Practice Exam 3: 70%

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

A) Contraction It is during periods of economic contraction that interest rates tend to decline. They tend to rise during expansions.

Calvin has the following securities in his portfolio: ABC common stock, XYZ common stock, PQR mutual fund (domestic small cap), DEZ mutual fund (foreign small cap), 30-year Treasury bond, and 5-year Treasury note. Which of the following risks should not concern Calvin? A) Default risk B) Systematic risk C) Business risk D) Reinvestment rate risk

A) Default risk Default risk applies only to debt securities. That is, one can default only on a debt (failure to pay the interest when due and/or the principal). For exam purposes, there is one category of debt securities that has no default risk: securities issued by the U.S. Treasury. Therefore, with a portfolio consisting of nothing but equity securities and Treasuries, default risk would not be a concern to Calvin. Business risk is the uncertainty that a corporation will underperform, either due to management failures or some other event unique to that company or industry. That is certainly a concern with the investments in ABC and XYZ common stock. To a lesser degree (because of the diversification), business risk also applies to ownership of mutual funds. Reinvestment rate risk is the risk that as cash flows are received they will be reinvested at lower rates of return than the investment that generated the cash flows and applies largely to any debt security. Systematic risk is the risk that all securities are subject to and typically cannot be eliminated through diversification.

Mr. Brown has received preemptive rights from one of the stocks held in his portfolio. Which of the following is NOT an alternative regarding these stock rights? A) Selling at the market B) Redeeming them from the issuer for cash C) Giving the rights to his son D) Exercising

B) Redeeming them from the issuer for cash Rights are not redeemable by the issuer. They may be sold in the secondary market or be given to someone else to exercise. If exercised, rights are exchanged for an appropriate number of shares of the underlying common stock.

Which of the following is least likely to be considered an investment constraint when preparing an investment policy statement? A) Liquidity needs B) Risk tolerance C) Legal and regulatory factors D) Tax concerns

B) Risk tolerance The commonly tested investment constraints are: - liquidity needs - time horizon - taxes - legal and regulatory factors - and unique needs and preferences. Risk tolerance is used to help determine what investment objectives will best meet the investor's goals.

Under the Uniform Transfer to Minors Act, the beneficial owner of the securities held in the account is the A) custodian B) minor C) parent of the minor D) donor of the securities

B) minor The minor is the beneficial owner of the securities in an UTMA account, although the securities are held in the custodian's name as owner of record.

A term used to describe the results of subtracting a corporation's liabilities from its assets is A) net income. B) owners' equity. C) operating income. D) retained earnings.

B) owners' equity. There are several terms used on the exam to express the results of the balance sheet formula. In most cases, it will be shown as: assets minus liabilities equals net worth. Net worth can also be expressed as owners' equity or shareholders' equity. Income has nothing to do with assets and liabilities, and RETAINED EARNINGS IS PART OF THE SHAREHOLDER'S EQUITY PORTION OF THE BALANCE SHEET...

When compared to mutual funds, which of the following statements regarding hedge funds is least accurate? Hedge funds A) use derivatives to a greater extent. B) tend to be more diversified in order to hedge risk. C) can take both long and short positions. D) are generally only appropriate for qualified investors.

B) tend to be more diversified in order to hedge risk. Hedge funds portfolios are more concentrated (i.e., less diversified), so that individual positions provide a significant contribution to the portfolio's return. In most cases, only accredited investors may invest in hedge funds. A major difference between hedge funds and mutual funds is the ability of the hedge fund to take short positions and one way the hedge fund obtains greater leverage is through the use of derivatives.

A registered investment company whose capitalization may include preferred stock and/or bonds is... A) the open-end management investment company. B) the closed-end management investment company. C) the face-amount certificate company. D) the unit investment trust.

B) the closed-end management investment company. Only the closed-end company is legally permitted to issue senior securities (preferred stock and bonds).

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

C) Preferred stock Preferred stockholders do not have preemptive rights. Preemptive rights allow COMMON STOCKHOLDERS to subscribe to additional issues of shares before they are offered to the public, to maintain their percentage ownership.

An agent has a new client who is prone to tergiversation. As such, it would probably make sense to: A) make recommendations on a frequent basis B) obtain permission from both the client and the broker-dealer before sharing in the profits and losses in the account C) accept unsolicited orders only D) open a discretionary account

C) accept unsolicited orders only Those who tergiversate repeatedly change their attitude or opinions. As a consequence, the client who likes an agent's recommendation one day may quickly change his mind the next. Therefore, the agent could be placed in an untenable position, being unable to satisfy the client. To avoid this possibility, it would be most sensible to leave all the decisions to the client and only accept unsolicited orders.

All of the following statements regarding scheduled premium variable life insurance are correct EXCEPT A) premiums are determined based on age and sex of the insured B) once selected, the policyowner may change payment modes All of the following statements regarding scheduled premium variable life insurance are correct EXCEPT C) better than anticipated results in the separate account could lead to a reduction in annual premium D) the policyowner has the right to change the selection of subaccounts

C) better than anticipated results in the separate account could lead to a reduction in annual premium Scheduled (fixed) premium variable life premiums are fixed. It is universal life that has flexible premiums.

Under the Uniform Securities Act, all of the following would cause an agent's registration to be canceled by the Administrator EXCEPT A) the agent has died B) the agent cannot be located after reasonable search C) the agent is found by a court to have violated a securities statute D) the agent is found by a court to be mentally incompetent

C) the agent is found by a court to have violated a securities statute The key word is canceled. The Administrator would cancel an agent's registration in the event of death or mental incompetence of the registrant. Failure to locate an agent, such as mail being returned without a forwarding address, is also a cause for cancellation. Cancellation carries no connotation of wrongdoing; the Administrator may revoke a registration for violations.

Under the Investment Advisers Act of 1940, who is not excluded from the definition of investment adviser when their investment advice is solely incidental to the individual's profession? A) Teachers B) Attorneys C) Engineers D) Insurance agents

D) Insurance agents The persons excluded from the definition of investment adviser when advice is provided solely incidental to their profession include lawyers (attorneys), accountants, engineers, and teachers. **Insurance agents are not included in this group and are not excluded from the definition.

