Series 65 Incorrect Answered Questions

Which of the following statements comparing fixed and variable annuities is correct? I Fixed annuities pay for the annuitant's lifetime; variable annuities pay for varying lengths of time II Fixed annuities pay the same amount each period; variable annuities pay the same number of annuity units each period III The insurance company guarantees a rate of return for fixed annuities but not for variable annuities IV The insurance company guarantees an increasing payout for variable annuities but not for fixed annuities A. I and II only B. II and III only C. III and IV only D. I, II, III, and IV

Answer: B Fixed annuities pay the same amount each period; variable annuities pay the same number of annuity units each period. The payout may increase or decrease with a variable annuity. The insurance company guarantees a rate of return for fixed annuities, but not for variable annuities. Both fixed and variable annuities make payments for the annuitant's lifetime.

What style of investing justifies paying a premium for companies that have good future potential? A. Growth B. Value C. Strategic D. Tactical

The best answer is A. A "growth" investor looks for companies that are likely to "grow" their earnings at rapid rates, which would cause the stock price to rise. Value investors look for "out of favor" companies that have a depressed stock price. When the market realizes that these companies are "solid," their prices are expected to rise. Strategic and tactical refer to styles of asset allocation; not to investing styles.

If a stock's price breaks out through a resistance level, it is expected that the price of the stock will: A. rise B. fall C. remain stable D. become volatile

The best answer is A. A "resistance" level is a price above the current market, through which a stock's price tends not to rise. Thus, the stock is said to have "resistance" at this price, meaning it is resisting further price rises, because investors are willing to sell at this price. If a stock breaks the resistance level, this is strongly bullish, since all of the ready sellers have been "cleaned out" and there are still buyers for the stock. If there are many more buyers than sellers, prices will rise.

A portfolio with a beta of +1 has: A. systematic risk B. non-systematic risk C. both systematic and non-systematic risk D. no risk

The best answer is A. A portfolio with a beta of +1 is one that moves in the same direction and at the same rate as the market. Thus, this portfolio only has market risk - which is also known as systematic risk. This is the risk that cannot be diversified away.

Active asset managers select investments based primarily upon: A. inefficient market pricing of the investment B. efficient market pricing of the investment C. minimum time needed to achieve projected investment returns D. minimum number of investments needed to achieve projected investment returns

The best answer is A. Active asset managers believe that by performing fundamental analysis, they can find undervalued companies - that is, companies that are not "efficiently priced." Passive asset managers believe that the market is basically efficient, and that one cannot consistently find "undervalued securities" - so why bother. Instead, just invest in an asset that mimics the index - that is, an index fund. This will do as well as the "market" with much lower expenses than those associated with "active" asset management.

Which of the following statements are TRUE regarding International Bond Funds? I The fund will hold securities denominated in foreign currencies II The fund will hold securities denominated in U.S. dollars III The fund will have a currency exchange gain when the dollar falls in value IV The fund will have a currency exchange gain when the dollar rises in value A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. An international bond fund will have securities that are denominated in foreign currencies. (A Global fund would have both foreign and U.S. securities.) If the foreign currency value rises against the dollar, then when the fund's NAV is converted into dollars, proportionately more dollars will be created, since each unit of foreign currency buys more dollars. Similarly, if the U.S. Dollar drops against the foreign currency, when the fund's NAV is converted into dollars, proportionately more dollars will be created, since each unit of foreign currency buys more dollars.

The simplest way of investing in a mutual fund is: A. buy and hold B. indexing C. rebalancing D. dollar cost averaging

The best answer is A. Because mutual funds are managed by an investment adviser, they are designed to be a "buy and hold" investment. The fund manager is constantly deciding which securities positions to add to, or subtract from, the portfolio to maximize returns. Therefore, the investment is continually rebalanced. Dollar cost averaging is a more disciplined method of making mutual fund investments - but it required the investor to make periodic purchases of constant dollar amounts over a long time frame, so it is not as "simple" as just "buy and hold."

All of the following are "preference" items included in the alternative minimum tax computation EXCEPT: A. Excess intangible drilling costs B. Straight line depreciation C. Excess depletion D. Excess depreciation

The best answer is B. Excess intangible drilling cost deductions, excess depletion, and excess depreciation (amounts over straight line) are all tax preference items included in the Alternative Minimum Tax (AMT). Straight line depreciation is not included, nor are tax credits.

Which statement is TRUE regarding the tax treatment of bond interest income received by a C Corporation versus that received by an S Corporation? A. In a C Corporation, the interest received is taxable at the corporate level and if a dividend is declared based on the receipt of the interest, then the dividend is taxable at the shareholder level B. In an S Corporation, the interest received is taxable at the corporate level and if a dividend is declared based on the receipt of the interest, then the dividend is taxable at the shareholder level C. In both a C Corporation and an S Corporation, income is only taxable at the shareholder level D. In both a C Corporation and an S Corporation, income is only taxable at the corporate level

The best answer is A. C Corporations are taxable entities. Net income is computed by the corporation and tax is paid at corporate income tax rates. If the C Corporation makes a distribution to its shareholders (a dividend), then the shareholders must include the dividend in their taxable income and pay personal income tax. Thus, corporate dividends are said to be "double taxed." In contrast, S Corporations are not taxable entities. Any income or loss "flows through" onto the shareholder's tax return and is only taxed at the shareholder level.

All of the following statements concerning dollar cost averaging (DCA) are correct EXCEPT: A. DCA reduces the cost of purchasing shares below current market price B. the investor using DCA makes no attempt to adjust the amounts of investment by market trends C. an investor using DCA makes fixed dollar investments at regular intervals D. an investor using DCA will buy fewer shares when the price of shares is high

The best answer is A. Dollar-cost averaging is a way to reduce the investor's average cost of shares below the average price per share over the same period. The average cost will not be below the market price, and may actually be above the current market price in a steadily decreasing market. DCA requires an investor to make fixed dollar investments at regular intervals without regard to market trends. The result will be that the investor will buy more shares when the price falls and fewer shares when the price for shares is high.

An employee of a company is given an incentive stock option package that permits the employee to exercise and buy the stock of the company at a lower than market price. This is known as a(n): A. qualified stock option B. non-qualified stock option C. accredited stock option D. non-accredited stock option

The best answer is A. Employees of companies can be given the right to acquire the common stock of the company for which they work. These employer-granted stock options can either be: Qualified Stock Option: Also called an Incentive Stock Option, these get an IRS tax benefit. The option gives the employee the right to exercise and buy the stock of the company at the exercise price. If the option is exercised when the stock has appreciated in price, there is no tax due as of the exercise date. Rather, any tax is due when the stock is sold, and any gain will be taxed as long term as long as the stock is held for at least a year after exercise. QSOs (or ISOs) are typically reserved for top level employees and officers of companies. Non-Qualified Stock Option: This type of employer-granted option does not have the tax benefit of deferral of tax upon exercise. If a non-qualified stock option is exercised when the stock price has appreciated, tax is due on the difference between the higher market price and the lower exercise price. Furthermore, the difference is taxed at higher ordinary income tax rates - not long term capital gains rates. NQSOs are typically offered to all employees of a company.

