Practice Exam 5 - 68%
An investor is considering a 10-year stripped U.S. Treasury and a 10-year U.S. Treasury note, both with a yield to maturity of 4.8%. Compared to the note, the strip has A) more interest rate risk and less liquidity risk. B) less reinvestment risk and more interest rate risk. C) more reinvestment risk and less interest rate risk. D) more liquidity risk and less interest rate risk.
B) less reinvestment risk and more interest rate risk. The strip is a zero-coupon security so it has no cash flows to reinvest and therefore no reinvestment risk. However, it has more interest rate risk (longer duration) than the Treasury note. Remember, the duration of a zero-coupon bond is its maturity date while any debt security paying periodic interest (Treasury notes pay semiannually) will always have a duration shorter than its length to maturity.
NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers would consider the adviser to be engaging in an unethical business practice if he loaned money to a client other than one A) who was in the money-lending business B) who was an immediate family member of the adviser C) borrowing under the same terms and conditions as the client could find at a commercial bank D) who was an affiliate of the adviser
D) who was an affiliate of the adviser Loaning money to a client is prohibited unless the investment adviser is a financial institution engaged in the business of loaning funds or the client is an affiliate of the IA. Please note that because this question deals with an IA lending money, the fact that the IA's client is in the money-lending business is of no consequence. That would only be an issue if the question dealt with the IA borrowing money.
What is the balance sheet equation? A) Assets = liabilities + shareholders' equity B) Assets = net worth C) Assets = liabilities − shareholders' equity D) Assets = shareholders' equity − liabilities
A) Assets = liabilities + shareholders' equity
Strategic Capital Asset Managers (SCAM) is preparing its Form ADV Part 2B relating to certain individuals. On this form, SCAM must disclose all of the following information EXCEPT A) compensation earned on dealings with clients B) the fact that any listed person has no formal education after high school C) the name, title, and telephone number of the individual supervising any listed person D) disciplinary information about material events within the past 10 years
A) compensation earned on dealings with clients It is compensation beyond that paid by the client (such as a sales award or other prize) that must be disclosed.
XYZ Corporation has a beta of 1.0, and ABC has a beta of 1.4. XYZ has returned 12% and ABC 14.8%. Based on this information, ABC had alpha of A) −2% B) 2.8% C) 2% D) 14.8%
A) −2% Alpha is the extent to which a security's performance exceeds (or falls short of) that of the market compared to what would be expected based on its beta. A key to this question is that XYZ's beta of 1.0 equals the beta of the market. A stock with a beta of 1.4 would be expected to perform 40% better in an up market than the market itself. Because XYZ with a beta of 1.0 gained 12%, ABC should return 140% of that or 16.8% (12% × 1.4). With an actual return of 14.8%, ABC underperformed the expected by 2% and that is why it has a negative alpha.
How often must an investment company file reports with the SEC as required by the Investment Company Act of 1940? A) Quarterly B) Semiannually C) Annually D) Monthly
C) Annually Registered investment companies are similar to other publicly registered entities in that an annual audited report must be filed with the SEC. Unrelated to this question is the requirement that semiannual reports must be sent to shareholders.
Olga holds XYZ stock. The stock recently increased in value by 50%. She would like to preserve as much of this gain as possible and retain the potential for additional price increases. Which strategy best meets Olga's goal? A) Buy a call option B) Write a call option C) Buy a put option D) Short the stock
C) Buy a put option Buying a put option would allow Olga to hold the stock for additional gain but reserve the right to sell at or near the current value if the stock price plummets. Shorting the stock would lock in Olga's gain but not allow her to take advantage of additional price increases; additional price increases would be offset by the cost of replacing the shorted stock. Writing a call option would provide some offset to a drop in price but would not allow for potential gain in value. Buying a call option would not provide any downside protection.
An investor is considering the purchase of some bonds to diversify his portfolio. If he should decide to purchase Treasury STRIPS instead of Treasury Bonds, his major risk would be A) reinvestment risk B) credit risk C) interest rate risk D) purchasing power risk
C) interest rate risk Treasury STRIPS are zero-coupon bonds and, as such, have a longer duration than those paying semiannual interest. The longer the duration, the greater the interest rate risk. Because both are guaranteed by the U.S. government, there is no credit risk. Both have the same purchasing power risk, and there is no reinvestment risk with a zero-coupon bond.
