Series 65 Practice Test 3 Incorrect Questions

Halethorpe has had a difficult time passing the Series 66 examination. He just tried again and failed for the fourth time. He will be eligible to try again in...

180 days For the first two failures, one must wait 30 days before retrying the exam. If there is a third failure, the waiting period is 180 days for the next and any subsequent attempts.

During the previous fiscal year, The Kaplan Family Trust received $24,000 in dividends and $35,000 in interest from corporate bonds. Securities transactions during the year resulted in long-term capital gains of $48,000, $20,000 of which were reinvested in the corpus. The DNI for the Kaplan Family Trust is: A) $87,000 B) $11,000 C) $107,000 D) $79,000

A) $87,000 DNI= Dividends + interest + cap gains (that have not been reinvested back into the trust) In this case, $24,000 + $35,000 + $28,000 = $87,000.

An investment adviser who is discussing forward contracts with a client would most likely be referring to an investment in what?

An agricultural commodity Forward contracts are available on commodities, such as agricultural products (e.g., corn, wheat, and soybeans).

If your clients, spouses both age 50, are interested in long-term growth and are willing to accept a moderate amount of risk, you should recommend: A) a money market fund B) a large-cap stock fund C) a municipal bond fund D) an equity/income fund

B) a large cap stock fund A mutual fund investing in large-cap stocks (see Glossary of Terms) has relatively moderate risk with likely growth potential.

Which of the following activities by a registered agent of a broker-dealer would constitute a prohibited practice under the Uniform Securities Act? A) Informing a customer of a negative research report recently published on a stock that represents the client's largest holding B) Failing to disclose a nonmaterial fact C) Personally raising capital, without written authorization from the broker-dealer, for a new high-tech venture being run by the agent's former college roommate D) Refusing to lend money to clients

C By attempting to effect securities sales by circumventing his broker-dealer, the agent has committed the prohibited practice of a private securities transaction, referred to as selling away. Failure to disclose a material fact would be prohibited, but nonmaterial facts do not carry that burden. One would expect an agent to keep the client informed regarding news about securities held in the account, and agents would be expected to refuse to make loans to customers because that is a prohibited practice.

Which of the following would likely have the lowest degree of exposure to credit risk? A) A-rated general obligation municipal bond B) Baa-rated municipal revenue bond C) Aa-rated corporate debenture D) Ba-rated corporate mortgage bond

C) Aa-rated corporate debenture This is the highest rated of the choices based on credit rate table: Moodys. S&P Aaa. AAA Aa. AA A. A Baa. BBB Below is junk bonds

Which of the following debt instruments does NOT make periodic interest payments? A) T-notes B) T-bonds C) T-bills D) TIPS

C) T-Bills Treasury bills are always issued at a discount from their face value. At maturity, the investor receives the face value. The other choices pay interest semiannually. What makes TIPS different from the others is that the principal adjusts for inflation every six months. That means the fixed interest rate is paid on a varying principal.

A new client is looking for a recommendation. The client is 72 years old, has sufficient income from Social Security, and has a pension plan to cover all of her living expenses. She has just inherited $100,000. She wants to invest this money to have a bit more income so she can spoil her grandchildren. Which of the following would be antipodal to her wishes? A) Jumbo CDs B) Treasury bonds C) Treasury STRIPS D) Public utility stock

C) treasury STRIPS (antipodal means opposite) If she wants additional income, she cannot get that from Treasury STRIPS. They are zero-coupon bonds and pay nothing until maturity.

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 trimmed hedge. B) a neutral hedge. C) a short hedge. D) a long hedge.

D) A LONG HEDGE The concern is that the price will go up. Just as with options, WHEN WE ARE CONCERNED THE PRICE OF SOMETHING WILL GO UP, WE ARE 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.

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) cash proceeds from issuing stocks or bonds. D) transactions and events involving the purchase and sale of land, buildings, and equipment.

D) transactions and events involving the purchase and sale of land, buildings, and equipment. 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.

Which of the following are the most common characteristics of a REIT? I. It is traded on an exchange or over the counter. II. It is professionally managed. III. It passes through both gains and losses to investors. IV. It is a type of limited partnership.