A technical analyst would evaluate all of the following EXCEPT: A. Earnings trends B. Chart movements C. Trading volumes D. Advance / Decline ratios

The best answer is A. Fundamental analysts select investments based on fundamentals such as earnings trends, balance sheet strength (liquidity ratios), management etc. Technical analysts select investments based on chart movements, trading volumes, advance / decline ratios, etc.

The conversion price of a convertible debenture is set at issuance at $25 per share. The common stock is now trading at $27.50 while the bond is trading at 110. If the bond falls 20% from its current market value, the new parity price of the common stock will be: A. $22.00 B. $25.00 C. $27.50 D. $31.25

The best answer is A. If the bond falls 20% from its current price of $1,100, the new price will be 80% x $1,100 = $880 per bond. Since each bond is convertible based upon a conversion price of $25 per share, the conversion ratio is $1,000 par / $25 conversion price = 40:1. The new parity price is $880 / 40 = $22 per share.

To ensure the integrity of electronically stored data, the record must be: A. non-rewritable B. non-duplicable C. non-transferable D. non-negotiable

The best answer is A. In order to ensure the integrity of electronically stored data, the storage medium must be non-rewritable and non-erasable. A separate duplicate copy must be retained in another location, making choice B incorrect. Choices C and D are terms that apply to securities - not to digitally stored data.

An investor has a broadly diversified portfolio of blue chip stocks. The use of index options to hedge the portfolio reduces: A. systematic risk B. non-systematic risk C. interest rate risk D. timing risk

The best answer is A. Index options can be used to hedge a portfolio. If index puts are bought, then a drop in the market lowering the portfolio's value will be offset by a gain in the value of the index puts. This strategy hedges against market risk, also known as systematic risk. Non-systematic risk is the risk that any one security will perform poorly. The larger the portfolio, the lower the effect of non-systematic risk. Timing risk is the risk that trades will be not be performed at the best market prices; interest rate risk is the risk that interest rates rise, forcing bond prices and stock prices down.

A registration statement which has been filed for a security: I is effective for 1 year II remains in effect if the issuer cancels the sale of the issue III remains in effect if a "stop" order is issued by the Administrator A. I only B. I and II C. II and III D. I, II, III

The best answer is A. Registration statements for securities are effective for 1 year. If the issuer cancels the sale of the issue, that registration becomes void. If a stop order is entered, the registration ceases to be effective and sale of the issue must stop.

Short sale transactions are typical for which of the following? I Closed-end funds II Municipal bonds III Treasury bonds IV Limited partnerships A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Short sales can only be done for actively traded securities. The effect a short sale, the security must be easy to borrow and sell short and then it must be easy to buy later on to cover the short position. Treasury bonds are the largest and most active trading market in the world. Closed-end funds trade like any other stock on an exchange and can be easily borrowed and sold short. Illiquid securities, such as municipal bonds and limited partnerships, cannot be shorted, since they are hard to borrow and later on, may be impossible to buy and replace to cover the short position.

If an adviser's registration filing is made electronically with the State, the requirement to affix a signature to an application is met by the applicant: A. typing his or her name in the appropriate fields and submitting the filing electronically to IARD B. signing a separate written document in the presence of a notary public, evidenced by the notary's seal C. faxing an application that has been signed by the applicant in ink, with the same return fax phone number as that given on the application D. validating his or her identity by telephoning the State Securities Administrator's office and answering questions correctly

The best answer is A. The States are attempting to streamline the registration process by requiring electronic registration filing and payment of fees. They don't want any more paper! Paper forms are only accepted for reasons of "hardship." Typing of one's name into the required field on the electronic form constitutes a proper filing. The electronic database for investment adviser filing at the State level is "IARD" - Investment Adviser Registration Depository.

A person with no office in the State is solely engaged in the business of giving investment advice to insurance companies for compensation. Under the Uniform Securities Act, this person would be EXEMPT from the Act's: A. registration provisions B. anti-fraud provisions C. advertising filing provisions D. common law deceit provisions

The best answer is A. The Uniform Securities Act exempts advisers with no office in the State from registration if they only deal with institutions (such as an insurance company). However, everyone and everything is subject to the anti-fraud provisions of the Uniform Securities Act. Everyone and everything is subject to common law deceit provisions. Finally, the advertising and filing provisions of Uniform State law do not apply to exempt securities or to exempt transactions. They do apply to broker-dealers, investment advisers and their agents, regardless of whether they are registered or exempt from registration.

On January 2nd, an issuer files a registration statement with the State Administrator for a new issue of common stock. 14 months later, the offering has not been completed and the issuer wishes to continue selling the securities until all of the common shares have been placed with the public. Which statement is TRUE? A. The issuer can continue to sell the shares because the registration expires only when the sale is complete B. The issuer cannot continue the sale of the issue because each securities registration automatically expires after 180 days C. The issuer cannot continue the sale of the issue because each securities registration automatically expires after 12 months D. The issuer can continue to sell the shares because each securities registration never expires

The best answer is A. The basic rule for registration statements filed with the Administrator for securities offerings is that they are good for 12 months. However, if the offering takes longer than 12 months, the registration is still good until the sale is complete. The exact wording of the Uniform Securities Act is: "Every registration statement is effective for one year from its effective date, or any longer period during which the security is being offered or distributed in a non-exempted transaction by or for the account of the issuer or other person on whose behalf the offering is being made or by any underwriter or broker-dealer who is still offering part of an unsold allotment or subscription taken by him as a participant in the distribution, except during the time a stop order is in effect."

A company receives a bill from its electric company for $1,000. The bill is payable within 30 days. If the company uses accrual accounting, it will: I record the $1,000 electric bill as an account payable as the date of receipt II not record the $1,000 electric bill as an account payable as the date of receipt III record the $1,000 electric bill as an expense as the date of receipt IV not record the $1,000 electric bill as an expense as the date of receipt A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. There are 2 basic methods of accounting - cash or accrual. Under the cash method, transactions are recognized based on the date payment (cash) is received or paid out. Small businesses often use this method because it is simple. Companies that use cash accounting do not have "accrued items" such as accounts payable and accounts receivable on their books. However, Generally Accepted Accounting Principles (GAAP) require that accrual accounting be used - and this is the case for larger businesses that are required to be audited. Accrual accounting recognizes revenue and expenses of the date of the transaction; not on the date actual payment is made. Because this company uses accrual accounting, it will record the electric bill as an expense on its income statement when the bill is received and will also set up an account payable (a liability) to show that the bill will be paid in 30 days. When payment is made in 30 days, the account payable is relieved, but this has no effect on the date of recognition of the expense on the firm's income statement.

An RIA registered in State A is hired by a cruise ship line to offer investment advice to passengers during the cruise. The cruise ship line has obtained a letter from the State Securities Administrator of State A stating that the adviser is authorized to solicit accounts from the passengers from the port of embarkation, which is in State A. The adviser: A. can solicit all of the passengers to buy advisory services B. can only solicit accredited investors to buy advisory services C. can only solicit sophisticated investors to buy advisory services D. cannot solicit any of the passengers to buy advisory services

The best answer is A. This is a question right out of left field! Does the State Administrator have jurisdiction over offers of securities and advisory services made on cruise ships docked in that State? The answer would be yes. Of course, once the cruise ship leaves the dock and travels into international waters, then the State Administrator would not have jurisdiction. We have never heard of a State Administrator issuing a letter stating that an RIA is "authorized" to solicit accounts in a State, but since this is what is given in the question, then it would be OK. This is an awful question!

