Practice Exam #3
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) 1.2 shares for each bond B) 12 shares for each bond C) 2 shares for each bond D) 8 shares for each bond
B) 12 shares for each bond
Under the Uniform Securities Act, if the Administrator does not deny an application for registration and no disciplinary proceeding is underway in regard to it, how many days after filing the application as an investment adviser representative does registration generally become effective? A) 10 B) 30 C) 5 D) 7
B) 30
An investment adviser representative attends a seminar discussing derivative investments. It would be unlikely that there would be any mention of A) call options B) REITs C) futures D) warrants
B) REITs
Which of the following is not a characteristic of expansionary monetary policy? A) More funds are available for banks to lend to borrowers. B) The reserve requirement will be increased. C) Interest rates may decline. D) The money supply will increase.
B) The reserve requirement will be increased. Expansionary monetary policy is also referred to as easy monetary policy. The Federal Reserve follows an easy monetary policy when it wants to expand the level of income and employment. The Federal Reserve may decrease rather than increase the reserve requirement affording banks the opportunity to loan more money to borrowers.
Aaron Jones, a client of XYZ Financial Services, has suspected the possible churning of his account over the past several years but has taken no action. He consults his attorney who informs him that any lawsuit for recovery of damages under the USA must be started within A) 2 years of occurrence B) 2 years of occurrence or 3 years of discovery, whichever occurs last C) 3 years of occurrence or 2 years of discovery, whichever occurs first D) 1 year of occurrence
C) 3 years of occurrence or 2 years of discovery, whichever occurs first
Which of the following is required to register in a state under the Uniform Securities Act? A) ABC State Bank, which provides investment advice in its branches throughout the state B) An investment adviser who has no place of business in the state and communicates with only 5 advisory clients in the state for the year C) An investment adviser who has a place of business in the state and whose only clients in the state are insurance companies, banks, and broker-dealers D) A broker-dealer who has no place of business in the state and whose only clients in the state are limited to insurance companies, banks, and broker-dealers
C) An investment adviser who has a place of business in the state and whose only clients in the state are insurance companies, banks, and broker-dealers
Which of the following is not correct regarding the capital asset pricing model (CAPM)? A) The market risk premium is the incentive required for the individual to invest in the securities market. B) CAPM only considers the systematic risk. C) CAPM uses standard deviation as a measure of market risk. D) The stock risk premium is the inducement necessary to entice the individual to invest in a particular stock.
C) CAPM uses standard deviation as a measure of market risk.
Under the Investment Advisers Act of 1940, an IA that uses a website would be required to I. maintain a copy of the screens used on its site in the firm's advertising file II. place copies of new screens into the firm's advertising file each time a change is made III. file copies of the web design with the SEC IV. password protect the site to limit access to existing clients only A) II and IV B) III and IV C) I and II D) I and III
C) I and II
Which of the following would have the effect of reducing a taxpayer's taxable income? I. Net capital loss II. Traditional IRA contribution III. Public purpose municipal bond interest IV. Earnings in a deferred variable annuity A) I and IV B) III and IV C) I and II D) II and III
C) I and II
In general, a broker-dealer will disclose any changes to its fee schedule A) to the Administrator and then to the clients B) within 30 days following the change C) by notifying clients of the change in advance D) when requested by the client
C) by notifying clients of the change in advance
Under the USA, all the following statements regarding the registration of agents are true EXCEPT A) an agent can only sell securities that have been registered in a state or that are exempt from registration B) if an agent resigns and affiliates with another broker-dealer, both firms and the agent must notify the Administrator C) if a broker-dealer's registration is revoked by a state, it has no effect on the agent's registration D) a nonresident agent can solicit business in another state only if the agent and the broker-dealer are registered in that state
C) if a broker-dealer's registration is revoked by a state, it has no effect on the agent's registration
Your firm's market analyst believes the current bullish market in equities will continue. Which of the following would be most suitable for a growth-oriented investor? A) GNMA fund B) Bond fund C) Preferred stock fund D) Large-cap stock fund
D) Large-cap stock fund
Small corporations that satisfy certain criteria can elect not to pay income tax at the corporate level but instead pass their earnings through to their shareholders. These corporations are known as A) C corporations B) R corporations C) Q corporations D) S corporations
D) S corporations
Although most investors are buying common stock issued by LMN corporation, Jack is selling it short. In this action, Jack appears to be A) a fundamentalist B) an institutional investor C) a writer D) a contrarian
D) a contrarian
All of the following are potential benefits of high frequency trading (HFT) except A) lower costs for institutional purchasers. B) increased liquidity, especially in very active stocks. C) arbitrage opportunities increase market efficiency. D) greater trading opportunities for the small investor.
D) greater trading opportunities for the small investor.
An individual is deciding between a flexible premium variable life contract and a scheduled premium variable life contract. If she is concerned about maintaining a minimum death benefit for estate liquidity needs, she should choose A) the flexible premium policy because the contract's face amount cannot be less than a predetermined percentage of cash value B) the scheduled premium policy because earnings do not affect the contract's face amount C) the flexible premium policy because earnings of the contract directly affect the face value of the policy and earnings can never be negative D) the scheduled premium policy because the contract is issued with a minimum guaranteed face amount
D) the scheduled premium policy because the contract is issued with a minimum guaranteed face amount
GEMCO Securities, Inc., a broker-dealer registered in the state, has over 10,000 clients ranging from small individual accounts to substantial institutions. GEMCO has determined that the most efficient way to maintain contact with its clients is through electronic communications. Under the USA, these emails must be retained by the broker-dealer for a minimum of A) 3 years B) 8 years C) 2 years D) 5 years
A) 3 years The USA specifies that all records, including electronic communications (emails), must be maintained for a minimum of 3 years. For investment advisers, the requirement is 5 years.
