Series 65 QBank Questions

leading indicators of the economy

-full employment -Dow Jones industrial average -contruction starts -wholesale orders -expansions -easy credit -start ups

Performance Based Compensation rules

1. must be net performance, factoring gains and losses 2. Administrator has the power to authorize this type of fee when client doesn't meet financial requirements

When an investor notices that a bond's coupon yield is lower than its current yield, that is an indication that the bond A) is selling at a discount B) is selling at a premium C) is probably rated investment grade D) is in danger of going into default

A - selling at a discount any time a bond is selling below par - the current yield will be higher than nominal

A technical analyst (chartist) with a long position in a particular stock would most likely enter a sell stop order below that stock's A) support level B) previous high C) resistance level D) 200-day moving average

A - support level

A customer invests $18,000 in a mutual fund and signs a letter of intent for $25,000 to qualify for a breakpoint. One year later, the shares are valued at $25,100, even though the customer has made no new investments. Which of the following statements is TRUE? A) The agent should remind the customer of the letter of intent that was signed 12 months ago. B) The investment no longer qualifies for a breakpoint. C) Shares held in escrow will be liquidated at the appreciated value. D) The letter of intent is considered fulfilled.

A - the LOI lasts 13 months so the shares have not yet been liquidated

an order is discretionary if any of the three A's are missing. These three A's are

Amount Asset Activity

Monetarist Economic Theory

Amount of money in the economy determines overall price level over time, and the fed should control the growth in a gradual and predictable way

Five years ago, an investor purchased an ABC Corporation BBB-rated debenture with a coupon of 6% maturing in 2037. Currently, new BBB-rated debentures maturing in 2037 are being issued with coupons of 5%. Based on the discounted cash flow method, one could say that the present value of the investor's security is A) equal to the par value B) more than the par value C) less than the par value D) positive

B - 6 is more than 5

Which of the following has the least exposure to inflation risk? A) Cash B) Fixed annuity C) Common stock D) Preferred stock

C

Each of the following statements regarding registration of securities by coordination is true EXCEPT A) the Administrator may reduce the required time that the registration statement must be on file prior to becoming effective B) the registration becomes effective at the state level concurrent with SEC registration if the Administrator has not entered an order to deny it C) state registration must be effective prior to federal registration D) the registration statement must contain or be accompanied by consent to service of process

C. state registration must be effective prior to federal registration

Which type of risk is a mortgage-backed security most likely to experience? A) Exchange rate risk B) Market risk C) Business D) Reinvestment risk

D - reinvestment risk as mortgages get paid off b/c of lowering interest rates, cash flows from that will be reinvested in lower-yield securities

Hedge Clause/Exculpatory Clause

IA attempts to waive the implied fiduciary responsibility by having the client sign off on it this is not allowed under IAA 1940

Front Running

Placing broker's personal orders ahead of a customer's large order to profit from the market effects of the trade

Under the USA, an Administrator may A) require broker-dealers to retain books and records for the life of the firm plus two years B) revoke the registration of a broker-dealer and thereby place into suspense the registration of all the agents employed at the broker-dealer C) revoke the registration of an agent and thereby place into suspense the registration of the agent's broker-dealer D) require that registrants post a surety bond prior to hearing to ensure payment of money fines

Revoke BD registration

3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template...

commissions, markups and markdowns, and advisory fees for firms that are also registered IAs

Which of the following would probably not be an attractive investment during periods of rising inflation?

corporate bonds

Sovereign Debt

debt securities issued by a specific country

access persons must record personal trades

on a quarterly basis

p/e ratio

price per share/earnings per share

Fiduciary Responsibility Definition

putting the clients needs ahead of their own

Updating amendments to form ADV must be filed

within 90 days of fiscal year en

Which of the following are NOT considered money market instruments? 1. American depositary receipts 2. Commercial paper 3. Corporate bonds 4. Jumbo (negotiable) certificates of deposit