To reflect a more accurate picture of economic results, gross domestic product is adjusted A) for inflation B) to include bank reserves C) downward by the balance of payments D) to match foreign GDP
A) for inflation By adjusting GDP for inflation, one can measure economic activity with less distortion. A constant dollar adjustment is made to remove the effects of inflation.
All of the following are characteristics of a rights offering EXCEPT A) the subscription price is below the current market value B) the subscription period is up to 2 years C) it is issued to current stockholders D) the rights are marketable
A) the subscription period is up to 2 years Rights offerings are usually very short-lived (30 to 45 days).
The price of which of the following will fluctuate most with a change in interest rates? A) Money market instruments B) Long-term bonds C) Short-term bonds D) Common stock
B) Long-term bonds Long-term debt prices fluctuate more than short-term debt prices as interest rates rise and fall.
Which of the following would be common features of mutual funds and hedge funds? A) Portfolio transparency B) Registration with the SEC C) Investors have pooled their money together D) Redemption of ownership interests within 7 days
C) Investors have pooled their money together Both of these are in the category of pooled investment vehicles. Only the mutual fund is registered with the SEC and that means full disclosure, including portfolio holdings. No such disclosure is required of hedge funds. The mutual fund offers the 7-day redemption - no such policy exists with hedge funds. In fact, most have a lock-up period where redemption cannot take place.
Mr. and Mrs. Williams are a retired couple receiving most of their income from a diversified portfolio of high-quality bonds and preferred stock. One of the reasons that life insurance might be a useful addition to their overall planning is that A) the proceeds of a life insurance policy are free of income tax B) dividends received on a life insurance policy are tax free C) upon the death of the insured, the insurance provides liquidity to preserve income-producing assets from having to be liquidated to cover death expenses D) the premiums can be paid directly from their brokerage account
A) the proceeds of a life insurance policy are free of income tax Even for those whose estate is not large enough to incur estate tax, life insurance proceeds provide liquidity to cover the expenses incurred at death without having to sell assets out of the portfolio. It is true that the proceeds are free of income tax, but that is not the major reason to own life insurance.
Which of the following statements is CORRECT? A) A state-registered investment adviser collecting fees of $500 for 6 months or more in advance, is considered to be receiving a substantial prepayment. B) Federal covered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. C) Both state-registered and federal covered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. D) State-registered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients.
D) State-registered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. It is only state-registered investment advisers who must provide audited balance sheets to clients for whom they maintain custody. In order to be considered a substantial prepayment of fees, state laws require that they be more than $500for6ormoremonthsinadvance.
Under the Securities Exchange Act of 1934, an exchange is A) an organization that provides facilities for bringing together buyers and sellers of securities B) any transaction involving a security C) a disposition of a security for value D) an organization of securities professionals designed to promote fair practices in doing business with the public
A) an organization that provides facilities for bringing together buyers and sellers of securities Under the Securities Exchange Act of 1934, exchange does not refer to a transaction but to an organization or facilities for bringing together buyers and sellers of securities. It is important to distinguish this function from other activities carried out by persons in the secondary market, such as transfer agents, securities information processors, or broker- dealers.
An advisory client of yours dies in 2019, and you transfer the $1.4 million of securities in the individual's name to the estate account. You will A) tell the executor that he will be receiving a Form 1099 for tax purposes, representing the transfer of account over to the estate account B) continue to manage the account unless the advisory contract called for termination upon death or informed otherwise by the executor C) inform the executor that you need to keep sufficient liquid funds in the account because estate taxes will be due in 6 months D) notify the executor of the estate that he is able to do any trades to rebalance the account, and that taxes will be of no consideration
B) continue to manage the account unless the advisory contract called for termination upon death or informed otherwise by the executor Unless the advisory contract has a termination upon death provision or the executor wishes to assume management of the account, the investor adviser may continue to manage the account of the estate. Trades made in the account must take into consideration tax implications as with any other account. Estate taxes are due 9 months after death, and unless there are other assets not listed here, no tax is due because this estate is less than $11.4 million (the amount exempt from taxation for 2019).