Which of the following statements are true regarding repurchase agreements? I Repurchase agreements are used by dealers to reduce the carrying cost of Government securities held in their inventory II Repurchase agreements are initiated by the Federal Reserve to loosen the money supply III If a repurchase agreement specifies a date and price at which time the trade will be reversed, the agreement is known as a "Reverse" repurchase agreement IV If a repurchase agreement extends for longer than overnight, the agreement is known as a "Due Bill" repurchase agreement A. I and II only B. III and IV only C. II and IV only D. I, II, III, IV

The best answer is A. Under a "repurchase agreement," a government securities dealer sells some of its inventory to another dealer or to the Federal Reserve, with an agreement to buy back the securities at a later date for a pre-established price. In this manner, the dealer gets a temporary inflow of cash. Since government dealers finance their inventory, by reducing the amount of inventory on hand, they are reducing inventory finance charges when such an agreement is employed. Thus, Choices I and II are true. Choice III is false. Under a "reverse repurchase agreement", the dealer is buying securities from the Federal Reserve (instead of selling), draining the dealer of cash. Choice IV is also false. Under any repurchase agreement, the underlying government securities are the collateral. The collateral that underlies the agreement must be transferred from seller to buyer to support the transaction. In the "good old days," dealers could do repurchase agreements that were backed by a promise to deliver the underlying securities (a "due bill" for the securities) instead of making physical delivery. Due bill repurchase agreements are no longer permitted.

Which of the following investments is NOT categorized into an "asset class"? A. Mutual funds B. Real estate C. Fixed income securities D. Commodities

The best answer is A. Asset allocation theory says that allocating assets among a selection of asset classes based on investment objectives and risk tolerance provides needed diversification. These allocations are rebalanced periodically (typically at least annually) based on changing needs over time as well as relative performance of each asset class. The typical asset classes are: •Cash/Money Market Instruments •Fixed Income Securities •Equities •Commodities •Real Estate Note that mutual funds are not an asset class - rather, they are an investment vehicle that can be used as a way to invest in an asset class. For example, a government bond fund can be the investment vehicle to make a fixed income asset class investment.

A portfolio manager who believes that an extremely large short interest in NYSE listed issues is bullish would be called a: A. fundamentalist B. contrarian C. market timer D. technician

The best answer is B. A "contrarian" is an analyst that goes against the conventional wisdom. A contrarian believes that when prices are moving up quickly, it's time to sell; and that when prices are moving down rapidly, it's time to buy. The "idea" is that these signal either an "overbought" market that is ripe for a decline, or an "oversold" market where prices have dropped too far and are ready for a rebound. A very large short interest (that is, lots of investors have sold that stock short) indicates an "oversold" market, hence prices have been pushed too low and it is time to buy.

An order to sell 100 shares of ABC at $50 GTC on the Specialist's book (DMM) is a: A. market order B. limit order C. stop order D. stop limit order

The best answer is B. A limit order specifies an execution price ("the limit"). An order to sell at $50 is a limit order. Market orders do not specify a price. Stop orders must state "Stop" with a price.

A company that is listed on the NYSE has been in business for 30 years. It has a low P/E ratio and a consistent record of growing dividend payments from its large cash reserves. This would be categorized as a: A. growth stock B. value stock C. blue chip stock D. defensive stock

The best answer is B. A value stock gives investors "value" for their money. They are stable companies (this one has been in business for 30 years) that are consistently profitable, but are currently out-of-favor with investors (as evidenced by the low Price/Earnings ratio). The view is that they will come back into favor as investors realize that the company is undervalued and will appreciate in price more rapidly than the overall market. The company might, or might not be a blue chip (large, top rated company); and it might, or might not, be a defensive stock (a company that is unaffected by the economic cycle). In contrast, a growth stock would have a high P/E ratio and a low dividend payout ratio.

Under an insurance approach to Capital Needs Analysis, the investment adviser would: A. determine the securities to be selected based upon the customer's financial objectives, financial situation and risk tolerance B. calculate the insurance coverage needed to complete the customer's financial objective should the customer die prior to the objective being met C. invest in securities that have an insurance feature, such as insured municipal bonds and guaranteed investment contracts D. only invest in securities issued by insurance companies that are highly rated by Best's

The best answer is B. An "insurance approach" to a customer's capital needs analysis factors into the investment plan the fact that if the client dies prematurely, then the plan may not be fully funded and the client's beneficiaries may suffer as a result. In such a case, life insurance would be purchased in an amount to complete the funding of the plan if the client dies prematurely. If the insurance policy is owned by someone other than the decedent (e.g., owned by an irrevocable trust or by the spouse of the decedent), then the life insurance proceeds are not included in the decedent's gross estate. In such a case, the amount of insurance needed does not have to be increased to cover additional tax liability.

If an investment adviser wishes to take custody of client funds or securities: I the investment adviser must be audited, on a surprise basis, at least annually II customers must receive account statements at least quarterly III prior permission from the SEC must be obtained A. I only B. I and II only C. II and III only D. I, II, III

The best answer is B. If an investment adviser wishes to take custody of client funds or securities, all customer funds must be maintained in a bank account or securities account that is separate from the adviser's personal accounts. Customers must receive notification of the name and location where the funds and securities are being held. Customers must receive account statements at least quarterly. Finally, the adviser must be audited, on a surprise basis, at least annually - with a copy of the audit report filed with the SEC. Note, however, that there is no requirement for prior permission of the SEC for an adviser to take custody of customer funds or securities.

An investment adviser enters into an arrangement with a broker-dealer where the adviser, in return for directing trades to that broker-dealer, will receive payments for order flow. The payment, of one cent for each trade, is conditioned upon the adviser directing a minimum number of trades each month. Which statement is TRUE about this arrangement? A. This is a prohibited practice and violates that adviser's fiduciary responsibility to its clients B. This action on the part of the adviser is permitted only if it is disclosed in the Form ADV Part 2A ("Brochure") given to clients C. This action on the part of the adviser is permitted because it reduces the adviser's operating costs D. This action on the part of the adviser is permitted because it is based on a minimum number of trades occurring each month

The best answer is B. An investment adviser is supposed to be impartial when deciding which brokerage firm does its portfolio trades - the overriding concern for the adviser is that it gets the best execution at a "fair" price (which is not necessarily the lowest price). A "payment for order flow" is a small payment made by a market making firm for each order sent to it. This is used by the market maker to attract order flow - and almost all market makers pay for order flow. This creates a conflict of interest for an adviser, because the adviser may choose an executing broker based on the payments it will get rather than on best execution. This conflict of interest must be disclosed in the Form ADV given to clients and most advisers that accept such payments apply them as a credit to their customer accounts, so they benefit the customer directly and not the adviser.

The advantage of buying a foreign index fund as compared to direct investing in foreign stocks is that it: A. minimizes the risk of changing currency values B. is easier than individually investing in foreign stocks C. reduces tax liability when dividends are distributed D. minimizes the business risk of the investments

The best answer is B. Buying a foreign stock index fund is much simpler than trying to buy foreign stocks directly. The holder is still subject to the risk that the companies invested in do poorly - this is business risk. The holder of a foreign stock index fund is still subject to exchange rate risk (the risk that the value of the foreign currency in which the stocks are denominated falls versus the U.S. dollar, so that when the currency value is converted into U.S. dollars, it buys fewer U.S. dollars). Finally, all dividend distributions from mutual funds are taxable (with the exception of distributions from municipal bond funds).

