Missed questions practice #3

If there is a _____% or more ownership interest among members of an immediate family living at the same residence, then all members are considered control persons (affiliates) subject to Rule 144.

10%

An example of systematic rather than unsystematic risk is A) political risk. B) financial risk. C) purchasing power risk. D) tenure risk.

C) purchasing power risk.

An analyst is reviewing a company's financial statements. One of the calculations involves taking all of the current assets except the inventory and dividing that by the total current liabilities. This analyst is looking at the company's A) current ratio. B) debt-to-assets ratio. C) working capital. D) quick asset ratio.

D) quick asset ratio.

return that compares the actual return with the inflation rate

The real rate of return, often called the inflation-adjusted return

the total return earned on a bond that is held to maturity

The yield to maturity (YTM), or internal rate of return

Are cash payments permitted by investment advisers (IAs) for referrals from broker-dealers whether or not the broker-dealer is affiliated with the IA?

Yes and in all cases, such compensation must be disclosed to affected clients.

Investment adviser records, including copies of advertisements, must be kept for at least ____ years from the end of the fiscal year in which the records originated

five

Income statements reflect the family's what?

income and expenses, not assets and liabilities.

efficient mkt hypothesis - what form is that excess returns are from current stock prices fully reflecting all currently available public info of volume and price

weak form

A computerized mathematical technique that is often used by investment advisers to project future financial outcomes, such as the probability of a client's funds lasting through retirement, is called A) Monte Carlo simulation (MCS). B) efficient market hypothesis (EMH). C) capital asset pricing model (CAPM). D) asset allocation modeling (AAM).

A) Monte Carlo simulation (MCS).

A manager of a venture capital fund would be most interested in investing in A) a young, promising company. B) a company interested in going private. C) a well-established company going through management changes. D) a company listed on a major stock exchange.

A) a young, promising company. Venture capitalists prefer to get involved in the earlier stages of a company's development. This would certainly not be a company listed, nor would it be likely that the company is already publicly traded.

Under provisions of the Investment Advisers Act of 1940, investment advisers that maintain custody of client securities are required to do all of the following except A) send an itemized statement to clients at least monthly. B) maintain a separate ledger for each client, showing all purchases and sales. C) keep copies of all confirmations sent to clients. D) arrange for a surprise audit by an independent public accounting firm at least annually and subsequently file a report of the examination with the SEC.

A) send an itemized statement to clients at least monthly.

The return that will be earned over the life of a fixed annuity A) will always be at least equal to the guaranteed minimum specified in the contract B) is tied to a portfolio of common stocks selected by the annuity owner C) may decrease over time due to the increase in surrender charges D) is tied to an investment index such as the Standard & Poor's 500

A) will always be at least equal to the guaranteed minimum specified in the contract Fixed annuities are what the term implies—the return is fixed for the life of the contract. In some cases, a fixed annuity may actually pay more (but never less) than the guaranteed amount. This would be true if the insurance company earned what is called "excess interest."

One of your clients buys 300 shares of RIF common stock in March at $25 per share. Three months later, the client purchases 200 shares of RIF at $30 per share. One month later, RIF pays a dividend of $1 per share. Then, five months later, another purchase of RIF is made—this time 400 shares at $35 per share. If the client were to sell all RIF at $30 per share, what is the client's capital gain or loss? A) $400 gain B) $500 loss C) No gain or loss D) $500 gain

B) $500 loss The investor's total cost is $27,500 for the 900 shares purchased. The proceeds of the sale are $27,000 (900 × $30). That results in a capital loss of $500. The cash dividend has nothing to do with capital gain or loss.

The current yield on a bond with a coupon rate of 5.5% selling at 110 is A) 5.5%. B) 5.0%. C) 6.0%. D) 2.0%.

B) 5.0%. The current yield of any security, equity, or debt is always the income return (dividend or interest) divided by the current market price. In this case, it is the annual interest of $55 ($1,000 × 5.5%) divided by $1,100, and that equals 5%.

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 limited liability company (LLC) C) A general partnership D) A sole proprietorship

B) 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.

The yield to maturity of a bond represents the bond's A) real rate of return. B) internal rate of return (IRR). C) annualized rate of return. D) net present value (NPV).