I & II A REIT shares some features with a limited partnership, but it is a different type of business entity. REITs are traded on exchanges and OTC and are professionally managed. Both REITs and limited partnerships provide pass-through of gains to investors, but REITs do not provide pass-through of losses. Please note: NASAA has recognized that, over the past few years, there has been an enormous growth in non-traded REITs. Non-traded REITs don't trade, so there is little or no liquidity. Unless something in the question refers to a non-traded REIT, assume that all REITs are publicly traded either on the stock exchanges or OTC.

Although there are others that may be used in construction of a portfolio, the primary asset classes used in asset class allocation include: I. bonds. II. cash. III. commodities. IV. stock.

I, II & IV: Stocks, Bonds and Cashola The three major asset categories used in allocation are bonds, cash and stock. Commodities, real estate and other tangible assets are sometimes used, but all models use the big three.

The economic theory that says economic growth results from lower tax rates and reduced government regulation is...

SUPPLY SIDE THEORY

A client owns a taxable bond with a coupon rate of 5%. His marginal tax rate is 28%. What is the after-tax yield he will receive on this investment?

3.60% After-tax yield= Coupon rate x (1 - tax rate) 5% × (1 − 0.28). Or, you could simply take off the 28% tax from 5% (1.40%) and subtract that from the 5% to arrive at 3.60%.

Which of the following rates of return is used by investment professionals as the risk-free rate? A) 91-day Treasury bill rate B) Discount rate C) Prime rate D) Federal funds rate

A) 91-day Treasury bill rate The interest rate used as the basis for a risk-free rate of return is the 91-day Treasury bill rate. T-bills are U.S.-government guaranteed, the rate is short term, and the market risk is minimal.

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

A) Direct participation programs 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.

Savant Investment Managers (SIM) has a client with a short position in PQR common stock. The position was initiated at a price per share of $50, and with PQR currently selling at $30 per share, the client is interested in a method that will allow him to protect some of the unrealized profit without an expenditure of funds. His representative at SIM could suggest: A) entering a buy stop order at $35. B) entering a buy stop order at $55. C) buying PQR 35 call options. D) entering a sell stop order at $35.

A) entering a buy stop order at $35. Buy stop orders, commonly referred to as "stop loss" orders are designed to halt a loss or protect a gain. These are buy orders placed above the current market that become triggered if it happens that the stock should trade at or through the specified stop price. Buying the call options would also offer the protection, but the question specified no expenditure of funds.

Investment adviser representatives are often called upon to help clients select an appropriate mutual fund. When making a recommendation, which of the following would not be a consideration? A) The fund's expense ratio B) The fund's investment objective C) The fund's net asset value per share D) The portfolio manager's tenure

C) The fund's net asset value per share The price per share (NAV per share) of a fund is not a relevant factor when considering recommending a mutual fund. The fund's investment objective must align with that of the client, and it is important to know if the fund's portfolio manager has just come aboard or has been managing the fund for a number of years. All other things equal, the IAR will generally look for the funds with lower expense ratios.

If a new joint tenants with rights of survivorship account is opened by two related individuals, all of the following statements are true except: A) in the event of death, the decedent's interest in the account goes to the other party B) orders may be given by either party C) checks may be drawn in the name of either party D) mail may be sent to either party (with the permission of each party)

C) checks may be drawn in the name of either party While either party may enter an order, any money or securities delivered out of the account must be in the names of both owners.

A broker-dealer holds fully paid-for customer securities for safekeeping. Under the NASAA Statement of Policy on Unethical and Dishonest Business Practices of Broker-Dealers and Agents, the broker-dealer: A) may lend them to make delivery on short sales. B) would be in violation unless a properly executed margin agreement was in effect. C) must pay interest to the clients. D) must segregate them.

D) must segregate them. Any securities held in custody by a broker-dealer (or, for that matter, an investment adviser) must be segregated from those belonging to the broker-dealer (or investment adviser). To do otherwise would be to commit the prohibited practice of commingling. Fully paid securities may not be loaned out; only those collateralizing a debit balance may be and, then, only with customer permission.

Which of the following statements regarding the handling of discretionary accounts are true? I. Discretionary accounts must be reviewed frequently by the designated supervisory person. II. An investment adviser representative may decide, without discretionary authority, the security to buy or sell and the amount to buy or sell. III. A husband or wife may, at any time, exercise discretionary authority in the spouse's account without specific written authorization. IV. An investment adviser representative may decide, without discretionary authority, the time at which to execute a trade.

