Practice Exam Questions

A company currently has earnings of $4 and pays a $0.50 quarterly dividend. If the market price is $40, what is the current yield? A) 5% B) 10% C) 15% D) 1.25%

A) 5% The quarterly dividend is $0.50, so the annual dividend is $2.00; $2 ÷ $40 (market price) = 5% annual yield (current yield).

The Uniform Securities Act grants exemptions to the securities of a number of issuers. If you were the Administrator, which of the following securities would NOT be eligible for an exemption in your state? A) Debt securities issued by the ABC Savings and Loan Association, organized under the laws of a neighboring state, but not authorized to do business in your state B) Bonds issued by the Province of Alberta C) Common stock issued by the XYZ Trust Company, organized under the laws of a neighboring state, but not authorized to do business in this state D) Equipment trust certificates issued by a regulated common carrier

A) Debt securities issued by the ABC Savings and Loan Association, organized under the laws of a neighboring state, but not authorized to do business in your state Any issue from a state or Canadian province is always exempt. Equipment trust certificates issued by any regulated common carrier are always exempt. Banks, savings institutions, and trust company securities are also exempt as long as they are organized under the laws of the United States or any state. However, securities issued by a savings and loan or building and loan are only exempt if the issuer is authorized to do business in this state.

Which of the following statements correctly describes a mutual fund or open-ended investment company? A) Each investor's account value is based on the number of shares owned multiplied by the fund's net asset value. B) Marketability is limited because a willing buyer must be found in the secondary marketplace. C) In contrast to a closed-end investment company, a mutual fund will eliminate systematic risk. D) Shareholders are not taxed on the earnings of the fund because taxation takes place at the entity level.

A) Each investor's account value is based on the number of shares owned multiplied by the fund's net asset value. An investor's account value in a mutual fund is based on the number of shares multiplied by the fund's net asset value. As long as the fund distributes a certain percentage of its income, there is no taxation at the entity level; rather, shareholders pay tax on the distributions. Guaranteed marketability of fund shares is ensured.

An investor is considering the purchase of $100,000 maturity value of zero-coupon AAA-rated corporate bonds scheduled to mature in 20 years. Among the risks that this investor will be assuming are I. default risk II. interest rate risk III. prepayment risk IV. reinvestment risk A) I and II B) II and III C) III and IV D) I and IV

A) I and II Even though these bonds are rated AAA, 20 years is a long time and it is possible that this corporation may not even exist when the maturity date arrives. Adding to the risk is the fact that there are no interest payments in the interim. That is why the most commonly recommended zero-coupon bonds are those issued or guaranteed by the U.S. Treasury. Because zero-coupon bonds have the longest duration for their maturity of any bonds, they have the greatest exposure to interest rate changes. Prepayment risk is only found with mortgage-backed securities, and one of the benefits of zeroes is that there is no reinvestment risk.

Which of the following is TRUE of GNMA securities? I. Interest is subject to federal income tax. II. Interest is exempt from federal income tax. III. They are backed by farm mortgages. IV. They are backed by residential mortgages. A) I and IV B) II and III C) I and III D) II and IV

A) I and IV Income received by investors in Government National Mortgage Association (GNMA) securities is subject to both state and federal income tax, and the asset backing them is residential mortgages.

Registration of an investment adviser automatically confers registration on I. officers, partners, and directors of the firm who are functioning as IARs II. any employee who is functioning as an IAR III. clerical employees handling back-office operations IV. an employee who will be soliciting clients for the adviser A) I only B) I, II, III, and IV C) I and III D) I, II, and III

A) I only Under Section 202(a) of the Uniform Securities Act, registration of an investment adviser automatically constitutes registration of any investment adviser representative who is a partner, officer, or director, or a person occupying a similar status or performing similar functions. This only applies to those individuals who are listed on the firm's Form ADV Part 1, so we're limited to officers, partners, directors, or anyone else doing that type of job, regardless of what this IA has chosen to use as the title.

If the value of the U.S. dollar increases against other currencies, which of the following are TRUE? I. U.S. exports are more competitive in foreign countries. II. U.S. exports are less competitive in foreign countries. III. Foreign imports into the United States are more competitive in U.S. markets. IV. Foreign imports into the United States are less competitive in U.S. markets. A) II and III B) I and IV C) I and III D) II and IV

A) II and III If the value of the U.S. dollar increases against other currencies, then U.S. exports cost more for foreign markets to purchase. This also makes foreign imports less expensive for U.S. consumers.

Which of the following acts requires publicly traded corporations to issue annual reports? A) Securities Exchange Act of 1934 B) Trust Indenture Act of 1939 C) Securities Act of 1933 D) Investment Company Act of 1940

A) Securities Exchange Act of 1934 The Securities Exchange Act of 1934 mandates that public issuers file annual and quarterly reports with the SEC.

According to the USA, under which of the following circumstances may an Administrator cancel an investment adviser representative's registration? A) The Administrator determines it would be in the public interest. B) The investment adviser representative is judged to be mentally incompetent. C) The investment adviser representative is the subject of an insider trading lawsuit. D) The investment adviser representative has admitted to selling unregistered exempt securities to individual clients.

A) The Administrator determines it would be in the public interest. Registration may be canceled by the Administrator if the registered individual has been judged mentally incompetent. Cancellation is a nonpunitive action of the Administrator.

A similarity between the capitalization of closed-end and open-end management investment companies is that both A) compute net asset value per share. B) raise capital through a continuous public offering of shares. C) are traded on listed exchanges or in the over-the-counter market. D) can issue common and preferred stock.

A) compute net asset value per share. The only similarity here is that both kinds of management investment companies compute NAV. Open-ends must do it daily and closed-ends can compute daily or even weekly. It is only the open-end company where the capital is raised through a continuous offering of new shares. Closed-end funds generally have a single IPO of common stock and may, if they wish, also have a preferred stock issue. Open-end funds are limited to one class of equity security (not to be confused with different classes for sales charge purposes). There is no secondary market trading in open-end funds, only closed-ends.

An investment constraint that is unique to private foundations is the requirement to A) distribute 5% of its assets each year as qualifying distributions. B) invest 5% of its assets each year in qualifying investments. C) have a board of directors. D) have an investment policy statement.

A) distribute 5% of its assets each year as qualifying distributions. Under Section 4942 of the Internal Revenue Code, a private foundation must pay out each year an amount equal to 5% of its net investment assets in "qualifying distributions". There is no legal requirement on how much must be invested each year, and having an investment policy statement is not unique to foundations. Likewise, there is nothing unique about the requirement to have a board of directors and that isn't an investment constraint.

Under the USA, each of the following is specifically excluded from the definition of a broker-dealer EXCEPT an A) investment adviser B) issuer C) international bank D) agent

A) investment adviser The USA specifically excludes agent/issuers and banks, international or domestic, from the definition of a broker-dealer. Investment advisers also may have to register as broker-dealers if their method of operation requires it.

A customer opens a margin account with a broker-dealer and signs a loan consent agreement. The loan consent agreement allows the firm to A) loan out the customer's margin securities B) commingle the customer's securities with securities owned by the firm C) lend the customer money D) hypothecate securities in the account

A) loan out the customer's margin securities A signed loan consent agreement permits a firm to loan out a customer's margin securities. This is the only part of the margin documentation that is optional.

