the fact that the only clients are financial institutions. Notice that the state registration rules are different for broker-dealers and investment advisers. Banks are exempt from registration as broker-dealers or as investment advisers, as are investment advisers with no place of business in the state and fewer than six clients in the state in a 12-month period (de minimis standard). LO 9.b

A client who purchased a variable life insurance policy 15 months ago has suffered a stroke. In addition, he has developed adult onset diabetes. When receiving treatment for the stroke, he was diagnosed with lung cancer. He has decided to convert his variable policy to a whole life policy. Which of the following statements is correct? I) He will not be able to convert to a whole life insurance policy because his health has deteriorated to such a severe level. ii) The new policy will bear the same issue date and age as the original policy. III) The face amount must remain the same. IV) The premium will be rated because his health has taken a marked turn for the worse. A) II and III B) II, III, and IV C) I, II, III, and IV D) I and IV

A Variable life insurance offers a unique conversion policy. Anytime during the first 24 months after policy issue, the policy may be exchanged for a whole life policy (or some similar form of permanent insurance if the company doesn't offer whole life) using the age and medical condition at issue, regardless of the insured's current health. However, the face amount cannot be changed from its original amount. LO 24.g

According to the Uniform Securities Act, which of the following is not an exempt transaction? A) The executor of an individual's estate liquidates individual stocks and invests the proceeds in a money market account at a bank. B) A broker-dealer sells an entire new issue to five bank clients. C) Bonds with a rating below investment grade are sold to the ABC High Yield Bond Fund. D) A broker-dealer makes an offer of private placement securities to 15 individual investors within a 30-day period.

D The Uniform Securities Act defines a private placement as an offering made to no more than 10 noninstitutional (individual or retail) investors in a 12-month period. If a private placement complies with this restriction, it is an exempt transaction. Exempt transactions under the USA include transactions made by executors and transactions with institutional clients. Banks and funds are included in the list of institutional investors. LO 8.d

One of the components of a cash flow statement is cash flow from investing activities. Included would be A) payments to retire bonds and the payment of dividends. B) cash receipts (money coming in) from items such as interest and dividends. C) transactions and events involving the purchase and sale of land, buildings, and equipment. D) cash proceeds from issuing stocks or bonds.

C Investing activities include transactions and events involving the purchase and sale of securities, land, buildings, equipment, and other assets not generally held for resale as a product of the business. The proceeds from issuing securities (stocks or bonds) is a financing activity, as is using funds to retire bonds and/or pay dividends. Cash receipts are included in cash flow from operating activities, even when generated through investments such as interest or dividends. LO 7.d

In the secondary market, U.S. Treasury bond prices are most influenced by A) the primary dealers. B) the Treasury Department. C) the inflation rate. D) the prime rate.

C There are two major influences on the price of bonds in the secondary market. One of those is the amount of credit risk (chances that the issuer won't be able to pay the interest and/or principal). That is not considered a risk with U.S. Treasury securities. The other, and generally stronger, influence is the inflation rate. Inflation eats away at the fixed income and principal of bonds. To compensate, the bonds must offer a higher return. That is either in the form of a new bond carrying a higher coupon rate or, as this question refers to, trading in the secondary market at a lower price. Remember the inverse relationship between interest rates and bond prices. Interest rates follow the inflation rate, so when inflation rises, so must the yield on bonds. The yield on outstanding bonds increases as the market price decreases. LO 6.b

When discussing the purchase of a scheduled premium variable life insurance policy with a client, it would be correct to state that A) if a policy loan exceeds the policy cash value, the deficiency must be remedied within 10 business days to keep the policy from lapsing B) premiums will vary based upon performance of the separate account C) by surrendering the policy, its cash value may be obtained D) you will receive a statement of your death benefit no less frequently than semiannually

C Surrender of the contract requires the insurance company to pay out its cash value. The death benefit is calculated annually (not semiannually) with the cash value being figured monthly. There is no time requirement to remedy a cash value deficiency. Scheduled premium means fixed premium, one that does not change. It is the cash value and the death benefit that will be affected by the performance of the separate account. LO 24.f

Which one, if any, of these transactions will be treated as a prohibited transaction under the provisions of the ERISA legislation? A) None of these transactions constitute a prohibited transaction under the provisions of the legislation B) An investment adviser using the interest from plan assets to cover the adviser's office expenses C) The furnishing of office space to a plan trustee for reasonable compensation and fair rental value D) A loan between a 401(k) plan and plan participant

B An investment adviser, as a fiduciary and disqualified person under the plan, is prohibited from using plan assets in payment of personal obligations (such as outstanding office expenses). Loans from a 401(k) plan to a participant are not prohibited transactions. The plan trustee may rent space from the plan (one of the plan's assets is an office building). LO 18.g

The revocation or suspension of a federal covered investment adviser's registration under the Investment Advisers Act of 1940 may be appealed A) through arbitration with the Financial Industry Regulatory Authority (FINRA). B) to the U.S. Court of Appeals serving the district where the order was issued within 60 days of its issuance. C) to the U.S. Supreme Court because the Investment Advisers Act of 1940 is federal legislation, unlike the Uniform Securities Act, which is a model for state securities legislation. D) by petition to the appropriate state securities Administrator.