1 and 3 ADRs are equity, corporate bonds are long term

Types of Preferred Stock

1. Straight -pays the stated dividend payment -missed dividends are not paid to holder 2. Cumulative -accrues payments due in the event dividends are reduced/suspended -provides steady income 3. Callable Preferred -typically has highest state dividend rate -company can buy back @ stated price after specified date (refinance) 4. Convertible Preferred -generally issued with a lower stated dividend rate because the investor can convert it to common shares, price fluctuates w/ CS price 5. Adjustable Rate Preferred -dividends are tied to rates of other interest rate benchmarks -price stable -LEAST appropriate choice if looking for income

Statute of Limitations for civil liability under federal law

3 years after action or 2 year after discovery, whichever is sooner

Statute of Limitations for civil liability under USA

3 years after action or 2 years after discovery, whichever is sooner

rule of 72 formula

72/i=years to double

Of the following securities, which is most commonly recommended to fund a child's college education? A) Investment-grade corporate bonds B) Zero-coupon Treasury bonds C) Municipal bonds D) Treasury bills

B - zero coupon t-bonds can pay a fixed sum at a future date accurately

Retained Earnings Formula

Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

Mr. Beale buys 10M RAN 6.6s of 32 at 67. What is his total purchase price? A) $10,000 B) $6,600 C) $6,700 D) $10,200

C

A bond with a par value of $1,000 and a nominal yield of 6% paid semiannually is currently selling for $1,300. The bond matures in 25 years and is callable in 15 years at $1,080. In the computation of the bond's yield to call, which of these would be a factor? A) Future value of $1,300 B) 50 payment periods C) Interest payments of $30 D) Present value of $1,080

C - A and D are switched, and there are 30 payment periods, not 50

An investor purchases a TIPS bond with a 4% coupon. If during the first year the inflation rate is 9%, the approximate principal value of the security at the end of that year will be A) $1,040. B) $1,090. C) $1,045. D) $1,092.

D - because of semi-annual compounding, it has to be something higher than 1090

An investor is analyzing various risks related to corporate and government bonds. She is interested in finding a risk that is more specific to corporate bonds than to government bonds. Which of the following options correctly defines that risk? A) Liquidity risk B) Purchasing power risk C) Interest rate risk D) Default risk

D - default risk is avoided with government bonds

In 1933, Congress passed the Securities Act which required the registration of new issues before their offering to the public. However, the law contained a number of exemptions, including that for A) corporate common stock listed on the NYSE B) stock issued by regulated insurance company C) obligations of the Canadian government D) equipment trust certificates issued by a regulated common carrier

D - equipment trust certificates

A corporation issued a bond with a coupon of 6%, callable at 103. The bond matures in 2059. Current interest rates are 8%. It is most likely that A) the bond will be called. B) the bond will go into default. C) the coupon will be increased. D) the bond is selling at a discount.

D - only thing that matters here is the coupon rate of 6% and market rate of 8%, this tells us that the bond is selling at a discount because the coupon rate is lower than the market rate

Which of the following best describes a prudent investor? A) An investment adviser representative (IAR) handling a discretionary account B) The custodian for a minor under the Uniform Transfers to Minors Act C) A person in a fiduciary capacity who invests in a prudent manner D) A trustee who invests with reasonable care, skill, and caution

D - specific definition given in UPIA 1994

Private Placement Definition

Directed at no more than 10 non-institutional investors during the previous 12 consecutive months

Gross Margin Formula

Net Sales - COGS/Net Sales

Form ADV Part 2a

Requires advisers to create narrative "brochures" containing information about the advisory firm. Apply to all investment advisers registered with SEC and most states "A" IS FOR THE ADVISER

Which of the following acts requires publicly traded corporations to issue annual reports?

