Scan 65
A BCP should be designed to protect the firm's clients in the event of which of the following? I. A natural disaster such as a hurricane or tornado II. Acts of terrorism III. Pregnancy of one of the firm's IARS IV. Climate change A. Iand II B. Iand IV C. Il and II D. IIl and IV
Answer: A. Business Continuity Plans are designed to provide for the sudden unexpected events that can disrupt day-to-day business operations and that makes choice A the correct answer.
Holders of each of the following are creditors EXCEPT investors owning A. preferred stock B. corporate bonds C. municipal bonds D. government bonds
Answer: A. Remember all stockholders (even preferred stockholders) are owners of a corporation, not creditors.
Commonly traded on a regulated exchange would be any of the followie EXCEPT A. ETFS B. forward contracts C. futures D. warrants
Answer: B. A forward contract, choice B, is a direct commitment between one buyer and one seller. This makes each contract different, and lack of standardization makes exchange trading a virtual impossibility.
Among the purposes of purchasing derivatives would be all of the following EXCEPT: A. hedging B. income C. profits D. speculation
Answer: B. Purchase of a derivative, whether an option, a forward, or futures contract, never generates income, Selling one does, but the question refers to a purchaser and that is why the correct answer is choice B.
Which type of investment company is most often organized as a limited partnership? A. Face-amount certificate company B. Exchange-traded fund C. Hedge fund D. Unit investment trust
Answer: C. For various legal reasons, mostly related to the need to avoid registration with the SEC, hedge funds are generally structured as limited partnership entities, choice C, with the organizers invariably sinking their own funds into a few units.
What is this firm's contribution to the U.S. GDP? A. $14 million B. $30 million C. $44 million D. $60 million
Answer: C. The question is how we measure this firm's contribution to U.S. output. At first glance, the answer would seem to be $60 million, the total value of its sales. However, $16 million of this was produced somewhere else, so it shouldn't be counted as part of the firm's-or the United States'- output. Thus, the correct answer is $44 million, the amount of value the firm has added to the imported parts.
ADRS are used to facilitate A. foreign trading of domestic securities B. foreign trading of U.S. government securities C. domestic trading of U.S. government securities D. domestic trading of foreign securities
Answer: D. Because everything is in U.S. dollars and in English, ADRS make trading in foreign securities (choice D) much easier for those who live here.
One of your clients wishes to invest in a hedge fund. You should explain which of the following points? A. Shares of these funds are easy to redeem. B. The fund can be expected to generate a profit whether the markets trend up or trend down. C. These funds purchase a large amount of preferred stock. D. Expenses for these funds tend to be higher than those for traditional mutual funds.
Answer: D. One of the distinguishing characteristics of hedge funds is their high fee structure when compared to mutual funds, choice D. Hedge funds typically use risky strategies to generate profit regardless of market direction, but there is no assurance that the objective will be realized. Redemption may be difficult with these funds.
Potential litigation for patent infringement would appear on a corporation's A. balance sheet as a deferred asset B. footnotes C. income statement as an expense D. statement of potential litigation
Answer B. The footnotes to the financial statements carry information such as potential legal actions, accounting methods used, and off-book debt.
Daniella has a number of investment company products within her may trade at a premium or discount retirement portfolio. One of these investments trades on an exchange and to its net asset value. These features of investment? are most likely found in what type A. Closed-end investment company B. Unit investment trust C. Open-end investment company D. Face-amount certificate company
Answer: A. A closed-end investment company (closed-end fund, or CEE) choice A, is a type of investment company whose shares trade in the secondary market. It is critical to remember for the exam that the price of a closed-end company is based on supply and demand and, therefore, can sell at, above, or below the fund's NAV.
The key difference between a fixed annuity and a variable annuity is that the fixed annuity A. offers a guaranteed return B. offers a monthly payment that may vary in amount C. will always pay out more money than a variable annuity D. attempts to offer protection to the annuitant from inflation risk.
Answer: A. If an annuity is fixed, it means the return to the investor is guaranteed, (choice A), whereas with a variable annuity, there are no guarantees as to the amount of return. It is the variable annuity whose annuity payment will vary and, because of the growth opportunity, offers potential inflation protection.
A broker-dealer's cybersecurity procedures should address all of the following EXCEPT on hold A. the music played while customers are placed B. office desktop computers C. agent's personal smartphones used on occasion to communicate with clients D. remote access to servers or workstations via a virtual private network (VPN)
Answer: A. It is hard to imagine how the music on hold, choice A, would present a security risk. All of the others clearly offer potential for los.
In the assessment of a company's stock, a technical analyst takes into consideration all of the following EXCEPT A. earnings B. market price C. price trends D. volume
Answer: A. Remember our key phrase: A technical analyst charts a stock's price and volume over a period of time. It is the fundamental analyst who focuses on the company's performance, such as earnings.
The Conference Boa has released information indicating an increase in the Help Wanted Index. Most analysts would take this as a sign of A. an impending recession inflation in the future B. likely wage C. an increase in manufacturing inventories D. a rising trade deficit
Answer: B. An increase in the Help Wanted Index signifies that employers are hiring-business is good. Competition for qualified workers will usually and that will translate to higher prices for result in paying higher wages goods and services (inflation).
A person giving advice on which of the following investments would be A. Gold B. Common stock C. Rental real estate D. Rare stamps
Answer: B. Common stock is a security; the others are considered non-securities.
One would expect to have checkbook access to A. a CMO B. a DDA C. a GNMA D. a LIBOR
Answer: B. DDA stands for demand deposit account, most often a checking account at a bank.