An investor owns five DEF call options with a strike price of $40. The options are European style. If the holder exercises, the cost will be A) $20,000. B) zero because European options are exercisable only at expiration. C) $2,000. D) $4,000.

A) $20,000. Each option contract represents 100 shares. Exercising five call options means buying 500 shares at a price of $40 each, which equals $20,000. Although it is true that European-style options are exercisable only at expiration, nothing in the question indicates the investor tried to exercise before then.

Which of the following is the form of portfolio management that rotates between sectors based on changes to the business cycle? A) Cyclical rotation B) Strategic portfolio management C) Tactical portfolio management D) Segment rotation

D) Segment 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.

Which of the following would be used to provide end-of-life instructions once a person becomes incapacitated? A) Living will B) Durable power of attorney C) Incapacitated will D) Living trust

A) Living will The purpose of a living will is to give clear instructions regarding end-of-life decisions, such as organ donation or when to "pull the plug". There is no such thing as an incapacitated will. A living trust deals with how assets are distributed and a durable power of attorney grants authorization to a person to legally act on behalf of someone who cannot do so.

The call feature available on some bonds A) allows the issuer the option to escape high interest rates if market rates decline. B) allows bond issuers to extend the life of the bond. C) may be used to convert the bond into preferred shares. D) allows the issuer to refinance the debt if interest rates rise above the call rate.

A) allows the issuer the option to escape high interest rates if market rates decline. Many bonds have a call feature that allows the issuer to call in the bonds, assuming the issuer has the cash available to pay them off, and escape high interest rates if market interest rate declines. If the company does not have the cash, it may issue a new bond at the lower prevailing interest rates and use that money to pay off the old bonds. This is known as refunding and, in essence, is no different from refinancing the mortgage on a home.

The holding period return (HPR) on a share of stock is equal to A) the capital appreciation plus the dividend income received over the period B) the dividend yield plus the risk premium C) the current yield plus the dividend yield D) the capital appreciation minus the inflation rate over the period

A) the capital appreciation plus the dividend income received over the period To compute holding period return, you calculate the total return for that holding period. Total return combines any dividend income plus appreciation (or minus depreciation).

An investor owns a 2x leveraged inverse ETF. If the underlying index should decrease in value, A) there is no correlation between the fund and the value of the index B) the ETF shares will increase in value by a factor of 2 C) the fund shares will also decrease in value D) the fund shares will increase in value

B) the ETF shares will increase in value by a factor of 2 An inverse, or short ETF, will move in the opposite direction of the underlying index. It is known as a short fund because as the underlying index goes down, the value of the shares increases. Because this is a 2x (2 times) leveraged fund, it will move at a rate that is twice that of the index.

From the standpoint of diversification, which of the following would be considered the most conservative? A) A growth fund B) A sector fund C) An income fund D) A balanced fund

D) A balanced fund Balanced funds invest in a variety of investment vehicles; therefore, they have more diversification. Because of the diversification, they are better protected against downturns in the financial markets and are more conservative than the other choices listed.

A margin account could be opened for which of the following? A) UTMA account B) Coverdell ESA C) IRA D) Partnership

D) Partnership There is no legal reason why a partnership (or other business structure) cannot open a margin account. A margin account could never be opened for retirement accounts, Coverdell ESAs, and UTMA/UGMA accounts.

An investor goes short 5 soybean futures contracts on the Chicago Mercantile Exchange (CME). When the contract expires, A) only the exchange is obligated to perform B) only the buyer is obligated to perform C) only the seller is obligated to perform D) both the buyer and the seller are obligated to perform

D) both the buyer and the seller are obligated to perform Among the ways in which futures differ from options is that both parties, long and short, are obligated to execute the contract. At expiration date, if not exercised before, the buyer must purchase at the contract price and the seller must deliver at the contract price. In the case of options, the buyer (long position) is the one who chooses to exercise or not, and it is the seller (short position) who becomes obligated to perform.

The owners' equity portion of a corporation's balance sheet would contain all of the following except A) preferred stock. B) Treasury stock. C) paid-in capital. D) net income.

D) net income. Net income is only found on the income statement. The other three are part of stockholders' equity (net worth). Treasury stock is company stock that has been issued to the public and then re-acquired by the issuer (the company). It appears as a negative number so it reduces the net worth (owners' equity). Note, even though the Treasury stock reduces the owner's equity, the question is asking for the items you would see in the owners' equity section on the balance sheet and, if it exists, it would appear there as a deduction.

If a technician believed in the importance of volume, which of the following would indicate bullish sentiment? A) Prices increase on heavy volume. B) Prices decrease on heavy volume. C) Prices increase on light volume. D) Prices decrease on light volume.

A) Prices increase on heavy volume. Technicians watch volume changes along with price movements as an indicator of changes in supply and demand. A price increase on heavy volume relative to the stock's normal trading volume is interpreted as an indication of bullish activity.

ABC Advisers changes its name to XYZ Advisers and also changes its location. Under the Investment Advisers Act of 1940, it must A) amend Form ADV promptly B) notify FINRA within seven days C) notify the Administrator D) amend Form ADV in advance

A) amend Form ADV promptly If information on certain parts of Form ADV becomes out of date, a federal covered adviser must file a prompt amendment with the SEC (a state-registered adviser would have to do the same with the Administrator under the USA). Information requiring immediate amendment includes name, address, telephone number, organization type changes (corporation, sole proprietorship, and partnership), degree of control over clients' funds, sources of funding, management organization, or any information relating to disclosure to clients. If any other information on the form changes (nonmaterial information), the SEC requires the form to be amended within 90 days of the end of the adviser's fiscal year.