I & IV Discretionary accounts must be reviewed frequently by the designated supervisory person (I), and an investment adviser representative may decide both the time and the price at which to execute a trade without discretionary authority (IV). Only if he is to decide action (whether to buy or sell), asset (what to buy or sell), or amount (how much to buy or sell) is discretionary authority required. ***If all three As are there, or time/price, you do NOT need discretionary authority, but you have authority to act for the client. If you have less than all three As, an order is discretionary***

Which of the following are prohibited practices? I. An investment adviser transferred a client's account to a brokerage house because the account went below the firm's minimum size and then informed the client. II. An investment adviser organized as a partnership did not notify its clients of the departure of a partner who had only a very small interest in the firm. III. An investment adviser subsidiary of a publicly traded bank holding company failed to inform its clients of the departure of the firm's chairman and major stockholder. IV. An investment adviser firm organized as a general partnership sends prompt notification to all clients after the addition of a new partner.

I AND II Transfer or assignment of an advisory account without prior client consent is always prohibited. (I) An investment adviser need not inform clients of departures of employees, senior or otherwise, from investment advisory firms that are incorporated (III). Clients must, however, be informed of the departure or addition of any minority partner if the firm is organized as a PARTNERSHIP. (II) The legal requirement for this notification is "within a reasonable period of time," but there is nothing prohibited about doing it promptly.

The SEC has determined that advertising regarding past recommendations made by investment advisers is misleading if which of these are true? I. Results do not reflect the deduction of fees. II. Actual market conditions during the referenced period are not disclosed. III. The advertisement does not reflect performance for a minimum period of three years. IV. The advertisement does not disclose that it applies to only a specific group of clients.

I, II AND IV Advertising that reflects past performance must show a minimum period of one year, not three (III). All investment advisers' advertising must: 1. reflect deduction of fees; 2. disclose the specific group of clients to which it applies, if applicable; and 3. state actual market conditions during the referenced period.

An investment advisory firm advertises a stock-picking system that helps investors choose the timing and selection of securities for purchase. Under the Investment Advisers Act of 1940, which of the following must be disclosed in the advertisement? I. The number of years the system has been used successfully II. The difficulty of using the system III. The limitations of the system

II & III

Among the differences between C corporations and S corporations is: I. the liability assumed by the shareholders II. the number of allowable shareholders III. the tax treatment of the corporation's earnings IV. residency requirements of shareholders

II, III & IV A feature common to both C and S corporations is the limited liablity of the investor. That is, the investor is not liable for the debts of the business and cannot lose more than the original investment. Unlike C corporations, there is a limit placed on the number of shareholders in an S corporation. At the time of this printing, that maximum is 100, none of whom may be a nonresident alien (C corps have no residency restrictions). The primary practical difference is the fact that S corporation earnings (and losses) flow through to the shareholders, whereas C corporation earnings are only received by shareholders when dividends are paid.

Which of the following is the form of portfolio management that rotates between sectors based on changes to the business cycle?

Segment rotation/ Sector rotation Segment rotation, more commonly known as sector rotation, involves altering portfolio composition based on which sectors are poised to outperform as the business cycle is changing phases.

Q14: Under the Uniform Securities Act, which of the following are NOT required to register as investment adviser representatives in this state? 1. An individual who sells advisory services in several states, including this one, for AAA Advisers, Inc. 2. United Trust Company of America 3. An agent for a broker-dealer advising customers for a fixed separate fee stated as a percentage of the customer's assets under management 4. An investment adviser with no office in the state that does business exclusively with other investment advisers located in the state

2 & 4 An individual who sells advisory services for AAA Advisers, Inc., is an IAR. (1) A trust company is NOT an investment adviser under the USA. (2) An agent for a broker-dealer advising customers for a fixed fee, stated as a percentage of the customer's assets under management, is acting as an IAR (3). An investment adviser with no office in the state doing business exclusively with other investment advisers located in that state is NOT required to register in that state as an investment adviser under the USA. (4)

An investor owns a TIPS bond with an initial par value of $1,000. The coupon rate is 6% and, during the first year, the inflation rate is 9%. How much interest will be paid for the year?

