Practice Exam Part 2
Plymouth Standard's common stock has an average return of 12%; its returns fall within a range of -2% to +26% approximately 68% of the time. Which one of the following numbers is closest to the standard deviation of returns of Plymouth Standard's stock? A) 14% B) 8% C) 28% D) 19%
A A standard deviation of 14% means an investor can expect a return on an investment to vary ±14% from the average return approximately 68% of the time. A return of +26% minus the 12% average return equals 14%. Likewise, the difference between the -2% return and the average of 12% is also 14%
As defined in the Uniform Securities Act (USA), the term person would include which of the following? A limited partnership A political subdivision An unincorporated association The executor of an estate for a deceased individual A) I, II, III, and IV B) I and IV C) II and III D) I, II, and III
A All of these would be included in the USA's definition of person. Not included are a minor, a deceased person, or someone judged as mentally incompetent.
Which of the following classes of mutual fund shares would be appropriate for an investor who doesn't mind paying some sales charges on a purchase but wants to minimize operating expenses over a long-term holding period? A) Class A shares B) Class B shares C) Class C shares D) Noload shares
A Class A shares have a front-end load, but their operating expense ratio is usually lower than that of any other class. Because the question states that the investor is willing to pay a sales charge, noload shares is an inappropriate choice.
Section 529 plans differ from Coverdell ESAs in that Section 529 plans offer which of the following? Tax-free distributions when the funds are used for qualifying educational expenses Higher contribution limits No earnings limitations Contributions that may be made by someone other than a parent or legal guardian A) II and III B) I and IV C) II and IV D) I and II
A Contributions to an ESA are limited to $2,000 per beneficiary per year, while the 529 limit is set by the plan sponsor and is sometimes as high as $500,000. Unlike the ESA where there is a ceiling on the earnings for a contributor, there is no limit for someone setting up a 529. Both Section 529 plans and Coverdell ESAs enjoy tax-free distributions, and plans may be established by almost anyone.
An investment adviser representative (IAR) is meeting with a potential advisory client. Which of the following are among the items of information the IAR needs to obtain about the prospect in order to develop the proper plan? Anticipated number of years until retirement Location of current bank and brokerage accounts Current savings and investments College alma mater A) I and III B) III and IV C) I and II D) II and IV
A Proper investment planning involves saving for retirement, and the steps taken to reach that goal are influenced by the time remaining. Future plans are developed using current assets as the starting point. An IAR doesn't care where the assets are, just what they are.
Listed options are also known as standardized options. Which of the following choices is not one of the standardized terms of a listed option? A) The premium B) The underlying asset C) The expiration date D) The exercise price
A Supply and demand in the marketplace set the premium of a listed option. All of the other choices are standardized.
On the basis of IRS guidelines, which of the following is most likely eligible to contribute to a Keogh plan? A) A public school teacher who gets paid during her summer vacation to give motivational speeches to training directors at major brokerage firms B) A doctor who has formed a professional corporation with three other physicians C) A clerk who won $10,000 playing the state lottery while employed full time by a major department store D) The CEO of a listed corporation who receives a large bonus after an outstanding year
A The speaking income earned by the public school teacher is considered self-employment income and is therefore eligible for a Keogh plan. Remember, corporate employees are not eligible unless they have a separate source of self-employment income.
Which of the following activities might result in a positive yield curve in the bond market? A) A parallel downward shift in interest rates B) Investors buying short-term bonds and selling long-term bonds C) Investors buying long-term bonds and selling short-term bonds D) A parallel upward shift in interest rates
B A positive yield curve is the normal condition and occurs when long-term rates are higher than short-term rates. Buying short-term bonds tends to drive their prices up and their yields down, while selling long-term bonds has the opposite effect.
The head of marketing for a regional broker-dealer spots an article in the local newspaper that is an excellent presentation of an investment strategy the firm recommends. If the firm posts a link to the article on its website, it would be known as A) endorsement. B) adoption. C) entanglement. D) plagiarizing.
B Adoption is the use of content or a link to content that is solely the creation of someone else; your firm is just using it. Entanglement is when the firm had a role in the creation of the material.
A corporation is capitalized with common stock, senior preferred stock, mortgage bonds, and subordinated debentures. Your client, who holds $10,000 of the debentures, is concerned about the future viability of the enterprise. You can inform the client that the debentures have a claim A) ahead of the common stock but after the preferred stock and the bonds. B) ahead of the common stock and the preferred stock but after the bonds. C) ahead of the common stock, the preferred stock, and the bonds. D) behind the bonds, the preferred stock, and the common stock.
B Any debt security, even a subordinated debenture, has a claim ahead of all equity. However, they are subordinated to all other debt.
An index annuity has no cap on gains but guarantees a minimum return of 3.35% with an 80% participation rate. If the index increases by 15%, what is the rate of return to the investor? A) 15.00% B) 12.00% C) 2.68% D) 18.35%
B If the annuity contract calls for an 80% participation rate with no cap, the investor will receive 80% of the performance of the index. In this case, 80% of a 15% return is 12%.