One of the features of convertible preferred stock is that... A) the owner has the opportunity to participate in the growth of the company B) the dividend is paid ahead of all other securities C) the owner has the opportunity to convert the stock into the issuer's bonds D) the holder is able to select the conversion price

A) the owner has the opportunity to participate in the growth of the company Any convertible security, preferred stock or debenture, is convertible into the issuer's common stock. As a result, if the business is successful, the common stock's price will rise to the point where conversion is a wise idea. Although the investor can generally select when to convert, the conversion price or ratio is set at the time of issuance. Interest on debt securities is paid before the dividends on any stock. When it comes to preferred stock, there is frequently a "pecking order", such as a prior lien preferred or first preference preferred that would come ahead of the other preferred shares.

You have a 37-year-old client whose wife has just given birth to triplets. Because of the added responsibilities, he wants to maximize the amount of life insurance he can acquire. Which of the following types of insurance will give him the greatest amount of coverage for the lowest initial premium? A) Universal life B) Annual renewable term C) Whole life D) Variable life

B) Annual renewable term At ANY GIVEN AGE, term insurance always carries the LOWEST premium and, of the term policies available, annual renewable term always has the lowest initial premium. Of course, because the premium tends to increase each year the policy is renewed, at older ages it can become unaffordable. But, remember, this question is only asking about initial cost.

Which investment strategy is consistent with a belief in the efficient market hypothesis? A) Comparing the calculated value of a security, through fundamental analysis, to the market value of the stock B) Selecting a random set of stocks for a portfolio C) Waiting to purchase a stock until it increases above the 40-day moving average D) Searching for undervalued securities

B) Selecting a random set of stocks for a portfolio (RANDOM WALK THEORY) The efficient market hypothesis states that an investor cannot consistently outperform the market. Selecting a random set of stocks is consistent with this theory. The other strategies are aligned with technical and fundamental analysis.

Under the Uniform Securities Act, it is NOT considered fraudulent if an agent A) omitted a material fact because she knew she did not have time to cover everything in a short presentation B) actively solicited orders in unregistered exempt securities C) deliberately failed to follow a customer's instructions D) made an untrue statement of a material fact

B) actively solicited orders in unregistered exempt securities Securities that do not require registration under the USA are exempt securities. Although the securities are exempt from registration, thereby making the solicitation permitted, the agent who makes the solicitation and the broker-dealer must be registered. An agent may not make an untrue statement of a material fact, omit a material fact, or deliberately fail to follow a customer's instructions.

Use the following chart to answer this question Equity: 100% 35% 20% 0% Fixed income: 0% 65% 80% 100% High return: 45.4% 34.2% 31.3% 28.7% Low return: -7.4% 5.5% 8.2% 6.5% Avg. return: 18.8% 19.2% 16.5% 14.2% Std. dev: 12.25 10.95 10.02 10.46 Which of these portfolio allocations would you expect to show the least volatility over the next year? A) 0%/100% B) 35%/65% C) 20%/80% D) 100%/0%

C) 20%/80% This imposing-looking question should take 10 seconds to do. When the question is dealing with volatility, look for the standard deviation. The portfolio with the lowest (the 20/80 at 10.02) is the least volatile, the one with the highest (100/0 at 12.25) is the most volatile.

A technical analyst would be most interested in which of the following? A) Capitalization ratios B) Price-to-earnings ratios C) 200-day moving averages D) Working capital

C) 200-day moving averages Technical analysts try to predict the market by examining price and volume trends. They expect the market to act in the future as it has in the past. Technical analysts are not interested in the fundamental aspects of a company, such as its financial statement ratios.

Which of the following vehicles make use of the unified estate tax credit? i. Bypass trust ii. Generation-skipping trust iii. Living trust iv. Simple trust A) III and IV B) II and III C) I and II D) I and IV

C) I and II Both the bypass trust and the generation-skipping trust are tools used by estate planners to reduce estate taxes. They do so by passing the amount in the unified credit (currently $5.34 million for 2014) to heirs other than the spouse, usually grandchildren in the case of the GST.

Which of the following statements regarding a zero-coupon corporate bond is TRUE? A) These bonds have higher reinvestment risk as to interest than bonds paying semiannual interest. B) The investor reports the difference between the purchase price and maturity value as ordinary income at maturity. C) The investor has phantom income, which must be reported on an annual basis. D) Bonds selling at a premium have a yield lower than the coupon rate.

C) The investor has phantom income, which must be reported on an annual basis. On a taxable zero-coupon bond, the annual imputed interest is reported for tax purposes. Because this income is not actually received annually, it is referred to as phantom income. Zero coupon bonds always sell at a discount from their maturity value - never at a premium and one risk that zero coupon bonds avoid is reinvestment risk because there are no interest payments to reinvest.

When an investor's original value is subtracted from the ending value, and then has the income received over that time period added to it, which is then divided by the original cost, the result is... A) internal rate of return B) expected return C) holding period return D) annualized return

C) holding period return This is the method of computing holding period return.

When comparing a private equity fund to a public one, it would be incorrect to state that the private fund has A) lower reporting costs. B) less liquidity. C) stronger governance D) higher risk.

C) stronger governance The first step is to notice that the question is looking for the statement that is not correct. Corporate governance is an area where public shareholders look to ensure that the management is performing in ways that not only maximize operating results, but also represent high standards of business ethics. In the case of private funds, there are very few shareholders and they generally take less of an interest in ESG (environment, social, and corporate governance) matters. Private funds are not liquid and because they are private, they do not have the costs of regular reporting to the SEC. In general, private funds are considered a higher-than-average risk investment.

Palpable Retirement Options (PRO) is a sole proprietorship investment adviser registered in States M and P. The owner of PRO is also a registered agent with Magnificent Financial Futures (MFF), a large broker-dealer registered with the SEC and many states. After a hearing conducted by the Administrator, PRO's owner has been found guilty of selling away to clients in state M. What effect might that have on MFF? A) Disciplinary action brought by the SEC if it is found that MFF failed to supervise its agent's activities B) None because PRO is a separate legal entity responsible for the activities of its CEO C) Disciplinary action brought by the Administrator of State P if it is found that MFF failed to supervise its agent's activities D) Disciplinary action brought by the Administrator of State M if it is found that MFF failed to supervise its agent's activities

D) Disciplinary action brought by the Administrator of State M if it is found that MFF failed to supervise its agent's activities A significant portion of this exam deals with legal issues, and Latin is a commonly used language in the law. Here is an example of such usage: under the doctrine of respondeat superior... "a broker-dealer is responsible for the actions of any of its registered agents, even those who operate an independent investment advisory firm". In this case, because the agent's violation occurred in State M, only that state's Administrator has jurisdiction. Selling away is the prohibited practice of an associated person, such as an agent, engaging in private securities transactions WITHOUT THE KNOWLEDGE OR CONSENT OF THE EMPLOYING BROKER-DEALER. This violates the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents. This is not a federal violation which is why the SEC doesn't get involved here.