64.11 TIPS bonds have a fixed coupon rate with a principal that varies each six months based on the inflation rate. With an annual inflation rate of 9%, each six months, the principal increases by 4.5% (half of the annual rate). Each semiannual coupon is half of the 6% rate times the new principal. The arithmetic is: $1,000 × 104.5% = $1,045 × 3% = $31.35 plus $1,045 × 104.5% = $1,092 × 3% = $32.76. Adding the interest payments together results in a total of $64.11 for the year. OR, TO AVOID THE MATH: You should be able to eyeball this. Any bond with a 6% coupon will pay $60 in one year ($30 × 2). Because the TIPS bond increases the principal after the first six months, the second interest payment will be slightly higher than $30. There is only one choice slightly higher than $60.00 and it would be that way on the real exam.

Interest rates are rising. An analyst would be most likely to state that the business cycle is in which stage? A) Expansion B)Peak C) Contraction D) Trough

A) Expansion It is during periods of economic expansion that interest rates tend to increase. They tend to fall during contractions.

In projecting future cash requirements, one of the tools is a capital needs analysis. When doing one, all of the following would be considered capital needs except A) rolling over a 401(k) into an IRA B) a $20,000 loan for undergraduate school with a due date in 6 years C) a home equity loan with a $15,000 balance D) a $100,000 loan for law school with a due date in 10 years

A) rolling over a 401(k) into an IRA A capital needs analysis attempts to determine money that would be needed in the event of an individual's sudden passing. Included would be any outstanding debt obligations, regardless of when they are due (they will have to be paid off sometime). However, an asset such as the 401(k) is not a need; it is something that will help meet the need.

A widowed customer with no children has a portfolio invested in mutual funds valued at $250,000. The portfolio generates a monthly income of $1,600, an amount that exceeds her living expenses by $300. The investment portfolio is her sole source of income. Her agent recommends she sell $30,000 worth of her mutual funds and purchase a deferred variable annuity to take advantage of the tax deferral and death benefit features. This recommendation is: A) unsuitable B) suitable because it offers a growth opportunity with a death benefit for a portion of her holdings C) suitable because it provides diversification D) suitable because it provides tax deferral features

A) unsuitable The customer has no need for the death benefit (she has no immediate survivors) or tax deferral features (with $19,200 in annual income, there are virtually no income taxes due) of a variable annuity, so this transaction is unsuitable. Finally, she would be replacing income generating assets with one that does not offer immediate income and that could reduce her income cushion to an uncomfortable margin of safety.

One of your clients enters a sell stop order at 60, limit 59. Subsequent to the entry of the order, trades occur at 61, 61.10, 60, 58.95, 59, 60. The client's order was most likely filled at: A) 58.95 B) 59 C) 60 D) 61.10

B) 59 This is really two orders. The first is to "stop" at 60. That is, once the stock trades at 60 or lower, enter the order. The second order is a sell, but with a limit of 59. In this sequence, the first time the stock hits 60 (or less), is the 3rd trade, the one at 60. That triggers the sell limit. The next trade is at 58.95 and that is not acceptable to the limit order at 59. Why not? Because the limit order is saying, "get me 59 or higher"; that makes the following trade at 59 an acceptable price.

A broker-dealer informs a client that it does not intend to abide by all the provisions of the Uniform Securities Act. It has the client sign a waiver that specifically prohibits the client from entering a suit against the firm. The client's signature is properly witnessed and notarized. Which of these is true? A) Because the client signed the agreement, a suit against the firm will have no legal standing. B) Clients cannot waive their legal rights. C) This waiver is only effective if a copy is filed and registered with the Administrator. D)The client will only be able to sue in the case of fraud.

B) Clients cannot waive their legal rights. A waiver is NEVER acceptable

One of your clients, a couple in their early 30s, asks you to recommend a plan to save for their newborn child's education. They are only able to contribute $1,800 per year. Which of the following would most likely be the best fit for their situation? A) Equity index annuity B) Coverdell ESA C) UTMA D) Section 529 plan

B) Coverdell ESA The key to this choice is the contribution level. The Coverdell ESA has a maximum annual limit of $2,000 and offers tax-free growth. Why not the Section 529 plan? Invariably, that will be the correct choice when the question involves higher contribution amounts or tax benefits on a state level. When the couple can only contribute $1,800 per year, it seems logical to assume that they are in a low tax bracket where those benefits would be of minimal value. Money in an UTMA tends to lower financial aid for higher education. The annuity would not be suitable for anyone wishing to use the funds prior to age 59½.