An advantage of a closed end fund is that the shares can trade at a price that is lower than the NAV of the securities held within the fund. This is referred to as the: A. arbitrage B. discount C. premium D. margin

The best answer is B. Closed-end funds trade in the market like any other stock. They typically hold portfolios of less-liquid securities, such as municipal bonds. The fund manager never has to be worried about liquidating portfolio positions to meet redemption requests. The only way for an investor to get out of a position is to sell it in the market. If investors are not thrilled with the fund, the price per share can be pushed down in the market. Since these funds can trade at a discount, whereas mutual funds cannot, if an investor were looking at a closed-end fund versus an open-end fund with a similar portfolio, and if the closed-end fund were trading at a discount, the investor would get "more bang for the buck" with the closed-end fund since each $1 invested in the closed-end fund is actually buying more net assets.

An investment in common stock can provide a lower tax liability than a corporate bond investment because: A. the capital gains tax rate on a realized gain from an appreciated common stock position is lower than the rate on a realized gain from a appreciated bond position B. the income tax rate on qualified cash dividends received from common stock is lower than the rate on interest payments received from corporate bonds C. common stock dividend yields are lower than corporate bond interest yields D. all dividends and capital gains on common stock are taxed at a lower rate than the tax rate applied to all interest and capital gains on corporate bonds

The best answer is B. Common and preferred dividend payments received qualify for a lower 15% tax rate (for individuals who are not in the maximum tax bracket - for them, the rate increases to 20%), as opposed to a maximum 37% tax rate applied to interest payments received from corporate, U.S. Government and Agency bond investments. Note that the capital gains tax rules are the same for both common stock and bonds, with the same tax rates applied.

An individual owns a Traditional IRA from which she has never taken a distribution. Her 70th birthday falls on December 31, 2017. Her first distribution must be taken no later than A. April 1st of 2018 B. April 1st of 2019 C. June 30th of 2020 D. June 30th of 2021

The best answer is B. Distributions from an Individual Retirement Account must commence by April 1st of the year following the year that the person reaches age 70 1/2. This person turned age 70 at the end of 2017. She will be 70 1/2 on June 30th 2018. Distributions must commence by April 1st of the following year, which is 2019.

Which bond will decrease the most in price, if interest rates rise by 50 basis points? A. A bond with low duration B. A bond with high duration C. A bond with low credit risk D. A bond with high credit risk

The best answer is B. Duration is a measure of bond price volatility. Bonds with low coupons have large duration numbers; as do bonds with long maturities. Thus, the bonds with the biggest durations are those that are most volatile in price.

In order to comply with the requirements of ERISA Rule 404(c), a qualified retirement plan that offers participant-directed investments is: I required to offer at least 3 diversified investment alternatives that have materially different return and risk characteristics II required to offer at least 5 diversified investment alternatives that have materially different return and risk characteristics III prohibited from offering an investment option that consists only of the publicly traded stock of that company IV permitted to offer an investment option that consists only of the publicly traded stock of that company A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. ERISA Rule 404(c) applies to retirement plans that offer "self-directed" investment, such as 401(k) plan. It requires that the plan sponsor offer: •at least 3 investment alternatives that are diversified; that have materially different risk and return characteristics; and that when combined with each other, tend to minimize risk through diversification (e.g., an equity fund, a fixed income fund, and a capital preservation fund); •participants the opportunity to diversify their accounts sufficiently to avoid large losses; and •participants the opportunity to change investments with a frequency appropriate to the volatility of the investments. Note that the sponsor can offer its own stock as an asset class (e.g., an employee of GE can be offered GE stock as an investment option), as long as the stock is publicly traded and the participant gets the voting rights.

If the Federal Reserve Open Market Committee authorizes its trading desk to enter into system wide reverse repurchase agreements, the effect will be to: I increase yields II decrease yields III raise debt prices IV lower debt prices A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. If the Federal Reserve trading desk enters into reverse repurchase agreements with bank dealers, it is temporarily selling government securities to the dealers, draining them of cash. This decreases free reserves which can be loaned out by the banks. The net effect is to raise market interest rates since funds are not readily available. If interest rates rise, debt prices will fall. The Fed will take such action if it believes the economy is growing too rapidly.

Which statements are TRUE about the retention of customer account records for broker-dealers under Uniform State Law? I Customer trade confirmations must be retained for 3 years II Customer trade confirmations must be retained for 6 years III Customer account statements must be retained for 3 years IV Customer account statements must be retained for 6 years A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. In the absence of a specific rule by the Administrator, Uniform State Law requires that records be kept in accordance with the requirements of the Securities Exchange Act of 1934. Under the '34 Act, customer confirmations must be retained for 3 years; but customer account records (statements of account) must be retained for 6 years.

The final responsibility for the debt service on industrial revenue bonds rests with the: A. issuing municipality B. corporate lessee of the facility C. bond trustee D. bond underwriter

The best answer is B. Industrial development bonds are backed by the rental revenues paid by the corporate lessee as well as by the guarantee of the corporate lessee. These bonds, therefore, take on the credit rating of the corporation leasing the facility.

Sell stop orders: I used to sell securities at prices that are lower than the current market II used to sell securities at prices that are higher than the current market III guarantee a specific execution price or better IV do not guarantee a specific execution price or better A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Sell stop orders are used to sell securities at prices that are lower than the current market - they are used to "stop" a loss on the position. If the market drops to the stop price, the order is "elected" and becomes a market order to sell. They sell order will be filled at the prevailing market price - so there is no guarantee of a specific execution price or better.

The Dividend Discount model values common stock by discounting future dividends by the: A. expected rate of return B. required rate of return C. discount rate D. risk free rate of return

The best answer is B. The Dividend Discount Model is a way of finding the theoretical price of common stock. It takes the anticipated future dividends to be paid by the company and discounts them to present value. Instead of having to discount each year's anticipated dividend payment, the formula can be reduced to one similar to that for a perpetuity. The reduced formula is: Expected Next Year Dividend Rate Required Rate of Return for Equity Investors - Dividend Growth Rate For example, assume a company is expected to pay a $1 dividend next year. If the required rate of return is 8% and the expected dividend growth rate is 3%, then the projected price of the common stock is $1 Dividend / 8% - 3% = $1/.05 = $20.

The SEC is permitted to pursue persons for violations of: I FINRA rules II MSRB rules III State securities rules A. I only B. I and II C. II and III D. I, II, III

The best answer is B. The SEC is the federal regulator, and all self-regulatory organizations such as FINRA, CBOE, and the MSRB operate under SEC supervision and oversight. Thus, the SEC can pursue persons for violations of SRO rules. However, in each State, it is the Administrator (not the SEC) that has jurisdiction when violations of State law occur. Note that when someone violates securities laws, they may be pursued by both the SEC and the State(s).