A company realizes money from the sale of surplus equipment. It would like to invest this money but will need it in 4-6 months and must take that into consideration when selecting an investment. You would recommend A. preferred stock B. Treasury bills C. AAA rated bonds with long-term maturities D. common stock
Answer: B. For this client, the appropriate investment is a money market instrument (choice B) and nothing is safer than a T-bill.
A 30-year-old client indicates that he needs $500,000 of life insurance coverage for the next 20 years. The lowest out-of-pocket cost would be if he purchased a A. 20-pay life policy B. 20-year level term policy C. whole life policy D. variable annuity with an extended death benefit
Answer: B. In almost all circumstances, certainly for short to immediate time periods, term life will be the least expensive form of insurance. A 20-pay life is a permanent policy where the premiums are paid in a 20-year period rather than until death. Variable annuities are not life insurance policies even though they are issued by life insurance companies.
In order for a REIT to avoid being taxed like a corporation, it must distribute A. 75% of its taxable income B. 90% of its taxable income C. 95% of its taxable income D. 100% of its taxable income
Answer: B. In order to qualify at least 90% (choice B) of their taxable shareholders. At least 75% of the under IRS regulations, REITS must distribute income in the form of dividends tO REIT's income must come from real estate investments.
Present value is a computation that is frequently used to determine the amount of a deposit needed now to meet a future need, such as a college education. If an investor uses an expected return of 8% but the actual return over the period is 10%, the future value will be A. lower than anticipated B. higher than anticipated C. the same as anticipated D. too varying to tell
Answer: B. Present value is the amount deposited to meet a future goal based on an expected rate of return. If the return is higher than expected, the ending result will be greater (a good thing).
Among the purposes of purchasing derivatives would be all of the following EXCEPT A. hedging B. income C. profits D. speculation
Answer: B. Purchase of a derivative, whether an option, a forward, or futures contract, never generates income, Selling one does, but the question refers to a purchaser and that is why the correct answer is choice B.
The balance sheet of the DEF Corporation shows that included in its $15 million in current assets is $4 million in cash and $2 million in accounts receivable. If DEF's current liabilities are $4 million, the quick asset ratio is А. 1.0:1 В. 1.5:1 С. 2.5:1 D. 3.0:1
Answer: B. We aren't told what the inventory is, but we are given the other current assets. So, we can add together the $4 million in cash to the $2 million in receivables resulting in $6 million divided by the $4 million in for the question to tell us the inventory-we didn't have to subtract it because we current liabilities for a 1.5 to1 (choice B) answer. It wasn't necessary never included it in the first place.
Core inflation is best described as an inflation rate A. for producers' raw materials B. the central bank views as acceptable C. that excludes certain volatile goods prices D. that represents a market basket of consumer items
Answer: C. Core inflation is measured using a price index that excludes food and energy prices.
An investor who initially makes a small investment in a mutual fund may have the advantage of a lower sales charge on investments made over a 13-month period through A. a breakpoint letter B. a Class A letter C. a letter of intent D. a sponsor's letter
Answer: C. Investors who sign a LOI, (choice C), stating they will invest a specified amount over a 13-month period are eligible for a reduced sales load if they invest enough to reach the breakpoint within that time. Breakpoints entitle investors to reduced sales charges.
instead of index mutual funds? Which of the following is NOT touted as an advantage to purchasing ETFS A Intra-day trading ratios B. Typically lower expense C. Performance is generally better than the underlying index D. Can be purchased on margin
Answer: C. One thing that neither of these products can claim is performance better than the underlying index, choice C. Think about it- the index has no management fees. Even though the management fees on index funds are very low and those on ETFS generally lower than that, there are still expenses making it unlikely that their performance can beat that of the index. The fact that an investor can trade the ETF during the day instead of accepting whatever the next computed price is, can be a benefit for those who are trying to time the market. And, for those who wish to add the leverage of margin trading (explained more fully in Unit 22), that can only be done with ETFS, not index mutual funds.
After the death of the annuitant, beneficiaries under a life and 15-year period certain option are subject to A. capital gains taxation on the total amount of payments received B. ordinary income taxation on the total amount of payments received, plus a 10% withdrawal penalty if the annuitant was under age 592 C. ordinary income taxation on the amount of the payout that exceeds the cost basis based on the exclusion ratio D. tax-free payout of all remaining annuity benefits
Answer: C. Payments from the annuity to the beneficiary through a period certain option are taxed in the same way as other periodic annuity payments; benefits over the amount of the cost basis are taxable as ordinary income. However, no 10% penalty applies in this situation.
All of the following risks are considered diversifiable EXCEPT A. risk currency B. liquidity risk C. purchasing power risk D. sovereign risk
Answer: C. Purchasing power risk, also known as inflation risk, is a systematic risk and, as such, is one that cannot generally be lessened through diversification.
Money market instruments are A. short-term equity B. intermediate debt C. short-term debt D. long-term debt
Answer: C. The definition of a money market instrument is that of high-quality, short-term debt-choice C.
Louis owns an investment that is an unmanaged portfolio in which the money manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the investment portfolio terminates. This statement best describes which type of investment? A. Closed-end investment company B. Face-amount certificate company C. Open-end investment company D. Unit investment trust
Answer: D. A unit investment trust (UIT) is a type of investment company, choice D, which is generally unmanaged as the money manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the UIT terminates.
The contraction phase of the business cycle is least likely accompanied by decreasing A. consumer spending B. economic output C. inflation pressure D. unemployment
Answer: D. An economic contraction is likely to feature increasing unemployment (i.e., decreasing employment), along with decreasing consumer spending, declining economic output, and decreasing inflation pressure.