An investor invests a total of $30,000 and creates a portfolio of 3 different stocks placing 1/3 of his investment into each security. From his holding in Company A, he receives a dividend of $600; from Company B, a dividend of $500; and from Company C, no dividend. One year later, the market price of the Company A stock has increased by 20%, Company B's stock increased by 10%; and Company C's stock has remained the same. What is the investor's total return on this portfolio? A) 3.67% B) 10% C) 13.67% D) 4.56%
C) 13.67% Total return includes both appreciation (growth) and income (dividends). Let's go step by step. Company A's $10,000 original investment increases by 20%, or $2,000 plus dividends of $600. Company B's $10,000 original investment increases by 10%, or $1,000 plus dividends of $500. Company C's $10,000 original investment is unchanged and there is no dividend. Therefore, we have appreciation of $3,000 plus dividend income of $1,100. That is a total return of $4,100 on an investment of $30,000, or 13.67%.
Under the Investment Advisers Act of 1940, an adviser who has custody of a client's funds must I. notify a client when the client's funds are moved to another location II. segregate client's funds and keep them identified by client III. not move the client's funds without prior notification and specific written authority from the client A) I and III B) II and III C) I, II, and III D) I and II
D) I and II Advisers who have custody must segregate a client's securities and keep them in a safe place, deposit client funds in bank accounts that contain only client funds (may be combined in one account, but complete records must be kept), report to clients at least every 3 months with a statement, and annually arrange for an unannounced audit by an independent accountant that will report the audit results to the SEC. All clients must be notified in writing of the location of their securities or funds and of any changes to the location. It is not necessary to notify the client before the move to obtain the client's specific written authority to move the fund. The original custodial agreement includes that authority at the discretion of the adviser.
If the U.S. dollar has fallen relative to foreign currencies, which of the following statements are TRUE? I. U.S. exports are likely to rise. II. U.S. exports are likely to fall. III. Foreign currencies buy fewer U.S. dollars. IV. Foreign currencies buy more U.S. dollars. A) II and III B) I and III C) II and IV D) I and IV
D) I and IV When the U.S. dollar loses value compared to a foreign currency, the same amount of the foreign currency now buys more dollars. As a result, U.S. goods are cheaper in terms of that foreign currency, which means that the foreign country and its residents tend to buy more U.S. products and U.S. exports rise.
According to the Investment Advisers Act of 1940, under which of the following circumstances is an exculpatory provision acceptable in a contract between an investment adviser and its clients? A) The client is purchasing government securities only. B) The client is a broker-dealer. C) The client has received written disclosure of this provision and has signed a written acceptance prior to any transaction. D) This provision is prohibited under all circumstances.
D) This provision is prohibited under all circumstances. An exculpatory (culpa meaning fault) provision is never acceptable in an investment advisory contract. Its purpose is to exclude officers and directors from liability for disregard of their duties. This might also be phrased as the client waiving his rights, and is also not permitted.
Phocine and Ursus, LLC, a covered investment adviser, has a client with a large short position in PQR common stock. Their chief analyst believes that PQR is an attractive target for an acquisition. Based on this information, it might be wise for the firm to suggest this client A) take a long position in PQR. B) purchase put options on PQR. C) sell call options on PQR. D) purchase call options on PQR.
D) purchase call options on PQR. If the analyst is correct, a takeover usually occurs at significant premium to the current market. That would be bad news for the client with a short position because covering the short would be at that higher price. The best protection for a short stock position is buying a call because that fixes the future purchasing price. In the event the analyst is wrong, or the takeover bid fails, the client has maintained the short position and is only out the premium paid for the "insurance".
Under the NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents, in which of the following situations has an agent acted properly in placing an order for a client's account? I. The client agrees with an agent's recommendation of a particular security and the amount that should be purchased. The client then tells the agent to proceed with the purchase when the timing seems best. Because the market as a whole is dropping, the agent waits two weeks until the economy looks brighter before making the purchase. The agent does not have written discretionary authority. II. The agent obtains written discretionary authority to manage the client's account. The agent then proceeds to restructure the entire account without further consultation with the client. III. The agent obtains an existing client's oral agreement that shares of XYZ fund are a good buy right now. The client gives the agent oral authority to determine how much of his account should be allocated to XYZ shares. Without written discretionary authority, the agent places an order. IV. A client supplies the agent with written trading authorization. The client proceeds to request the agent to purchase $7,000 of any ADR that would be appropriate for the account. The agent goes ahead and purchases $7,000 of a Taiwanese computer chip company's ADRs.