An investment adviser representative (IAR) is attempting to develop an investment plan for a client. The IAR decides to use two different mutual funds in an effort to provide appropriate diversification. Of the four pairs given below, which one would offer the most diversification? A) Portfolio 1 and 2, with a correlation coefficient of +0.90 B) Portfolio 7 and 8, with a correlation coefficient of -0.20 C) Portfolio 5 and 6, with a correlation coefficient of -0.05 D) Portfolio 3 and 4, with a correlation coefficient of +0.20
B If two portfolios have a high correlation coefficient, it means that their performance will be very similar. The purpose of diversification is to have some negative correlation so that losses in one portfolio are offset by gains in the other.
As specified in the Dodd-Frank Act of 2010, which of the following would not qualify for the private fund exemption? A) An investment adviser who limits her advisory services to venture capital funds B) An investment adviser who limits her advisory services to insurance companies C) A non-U.S.-based investment adviser with no place of business in the United States and less than $25 million in assets under management belonging to U.S. clients D) An investment adviser who limits her advisory services to private funds with less than $150 million in assets under management in the United States
B The Dodd-Frank Act tells us that we're referring to federal law. Although investment advisers dealing solely with insurance companies are exempt from registration under the Investment Advisers Act of 1940, that is not the private fund exemption found in the Dodd-Frank Act of 2010 the question is asking about.
The technical market theory that measures the breadth of the market is A) the short-interest theory. B) the advance/decline theory. C) the odd-lot theory. D) the support/resistance theory.
B The advance/decline theory compares the number of stocks advancing versus those declining, generally on the New York Stock Exchange. Because it uses such a large sample, it is used as an example of the breadth of the market.
An investor reviewing a corporation's balance sheet will be able to determine the company's A) dividend payout ratio. B) owners' equity. C) productivity. D) profitability.
B The balance sheet reflects the difference between the company's assets and liabilities. This is the owners' or shareholders' equity. Profits and dividends are shown on the income statement.
One of your clients is a widow with three grown children. She wants the assets in her account to go to her children upon her death—50% to her daughter and 25% to each of her sons. She does not want the estate to have to deal with probate on these assets. How should her account be set up? A) Joint tenants with right of survivorship B) Transfer on death C) Tenants in the entirety D) Tenants in common
B Transfer on death, or TOD as it is usually called, would be the appropriate choice here. It avoids probate but not estate taxes. It allows the account owner to specify different percentages for each beneficiary if desired.
A portfolio manager who follows the value style of investing would most likely focus her attention on A) market capitalization. B) financial statements. C) 52-week highs and lows. D) moving averages.
B Value managers look for value as found on the company's financial statements.
A balance sheet shows that a corporation builds its capital structure with all of the following except A) retained earnings. B) capital stock. C) cash. D) long-term debt.
C A corporation's capital structure consists of the capital raised through the issuance of long-term debt securities (bonds), equity securities (stocks), and money reinvested in the business (retained earnings).
The term alternative investment would least likely apply to A) leveraged ETFs. B) exchange-traded notes (ETNs). C) closed-end funds (CEFs). D) inverse ETFs.
C Although there are closed-end funds that invest in alternative investments, those are in the minority. The other choices are all clearly labeled as alternatives.
An investor contacts you to say he is somewhat puzzled over the fact that he saw a newspaper listing for the KAPLOW Fund where the net asset value per share was $10.27 and the asking price was $14.14 per share. He wants to know why the difference between the two is so great. You would respond, saying A) that this is probably an unregistered hedge fund not subject to SEC rules. B) the KAPLOW Fund is being investigated by the SEC for being sold with a sales charge in excess of the 8.5% maximum limit. C) the KAPLOW Fund is a closed-end company with a selling price based not on NAV, as is the case with an open-end fund. D) there is probably a misprint in the paper, and more than likely, the asking price is $11.22, making the sales charge 8.5%.
C Closed-end investment company shares trade like any other stock on the exchanges or Nasdaq. That is, the price is determined by supply and demand, not by NAV.
An investor concerned about liquidity would be least likely to invest in A) ADRs. B) common stock listed on the New York Stock Exchange. C) stock subject to Rule 144. D) cumulative preferred stock.
C In most cases, stock subject to Rule 144 is stock that cannot be immediately resold. That is why it is known as restricted stock.
Individuals who pass the Series 65 exam will be able to tell prospects that A) by passing the exam, they are now registered as investment adviser representatives with the SEC. B) this indicates the regulatory bodies consider them qualified to manage money. C) they passed a 130-question examination in order to qualify as investment adviser representatives. D) their investments will be offered protection by the antifraud statutes of the Uniform Securities Act.
C Passing the exam allows individuals to make no claims other than that the exam was a requirement for licensure. Additionally,they are not registered with the SEC, only with the state(s).
Which of the following forms of joint ownership is most associated with ownership of real estate? A) Totten trust B) Joint tenants with right of survivorship C) Tenancy by the entirety D) Tenants in common
C Tenancy by the entirety is most commonly used for ownership of real property (real estate).