A contract between an investment adviser and a customer may be assigned to another investment adviser, provided... A) the broker-dealer handling the account's transaction is notified in writing B) the assignment is done 1 year after the initial contract C) the client is notified in writing within a reasonable period of time D) the client consents to the assignment

D) the client consents to the assignment Except as may be permitted by rule or order of the Administrator, it is ..... "unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract unless it provides in writing that no assignment of the contract may be made by the investment adviser without the consent of the other party to the contract"

If ABC Fund pays regular dividends, offers a high degree of safety of principal, and appeals especially to investors seeking tax advantages, ABC is... A) a municipal bond fund B) an aggressive growth fund C) a corporate bond fund D) a money market fund

A) a municipal bond fund Municipal bonds are considered second only to U.S. government securities in terms of safety. Also, interest received from the bonds is generally exempt from federal income tax.

The Investment Company Act of 1940 permits a reduction in sales charge when reaching a breakpoint for... A) purchasers meeting the definition of any person B) a mother and her 35-year-old son purchasing in separate accounts C) a designated agent of an investment club D) clients of fee-only investment advisers

A) purchasers meeting the definition of any person The term any person specifically excludes an investment club. Groups put together for the purpose of investing together, such as an investment club or clients of an investment adviser, DO NOT QUALIFY TO MEET THE BREAKEVEN POINT... Although there are exceptions, the exam will only consider ACCOUNTS HELD FOR MINOR CHILDREN as being included in the definition.

An analyst is reviewing the financial statements of Penta Ltd. Over the period shown, Penta has sales of $5 million, net profit of $1.5 million, annual bond interest charges are $500,000, and total assets are $2 million. Penta's net profit margin is A) 35%. B) 30%. C) 25%. D) 20%.

B) 30%. Profit margin = Net profit ÷ sales = $1.5 million ÷ $5 million = 30%. Profit margin is based on operating costs. Because interest on bonds is a fixed expense, it is not included in the computation. As is often the case, there is more information supplied than needed.

Under the Securities Exchange Act of 1934, which of the following would NOT be grounds for disqualification of a broker-dealer's registration? A) Violating a securities act B) Being sued by a client C) Conviction of misappropriation of client funds D) Prohibition by court order from practicing as an investment adviser

B) Being sued by a client Being sued by a client is not grounds for disqualification. Items that would disqualify a registration include: - being currently under suspension - revocation, or injunction by any court - regulatory authority or SRO, domestic or foreign - currently employing a person statutorily disqualified; having been convicted in the past 10 years of a felony or a securities or financially related crime - or falsifying an application for registration.

All of the following are advantages of a 401(k) plan EXCEPT A) the owner of the business may participate in the plan B) the employer may make unlimited contributions, which generate unlimited tax deductions for the business C) employees and the business may reduce current taxes D) tax deferral on the plan earnings is advantageous to employees

B) the employer may make unlimited contributions, which generate unlimited tax deductions for the business Contributions are deductible by the employer but are not unlimited because contributions to a 401(k) are subject to a number of limits. Tax deferral on plan earnings is advantageous to employees. The owner of the business may participate in the plan.

The institutional trading desk of a major broker-dealer receives a substantial purchase order for XYZ common stock from one of its clients. While completing the paperwork to begin the order sequence, the firm decides 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) this would be considered market manipulation B) this would be the prohibited practice of front running C) the purchase could only be made with prior disclosure to the client D) the broker-dealer has the right to purchase shares of XYZ whenever it wishes.

B) this would be the prohibited practice of front running The practice of entering an order for the firm in front of a previously received customer order, known as front running, is prohibited. Customer orders always take priority over firm orders, assuming they were not received after the firm entered its orders.

Which of the following statements regarding the correlation coefficient is not correct? A) Perfectly positively correlated assets have a correlation coefficient of +1.0. B) Perfectly negatively correlated assets have a correlation coefficient of -1.0. C) Combining assets with less than perfect positive correlation will not reduce the total risk of the portfolio. D) A correlation coefficient of 0.0 means there is no relationship between the returns of the assets.

C) Combining assets with less than perfect positive correlation will not reduce the total risk of the portfolio. Watch out for the double negatives here. Combining assets with less than perfect positive correlation can reduce the total risk of the portfolio. The further the correlation coefficient between the two assets is away from +1.0, the greater the diversification benefits that may be attained.

One type of alternative investment considered to be a pooled investment vehicle is the exchange-traded note. Exchange-traded notes (ETNs) are... i. unsecured debt securities ii. unsecured equity securities iii. issued by financial institutions, such as banks iv. insured by the FDIC A) II and III B) I and IV C) I and III D) II and IV

i and iii - UNSECURED DEBT SECURITIES AND THEY ARE ISSUED BY FINANCIAL INSTITUTIONS SUCH AS BANKS... Exchange-traded notes are unsecured debt securities issued by financial institutions, such as banks. Their prices can be impacted by changes in the credit rating of the issuer, and they are not insured by the FDIC.

Alpha Electronics Company wishes to raise capital by issuing some securities in its home state. They have been advised by their legal counsel that registration with the Administrator is unnecessary because the issue is exempt. Should Alpha be served with an order, the burden of proving its issue is exempt is on the... A) company B) court C) lawyers D) Administrator

A) company In any case where there is a question as to the legality of a specific exemption, the burden of proof is always on the party requesting the exemption.