II and IV Written authority is necessary to restructure an account without client consultation. This is one of the benefits of a discretionary account; the flexibility it gives to the agent. Once the client has supplied the written authorization, the agent has the ability to select any or all of the asset, the action, or the amount. When the client says, "Buy $7,000 worth of an appropriate stock," the amount and the action have already been determined; all the agent has to do is select the asset. Authority to use discretion may be given orally if the discretion relates only to the price or the time at which an order regarding a specified amount of a particular security will be executed, but time and price discretion is only good for that day. Oral authority is not sufficient when the agent is using discretion to determine the amount of a security to be purchased.
Which of the following statements regarding ADRs are TRUE? I. The securities are vehicles used to facilitate U.S. trading of foreign securities. II. Dividends are received in the foreign currency. III. Holders have foreign currency risk. IV. The receipts are issued by a foreign branch of a domestic bank. A) I, II and III B) II and IV C) I, III and IV D) I and III
D) I and III ADRs are vehicles that facilitate U.S. trading of foreign securities. They are issued in English in the United States by domestic banks. Dividends are declared in the foreign currency but are payable to holders in U.S. dollars, which means that ADR holders are subject to foreign currency risk.
Which of the following investments is the most liquid? A) Long-term municipal bond fund B) Oil drilling limited partnership interest C) Municipal revenue bond issued by a township D) Common stock in a small oil drilling corporation that is quoted on the OTC Link
A) Long-term municipal bond fund The long-term municipal bond fund is the most liquid because it is a mutual fund (a redeemable security), and the investor is assured of a buyer that will exchange money for the redeemed fund shares within 7 days of the redemption request. Municipal bonds of a township, especially those that are from extremely small issuers, may have thin trading markets where sellers have difficulty finding willing buyers. There is not an active secondary market for reselling interests in limited partnerships. Stock of a small corporation that trades on the OTC Link (formerly known as the "Pink Sheets") may also have a thin trading market.
A client is interested in investing in a mutual fund that will provide current income without the risk of large swings in the portfolio's value. The client is in a high-income tax bracket and has a moderate risk tolerance. Which of the following funds is most appropriate for this client? A) Money market fund B) Intermediate-term municipal bond fund C) High-yield bond fund D) Long-term municipal bond fund
B) Intermediate-term municipal bond fund When the question states a high-income tax bracket, the answer will almost always be municipal bonds. An intermediate-term municipal bond fund will experience less price fluctuations when interest rates change than would a long-term municipal bond fund due to its shorter duration. Even if the high-yield bond fund might produce a greater yield after taxes, it would not be suitable for an investor with a moderate risk tolerance. Money market funds will provide safety from large swings, but even if it is a municipal money market fund where the income would be tax-exempt, the current income would be too low to be attractive to this 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 scheduled premium policy because earnings do not affect the contract's face amount B) the scheduled premium policy because the contract is issued with a minimum guaranteed 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 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 the contract is issued with a minimum guaranteed face amount A scheduled premium variable life contract is issued with a guaranteed minimum death benefit. If the individual is concerned about having the minimum guarantee, you should recommend the scheduled contract.
Which of the following statements is not true of investment advisers under the Uniform Securities Act? A) Only written advice concerning investments is covered by the act. B) A natural person may register as an investment adviser. C) Investment advice includes advice regarding the value of securities, as well as recommendations to buy or sell. D) Compensation is a key factor in determining whether a person is required to register as investment adviser.
A) Only written advice concerning investments is covered by the act. One of the three prongs defining an investment adviser under both state and federal law is the giving of investment advice. That advice can be in written or oral form. Any person, as defined in the USA, may register as an investment adviser. Even though we tend to think of the investment adviser as the company you will be working for, a significant percentange of state-registered investment advisory firms are sole proprietorships (one-person shops). Investment advice includes advice as to the value of securities, as well as recommendations to buy or sell. Compensation is another one of the three prongs in determining whether a person is defined as an investment adviser.