The Sharpe ratio is the average annual return of a security A) minus the risk-free rate for the period divided by the security's standard deviation B) divided by the expected return of the market C) divided by the risk-free rate D) plus the risk-free rate divided by the security's beta

A) minus the risk-free rate for the period divided by the security's standard deviation The Sharpe ratio is the average annual return of a security less the risk-free rate divided by the security's standard deviation. In other words, the Sharpe ratio is a risk-adjusted return because it measures the amount of return per unit of risk taken; the most common risk-free rate is that paid by 91-day U.S. Treasury bills.

Amie Lear is a securities analyst employed by Empyreal Benefits, Inc., a registered broker-dealer. She is assigned to cover a number of different equity and debt investments. One of the investments is Taylor, Inc. (Taylor), a manufacturer of a wide range of children's toys. Based on her extensive analysis, she determines that her expected return on the stock, given Taylor's risks, is 10%. However, when applying the capital asset pricing model (CAPM), the result is a 12% rate of return. Based on Lear's analysis, Taylor's stock is A) overvalued. B) correctly valued. C) undervalued. D) neither overvalued nor undervalued.

A) overvalued. The CAPM gives us the expected rate of return on an investment. It is sometimes referred to as the required rate of return. That is, based on the risks, the CAPM reveals the return that should be earned. In this example, that return is 12%.Lear's computation expects the return to be only 10%. Therefore, Lear is showing that instead of providing the required return of 12%, she believes the stock will only return 10%. That makes the stock overpriced (a lower price will generate a higher rate of return). As a result, Lear would not recommend this stock because her calculations indicate it will not return as much as it should for the risk being taken.

All of the following actions must be completed prior to customers entering their first option trade EXCEPT A) receipt of a completed options agreement B) delivery of the options disclosure document (ODD) C) approval by a designated options supervisor D) completion of the new account form

A) receipt of a completed options agreement Customers do not have to complete (sign) the options agreement prior to entering an order; under current rules, the agreement must be signed and returned by the customer within 15 days of account approval.

When contrasting preemptive rights and warrants, it would be correct to state that, at issuance, A) rights have intrinsic and time value while warrants only have time value. B) rights have time value while warrants have intrinsic and time value. C) rights have intrinsic value while warrants have intrinsic and time value. D) rights have intrinsic and time value while warrants only have intrinsic value.

A) rights have intrinsic and time value while warrants only have time value. At the time of issuance, preemptive rights always offer the stock at a price below the current market thus creating intrinsic value. Although rights rarely are effective for longer than 45-60 days, that does represent time value. On the other hand, warrants are always issued with an exercise price above the current market (no intrinsic value) but do have time value.

Under the Uniform Securities Act, the state Administrator may by order deny, suspend, or revoke an investment adviser's registration for A) violation of another state's securities laws within the last 10 years B) lack of experience as an investment adviser C) conviction for a securities-related misdemeanor more than 15 years ago D) conviction for a non-securities-related felony more than 15 years ago

A) violation of another state's securities laws within the last 10 years A violation of any state or federal securities or commodities law within the last 10 years is grounds for denial, suspension, or revocation of registration by order. This means that no hearing is required. Convictions are grounds for administrative action only if they occurred within the past 10 years. Lack of experience is not sufficient cause for revoking or denying registration.

Under Section 28(e) of the Securities Exchange Act of 1934, which of the following is allowable soft-dollar compensation from a broker-dealer to an investment adviser under the safe harbor provisions? A)Custodial services provided by the broker-dealer B)Vacations C)Cell phones to rapidly communicate with clients D)Office rental payments

A)Custodial services provided by the broker-dealer The use of a client's commission dollars to purchase a broker-dealer's custodial services is an allowable soft-dollar compensation. It is an investment benefit that accrues directly to the client and not to the adviser. Office rental payments, cell phones, and vacations are not allowable because their benefits do not accrue directly to the client. Other examples of permitted soft-dollar items are research and analytical software because they benefit the client whose commission dollars are, in effect, paying for them.

Which of the following are characteristics of newly issued warrants? A)Time value, but no intrinsic value B)Time value and intrinsic value C)Intrinsic value, but no time value D)No intrinsic value and no time value

A)Time value, but no intrinsic value Warrants could be thought of as call options with a long expiration period. They are always issued with a strike price in excess of the current market value, so there is no intrinsic value. One could say that on issuance, they are always out-of-the-money. The only value is in the time to expiration, usually several years or longer. Warrants: A security that gives the holder the right to purchase securities fro the warrant issuer at a stipulated subscription price. Are usually long term instruments with exp dates years in the future.

Bond prices are quoted as a percentage of A)par value B)market value C)conversion value D)stated value

A)par value Bond prices are quoted as a percentage of par value. On the exam, the par value of bonds is always $1,000.

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

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

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% C)2.8% 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.

Which of the following is not included in the definition of broker-dealer as found in the Uniform Securities Act? A) Attorneys B) Banks C) Credit unions D) Investment advisers

B) Banks In the Uniform Securities Act, it specifically states: "Broker-dealer" means any person engaged in the business of effecting transactions in securities for the account of others or for his own account. "Broker-dealer" does not include (1) an agent, (2) an issuer, (3) a bank, savings institution, or trust company. Attorneys are excluded from the definition of investment adviser, as long as their advice is incidental to their legal practice, but that exclusion does not apply to the term "broker-dealer". Even though credit unions engage in banking activity, they are not included in the exclusion. Being an investment adviser does not exclude a person from the need to register as a broker-dealer if that person is performing the functions of a BD.

A professional tennis player comes to you seeking advice on setting up a trust. She is interested in giving to charity and also wants discretion as to when income is distributed to the beneficiaries, her parents. Which trust do you advise she use? A) Charitable remainder trust B) Complex trust C) Charitable lead trust D) Simple trust

B) Complex trust Only a complex trust allows the two features that she requires. Simple trusts may not make charitable contributions, and they provide no discretion on income distribution. The two types of charitable trusts mentioned provide no ongoing discretion as to when income is distributed or who the beneficiaries are.

Under the Uniform Securities Act, which of the following statements regarding the employment of investment adviser representatives by a state-registered investment adviser is (are) true? I. The investment adviser must notify the Administrator whenever an investment adviser representative is terminated. II. An investment adviser is not required to notify the Administrator when an investment adviser representative begins employment. III. The registration of an investment adviser representative is effective only as long as the individual is employed by a registered investment adviser. A) III only B) I and III C) I only D) I, II, and III

B) I and III Whenever an individual begins or ends association as an IAR with a state-registered investment adviser, the IA must notify the Administrator. An IAR's registration is only valid while employed by a registered investment adviser.

A client of yours has been investigating a particular mutual fund. She mentions that she saw a blurb on the internet that the fund has had net redemptions over the past 6 months and asks you to explain how that might affect the fund's performance. You should explain that I. this is a good thing because now, with less money to invest, the fund's adviser is able to be more selective II. performance will probably suffer because the fund's adviser will have to sell positions prematurely in order to meet redemption requests III. this would be a good time to buy because the supply of shares exceeds the demand IV. many of the fund's expenses are relatively fixed so with less assets in the fund, the expense ratio will probably increase A) I and III B) II and IV C) II and III D) I and IV

B) II and IV When a fund has net redemptions, it means that less money is coming in than is going out. In order to meet those redemptions, the fund's manager will either have to sell securities that they planned to hold onto, or maintain more assets in cash (which generally will return less than other investments). Because the expense ratio is the annual expenses divided by the average annual assets, with less assets to cover the fixed expenses, the ratio will probably increase.