A client invests $2,200 in an open-end investment company and signs a letter of intent for a $10,000 breakpoint. If six months later he deposits $11,000, which of the following statements is true? A) He will receive a reduced load on $8,800 worth of the shares. B) He will receive a reduced load on $13,200 worth of the shares. C) He will not receive any reduction in the sales load. D) He will receive a reduced load on $10,000 worth of the shares.

B) He will receive a reduced load on $13,200 worth of the shares. An investor signing a letter of intent has 13 months to contribute funds to reach the reduced load. The sales charge in this case, then, will be based on the total investment of $13,200. If at the end of the 13 months the investor has not invested up to the breakpoint, the fund will liquidate enough shares to pay the difference in sales load.

If a high-income taxpayer is subject to the AMT, which of the following preference items must be added to adjusted gross income to calculate his tax liability? A) Dividends paid on preferred stock B) Interest on a private-purpose municipal bond C) Interest on a general obligation municipal bond D) Distributions from a corporate bond mutual fund

B) Interest on a private-purpose municipal bond Private purpose muni bond= tax pref item for AMT The interest received on private-purpose municipal bonds is considered a tax preference item for the AMT. The interest on GO bonds and income received on corporate securities are never considered preference items under the AMT. In the real world, it is not only those with high incomes that are caught by the AMT, but the exam is not likely to go that deep.

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 measures the increase or decrease in the level of consumer prices with respect to the level of wholesale prices upon which consumer prices depend. C) The CPI measures the rate of increase or decrease in a broad range of prices, such as food, housing, medical care, and clothing. D) The CPI is computed monthly.

B) 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. The CPI ONLY measures RETAIL prices, whether or not wholesale prices are passed through to the consumer. The CPI does not measure the increase or decrease in the level of consumer prices with respect to the level of wholesale prices.

According to the USA, under which of the following circumstances may an Administrator cancel an investment adviser representative's registration? A) The Administrator determines it would be in the public interest. B) The investment adviser representative is judged to be mentally incompetent. C) The investment adviser representative has admitted to selling unregistered exempt securities to individual clients. D) The investment adviser representative is the subject of an insider trading lawsuit.

B) The investment adviser representative is judged to be mentally incompetent. Registration may be canceled by the Administrator if the registered individual has been judged mentally incompetent. Cancellation is a nonpunitive action of the Administrator. I picked D: incorrect bc NO charges YET

Your elderly client has $10K to invest and seeks preservation of capital and a moderate income stream. If she has never invested in mutual funds before and all of her savings are in bank CDs and saving accounts, you should recommend: A) a tax-exempt bond fund B) a money market fund C) a government bond fund D) a T-bill

B) a money market fund A money market fund is the most appropriate for an elderly person seeking preservation of capital and some income on a regular basis. A T-bill, although safe, provides interest income only at maturity. Because the client has never invested in mutual funds before, she may be uncomfortable with the potential fluctuations in principal of the bond funds.

Under normal circumstances, the Administrator will do all of the following before revoking a registration except: A) give the applicant or registrant appropriate prior notice and written evidence of alleged violations. B) act as the attorney for the applicant or registrant to ensure a fair hearing. C) give the applicant or registrant an opportunity for a hearing. D) give the agent's employing broker-dealer prior notice.

B) act as the attorney for the applicant or registrant to ensure a fair hearing. The Administrator will not act as the applicant's or registrant's attorney. The Uniform Securities Act does, however, require registrants to provide the Administrator with consent to service of process. This consent grants the Administrator a limited power of attorney to receive service of process in actions that arise under the act. The Administrator does not act as the registrant's attorney in proceedings that result. Do not confuse this with the consent to service of process. That consent allows the Administrator to receive legal papers such as a subpoena on behalf of the registrant but not to represent them.