Fundamental analysts give significant credence to financial ratios. Which of the following tends to give an indication of the profitability of the enterprise? A) Sales-to-earnings ratio B) Debt-to-equity ratio C) Price-to-earnings ratio D) Current ratio
A) Sales-to-earnings ratio Of the four choices given, the sales-to-earnings ratio is the only one not discussed in the License Exam Manual. Why not? Because we know there will always be a question or two on the real exam that was not covered in our material. It is important that students use good test-taking skills to correctly answer those questions. It would seem logical that a question about profitability would relate to earnings. That would reduce the choices to two from four. The price-to-earnings (P/E) ratio reveals the relationship between the market price of the company's stock and its earnings, but it doesn't tell us anything about the degree of profitability of the enterprise. If we know that the P/E ratio compares the price to the earnings, then it makes sense that the sales-to-earnings ratio compares the net sales of the business with its earnings. Companies with a higher percentage of earnings from each dollar of sales are more profitable. For example, Company A and Company B both reported $100 million in net sales for the year. The net income (earnings) of Company A was $20 million and Company B was $8 million. We can see that each dollar of sales generated $0.20 of profit for Company A and only $0.08 of profit for Company B. Or, we could say that it takes $5 of Company A sales to generate $1 of profit ($100 ÷ 20) while it takes $12.50 of Company B sales ($100 ÷ 8) to earn that same $1 of profit.
Which of the following statements is (are) TRUE regarding the jurisdiction of the SEC under the Securities Exchange Act of 1934? I. The SEC has jurisdiction over exchanges and SROs. II. The SEC has jurisdiction over broker-dealers, investment advisers, and associated persons that are required to be registered under federal law. III. The SEC has jurisdiction over banks and savings and loans regarding their securities activities. A) I, II, and III B) I only C) I and II D) II only
C) I and II The SEC was created by the Securities Exchange Act of 1934 and has the responsibility of administering all federal securities laws. The SEC has jurisdiction over exchanges, SROs, and all persons required to be registered under federal law. The SEC does not enforce state securities statutes, nor does it have jurisdiction over banks or savings and loans regarding their securities activities. Banking authorities, such as the Federal Reserve Board, the Federal Deposit Insurance Corporation, and others, regulate banks and savings and loans.
An investment adviser's model portfolio has returned 20% for 10 consecutive years. Which of the following statements regarding this adviser's advertisements is CORRECT? A) No statement may be made about the performance. B) It may state that an investor will not lose money. C) It may state the rate of return and that past performance does not guarantee future performance. D) It may state that the portfolio will likely continue its past performance 20%.
C) It may state the rate of return and that past performance does not guarantee future performance. Guarantees of performance are prohibited. Past performance may be shown, provided proper disclaimers regarding future performance are made.
While managing a client's portfolio, an investment adviser representative attempts to take advantage of perceived market inefficiencies. The IAR is not concerned with the client's long-term goals; rather, the interest lies in CONTINUOUSLY CHANGING THE INVESTMENT MIX TO TAKE ADVANTAGE of overall investor sentiment. Based on this information, what type of portfolio management style is the investment adviser representative using to manage the client's money? A) Strategic asset allocation B) Portfolio ratio analysis C) Tactical asset allocation D) Buy-and-hold
C) Tactical asset allocation Tactical asset allocation continuously adjusts the asset allocation in an attempt to take advantage of changing market conditions. This is unlike strategic asset allocation which, due to its focus on the long-term goals of the client, tends to be a passive style. Buy and hold is another example of a passive (not active) style.
Your retired 72-year-old client still lives in the home he purchased 35 years ago for $40,000. It is currently valued at $700,000 and there is no mortgage. The client has almost $500,000 in his self-directed IRA rollover account. When determining suitable investments for this client, you would base your recommendations on the fact that... I. the client is an accredited investor having a net worth in excess of $1 million II. a home equity loan could more than double the amount of funds available to invest III. as a retiree, any losses suffered cannot be made up from current income IV. the client's time horizon could be as long as 20 years A) II and III B) I and II C) I and IV D) III and IV
D) III and IV One of the risks facing senior investors who are retired is that, unlike those still employed, loss of principal can be devastating. With today's medical advances, a 72-year-old can be looking at 15 to 20 additional years of life. Therefore, recommendations must be made to maximize the probability of the client's assets lasting that long. Effective with the Dodd-Frank Act of 2010, this investor is no longer accredited because the value of the primary residence must be excluded from the net worth computation. And, even if he were, eligibility does not equal suitability.
Which of the following statements regarding advisers who maintain custody over client accounts is NOT true? A) The adviser must maintain complete and accurate records of all accounts and ensure that the funds and securities are segregated by client. B) The adviser must arrange for the audit of client accounts by an independent public accountant on a systematic basis at least once a year. C) Advisers must send clients quarterly statements that itemize the funds and securities in the adviser's possession. D) If customer funds and securities are deposited in a bank, the bank account must only contain customer funds and identify the adviser who is acting as an agent for the customers.