Doug runs a sole proprietorship IA and is also a registered agent with Pelf Securities, Inc., a registered broker-dealer. Doug charges his clients an hourly fee for advice, and when they wish to purchase recommended securities, they may do so through Pelf Securities if they have an account there. In those circumstances, Doug earns a commission on the securities transaction in addition to the hourly fee he earned while making that recommendation. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) this would be permitted if the compensation were disclosed to the client B) the trade could only be placed through Pelf Securities if they were the market maker in the recommended security C) this would constitute a prohibited practice D) this would be acceptable if it were disclosed to the client and the IA fee was based on a percentage of assets under management rather than an hourly basis

A) this would be permitted if the compensation were disclosed to the client Investment advisers may charge fees on an hourly basis, as a percentage of assets under management, or even as a flat annual fee. In addition, if licensed as agents of a broker-dealer, they may also earn commissions on transactions routed through that BD. However, disclosure to the client is required, and it must be made clear to the advisory client that transactions may be executed at whatever broker-dealer the client chooses.

Which of the following statements about the consumer price index (CPI) is NOT true? A) 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. C) The CPI measures the increase in the general price level of a basket of consumer goods. D) The CPI measures the rate of increase or decrease in a broad range of prices, such as food, housing, medical care, and clothing.

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

In the banking industry, the term POD refers to an account similar to the TOD designation used by broker-dealers. An old, but sometimes still used term to describe this kind of account, is A) demand deposit account (DDA) B) revocable trust C) Totten trust D) passbook savings account

C) Totten trust The name comes from a 1904 decision in a New York case called In re Totten. The court ruled that someone could open a bank account as a trustee for another person, who had no right to the money until the account owner died. The account owner is the trustee, in control of money that will eventually go to the trust beneficiary, and could change beneficiaries as desired. But whether the arrangement is called a Totten trust or a POD account, the result is the same.

In order to be in compliance with the rules, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) the trade is being executed by an officer or partner of the firm B) engaging in an agency cross transaction C) purchasing shares directly from advisory clients D) directing securities transactions to an affiliated broker-dealer

C) purchasing shares directly from advisory clients There are 2 principals in every securities trade: the buyer and the seller. In this case, buying shares directly from clients who own those shares places the IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. In an agency cross transaction, the firm is acting as an agent—that's the reason for the term.

Which of the following is an unethical practice for agents of broker-dealers? A) Failure to make a bona fide public offering of all securities acquired as an underwriter B) Effecting securities transactions not recorded on the books of the employing broker-dealer with the employing broker-dealers' approval in writing C) Borrowing money from a commercial bank that has investment accounts at the broker-dealer D) Effecting securities transactions not recorded on the books of the employing broker-dealer without prior written authorization

D) Effecting securities transactions not recorded on the books of the employing broker-dealer without prior written authorization It is an unethical practice for an agent of a broker-dealer to effect securities transactions not recorded on the books of the employing broker-dealer, unless prior written authorization is secured. Broker-dealers, acting in the capacity of underwriters, not their agents, must make a bona fide public offering in underwritings.

Which of the following is (are) NOT exempt from registration as an investment adviser representative in the state in which they conduct business? i. A Certified Financial Planner who prepares financial plans and whose only compensation is commissions ii. An insurance agent who prepares comprehensive financial plans and receives commissions on any insurance products purchased by his clients iii. A broker-dealer with extensive business in the state iv. A mutual fund company with offices and clients in the state A) I and II B) III and IV C) I only D) I, II, III, and IV

A) I and II A Certified Financial Planner who prepares financial plans for commissions must register in the state as an investment adviser representative. An insurance agent who prepares comprehensive financial plans for commissions is also acting in the capacity of an investment adviser representative and must register accordingly. In both cases, these individuals are holding themselves out as offering investment advice because, at least in the eyes of the USA ....... THERE IS NO SUCH THING AS A COMPREHENSIVE FINANCIAL PLAN THAT DOES NOT INCLUDE SECURITIES ... The commissions they receive are considered indirect compensation for the rendering of investment advice. Broker-dealers and mutual fund companies are not investment advisers under the Uniform Securities Act.

A broker-dealer acting as a principal in a trade would A) must always disclose the amount of markup on a client's confirmation statement B) add a markup to the offering price when selling shares to a client C) add a markup to the bid price when offering shares to a client D) must disclose to clients the amount of earnings he made on principal transactions in excess of the amount he would have made had he charged a commission

B) add a markup to the offering price when selling shares to a client When selling a security to a public customer, the broker-dealer adds his markup to the ask price (offer price), not the bid price. A broker does not add a markup to the bid price when buying shares from a client; the broker-dealer would mark down the bid price. Unlike commissions, which are always disclosed on the trade confirmations, only for certain categories of securities is the markup or markdown shown.

To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes... i. name ii. verbal assurance that the customer is of legal age iii. a street address, unless the primary mailing address is a PO Box located in the state of residence iv. a taxpayer identification number

i and iv; Name and Taxpayer Identification number... Mere verbal assurance that the customer is of legal age is not sufficient; the actual date of birth must be obtained. A PO Box is never acceptable without a physical address. In addition, the identity of the person opening the account must be verified through documentation such as an unexpired driver's license or passport.

Which of the following actions by an agent would NOT constitute fraud as defined in the Uniform Securities Act? A) Purchasing a security for the account of a client and then buying 100 shares of it for her own account B) Executing a trade for a customer at a price that is unrelated to the current market C) Purchasing a security on an exchange and simultaneously selling it on another exchange to create the impression of increased trading volume. D) Executing a trade for a customer without the customer's knowledge

A) Purchasing a security for the account of a client and then buying 100 shares of it for her own account There is nothing illegal about an agent purchasing stock for her own account after a trade in that security is made in a customer's account. Depending on the circumstances, it could be a problem if the agent bought first and then executed customer orders. The other activities are all fraudulent.