B) internal rate of return (IRR). The yield to maturity (YTM), or internal rate of return, of a bond is the total return earned on a bond that is held to maturity. A major assumption when calculating YTM is that all interest payments on the bond are reinvested at the calculated YTM. For example, if the calculated YTM is 7%, any interest payments generated from the bond are also assumed to be reinvested at 7%. The NPV indicates how the market price of the bond compares to its present value. The real rate of return, often called the inflation-adjusted return, compares the actual return with the inflation rate. The annualized return is the return an investor would have received had he held an investment for one year.

Under the Investment Advisers Act of 1940, cash payment to a broker-dealer from an investment adviser in return for client referrals is A) permitted only if the investment adviser and broker-dealer are affiliated. B) permitted if the investment adviser makes certain disclosures to the clients and meets other requirements. C) permitted with no restrictions. D) not permitted under any circumstances.

B) permitted if the investment adviser makes certain disclosures to the clients and meets other requirements.

If an investment can be expected to return 8%, using the rule of 72, what is the present value needed to have $50,000 for a child's education in 18 years? A) $2,777 B) $6,250 C) $12,500 D) $25,000

C) $12,500 Under the rule of 72, dividing 72 by the expected return shows the number of years it will take for a deposited sum to double. 72 divided by 8 equals 9 years. Over an 18-year period, there will be 2 doublings. So, dividing the future value ($50,000) by 4 solves for the present value required.

Which of the following orders may be used to acquire a security at a specific price or better? A buy stop limit A buy limit A sell stop A sell limit A) II and IV B) II and III C) I and II D) I and III

C) I and II

A client profile is not complete without a family income statement. A typical one would include dividends credit card debt autos mortgage interest A) II and III B) I and II C) I and IV D) III and IV

C) I and IV

Which of the following forms of the efficient market hypothesis claims that technical analysis works? A) Weak B) Semi-strong C) None of these D) Strong

C) None of these none of them state that excess returns can be obtained using technical analysis

All of the following are true about education funding plans except A) Section 529 plans allow a gift tax exclusion equal to five times the annual limit that may be repeated every 5 years B) proceeds in 529s may be withdrawn income-tax free only if used for qualified educational expenses. C) a beneficiary of an ESA who withdraws the funds for nonqualified expenses will be taxed on the entire amount of the withdrawal plus a 10% penalty D) proceeds in ESAs may be withdrawn income tax free for qualified education expenses even if the child is under age 18

C) a beneficiary of an ESA who withdraws the funds for nonqualified expenses will be taxed on the entire amount of the withdrawal plus a 10% penalty The tax and 10% penalty is only levied against earnings since the contributions were made with after-tax dollars. ESAs may be used for any level of education, including elementary school where it is hoped that the student would be under age 18. In order to receive the favored tax treatment, the proceeds must be used to pay for qualified educational expenses. Section 529 plans have the unique 5-year front-loading feature.

Which items change when a company pays a cash dividend? Working capital Total assets Total liabilities Shareholders' equity A) II, III, and IV B) I, II, and III C) I and IV D) II and III

D) II and III When that dividend is paid, cash—a current asset—is decreased by the amount of the dividend. Payment of the dividend removes it from the balance sheet as a current liability. Therefore, there is no change to the company's working capital (current assets minus current liabilities) because they are both reduced by the same amount. The total assets (of which cash is one) and the total liabilities (of which the dividend payable is one) both decrease. Because assets and liabilities are changed by an identical amount, there is no change to shareholders' equity (net worth).

the return an investor would have received had he held an investment for one year.

annualized return

Investment advisers that maintain custody of customer securities and/or cash are required to send statements to customers on a _____ basis

quarterly

efficient mkt hypothesis - what form is that prices reflect info available with some effort to find like company financials

semi-strong form

Quick and Fast Executions, Inc., a broker-dealer registered with the administrator, maintains a website describing the services offered by the firm. Websites, like any other advertisement, must be retained for a period of at least ____ years from initial use.

three

Which of the following statements about closed-end investment companies are true? Investors in closed-end investment companies may trade only in full shares. Shares in closed-end investment companies may trade at more or less than the net asset value of the shares. A closed-end investment company offers a fixed number of shares and does not continually offer new shares in response to investor demand. A) I, II, and III B) II and III C) I and III D) I and II

A) I, II, and III

On the initial public offering, an investor buys a $10,000 Aa-rated, 20-year corporate bond with a 4% coupon rate. One year later, the prevailing market rate is 5% and the bond has had its rating increased to Aa1. Which of the following statements is most likely true with reference to the current market price of this bond? A) The bond would be selling at a discount. B) The yield to maturity of this bond is above 4%. C) The bond would be selling at par value. D) The bond would be selling at a premium.