Which of the following would you most likely consider characteristics of a growth stock? A) High P/E and low dividend yield B) High P/E and high dividend yield C) Low P/E and low dividend yield D) Low P/E and high dividend yield
A) High P/E and low dividend yield Growth stocks generally have high P/E ratios and low (or no) dividends. Value stocks normally have low P/E ratios with higher dividend payouts.
Which of the following statements describes the federal funds rate? A) Rate charged on reserves traded among commercial banks for overnight use in amounts of $1 million or more B) Charge on loans to depositary institutions by the New York FRB C) Charge on loans to brokers on stock exchange collateral D) Base rate on corporate loans at large U.S. money center commercial banks
A) Rate charged on reserves traded among commercial banks for overnight use in amounts of $1 million or more
Which of the following is the risk that diminishes through portfolio diversification? A) Unsystematic risk B) Systematic risk C) Interest rate risk D) Purchasing power risk
A) Unsystematic risk
Which of the following statements regarding ADRs are TRUE? I. They are issued by large domestic commercial banks. II. They are issued by foreign banks. III. They facilitate U.S. trading in foreign securities. IV. They facilitate a foreign investor who wants to trade U.S. securities. A) I and III B) II and III C) II and IV D) I and IV
A) I and III
Ian is a technical analyst who believes the market, as represented by the S&P 500 Index, is overbought. Over the next several months, there is a 12% correction. Which of the following strategies would have been successful for Ian? A) Sell futures contracts on the S&P 500 Index B) Buy call options on the S&P 500 Index C) Sell put options on the S&P 500 Index D) Buy futures contracts on the S&P 500 Index
A) Sell futures contracts on the S&P 500 Index
According to the Uniform Prudent Investors Act , it is NOT a breach of fiduciary duty if investment advisers do not inquire into a client's A) Social Security or tax ID number B) financial situation C) specific financial needs D) investment objectives
A) Social Security or tax ID number
An IAR is doing some research on a company. When viewing the corporation's financial statements, prepaid expenses would most likely be found A) as a current asset on the balance sheet. B) as a current liability on the balance sheet. C) as an expense on the income statement. D) as a fixed asset on the balance sheet.
A) as a current asset on the balance sheet. Prepaid expenses, such as rent, insurance, and postage, are considered current assets and are shown as such, sometimes under the listing, "other assets". The amounts paid for those expenses will not appear on the income statement until the specific item is actually used. For example, if a company pays its property insurance premiums six months in advance, it isn't until the next premium is paid that the prepaid expense comes off the balance sheet and is reflected as an actual expense.
Which of the following statements accurately captures the significance of the Sharpe ratio? A)The higher the Sharpe ratio is, the better the risk-adjusted performance of the portfolio. B) It measures the dispersion of the fund's returns over a period of years. C) It measures the degree to which the fund's performance can be attributed to the index against which it is benchmarked. D) Its use is limited to portfolios rather than individual securities.
A)The higher the Sharpe ratio is, the better the risk-adjusted performance of the portfolio. The Sharpe ratio measures the fund's return over and above the risk-free rate. The higher the Sharpe ratio, the better the risk-adjusted performance of the portfolio and the greater the implied level of active management skill.
Asset-based sales charges will generally be lowest when holding which of the following mutual fund share classes? A) Class T shares B) Class A shares C) Class C shares D) Class B shares
B) Class A shares Class A shares have a front-end load, but a low- or no asset-based sales charge. Class B and C shares don't have a front-end load, but do have a higher asset-based sales charge. Class T shares always have a 12b-1 charge.
DEF Investment Advisers, organized as a partnership, is currently registered with State Y. Marjorie is one of the partners and is registered as an IAR. If DEF were to register with State Z, A) Because DEF is a state-registered investment adviser, Marjorie could only register in State Z if she was a resident of the state. B) Marjorie would automatically be registered as an IAR in State Z. C) Marjorie would be required to complete an application for IAR registration with State Z. D) Marjorie's registration as an IAR in State Z would become effective after passing the Series 65 or Series 66 exam.
B) Marjorie would automatically be registered as an IAR in State Z.
An exchange-traded fund whose strategy is to generate performance opposite that of the designated index is called A) a leveraged fund. B) an inverse fund. C) a reverse fund. D) a hedge fund.
B) an inverse fund.
An investment adviser should develop an investment policy based on the needs and objectives of the client. When the client is a business entity structured as a general partnership, the investment policy would have to consider A) the number of limited partners B) the objectives of all the partners on a collective basis C) the mean requirement of the wealthiest and the poorest partner D) the liability of the general partner
B) the objectives of all the partners on a collective basis
Discretion is exercised when a securities professional determines all of the following EXCEPT A) number of shares B) time or price C) to buy or sell a particular security D) dollar amount of trade
B) time or price Determining control over the time or price of an order does not constitute discretion. The selection of the number of shares or the dollar amount of a trade constitutes discretion. When a registered securities professional (BD, agent, IA, or IAR) determines what to buy or sell or the number of shares to be bought or sold, that person is exercising discretion.
Many investment advisers follow a program of asset allocation. Which of the following categories of assets is most likely classified as an alternative asset? A) Cash B) Callable bonds C) Real assets D) Preferred stocks
C) Real assets
Two sisters might wish to open an account as tenants in common (TIC) rather than JTWROS in order to A) provide for an undivided interest in the assets of the account. B) allow the spouse of each sister to have access to the account. C) ensure that their respective shares go to their heirs instead of the surviving sister. D) limit the right of each party to withdraw assets from the account.
C) ensure that their respective shares go to their heirs instead of the surviving sister.
An employee is offered a nonqualified stock option with an exercise price of $20 per share. If the option is exercised when the current market value of the stock is $30, the employee A) is taxed on $30 per share as if it were salary B) has a capital gain of $10 per share C) is taxed on $10 per share as if it were salary D) is taxed on $20 per share as if it were salary
C) is taxed on $10 per share as if it were salary In the case of NSOs, the difference between the exercise (or strike) price and the current market value is considered salary to the employee.