According to Standard and Poor's rating system, the four highest grades of bonds (from best to lowest grade) are A. Aaa, Aa, A, and Baa B. A, Aa, Aaa, and B C. B, A, AA, and AAA D. AAA, AA, A, and BBB
Answer: D. Choice A would be correct if the question referred to Moody's.
A rich aunt wishes to provide $1,000 per month in perpetuity to her favorite nephew. If the account can be invested to earn 5% per annum, what is the required deposit? A. $20,000 B. $24,000 C. $200,000 D. $240,000
Answer: D. The first step is to take the monthly income and convert it to month is $12,000 per year. Then, divide that a yearly number: $1,000 per arrive at a lump-sum deposit of $12,000 by the 5% rate of return, and you $240,000.
Who of the following would NOT qualify for an exemption from registration under the Investment Advisers Act of 1940? A. A person whose only advisory clients are insurance companies B. A person whose only offices are in a single state, whose only clients are residents of that state, and who does not render advice on securities traded on a national exchange C. A person who only gives advice to venture capital funds D. An accountant whose advice is incidental to her accounting business and for which no separate fee is charged.
Answer: D. This is tricky (as is the exam). The accountant is excluded from the definition. Therefore, there is no reason for her to be exempt. The other three choices are investment advisers who qualify for one of the exemptions described previously.
Protection of customer confidential information is an obligation of the 1. agent servicing the customer's account II. broker-dealer maintaining the account III. customer IV. investment adviser in an advisory account A. Iand II B. Il and IV C. III and IV D. I, II, III, and IV
Answer: D.. Although any securities professional handing a customer account is obligated to follow all necessary procedures to protect client data, customers themselves also bear a responsibility. Customers ignoms the cybersecurity safeguards put not only their own data at risk, but als that of other customers, by potentially opening the door to hackers.
A bond analyst is plotting a yield curve and notices that short-term maturities have higher yields than intermediate and long-term maturities. This is an example of A. an inverted yield curve B. a positive yield curve C. a normal yield curve D. an algorithmic yield curve
maturities that are longer. A positive, or normal, yield curve results when when debt with short-term maturities has higher yields than those with Answer: A. An inverted, or negative, yield curve is one that results the yields increase as maturities do.
A corporation's cash flow will increase as a result of A. paying dividends to preferred stockholders B. collecting on past due receivables C. paying overdue bills D. increasing inventory on hand
Answer B. Cash flow increases when more money comes in than goes When out. When receivables are collected, the company receives money. When we buy dividends or bills are paid, someone else receives money. more inventory, we use cash to do so.
A bond issue that may be retired in advance of maturity at the option of the issuer is said to have A. a callable feature B. an optional reserve C. a conversion feature D. a cumulative feature
Answer: A. A bond that is callable, choice A, has a provision that the issuer, at its option, may redeem that bond at a specified price known as the call or redemption price. As we will see in the next topic, the conversion feature may be exercised by the investor, not the issuer.
All of the following debt instruments pay interest semiannually EXCEPT A. Ginnie Mae pass-through certificates B. U.S. Treasury notes C. U.S. Treasury bonds D. TIPS
Answer: A. A unique feature of Ginnie Maes (choice A) is that they pay interest on a monthly basis, not semiannually. In addition to the interest, investors receive their share of that portion of the mortgage payments tha represented principal repayment.
Limited liability regarding ownership in a U.S. corporation means all of the following EXCEPT A. investors might lose more than the amount of their investment B. investors might lose their investment C. creditors of the corporation cannot seek relief from the shareholders D. investors are not liable to the full extent of their personal property
Answer: A. An advantage of owning stock is that an investor's liability is limited to the amount of money invested when the stock was purchased.
A debenture is issued based on A. the general credit of the corporation B. a pledge of real estate C. a pledge of equipment D. the ability to levy taxes
Answer: A. There are no pledged assets behind a debenture, merely the credit standing of the corporation, choice A. It is a corporate 1OU.
Which two of the following risks would be of greatest concern to the holder of an ADR? I. Currency II. Liquidity III. Market IV. Purchasing power A. l and II B. I and II C. Il and IV D. II and IV
Answer: B. ADRS represent ownership in a foreign security so there is always going to be currency risk, (1). These ADRS trade in the market and have market risk (III). Because most ADRS are traded on the exchanges, there is little liquidity risk and, because they represent equity, they are usually a good hedge against inflation. Choice B is correct.
Among the benefits of owning common stock are I. it has historically been a hedge against inflation II. voting rights III. access, as owners, to information about corporate earnings before the general public IV. dividends A. I and II B. I, II, and IV C. Il and IV D. I, II, III, and IV
Answer: B. One does not have access to insider information solely by becoming a shareholder. Even if one did receive material nonpublic be received information, such as prior access to earnings, no benefit may from that information. All of the other choices are among the reasons to purchase common stock.
Agreat concern to broker-dealers is the theft of the identity of a client. To reduce the possibility of a client's assets being improperly taken, most firms would consider all of these to be a red flag EXCEPT A. almost 1 year since your last contact with your client, you receive a phone call requesting that funds be wired to an offshore account B. a client regularly visits your office to pick up a check representing the proceeds of recently settled transactions C. when running a credit report on a new client's applications, there is a discrepancy between the home address listed on the report and the one on the new account form D. the photograph on the identification documents provided does not resemble the individual opening the account
Answer: B. There is nothing wrong with a client picking up a check for the proceeds of a securities transaction, choice B, even if done on a regular basis (some folks don't trust the mail). Each of the other choices should raise a red flag as being something needing further investigation.