All of the following positions expose a customer to unlimited risk except: A) short 200 shares of XYZ and short 2 XYZ puts. B) short 2 XYZ uncovered puts. C) short 200 shares of XYZ. D) short 2 XYZ uncovered calls

B) short 2 XYZ uncovered puts. When an investor writes an uncovered (naked) call option, the potential loss is unlimited. So I guess the inverse, uncovered puts, means no exposure to unlimited risk

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

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

Which of the following sources of income is eligible for funding an IRA? A) Income received as a shareholder of an S corporation B) Child support C) Income received as a sole proprietor D) Income received as a limited partner

C) Income received as a sole proprietor Only earned income can be used to fund an IRA. When a business is run as a sole proprietorship, the income reported on the taxpayer's Schedule C is considered earned. As a shareholder of an S corporation or a limited partner in a partnership, the income received is considered passive rather than earned and may not be used to fund an IRA. Child support is not earned income and alimony received from a divorce settlement dated January 1, 2019 or later is also not considered earned.

Bachelier and Louis Associates, BALA, is an investment adviser registered in States W, X, and Y. BALA is completing the Form ADV to register in State Z. Which of these would be automatically registered as an investment adviser representative in State Z simultaneously with BALA's effective registration? A) Thomas, an IAR currently registered in States W, X, and Y B) Wilson, the company's legal counsel C) Louise, vice president of the company's sales department D) Janice, the director of the company's information technology (IT) department

C) Louise Officers, directors and partners are auto registered in the ADV app. This is limited to those IARs who are in these specific positions or who are performing these functions. So, sales and NOT I.T.

Dr. Smith is resigning from the clinic where he was an employee covered under its profit-sharing plan. The plan document requires distribution of vested amounts once an employee leaves the clinic. Under the Internal Revenue Code, what can he do to avoid current-year taxation of the distribution? A) Invest the distribution in municipal bonds B) Invest the distribution in a government zero-coupon bond C) Roll over the distribution into an IRA within 60 days D) Place the distribution in a Keogh Plan

C) Roll over the distribution into an IRA within 60 days Lump-sum distributions from retirement accounts can be rolled over into an individual retirement account. If implemented within 60 days, no tax liability is incurred.

Thirty years ago, an investor deposited $100,000 into a single premium deferred variable annuity. Today, the value of the accumulation units is $1.5 million. The investor is ready to annuitize and wishes to maximize monthly payments to be received. You would suggest which of the following settlement options? A) Life with 10 years certain B) Life with 20 years certain C) Straight life D) Joint and survivor

C) Straight life (only one where payments die at death, lowest risk to insurer When one annuitizes, the amount of the annuity payment is highest when the annuitant takes the most risk (and the insurance company the least). Straight life payments end upon the death of the individual, and if that should be the following month, the insurance company keeps the rest of the money. In the period certain choices, the insurance company is "on the hook" for that number of years, even if the annuitant does not live that long.

Health savings accounts (HSAs) offer the opportunity for employees to use pretax funds to pay for a wide range of medical expenses. Medical expenses included are all of the following except: A) long-term care insurance premiums. B) Medicare premiums for those age 65 or older. C) long-term disability insurance premiums. D) health insurance coverage under COBRA.

C) long-term disability insurance premiums. If an HSA may be used to pay long-term care (LTC) premiums, why can't it be used for long-term disability premiums? The answer is in the first word of the name: health. Disability insurance is not health insurance. It is used to replace the income lost when one is unable to perform the labor required for their occupation.

A bond's duration is: A) expressed as a percentage B) an indication of a bond's yield that ignores its price volatility C) longer for a 10-year bond with a 5% coupon than it is for a 10-year bond with a 10% coupon D) identical to its maturity for an interest-bearing bond

C) longer for a 10-year bond with a 5% coupon than it is for a 10-year bond with a 10% coupon. There is a similar question from the other test. For duration when comparing bonds, just remember (match the Ls): If maturity is equal, then lower coupon is longer duration (higher price volatility) If coupons are equal, longer maturity is longer duration (higher price volatility) Duration measures a bond's price volatility by weighting the length of time it takes for a bond's cash flow to pay for itself. If 2 bonds with differing coupon rates have identical maturities, the one with the lower coupon has the longer duration. The cash flow from an interest-bearing bond makes its duration shorter than its maturity. Bonds with longer duration carry greater price volatility. Duration is expressed in years (time) rather than in percentage.