As a client's only child is about to complete her college education, it is obvious that the 529 Plan used to accumulate funds has been overfunded. Which of the following might be suggested to minimize tax consequences? i. Encourage the daughter to go to graduate school and use the money for qualified expenses there. ii. Roll over the funds to a member of the beneficiary's family. iii. Roll over the funds to a Coverdell ESA. iv. Roll over the funds to the donor's IRA.

i and ii When there is money remaining in a Section 529 plan after a student has completed college, withdrawal of that excess will result in the portion representing earnings being taxed at ordinary income tax rates plus a 10% penalty. Those taxes and penalties can be avoided if the funds are properly used, such as graduate school for the original beneficiary or designating a new beneficiary who is an immediate family member (as defined in the law) and rolling over the funds. There is no such thing as a rollover to a Coverdell ESA and money in a 529 plan is not part of a qualified plan, so rolling over to an IRA is out of the question.

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 and iv A feature common to both C and S corporations is the LIMITED LIABILITY 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.

An investment adviser's contract contains the following statement: "While GEMCO Advisers agrees to use its best efforts in the management of the portfolio, GEMCO shall not be responsible for errors in judgment or losses incurred on investments made in good faith, and its liability shall be limited expressly to losses resulting from fraud or malfeasance, or from violation of applicable law." Under the USA, this statement A) is an improper waiver and makes the contract null and void B) complies with the investment adviser's fiduciary liability C) offers protection to the client by limiting those acts for which the adviser can be sued D) clearly defines the parameters of the adviser's responsibilities

A) is an improper waiver and makes the contract null and void The regulators tend to be quite strict on the use of hedge clauses waiving certain rights of clients or obligations of IAs. More than likely, the Administrator would view this language as potentially misleading to clients, given the adviser's duties as a fiduciary. Moreover, the adviser's statement that it assumes liability for "violation of applicable law" only compounds the problem because it was unlikely that the client would realize that "applicable law" does, under several circumstances, provide a right of action for even good faith "errors in judgment."

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 corporate bond because the after-tax yield is 4.5% B) The corporate bond because the after-tax yield is 6.25% C) The municipal bond because its equivalent taxable yield is 6.6% D) The municipal bond because its equivalent taxable yield is 6.3%

C) The municipal bond because its equivalent taxable yield is 6.6% (INVESTOR'S TAX BRACKET - 100%) If we compute the tax-equivalent yield of the muni, we see that it is 6.6%, which is a higher return than the 6.25% on the corporate bond. The formula to get this starts by taking the investor's tax bracket and subtracting that from 100%. 100% − 28% = 72%. We then divide the muni coupon of 4.75% by the 72% and the result rounds off to 6.6%.

Which of the following is not a characteristic of American depositary receipts (ADRs)? A) Because ADRs are traded on the exchanges, they are relatively liquid and marketable investments. B) ADR holders may surrender ADRs in exchange for receiving the shares of the non-U.S. company. C) ADRs are denominated and pay dividends in U.S. dollars, not foreign currencies, thus saving the investor transaction costs with respect to converting currencies. D) Dividends are declared in the foreign currency, so exchange rate, or currency, risk is completely eliminated.

D) Dividends are declared in the foreign currency, so exchange rate, or currency, risk is completely eliminated. ADRs are receipts issued by a U.S. bank for shares of a foreign company purchased and held by a foreign branch of the bank. Dividends are declared in the local currency, so exchange rate, or currency, risk is not completely eliminated. They are generally traded on one of the major exchanges ensuring liquidity. They are an alternative to investing directly in foreign companies or foreign mutual funds. If the investor desires the foreign shares, the ADR may be surrendered and the exchange made.

A QDRO is a judgment, decree, or order for a qualified retirement plan to pay child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant. The QDRO must contain certain specific information as stated in whose regulations? A) ERISA B) DOL C) NASAA D) IRS

D) IRS It is the IRS who states the QDRO must contain certain specific information, such as: the participant and each alternate payee's name and last known mailing address, and the amount or percentage of the participant's benefits to be paid to each alternate payee. This is not part of ERISA or the Department of Labor and, least of all, NASAA.

The Uniform Prudent Investor Act identified a number of fundamental changes in the former criteria for prudent investing. Which of the following incorrectly states one of these changes? A) The standard of prudence is applied to each investment individually. B) The trade-off between risk and return in all investing is the fiduciary's central consideration. C) Prudent investing requires that fiduciaries diversify their investments. D) Delegation of trust investment and management functions is permitted, subject to safeguards.

A) The standard of prudence is applied to each investment individually. Prior to the Uniform Prudent Investor Act, THE FOCUS WAS ON INDIVIDUAL INVESTMENT CHOICES, which made it very difficult to focus on the risk and return of the entire portfolio. The benefits of diversification have now been firmly established, and the standard of prudence is now applied to ANY INVESTMENT as part of the total portfolio rather than to that investment individually. Another key change was the ability to delegate the portfolio management decisions to others (who must be qualified).

Wealth Funders and Associates (WFA) is a state-registered investment adviser organized as a partnership. The firm has had 5 equal partners since its inception. However, with the retirement of 1 of the partners and the need for additional capital, WFA has added 3 new partners. As a result of this activity, WFA... A) shall notify clients of the change to the partnership within a reasonable time B) will now be required to register with the SEC C) is considered to have assigned client contracts and must obtain their consent D) shall renew its registration promptly

A) shall notify clients of the change to the partnership within a reasonable time It is unlawful for an investment adviser to enter into, extend, or renew any investment advisory contract unless it provides that the investment adviser, if a partnership, shall notify its clients of any change in the membership of the partnership within a reasonable time after the change. If the investment adviser is a partnership, no assignment of an investment advisory contract is considered to result from the death or withdrawal of a minority of the members of the investment adviser who have only a minority interest in the business of the investment adviser, or from the admission to the investment adviser of one or more members who, after admission, will be only a minority of the members and will have only a minority interest in the business. In this example, the new members will represent 3/7 of the partnership—a minority interest.

Which of the following regarding the registration of investment advisers and their representatives is TRUE? A) XYZ Advisers, Inc., is a federal covered investment advisory firm registered with the SEC; therefore, its representatives need not be registered with the Administrator. B) ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm 6 months ago. ABC must notify the Administrator of this association promptly. C) An investment adviser representative, terminated his employment with ABC Advisers and, 6 months later, was employed as an advisory representative by KLM, a federal covered adviser. Each firm is required to notify the Administrator of each event. D) ABC Advisers, Inc., is an investment advisory firm registered with the Administrator; therefore, its representatives need not be registered with the Administrator.

B) ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm 6 months ago. ABC must notify the Administrator of this association promptly. Only state-registered investment advisory firms are required to notify the appropriate state Administrator when employment is terminated or begun. In the case of investment adviser representatives of federal covered advisers, notification is the responsibility of the adviser representative. Investment adviser representatives of both state and federal registered investment advisers must be registered with the appropriate state Administrator(s), unless otherwise exempted. In the case of agents, not only the broker-dealers but also the agents must notify the Administrator.

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

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

The Jones family has scheduled an initial visit with a financial planner. Mr. Jones has an annual salary of $70,000, and this is their first attempt at financial planning. Which of the following should be the first step taken by the financial planner? A) Determine a reasonable fee for designing the plan B) Set goals and dates for reaching them C) Establish an emergency fund D) Pay off credit card debt

C) Establish an emergency fund There are many questions on the exam where you will be forced to choose between two possible answers, only one of which is correct. In many cases, it is strictly a matter of opinion, but only NASAA's opinion counts. This is one of them. Goal setting is important, but the regulators feel that the first step in any plan is making sure that there is a "rainy day" fund. We can argue about that because some will say that a good plan can be used to establish that fund where none has existed before. But, please go with the right choice.

A person who has no place of business in this state would not be considered a broker-dealer if he effects transactions in this state exclusively with all of the following except A) insurance companies. B) other broker-dealers. C) investment advisers. D) the issuers of the securities involved in the transaction.

C) investment advisers. The Uniform Securities Act excludes from the definition of broker-dealer....... "a person who has no place of business in this state if he effects transactions in this state exclusively with or through the ISSUERS OF SECURITIES involved in the transactions, other BROKER-DEALERS, or BANKS, SAVINGS institutions, TRUST companies, INSURANCE COMPANIES, INVESTMENT COMPANIES as defined in the Investment Company Act of 1940, PENSION OR PROFIT-SHARING TRUST, or other financial institutions or institutional buyers. Please note that INVESTMENT ADVISORS ARE NOT INCLUDED IN THIS LIST!!!!!!!!!!!!!! What is confusing is that the USA offers almost the exact same exclusion for investment advisers and that list includes other investment advisers as well as broker-dealers.

An investment adviser representative recommends that a customer purchase shares of Silicon Switches. The representative indicates that the company has reduced market risk because it has graduated to the level of quality acceptable to the New York Stock Exchange. According to the Uniform Securities Act, the adviser's statement is A) permitted because an investment adviser may recommend listed stocks B) permitted because the NYSE sets stringent earnings requirements for listed stocks C) not permitted because it is misleading to imply that meeting listing requirements reduces market risk D) not permitted because the transaction is not suitable for the customer

C) not permitted because it is misleading to imply that meeting listing requirements reduces market risk Meeting the listing requirements of the New York Stock Exchange does not reduce the risk of loss to the client, so the agent's statement is misleading and therefore prohibited. NYSE listing requirements are numerical standards and do not imply that the exchange has passed on the quality of the issue.

There are a number of requirements placed upon investment advisers found in both the Uniform Securities Act and NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers. Which of the following is NOT included in those requirements? A) The adviser may not provide a report or a recommendation to any advisory client prepared by someone other than the adviser without making a disclosure of that fact. B) Investment advisory contracts must be in writing. C) The adviser may only accept an order from a third party if the proper trading authorization is in hand. D) Advisory clients must receive the adviser's brochure at least 48 hours BEFORE entering into an advisory contract.

D) Advisory clients must receive the adviser's brochure at least 48 hours before entering into an advisory contract. Under state and federal law, clients entering into an advisory agreement with an IA MUST receive the brochure within 48 hours of signing .... NOT 48 BEFORE!!!!!!!!!!!!!!!!! The 48-hour rule for state-registered IAs refers to the RULE stating that if the brochure is not delivered 48 hours in advance, the client has the right to WITHDRAW from the agreement, PENALTY-FREE ________________________________________________________________________________ The USA requires all initial and renewal investment advisory contracts to be in writing. If a specific securities report or recommendation has been prepared by someone other than the adviser, disclosure must be made to clients. In order to accept instructions from a third party (someone other than the client), the proper written authorization must be present.

Which of the following securities is the least suitable recommendation for a qualified money purchase plan account? A) Investment-grade municipal bond B) Treasury bond C) A-rated corporate bond D) Large-cap common stock

D) Large-cap common stock Investment-grade municipal bonds bear low yields that are federally tax exempt. Because money in a qualified retirement plan account grows tax deferred regardless of the investment instrument ...... TAX EXEMPT SECURITIES ARE UNSUITABLE. In addition, when the money is withdrawn, it is taxable as ordinary income, so in effect, tax-free income has been converted into taxable income. Although the interest on Treasury bonds is exempt from state income tax, that rate is invariably considerably less than the federal income tax rate.

During your annual review with your clients, Matt and Sally Eberhart, they indicate that they think it is time to start putting away some money for college for their 3-year-old son. They ask you to describe the advantage of using an UTMA account over a Coverdell ESA. You would likely point out all of the following as advantages EXCEPT A) there are no earnings limits for making UTMA contributions B) withdrawals for other than qualified education expenses are not subject to any penalties C) there is no limit to the amount that can be contributed to an UTMA D) contributions to the UTMA are made with after-tax dollars

D) contributions to the UTMA are made with after-tax dollars We're looking for a feature possessed by the UTMA that is not found in an ESA, but in both cases, contributions are made with after-tax dollars. Therefore, you would not describe that as an advantage. Unlike the ESA where couples earning in excess of $220,000 per year are not eligible to contribute, no such ceiling is imposed on those donating or transferring property to an UTMA. Unlike the ESA, where there is a 10% tax penalty on the earnings withdrawn for nonqualified educational expenses, no such penalty applies to an UTMA. Unlike the ESA, which has a $2,000 per year per child limit, there is no limit to the amount that one can give to an UTMA. However, unlike the ESA, where all earnings are tax free if used for qualified educational expenses, EARNINGS IN AN UTMA ARE TAXABLE, if over a certain amount, might be taxed at the parent's top marginal rate.