Which of the following statements is accurate when describing preferred stock? Owners of convertible preferred stock have an opportunity to participate in the growth of the company. Unlike any other securities the company may issue, the return on preferred stock is fixed. Issuing preferred stock confers certain tax benefits to the company. In general, preferred stock does not have a maturity date. A) III and IV B) II and III C) I and IV D) I and II
C The ability to convert their stock into the company's common stock enables holders of convertible preferred stock to participate in the company's growth. With rare exception, there is no maturity date on preferred stock. Preferred stock does offer a fixed return, but so does any debt security issued by the company. Only debt securities offer the issuer a tax benefit because the interest is a tax-deductible expense.
What is the current yield on ABC common stock that is selling for $60 per share with a semiannual dividend of $0.75 per share? A) 5.00% B) 7.50% C) 2.50% D) 1.25%
C The formula for current yield is annual current dividend divided by current market value. The trick with this question is that you are given a semiannual dividend as information. You must multiply the dividend by 2 to find the annual dividend. Therefore, $ 0.75 × 2 = $1.50 annual dividend and $1.50 ÷ $60 = 2.50%.
An options strategy that would be most useful for an investor with a long position in a stock who is concerned that a proposed management change will negatively impact the stock's price would be to A) sell a call on that stock. B) buy a call on that stock. C) buy a put on that stock. D) sell a put on that stock.
C This investor is looking to hedge his risk of loss. The best way to hedge a long position is to buy a put option.
A corporation with a 6%, $25 par cumulative preferred paid $0.50 to preferred stockholders last year. This year, the company wants to pay common dividends. How much must it pay each preferred share? A) $1.50 B) $0.50 C) $11.50 D) $2.50
D A 6% cumulative preferred stock with a $25 par value would pay an annual dividend of $1.50 ($25 × 6%). Cumulative preferred stock requires payment of all dividends that have previously been skipped before any dividends can be paid to common stock. The $0.50 that was paid last year left $1 in dividends in arrears. Therefore, this year requires a $2.50 dividend to be paid to the preferred shareholders before any common dividend can be paid to common shareholders.
When a market maker publishes a quote, what prices will be shown? Bid Market Offer Spread A) II and IV B) I and II C) III and IV D) I and III
D A market maker's quote always reflects the price he is willing to pay (the bid) and the price at which he is willing to sell (the offer). The difference between these two is the spread.
Which of the following is required for annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser? A) Sending a renewal notice to the SEC B) Filling out the consent to service of process C) Filling out Form U4 D) Paying the state licensing fee
D All investment adviser representatives are registered with their respective states, not with the SEC. Renewal requires the payment of the annual renewal registration or licensing fee. The consent to service of process is a permanent document submitted with the initial application for registration.
Fiscal policy, as implemented by Congress and the administration, would entail all of the following except A) changing tax rates. B) running a budget deficit. C) increasing military spending. D) changing the discount rate.
D Changing the discount rate is a function of the Federal Reserve Board in implementing monetary policy.
Which of the following actions by an agent would be an unethical practice under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents? A) Entering a buy order, with discretionary authority, for a security when its price is rising B) Recommending securities that result in major losses in the customer's account C) Telling a customer that the investment being recommended will be sold from the inventory of the broker-dealer and indicating on the trade confirmation that the firm acted in a principal capacity D) Splitting commissions with a customer service representative who is not registered but works for the same firm
D Commissions can be received only by those with the appropriate registrations. A nonregistered person cannot participate in transactional-based compensation.
All of the following statements relating to ADRs are true except A) the issuer is a domestic bank. B) dividends are paid in U.S. dollars. C) trading takes place on domestic secondary markets. D) currency risk is avoided.
D Even though everything relating to ADRs is done in English using U.S. dollars on domestic stock markets, there is still currency risk since the ultimate value of the stock and its dividends are based on the foreign company's home currency.
Your client has a long position in a security that has had considerable appreciation since the date of purchase. The client is concerned that speculation that the company's CEO may retire could have negative implications for the stock. Wishing to protect those unrealized gains, which of the following orders would be appropriate? A) Buy stop B) Sell limit C) Buy limit D) Sell stop
D Sell stop orders are frequently referred to as stop loss orders and are used either when a security is purchased to offer downside protection or, as in this case, to preserve a gain that has not yet been realized. Buy stops are used to protect against loss or to preserve the gain on a short position.
Current market interest rates are 6%. Using the discounted cash flow method of valuation, you would expect to arrive at the highest valuation for which of the following? A) 7% coupon maturing in 9 years B) 5% coupon maturing in 20 years C) Zero-coupon bond maturing in 11 years D) 10% coupon maturing in 10 years
D The discounted cash flow method considers the future expected free cash flow (the interest payments plus the eventual return of the principal) and discounts it to arrive at a present value. In its simplest iteration, this is nothing more than taking all the money you are scheduled to receive over a given future period and adjusting that for the time value of money. In general, bonds with higher coupons will have the greatest value because they will clearly produce the most cash flow, and zero-coupon bonds will produce the lowest because they have no cash flow other than the return of the face value at maturity.