B The revocation or suspension of an investment adviser's registration under the Investment Advisers Act of 1940 may be appealed to the U.S. Court of Appeals for the appropriate U.S. district within 60 days of the revocation or suspension order. Advisers covered under federal legislation do not make appeals to state securities Administrators. The National Securities Markets Improvement Act of 1996 (NSMIA) eliminates dual regulation of investment advisers. FINRA does not have regulatory authority over the registration of federal covered investment advisers. LO 12.e

Concerning index annuities and their method of crediting interest, which of the following is true? A) High-water mark with look back offers the best return during periods of high volatility. B) Annual reset offers the best return regardless of market fluctuations. C) Point to point offers the best return when the market has had a single drastic decline during the period. D) On average, annual reset has a higher participation rate than point to point.

A Using the annual high-water mark with look back will generally result in the highest return during periods of high volatility. The reason is because under this method, the highest anniversary value is used to determine the gain. In a volatile market, there is likely to be a high spike sometime during the period and that is the value used. The problem with point to point when there is a single drastic decline during the period is that the decline might occur at or just prior to the annual crediting computation. Annual reset does ignore the daily market fluctuations, but if the index is lower at the end of the year, there is nothing credited. In reality, annual reset has a lower participation rate than point to point. LO 24.c

A "margin account" is a type of brokerage account in which the broker-dealer lends the investor cash to purchase securities using marginable securities in the account as collateral. Which of the account documents authorizes the use of those securities as collateral for that loan? A) The loan consent agreement B) The hypothecation agreement C) The credit agreement D) The secured agreement

C The hypothecation agreement permits the broker-dealer to accept the client's margin securities as collateral for theloan that the BD makes to the investor. It also permits the BD to re-hypothecate those securities as collateral for a loan that it takes out to provide the money for the loan it makes to the investor. In simple terms, there are two loans taking place under the hypothecation agreement: The loan from the BD to the client with the client's securities used as collateral. The loan from a bank to the BD with the client's securities used as collateral for the BD's loan. LO 23.a

An analyst who wants to examine a firm's financing transactions during the most recent period is most likely to evaluate the firm's statement of A) comprehensive income. B) changes in equity. C) cash flows. D) financial position.

C The statement of cash flows describes a firm's inflows and outflows of cash during a reporting period from operating, investing, and financing activities. Financing transactions such as issuance of debt or stock are shown on the statement of cash flows. The statement of financial position (balance sheet) presents the firm's assets, liabilities, and equity at a point in time. The statement of comprehensive income (income statement) does not directly reflect a firm's financing transactions. Cash raised is not included in a firm's revenues and dividends paid and debt principal repaid are not included in its expenses. LO 7.d

One of your clients has a margin account. There is a drop in the value of the stock owned in the account, and additional funds are required based on the terms of the firm's margin agreement. This would be known as A) a margin call B) a Regulation T call C) a sellout D) a house call

D Maintenance and house are the same margin and regulation t are the same When additional funds are required, it is known as a house or maintenance call. If based on the firm's stricter requirement, it is a house call; if based on the requirement of the SRO, it is a maintenance call. The initial or Regulation T call (the margin call) occurs at the time of the purchase. If any call for funds is not met, then there will be a sellout. Remember the three important margin terms: Margin call: Set by the Federal Reserve Board under Regulation T. This is the initial 50% deposit required when purchasing securities on margin. Minimum maintenance: Set by the SROs. This is the minimum equity that must be maintained in a margin account. Should the equity fall below the minimum required, a maintenance call (sometimes called maintenance margin) will go out demanding an immediate deposit of enough equity to bring the account above the required level. House maintenance: Set by the individual broker-dealer firm. As a cushion, and to reduce the possible sellout caused by failure to meet a maintenance call, most firms set a minimum equity level above the SRO minimum. Falling below this amount triggers a house call. LO 23.b

All of the following are examples of non-diversifiable risks except A) liquidity risk B) purchasing power risk C) interest rate risk D) market risk