Your 55-year-old client owns a nonqualified variable annuity. He originally invested $50,000 4 years ago. The annuity has grown to a value of $60,000. If the client, who is in a 30% tax bracket, makes a random withdrawal of $15,000, what will he pay to the IRS? A) $0.00 B) $4,500.00 C) $3,000.00 D) $4,000.00
D) $4,000.00 Because this is a nonqualified annuity (with no tax deduction), the client pays taxes only on the growth portion or, in this case, $10,000. The tax on this amount is $3,000. However, because the client is not yet age 59½ when making the withdrawal, he also pays a 10% tax penalty, or $1,000. This makes a total of $4,000 tax and tax penalty paid on the random withdrawal.
An investment of $5,000 made 10 years ago is now worth $20,000. Using the Rule of 72, the approximate compounded annual rate of return is A) 40% B) 7.2% C) 25% D) 14.4%
D) 14.4% This investment has quadrupled in 10 years. Using the Rule of 72, we know how to compute the rate of return when an investment doubles. This one has doubled every 5 years. Dividing 72 by 5 years gives us an approximate rate of 14.4%.
Fundamental analysts give significant credence to financial ratios. Which of the following tends to give an indication of the profitability of the enterprise? A) Price-to-earnings ratio B) Current ratio C) Debt-to-equity ratio D) Sales-to-earnings ratio
D) Sales-to-earnings ratio
Under modern portfolio theory, MPT, which of the following types of risk cannot be eliminated through diversification? A) Credit risk B) Business risk C) Liquidity risk D) Systematic risk
D) Systematic risk
You have a 45-year-old client wishing to save for retirement. The client does not have a great deal of investment sophistication and inquires about the risks you have exposed him to by placing the majority of his portfolio in listed common stocks. You would respond that one risk he should not concern himself with is: A) inflation risk B) systematic risk C) business risk D) liquidity risk
D) liquidity risk A portfolio of listed common stocks will have little to no liquidity risk because listed shares are easily traded. Even though common stock tends to offer protection against inflation, there is no assurance that the portfolio will keep pace with the rising cost of living.
Using the net present value method, a potential investment should be undertaken if the present value of all cash inflows minus the present value of all cash outflows (which equals the net present value) is A) equal to zero B) greater than zero C) positively correlated D) less than zero
B) greater than zero NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a proposed investment is positive, it should be accepted. However, if NPV is negative, the investment should probably be rejected because cash flows will also be negative.
Many fixed-income investors are looking to avoid loss of principal. Which of the following would likely have the lowest degree of exposure to credit risk? A) Aa-rated corporate debenture B) Baa-rated municipal revenue bond C) A-rated general obligation municipal bond D) Ba-rated corporate mortgage bond
A) Aa-rated corporate debenture
According to the Investment Advisers Act of 1940, which of the following statements regarding registration of investment advisers is TRUE? I. State registration is a requirement for federal registration. II. An investment adviser must be registered with the SEC to be registered at the state level. A) II only B) Neither I nor II C) Both I and II D) I only
B) Neither I nor II
Nobody Walks Motor Company, a licensed automobile dealer, is running a promotion offering anyone who purchases a car over the weekend to receive a $1,000 corporate bond at no additional cost. Under the Uniform Securities Act, in order to make this offer, A) there are no specific requirements as the company is a licensed automobile dealer and, because of the free offer, no sale of securities is involved B) Nobody Walks Motor Company must be registered as a broker-dealer in the state C) Nobody Walks Motor Company may not pay a commission on the sale of a car to any salesperson who is not registered with the Administrator as an agent D) it must be made available to anyone who purchases a car during the specified period
B) Nobody Walks Motor Company must be registered as a broker-dealer in the state
Which of the following statements about equity securities is NOT true? A) Preferred stock is usually nonvoting. B) Preferred stock is an equity security while common stock is a hybrid. C) Common stock is less sensitive to interest rate risk than preferred stock. D) Preferred stock pays a fixed dividend.
B) Preferred stock is an equity security while common stock is a hybrid.
A corporation may benefit by attaching warrants to a new issue of debt securities from A) a decrease in the bond's rating B) a decrease in the company's interest costs C) a decrease in the company's amount of debt service coverage D) a decrease in the earnings per share
B) a decrease in the company's interest costs
In general, it could be said that an investor is exposed to the greatest potential risk of loss when maintaining A) a wrap fee account B) a margin account C) a cash account D) a discretionary account
B) a margin account
All of the following statements concerning IRA contributions are true EXCEPT A) between January 1 and April 15, contributions may be made for the current year, the past year, or both B) contributions for the past year may be made after April 15, provided an extension has been filed on a timely basis C) contributions can be paid into this year's IRA from January 1 of this year until April 15 of next year D) if you pay your tax on January 15, you can still deduct your IRA contribution, even if not made until April 15
B) contributions for the past year may be made after April 15, provided an extension has been filed on a timely basis
Your client is 75 years old and has $100,000 to invest. He enjoys a relatively high income and is not concerned with immediate liquidity, although he is risk averse. The most suitable asset allocation strategies listed below would be A) a 50% municipal bond fund, 40% money market fund, 10% large-cap common stock fund B) a 50% municipal bond fund, 40% government bond fund, 10% money market fund C) a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund D) a 50% municipal bond fund, 50% large-cap common stock fund
C) a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund
Risk-adjusted return is calculated by A) multiplying the return of an investment by its standard deviation B) dividing the security's price by its beta C) dividing the security's return in excess of the risk-free rate by its standard deviation D) dividing the price of the stock by the standard deviation
C) dividing the security's return in excess of the risk-free rate by its standard deviation
One of your clients has a tendency to follow the actions of a larger group of people when making financial decisions, whether those actions are rational or not. The client's behavior is an example of A) confirmation bias. B) overconfidence. C) herd mentality. D) anchoring.