When a bond with a 6% coupon is selling for 90, each of the following statements is correct, EXCEPT A. the current yield is approximately 6.67% B. the bond is selling at a discount C. the bondholder will receive two semiannual interest payments of $27 each D. the yield to maturity is slightly higher than the current yield
Answer: C. A bond with a 6% coupon is going to make two semiannual interest payments of $30 each, regardless of the bond's market price. After all, the loan was $1,000 at 6% interest and that won't change. A price of 90 is 90% of the $1,000 par-clearly a discount. The current yield is the $60 annual interest divided by the $900 price, or 6.67%, and that is a bit lower than the yield to maturity, because if we hold the bond to maturity, we're going to get back the full $1,000, which will represent a $100 profit. Please see the chart at the previous Test Topic Alert.
Among the popular methods of valuing equity securities is the dividend growth model. One could expect to see an analyst using this to value anyes these EXCEPT A. common stock B. ADRS represent common stock in a foreign company C. preferred stock D. none of these are exceptions
Answer: C. To use the dividend growth model, there must be a possibility of dividend growth. Because preferred stock dividends are fixed, this tool would not make any sense.
Which of the following statements regarding derivative securities is NOT true? A. Derivatives can be sold on securities and non-securities. B. An option contract is a derivative security because it has no value independent of the value of an underlying security. C. An option contract's price fluctuates in relationship to the time remaining to expiration as well as with the price movement of the underlying security. D. An owner of a put has the obligation to purchase securities at a designated price (the strike price) before a specified date (the expiration date).
Answer: D. An owner of a put has the right, not the obligation, to sell, not purchase, a security at a designated price (the strike price) before a specified date (the expiration date). That makes choice D the untrue statement. It is the only the seller of an option who has an obligation.
Which of the following would NOT be considered an investment company under the Investment Company Act of 1940? A. Face-amount certificate company B. Unit investment trust C. Management company D. Holding company
Answer: D. Holding companies are specifically excluded from the chn definition of investment company so choice D is correct.
Adding investments with a negative beta to a well-diversified portfolio that currently has a beta of +1.0 will A. cause the expected performance of the portfolio to improve in declining markets B. cause the expected performance of the portfolio to decline in declining markets C. cause the portfolio to experience more volatility in times of a rising market D. cause the portfolio to experience more volatility in times of a declining market
Answer: A. A negative beta means that the investment will move in an opposite direction from the overall market. Therefore, if the market is declining, then the asset should increase in value, thereby increasing the expected performance of the portfolio.
The Investment Company Act of 1940 prohibits registered open-end investment companies from engaging in any of the following practices EXCEPT A. issuing common stock B. selling short or purchasing securities for the company's portfolio on margin C. owning more than 3% of the outstanding voting securities of another investment company D. opening a joint account with another investment company
Answer: A. The one thing that all open-end investment companies must do is issue common stock, choice A. That is the form of ownership. All of the other activities are prohibited.
A client has a TIPS with a coupon rate of 4.5%. The inflation rate has been 7% for the last year. What is the inflation-adjusted return? A -2.5% B. 4.5% C. 7.0% D. 11.5%
Answer: B. TIPS adjust the principal value every 6 months to account for the inflation rate. Therefore, the real rate of return will always be the coupon.
A customer has the right to sell 100 shares of MNO at 60 any time between July and October. A. Long call B. Long put C. Short call D. Short put
Answer: B. The put buyer (long position) has the right to sell stock to a put writer who is obligated to buy that stock (choice B).
The term derivative would not include A. futures on commodities B. interest rate swaps C. REITS D. LEAPS
Answer: C. A derivative is something which derives its value from something else. REITS represent direct investment into real estate; the asset purchase is the actual asset (choice C). LEAPS are the options with the long-term expiry. Never heard of interest rate swaps? Well, on the real exam, there will occasionally be an answer choice that you've never heard of, but it should not affect your ability to choose the correct one.
Under Regulation S-P, if an investment adviser sends a customer an initial privacy notice that contains an opt-out provision, the firm may NOT disclose nonpublic, personal information about that customer for how many days from the mailing? А. 10 В. 15 С. 20 D. 30
Answer: D. An investment adviser (or broker-dealer) must give a customer 30 days, choice D, to implement any opt-out provision in the privacy notice.
A customer wishes to buy a security providing periodic interest payments, safety of principal, and protection from purchasing power risk. The customer should purchase A. TIPS B. TIGRS C. CMOS D. STRIPS
Answer: A. TIPS offer inflation protection and safety of principal because they are backed by the U.S. government.
A company that has issued cumulative preferred stock A. pays past and current preferred dividends before paying dividends on common stock pays B. the preferred dividend before paying the coupons due on its outstanding bonds C. pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common D. forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends
Answer: A. The concept behind cumulative preferred stock is that dividends in arrears accumulate and must be paid, along with the current year's dividend, before anything can be paid to common stockholders, choice A. Bond interest is always paid before dividends.
Advantages of Brady bonds to an American investor include all of the following EXCEPT A. tax-free interest B. greater liquidity than found in most emerging market securities C. greater safety than most emerging market debt because of the collateral D. higher yields than on U.S. Treasury securities
Answer: A. The interest on Brady bonds is fully taxable to a U.S. investor. All of the other statements are true.
On July 15, 2015, your client purchased a variable life insurance policy with a death benefit of $500,000. The November 2017 statement showed a cash value of $30,000. If the client wanted to borrow as much as possible, the insurance company would have to allow a loan of at least A. $0 B. $15,000 C. $22,500 D. $27,000
Answer: A. Until a variable life policy is in force for a minimum of 3 years (this one is a bit less than 22 years), there is no requirement to make the loan provision available. Once the 3-year mark is reached, that minimum becomes 75% of the computed cash value
An investor is always purchasing newly issued shares of common stoCK when investing in A. a closed-end investment company B. an open-end investment company (mutual fund) C. a unit investment trust (UIT) D. a holding company
Answer: B. A unique characteristic of mutual funds is that they are capitalized by a continuous offering of new shares, choice B. Whenever an investor adds to her portfolio, she is buying new shares of common stock issued by that fund. In a UIT, the investor is purchasing units, not shares.