A corporation has issued 10% AA rated sinking fund debentures at par. Three years later, similar issues are being offered in the primary market at 12%. Which are TRUE statements about the outstanding 10% issue? I The current yield will be higher than the nominal yield II The current yield will be lower than the nominal yield III The dollar price of the bond will be at a premium to par IV The dollar price of the bond will be at a discount to par A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. The bond was issued with a coupon of 10%. Currently, the yield for a similar issue is 12%. Therefore, interest rates have risen. When interest rates rise, yields on bonds already trading must also rise. What causes this is a drop in the dollar price of the issue - the bond now trades at a discount.

On the same day in a cash account, a customer buys 100 shares of PDQ stock at 51 and sells 1 PDQ Jan 50 Call @ 2. The maximum potential loss is: A. $4,800 B. $4,900 C. $5,100 D. unlimited

The best answer is B. The maximum loss occurs if the stock becomes worthless. If this happens, the call expires and the customer loses the full value of the stock. Since he bought the stock at 51, he loses $5,100 on the stock. Because he collected $200 in premiums, the net loss is $4,900.

The formula for the risk adjusted rate of return is: A. (Rate of return - Rate of inflation) / Amount invested B. (Rate of return - Risk free rate of return) / Amount invested C. (Rate of inflation - Rate of return) / Amount invested D. (Risk free rate of return - Rate of return) / Amount invested

The best answer is B. The risk adjusted rate of return is the excess return that is earned from an investment, over and above, the risk free rate of return. If the risk free rate of return on Treasury bills is 4%; and the investment is yielding 10%; then the risk adjusted rate of return is 10% - 4% = 6%. Thus, the risk adjusted rate of return is the:

An IAR associated with a State-registered adviser receives correspondence from his uncle about the uncle's securities account that the IAR handles. Under the Uniform Securities Act, this letter is considered: A. the private property of the IAR and can be disposed of as the IAR sees fit B. the private property of the IAR but must be kept on file for 2 years C. a record of the investment adviser, subject to examination by the Administrator D. a record of the investment adviser, but is not subject to examination by the Administrator

The best answer is C. Any written documents about customer accounts are a record that can be examined by the Administrator. They must be kept on file for the time period specified under Federal securities law for a Federal-covered adviser; or such period as set by the Administrator for a State-registered adviser.

Limited partnership shares are sold to a bank. Under the provisions of the Uniform Securities Act of 1956, as amended, this transaction is subject to: I advertising filing requirements with the Administrator II anti-fraud provisions as promulgated in the Act III payment of filing fees with the State A. I and III only B. II only C. II and III only D. I, II, III

The best answer is B. The sale of securities to a financial institution is an "exempt transaction" under the Uniform Securities Act - because the general public is not involved. As an exempt transaction, the securities involved are not required to be registered in the State (however the person selling them must still be registered in the State). Both exempt securities and exempt transactions are specifically excluded from the Act's advertising filing requirements. Finally, filing fees are only required for securities registrations in the State (primary market); not for secondary market transactions that occur in the State.

A stock is quoted as follows: Bid Ask 52.43 52.45 10 x 10 The spread for a round turn trade is: A. $2 B. $20 C. $200 D. $2,000

The best answer is B. The size of the quote is "10 x 10" = 10 round lots of 100 shares = 1,000 shares both bid and offered. If the dealer sells 1,000 shares at $52.45 and buys 1,000 shares at $52.43 (a round turn trade), the dealer makes a spread of $.02 on 1,000 shares = $20.

A customer buys 100 shares of ABC stock at $51 and sells 1 ABC Jan 50 Call @ $4. The maximum potential loss is: A. $400 B. $4,700 C. $5,100 D. unlimited

The best answer is B. The worst case is the stock becoming worthless. The customer loses the full value of the stock ($5,100) net of the $400 in collected premiums, for a net loss of $4,700.

A 5% coupon bond is being offered on a 6% basis. If interest rates for similar bonds fall below 6%, the basis for this bond will: A. increase B. decrease C. be unaffected D. be volatile

The best answer is B. This is pretty simple. A basis quote is a yield to maturity quote. If market yields are rising, the basis quote will rise, forcing the bond's price down. If market yields are falling, the basis quote will fall, forcing the bond's price up.

If one asset class greatly underperforms another class in an asset allocation plan, the portfolio must be: A. renegotiated B. rebalanced C. repositioned D. realigned

The best answer is B. When investment performance varies over time from one asset class to another, the target percentage allocations will shift from their optimal setting. To bring the portfolio back to these targets, it must be rebalanced - that is, a portion of the overperforming class(es) must be sold off and the proceeds reinvested in the underperforming class(es).

An existing customer of an agent who is registered in State A contacts the agent to inquire about purchasing 1,000 shares of XYZZ Corp. - a thinly traded stock that is sometimes quoted in the Pink Sheets. The agent attempts to locate the shares for the customer, but they are not available. Three weeks later, a new customer contacts the agent, asking him to sell 1,000 shares of XYZZ Corp. that he owns. The agent contacts the existing client to see if he is interested in purchasing these shares. This action is: A. a violation of the Uniform Securities Act B. considered to be an offer to sell made by the agent C. a conflict of interest that must be disclosed to the existing customer D. defined as a contract to buy the shares

The best answer is B. An "offer" or "offer to sell" is defined as any attempt to offer to dispose of a security; or a solicitation of an offer to buy a security or an interest in a security; for value. The agent has contacted the existing client, to see if he is interested in buying the 1,000 shares that this new customer wishes to sell. Thus, the agent is making an offer to sell the securities to the existing client. Do not confuse an "offer" (the attempt to sell) with a "sale" (which is a "done deal"). A "sale" is defined as a contract to sell or dispose of a security, or an interest in a security, for value.

A double barreled municipal bond is one that is backed by: A. 2 separate sources of revenue B. 2 separate sources of taxing power C. a pledge of revenues and the backing of that municipality's ad valorem taxing power D. a pledge of revenues and the unconditional guarantee of the U.S. Government

The best answer is C. A double barreled bond is one backed by a defined source of revenue (other than taxes) plus the full faith and credit of an issuer that has taxing powers. The term is occasionally, but erroneously, used to describe bonds backed by 2 sources of revenue or a bond backed by a revenue pledge that additionally, has the guarantee of the U.S. Government.

The Current Account and the Capital Account are part of a: A. corporate balance sheet formula B. customer's personal financial statement C. nation's balance of payments D. municipality's flow of funds

The best answer is C. A nation's balance of payments shows whether the nation is a net importer or a net exporter. If a nation has a balance of payments surplus, it is a net exporter; if it has a balance of payments deficit, it is a net importer. Because this is a "balance of payments" calculation, it compares spending by foreigners in that country versus spending by that nation's citizens outside that country. The calculation looks at the nation's "Current Account" and "Capital Account." The Current Account looks at spending on goods and services that are used up quickly. The Capital Account looks at spending (and borrowing) for long-term assets such as equipment and real estate.

All of the following persons are defined as federal covered advisers EXCEPT: A. advisers with $100,000,000 or more of assets under management B. advisers to investment companies C. advisers to sophisticated investors D. advisers not subject to State regulation

The best answer is C. Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. These are so-called federal covered advisers; and they cannot be required to register with the State. The smaller advisers are only required to be registered at the State level. If an adviser has under $100,000,000 of assets, it must register in the State. However, there are a few States that do not require registration of investment advisers (New York and Wyoming), so to make sure than SOMEONE regulates them, these are also defined as "federal covered advisers."