C) herd mentality. This behavior is known as herd mentality. Confirmation bias is the tendency to pay attention to information that supports one's preconceived opinions, while disregarding accurate, unsupportive information. Overconfidence occurs when an investor considers his abilities to be much better than they actually are. Anchoring occurs when a person makes an irrational decision based on information that should have no influence on the decision.
Which of the following securities is NOT exempt from the registration provisions of the Securities Act of 1933? A) An equity security issued in only one state solely to residents of that state B) A U.S. government bond C) A high-quality corporate promissory note maturing in 180 days D) A new stock being offered in three states
D) A new stock being offered in three states
Which of the following statements regarding investment adviser compliance rules is TRUE? A) The CCO must have at least 3 years' experience in securities industry compliance. B) If the chief compliance officer (CCO) conducts appropriate annual compliance reviews, interim review is generally not necessary. C) Compliance procedures should review the accuracy of disclosures made to clients and investors, although it is not necessary that they review disclosures made to regulators. D) Compliance procedures should be designed to prevent violations, as well as detect existing violations.
D) Compliance procedures should be designed to prevent violations, as well as detect existing violations.
While reviewing nationwide industrial production figures, an analyst notices that inventories have been rising. From that information, one would gather that the economy is most likely in which phase of the business cycle? A) Expansion B) Peak C) Recovery D) Contraction
D) Contraction Downturns in the business cycle (a contraction) tend to be characterized by rising inventories due to a lack of consumer demand. During expansion or recovery, demand is high and goods are less likely to remain in inventory.
Riley, as an investor, prefers to be on the lower end of the efficient frontier. We would expect to see which of the following risk and return combinations? A) Low risk and high return B) High risk and low return C) Low risk and medium return D) Low risk and low return
D) Low risk and low return The lower end of the efficient frontier includes low-risk and low-return portfolios. The higher end includes high-risk and high-return portfolios. It is all about the risk-reward ratio - the more risk the investor is willing to assume, the higher the potential rewards.
George owns XYZ stock. Based on recent analyst projections and George's own research, he believes XYZ's price will remain flat over the next few months. Accordingly, which strategy would George most likely employ? A) Sell a put option B) Buy a call option C) Buy a warrant D) Sell a call option
D) Sell a call option When the price is expected to stay flat, selling an option is a way to profit with little risk of the option being exercised. Why sell the call instead of the put? Because George owns the XYZ stock, this is a covered call and entails no downside risk. Selling the put would expose George to potentially significant loss if the price of XYZ should suffer a large decline.
A client is considering the purchase of American depositary receipts (ADRs). She is looking to further diversify her portfolio. Which of the following is NOT a feature of this type of investment vehicle? A) ADRs are denominated in and pay dividends in U.S. dollars. B) Information regarding the foreign company is easily attainable. C) ADRs are traded on exchanges and the OTC markets. D) They are not subject to exchange rate, or currency, risk.
D) They are not subject to exchange rate, or currency, risk. Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk. In order to trade in the U.S. markets, information about the foreign company must be available to investors. ADRs representing the best known companies typically trade on the NYSE or the Nasdaq Stock Market, while lesser companies trade OTC.
Your client maintains a small cash account at the firm. One typical broker-dealer fee that would not be charged to this client is A) the fee for transferring certificates B) an account maintenance charge C) a charge if the client asks to have funds wired D) margin interest on the debit balance
D) margin interest on the debit balance
When contrasting preemptive rights and warrants, it would be correct to state that, at issuance, A) rights have intrinsic and time value while warrants only have intrinsic value. B) rights have intrinsic value while warrants have intrinsic and time value. C) rights have time value while warrants have intrinsic and time value. D) rights have intrinsic and time value while warrants only have time value.
D) rights have intrinsic and time value while warrants only have time value.
Which of the following mutual fund share classes generally has a 1% CDSC that is eliminated once the shares have been held more than 1 year? A) Class 1% B) Class C C) Class A D) Class B
B) Class C It is the Class C shares that have no front-end load, but they do have a 1% CDSC for a period of 1 year.
A bond purchased at $900 with a 5% coupon and a 5-year maturity has a current yield of A) 5.56% B) 7.80% C) 5.00% D) 7.40%
A) 5.56% Current yield is determined by dividing the annual interest payment by the current market price of the bond ($50 ÷ $900 = 5.56%). Years to maturity is not a factor in calculating current yield.
If general interest rates increase, the interest income of a bond unit investment trust will probably: A) remain the same B) decrease C) increase D) change as soon as the portfolio manager can take advantage of the higher rates now available in the marketplace
A) remain the same Because the portfolio of a UIT is fixed, the income generated by that portfolio will not change. Remember, a UIT does not have a portfolio manager.
After receiving some money from an inheritance, an individual purchases a rare gold coin for $10,000. Five years later, he gives the coin to his daughter-in-law after receiving an appraisal showing the coin is worth $15,000. The daughter-in-law's cost basis of the coin is A) $0.00. B) $10,000. C) $15,000. D) $5,000.
B) $10,000. When a gift is made of an asset, whether it be a security or a collectible, the donor's cost basis passes to the donee. In this case, the original cost is $10,000 and that becomes the cost basis for the daughter-in-law and is used to determine a gain or loss when that coin is sold. Do not confuse this with the annual gift tax exclusion. Because the value of the gift did not exceed $15,000, the donor has no gift tax obligation, but that is completely different from the daughter's cost basis.
Which of the following indicates a bond selling at a discount? A) 5% coupon yielding 5% B) 7% coupon yielding 7.5% C) 7% coupon yielding 6.5% D) 10% coupon yielding 9%
B) 7% coupon yielding 7.5%
Under the Uniform Securities Act, a person who exclusively provides advice on commodities is A) an options representative B) not a registered investment adviser C) a registered investment adviser representative D) a registered insurance agent
B) not a registered investment adviser A person who only provides advice on commodities is not a registered investment adviser. To be an investment adviser under the Uniform Securities Act, advice must be given on securities. The act specifically excludes commodities from the definition of security.