One way in which an investment adviser acting in the capacity of an agent in a transaction with a client differs from a broker-dealer performing the same task is that the investment adviser: A) shall notify the Administrator of its capacity in the proposed transaction. B) shall disclose the agency capacity before the transaction. C) shall obtain client consent before completion of the transaction. D) may not charge a commission on the transaction.

C) shall obtain client consent before completion of the transaction. In order to act as an agent (or principal) in a trade with an advisory client, there are two requirements for an IA (and not a BD, since they already get paid to trade they do not need this): 1. Client receives full written disclosure as to the capacity in which the adviser proposes to act 2. Consent of the client Both of these are required before the completion of the transaction.

If a businessowner's goal is to establish an entity that features ease in raising capital, which of these entities is the most appropriate? A) An S form of corporation B) A sole proprietorship C) A general partnership D) A limited liability company (LLC)

D) A limited liability company (LLC) If a businessowner's goal is ease in raising capital, the limited liability company (LLC) is the best choice because it has no restrictions on the number or nationality of investors. While the regular or C corporate form is also preferable, the S form of corporation is limited to a maximum of 100 potential shareholders, none of whom may be a nonresident alien.

Foster Advisers, based in New Jersey, manages $135 million in funds for New Jersey-based clients. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which of the following statements best describes the registration requirement for Foster Advisers? A) Foster Advisers is required to register as an adviser with the SEC and has no requirement to notify the Administrator of the New Jersey Department of Securities. B)Foster Advisers is required to register with the Administrator of the New Jersey Department of Securities. C) Foster Advisers is required to register with both the SEC and the Administrator of the New Jersey Department of Securities. D) Foster Advisers is required to register as an adviser with the SEC and notify the Administrator of the New Jersey Department of Securities of its operation.

D) Foster Advisers is required to register as an adviser with the SEC and notify the Administrator of the New Jersey Department of Securities of its operation. More than $110MM = register with SEC. At the state level, a notification fee (but not registration) is generally required. SO, "notification" also means the filing fee apparently

Which of the following statements regarding an agent's registration is correct? A) Agents may be licensed in a state even if their broker-dealer is not. B) If the broker-dealer with which that agent is registered should have its registration revoked, the agent's license will be held by the Administrator and the agent will be required to register with an active broker-dealer within 30 days. C) If the broker-dealer with which that agent is registered should have its registration revoked, the agent may continue to do business only with existing clients and may not acquire any new ones until registered with an active broker-dealer. D) Revocation of the registration of that agent's broker-dealer will result in that agent's effective registration being put on hold.

D) Revocation of the registration of that agent's broker-dealer will result in that agent's effective registration being put on hold. An agent of a broker-dealer is active ONLY when that broker-dealer's registration is in force. The exam may refer to the agent's registration being placed into suspense or canceled; any of these has the same effect.

Fundamental analysts give significant credence to financial ratios. Which of the following tends to give an indication of the profitability of the enterprise? A) Price-to-earnings ratio B) Current ratio C) Debt-to-equity ratio D) Sales-to-earnings ratio

D) Sales-to-earnings ratio Of the four choices given, the sales-to-earnings ratio is the only one not discussed in the License Exam Manual. Why not? Because we know there will always be a question or two on the real exam that was not covered in our material. It is important that students use good test-taking skills to correctly answer those questions. It would seem logical that a question about profitability would relate to earnings. That would reduce the choices to two from four. The price-to-earnings (P/E) ratio reveals the relationship between the market price of the company's stock and its earnings, but it doesn't tell us anything about the degree of profitability of the enterprise. If we know that the P/E ratio compares the price to the earnings, then it makes sense that the sales-to-earnings ratio compares the net sales of the business with its earnings. Companies with a higher percentage of earnings from each dollar of sales are more profitable. For example, Company A and Company B both reported $100 million in net sales for the year. The net income (earnings) of Company A was $20 million and Company B was $8 million. We can see that each dollar of sales generated $0.20 of profit for Company A and only $0.08 of profit for Company B. Or, we could say that it takes $5 of Company A sales to generate $1 of profit ($100 ÷ 20) while it takes $12.50 of Company B sales ($100 ÷ 8) to earn that same $1 of profit.