Each of the following would be exempt from the definition of an agent under the Uniform Securities Act except A) Florence, an employee of the First Fidelity Trust Company, who buys and sells securities to meet the needs of her trust clients. B) Beatrice, who was appointed by the other members of her investment club to make the portfolio decisions for the next quarter. C) Katrina, the administrator of the Widget Spinners Corporation pension plan, who is paid for making investment decisions for the portfolio. D) Violet, an employee of the Widget Spinners Corporation, who is paid a commission on sales of the company stock to fellow employees.
D When an individual receives compensation for selling employer stock to employees, that person is defined as an agent and must register as such. Managing a pension plan (and getting paid for it, naturally) does not make one an agent; she is not being compensated for the trades. Because banks and trust companies are excluded from the definition of a broker-dealer, their employees cannot be considered agents.
In which of the following cases does exercise not involve the issuer of the underlying asset? A) A right B) A convertible bond C) A warrant D) An option
D When an option is exercised, the seller (writer) of the option is the one who must deliver (call) or purchase (put). In all of the other choices, the issuer is the one who delivers the stock.
One respect in which advertising by investment advisers differs from that of broker-dealers is that A) investment advisers are not permitted to use the internet while broker-dealers can. B) investment advisers are permitted to conduct seminars while broker-dealers cannot. C) investment advisers are permitted to refer to charting systems in their advertisements while broker-dealers cannot. D) investment adviser advertising is regulated by federal law while advertising by broker-dealers is regulated by FINRA.
D When it comes to investment advisers, stateregistered or federal covered, any advertisement that does not comply with the SEC's Investment Adviser Marketing Rule as found in the Investment Advisers Act of 1940 (federal law) would be prohibited. On the other hand, broker-dealers must comply with FINRA's rule on communication with the public as well as the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents.
When preparing recommendations for clients, nonfinancial considerations can often be as important, or even more important, than financial ones. For example, clients who want to avoid investing in fossil fuels would be expressing their A) educational background. B) values. C) demographics. D) investment experience.
B A rapidly growing trend in investment circles is socially responsible investing. Socially responsible investing is commonly called ESG investing, with ESG standing for environmental, social, and governance factors used to judge the investment. Those clients are expressing their values or attitudes.
An investor indicates that her objective is long-term growth. Income is of secondary importance. While she is basically quite conservative, she feels her time horizon is long enough to give her a bit more risk tolerance. Which of the following common stock mutual fund selections would probably be most suitable? A) 100% smallcap B) 75% largecap, 25% smallcap C) 100% largecap D) 50% largecap, 25% smallcap, 25% investment-grade bonds
B The large-cap stocks are generally the most conservative when looking for growth. Adding 25% small-cap stocks to the mix adds the small extra risk the investor indicated she was willing to assume. Although the mix with the investment-grade bonds might be a good one, please note that the question specifically asks about common stock funds.
Under the Uniform Securities Act, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) engaging in an agency cross transaction. B) the trade was being executed by an officer or partner of the firm. C) directing a securities transaction to an affiliated broker-dealer. D) selling shares from its proprietary account to an advisory client.
D There are two principals in every securities trade: the buyer and the seller. In this case, selling shares directly to the client from its own account places the investment adviser in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. In an agency cross transaction, the firm is acting as an agent rather than a principal; that's the reason for the term.
Arguably, determining a client's risk tolerance is the most critical step before making any recommendations. Methods of doing that would include knowing all of the following except A) the investment time horizon: shortterm or longterm. B) the name of other firms where the client has or has had an account. C) the client's prior investment experience. D) how much of a loss the client can tolerate emotionally.
B Knowing the names of firms where the client has had previous accounts doesn't tell us anything about his risk tolerance.
Which of the following risks would most likely be minimized through portfolio diversification? A) Market risk B) Interest rate risk C) Purchasing power risk D) Credit risk
D Only those risks that are unsystematic can benefit from diversification.
To be in compliance with the rules under the Investment Advisers Act of 1940, which two of the following statements are correct regarding a registered investment adviser's relationship with promoters engaged to solicit for advisory business? An individual who is subject to statutory disqualification from registration as an investment adviser representative may be compensated to solicit clients for the adviser when employed by a third-party promoter. If the compensation exceeds a de miminis amount, there must be a written agreement between the investment adviser and the solicitor. Although the sales script used may be written by the promoter, making sure that its content is fair and reasonable is the responsibility of the investment adviser. Cash referral fees to promoters hired to solicit may be paid only in the case of impersonal advisory services. A) II and III B) I and IV C) I and II D) III and IV
A All relationships between registered investment advisers and a promoter where compensation is involved must be in writing. It is important to note that compensation is defined as more than $1,000 over a 12-month period. Making sure that the content of any scripts is fair and balanced is the responsibility of the investment adviser, regardless of who prepared them. Those subject to statutory disqualification (bad actors) may not be used as solicitors if compensation is to be received. Cash referral fees to promoters are not restricted to impersonal advisory services.
A portfolio manager looking to create alpha would most likely use which of the following? A) Tactical asset allocation B) Indexing C) Strategic asset allocation D) Buy and hold
A Alpha is the extent to which a portfolio outperforms its expected returns. Expected returns are based on the systematic risk of the portfolio (its beta). In order to exceed those returns, one must generally construct a portfolio that deviates from the market allocations. With tactical asset allocation, the manager either overweights or underweights the portfolio allocations based on near-term expectations of returns on those assets classes. The other choices are all basically the same, with little or no attempt to time the market's ups and downs.