A) The bond would be selling at a discount. When interest rates go up, bond prices go down

The most common form of organizational structure for venture capital investment is the A) limited partnership. B) limited liability company. C) venture capital fund of funds. D) corporate venture capital funds.

A) limited partnership.

One way in which incentive stock options (ISOs) differ from nonqualified stock options (NQSOs) is that A) gains on an ISO are always short term, while those on an NQSO are long term. B) the bargain element of the ISO is an AMT preference item. C) there is a maximum five-year limit for exercise on the ISO, while the time limit on the NQSO is 10 years. D) the bargain element of the ISO is reported as wages on the tax returns of the employer and the employee.

B) the bargain element of the ISO is an AMT preference item.

Miranda is an employee of the First National Bank of State D. The bank is raising additional capital through an offering of 1 million new shares of common stock. Miranda will be paid a generous commission on all retail sales of the stock. Under the Uniform Securities Act, A) Miranda must limit her sales to existing customers of the bank. B) First National Bank of State D must register as a broker-dealer in order to pay employees a commission based on the sale of securities. C) Miranda must register as an agent in order to receive commissions. D) Miranda is excluded from the definition of an agent.

D) Miranda is excluded from the definition of an agent.

In general, a broker-dealer is required to register with the SEC. An exception to that requirement would apply to a broker-dealer who A) does not have a place of business in the state and limits its clientele to institutional clients. B) is registered with the Administrator of the states in which it does business and only deals with issuers of the securities it trades. C) is currently registered with the SEC as an investment adviser. D) maintains a place of business in a single state, only deals with residents of that states, and does not execute transactions in securities traded on a national exchange.

D) maintains a place of business in a single state, only deals with residents of that states, and does not execute transactions in securities traded on a national exchange. The only exemption from SEC registration applies to broker-dealers functioning strictly on an intrastate basis. Many broker-dealers are registered with the SEC as both broker-dealers and IAs—one does not suffice for the other. The exemptions from state registration as a broker-dealer are much broader and would include the cases where the broker-dealer does not have a place of business in the state and its only clients are institutions or it effects transactions in this state exclusively with or through the issuers of the securities involved in the transactions.

efficient mkt hypothesis - what form is that prices reflect all info available to both the public and insiders together. best approach that reflects the price is random walk which is throwing a dart on the wall at the wall street journal

strong form

Samantha Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. She is looking for favorable tax treatment of earnings and losses. She also wants to limit the number of investors, but is willing to share control of the enterprise with others to attract them. What business form do you advise to her? A) General Partnership B) Limited Partnership C) S Corporation D) C Corporation

A) General Partnership bc shes a british citizen s corp wouldnt work bc they have to be U.S residents can be shareholders

Quick and Fast Executions, Inc., a broker-dealer registered with the administrator, maintains a website describing the services offered by the firm. Which of the following statements would be in compliance with the requirement to maintain certain books and records? A) The original website design must be retained for a period of at least three years from initial use. B) Because websites tend to be fluid, administrators require only that they be available for spot-checking. C) The original website design must be retained for a period of at least five years from initial use. D) Retention of any revised design must be kept for a period of at least three years after the initial design's retention period ends.

A) The original website design must be retained for a period of at least three years from initial use. Websites, like any other advertisement, must be retained for a period of at least three years from initial use. Because they are fluid (frequently changing), each design change must be filed after first use, beginning a new three-year holding period.

All of the following industry violations would probably constitute fraud except A) misrepresentation of the status of a client's account B) omitting material facts in the offer/sale of securities C) charging unreasonable commissions D) inaccurate market quotations

C) charging unreasonable commissions Charging an unreasonable commission (or markup or markdown) is a prohibited practice, but it is not considered fraud. It would be fraudulent to make inaccurate statements regarding the amount of commission being charged, such as, when acting as a principal, telling the customer that there was no commission being charged when, in fact, there is a markup or markdown built into the price.