Included in the Investment Advisers Act of 1940 are a number of different recordkeeping requirements. Wealth Preservation Specialists is a covered adviser that is organized as a partnership. If the firm were to dissolve, partnership agreements must be kept for A) the lifetime of the firm B) 5 years after the dissolution C) 3 years after the dissolution D) 5 years from the date of organization
C) 3 years after the dissolution Both the Investment Company Act of 1940 (applicable here because this is a covered adviser) and the NASAA Model Rule on Recordkeeping require that investment advisers maintain certain records, such as partnership agreements and corporate articles of incorporation, for a period of no less than 3 years after dissolution.
When reviewing a corporation's financial statements, shareholders' equity is computed by A) multiplying the current market price per share times the number of outstanding shares. B) subtracting current liabilities from current assets. C) adding together retained earnings, preferred and common stock, and long-term debts. D) subtracting total liabilities from total assets.
D) subtracting total liabilities from total assets.
One of the portions of the USA PATRIOT Act of 2001that affects the opening of an account for a new customer is A) the Transportation Security Administration (TSA) B) the requirement to obtain suitability information C) the "know-your-customer rule" D) the customer identification program
D) the customer identification program
A customer who is changing jobs has how many days to roll over a lump-sum distribution from a qualified pension plan into an IRA? A) 60 days B) 15 days C) 30 days D) 90 days
A) 60 days
Which of the following statements about dividends on common stock is NOT true? A) Corporations are contractually obligated to pay dividends to their shareholders each year B) Only those who are owners of the stock on the record date will receive dividends C) Dividends represent a pro rata distribution of corporate profits to shareholders D) Dividends may be paid in cash, property, or stock
A) Corporations are contractually obligated to pay dividends to their shareholders each year
Which of the following are examples of systematic risk? I. Business risk II. Market risk III. Interest rate risk IV. Credit (default) risk A) I, II, III, and IV B) II and III C) I and III D) II, III, and IV
B) II and III
Under the USA, a guaranteed security is protected by someone other than the issuer against loss of all of these EXCEPT A) principal on equity issues B) interest on debt securities C) dividends on equity securities D) principal repayment at maturity on debt securities
A) principal on equity issues Guarantees generally apply to income from the security (dividends or interest) and to payment of the principal amount at maturity. Third-party guarantees do not provide against market loss. Please note that capital gains are never included in this type of guarantee.
All of the following pay dividends EXCEPT A) warrants B) preferred stock C) common stock D) convertible preferred stock
A) warrants
It would not be considered an unethical business practice under NASAA's policies for an investment adviser to charge fees I. as well as commissions II. based on an hourly rate III. based on a percentage of the change in value of funds from quarter to quarter IV. based on a percentage of the aggregate value of funds under management A) I and IV B) I, II, and IV C) III and IV D) II and III
B) I, II, and IV
Which of the following usually does NOT pay interest semiannually? A) Treasury notes B) GNMA C) Public utility bonds D) Treasury bonds
B) GNMA GNMA pass-through certificates pay principal and the interest monthly. All other choices usually pay interest semiannually.
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) Segment rotation C) Tactical portfolio management D) Strategic portfolio management
B) 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.
Under the rules of the Investment Advisers Act of 1940, which of the following need NOT be included in an investment advisory contract? A) A description of the services to be provided B) The past performance record of the investment adviser C) The advisory fee D) Amount of prepaid fees to be returned to a client if the contract is terminated
B) The past performance record of the investment adviser
If the Administrator were to examine the actions of a particular agent to determine if the agent engaged in churning a client's account, focus would be placed upon A) the length of time the account had been opened B) the client's objectives, financial resources, and the character of the account C) the number of complaints received relating to that agent D) the amount of profits generated in the client's account
B) the client's objectives, financial resources, and the character of the account Churning is the practice of generating commissions through excessive trading in a client's account. In order to determine what is excessive, the regulators will look at the client's investment objectives, financial resources, and the character of the account.
The type of analysis that attempts to value securities by examining general economic trends and the growth potential and productivity of individual companies is A) holding period analysis B) credit analysis C) fundamental analysis D) technical analysis
C) fundamental analysis There are two main approaches to valuing securities. Fundamental analysis takes the approach described in this question. The other approach—technical analysis—relies on charts of past performance to forecast future price movements.
A company that has issued cumulative preferred stock A) pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common B) pays the preferred dividend before paying the coupons due on its outstanding bonds C) pays past and current preferred dividends before paying dividends on common stock D) forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends
C) pays past and current preferred dividends before paying dividends on common stock
A frequently-used metric by analysts is the yield, or credit spread. Common methods of computing this would be comparing I. bonds of similar quality and similar maturities. II. bonds of similar quality and different maturities. III. bonds of different quality and different maturities. IV. bonds of different quality and similar maturities. A) I and III B) II and III C) I and IV D) II and IV
D) II and IV The term spread, always signifies a difference. Therefore, the correct choices have to reflect some kind of difference. One way is when the quality (rating) of the bonds is the same, but the length to maturity is different. A very common example of this is the U.S. 2-year Treasury note plotted against the 10-year Treasury note. The other method is to take bonds of different quality (ratings) having the same maturities. An example might be comparing two bonds with a 20-year maturity: one has a AAA rating and the other a BBB rating.
Which of the following industries is most exposed to regulatory risk? A) Consumer retailers B) Entertainment companies C) Publishing companies D) Public utilities
D) Public utilities
According to the Uniform Securities Act, the investment adviser brochure must include the business backgrounds of A) institutional clients B) all employees of the adviser C) an affiliated broker-dealer D) each member of the investment committee or group that determines general investment advice to be given to clients
D) each member of the investment committee or group that determines general investment advice to be given to clients The business background of these key individuals must be included in Part 2B of Form ADV and in the disclosure brochure. The business background of other employees, affiliated broker-dealers, and institutional clients need not be included in the brochure.