A Liquidity risk is a type of unsystematic, or diversifiable, risk. All of the other choices are systematic risk, which is considered to be non-diversifiable. LO 19.b

Which one of the following option positions would generally command the greatest time value? A) LEAPS B) Calls C) Puts D) Straddles

A LEAPS, the acronym for long-term equity anticipation securities, have expiration dates that can run more than three years compared with the nine months for standard option contracts. Because time value is a direct function of the length of the option, the longer the time until expiry, the greater the potential time value. LO 4.b

David is registered as an agent in States H and M with Stanley Securities, a broker-dealer registered in every state. He would now like to register in State W. In order to do so, all of the following would be required except A) passing State W's qualification exam. B) filing a consent to service of process with State W. C) filing an application for registration with State W. D) paying the appropriate fee to State W.

A Many years ago, applicants for registration as an agent in a state had to pass that state's exam. Now, because the NASAA exams are uniform exams, they are accepted in every state that requires passage of an exam. A consent to service must be filed with every state in which the person intends to register and, of course, the application must be accompanied by the proper fee. LO 11.f

What is the term used to describe a common stock issued below its par value? A) Subpar B) Assessable C) Below book D) Nonassessable

B Assessable stock is a stock that is issued below its par or stated value. The issuer and/or creditors have the right to assess the shareholder for the deficiency. All stock issued today is nonassessable. LO 12.a

An American depositary receipt (ADR) is A) a document used with interest rate swaps. B) a certificate representing ownership of a U.S. security that is deposited in a foreign bank. C) a certificate representing ownership of a foreign security that is on deposit at a U.S. bank. D) a type of derivative used to speculate in foreign currencies.

C An American depositary receipt (ADR) is a certificate representing ownership of foreign securities that are on deposit at a U.S. bank. ADRs can be traded on U.S. stock exchanges, are quoted and pay in dividends in U.S. dollars, and receive all the shareholder protections of U.S. securities. LO 1.f

A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. How is the distribution taxed? I) The entire amount is taxed as ordinary income. II) The growth portion is taxed as ordinary income. III) The growth portion is taxed as a capital gain. IV) The growth portion is subject to a 10% penalty. A) III and IV B) II and III C) I and IV D) II and IV

D On withdrawals from a nonqualified annuity, taxes are paid only on the amount that exceeds cost basis (the amount paid into the annuity). In this case, the investor is taking a lump-sum distribution before reaching age 59½ and must pay an additional 10% penalty on the taxable amount. LO 24.e

The death benefit of a variable life policy must be calculated at least A) semiannually B) monthly C) weekly D) annually

D The death benefit must be calculated annually and the cash value, monthly. LO 24.g

If the return on Treasury bills is 3% and the equity risk premium is 4%, the expected equity returns should be A) 12% B) 1% C) 4% D) 7%

D The expected return on an equity investment is the risk-free (for example, T-bill) rate of return added to the equity risk premium (3% + 4% = 7%). LO 22.a

If an investor purchases 500 shares of an aggressive growth stock, which strategy would limit his downside risk? A) Buying 5 puts on the stock B) Writing 5 puts on the stock C) Writing 5 straddles D) Buying 5 calls on the stock

A A put gives the investor the right to sell stock at a set price (the strike price) for a period of time, and protects against losses below the strike price. Buying calls can protect a short stock position. If the customer is long stock, the purchase of calls on that security increases leverage and risk. Writing a put creates the obligation to buy more stock at the strike price, which increases downside risk. LO 21.k

A grantor retained annuity trust is a planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize A) property taxes. B) estate taxes. C) income taxes. D) excise taxes.

B A GRAT is an estate planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize gift and/or estate taxes. Because incidents of ownership remain with the grantor, all income is taxed to the grantor. LO 16.f

Which of the following statements regarding a unit investment trust is not true? A) It is considered an investment company. B) It charges no management fee. C) It invests according to stated objectives. D) Overall responsibility for the fund rests with the board of directors.

D A unit investment trust (UIT) has no board of directors; rather, it has a board of trustees. A UIT must follow a stated investment objective (as must any investment company) and does not charge a management fee because it is not a managed portfolio. LO 3.f

Which of the following statements regarding the powers of the Administrator under the Uniform Securities Act is not true? A) The administrator may issue cease and desist orders. B) Denial of registration may take place in the event of the filing of an incomplete application. C) In the case of noncompliance, the Administrator may apply to a court of competent jurisdiction for the issuance of an injunction. D) A final order of the Administrator may not be appealed.

D Final orders of the Administrator may be appealed to the appropriate court within 60 days of the issuance of the order. LO 12.e