Which of the following items does not fall within the Section 28(e) safe harbor? A) Software used to simplify the investment adviser's preparation of its tax returns B) Proprietary research reports analyzing the performance of a specific industry C) Software used to analyze clients' portfolios D) Research reports prepared by a third party other than the broker-dealer
A Research reports, whether prepared by the firm or by a third party, fall within the safe harbor provisions of Section 28(e). Software used to analyze securities is also permissible since that benefits the client. Tax preparation software benefits the adviser but not the client.
An investor has returns of 4%, 5%, and 9% over a three-year period. What is the investor's arithmetic mean? A) 6% B) 5% C) 18% D) 7%
A The arithmetic mean is the same as the average. In this case, add together the three returns and then divide by three: 4 + 5 + 9 = 18 ÷ 3 = 6%.
A U.S. Treasury bond's price moved from 96.18 to 96.22. An investor's account holding 10 of these bonds would show an increase of A) $12.50. B) $1.25. C) $0.40. D) $4.00.
A U.S. Treasury bonds are quoted in 32nds, where the difference between 96.22 and 96.18 represents an increase of 4/32 per bond. That is ⅛, or $1.25, times 10 bonds, or $12.50.
It would be reasonable to expect an increase in exports from the U.S. if which of the following happen? The dollar strengthened against the euro. The yen strengthened against the dollar. The Swiss franc weakened against the dollar. The dollar weakened against the British pound. A) II and IV B) I and II C) III and IV D) I and III
A U.S. exports should increase when foreigners have greater purchasing power. That occurs when their currency is stronger than the dollar.
Which of the following is the primary advantage to the employer who offers a nonqualified plan when compared to one that offers a qualified plan? A) The nonqualified plan is permitted to discriminate in favor of highly compensated employees. B) The nonqualified plan allows for an immediate employer deduction for contributions. C) The qualified plan costs less to administer than the nonqualified plan. D) The qualified plan is permitted to discriminate in favor of key employees.
A Unlike a qualified plan, a nonqualified plan is permitted to discriminate in favor of highly compensated employees. Because so few regulations are involved, the administrative costs of a nonqualified plan are much lower than those for a qualified plan. The nonqualified plan, typically deferred compensation, allows for a tax deduction when the money is ultimately paid out to the employee or beneficiary.
One would not typically place convertible bonds in the portfolio of an investor A) seeking capital gains. B) seeking to maximize current income. C) who is bullish on the future for a specific issuer's common stock. D) seeking a position senior to that of common stock.
B A conversion feature is a benefit to the bondholder. It allows the bondholder a choice either to continue holding the debt represented by the bond or to convert the bond into shares of common stock of the underlying issuer. Everything that is done in the securities industry has to be a win-win situation. The win for the bondholder in this instance is the ability to take advantage of the capital appreciation potential the common stock may offer. The win for the issuer is that by offering something extra to the bond purchaser, the bond purchaser is willing to accept a lower interest rate on the bond (compared to a nonconvertible bond), therefore giving the issuer a lower cost of capital.
When is an investment adviser representative (IAR) required to make disclosure to the client? When the IAR, in preparing a recommendation, uses research provided by a third party with whom the IAR is not affiliated When the IAR recommends a specific insurance policy for the client's overall financial plan where a commission will be received on that sale When transactions recommended to a specific client are inconsistent with those for other clients with objectives that are similar to that particular client When transactions recommended to the client are inconsistent with those for the IAR's own account A) I, II, and III B) II and IV C) I and III D) II, III, and IV
B An investment adviser must provide full disclosure to his client if there would be even a hint of conflict of interest. This includes the case where a recommended product will generate a commission or other source of income to the adviser as well as full disclosure if a recommendation is not consistent with the adviser's activity in his own account. The adviser can use any source of information to create his own analysis, with disclosure of the source being required only if the adviser uses the product of a third party as the presentation to the client. It would be unusual that all clients with the same or similar objectives would purchase or have recommended for purchase the same securities.
All of the following would decrease the U.S. balance of payments deficit except A) an increase in exports of domestic goods from the U.S. B) a decrease in purchases of U.S. securities by foreign investors. C) a decrease in imports of foreign goods into the U.S. D) a decrease in dividend payments by U.S. companies to foreign investors.
B Anything that brings foreign money to the U.S. will decrease the balance of payments. Foreign investors pulling their money out of the U.S. or investing less in the U.S. will increase the deficit.
Daphna works for Automated Asset Allocators (AAA), an investment adviser that has offices in States D, E, and F and is registered with the SEC. Daphna spends most of her time in an office in State D, but once every other week, she goes to the branch in State E. Daphna would be exempt from registration as an investment adviser representative (IAR) in which of the following states? A) Daphna would be exempt in States E and F. B) Daphna would be exempt in State F, where she has 227 retail clients. C) Daphna would be exempt in State E, where she has no retail clients. D) Daphna would have to register in all three states.
B As an IAR with a federal covered investment adviser, Daphna has to register only in those states in which she maintains a place of business. That means registering in States D and E. The number of clients is irrelevant.