Exchange traded funds are NOT: A. marginable B. negotiable C. redeemable D. diversifiable

The best answer is C. ETFs (Exchange Traded Funds) such as SPDRs are negotiable - they trade as would any regular stock. They are marginable; and they are diversifiable, since ETFs are available for many different indexes and sectors. ETFs are not redeemable - it is mutual fund shares that are redeemable.

Which of the following is NOT EXCLUDED from the definition of an "investment adviser"? A. Broker-dealer B. Trust company C. Insurance company D. Savings and loan

The best answer is C. Excluded from the definition of an investment adviser are: investment adviser representatives, broker-dealers, depository institutions (banks, trusts, savings and loans), professionals (lawyers, accountants, teachers, engineers) and newsletters that do not render advice based upon a specific client situation. Insurance companies and investment companies are not excluded from the definition (though they may be exempt from registration under certain circumstances).

Which of the following are types of joint accounts? I Tenancy by Entireties account II Tenancy in Common account III Joint Tenants with Rights of Survivorship account IV Partnership account A. I and IV B. II and III C. I, II, III D. I, II, III, IV

The best answer is C. In a joint account, each owner can trade the account and can draw checks in the account's name. The joint account ownership options are Tenants in Common - each person has a divided interest with a specified ownership percentage for each party; and Joint Tenancy With Rights of Survivorship - each person has an undivided interest with each owning 100% of the account (another name for such an account is "Tenants by Entireties"). Partnership accounts are not joint accounts - only the designated partner(s) authorized in the partnership agreement can trade the account and draw checks - each individual partner is not permitted to do so.

Income in a non-revocable trust is taxed at the: A. corporate rate B. individual rate C. trust rate D. AMT rate

The best answer is C. Income in a non-revocable trust is taxed at the rates scheduled for trusts - these are the similar to the rates as for individuals but the brackets "ratchet up" faster to a maximum rate of 40% - as opposed to 37% for individuals (in 2018). In contrast, income in a revocable trust is taxed at the grantor's tax bracket (since the grantor still has control of the assets that generate the income).

The use of which tool of the Federal Reserve has the biggest impact on money supply levels? A. Open market operations B. Discount rate C. Reserve requirements D. Margin on securities

The best answer is C. Monetary policy tools of the Fed include setting reserve requirements, open market operations, setting the discount rate, and setting margin rates on securities. Changing reserve requirements has the largest impact on money supply levels, due to the effect of the "money multiplier". Because only a small percentage of deposits are retained on reserve, the amount that is lent out by the bank "multiplies out" as it is deposited to another bank, who retains a portion and lends out the balance, which is deposited to another bank, who retains a portion and lends out the balance, etc. Changing the reserve requirement would have an enormous expansionary or contractionary effect on money supply levels - hence this tool of the Federal Reserve is almost never changed.

Which of the following are NOT suitable investments for Individual Retirement Accounts? I U.S. Government bonds II Corporate bonds III Municipal bonds IV Zero coupon bonds A. I and II only B. III and IV only C. III only D. II, III, IV

The best answer is C. Municipal bonds are not suitable for tax deferred accounts such as pension plans and IRAs. These accounts are already tax deferred, so putting taxable investments in them that generate a higher rate of return than municipals is appropriate. Furthermore, these higher returns will compound tax deferred as long as they are held in the pension account. Municipals give a lower rate of return than governments or corporates because of the federal tax exemption on their interest income. They are a bad choice for retirement accounts. Finally, zero-coupon governments and corporates give a higher rate of return than municipals, since the annual accretion of the discount on these is taxable; and they are great investments to put in a retirement account; since then the annual accretion of the discount will build tax-deferred.

An investor in a "Ginnie Mae" mutual fund assumes all of the risks EXCEPT: A. Fluctuation of Net Asset Value B. Reinvestment Risk C. Credit Risk D. Prepayment Risk

The best answer is C. Since Ginnie Maes are backed by the full faith and credit of the U.S. Government, there is no credit risk (as is the case with direct Government obligations). Since Ginnie Mae only issues mortgage backed pass-through certificates, in periods of declining interest rates, prepayment risk exists. Homeowners tend to prepay their "old" high rate mortgages when rates have declined by refinancing at the new lower rates. When these prepayments are reinvested by the fund, the monies earn lower current rates, so reinvestment risk is also present. As with any mutual fund (other than a money fund which has a constant $1 per share NAV), there is the risk that NAV can decline - which would occur if interest rates rise, forcing Ginnie Mae certificate values down.

An investment adviser has 3 managing partners and 3 investment adviser representatives. All of the partners have completed the Certified Financial Planner (CFP) program and received the designation. The 3 IARs have been enrolled in a CFP preparation course and are scheduled to take the next CFP exam. The IA publishes an advertisement that states: "All of our partners are Certified Financial Planners." This advertisement is: A. fraudulent and misleading B. unethical because an advertisement cannot include the qualifications of the firm's principals C. permitted since it is true D. permitted only after the IARs pass their CFP exams

The best answer is C. Since the 3 partners of the firm all have their CFPs, this is a true statement and is not misleading.

A portfolio manager generates a 10% rate of return on a "small cap" portfolio, compared to an 8% rate of return on the benchmark portfolio and a 6% rate of return on the Standard and Poor's 500 index over the same period. The passive rate of return on the portfolio is: A. 2% B. 6% C. 8% D. 10%

The best answer is C. The "passive" rate of return is that achieved by investing in an appropriate index fund. Here, the benchmark index has an 8% rate of return - this is the return that any passive investor could achieve by investing in an index fund that mimics that index.

Which item is used when computing a corporation's Current Ratio? A. Net Working Capital B. Long Term Debt C. Inventory D. Sales

The best answer is C. The Current Ratio is: Current Assets / Current Liabilities. It is a measure of liquidity, because it looks at whether the company can pay its current bills as they come due. Cash, Accounts Receivable and Inventory are the primary "Current Assets." Net Working Capital is Current Assets - Liabilities. Net Worth is All Assets - All Liabilities. Sales are found on an income statement, not on a balance sheet.

The NASAA Statement of Policy regarding investment advisers that wish to exercise discretion in a customer account: A. requires that written power of attorney be obtained prior to the agent exercising discretion B. permits the agent to exercise discretion for up to 5 days upon the verbal authorization of the customer, as long as a written power of attorney is obtained by the end of that time period C. permits the agent to exercise discretion for up to 10 days upon the verbal authorization of the customer, as long as a written power of attorney is obtained by the end of that time period D. permits the agent to exercise discretion for up to 30 days upon the verbal authorization of the customer, as long as a written power of attorney is obtained by the end of that time period

The best answer is C. The NASAA Statement of Policy permits oral discretion to be exercised by an investment adviser for up to 10 business days; as long as a written power of attorney is obtained from the customer within 10 business days of exercising such oral discretion. (Please note that if the investment adviser is also a registered broker-dealer, the rules of FINRA would not permit this - FINRA requires written power of attorney from the customer prior to exercising discretion in the customer's account).