Barbara wishes to invest in the KAPCO Growth Fund, an open-end investment company. She expects to hold the shares for at least 10 vears If she purchases KAPCO's Class A shares, each of these would be a way for her to receive a reduction on the sales charge EXCEPT A. a single investment that reaches a breakpoint B. joining together with her sister to make a purchase at a breakpoint level C. signing a letter of intent D. benefiting from the right of accumulation
Answer: B. Reaching a breakpoint is the way in which investors can receive a break on the sales load charged when purchasing Class A shares. Purchases may be combined with spouses and dependent children, but
Proponents of which of the following technical theories assume that small investors are usually wrong? A. Advance/decline B. Moving averages C. Odd lot D. Short interest
Answer: C. Odd lots are usually traded by small investors; some analysts believe small investors are generally wrong, making choice C correct.
If an investor in the 27% federal income tax bracket invests in municipal of 4.5%, what is the general obligation bonds selling at par with a coupon tax equivalent yield? A. 3.29% B. 5.72% C. 6.16% D. 16.67%
Answer: C. The formula for computing tax equivalent yield is: nominal (coupon) yield divided by (1- federal income tax rate) 0.045/ (1- 0.27) = 6.16%.
One of your clients has a portfolio that has a correlation of 0.91 with the overall market. A stock with which correlation coefficient would most likely offer the greatest diversification to this client? A. 0.91 B. 0.51 C. 0.01 D. -0.51
Answer: D. Remember, the best way to diversify is to include securities with a negative correlation and, the only one here that meets that requirement is choice D.
Which of the following statements about zero-coupon bonds is NOT true? A. Zero-coupon bonds are sold at a deep discount from face value. B. Zero-coupon bonds pay periodic interest payments. C. The owner of a zero-coupon bond receives the face value only at maturity. D. Zero-coupon bonds have greater price volatility than interest-bearing bonds.
Answer: B. The key distinguishing feature of zero-coupon bonds, and the reason for their name, is that there is no periodic interest payment made during the life of the bond (choice B is the untrue statement). Without interest payments, the bonds must sell at a discount and the investor receives payment of the face value at maturity. The lack of periodic interest payments causes the price volatility even with the safest zero-coupon bond-the Treasury STRIPS.
Being concerned about price volatility, a bond investor wishes to compute the duration of a bond being considered for her portfolio. Which of the following is NOT a necessary component of that calculation? A. Coupon rate B. Current market price C. Rating of the bond D. Time until maturity
Answer: C. Although it is true that lower-rated bonds tend to have greater price volatility than high-rated ones, the rating has nothing to do with the calculation of the bond's duration so our exception here is choice C. Duration is simply the weighted average of the cash flows an investor will receive over time, discounted to the bond's present value. Those cash flows come from the coupon and the return of the par value at maturity.
Which of the following is indicative of the primary difference between variable life insurance and straight whole life insurance? A. Amount of insurance that can be issued B. Cost of the insurance C. Tax treatment of the death proceeds D. Way in which the cash values are invested
Answer: D. Variable life insurance allows the policyowner to decide how the cash value is invested (choice D) through a number of subaccounts. With a whole life policy, all investment decisions are made by the insurance company.
wishes to invest it into a single payment deferred variable annuity.. What Your 50-year-old client has just inherited $50,000 from a relative and computation would be used to approximate the value of the account when the client reaches 70? A. Future value B. Present value C. Net present value D. Internal rate of return
Answer: A. This is what the future value (A) computation is used for. We will take a sum of money available now, consider the time the money be invested, estimate a rate of return, and arrive at the expected value (assuming the earnings are equal to the estimated rate).
All of the following are advantages of universal life insurance EXCEPT: A. ability to adjust the amount of premium payments B. the policy is guaranteed never to lapse C. ability to change death benefit amount D. when the cash value is sufficient, no premium payment is required
Answer: B. A universal life policy may lapse if the accumulation fund drops below a specified level and an additional premium is not paid. Universal life has flexible premiums and, when there is sufficient cash value in the policy, premiums may be skipped (with the premium payments taken from that cash value).
Which the following is included in the definition of person? A. A minor B. The National Basketball Association C. A deceased person D. A person whom the courts have declared to be mentally incompetent
Answer: B. Odd to think of the NBA as a person, but, they would be included in the USA's definition. That is why questions are much easier if you just remember the 3 things that are not a person.
Which of the following statements regarding rights is TRUE? A. Common stockholders would not generally receive preemptive rights B. Preferred stockholders would not generally receive preemptive rights C. Both common and preferred stockholders would generally receive preemptive rights D. Neither common nor preferred stockholders would generally receive preemptive rights
Answer: B. Preferred stockholders have no right to maintain a percentage of ownership when new shares are issued (no preemptive rights), choice B. However, they do receive preference in dividend payment and company liquidation.
The LIBOR rate is established on a daily basis in A. Liberia B. Libya C. London D. New York
Answer: C. LIBOR is the London Interbank Offered Rate (technically the ICE-LIBOR now) and, as shown, the L stands for London, U.K.
Which of the following statements reflects the monetarist economic position? A. The amount of money in the economy is not significant because economic activity reflects the value of real goods and services and therefore, the Federal Reserve should not attempt to manage the money supply. B. The total amount of money in the economy is the result of the level of interest rates. C. The amount of in the money economy determines the overall price level over time and, therefore, the Federal Reserve should control the growth in the amount of in the money economy in a gradual and predictable way. D. The best way to control the money supply is to raise taxes, which, in turn, will reduce the amount of money in the economy and lower prices.