KAPCO, Inc., has 100 million shares of $1 par common stock outstanding. If the current market price of the KAPCO common stock is $33 per share, KAPCO would be considered a A) small-cap stock. B) mid-cap stock. C) large-cap stock. D) micro-cap stock.
B By doing the arithmetic, we see that the market capitalization of KAPCO common stock is $3.3 billion. Stocks with a market cap in the range of $2 to $10 billion are considered midcap.
LMN, Inc., is preparing to report its net income for the past year. An increase in which of the following would not cause a decrease in the reported net income? A) Corporate income tax rate increase B) Cash dividends C) Year-end bonuses to employees D) Allowance for bad debts
B Cash dividends are paid out of the company's net income, so an increase or decrease will not impact that net income. Net income is a calculation determined by current operations, so an increase in the amount set aside as an allowance for bad debts will reduce operating income. Because net income is always after taxes, raising the company's income tax rate will obviously decrease the net income of the corporation. One of the major expenses for most corporations is labor, so any increase (whether in the form of raises or bonuses) will decrease the net income.
An estate-planning technique often recommended for those with large, taxable estates is the use of A) a testamentary trust. B) an irrevocable life insurance trust (ILIT). C) the alternative valuation date. D) the capital needs analysis.
B For those with large, taxable estates, the purchase of life insurance to cover the potential estate tax liability is frequently recommended. The use of the ILIT will generally keep the proceeds out of the estate. The alternative valuation date helps only if the value of the estate drops sometime during the six months after death. A testamentary trust does little, if anything, to reduce estate taxes. The capital needs analysis is used to determine the replacement value needed in the event of premature death—which is unlikely to be needed with this large of an estate.
One of the major goals of most hedge funds is to A) appeal to the sophisticated investor. B) use long and short strategies to provide a stable return in both up and down markets. C) generate liberal tax write-offs for their investors. D) generate higher fees for their advisers.
B Hedge funds are known for using speculative strategies such as selling short and margin trading. The reasoning behind such strategies is to enable the fund to perform well in both bull and bear markets. Although they do appeal to the sophisticated investor, that is a by-product, not a goal. Yes, the management fees are higher than with other investments, but that is the goal of the adviser, not the fund.
You have a client who is interested in a preferred stock with guaranteed dividends. What is likely the reason for using the term guaranteed? A) A previous investment adviser representative has improperly used that term in an effort to make a sale. B) Someone other than the issuer has guaranteed the payment of those dividends. C) As a fixed income security, the dividends are guaranteed to never increase. D) The issuer has a AAA rating that is tantamount to dividend payments being a sure thing.
B In the Uniform Securities Act, guaranteed means guaranteed as to payment of principal, interest, or dividends by some third party other than the issuer.
If a client prefers owning an investment company whose portfolio consists primarily of companies that have a history of paying regular dividends rather than companies reinvesting their earnings for the purpose of generating capital appreciation, what type of mutual fund would you recommend? A) A government bond fund B) An income fund C) An index fund D) A growth fund
B Income funds invest in companies that tend to be more liberal in their dividend payout, thus enabling the fund to provide income to the investor. Be careful. The question did not ask about a fund that paid regular dividends; it was the portfolio securities that were the dividend payers, and that could not be a bond fund.
Increasing inflation is likely to accompany all of the following except A) an increase in government spending. B) an increase in purchasing power. C) an increase in consumer prices. D) an increase in interest rates.
B Inflation is the enemy of purchasing power. Interest rates and government spending almost always increase. Consumers feel the effects through higher prices for most of their purchases.
To assist broker-dealers with compliance, NASAA prepared a fee disclosure template. Based on the template, all of the following broker-dealer charges would be disclosed except A) account transfer fees. B) brokerage commissions. C) fees for issuance of stock certificates. D) account maintenance fees.
B Not included in the fee disclosure documents are commissions, markups and markdowns, and advisory fees.
In October 1987, the SEC promulgated Release IA-1092, which had the effect of broadening the definition of investment adviser. As a result of the release, which of the following is included in the definition? Commercial banks offering comprehensive financial planning for their highnetworth clients Entertainment agents earning a fee for negotiating contracts for their clients and then placing a portion of the client's royalties into investment-grade bonds or large-cap stocks as market conditions dictate Persons being compensated for assisting employee benefit plan administrators in selecting investment managers for the plan's assets Lawyers who prepare trust agreements for clients with large securities holdings, with a goal of minimizing estate taxes A) I and IV B) II and III C) II and IV D) I and II
B Once the entertainment agent makes investment decisions for a client who is paying fees for overall services rendered, that agent comes under the IA-1092 definition of investment adviser (IA). In a like manner, any person who is compensated for giving investment-related advice to employee benefit plans is considered a pension consultant, requiring registration under IA-1092. Banks are never IAs, and the lawyer is merely doing legal and tax work.