Tim, Jim, and Kim are equal partners in TJK Investment Advisers, a general partnership. Tim decides to sever his relationship with the other partners and work for a different firm. When, if at all, must the clients of TJK be notified of Tim's departure? A) It is not necessary to notify TJK's clients of Tim's departure, because the advisory will continue to serve its clients as before. B) TJK must notify its clients of Tim's departure within 15 days of Tim's severance from the firm. C) TJK must notify its clients of Tim's departure within 30 days of Tim's severance from the firm. D) TJK must notify its clients of Tim's departure within a reasonable period after his severance from the firm.

D) TJK must notify its clients of Tim's departure within a reasonable period after his severance from the firm. An investment adviser firm organized as a general partnership must notify its clients of the departure of a general partner within a reasonable time. (notify, not consent like w a majority of change or death)

The institutional trading desk of a major broker-dealer received a substantial purchase order for 20,000 shares of XYZ common stock from one of its clients. While completing the paperwork to begin the order sequence, the firm decided to purchase shares of XYZ for its proprietary account. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, A) the broker-dealer has the right to purchase shares of XYZ whenever it wishes. B) the purchase could only be made with prior disclosure to the client. C) this would be considered market manipulation. D) this would be the prohibited practice of front running of block transactions.

D) this would be the prohibited practice of front running of block transactions. The practice of entering an order for the firm in front of a previously received block order known as front running is prohibited. By definition, a block order is a minimum of 10,000 shares.

Under Rule 144, which of the following sales are subject to volume limitations? I. Control person selling registered stock held for one year II. Control person selling restricted stock held for two year III. Nonaffiliate selling registered stock held for one year IV. Nonaffiliate selling restricted stock held for two year

I & II Control persons are ALWAYS subject to volume limitations

An individual wishing to register as an agent with a broker-dealer may have to do which of these? I. Pass an examination. II. Post a bond. III. Maintain minimum net capital. IV. Meet minimum state educational requirements.

I & II In almost all cases, an individual wishing to register as an agent must pass an examination. Many Administrators require that all agents post a bond, whereas others only require bonding for those with investment discretion in customer accounts. Minimum net capital requirements apply to broker-dealers, not agents.

Which of the following statements about the gift tax annual exclusion are true? I. The annual exclusion is the amount that an individual may give to other individuals each year without incurring a gift tax. II. The annual exclusion is indexed to account for inflation. III. A separate annual exclusion is available for each donee.

I, II, and III. ALL are true

If a customer purchases shares in a municipal bond fund, which of the following statements are true? I. Dividends are subject to federal income tax II. Dividends are not subject to federal income tax III. Capital gains distributions are subject to federal capital gains tax. IV. Capital gains distributions are not subject to federal capital gains tax.

II & III Dividends distributed by municipal bond funds are federal tax free (and in some cases, state tax free as well) in alignment with the tax rules of how the fund's investment income was earned(I). However, any capital gains distribution resulting from the sale of bonds held long term by the fund is subject to capital gains taxation to the shareholder (III).

The NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents describes many actions considered by NASAA to be prohibited under the intent of the USA, as amended. Under that Statement of Policy, which of the following actions would be a prohibited practice? I. Stating material facts in such a manner that they may be easily understood by a prospective client II. Making unsuitable investment recommendations even when the client agrees with your assessment III. Exercising discretion without previous written authority IV. Using inside information, but only if the client makes money as a result of the trade

II & III No broker-dealer or agent may exercise discretion in a client's account without having received prior written authorization. Read choice IV carefully. The use of inside information is a prohibited practice under all circumstances, not only if the client makes money. Win or lose, it is still prohibited. It is appropriate to disclose material information in such manner as to make it easily understandable and all recommendations must be suitable, whether or not the client agrees with them.

An investment adviser with $20 million under management exercises investment discretion over client portfolios. If the firm's accounting manager were to discover that the firm's net worth was only $8,500, what would the USA require the firm to do? I. Cancel all discretionary powers. II. Immediately raise an additional $1,500. III. Send notice to the Administrator before the close of business on the day following discovery. IV. Send a financial report to the Administrator before the close of business on the day following the sending of notice.

III & IV State-registered investment advisers maintaining discretion over client accounts must maintain a minimum net worth of $10,000. Any advisory firm whose net worth falls below required minimums is required to: 1. Send notice to the Administrator no later than the close of business on the day following discovery (III). 2. This notice must be followed up no later than the next business day with a complete financial report to the Administrator (IV).