Which of the following statements regarding broker-dealer registration under the Uniform Securities Act are TRUE? I. In the absence of any action by the Administrator, the effective date of a registration is noon of the 45th day. II. The Administrator may initiate a disciplinary action within 2 years of a broker-dealer's withdrawal of registration. III. The Administrator may request that the broker-dealer furnish a statement of assets and liabilities. IV. 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 upon filing of those amendments. A) I and IV B) III and IV C) I and II D) II and III

B) III and IV Normally, registration of persons becomes effective at noon of the 30th day following filing. If the Administrator requires the filing of amendments, the clock starts over again with the filing of those amendments. Broker-dealers have financial requirements, and the Administrator has a maximum of 1 year after termination to initiate any actions.

The USA would permit an agent to use the term "guaranteed" to refer to I. a security that is backed by the U.S. government II. a bond that is backed by the taxing power of a governmental body III. a bond whose interest and principal payments are guaranteed by someone other than the issuer IV. a stock whose dividend payments are guaranteed by someone other than the issuer

B) III and IV Under the USA, the term "guaranteed" refers to a guarantee of interest, principal, or dividends by a party other than the issuer.

Which of the following statements about equity securities is NOT true? A) Common stock is less sensitive to interest rate risk than preferred stock. B) Preferred stock is an equity security while common stock is a hybrid. C) Preferred stock pays a fixed dividend. D) Preferred stock is usually nonvoting.

B) Preferred stock is an equity security while common stock is a hybrid. Both common and preferred stock are equity securities. Common stock is never referred to as a hybrid; there are times when preferred stock is because of those features that are similar to a debt security. The dividend on preferred stock is fixed, and shares do not have voting rights. The price of a common share generally doesn't fluctuate with changes to interest rates in the same manner as that of preferred stock.

When the securities professional is registered in his state, which of the following statements does NOT correctly reflect the power granted to the Administrator by the Uniform Securities Act? A) The Administrator may require examinations for investment advisers. B) The Administrator may not examine the records of a broker-dealer without seeking a court order from a federal court. C) The Administrator may require a broker-dealer to have a minimum net capital as a condition of registration. D) The Administrator may require financial reports from broker-dealers.

B) The Administrator may not examine the records of a broker-dealer without seeking a court order from a federal court. The Administrator has inspection power to view all records within or outside the state as is appropriate or necessary in the public interest, without seeking court approval Administrators may require minimum capitalization as a condition of registration. The Uniform Securities Act states that the Administrator may, by rule, provide for an examination, which may be written or oral or both, to be taken by any class of or all applicants. As a practical matter, an oral examination would apply to the business entity (broker-dealer or investment adviser) while written examinations are taken by agents and investment adviser representatives. The Administrator is also given the authority by the act to require the filing of financial reports regarding the net worth of the firm.

If 150 investors want to form a corporation to limit their financial liability to the amount of money they invest and do not want to be responsible for any debt that the corporation incurs, they would most likely form A) an S corporation B) a C corporation C) a proprietorship D) a general partnership

B) a C corporation The investors would form a C corporation. The advantages of the C corporation are that stockholders are not liable for corporate debt; that it is easier to raise money by issuing stock; that it is easier to transfer ownership; and that unlike a partnership or a proprietorship, a C corporation has a continuous life because it does not terminate on the death of shareholders, officers, or directors. An S corporation is limited to 100 investors.

One of your customers has a substantial savings account at the local S&L. The customer has several grandchildren and wants the flexibility of being able to change the beneficiary allocations as their financial conditions change. You should recommend that the customer investigate the use of A) a Uniform Transfers to Minors Act (UTMA) account. B) a Totten trust. C) an irrevocable trust. D) a durable power of attorney (POA).

B) a Totten trust. A Totten trust allows for the transfer of ownership of a bank account to a beneficiary or beneficiaries after the owner's death. It is the predecessor of today's POD (pay on death) and TOD (transfer on death) accounts. Beneficiary names and/or percentages can be changed at will. An irrevocable trust can't be changed; there is no flexibility. In an UTMA account, once the money is allocated, the decision is irrevocable (and who says the grandchildren are minors). The durable POA gives a designated person the authority to manage the affairs of the account, and this customer wants the control.

A company's dividend on its common stock is A) voted on by shareholders B) determined by its board of directors C) specified in the company charter D) mandatory if the company is profitable

B) determined by its board of directors A common stock's dividend payment and amount are determined by the company's board of directors.

Since its inception in 1986, virtually all the states have replaced the Uniform Gifts to Minors Act with the Uniform Transfers to Minors Act. It is generally agreed that one of the primary benefits offered by UTMA over UGMA is A) greater flexibility in naming custodians B) greater flexibility in the type of property that may be transferred C) greater flexibility in naming beneficiaries D) mandatory surrender of control at majority

B) greater flexibility in the type of property that may be transferred The property that may be transferred into an UGMA account is generally limited to cash and securities, while in an UTMA account, almost any kind of property—real or personal, tangible or intangible—can be transferred to the custodian.

Anyone who represents an issuer in effecting transactions between the underwriter and the issuer: A) must be registered as an agent. B) is excluded from the definition of agent under the Uniform Securities Act. C) must be registered as an investment adviser. D) must be registered as an administrator.

B) is excluded from the definition of agent under the Uniform Securities Act. When an individual represents an issuer (not a broker-dealer), the Uniform Securities Act provides several exclusions from the definition of an agent. One of those is representing the issuer in an exempt transaction. A transaction between the issuer and the underwriter of its securities is an example of the exempt transactions

The portfolio manager of a bond fund believes that interest rates are going to increase in the near future. As such, it would be wise for that manager to A) shift into higher-rated bonds. B) shorten the average duration of the portfolio. C) lengthen the average duration of the portfolio. D) increase the equity portion of the portfolio.

B) shorten the average duration of the portfolio. Increasing interest rates lead to declining bond prices, regardless of the ratings. This is interest rate risk. Those bonds with the longest duration have the most sensitivity to that risk, while short-term maturities are only slightly affected. Reducing the average duration of the portfolio means that the average maturities will be shortened, thus reducing the effects of an increase to interest rates.

It is not uncommon for many federal covered advisers to be affiliated with a broker-dealer. Take the case where an IAR with a federal covered adviser is also an agent with a broker-dealer. When dealing with advisory clients, all of the following are true EXCEPT A) the IAR must disclose that trades will be executed through his broker-dealer unless the client elects otherwise B) the IAR must disclose that he is liable for any losses suffered in the account due to poor portfolio performance C) the IAR must disclose that he may earn commissions in addition to the fees charged for advice D) the IAR must disclose that the advisory services he offers are separate from the broker-dealer

B) the IAR must disclose that he is liable for any losses suffered in the account due to poor portfolio performance Full disclosure of all possible conflicts of interest must always be made. However, registered persons can never assume liability for losses due to poor portfolio performance.

When does a customer have to receive the OCC Options Disclosure Document? A)With the confirmation of the first options transaction B)Before accepting the customer's first order to trade options covered by the ODD C)Within 5 business days of the first options trade D)Within 15 days of account approval by the firm's designated options supervisor

B)Before accepting the customer's first order to trade options covered by the ODD When opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document titled Understanding the Risks and Uses of Options, the broker-dealer satisfies the risk disclosure requirements. There are 2 alternatives for meeting the delivery requirement. It may be done before or at the time the broker-dealer approves that customer's options account or accepts the customer's first order to trade the listed options covered by the ODD. 1) When opening the account 2) Before or at the time of account approval 3) Before at at the time of Acceptance of first order to trade the listed options covered by ODD

Based on the following information, which stock is most likely to appeal to a growth investor? A)Book value of $22 per share, current market value of $17 per share B)Dividend yield of 0.3% C)Dividend payout ratio of 65% D)P/E ratio of 8:1

B)Dividend yield of 0.3% Growth investors usually seek stocks with high-growth expectations, reflected by a higher-than-normal P/E ratio, typically 20:1 or higher, and a low dividend yield, usually caused by a low dividend payout ratio. It would be unlikely to find a growth stock selling for close to its book value and certainly not below it.