An employer whose 401(k) plan complies with ERISA Section 404 is placing investment risk with the A) Internal Revenue Service B) employer C) Securities and Exchange Commission D) plan participant
D) plan participant In a 401(k) plan, a plan sponsor can shift investment risk to the employee by complying with ERISA Section 404(c) rules. In this case, the employee is making the investment decisions rather than the investment managers employed by the plan.
Social networking sites typically contain both static and interactive content. The difference between these two is that static content A) is always provided by the broker-dealer, while interactive content is the domain of the firm's agents B) need not be approved before use, while interactive content needs the approval of a designated supervisor C) is only visible to a limited number of website visitors, while all can access interactive content D) remains posted until it is changed by the poster, while interactive content contains real-time communication
D) remains posted until it is changed by the poster, while interactive content contains real-time communication
An IA hires a third-party solicitor to recruit new clients. Which of the following records is the IA required to keep? A) A statement, signed by the client, that both the IA's and solicitor's brochures were received B) A receipt for any fee charged by the solicitor, signed by the client C) A copy of the written agreement between the IA and the solicitor, signed by the client D) Copies of all investment recommendations made by the solicitor
A) A statement, signed by the client, that both the IA's and solicitor's brochures were received
Under the Uniform Securities Act, requirements for registration as an investment adviser in a state include which of the following? I. The Administrator may require an announcement of the application for registration in one or more newspapers in the state. II. Minimum financial requirements for federal covered advisers with a place of business in the state who have custody of customer funds and/or securities, or have discretionary authority over customer accounts. III. For those needing a surety bond, it must provide that any customer who can prove a violation is entitled to collect against the bond. A) I and III B) II and III C) I, II, and III D) I and II
A) I and III
A discussion of algorithmic trading is probably referring to A) a trading program invented by Al Gore. B) trading done following the rhythms of the market. C) high frequency trading. D) a highly sophisticated method of wash trades.
C) high frequency trading. HFT uses algorithms to maximize speed. In this style of trading, computers take advantage of minute discrepancies in price.
Which of the following is not included in the calculation of a mutual fund's NAV per share? A) Accrued sales charges B) Closing values of portfolio assets C) Accrued management fees D) Accrued custodian bank fees
A) Accrued sales charges Sales charges have nothing to do with a mutual fund's net asset value. The NAV is computed by subtracting all liabilities (it is the investor who pays the sales charge, not the fund) from the fund's assets. The principal asset is the portfolio and that is valued as of the close of the markets, generally 4PM Eastern time.
Under the Uniform Transfers to Minors Act, Ralph wants to give some stock to his brother's son, Jose. Jose's father, Bob, is the legal guardian, but he has failed the Series 7 exam 11 times. Which of the following is CORRECT? A) Either Ralph or Bob can be the custodian. B) Uncle Ralph cannot be the custodian, because he is not the legal guardian. C) Bob cannot be the custodian because he is not qualified. D) Ralph can be the custodian only if the securities are on the legal list of the state.
A) Either Ralph or Bob can be the custodian.
Which of the following are characteristics of commercial paper? I. It represents a loan by the holder to the issuer. II. It is a certificate of ownership in the corporation. III. It is commonly issued to raise working capital for a corporation. IV. It is junior in preference to convertible preferred stock. A) I and III B) II and IV C) I and IV D) II and III
A) I and III Commercial paper instruments are debt securities; they represent loans to the issuing corporation by the holder. They are commonly issued to raise working capital and, as debt obligation, are senior in preference to preferred stock in claims against an issuer.
The Uniform Securities Act authorizes the state Administrator to require I. either oral or written qualification examinations of investment adviser representatives and officers of investment adviser partnerships or corporations II. officers of investment advisers to pass a qualification examination III. an applicant for initial registration to publish an announcement of the application in one or more specified newspapers published in the state IV. investment adviser representatives to pass a qualification examination A) I, II, III, and IV B) III and IV C) I only D) I and II
A) I, II, III, and IV
Which of the following investments is required by law to have at least 75% of its assets represented by real estate assets such as real property or loans secured by real property, cash, and U.S. government securities? A) Real estate investment trust B) Real estate sector fund C) Mutual fund with the name, MNO Real Estate Investments Fund D) Real estate money market fund
A) Real estate investment trust
Under the Uniform Securities Act, which of the following is NOT an exempt transaction? A) The sale of U.S. government securities to an individual with a net worth in excess of $2 million by a registered government securities dealer B) A sale of stock through a rights offering to existing shareholders of the issuing corporation if no commission is paid C) The sale of a non-Nasdaq over-the-counter stock to a closed-end investment company D) A sale of securities by the executor of an estate
A) The sale of U.S. government securities to an individual with a net worth in excess of $2 million by a registered government securities dealer In the case of a U.S. government security, the security is exempt, but the transaction is not. All the other choices are exempt transactions because they are either to an institutional investor, existing owners for no consideration, or by certain fiduciaries, such as an executor.
Publicly-traded corporations are generally required to have an annual independent audit of their financial records. What is the highest opinion offered under GAAP? A) Unqualified opinion B) Disclaimer of opinion C) Adverse opinion D) Qualified opinion
A) Unqualified opinion An unqualified or "clean" opinion is the best type of report a business can get. The term qualifiedmeans that the auditor has some reservations about the information contained in the financial statements. An adverse opinion means the auditor is not willing to vouch for the accuracy of the information. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
Which of the following items is NOT necessary to establish before helping a client open an investment account? A) Zero balance on all credit cards B) Established short- and long-term investment goals C) Emergency fund D) Adequate life insurance
A) Zero balance on all credit cards Although credit card debt may carry a high interest rate, no investment plan should be started without an emergency fund, adequate life insurance, and a set of goals. In fact, it is possible that the client is carrying the balance because of a very low promotional rate.