D) If customer funds and securities are deposited in a bank, the bank account must only contain customer funds and identify the adviser who is acting as an agent for the customers. The adviser must arrange for the audit of client accounts by an independent public accountant without prior notice to the adviser, and not on a systematic basis (hence the surprise audit). The adviser must send quarterly statements to clients itemizing the funds, securities, and transactions that have occurred. The adviser must maintain accurate records of all accounts and ensure that the funds and securities are segregated by client.
The National Securities Markets Improvement Act of 1996 (NSMIA), which amended the Uniform Securities Act, preempts state registration of federal covered securities. Under the NSMIA, all of the following are federal covered securities EXCEPT... A) warrants trading on the OTC Bulletin Board offered by a company whose common stock trades on the Nasdaq Stock Market B) securities offered pursuant to the provisions of Rule 506 of Regulation D under the Securities Act of 1933 C) securities issued by unit investment trusts registered under the Investment Company Act of 1940 D) municipal securities of an issuer within the state of issuance
D) municipal securities of an issuer within the state of issuance The NSMIA is designed to eliminate dual registration or regulation of securities. Because these municipal securities are issued in the state in which they are offered, there is no federal authority to regulate them. They are not federal covered securities and can be regulated by the state in which they are offered (although they are exempt from registration under the USA). Securities issued by any investment company registered under the Investment Company Act of 1940 are federal covered. Securities offered pursuant to the provisions of Rule 506 of Regulation D under the Securities Act of 1933 are federal covered. Rule 506 is the exemption from registration for the private offering of securities to a limited number of investors, often called private placements. Finally, if the common stock of an issuer is traded on the Nasdaq Stock Market, then any security equal to it (rights and warrants) or senior to it (preferred stock and debt securities) is also federal covered.
Richard purchased a 30-year bond for 103½ with a stated coupon rate of 8.5%. What is the approximate yield to maturity for this investment if Richard receives semiannual coupon payments and expects to hold the bond to maturity? A) 8.19% B) 8.50% C) 9.36% D) 8.68%
A) 8.19% No calculation is necessary here. Why not? Because anytime a bond is purchased at a premium over par (103½% is a premium), the YTM must be less than the nominal (coupon) rate. There is only one choice lower than 8.5%. It isn't about your computational skills; it is about your understanding the relationship between prices and yields.
Which of the following are governed by the prudent investor rule? I. Trustee II. Executor III. Custodian IV. Agent who has been granted discretionary authority A) I, II, III, and IV B) I, II, and III C) III and IV D) I and II
A) I, II, III, and IV The prudent investor rule applies to fiduciary accounts, or accounts in which someone is acting on someone else's behalf. In these accounts, the fiduciary must act prudently. An agent who has been granted discretionary authority is acting in a fiduciary capacity.
The Uniform Securities Act provides for both civil and criminal prosecution. In which of these cases might an agent face civil liability? I. A sale was made of an unregistered nonexempt security. II. During a sales presentation, the agent misstated a material fact that resulted in the prospect deciding to make the purchase. III. The agent was included in the judgment along with the broker-dealer for a civil infraction. A) I, II, and III B) II and III C) I and III D) I and II
A) I, II, and III These are all cases for civil, not criminal liability. Unless it can be proven that the agent acted willfully and with knowledge, it is hard to have a criminal case.
The business cycle has expanded, peaked, and contracted. The current economic activity could best be described as a trough. Which of the following would most likely be found in the trough? I. A high rate of inflation II. A low rate of inflation III. A high rate of unemployment IV. A low rate of unemployment A) II and III B) I and IV C) I and III D) II and IV
A) II and III A trough is the latter stage of a recession. Unemployment is higher than normal, and with a lesser demand for goods and services, the inflation rate is low.
In discussing a direct participation program with your customer, rank the following items in order of importance from most to least. I. Tax write-offs II. Liquidity and marketability III. Potential for economic gain A) III, I, II B) III, II, I C) I, II, III D) II, III, I
A) III, I, II A program's economic viability is the first priority in the assessment of DPPs. The IRS considers programs designed solely to generate tax benefits abusive. Because there is a very limited secondary market for DPPs, liquidity and marketability should be a low priority.