Answer: C. Monetarists believe that the economy and inflation are best controlled through the management of the money supply rather than through fiscal policy stimulation.
A client interested in fixed income is viewing different bonds with the same rating and a coupon of 6%. Using the DCF method, which bond should have the highest market value? A. 5-year maturity when the discount rate is 4% B. 5-year maturity when the discount rate is 8% C. 10-year maturity when the discount rate is 4% D. 10-year maturity when the discount rate is 8%
Answer: C. Remember, the discount rate is just another way of stating the current interest rate in the marketplace. If the discount rate is higher
Forwards are commonly used by producers (farmers) to hedge the risk of the price of the commodity falling before it is able to be harvested and sold. For example, if a farmer has planted soybeans and wishes to hedge against a possible decline in the spot or cash price at delivery, the farmer could A. buy forward contracts in a size equal to the amount of soybeans expected to be harvested B. buy futures contracts in a size equal to the amount of soybeans expected to be harvested C. sell futures or forward contracts in a size equal to the amount of the soybeans expected to be harvested D. sell the soybeans for cash today
Answer: C. Hedging a commodity yet to be harvested is done by selling a forward or a futures contract on that commodity. In that way, the price is guaranteed in the event of a market decline. However, the producer is giving up any potential gain in the event the prices rise above the futures/ forward agreed upon one.
An annuity contract owner, age 45, surrenders the annuity to buy a home. Which of the following best describes the tax consequences of this action? A Ordinary income taxes and a 10% early withdrawal penalty will apply to all money withdrawn, B. Capital gains tax will apply to the amount of the withdrawal that represents earnings; there will be no tax on the cost basis. C. Ordinary income taxes and a 10% early withdrawal penalty will apply to the amount of the withdrawal that represents earnings; there will be no tax on the cost basis, D. Ordinary income taxes apply to the amount of the withdrawal that represents earnings; the 10% early withdrawal penalty does not apply to surrendering an annuity.
Answer: C. Interest earnings are taxable as ordinary income. They are also subject to the 10% early withdrawal penalty when withdrawn before age 592. The contract holder recovers the cost basis without tax.
When Treasury bills are issued, they are quoted at A. a premium over par B. 100% of the par value C. par value with interest coupons attached D. a discount from principal with no coupons attached
Answer: D. Treasury bills are always issued at a discount, they pay no value and makes the interest. The investor profits by receiving back par difference between the discounted purchase price and the par received at maturity. All government bonds are now book entry (electronic record); there has not been a Treasury note or nd issued since July 1986 with interest coupons attached.
One of your friends is an entrepreneur who is looking for a way to raise history, it is most likely that her best bet would be to approach capital for her fledgling business. Because the enterprise has no operating A. a hedge fund B. a mutual fund C. a private equity fund D. a venture capital fund
Answer: D. When the business is in the pre-operating stage, it is of most interest venture capitalists, choice D. Private equity funds, including hedge funds, invariably invest in going concerns and mutual funds are almost always limited to purchasing securities that are marketable.
Insurance companies selling annuities offer a variety of purchase options to owners, Which of the following definitions regarding these annuity option is NOT true? A. Accumulation annuity-an annuity that allows the investor to accumulate funds in a separate account before investment in an annuity B. Single-premium deferred annuity-an annuity with a lump-sum investment, with payment of benefits deferred until the annuitant elects to receive them C. Periodic payment deferred annuity-allows a person to make periodic payments over time. The contract holder can invest money on a monthly, quarterly, or annual basis D. Immediate annuity-allows an investor to deposit a lump sum with the insurance company. Payout of the annuitant's benefits starts immediately, usually within 60 days
Answer: A. Accumulation does not refer to a purchase option. The pay-in period for an annuity is known as the accumulation stage. A single-premium deferred annuity is an annuity with a lump-sum investment, with payment of benefits deferred until the receive them. Periodic payment deferred annuities allow a person to make annuitant elects to annuities allow an investor to benefits starting periodic payments over time. Immediate deposit a lump sum with the insurance company immediately, usually within 60 days. payout of the annuitants
If the Consumer Price Index (CPI) is down but consumer demand is up, the economy is likely in which stage of the business cycle? A. Recovery to expansion B. Peak to contraction C. Recovery to trough D. Contraction to trough
Answer: A. As prices trend downward and consumer demand increases, recovery to expansion, choice A. As demand the economy is moving from continues to increase, assuming supply remains constant, upward pressure will be put on prices through the expansion to the peak.
An analyst would use the discounted cash flow method in an attempt to find A. the fair value of a security B. the current market price of a security C. the current rate of return of a security D. the cash flow from operations
Answer: A. DCF uses the present value of future cash flows, based on a specified discount (interest) rate, to evaluate the price that a security should be selling for in the market. If the current market price or the security is less than this value, it has a positive net present value (NPV) and should be a good investment. The opposite is true if there is a negative NPV (the market price is higher than that computod DCE method).
A publicly traded corporation keeps its books on a calendar year basis An investor wanting the most up-to-date financial information in late August would view the company's A. June 30 Form 10-Q B. June 30 Form 8-K C. December 31 Form 10-K D. July 31 Form 10-Q
Answer: A. Form 10-Q is the quarterly financial information document filed with the SEC. Because this is a calendar year company, 10-Qs are prepared as of March 31, June 30, and September 30. The Form 10-K is prepared as of December 31 in lieu of another Form 10- Q. Form 8-K is event driven, nota routine financial report.