Securities Exchange Act of 1934

Fed covered IA employs the services of a 3rd party solicitor. The Investment Advisors Act of 1940 would require the solicitor to deliver:

The IA's brochure (Form ADV Part 2a) as well as the solicitor's brochure

The duties and responsibilities of a fiduciary are spelled out in

The Uniform Prudent Investors Act of 1994

Reinvestment Risk

The risk that a decline in interest rates will lead to a decline in income from a bond portfoli

leading economic indicators

Variables that predict, or lead to, a recession or recovery; examples include consumer confidence, stock market prices, business investment, and big-ticket purchases, such as automobiles and homes

Pre-paid advisory fees are prohibited

always under USA

lagging economic indicators

average prime rate - longer these stay low the faster the recovery should be

When can a state administrator take action against a federally covered IA?

if their action violates the anti-fraud provisions of the USA

A succession plan under a Business Continuity Plan would likely be most important for an investment adviser

organized as a sole proprietorship

oral discretion for an account is permitted:

within the first 10 days

Exempt Transactions under USA

- isolated nonissuer transactions - unsolicited brokerage transactions - underwriter transactions - bankruptcy, guardian, or conservator transactions - Institutional investor transaction - Limited offering transactions (private placement)

Under IAA 1940, how many days does it take for an adviser's registration to become effective after file?

45 days

Which of the following investment advisers would be required to register with the state? A) An IA whose annual updating amendment showed a drop in AUM from $141 million to $99 million B) An IA whose annual updating amendment showed a drop in AUM from $109 million to $87 million C) An IA who expects to have $132 million in AUM within 120 days D) An IA who is under contract to manage a registered investment company

B - IA drops below 87 million and therefore cannot be registered with SEC

A corporation is likely to call eligible debt when interest rates are A) stable B) declining C) rising D) volatile

B - declining they can replace old high interest bonds with newer low interest ones

Which of the following is NOT a valuation method for a fixed-income security? A) Conversion parity B) Price-to-earnings ratio C) Dividend discount model D) Discounted cash flow

B - p/e just used for common stock

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

C - warrants provide no income

If a convertible bond is purchased at its $1,000 par value and is convertible at $83.33 per common share, what is the conversion ratio of common shares per bond? A) 2 shares for each bond B) 8 shares for each bond C) 1.2 shares for each bond D) 12 shares for each bond

D - (1000/83.33) = approx. 12

Brady Bonds

Debt instruments, generally from third world countries, that may have a US Treasury bond as collateral

National Securities Markets Improvement Act (NSMIA) affects fed and state law in that:

Federal law preempts state law

Unethical Practices relating solely to agents

Fictitious accounts, sharing in accounts and splitting commissions

Investment Adviser Registration (state)

Form ADV (Admin.) pay initial/renewal fees (12/31), effective at noon on 30th day, net worth and surety bonds required (35k & 10k) (custody or discretion), successor firm pays no fee until renewal, registration automatically registers any IAR

Investment Adviser Registration (federal)

Form ADV (SEC) w/ initial and renewal fees, effective within 45 days, no net worth requirements, no surety bonds, withdrawal of registration is 60th day, successor firm pays fee, no registration of IARs

Exclusions from definition of IA

banks, those who don't base their advice on the market, adviser representatives, and those who advise on commodities like coins

If someone purchases a food stock and a utility stock, than their portfolio is

defensive

What items change when a cash dividend is paid

total assets and total liabilities *makes sense why this would balance out - liability is reduced as well as asset - because cash is paid out to eliminate liability of dividend

Which of the following statements regarding ADRs are TRUE? 1. They are issued by large domestic commercial banks. 2. They are issued by foreign banks. 3. They facilitate U.S. trading in foreign securities. 4. They facilitate a foreign investor who wants to trade U.S. securities.

1 and 3

Which of the following securities are most interest rate sensitive? 1. Utility Stocks 2. Growth Stocks 3.Preferred Stocks 4. Common Stock

1 and 3 Utility Stocks are highly leveraged Preferred stocks are like bonds and have set payouts

Partners with the United States in the creation of Brady bonds were 1. the International Monetary Fund (IMF) 2. the Import/Export Bank 3. the United Nations 4. the World Bank

1 and 4 IMF and World Bank

An investor who chooses to use preferred stock as an income source instead of bonds would potentially incur which of the following risks? 1. Loss of principal 2. Price volatility of preferred stock is closely related to interest rates 3. Preferred stock cannot be traded as readily as bonds 4. If the stock is callable, the client's income can be suddenly lowered