Gerald has been a client of yours for more than a decade. Over that period, the relationship expanded from business to socializing, including attending events with your spouses. One afternoon, Gerald's wife called, explaining that she just got off the phone with Gerald. Before hanging up, he asked her to contact you with a sell order in his account. Having had extensive social contact, you recognize her voice and know that their marriage is on strong footing. You should A) accept the order because you know the wife and understand that this is something that would be fine with Gerald. B) explain that you cannot accept an order from anyone other than the account holder without having written trading authorization. C) email a copy of the trading authorization form and ask her to sign electronically for Gerald and return it so that you can place the order. D) contact your compliance department, explain the relationship, and wait for further instructions.
B Orders from anyone other than the account owner need written trading authorization prior to acceptance.
Both state-registered and federal covered investment advisers have brochure delivery requirements. One significant difference between the two is that A) federal covered advisers are exempt from the brochure delivery requirements to investment company clients while state-registered advisers are not. B) state-registered advisers who do not deliver the brochure at least 48 hours prior to contract signing must offer a five-day, penalty-free withdrawal. C) state-registered advisers must deliver the brochure within 90 days of the end of their fiscal year while covered advisers have 120 days. D) state-registered advisers who do not deliver the brochure at least five days prior to contract signing must offer a 48-hour, penalty-free withdrawal.
B State-registered investment advisers who do not deliver the brochure at least 48 hours prior to entering the contract must offer a penalty-free withdrawal of five days. There is nothing comparable to that in the federal law. Both have the 120-day delivery requirement, and state-registered investment advisers cannot have investment companies as clients.
A 46-year-old investor wants to have retirement savings worth $1 million at age 70. If the investor can earn 9%, using the rule of 72, the present value needed today is closest to A) $250,000. B) $125,000. C) $90,000. D) $500,000.
B The rule of 72 can be used to determine how long it takes for a specific sum to double in value. If you know the rate of return (9% in this question), you divide 72 by that rate (72 divided by 9) to learn that money will double every 8 years. A 46-year-old looking ahead to age 70 has 24 years (70 - 46) for the money to grow. If the IRA earning 9% will double in value every 8 years, in 24 years, it will have doubled3 times. If a number doubles 3 times, its value is 8 times the original amount (1 doubled is 2, doubled is 4, doubled is 8): $1 million ÷ 8 = $125,000. Another way to get the answer on the exam is to start with the answer choices and see which one when doubled 3 times reaches $1 million. If you have $125,000 presently, the first doubling takes it to $250,000, the second to $500,000, and the third to $1 million.
Most states have replaced the Uniform Gift to Minors Act (UGMA) with the Uniform Transfers to Minors Act (UTMA). One of the major advantages of UTMA is A) reduced fiduciary exposure to the custodian. B) greater flexibility in the choice of investments. C) better tax benefits. D) the beneficiary has access to the account at an earlier age.
B While UGMA permits only gifts of cash and securities, UTMA accounts can hold other property, such as real estate and limited partnership interests. Taxation is the same, as is the fiduciary liability of the custodian. In most cases, the beneficiary has access to a UTMA account at a later age than was the case with UGMA.
One of your customers purchased a TIPS bond three years ago. The bond's nominal yield is 4%, and inflation has averaged 6% over the holding period. The interest payment at the end of the three years would be closest to A) $47.76. B) $23.88. C) $33.78. D) $21.60.
B With a TIPS bond, the principal is adjusted every six months by the inflation rate. When that rate is 6%, there is a 3% semiannual adjustment. Multiplying the $1,000 par value times 103% six times (there are six semiannual adjustments in three years) results in a principal value just over $1,194. Because the 4% coupon rate is paid semiannually, the payment at the end of three years will be the adjusted principal of $1,194 times 2%, and that equals $23.88. For testing purposes, you can always arrive at the correct answer by using simple interest instead of compounded interest. That is, with a 6% annual inflation rate, the bond's principal will increase by $60 per year for three years. That would make the adjusted principal $1,180. Take 2% of that, and the result is $23.60. The correct answer will always be the next greater number.
An advisory client is interested in learning more about municipal bonds. Which of the following statements arecorrect? General obligation bonds are usually, but not always, safer than revenue bonds. Interest received on municipal bonds is generally free of both federal and state income taxes. Municipal bonds are usually suitable for investors in higher tax brackets. The coupon yield on AAArated municipal bonds will generally be slightly higher than that of AAArated corporate bonds with a comparable maturity. A) I and II B) II and IV C) I and III D) III and IV
C Because general obligation bonds are backed by taxes rather than revenues, they are generally more secure. Coupon yields on highest-rated municipal bonds are generally lower than those available on corporate bonds with similar maturities. However, the federal tax-free status makes those yields competitive but only to those in higher tax brackets. In most cases, only municipal bonds offered by issuers in a specific state are exempt from that state's income tax.
Which of the following would offer your client check-writing privileges and FDIC insurance coverage? A) Government securities money market fund B) GIC C) DDA D) Negotiable CD
C DDA stands for demand deposit account, most commonly a bank checking account. It, like all other bank accounts, carries FDIC insurance. GICs offer neither. Money market funds offer checkwriting but not FDIC coverage; negotiable CDs offer FDIC coverage but not checkwriting.