Which of the following investment vehicles provides for redemption by the issuer? A)Exchange-traded fund (ETF) B)Unit investment trust (UIT) C)Closed-end fund (CEF) D)Face amount certificate (FAC)

B)Unit investment trust (UIT) A UIT typically issues redeemable securities (or "units"), like a mutual fund, which means that the UIT will buy back an investor's "units," at the investor's request, at their approximate net asset value. ETFs and CEFs are traded in the secondary markets and investors sell their shares in the marketplace rather than redeeming them through the issuer. Face amount certificates are not redeemable - the investor's funds are returned when the debt is paid off.

A client opens a discretionary account with an IAR over the phone and tells her to buy 3,000 shares of any technology stock that she thinks is suitable. One month later, the stock has dropped and the IAR determines that it is time to cut the losses and get out of the stock. In checking the records, the IAR discovers that the written discretionary authorization form has not yet been received. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers, the IAR should A)attempt to get permission to sell from her supervisor B)contact the client and indicate that the firm cannot act with discretion until the authorization form is received C)sell the shares relying on the clients' oral authorization to use discretion D)sell the shares immediately because that is in the client's best interest

B)contact the client and indicate that the firm cannot act with discretion until the authorization form is received NASAA policy permits oral discretionary powers to IAs and their representatives as long as the written authorization form is received within 10 business days of the first trade made using that discretion. One month is more than 10 business days so nothing can be done without the written authorization. Remember, when the client leaves the specific security to be purchased up to the discretion of the IAR, discretion has been exercised.

An issuer wishing to comply with Regulation D of the Securities Act of 1933 must file a Form D with the SEC A)no later than 30 days after the first sale B)no later than the time of the first sale C)no later than 15 days after the first sale D)no fewer than 20 days prior to the first expected date of sale

C)no later than 15 days after the first sale Issuers wishing to avail themselves of the private placement exemption offered under Regulation D of the Securities Act of 1933 must file a Form D with the SEC no later than 15 days after the first sale.

A state-registered investment adviser would be permitted to A) use Part 1 of the Form ADV to satisfy the brochure requirement B) make annual delivery of the brochure within 150 days of the end of the fiscal year C) use Part 2 of the Form ADV to satisfy the brochure requirement D) deliver the brochure to a new client within 48 hours of entering into the contract

C) use Part 2 of the Form ADV to satisfy the brochure requirement Part 2 of the Form ADV may be used in lieu of a fancy brochure. The brochure must be delivered to a new client no later than the entry of the contract—the 48 hours is a "prior to" entry requirement in order to avoid having to offer a penalty-free withdrawal. The annual delivery must be made within 120 days, not 150.

An investor purchases a 5% callable convertible subordinated debenture at par. Exactly one year later, the bond is called at $104. The investor's total return is A) 7.5%. B) 4%. C) 9%. D) 5%.

C) 9%. Total return consists of income plus gain. Buying a bond at par and having it called at $104 results in a $40 gain. With a 5% coupon, there will be two semiannual interest payments of $25 in a one-year holding period. Adding the $40 + $50 = $90 total return on an investment of $1,000 which = 9%.

Formula methods of investing that involve selling equities in rising markets and buying them in falling markets would include I. constant dollar plan II. constant ratio plan III. dollar cost averaging IV. DRIPs A) III and IV B) II and III C) I and II D) I and IV

C) I and II n both a constant dollar plan and a constant ratio plan, the goal is to maintain a balance between equity and debt securities in the portfolio. This is done by selling equities as their price rises (the proportion has now changed) and buying equities when the prices fall to get back to the constant dollar or ratio.

The Federal Reserve Board foresees the probability of an overheated economy and the resumption of double-digit inflation. Therefore, the FRB takes actions to slow down the economy, including increasing the discount rate. Which of the following are likely effects of these moves? I. An increase in the prime rate II. An increase in bond yields and an accompanying decrease in bond prices III. A slowdown in corporate growth IV. A decrease in corporate earnings A) I, III, and IV B) I and II C) I, II, III, and IV D) III and IV

C) I, II, III, and IV The FRB attempts to slow the economy and decrease the money supply with a corresponding increase in interest rates. When interest rates rise, the prime rate increases, bond yields rise, and bond prices drop. Higher interest rates have a tendency to slow corporate growth, with a resulting slowdown in earnings; these events occur in this approximate sequence.

The Investment Advisers Act of 1940 requires delivery of a brochure containing information about the adviser's background and business practices in all of the following situations EXCEPT I. when the service provided is an individual supervisory service II. when the client is an investment company III. when the contract is for an impersonal advisory service requiring payment of less than $500 IV. when the client is an individual with a net worth of more than $1 million

C) II and III A disclosure brochure is not required to be delivered if the client is a registered investment company, or if the advisory service is of an impersonal nature and costs less than $500. A brochure is required when the service provided is an individual supervisory service and the client's net worth has no bearing on brochure delivery requirements.

Which of the following statements with regards to net present value and internal rate of return is correct? A) If the net present value equals zero, then the internal rate of return is less than the required rate of return. B) If the net present value is less than zero, then the internal rate of return is greater than the required rate of return. C) If the net present value is greater than zero, then the internal rate of return is greater than the required rate of return. D) If the net present value equals zero, then the internal rate of return is greater than the required rate of return.

C) If the net present value is greater than zero, then the internal rate of return is greater than the required rate of return. Any time the net present value is greater than zero (a positive NPV), the internal rate of return is greater than the required rate of return and the investment should be made. If the net present value is zero, then the internal rate of return equals the required rate of return.

Which of the following statements about investment constraints is least accurate? A) Unwillingness to invest in tobacco stocks is a constraint. B) Being an accredited investor increases investment opportunities. C) Investors with short time horizons are not likely to worry about liquidity. D) Diversification efforts can increase tax liability.

C) Investors with short time horizons are not likely to worry about liquidity. Investors with a time horizon constraint may have little time for capital appreciation before they need the money. The need for money in the near term is a liquidity constraint. Time horizon and liquidity constraints often go hand-in-hand. Diversification often requires the sale of an investment and the purchase of another. Those transactions may trigger tax liability. Attitudes are unique to the client and one of those could be an aversion to certain "sin" products. As an accredited investor, the law permits one to participate in many offerings not available to others.

Under the Investment Advisers Act of 1940, an adviser is required to be registered with the SEC if A) the adviser is the publisher of a news magazine of general and regular circulation B) the adviser's advice relates solely to securities issued or guaranteed by the U.S. government. C) the adviser's clients are investment companies registered under the Investment Company Act of 1940 D) the adviser's clientele is exclusively federal credit unions and the adviser has less than $100 million in assets under management

C) the adviser's clients are investment companies registered under the Investment Company Act of 1940 Advisers to registered investment companies are required to be SEC-registered. Under the Advisers Act, as modified by the Dodd-Frank Act, advisers are exempt from SEC registration if they manage less than $100 million in assets and have no investment company clients. Persons are excluded from the Advisers Act definition of investment adviser if they are publishers of news or business/financial publications of general and regular circulation or if their advice relates solely to U.S. government securities.