1, 2, and 4

The Uniform Securities Act provides for civil penalties in the event of illegal activities of broker-dealers and their agents. Under the act, the maximum that a purchaser would be entitled to claim would be 1. attorney's fees 2. court costs 3. interest at the state's legal rate 4. the greater of the original consideration paid for the security or the current market value

1,2,3 cannot claim on current market prices, only original investment

Which of the following statement regarding cash referral fees to solicitors are correct under the Investment Advisers Act of 1940 1. if solicitation involves anything other than impersonal advisory services, disclosure must be made to client regarding any affiliation between IA and solicitor 2. Agreement must be in writing 3. Solicitor must not be subject to a statutory disqualification 4. Adviser's principal business activity must be rendering of Investment Advice

1,2,3 are correct

4 Broad powers of administrator

1. Make, Amend, or Rescind Rules and Orders -all rules and forms must be published -rules apply to everyone -orders apply to a specific instance -person can challenge in court within 60 days of issuance -cannot alter the law itself (only rules and orders) 2. Conducts Investigations and Issue Subpoenas a. require statement in writing, under oath, as to all matters relating to the issue under investigation b. publish and make public the facts and circumstances concerning the issue to be investigated c. subpoena witnesses and compel their attendance and testimony, d. take evidence and require production of documents deemed relevant -can make investigations private and may occur outside admin's state (does not need permission to investigate B/D registered in state, even if primary location out of state) -Failure to comply is Contumacy and Administrator can appeal to appropriate court for help -Can only issue and enforce subpoenas for violations of laws/rules/orders of that particular state 3. Issue Cease and Desist Orders and Seek Injunctions -no FORMAL order may be issued without: a. giving appropriate prior notice b. granting opportunity for a hearing, and c. providing findings of fact of law -Cease and desist is issued to pause activities until they can be thoroughly reviewed and go through formal process -compel compliance with injunction through court a. enjoined: person subject to injunction 4. Deny, Suspend, Cancel, or Revoke Registrations and Licenses -must notify registrant and provide hearing within 15 days

Uniform Prudent Investor Act (UPIA)

1. standard of prudence is applied to any investment as part of a total portfolio, rather than individual investments 2. Risk & Return is fiduciary's primary concern with client 3. categorical restrictions of investments are removed 4. diversification of investments is integrated into definition of prudent investing 5. delegation is permitted for trustees, subject to safeguards and requirements that fiduciary act with care, skill, and caution

An employee wishing to obtain long-term capital gain treatment would prefer the employer to offer A) incentive stock options B) listed stock options C) portable stock options D) non-qualified stock options

A - can result in long term capital gain

All of the following statements regarding a closed-end investment company are true EXCEPT A) it sells at the market price based on supply and demand B) it may redeem its own shares C) it differs from a mutual fund D) it is a type of management company

B - it cannot redeem its own shares, the term "mutual fund" refers to an open-end investment company that can redeem its own shares

An individual purchases a $10,000 CD with a 5-year maturity from her local bank branch. In doing so, she is eliminating A) opportunity cost. B) interest rate risk. C) inflation risk. D) purchasing power risk.

B - principal is not impacted by interest because CDs are not tradeable

A client is trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%. Assuming all other factors are equal and your client is in a 28% marginal income tax bracket, which bond do you tell the client to purchase and why? A) The municipal bond because its equivalent taxable yield is 6.3% B) The municipal bond because its equivalent taxable yield is 6.6% C) The corporate bond because the after-tax yield is 6.25% D) The corporate bond because the after-tax yield is 4.5%

B - subtract investor tax bracket from 100 (72%), then divide municipal coupon by 72% (4.75/72) = 6.6%

Your customer owns $100 par 5½% callable convertible preferred stock convertible into 4 shares of common stock at $25. What should she be advised to do if the board of directors were to call all the preferred at 106 when the common stock is trading at $25.50? A) Convert her preferred stock into common stock because it is selling above parity. B) Hold the preferred stock to continue the 5½% yield. C) Present the preferred stock for the call because the call price is $4 above the parity price. D) Place irrevocable instructions to convert the preferred stock into common stock and sell short the common stock immediately.