NSOS to purchase 500 shares Four years ago, Susan was granted enough of her employer's stock at $20 per share. Assuming Susan exercises all of her options when the fair market value of the stock is $30 and her ordinary income tax rate at the time is 28%, how much income tax will be due? A. $280 B. $1,400 C. $5,600 D. $8,400
Answer: B. The exercise cost of NQSO is $10,000 (500 shares x $20 per share). She will have to pay ordinary income taxes of $1,400, choice B, on the bargain element [($30 FMV- $20 exercise price) x 500 shares x 28%. In addition, that $5,000 will also be subject to the same taxes as her regular salary, e.g., Social Security tax.
Which of the following statements correctly expresses requirements under the Investment Company Act of 1940? I. A registered open-end investment company using a bank as custodian must choose one that has FDIC coverage. II. If an affiliated person of a registered investment company wishes to borrow money from the fund, there must be at least 300% asset coverage. III. No investment advisory contract may be entered into that does not provide for termination with no more than 60 days' notice in writing. IV. No registered investment company may acquire more than 3% of the shares of another investment company. A. l and II B. I and IV C. Il and II D. II and IV
Answer: D. The Investment Company Act of 1940 requires that all advisory contracts contain a provision the contract may be terminated upon no more than 60 days' notice in writing, choice II. The Act prohibits any of registered investment company from owning more than 3% of the shares choice IV of another investment company, making choice D the correct answer. There are no circumstances under which affiliated person can borrow from the fund, and it is not a requirement that the custodian bank have FDIC insurance.
Which of the following types of annuity settlement options provides a lifetime income to the annuitant regardless of how long he lives and the highest monthly payment amount? A Straight life annuity B. Life annuity with period certain C. Installment refund annuity D. Joint and survivor annuity
Answer: A. A straight life annuity, (choice A), provides a lifetime income to the owner/annuitant regardless of how long he lives. If the annuitant is fortunate to outlive his anticipated life expectancy, he has made a wise distribution choice. However, if he dies shortly after beginning distribution, he has made an imprudent choice because, after the annuitant dies, the issuer makes no further payments. Nevertheless, for a given purchase price, a single life annuity provides the highest monthly payment amount because the annuity provides no guarantees beyond the annuitant's life.
A man owns 15% of the stock of a company. His wife owns 5% of the stock of the same company. the following statements are TRUE? If the wife wishes to sell the stock she owns, which of I. Both the husband and the wife are control persons. II. He is a control person, but she is not. III. She must file a Form 144. IV. She does not have to file a Form 144. A. I and III B. Iand IV C. Il and III D. Il and IV
Answer: A. His 15% ownership is control. Her 5% is not, but the fact that she is the spouse of an insider makes her one, causing this to be a sale of control stock. All sales of control stock (unless an exemption applies) must be accompanied by a Rule 144 filing on Form 144.
Over the past seven years, a security has produced annual returns of 10%, 4%, -5%, 10%, 12%, -2%, and 6%. In this example, the mean return (the average) is 5% (adding these 7 returns totals +35% and dividing by 7 results in an average of 5%). The median return, the one with as many returns above as below, is 6%. The mode, the return with the most occurrences, is 10% and the range, the difference between the lowest and highest returns, is 17% (-5% to +12%). An investor is looking at the past performance of a security over the past three years. In year one, it returned 10%; year two it returned 15%; and year three it returned-4%. This computes to an average rate of return of 7%. This would be properly referred to as the A. arithmetic mean B. internal rate of return C. median return D. range
Answer: A. When a true average return is shown, that is the arithmetic mean. The median return (the number in the middle of the group of three) is 10%, and the range is 19% (-4 to +15).
When discussing investment companies, the term, sales load, most commonly refers to A. the fund's sales charge, expressed as a percentage of the NAV B. the fund's sales charge, expressed as a percentage of the public offering price C. the commission earned by the broker-dealer making the sale D. the 12b-1 fee
Answer: B. Class A shares of an open-end investment company, (mutual fund) have a "front-end" sales charge, or sales load, which is compuuted as a percentage of the POP, choice B. That is, if the fund's POP is $10 and the NAV is $9.50, the 50 cent sales charge is 5% of the $10 offering price. In general, most of the sales load is paid to the broker-dealer making the sale as compensation. The 12b-1 fee is never referred to as a sales load because it is not related to the sale of shares.
An investor who has purchased preferred stock with the goal of receiving steady quarterly income would be most interested in the A. seniority of the stock compared to other securities B. ability of the company to continue paying the stated dividend C. voting power of the shares value of the shares D. par
Answer: B. Investors in preferred stock with the goal of income are most concerned that the company will be able to sustain the dividend making all preferred stock is choice B the correct answer. For exam purposes, value is $10, $25, or $100 nonvoting and it makes no difference if the par concept is included in the ability of the company to pay preferred stock has seniority over the common is important, but that because the dividend is fixed as a percentage return. The fact that the its dividend.
As a result of corporate transactions, a company's assets remain the same and its owners' equity decreases. Which of the following statements is TRUE? A. Prepaid expenses decrease B. Total liabilities increase C. Accrued expenses decrease D. Net worth increases
Answer: B. Sometimes questions are best answered by analyzing the question before we even look at the answer choices. We are told in the question that assets have remained the same, but, somehow the net worth (owners' equity) has gone down. If the balance sheet formula is assets minus liabilities = net worth, then somehow the liabilities must have increased. That seems to make choice B a straightforward answer, but let's just check the others to be sure. Prepaid expenses are an asset-can't be that because we know assets haven't changed. Choice D is so simple that students sometimes choose it because they think there is a trick somewhere. No trick here-if owners' equity goes down, that is the net worth so we can't choose "net worth increases." Finally, accrued expenses are a liability so if they decrease, net worth goes up, not down. If you take these questions step by step, they tend to be very logical.