Purchasers of options can have a number of different objectives. One of your clients who is a soft drink fan already has a long position in KO. What would be a possible reason for this client to go long a KO call option? A) To fix the cost of acquiring additional stock to the portfolio B) Owning a long call on stock you already own offers a hedge against a market decline C) To complete the other side of a spread D) This would generate additional income
A) To fix the cost of acquiring additional stock to the portfolio Those who are bullish on a stock, but don't have sufficient funds at this time to purchase the stock, can "lock-in" their future cost by going long a call. Income is generated only through selling options. Because a long call is on the same side of the market as long stock, there is no hedge. A spread involves a long and short option.
One of the portions of the USA PATRIOT Act of 2001that affects the opening of an account for a new customer is A) the customer identification program B) the "know-your-customer rule" C) the requirement to obtain suitability information D) the Transportation Security Administration (TSA)
A) the customer identification program The customer identification program (CIP) is mandated by the PATRIOT Act and requires that broker-dealers (and other financial institutions) obtain certain specified information about new customers. The "know-your-customer" rule was written many decades before the PATRIOT Act. The PATRIOT Act, through the CIP, is concerned with validating identity, not suitability
Which of the following has the power to close a stock exchange for up to 90 days? A) The Administrator in the state where that stock exchange is located B) The SEC C) The president of that stock exchange D) The president of the United States
B) The SEC
What rate of interest would a bank in England charge another British bank for a short-term loan? A) Prime rate B) LIBOR C) Discount rate D) Fed funds rate
B) LIBOR The British Banker's Association LIBOR is the most widely used benchmark or reference rate for short-term interest rates. LIBOR stands for the London Interbank Offered Rate and is the rate of interest at which banks could borrow funds from other banks, in marketable size, in the London interbank market.
Investment adviser representatives are often called upon to help clients select an appropriate mutual fund. When making a recommendation, which of the following would not be a consideration? A) The portfolio manager's tenure B) The fund's net asset value per share C) The fund investment objective D) The fund's expense ratio
B) The fund's net asset value per share The price per share (NAV per share) of a fund is not a relevant factor when considering recommending a mutual fund. The fund's investment objective must align with that of the client and it is important to know if the fund's portfolio manager has just come aboard or has been managing the fund for a number of years. All other things equal, the IAR will generally look for the funds with lower expense ratios.
An investor will likely exercise a put option when the price of the stock is A) at the strike price. B) below the strike price. C) above the strike price. D) above the strike price plus the premium.
B) below the strike price. First of all, we know this investor is long the put. How? Because only those who own options (are long) can decide to exercise. The owner of a put (long put) profits when the stock falls. The put would be exercised when the price of the stock is below the strike price. For example, if this is a 50 put, the investor has the right to exercise and sell the stock at $50 per share. That is a benefit when the market price of the stock is below 50 and the lower the better. Remember the phrase "put down" because a put option becomes valuable to the holder when the market price goes below the exercise (strike) price.
An investment strategy where a higher price is paid for a stock based on expected returns is A) futures investing B) growth investing C) return on investment. D) dollar cost averaging
B) growth investing A growth investor purchases shares that have exhibited faster-than-average gains in earnings over the past few years that is likely to continue to show high levels of margin. Over the long run, growth stocks tend to outperform the market but are riskier than most other stocks and generally pay little or no dividend.
One of your clients is 10 years away from retirement and is trying to decide what would be a suitable investment for this year's IRA contribution. You would probably NOT recommend A) conservative growth mutual funds B) leveraged ETFs C) target date mutual funds D) broad market ETFs
B) leveraged ETFs Because most leveraged funds reset daily, they are best utilized by investors with a very short time horizon.
USATrade Securities, a FINRA member broker-dealer, is registered in 10 Midwest states. Regarding financial requirements, USATrade must meet those of A) the state with the most stringent financial requirements B) the SEC C) FINRA D) the state in which the principal office of the member is located
B) the SEC It may be assumed that a broker-dealer member of FINRA is also registered with the SEC. As such, when it comes to financial requirements, bonding, recordkeeping, and so forth, the SEC's requirements always trump those of the states.
An investor purchased stock for $50 per share at the beginning of the year. In December, the investor liquidated his stock for $55 per share, while also receiving dividends of $2 per share during the year. Assuming an inflation rate of 3%, what is the investor's real rate of return? A) 10% B) 14% C) 11% D) 4%
C) 11% Given the fact the client liquidated his shares at a price of $55, we can conclude that he attained a 10% ($5 profit ÷ $50 initial investment) return based on capital appreciation of the stock. He also received dividends of $2 per share giving him an additional return of 4% ($2 ÷ $50). By adding these 2 percentages together, we can conclude that his total return is 14%, less an inflation rate of 3%, which would give a real rate of return of 11%.