Under NASAA Model Rule on Custody Requirements for Investment Advisers, which of the following are violations of the requirements for advisers who have custody of client securities or funds? I. An adviser deposits client funds into its own bank account, making a careful record of the amount of funds belonging to each client. II. An adviser allows a CPA to make an unscheduled audit of all client securities and funds in the adviser's custody. III. Once a year, an adviser sends each client a report on the securities and funds in the adviser's custody. A) I and II B) I and III C) II and III D) I, II, and III
B) I and III
Which of the following would be causes for concern about cybersecurity? I. A broker-dealer keeps all the firm's financial records in a ledger book II. A broker-dealer stores some of the firm's financial records electronically III. A broker-dealer's agents operate as independent contractors and maintain devices that access personally identifiable information about clients IV. A broker-dealer's bookkeeper prefers to do the books from home on a personal computer A) II and IV B) II, III, and IV C) I and III D) I, II, III, and IV
B) II, III, and IV
Mary Huggins is the ex-wife of Charlie Huggins. They were married for 12 years and then finalized a divorce. Charlie is now 70 and has begun taking his Social Security benefits. Mary remarried last year. It would be correct to state that A) Mary is entitled to full spousal benefits because they were married for at least 10 years. B) Mary is not entitled to any of Charlie's Social Security benefit. C) Mary is entitled to Charlie's Social Security benefits or those of her new husband, whichever is the greater. D) Mary is entitled to Charlie's Social Security benefits only when she reaches full retirement age.
B) Mary is not entitled to any of Charlie's Social Security benefit. When a couple has been married for at least 10 years, the ex-spouse is entitled to full spousal Social Security benefits unless remarried. By remarrying, Mary no longer has any claim on Charlie's Social Security benefits.
Which of the following actions by an agent would NOT constitute fraud as defined in the Uniform Securities Act? A) Purchasing a security on an exchange and simultaneously selling it on another exchange to create the impression of increased trading volume. B) Purchasing a security for the account of a client and then buying 100 shares of it for her own account C) Executing a trade for a customer at a price that is unrelated to the current market D) Executing a trade for a customer without the customer's knowledge
B) 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.
One of your clients currently holds a long position in DEF common stock. Which of the following types of orders is designed to offer the client protection against loss? A) Sell limit B) Sell stop C) Buy limit D) Buy stop
B) Sell stop The risk to a long stock position is to the downside. The stock can, at least theoretically, fall to zero. To protect against a decline in the stock's price beyond the point the investor is willing to lose, it is wise to enter a sell stop order at that price. If the stock should fall to that price, the order is triggered, a market order is entered, and the stock is sold. This is why stop orders are usually referred to as stop loss orders; they keep you from losing any more money.
An agent tells a customer that by investing in U.S. Treasury bonds, he is guaranteed to make money. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following statements is TRUE? A) This is ethical if the Treasury bonds mature in less than 1 year. B) This is unethical because it constitutes a guarantee against market risk. C) This is ethical because U.S. Treasury bonds carry no risk. D) This is unethical if the customer loses money, but not if he at least breaks even.
B) This is unethical because it constitutes a guarantee against market risk. U.S. Treasury bonds are guaranteed to pay interest and principal, but they do carry market risk. It is unethical to indicate to a client that he is guaranteed against loss.
When, as per the Sharpe ratio, a stock exhibits superior performance, it implies A) a high beta. B) a positive alpha. C) a negative alpha. D) a low beta.
B) a positive alpha. The higher the Sharpe ratio, the higher the risk-adjusted return. In other words, the stock is returning significantly more than the risk-free rate. That will result in a positive alpha. Beta is not part of the Sharpe ratio.
You have a 70-year-old client with a $500,000 whole life insurance policy purchased 25 years ago. The policy currently has a cash value of approximately $150,000. With all of the children on their own and successful, the client no longer feels the need for the insurance, and asks you if there is any option that might result in netting more than surrendering the policy for its cash value. You might recommend A) canceling the policy, but leaving the cash value with the insurance company with interest B) engaging in a life settlement C) using IRS Section 1035 to transfer the cash value into a deferred annuity D) keeping the policy because the cash value will continue to grow
B) engaging in a life settlement A life settlement, involves selling an existing life insurance policy for an amount in excess of the cash value, but less than the death benefit. Exact numbers are hard to compute without knowing all the details of the type of policy and health of the insured, but it would certainly be well above the $150,000 cash value. If the question indicates a terminally ill individual, the answer would be a viatical. An IRS Section 1035 transfer to an annuity will not put any additional cash in the client's hands.
In addition to transaction costs (e.g., commissions or markups), most broker-dealers have a schedule of miscellaneous fees. The purpose of these fees is to A) build in a hidden markup B) help to reimburse the broker-dealer for expenses incurred in performing the transaction or a service for the client C) keep commissions low while making up the difference with fees D) increase the broker-dealer's net income
B) help to reimburse the broker-dealer for expenses incurred in performing the transaction or a service for the client Executing a transaction for clients frequently incurs expenses that commissions don't cover, such as clearing fees and execution facility fees. There are services performed for clients, such as postage and handling, for which expenses are incurred. Although charging these fees does have a positive effect on the firm's bottom line, they are designed for reimbursement purposes, not as an additional source of income.
Plenitude Premier Solutions (PPS) is registered in State C. If PPS wished to maintain custody of client funds or securities, A) notice is given to the State C Administrator as part of the annual updating amendment. B) prompt notice would have to be given to the State C Administrator on Form ADV. C) permission would have to be obtained from the State C Administrator . D) prompt notice would have to be given to the State C Administrator in a private letter.