Which of the following statements concerning the books and records of a state-registered investment adviser under the Uniform Securities Act is (are) true? i. Books and records must be maintained in the principal office of the adviser for the first two years. ii. Books and records must be maintained in an easily accessible place for no less than five years from the end of the last fiscal year in which an entry was made. iii. Copies of all investment letters, advertisements, or communications to two or more persons must be preserved for five years from the end of the fiscal year of the publication date. iv. An adviser who ceases business continues to be responsible for the maintenance and preservation of certain records, such as corporate charters and minute books, for three years after termination of the enterprise.

i, ii, iii, and iv All books and records required to be maintained by actively registered investment advisers—including investment letters, advertisements, or other communications to two or more persons (10 if the question dealt with federal law)—MUST be preserved in a readily accessible place for five years from the end of the fiscal year in which they were created or communicated. For the first two years, they must be maintained in the appropriate office of the adviser. The adviser remains responsible for the preservation of certain records, such as corporate charters and minute books or partnership agreements if operated in that business form, for THREE YEARS AFTER CEASING BUSINESS!!!!!

Your client with $100,000 to invest is looking for maximum current income. Which of the following would offer the highest current return? A) $100,000 market value of corporate bonds selling at a premium and yielding 6% to maturity B) $200,000 of utility common stock paying a current dividend of 3.5% C) $100,000 of zero-coupon bonds with a yield to maturity of 6% D) $100,000 AA-rated corporate bonds trading at par with a 6% coupon rate

A) $100,000 market value of corporate bonds selling at a premium and yielding 6% to maturity When you read the full question, including the answer choices, you can immediately disregard two of the four options. With $100,000 to invest, the answer cannot be to purchase $200,000 of anything. Maximizing current income excludes zero-coupon bonds because there is no current income. Why does a bond sell at a premium over par? Although there are exceptions, primarily it is because the coupon rate on that bond is higher than the current market interest rate. Therefore, with a higher coupon rate, the current income on the same amount of principal invested ($100,000 in our question) will always be higher for a bond selling at a premium. That is the K.I.S.S (Keep It Simple Student) answer.

An investor buys 5 put contracts with a strike price of $55 per share. The current price of the underlying stock is $60 and the option premium is $7. The commission schedule is shown as follows: Trade Amount Commission Rate ≤ $2,500 $35 + 0.9% of trade amount $2,501 to $11,999 $35 + 0.7% of trade amount ≥ $12,000 $35 + 0.5% of trade amount Using the information above, what is the total commission cost based for this trade? A) $39.90 B) $59.50 C) $199.50 D) $297.50

B) $59.50 The cost per contract is $7 x 100 shares, or $700. That makes the total trade amount $700 x 5 contracts, or $3,500, which qualifies for the commission rate of $35 + 0.7% of the trade amount. $35 + 0.7% of $3,500 = $35 + $24.50 = $59.50 total charge.

An investor begins contributing $600 on the third day of each month to a purchase plan for the KAPCO Total Return Fund. For the first six months, the per share prices were: $10 $12 $15 $20 $12 $8 What is this investor's breakeven point? A) $12.83 per share B) $8.00 per share C) $11.80 per share D) $12.50 per share

C) $11.80 per share This is a dollar cost averaging question. This investor has purchased a total of 305 shares with a total cost of $3,600. That makes the average cost per share $11.80. A sale of the shares at that price will cause the investor to break even.

A bond analyst reports that there is currently an inverted yield curve. That would mean... A) bonds with intermediate maturities have the highest yields. B) the closer the bond is to its maturity date, the lower the yield. C) the closer the bond is to its maturity date, the higher the yield. D) the further the bond is from its maturity date, the higher the yield.

C) the closer the bond is to its maturity date, the higher the yield. An inverted yield curve shows near-term maturities with higher yields than those of long-term maturities. Sometimes called a negative yield curve, it is usually an indication that interest rates are near a peak and the trend should soon reverse.

Which of the following statements is(are) TRUE about the investigative power of the Administrator under the Uniform Securities Act? i. The Administrator may conduct public or private investigations to determine if violations are about to occur or have occurred. ii. Persons could find themselves subject to contempt of court charges for failing to obey a subpoena issued by an Administrator. iii. The Administrator may proceed against an entire firm for the actions of any executive or supervisory person of the firm. A) I only B) III only C) II and III D) I, II, and III

D) i, ii, and iii The Administrator may conduct public or private investigations in pursuing suspected or actual violations and may do so within or outside the state. Administrators may issue subpoenas in conducting their investigations, and if persons fail to obey them, the Administrator may apply to the courts for a court order. If the persons then fail to obey the court order, they may be subject to contempt of court charges. The Administrator may take such action against an entire firm as a result of the actions of any executive or supervisory person of the firm.

A mutual fund investor is using a dollar cost averaging strategy. For the average price per share to exceed the investor's average cost, which of the following conditions must be present? i. The market price per share fluctuates with each purchase. ii. A fixed dollar amount is invested at regular intervals. iii. A fixed number of shares is purchased monthly. iv. A constant dollar value is maintained in the account.

i and ii Dollar cost averaging requires investing of a fixed amount of money at regular intervals. This procedure results in a lower average cost per share than average price paid if the mutual fund price fluctuates. The constant dollar plan involves buying and selling to maintain a constant dollar amount of either equity or debt securities in the account.

Under the USA, when one is referring to a security that is guaranteed, the guarantee applies to... i. capital gains to be expected by holding the specified security ii. dividends to be paid on the specified stock iii. interest and principal payment on the specified bond iv. reimbursement by the firm for any losses suffered while holding that security

ii and iii The USA defines the term guaranteed as meaning guaranteed as to payment of principal, interest, or dividends.