Mr. Berg has been charting DMF stock prices. The stock usually fluctuates between 71 and 86. The stock is currently at 84, and the increasing upside volume makes him believe that a breakout is possible. Which of the following would he most likely enter? A) A sell limit at 88 B) A buy limit at 85 C) A buy stop at 88 D) A sell stop at 70
C) A buy stop at 88 A breakout occurs when a security trades outside an established range. In this case, because Mr. Berg has no position, he would want to purchase only if the stock breaks through the resistance level already established.
Construction of an investment policy statement (IPS) requires identifying the client's objectives and constraints. Which of the following would not be in the list of constraints? A) Liquidity B) Taxes C) Risk tolerance D) Time horizon
C) Risk tolerance When constructing an investment policy statement (IPS) risk tolerance is an objective, not a constraint. Time horizon, taxes, and liquidity are all constraints. An easy way to remember the five constraints is TTLLU (time horizon, taxes, liquidity, laws, unique).
Assuming all of the following mature at about the same time, which of the following bonds should experience the greatest price decline if interest rates rise by 1%? A) Treasury bond issued at par carrying a 7% coupon B) Treasury bond issued at par carrying a 5% coupon C) Treasury bond issued at par and carrying a 4% coupon D) Treasury bond issued at par carrying a 6% coupon
C) Treasury bond issued at par and carrying a 4% coupon This is an example of duration. With approximately equal maturity dates, the bond with the lowest coupon will always have the longest duration. The longer the duration, the greater the susceptibility to price changes due to fluctuations in interest rates.
The USA considers certain transactions to be exempt from the requirements to register and the filing of advertising material. Included in that group are all of the following EXCEPT A) any transaction executed by a bona fide pledgee without any purpose of evading the act B) any transaction by an executor, administrator, sheriff, marshal, or guardian C) any offer or sale to a pension or profit-sharing trust as long as the plan has assets of no less than $750,000 D) an isolated nonissuer transaction effected through a broker-dealer
C) any offer or sale to a pension or profit-sharing trust as long as the plan has assets of no less than $750,000 In general, the USA does not consider a transaction with an employee benefit plan to be exempt unless the plan has assets of at least $1 million
What is the total return on a bond that cost an investor $950, was sold for $1,000, and paid $50 in interest payments? A) 5% B) The return cannot be determined from the information supplied C) 10% D) 10.50%
D) 10.50% Total return is the sum of all payments ($50) plus the capital gains ($50) divided by the cost ($950). In this case, $50 + $50÷$950=0.10526or10.5%.
Which of the following investments is least appropriate for a client primarily concerned with liquidity? A) Bank savings account B) Preferred stock C) Municipal bond mutual fund D) Direct participation program
D) Direct participation program There is little secondary market liquidity for direct participation programs (DPPs); of those securities listed, they are the least appropriate for a client seeking liquidity.
Which form of the efficient market hypothesis (EMH) suggests that fundamental analysis and insider information may produce above-market returns? A) Semi-weak B) Semi-strong C) Strong D) Weak
D) Weak The weak form holds that current stock prices reflect all historical market data and that historical price trends are therefore of no value in predicting future prices. However, this form holds that credible fundamental analysis and insider information may produce above-market returns. Those who truly believe in the EMH are of the opinion that none of these will do any better than the market; random selection is as good as anything else.
A variable annuity has A) a guaranteed rate of return B) fixed payments once it has been annuitized C) a high degree of liquidity D) different investment options known as subaccounts
D) different investment options known as subaccounts Variable annuities pay variable payments once annuitized, do not guarantee a rate of return, and are not considered liquid investments; they do offer multiple investment options through the subaccounts.
A bond is paying $100 per year in annual interest and is selling at par. If the discount rate is 10%, the net present value is A) the same as the coupon B) positive C) negative D) zero
D) zero A bond paying $100 in interest per year has a coupon rate of 10%. Whenever the coupon rate is equal to the discount rate, the NPV is zero. That is, the present value of a bond paying 10% interest when the current market rate is demanding a 10% interest rate is the bond's par value (as is the case with this bond).