It would be considered an unethical business practice for a state-registered investment adviser to A) notify the administrator that the adviser intends to maintain custody of customer securities. B) determine the price or time of execution of customer orders without written discretionary authority. C) claim that advisory fees are negotiable but maintain a fixed fee schedule. D) deposit marketable securities or cash with the administrator in lieu of a required surety bond.
C If an adviser states that fees are negotiable but charges fixed rates, that would be an unethical business practice. Time and price are not considered discretionary. State-registered investment advisers must notify the administrator if they wish to maintain custody, and surety bond requirements may be met with a deposit of cash or marketable securities.
An investor would be entitled to a breakpoint on quantity purchases made together with all of the following accounts except A) his wife's personal account. B) a custodian account under UTMA for his child. C) his brother with whom he regularly shares investment ideas. D) shares of that fund held in his 401(k) that were purchased with employer-matching funds.
C The breakpoints allow for combinations from a number of family accounts, but the accounts have to be with a spouse or dependent children, not brothers.
Your client noticed that the listing for the CDL $100 par common stock in the Wall Street Journal indicated that the current yield of the stock was 4%. If the last trade was at $40 per share, more than likely, CDL is paying quarterly dividends of A) $1.60. B) $4.00. C) $0.40. D) $1.00.
C The par value of the common stock is irrelevant to this question. In order for a stock selling at $40 to have a current yield of 4%, the annual dividend must be $1.60. Because common stock dividends are typically paid quarterly, more than likely, the quarterly dividend is $0.40 per share.
An investor has many tax preference items. Computing the investor's income tax using the regular method results in a tax burden of $29,200 while computing the alternative minimum tax (AMT) results in a tax liability of $27,500. Based on this information, the investor's income tax liability for the year is A) $56,700. B) $30,900. C) $29,200. D) $27,500.
C To determine if you owe AMT, you compute both your regular tax and your AMT and pay whichever is the higher amount. The IRS has an unusual way of stating this. It says that the AMT is the regular tax plus the amount by which the AMT exceeds the regular tax. So if the AMT computation shows a lower amount than the regular tax, the regular tax is the liability.
Which of the following statements regarding agent registration under the Uniform Securities Act is true? A) The administrator may request that the agent furnish a statement of assets and liabilities. B) The administrator may initiate a disciplinary action within two years of an agent's withdrawal of registration. C) In the absence of any action by the administrator, the effective date of a registration is noon on the 30th day after the filing of a complete application. D) If, before the effective date of the registration, the administrator requires amendments to the application, the registration will be considered to have first been filed as of the original filing date.
C Typically, registration of persons becomes effective at noon on the 30th day following filing. If the administrator requires the filing of amendments, the clock starts over again with the filing of those amendments. Agents do not have financial requirements, and the administrator has a maximum of one year after termination to initiate any actions.
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) business risk. C) systematic risk. D) liquidity risk.
D A portfolio of listed common stocks will have little to no liquidity risk as 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.
An investor is concerned that interest rates will be volatile over the next few years. Which of the following would eliminate interest rate risk? A) TIPS bonds B) Zero-coupon bonds C) Cumulative preferred stock D) Insured bank CDs
D Any negotiable instrument that has a yield component will be subject to interest rate risk. The insured bank CD cannot be traded and, therefore, will not be affected by changes in market interest rates. TIPS protect against inflation, and zero-coupon bonds have the greatest interest rate risk.
In order to come under the SEC's requirement to file a Form 13F, an institutional manager must have discretion over A) more than 10% of the outstanding voting securities of a reporting company. B) an equity portfolio of at least $100 million. C) an equity portfolio of at least $50 million in 13(f) securities. D) an equity portfolio of at least $100 million in 13(f) securities.
D Form 13F must be filed by institutional money managers with at least $100 million in 13(f) equity securities under discretionary management.
Which of the following statements regarding REITs are true? Equity REITs offer possible income and capital appreciation. Investors receive interest and principal payments periodically. In order to receive favorable tax benefits, the REIT must pay out at least 90% of its taxable income in the form of dividends. Interests in REITs offer the benefit of flow-through of income or loss. A) II and III B) II and IV C) I and IV D) I and III
D REITs are pooled tangible real estate assets. Owning an equity REIT gives the investor beneficial ownership of tangible real estate with the possibility of both income and capital appreciation. Most REITs trade in the open market, and their price is determined by supply and demand; there is no redemption by the issuer. REITs pay distributions in the form of dividends and not a pass-through of principal and interest, as is the case with a mortgage-backed security, such as those issued by GNMA. Although REITs pass-through at least 90% of their taxable income, there is no flow-through of losses as is the case with direct participation programs (DPPs).
Under the provisions of Regulation SP, a person who has an investment advisory contract with a registered investment adviser is known as A) a client. B) a consumer. C) a cohort. D) a customer.
D Regulation SP uses two terms: customer and consumer. The customer is one with an ongoing relationship, such as would be the case with an advisory contract. A consumer is basically a one-shot deal.
Which of these forms of business structure carries the greatest personal liability? A) Limited partnership B) S corporation C) LLC D) Sole proprietorship
D When a business is set up as a sole proprietorship, the owner carries unlimited personal liability for all of the company's debts. In each of the other choices, the liability is basically limited to the amount invested.