C Common: 102 (25.5 *4) Preferred: 106

BFJ Corp's 5% convertible bond is trading at 120. The bond is convertible at $50. An investor buying the bond now and immediately converting into common stock, would receive A) 20 shares plus cash for fractional shares B) 2.4 shares C) 20 shares D) 24 shares

C - conversion ration always uses par value, never price 1000/50 = 20

Securities Act of 1933 provisions include all of the following except A) prohibition of fraud in the sale of new securities B) regulation of offerings of new securities C) regulation of the secondary market D) requirement that an issuer provide full and fair disclosure about an offering

C - regulation of secondary market Trading & Secondary Markets are Securities exchange act of 1934

Which of the following statements represents an advantage of a municipal general obligation bond over a revenue bond? A) Only a facility's users pay for a GO bond. B) A GO bond is not charged against the municipality's borrowing limits. C) A GO bond issuer is required to conduct a feasibility study. D) A GO bond generally involves less risk to the investor.

D - GO bonds are backed by revenue from taxes, which are a solid source of collateral

Credible Investment Specialists (CIS) is a state-registered investment adviser with its only offices in State A. In which state(s) would registration be required? I. State A where the only clients are large pension plans II. State B where the only clients are banks III. State C where the only clients are insurance companies IV. State D where there are 6 or fewer retail clients over any 12 month period

I and IV must always register in state with offices, if over 5 clients de minimis exception doesn't apply so they must register in state D

Under USA terms, which of the following is an IA under state regulatory jurisdiction? A) An accountant located in the state who offers general securities advice as an incidental part of his business B) A commercial bank with a place of business in the state that advises clients on banking matters C) An investment advisory subsidiary of a bank holding company located in the state that manages $20 million in assets D) A federal covered adviser with clients in the state

IA subsidiary of a bank holding company man *fed covered does not fall under state jurisdiction

Relationship between NPV, IRR, and required return

If NPV is positive, that means IRR is greater than required return If NPV is negative, IRR is less than required return, so its a bad investment If NPV is zero, required rate of return equals IRR

fulcrum fee

fee averaged over a specified period at least 12 months, with an increase or decrease in proportion to the investment performance in relation to the performance of a securities index, like the S&P Example: for each 5% that the client's account outperforms the specified index, the IA would receive an increase to the fee of ten basis points (.10%) with negative performance having the same results

Inverted yield curve results in part by

investors buying long term bonds

ADV 2B Disclosures

must disclose the name, title, and telephone number of the individual supervising any listed person disciplinary information about material events within the past 10 years the fact that any listed person has no formal education after high school NOT: compensation earned on dealing with clients ****only compensation beyond that paid by client

Earnings per share

net income or profit divided by the number of stock shares outstanding

ISO vs. NSO

nonqualified stock options - can be offered to board members and suppliers - earnings reported as wages on tax returns of employer and employee, company can deduct as salary expense for difference between market and strike price incentive stock options - if held for 2 years after grant date and one year after date of exercise, profits are LTCG, will be treated as non-qualified if limits are broached *10 year exercise limit - when exercised the difference between the market value and the strike price is used in calculating ATM

Under USA, fixed annuities are

not a security, but variable annuities are

Debit in the U.S. Balance of payments

occurs when country pays more out abroad than it takes in, U.S imports more than it exports, invests money abroad, or spends on foreign aid

Registration by Qualification becomes effective when:

on the date set by the Administrator

Section 28(e)

person who exercises investment discretion will have not acted unlawfully or breached fiduciary duties if account pays more than lowest available commission if such person determines that amount of commission is reasonable compared to brokerage value and research provided

Inverted Yield Curve - Bonds

shows near-term maturities with higher yields than long-term maturities interest rates are near a peak, trend should soon reverse

Treasury Stock

stock that has been issued and then re-acquired by a corporation (has a negative effect on net worth)

assessable stock definition

stock that is issued at or below its par-value

When a bond's NPV is zero

the market is highly efficient indicates no difference between the bonds present value and its market price

When a firm files form ADV-W either by going out of business or being succeeded by another firm

they are responsible for keeping all of their records for 3 years

In most cases, yield curve analysis involves the use of

treasury bonds