One of the features of an index annuity is the ability for the principal value to increase based on the performance of the specified index. Which of the following is NOT used as a method to compute the amount of interest to be credited to the account? A) Point to point B) Annual reset C) Participation rate D) High-water mark

C) Participation rate Although the participation rate is a component of the computation, it is not a method of computing the interest credit. In the annual reset index method, interest, if any, is determined each year by comparing the index value at the end of the contract year with the index value at the start of the contract year. Interest is added to the annuity each year during the term. Using the high-water mark, the index-linked interest, if any, is decided by looking at the index value at various points during the term, usually the annual anniversaries of the date the annuity was purchased. The interest is based on the difference between the highest index value and the index value at the start of the term. Interest is added to the annuity at the end of the term. And finally, with the point-to-point method, the index-linked interest, if any, is based on the difference between the index value at the end of the term and the index value at the start of the term. Interest is added to the annuity at the end of the term. In each of these, the insurance company will specify the participation rate (what percentage of the increase will be credited) and a cap rate (the maximum amount to be credited).

Searching Out New Growth (SONG) is a venture capital fund. As such, all of the following statements are true EXCEPT A) SONG only issues securities which are, except in extraordinary circumstances, non-redeemable B) SONG's investment adviser is exempt from registration C) SONG must have less than $150 million in assets in the fund D) SONG is not registered under the Investment Company Act of 1940

C) SONG must have less than $150 million in assets in the fund Although venture capital funds are included in the general definition of private funds, unlike the private equity fund, there is no ceiling on the size of the fund before the adviser loses the exemption. Advisers to VC funds are exempt from registration. The funds themselves do not register with the SEC under the Investment Company Act of 1940 (and don't register with the states as well). These investments do not offer ready liquidity.

Which of the following offers the opportunity to realize a capital gain rather than ordinary income? A) Deferred annuities B) Cash dividends C) Stock dividends D) Section 529 plans

C) Stock dividends Stock dividends, unlike cash dividends, are not taxable in the year of receipt. Instead, they reduce the owner's cost basis and, when sold at a price above that cost basis, are treated as capital gain rather than ordinary income. Deferred annuities never generate anything but ordinary income, and qualified withdrawals from Section 529 plans result in no taxation on the earnings. If they are not qualified, there is ordinary income tax plus a penalty.

Under the Uniform Securities Act, each of the following statements regarding a sale, an offer, or an offer and sale is true EXCEPT A) every sale or offer of a warrant or stock right to purchase or subscribe to another security is considered to include an offer of the other security B) a purported gift of assessable stock is considered to involve an offer and sale C) a bona fide pledge is considered an offer and sale D) any security given or delivered, with or as a bonus for any purchase of securities, is considered to have been offered and sold for value

C) a bona fide pledge is considered an offer and sale The term "sale" does not include a bona fide pledge. It does, however, include securities given as a bonus with a purchase and gifts of assessable stock because the owner of the stock may be called on to produce additional money. Sales of rights or warrants are considered sales of the underlying security.

One of the likely consequences of a rating downgrade on a bond is A) the current yield will be reduced. B) the call feature will be employed. C) a reduction in the market price of the bond. D) an increase to the coupon by the issuer.

C) a reduction in the market price of the bond. If the rating agencies downgrade the quality of a bond, potential investors will look to compensate for the increased risk by demanding a greater yield on the issuer's bonds. This will inevitably result in a lower bond price. A change in ratings is unlikely to lead to a call. In fact, with the reduction in the market price, the bond may be selling below par giving the issuer the opportunity to retire the debt at a discount. Bonds are fixed-income securities because the coupon rate is fixed when the bond is issued and does not change.

Consent of the client before completion of a trade made between the firm and a client must be made when A) a broker-dealer will be acting in the capacity of an agent B) a broker-dealer will be acting as a contra party to the trade C) an investment adviser will be acting in the capacity of a principal D) a broker-dealer will be acting in the capacity of a principal

C) an investment adviser will be acting in the capacity of a principal In those uncommon cases where an investment adviser acts in the capacity of a principal (or agent) with an advisory client, consent of the client before completion of the transaction is required. In the case of broker-dealers, disclosure of capacity on the trade confirmation, but not consent, is needed.

Transparent Investment Advisers (TIA) is registered in 3 states and has $55 million in assets under management. TIA maintains custody of customer securities. TIA's chief financial officer reports that the net worth of the firm has suddenly fallen to $28,000. This would require TIA to A) obtain a surety bond in the amount of $7,000. B) borrow $7,000 from the owners. C) obtain a surety bond in the amount of $10,000. D) issue $7,000 of stock.

C) obtain a surety bond in the amount of $10,000. State-registered investment advisers who maintain custody of customer funds or securities must have a minimum net worth of $35,000. If the net worth should fall below that amount, the firm must immediately obtain a surety bond rounded to the next $5,000 to meet that level. In this case, the firm's deficiency is $7,000, and the next $5,000 that will cover that is a bond for $10,000. Borrowing money does not increase net worth and, even if TIA is a corporation, it would probably take too long to issue additional stock.

A client investing $50,000 into the KAPCO Growth Fund would most likely be eligible for a breakpoint if purchasing A) the Class C shares B) the Class B shares C) the Class A shares D) the closed-end shares

C) the Class A shares Breakpoints for quantity purchases are available on shares that carry a front-end load. Those are Class A shares. Class B shares have a back-end load, Class C shares are considered level load, and when one purchases shares of a closed-end company, commissions are charged, as would be on any stock purchase.

Which of the following investments is not registered under the Investment Company Act of 1940? A)ETFs B)UITs C)ETNs D)FACCs (Face-Amount Certificate Companies)

C) ETNs Exchange-traded notes, sometimes called equity-linked notes, are registered under the Securities Act of 1933 as debt instruments. All of the other choices are registered as investment companies under the Investment Company Act of 1940. 3 Types of Investment Company - FACC - Management Investment Company (Open or Closed ended mutual funds - UIT's

Your client calls you after reading a story in the business section of his local newspaper. It seems that the article focused on changes to the core CPI and the client wants to know how that is different from the normal CPI. You should explain that it is A)the figure used to determine annual increases, if any, to Social Security benefits B)the Consumer Price Index excluding housing and automobiles C)the Consumer Price Index excluding energy and food prices D)the total of the leading indicators, excluding stock prices

C)the Consumer Price Index excluding energy and food prices Because of their high volatility, economists exclude energy and food prices from core inflation figures. Social Security adjustments (and many others as well) are based upon the CPI itself, not the core.

Which of the following is not an assumption of the capital asset pricing model (CAPM)? A)All investors want to achieve a maximum return for minimum risk. B)All market participants borrow and lend at the same risk-free rate. C)Corporate and government taxes affect all transactions. D)All market participants are well-diversified investors, and specific risk has been diversified away.

C)Corporate and government taxes affect all transactions. CAPM assumptions include: 1. There are no tax or transaction costs to consider. 2. All market participants borrow and lend at the same risk-free rate. 3. All market participants are well-diversified investors, and specific risk has been diversified away. 4. All investors want to achieve a maximum return for minimum risk.