B) prompt notice would have to be given to the State C
During your annual review with a client, you go over all the year's transactions. The beginning of the year balance in the account was $3,000. The client purchased 100 shares of ABC on February 1 at $30 per share and sold it on June 1 at $33 per share. During that period, ABC paid 1 quarterly dividend of $.30. The client used the proceeds of the ABC sale to purchase 66 shares of DEF on June 15 at $50 per share and sold it on December 15 at $60 per share. DEF pays quarterly dividends of $0.25 on the 1st of each month on a cycle beginning with February. Based on this information, you would inform the client that the account's total return is A) 102.70% B) 100% C) 34.10% D) 46%
C) 34.10% Total return in an account is computed by taking all income plus capital gains and dividing that by the original investment. In this example, the client received a $0.30 dividend on 100 shares ($30) and two $0.25 dividends (August 1 and November 1) on 66 shares ($33). Add that $63 of income to the gain of $300 on the first transaction, and $660 on the second, to come up with a total of $1,023 divided by $3,000, which equals a total return of 34.1%.
Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A) DEF 6s of 2041 B) GHI 7s of 2042 C) ABC 5s of 2040 D) JKL 4s of 2020
C) ABC 5s of 2040 The bond with the longest duration is generally going to have the greatest exposure to interest rate risk. Because there is very little difference between maturity dates of 2040 through 2042, the bond with the lowest coupon will have the longest duration. The 4s of 2020 have a relatively short duration, even though their coupon is low.
Under the Uniform Securities Act, the definition of a broker-dealer includes A) an authorized representative of the issuer who receives a commission B) an agent handling principal transactions with major institutional clients C) a person in the business of making trades in his own account or for the accounts of others D) a trust company when executing transactions in accounts in which it does not act in a fiduciary capacity
C) a person in the business of making trades in his own account or for the accounts of others A broker-dealer is defined as any person in the business of making trades in its own account or for the accounts of others.
Publicly traded corporations are subject to an annual audit of their financial records. Those audits must comply with GAAP (generally accepted accounting principles). When preparing to recommend a stock to a customer, you would most likely want to see that the auditor gave A) a comprehensive opinion. B) a certified opinion. C) an unqualified opinion. D) a qualified opinion.
C) an unqualified opinion. An unqualified or clean opinion is the best type of report a business can get. The term qualifiedmeans that the auditor has some reservations about the information contained in the financial statements.
One of your clients has reached his company's mandatory retirement age of 67. He has been a participant in his employer's 401(k) plan and his account is valued at $400,000. The account is funded with mutual funds and company stock. The cost basis of the company stock is $25,000 and it is currently worth $125,000. If he were to rollover the entire account into an IRA, the tax treatment would be A) no current tax on the portion applicable to the mutual funds; ordinary income on the cost basis of the company stock; and long-term capital gains on the unrealized appreciation of the company stock when it is sold B) Current tax at ordinary income rates on the unrealized appreciation of the company stock, ordinary income rates on the balance when withdrawals are taken C) no current tax, but any withdrawals would be taxed as ordinary income D) no current tax, but any withdrawals representing the gain on the company stock would be taxed as long-term capital gains
C) no current tax, but any withdrawals would be taxed as ordinary income As with any rollover from a qualified plan to an IRA, there is no current tax, but withdrawals are taxed at ordinary income tax rates. This client would have saved had he taken advantage of the NUA (net unrealized appreciation) approach. In that case, taking the company stock and putting it into a taxable account would have resulted in ordinary income tax on the $25,000 cost basis, and long-term capital gain rates on the appreciation whenever the stock was sold.
Mary is a bowling buddy of Susan, a covered investment adviser. Mary refers Amanda, a wealthy widow, to Susan, and after a very pleasant meeting, Amanda places $15 million under management with Susan. If Susan were to give Mary a cash payment for the referral, A) both Susan and Mary would have to disclose the cash payment to Amanda B) she would have to obtain Mary's permission first C) she would be engaging in an prohibited practice D) only Susan would have to make disclosure to Amanda
C) she would be engaging in an prohibited practice Although there are circumstances under which cash payments may be made to solicitors, none of the required conditions found in the Investment Advisers Act of 1940 appear to be met here. A formal written agreement must be in effect, not just a one-time reward.
In which of the following cases is a 3rd-party trading authorization acceptable? A) The trades will be made through a broker-dealer under common control with the investment adviser. B) An investment adviser makes a hospital visit to a client who was critically injured. While there, the client gives oral instructions to permit her daughter to trade in the account. C) The spouse of a client sends an email to the investment adviser saying that the client has given authorization to the spouse to trade in the account. D) A client's secretary presents a card signed by the client stating that the secretary can trade in the account while the client is on a business trip.
D) A client's secretary presents a card signed by the client stating that the secretary can trade in the account while the client is on a business trip.
Which of the following statements about the redemption of mutual fund shares are TRUE? I. A mutual fund may, but is not required to, redeem its shares if requested by a shareholder. II. A mutual fund will redeem fractional shares as well as full shares. III. Redemptions of mutual fund shares are handled under forward pricing. A) I and III B) I, II, and III C) I and II D) II and III
D) II and III
Under the Uniform Securities Act, which of the following is TRUE regarding registration of investment adviser representatives? A) Registration in the state where a representative has his business office enables the representative to do business in any state. B) Representatives are automatically registered when they become employed by a registered investment adviser. C) A representative's registration remains in effect even during a period when the representative is not employed by a registered investment adviser. D) To register, a representative must submit a completed application for registration, a filing fee, and a signed consent to service of process.
D) To register, a representative must submit a completed application for registration, a filing fee, and a signed consent to service of process.
One of your clients purchases a European-style put option on a stock. The premium is $3 and the exercise price is $35. If the price of the underlying asset is $40 on the exercise date, the client has A) made $200. B) made $500. C) lost $200. D) lost $300.
D) lost $300. This option is out of the money and is therefore worthless. Remember, European-style options are exercisable only at expiration and a $35 put is worth zero unless the market price of the underlying asset is less than $35. As is the case with any long option position, the maximum loss is the premium paid.