A mutual fund has a beginning of year Net Asset Value (NAV) per share of $25. During the year, the fund has Net Investment Income (NII) of $3 per share. At the end of the year, the fund distributes $2 per share in dividends to its shareholders. The end of year NAV per share is: A. $24 B. $25 C. $26 D. $27

The best answer is C. The Net Investment Income of $3 per share is added to year beginning NAV, bringing the NAV per share up to $28. When the fund distributes the dividend of $2, this comes out of NAV, so the year ending NAV is $28 - $2 = $26.

A corporation issues $50 par convertible preferred stock, convertible at $20 per share, when the market price of the common is currently $10. Which statement is TRUE? A. The conversion ratio is 10:1 B. The conversion ratio is 5:1 C. The conversion ratio is 2.5:1 D. The conversion ratio is 2:1

The best answer is C. The conversion ratio is Par Value / Conversion Price. $50 Par / $20 Conversion Price = 2.5:1 Conversion Ratio.

When borrowing money, the interest rate charged measures the: A. inflation rate B. consumption rate C. cost of money D. opportunity cost

The best answer is C. The interest rate charged on loans is the "cost" of money. The higher the interest rate, the higher the "cost" of borrowing money, and vice-versa.

An extended period where there is no discernible trend in prices is termed: A. overbought B. oversold C. consolidation D. resistance

The best answer is C. The market is said to be "consolidating" when prices are not moving in any direction for a long period after a previous price rise or fall.

Who must register in a State as an investment adviser? A. A person selling a subscription to a service that gives timing of buy and sell orders for specific investment company securities that are exchange traded B. An investment adviser representative who has been registered with an investment adviser for more than 5 years C. An on-line broker-dealer who offers a "no maximum number of trades" program for a 90-day period for a set dollar amount D. A bank that is offering "Raise-Your-Rate" Certificates of Deposit for a set promotional period

The best answer is C. This question gets at an interesting lawsuit filed against brokerage firms by investment advisers when these brokerage firms started offering non-managed fee based accounts. For an annual flat fee, the brokerage firm client could trade an unlimited amount. The investment advisers argued that a "flat fee" product is an advisory product that requires investment adviser registration - and they won. Thus, any flat fee product offered by a broker-dealer is considered to be an advisory product and requires that the firm and each agent register as an IA and IAR respectively in order to sell these. Choice A is incorrect because general market newsletters are not investment advisers - they only become IAs if they tailor advice to a specific client situation. Choice B makes no sense; and Choice D is incorrect because banks are excluded from the definition of an investment adviser.

Zero-coupon bonds trade: A. and interest B. with accrued interest C. flat D. at par

The best answer is C. Zero-coupon bonds do not make semi-annual interest payments, therefore they trade "flat" - that is, without accrued interest. The term "and interest" means trading with accrued interest.

The method for computing return as shown in a mutual fund performance chart is: A. Internal Rate of Return B. Dollar Weighted Average Return C. Time Weighted Average Return D. Expected Rate of Return

The best answer is C. Time weighted average return is the measure used for mutual fund performance charts (Total Return, which shows dividends and capital gains as continually reinvested). It reflects the growth that would be achieved from a 1-time investment into the fund and then holding that investment over time - this is a buy and hold strategy. This method is consistent when comparing one fund's performance to another fund's performance. In contrast, Dollar weighted average return accounts for all cash flows (deposits) into the fund and all cash redemptions from the fund made by that investor. It is the same as the Internal Rate of Return, and will vary with the timing of each investor's deposits and withdrawals. Because investors often "chase" past performance, they will buy a fund "too late" (after the fund has posted its best performance and now enters a period of lesser performance) and will sell "too soon." Thus, for the individual investor, Dollar weighted average return is often lower than Time weighted average return.

A customer is considering investing in a private partnership that is currently being formed to buy an office building. The certificate of limited partnership places a life of 9 years on the partnership, after which the office building will be sold and the proceeds distributed to the limited partners. The customer is evaluating the annual cash flow projections included in the Private Placement Memorandum using a CAPM approach. When doing so, the interest rate that would be used as the minimum "hurdle rate" for the project would be the: A. 90 day Treasury Bill rate B. 5 year Treasury Note rate C. 10 year Treasury Note rate D. 20 year CD rate

The best answer is C. The Capital Asset Pricing Model (CAPM) finds the expected rate of return of an investment, based on the investment generating the risk-free rate of return plus a risk premium. The risk free rate of return would be the rate for a Treasury security with a maturity that approximates the life of the investment - which is 9 years - so the 10 year Treasury Note is closest in maturity. This would be the minimum return necessary to make the investment (also called the "hurdle rate" - as in clearing a hurdle in racing) if it was deemed to be "risk-free" (which it isn't). Using the CAPM approach, in addition to the risk free rate of return, the investment would also need to provide a risk premium, based on the expected risk of this investment.

A customer has made the following purchases of XYZ stock: Year 1: 300 shares @ $62 Year 2: 400 shares @ $66 Year 3: 100 shares @ $63 Year 4: 500 shares @ $69 Year 5: 200 shares @ $68 It is now Year 6 and the stock is trading at $70. The customer wishes to sell 1,000 shares. To minimize tax liability, the customer should use which tax valuation method for the shares that are sold? A. Last In First Out B. First In First Out C. Average Cost D. Specific Identification

The best answer is D. A customer that has purchased stock over many years and that sells part of the position can choose to use "specific identification" to identify the specific shares being sold. In this case, the customer will lower his or her tax bill by choosing the highest cost shares. These would be the 500 shares purchased at $69 in Year 4; the 200 shares purchased at $68 in Year 5; and 300 of the 400 shares purchased at $66 in Year 2 as the 1,000 shares sold for $70. These are the highest cost shares and this will reduce the capital gain. If the customer does not use specific identification, the IRS mandates FIFO accounting for shares sold. Average cost accounting can only be used for mutual fund shares; not for individual stocks.

Which of the following are "federal covered" advisers? I An investment adviser with $400,000,000 of assets under management II An investment adviser to an investment company with $400,000,000 of assets under management III An investment adviser to an investment company with $40,000,000 of assets under management A. I only B. I and II C. II and III D. I, II, III

The best answer is D. Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. These advisers are known as "federal covered" advisers. The smaller advisers are only required to be registered at the State level. Thus, the adviser with $40,000,000 of assets under management need only register with the SEC; and is exempt from registration in the State. The adviser to the investment companies (regardless of the dollar amount) need only register with the SEC; and is exempt from registration in the State.

An investment adviser that typically places about 900 trades per month for its clients receives a notice from its executing broker that the cost per trade will drop to a flat $8.00 from the current $12.00 if 1,000 trades per month are placed. The investment adviser wishes to take advantage of the discount. To do this, the investment adviser should effect the extra 100 trades per month: A. across its customer accounts in proportion to the size of each account B. divided equally across all customer accounts C. across its customer accounts in proportion to trading activity in each account D. in the adviser's proprietary accounts

The best answer is D. Excessive trading in customer accounts is "churning" and is prohibited. If the adviser wishes to effect an extra 100 trades per month to get the trading discount, it should do those trades in the firm's proprietary trading account. The only reason to increase trading activity in the customer accounts is if there will be a benefit to the customer in doing so. Just because the adviser will receive a lower commission cost per trade if it trades more does not mean that the adviser will pass along the discount to the customer!