The Conference Board releases information about the economy on a monthly basis. Included are a number of different indicators. Economic indicators can be leading, lagging, or coincidental, which indicates the timing of their changes relative to how the economy as a whole changes. Which of the following is a lagging economic indicator? A)Nonagricultural employment B)Building permits (housing starts) C)Prime interest rate D)Manufacturers' new orders for consumer goods

C)Prime interest rate The prime interest rate is a lagging indicator. Nonagricultural employment is a coincident indicator. The other two choices are leading indicators. Lagging indicators are measurements that change four to six months after the economy has begun a new trend and serve to confirm the new trend. Lagging indicators help analysts differentiate long-term trends from short-term reversals that occur in any trend. Lagging indicators include the following: Average duration of unemployment Ratio of consumer installment credit to personal income Ratio of manufacturing and trade inventories to sales Average prime rate Change in the CPI for services Total amount of commercial and industrial loans outstanding Change in the index of labor cost per unit of output (manufacturing)

A 61-year-old wanting to take a lump-sum distribution from his Keogh will A)incur a 50% penalty tax B)be taxed at long-term capital gains rates C)be taxed at ordinary income rates D)incur a 10% penalty tax

C)be taxed at ordinary income rates The distribution described here would be taxed as ordinary income. A 10% penalty tax would apply if the individual were under age 59½. Keogh plans are ERISA qualified plans for Self-employed people only. - employees must have same contribution % - only income from self-employment counts towards max that may be contributed - Employees must be FT, Tenured, 21-72 years of age - Can have both Keogh + IRA. IRA contribution exceeding earning limits are not tax deductible.

A client owns an investment-grade bond with a coupon of 7%. If similarly rated bonds are being issued today with coupons of 5%, and the market is efficient, it would be expected that the client's bond A)has a positive net present value B)has a negative net present value C)has a zero net present value D)will be selling at a discount from par

C)has a zero net present value With a discount rate of 5% (the discount rate in a present value computation is the current market interest rate), a debt instrument with a 7% coupon rate will be selling at a premium (interest rates down, prices up). If the market is efficiently pricing that bond, its market price should be equal to its present value, resulting in an NPV of zero. NPV = Present Value-Current Market Value Positive NPV = Good investment

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

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

Defalcator Investment Planning (DIP) has $175 million in AUM and has offices in States A, K, and R. DIP would be required to provide a balance sheet as part of its brochure if it charged fees of A) $1,500 for the next 3 months of advisory service. B) $600 for the next 6 months of advisory service. C) $1,200 for the next 6 months of advisory service. D) $1,500 for the next year's advisory service.

D) $1,500 for the next year's advisory service. Federal covered investment advisers, who charge substantial prepayment of advisory fees, must include a balance sheet with their brochure. The definition of a substantial prepayment is: more than $1,200, 6 or more months in advance. The correct choice is the only one meeting both requirements. Remember, it isn't $1,200 or more, it is more than $1,200 and it must be for at least 6 months of service to count. Please notice that with $175 million in AUM, DIP must be SEC registered; the location of its offices is irrelevant to the question.

Your 55-year-old client owns a nonqualified variable annuity. He originally invested $50,000 4 years ago. The annuity has grown to a value of $60,000. If the client, who is in a 30% tax bracket, makes a random withdrawal of $15,000, what will he pay to the IRS? A) $3,000.00 B) $4,500.00 C) $0.00 D) $4,000.00

D) $4,000.00 Because this is a nonqualified annuity (with no tax deduction), the client pays taxes only on the growth portion or, in this case, $10,000. The tax on this amount is $3,000. However, because the client is not yet age 59½ when making the withdrawal, he also pays a 10% tax penalty, or $1,000. This makes a total of $4,000 tax and tax penalty paid on the random withdrawal.

Which of the following investments would provide the highest after-tax income to your client in the 35% federal income tax bracket? A) 6% U.S. Treasury bond B) 5% general obligation municipal bond issued by State H C) 7% bond issued by Canadian Province M D) 8% debenture issued by the LMN Corporation

D) 8% debenture issued by the LMN Corporation Only the State H bond is exempt from federal income tax. Using the tax equivalent yield formula of the muni coupon divided by (100% minus the investor's tax bracket %) we get 5% divided by 65% or 7.7%. That's a better deal than receiving 6% on the Treasury and paying taxes as well as 7% on the Canadian bond (although you learned that securities issued by Canadian provinces were exempt from registration under the Uniform Securities Act, that has nothing to do with U.S. income taxes). However, with a TEY of 7.7%, your client would take home more with the 8% taxable corporate security. You can also work backward to get the correct answer. Simply subtract 35% tax from each of the choices (other than the muni) and see which is the highest. In this case, 8% minus a 35% tax equals 5.2%—just a bit higher than the 5% coupon on the municipal bond.

If a publicly traded corporation was going to sell a wholly-owned subsidiary, the information would be made available through the filing of a Form A) 13-F B) 10-K C) 10-Q D) 8-K

D) 8-K The Form 8-K is filed with the SEC within 4 business days of any one of a number of significant actions, including the sale of a significant asset such as a wholly-owned subsidiary.

Which of the following definitions involving derivatives is inaccurate? A) The seller of a put option has a neutral outlook. B) An option writer is the seller of an option. C) A long straddle consists of a long call and a long put on the same underlying stock with the same strike price and the same expiration date. D) A call option gives the owner the right to sell the underlying asset at a specific price for a specified time period.

D) A call option gives the owner the right to sell the underlying asset at a specific price for a specified time period. A call option gives the owner the right to buy the underlying security at a specific price for a specified time period. Writers of put options are neutral to bullish; it is the put buyers who are bearish. A short straddle is the opposite of a long straddle - it is a short call and a short put on the same underlying stock with the same strike price and the same expiration date.

Which of the following firms in the business of rendering investment advice for compensation would be considered a federal covered adviser? A) DEF Fund managers, a corporation managing an unregistered hedge fund with $10 million in assets B) GHI Consultants, a sole proprietorship, managing $82 million belonging to high-net-worth individuals C) JKL Pension Consultants, a management firm providing services to employee benefit plans, and currently has $179 million under management D) ABC Money Managers, a partnership with $115 million under management

D) ABC Money Managers, a partnership with $115 million under management Explanation It makes no difference what the structure of the adviser is. As long as the assets under management are $110 million or more, SEC registration is required. If the investment company is registered under the Investment Company Act of 1940, the adviser must be registered, regardless of size. The hedge fund is an unregistered fund, so the rule does not apply to it. Pension consultants are not eligible for SEC registration until their AUM reaches $200 million.

An option that may be exercised before its expiration date is said to be A) Flexible style B) Premature style C) European style D) American style

D) American style There are two forms of option exercise—American and European. American style can be operationally exercised any day that the market is open before the expiration date. With European style, the only time you can operationally exercise your contract is the last trading day before expiration. Remember, even though there is only one day in which you can exercise your contract, you can always close out your option position in the secondary market any day prior to expiration.

Julian and Jane are discussing risk-return measures. Julian states that "beta is used when looking at the performance of a fund or portfolio and refers to the extent of any outperformance against its benchmark." Jane disagrees and says that "outperformance of a fund or portfolio is actually measured by standard deviation." Which of the following statement is correct? A) Both Julian and Jane are correct. B) Only Jane is correct. C) Only Julian is correct. D) Both are incorrect.

D) Both are incorrect. Both Julian and Jane are incorrect. It is alpha, not beta, that is used when looking at the performance of a fund or portfolio. Alpha refers to the extent of any outperformance of a portfolio against its benchmark. Standard deviation is used for measuring volatility, not performance.

If you overheard an analyst referring to an investment's indicative value, the discussion would most likely be about A) TIPSs. B) REITs. C) ETFs. D) ETNs.

D) ETNs. The calculated value, called the indicative value or closing indicative value for ETNs, is calculated and published at the end of each day by the ETN issuer.

The alternative asset investments class is least associated with which of the following characteristics? A) Diversification B) Illiquidity C) Non-normal returns D) Efficient pricing

D) Efficient pricing Alternative assets are most often characterized by inefficient pricing, providing potential abnormal returns or alpha returns.