Broker-dealers are required to furnish clients with a fee disclosure document. All of the following are true statements about that document except A) changes to the fee schedule may be shown on the firm's website. B) changes to the fee schedule must be announced in advance. C) it must be filed with the Administrator of the state in which the broker-dealer's principal office is located. D) it must be up-to-date.

C) it must be filed with the Administrator of the state in which the broker-dealer's principal office is located. There is no requirement that the fee schedule be filed with the Administrator. It must be up-to-date, and any changes must be announced in advance (usually a minimum of 30 days). There are a number of ways to disclose the fees—the firm's website is one of them.

Lisa is considering investing in gold. She owns a portfolio of stocks, bonds, and money market securities. Relative to her existing portfolio, the primary benefit of the gold investment is most likely A) gold is a renewable resource, so Lisa can profit from the investment for many years. B) the investment horizon is longer than that of stocks and bonds, balancing the duration of the portfolio. C) low correlation between traditional asset returns and gold. D) gold values are tied to cyclical industries.

C) low correlation between traditional asset returns and gold. The returns on gold and other precious metals exhibit low correlation with stock and bond returns. Investment experts generally cite this as the key advantage to investing in hard assets. Precious metals do not generally follow cyclical industries. Indeed, most look at them as countercyclical investments. The investment time horizon is whatever the investor makes it. Investors can hold stock indefinitely and buy bonds with short or long maturities, depending on portfolio objectives. Gold is not a renewable resource.

A management investment company owns portfolio securities with a current market value of $100 million. The company owes $10 million for securities purchased but not yet paid for and accrued management fees of $5 million. If there are 2,611,437 shares outstanding and the current asking price of the shares is $36.38 per share, it would be correct to state that this investment company is A) an open-end investment company. B) selling at a discount. C) selling at a premium. D) selling at NAV.

C) selling at a premium. When a closed-end investment company is selling at a price in excess of its net asset value, it is said to be selling at a premium. The net asset value per share of a management investment company (either open-end or closed-end) is computed by dividing the net assets (assets minus liabilities) by the number of outstanding shares. In this example, the assets are the $100 million portfolio value and the liabilities are $10 million for the unpaid securities plus the $5 million in accrued management fees. Subtracting the $15 million in liabilities from the $100 million in assets leaves $85 million. Divide that by the 2,611,437 shares outstanding, and the quotient is approximately $32.55. Once we know the NAV, it is clear that the price of $36.38 is a premium over the NAV. And, we know that this can't be an open-end investment company because if it was, the $3.83 sales charge represents 10.5% of the asking price ($3.83 ÷ $36.38), which is well in excess of the maximum 8.5% permitted.

Which of the following statements regarding the SEC's power to revoke the registration of an investment adviser is true? A) An investment adviser receiving substantial prepayment of fees from 50% of its clients that fails to include a copy of its balance sheet in its brochure delivered to all clients would give the SEC cause for beginning revocation proceedings. B) If it is determined that an investment adviser is insolvent, the SEC may revoke the registration. C) Revocation would occur, with appropriate notice, when a firm's annual updating amendment was received by the SEC 120 days after the end of the registrant's fiscal year. D) Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm's registration.

D) Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm's registration. Failure to supervise, if proven, is one of the most common causes for disciplinary action against a broker-dealer or investment adviser. Insolvency is not a cause for revocation under the Investment Advisers Act of 1940, but it is for a state-registered investment adviser (it's tough to keep these straight; please see Appendix A). A late ADV annual updating amendment might be cause for some action but almost certainly not a revocation; it is not that serious an offense. The balance sheet would only have to be part of the disclosure statement (brochure) given to those from whom substantial prepayment of fees is received.

Which of the following statements regarding Coverdell Education Savings Accounts are true? After-tax contributions of up to an indexed maximum per student per year are allowed. Unless a special needs beneficiary, contributions may not be made for students past their 18th birthday. If the account value is not used for educational purposes, it can be rolled over into a traditional IRA. Distributions are always taxable. A) III and IV B) I and III C) II and IV D) I and II

D) I and II Coverdell Education Savings Accounts allow after-tax contributions of up to $2,000 per student, per year, for children until their 18th birthday. If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty, or rolled over into a different Coverdell ESA for another family member. When the beneficiary is a special needs beneficiary (an individual who because of a physical, mental, or emotional condition requires additional time to complete their education), there are no age restrictions. Furthermore, unless something in the question refers to this beneficiary, always use the age 18 and 30 restrictions.