An agent of BD "A" receives a job offer from BD "B." If the agent accepts the job at BD "B," his State registration with BD "A" will: A. remain in effect B. be transferred automatically by CRD to BD "B" C. automatically expire within 30 days of resignation from BD "A" D. be terminated by BD "A"

The best answer is D. If an agent of a broker-dealer terminates employment, prompt notice to the State Administrator must be given by BOTH the BD that no longer employs the agent (BD "A") and by the agent. The agent's registration will be reinstated by BD "B" when the agent starts employment there.

Which of the following actions are likely to cause the value of the U.S. Dollar to rise? I The Federal Reserve lowers the discount rate II The Federal Reserve raises the discount rate III United States investors purchase foreign securities IV Foreign investors purchase U.S. securities A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. If the Federal Reserve raises the discount rate, then interest rates would rise in the U.S. As interest rates rise, so does the U.S. Dollar's value, since dollar denominated investments are more attractive to foreign purchasers. If foreign investors make large purchases of U.S. securities, then they must sell their foreign currency to buy the U.S. dollars needed to pay for that security. As dollars are bought, the value will rise. Conversely, if U.S. investors make large purchases of foreign securities, then they must sell their dollars to buy the foreign currency needed to pay for that foreign security. As dollars are sold, the value will drop.

Which of the following securities can be registered by qualification in a State? I Direct Participation Program II Fractional Interest in an Oil and Gas Program III Voting Trust Certificates IV Pre-organization Certificates A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV

The best answer is D. Registration by Qualification in a State is the most difficult method and can be used for ANY security - and all of the choices listed are defined as securities. It is typically used for a company's initial public offering where there is no Federal SEC registration, so the State has no other information about the issuer and the issuer must "qualify" to have its securities registered in the State. In contrast, if an issuer is registering with the SEC, it can use the Federal SEC registration as its State registration document under "Registration by Coordination." If an issuer has previously registered securities with the SEC and State, it is a "seasoned issuer" and the State knows who the issuer is. Then the issuer can use the simpler method of Registration by Filing (Notification) in the State.

The sale of securities by a State chartered bank is: A. exempt from registration with the SEC only B. exempt from registration in the State only C. subject to both SEC and State registration D. exempt from both SEC and State registration

The best answer is D. Securities issued by banks (but NOT bank holding companies) are exempt from both Federal and State registration. Remember, banks are already extensively regulated at both the Federal and State level, so to require registration of their securities is considered to be overkill.

Under the Uniform Securities Act, the Administrator is empowered to make, amend or rescind any provision of the Act: A. under no circumstances B. with the prior consent of North American Securities Administrators Association C. with the prior consent of the State Securities Commission D. if the action is necessary and appropriate, and is in the public interest

The best answer is D. The Act allows the Administrator to make, amend, or rescind any provision of the Act, if the action is necessary and in the public interest. No prior approval of NASAA or the SEC is required. The only portion of the Act that the Administrator cannot change is the one that defines exempt securities (such as U.S. Government bonds, municipal bonds, etc.)

The Federal Farm Credit System issues bonds for which of the following farmers' agencies? I Federal Intermediate Credit Banks II Federal Land Banks III Banks for Cooperatives A. I only B. I and II C. II and III D. I, II, III

The best answer is D. The Federal Farm Credit System issues bonds for all of the farmers' agencies - these are Federal Intermediate Credit Banks, the Federal Land Banks, and the Banks for Cooperatives.

A customer inherits 3,000,000 shares of ABC stock, a company listed on the NYSE which has 10,000,000 shares outstanding. The customer is not a director or officer of the company. Which of the following statement(s) is/are TRUE? I The customer is defined as an "insider" under the Securities Exchange Act of 1934 II The customer is prohibited from selling ABC stock short except for tax deferral purposes (short against the box) III If the customer trades ABC stock at a profit after having held the stock for less than 6 months, the gain is forfeited IV The customer must report trading activity to the SEC A. I only B. II and IV C. I, II, IV D. I, II, III, IV

The best answer is D. This person falls into the definition of an "insider" because he holds 10% or more (in this case he holds 30%) of the company's stock. Insiders cannot sell their stock short (except to short against the box at year-end for tax deferral reasons); they must forfeit any short swing profits derived from trading their own company's shares; and trading activity must be reported to the SEC.

Long Market Value: $48,000 Short Market Value: $18,000 Debit: $25,000 Credit: $25,000 SMA: $3,000 The equity in the account is: A. $16,000 B. $25,000 C. $27,000 D. $30,000

The best answer is D. To compute equity in the combined account, compute the long and short accounts separately. Long Market Value Debit Equity $48,000 $25,000 $23,000 Credits Short Market Value Equity $25,000 $18,000 $7,000 The combined equity is $23,000 + $7,000 = $30,000.

Which statement is NOT true regarding the role of the trustee? A. The trustee owes a duty to the beneficiaries to comply with the prudent investor rule B. The trustee must invest and manage trust assets solely in the interest of the beneficiaries C. If the trustee has 2 or more beneficiaries, the trustee must act impartially, taking into account any differing interests of the beneficiaries D. The trustee is prohibited from delegating investment and management functions to an agent unless the beneficiary approves

The best answer is D. Trustees must act in the best interests of the beneficiaries of the trust and must conform to the "Prudent Man" rule. The trustee is permitted to delegate investment and management functions as he or she sees fit - there is no requirement for beneficiary approval.

If a bond is purchased at a premium, which of the following statements are TRUE? I Yield to call is higher than the yield to maturity II Yield to call is lower than the yield to maturity III Yield to maturity is higher than the current yield IV Yield to maturity is lower than the current yield A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. When a bond is purchased at a premium and called prior to its maturity date, the yield to call received will be lower than if the bond is held to maturity since the premium will be lost faster. Yield to maturity will always be lower than current yield for a premium bond because YTM includes the loss of the premium as a reduction of the overall return received from the bond; while current yield ignores this component (it is simply Annual Income / Current Market Price).

An investor buys a bond. At the end of the first year, the bond is worth $1,300. During the year, the investment paid $20 in interest and had a capital gain of $250. What is the Total Return? A. 1.54% B. 1.90% C. 20.77% D. 25.71%

The best answer is D. The cost of the investment is not given in the question (trick!) and must be calculated. Since the investment is worth $1,300 currently and there is a $250 capital gain, the cost of the investment was $1,050. Total Return is: Annual Income + Capital Gain / Amount Invested = $20 + $250 / $1,050 = 25.71%

If the writer of an equity call contract is exercised, the writer MUST: A. deliver cash in 1 business day B. deliver stock in 1 business day C. deliver cash in 2 business days D. deliver stock in 2 business days

The best answer is D. If the writer of an equity call contract is exercised, the writer must deliver the stock, receiving the strike price in payment from the holder. Settlement is 2 business days after exercise date - this is a regular way stock trade.

A customer sells 1 ABC Feb 50 Call @ $7 when the market price of ABC is 52. The customer's maximum potential loss is: A. $700 B. $4,300 C. $5,700 D. unlimited

The best answer is D. The writer of a naked call is obligated to deliver stock that he does not own. If exercised, the stock must be bought in the market for delivery. Since the market price can rise an unlimited amount, the maximum potential loss is unlimited as well.