Under SEC regulations, publicly-traded (reporting) companies are required to file all of the following except A) Form 8-K. B) Form 10-Q. C) Form 10-K. D) Form 13F.

D) Form 13F. Form 13F is used by money managers who manage equity portfolios with at least $100 million in equity securities. The other choices are forms that are filed as appropriate with the SEC by companies whose securities are registered with the SEC. * Form 8-K: Report that companies must file with the SEC to announce major events that shareholders should know about * Form 10-Q: Report of financial performance that must be submitted quarterly by all public companies to the SEC * Form 10-K: Report of financial performance filed annually by public companies

Which of the following statements regarding a mutual fund that offers class A, B, and C shares are TRUE? I. Class A shares have a front-end sales charge and a low 12b-1 fee. II. Class B shares have a declining contingent-deferred sales charge and a high 12b-1 fee. III. Class C shares have a high 12b-1 fee and a level contingent-deferred sales charge. IV. Class B and C shares allow investors to put the shares back to the fund for their original purchase price for up to 1 year after purchase. A) I only B) I, II, III, and IV C) I and II D) I, II, and III

D) I, II, and III There is no put provision that guarantees the return of an investor's purchase price associated with mutual fund shares.

Under the National Securities Markets Improvement Act of 1996, which of the following describe federal covered securities? I. A security registered under the USA II. A security registered under the Investment Company Act of 1940 III. A security of a company traded on the Nasdaq Stock Market IV. A security issued by the U.S. government

D) II, III, and IV A federal covered security has a federally imposed exemption from state registration, so selecting a choice that includes registering under the USA cannot be correct. The list includes most securities exempt from registration under the federal Securities Act of 1933 (those issued by the U.S. government and state and local governments). In addition, it includes a number of securities registered with the SEC, primarily those traded on the exchanges and Nasdaq, as well as investment companies registered under the Investment Company Act of 1940.

Which of the following transactions are exempt? I. XYZ Corp., a local manufacturing firm, sells its common stock to several local individual accredited investors on an infrequent or isolated basis. II. Joe Smith, an agent with ABC Securities, Inc., sells XYZ Corporation's 5-year fixed-income securities, rated AAA by Standard & Poor's, on a regular basis to selected members of his large retail client base. III. Joe Smith, an agent with ABC Securities, Inc., sells XYZ Corporation's securities to a high-net worth client on an unsolicited basis. IV. Alexander Wimpton had his sizable portfolio of stocks and bonds sold by the administrator of his estate upon his death.

D) III and IV Unsolicited secondary market transactions and those made by an estate's executor are exempt transactions; the net worth of the client is immaterial. While the AAA bonds may be an exempt security, soliciting regular transactions (unless with institutional buyers) is not an exempt transaction. XYZ Corp., a local manufacturing firm, is an issuer of the common stock. Had it been a nonissuer transaction on an isolated basis, the transaction would have been exempt and the accredited investor status of the clients is meaningless here.

The Conference Board releases information about the economy on a monthly basis. Included are a number of different indicators. Economic indicators can be leading, lagging, or coincidental, which indicates the timing of their changes relative to how the economy as a whole changes. Which of the following is a coincident economic indicator? A) Machine tool orders B) Agricultural employment C) Stock market prices as measured by the S&P 500 D) Industrial production

D) Industrial production Industrial production is a coincident indicator. The stock indices and manufacturing orders are leading indicators; economists do not use agricultural employment as an indicator. Coincident, or current, indicators are economic measurements that change directly and simultaneously with the business cycle. Widely used coincident indicators include the following: Nonagricultural employment Personal income, minus Social Security, veteran benefits, and welfare payments Industrial production Manufacturing and trade sales in constant dollars

Which of the following retirement plans is NOT legally required to establish vesting, funding, and eligibility requirements? A) Profit-sharing plan B) Defined benefit pension plan C) Keogh plan D) Payroll deduction plan

D) Payroll deduction plan Explanation A payroll deduction plan is a retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans. A payroll deduction plan is a nonqualified retirement plan. Profit-sharing, pension, and Keogh plans must have established standards.

As a rule, which of the following is NOT a characteristic of micro-cap stocks? A) Are typically subject to higher business risk than large-cap stocks B) Have lower liquidity because they are thinly traded C) Sometimes have great potential for growth D) Represent mature, well-established companies

D) Represent mature, well-established companies Micro-cap stocks generally represent younger, less-established companies than large-cap stocks. As a result, micro-cap stocks sometimes have a great potential for growth. At the same time, though, they may be subject to greater business risk than stocks in more mature companies. In addition, their shares are often thinly traded, so they can have fairly low liquidity.

A pension consultant who advises corporate retirement plans with assets of $135 million must register with which of the following? A) Both the state and the SEC B) Either the state or the SEC C) SEC D) The state

D) The state Under the Dodd-Frank Bill, until a pension fund manager has at least $200 million in AUM, registration with the states is required. Once the $200 million level is reached, SEC registration becomes an option.

A client is considering the purchase of American depositary receipts (ADRs). She is looking to further diversify her portfolio. Which of the following is NOT a feature of this type of investment vehicle? A) Information regarding the foreign company is easily attainable. B) ADRs are traded on exchanges and the OTC markets. C) ADRs are denominated in and pay dividends in U.S. dollars. D) They are not subject to exchange rate, or currency, risk.

D) They are not subject to exchange rate, or currency, risk. Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk. In order to trade in the U.S. markets, information about the foreign company must be available to investors. ADRs representing the best known companies typically trade on the NYSE or the Nasdaq Stock Market, while lesser companies trade OTC.

Publicly-traded corporations are generally required to have an annual independent audit of their financial records. What is the highest opinion offered under GAAP? A) Adverse opinion B) Disclaimer of opinion C) Qualified opinion D) Unqualified opinion

D) Unqualified opinion An unqualified or "clean" opinion is the best type of report a business can get. The term qualified means that the auditor has some reservations about the information contained in the financial statements. An adverse opinion means the auditor is not willing to vouch for the accuracy of the information. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

A stock has been in a downtrend for several days. When its price decreases to near $30, many investors enter orders to buy the stock and the price increases to $31. This is most likely an example of A) a resistance level. B) a change in polarity. C) a reversal. D) a support level.

D) a support level. The downtrend reached a support level where buying demand sustained the price. A resistance level is a price at which selling pressure emerges that stops an uptrend.

Active Technicians (AT), a state-registered investment adviser serving primarily retail accounts, would be in compliance if it A) filed a brochure with the Administrator, noting that it was available to clients upon request B) sent a copy of Form ADV Part 1A and Part 1B within 120 days of the end of AT's fiscal year C) sent a brochure within 150 days of the end of AT's fiscal year D) did not send an annual brochure to its clients if there was no material change from the previous year

D) did not send an annual brochure to its clients if there was no material change from the previous year The NASAA Model Rule dealing with brochures states that investment advisers do not have to deliver a summary of material changes or a brochure to clients if no material changes have taken place since the last summary and brochure delivery. If a brochure or summary of material changes is required, the delivery date is 120 days after the end of the adviser's fiscal year, not 150 days. If the adviser wishes to use Form ADV, it should use Part 2A and 2B.

Under the USA, all the following statements regarding the registration of agents are true EXCEPT A) an agent can only sell securities that have been registered in a state or that are exempt from registration B) a nonresident agent can solicit business in another state only if the agent and the broker-dealer are registered in that state C) if an agent resigns and affiliates with another broker-dealer, both firms and the agent must notify the Administrator D) if a broker-dealer's registration is revoked by a state, it has no effect on the agent's registration

D) if a broker-dealer's registration is revoked by a state, it has no effect on the agent's registration If a broker-dealer's (or investment adviser's) registration is revoked by a state, the registrations of all its agents (or IARs) are suspended. That is, those individuals can no longer function in a registered capacity until they register with another active firm.

The federal legislation that requires broker-dealers to verify the identity of any person opening an account is A) the Uniform Securities Act of 1956 B) the Insider Trading and Securities Fraud Enforcement Act of 1988 C) the Securities Exchange Act of 1934 D) the USA PATRIOT Act of 2001

D) the USA PATRIOT Act of 2001 The USA PATRIOT Act (the full title is Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) requires firms to obtain identifying information on each new customer, verify the identity of each new customer, maintain records relating to identity verification, and determine if any new customer appears on a list of known or suspected terrorist groups compiled by the Office of Foreign Assets Control (OFAC). This is accomplished through the customer identification program (CIP).

The main benefit that variable life insurance has over whole life insurance is A) the availability of policy loans B) an adjustable premium C) a lower sales charge D) the potential for a higher cash value and death benefit

D) the potential for a higher cash value and death benefit Premiums of variable life insurance policyholders are invested in the insurer's separate account. This allows the policyholder the opportunity (though there are no guarantees) to enjoy significant returns and substantially higher cash values than are obtainable through a whole life policy.

One of the advantages of using a 529 plan rather than a Coverdell ESA to fund higher education is A) contributions to a 529 plan are tax deductible. B) the 529 plan is a security while the ESA is not. C) the 529 allows you to change the beneficiary to another member of the beneficiary's family. D) there is no age limit by which time the funds must be used.

D) there is no age limit by which time the funds must be used. Unless the child is a special needs case, funds in a Coverdell ESA must be used by age 30. Contributions to neither program are tax deductible and both plans allow changing the beneficiary to another member of the beneficiary's family. Although the 529 plan is technically a municipal fund security, that is neither an advantage nor disadvantage to the investor.

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

D)30%. Profit margin = Net profit ÷ sales = $1.5 million ÷ $5 million = 30%. Profit margin is based on operating costs. Because interest on bonds is a fixed expense, it is not included in the computation

A federal covered investment adviser employs the services of a third-party solicitor. The Investment Advisers Act of 1940 would require the solicitor to deliver I. a copy of the IA's brochure II. a copy of the solicitor's brochure III. a copy of the solicitor's script IV. a copy of the IA's Form ADV Part 1

D)I and II Third-party solicitors must provide a copy of the investment adviser's brochure (Form ADV Part 2A), as well as a copy of the solicitor's brochure. The solicitor's script must be approved by the IA, and only the SEC receives a copy of the Form ADV Part 1. Form ADV Part 1: Info about the IA's business Part 1B: Additional questions required by state securities authorities only (no for federal covered) Part 2A: AKA the brochure (customer related info: compensation, investments, educational background, audited balance sheet Part 2B: Brochure supplements about supervised persons or those who manage accounts

Which of the following is an example of a regressive tax? A)Gift tax B)Estate tax C)Income tax D)Sales tax

D)Sales tax Regressive taxes are those where the rate remains the same, regardless of the cost of the item subject to the tax. For example, if your state has a 6% sales tax, it makes no difference if you are buying an item for $1.00 or one for $10,000, the tax rate is the same 6%. The other choices given are progressive taxes where the tax rate increases as the dollar amount being taxed increases.

Which of the following statements is CORRECT? A)Both state-registered and federal covered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. B)A state-registered investment adviser collecting fees of $500 for 6 months or more in advance, is considered to be receiving a substantial prepayment. C)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 $500 for 6 or more months in advance.

The fee charged by some mutual fund companies if shares are redeemed within a specified time after being purchased is known as A)a breakpoint fee B)a 12b-1 fee C)a forward pricing fee D)a contingent-deferred sales charge

D)a contingent-deferred sales charge Some mutual funds impose contingent-deferred sales charges (CDSC) on investors who redeem their shares within a specified period after purchasing them. These fees are designed to encourage investors to leave their money in the fund for longer periods. Typically, the amount of the contingent-deferred sales charge decreases the longer the investor owns the shares. * Forward pricing principle use for price determination for purchases and sales where the price is based upon the next computed NAV per share (mutual funds NAV gets computed at least 1x/day)

Nonsecurities derivatives include futures and forwards. Among the differences between futures and forwards is that futures contracts A)are not regulated by the CFTC (Commodity Futures Trading Commission) while forwards are. B)are preferred to forwards by producers. C)are nonstandardized while forwards are. D)are rarely exercised while forwards generally are.

D)are rarely exercised while forwards generally are. In the vast majority of the cases, futures contracts are closed out prior to expiration. That is one reason they are more popular with speculators than forwards. Because forwards are generally delivered, they are the preferred tool by producers and it is futures which are standardized and CFTC regulates, not forwards. Forward Contracts: A direct commitment between a specific buyer and seller, without 3rd party intervention. Not easily transferable (illiquid)

In order to qualify as a REIT, A)a mortgage REIT must have at least 75% of the assets in government-insured mortgages. B)at least 75% of the income must be paid out as dividends to investors. C)at least 90% of the assets must be invested in real-estate related assets. D)at least 75% of the assets must be invested in real-estate related assets, cash, and U.S. government securities.

D)at least 75% of the assets must be invested in real-estate related assets, cash, and U.S. government securities. A REIT must be invested in real estate. By law, at least 75% of a REIT's assets must consist of real estate assets such as real property or loans secured by real property. That 75% can also include cash and U.S. government securities. If it is a mortgage REIT, there is no specific requirement regarding government-insured mortgages. A REIT must distribute at least 90% of its income to investors, not 75%.

Washington, Adams, and Jefferson, Inc. (WAJI) is a broker-dealer whose principal and only office is in Alexandria, VA. WAJI's sole business is trading in securities issued by the U.S. Treasury. Rutherford Buchanan is employed by the firm in the main office and has the responsibility of servicing the firm's bank and insurance company clients. Which of the following statements is correct regarding Rutherford's licensing requirements? A)Rutherford must register as an agent of WAJI with the State of Virginia. B)Rutherford is exempt from registration because his only clients are institutions. C)Rutherford cannot register as an agent of WAJI because dealing exclusively with U.S. Treasury securities removes the firm from the definition of a broker-dealer. D)Rutherford is exempt from registration because he only deals with securities issued by the U.S. Treasury.

Rutherford must register as an agent of WAJI with the State of Virginia. Rutherford represents a broker-dealer in dealing with clients and that requires registration as an agent in any state in which he maintains a place of business. The fact that WAJI only trades in U.S. Treasury securities is irrelevant. Perhaps you were thinking of an investment adviser who, under these circumstances, would be excluded from the definition of IA under the Investment Company Act of 1940. That has nothing to do with broker-dealers. Even if WAJI's only clients were banks and insurance companies, it would still have to register in the state where it is headquartered; the "institutions only" exemption applies when the broker-dealer does not have a place of business in the state.

KapCo Balance Fund has a NAV of $9.50 and POP of $10. Over the past 12 months, it distributed dividends totaling $.75 and capital gains totaling $1.00. What is KapCo's current yield? A)7.5% B)10% C)7.9% D)17.5%

The first point is that capital gains are not included in calculation of a mutual fund's current yield. You must also remember that the NAV is not involved. The calculation is: $0.75 (annual dividend) = 7.5%/$10.00 (POP)