Peter and Connie are thinking about selecting a settlement option for their variable annuity. If their objective is to have the annuity provide income until both of them are deceased, which of the following settlement options will best meet their needs? A. Straight life annuity B. Joint and survivor annuity C. Installment refund annuity D. Life annuity with period certain
Answer: B. The joint and survivor annuity (choice B) will allow the couple both of them are deceased. The to have the annuity provide income until payment will be lower than on a involved rather than one-more risk for the the annuitants. Fora given provides the highest monthly payment purchase price, a straight life annuity because two lives are insurance company; less risk for straight life annuity generally amount because the annuity
GEMCO Manufacturing Company, traded on the NYSE, has announced that it will be issuing 10 million new shares of common stock to raise new capital for the purchase of new equipment. Your client owning 1,000 shares of GEMCO common stock would probably receive A. an advance invitation to purchase some of the new shares B. options to purchase some of the new shares C. preemptive rights to purchase some of the new shares D. warrants to purchase some of the new shares
Answer: C. Commonly, when a publicly traded company issues new shares of common stock, existing shareholders receive rights, called stock rights, enabling them to purchase shares in proportion to their current ownership, usually at a reduced price (choice C). These rights rarely last longer than 45 days and must be exercised or sold within that time or expire worthless. Warrants are not sent to shareholders; either purchased in the open market or come attached to a new issue as a sweetener.
An investor fears a coming recession. She would probably invest in A. biotech B. steel producers C. drug companies D. home builders
Answer: C. In a recessionary period, business activity slows, and one should take a defensive position. Drug companies, (pharmaceuticals), tend to have steady earnings, even in bad economic times. After all, those taking needed prescription drugs will not stop. Even OTC drugs like headache remedies and anti-acids will continue to be sold (some say even more in a downturn). People generally don't buy a new home when things slOW down, nor to the buy new cars (much of the steel produced goes imto manufacturing of autos). Biotech companies will find that funding for experimental treatments dries up.
ABC is an FINRA member broker-dealer. Among other functions, it serves as the principal underwriter of the XYZ Mutual Fund. Which of the following transactions of ABC would be prohibited? A ABC tenders, from its investment account, 500 shares of the XY7 Mutual Fund for redemption. B. ABC purchases, for its investment account, 500 shares of XYZ Mutual Fund. C. ABC purchases some securities directly from XYZ's portfolio. D. All of these.
Answer: C. It would be a violation of the Investment Company Act of 1940 for any affiliated person, such as the principal underwriter, to purchase any security from an investment company other than shares of the fund itself.Investing in the fund's shares would be permitted, not prohibited.
Your customer is long 10 ABC Jul 50 calls at 4.50. How many shares of stock will change hands if the option is exercised? А. 10 В. 100 C. 1,000 D. 10,000
Answer: C. One of the three standardized terms of equity options is that each contract is for 100 shares. Therefore, the exercise of 10 calls (or puts, for that matter), will involve 10 x 100 or 1,000 shares, choice C.
Which of the following investment advisers would be permitted to use the including tax planning, estate A. A financial planner offering a wide range services to his clients, planning, and insurance planning, as well as investment advice B. A professional providing a market timing service with an annual subscription fee of $495 (this service attempts to maximize profits hy suggesting entry and exit points for over 100 listed stocks) C. A firm whose exclusive business is placing their client's assets into model portfolios that are monitored on a daily basis D. All of these
Answer: C. To use the term investment counsel, two criteria must be met- the principal business must be giving investment advice and the adviser must provide investment supervisory services. Running model portfolios for clients with daily monitoring would meet both requirements. The principally in the business of offering describes his service as offering a wide investment of which advice is only one part. The exam frequently uses that wording to publisher's principal about the description indicates that individual business activity may be offering advice, nothing client accounts are bemg range of services, indicate that advice is not the principal activity. While the market timing monitored.
Julia, an IAR, is analyzing various policies utilized by hedge funds recommended by her firm. Julia has summarized the policies as follows: Policy 1: During the fund raising period, each new investor must contribute a minimum of $500,000 to the fund. Policy 2: The hedge fund manager will return incentive fees to investors in the event that the minimum required return is not met. Policy 3: Investors must provide redemption requests to the hedge fund manager at least 60 days before the funds are to be withdrawn. Policy 4: New investors may not withdraw funds during the first six months that the funds are invested with the hedge fund manager. Which of the policies identified by Julia specifies a lock-up period? A. Policy 1 B. Policy 2 C. Policy 3 D. Policy 4
Answer: D. A lock-up period refers to a set period, such as six months (choice D) that an investor's funds must remain invested in the hedge fund. During that time period, withdrawal requests are not permitted.
Which of the following statements is NOT true? A. A country wishing to restructure its debt using Brady bonds would do so to save on debt servicing costs. B. One of the benefits of holding convertible preferred stock is the option to convert into the corporation's common stock. C. A resident of England has no currency risk when holding U.K. gilts. D. A resident of France purchasing Eurodollar bonds does not incur currency risk.
Answer: D. As the name implies, Eurodollar bonds are denominated in U.S. dollars. That means that someone in France, choice D, will have the risk that the euro, the home currency in France, will rise against the dollar and, as a result, interest payments will be worth less as will the ultimate payback at maturity. Only U.S. residents have no currency risk with Eurodollar bonds. One of the benefits of Brady bonds is the ability of the sovereign government to borrow at a lower cost because of the collateral behind the bond. Currency risk is when investors hold securities denominated in a currency other than their home country. Convertible preferred shares are convertible into the issuer's common stock which is a benefit if the stock rises in price.
When comparing mutual funds and variable annuities, it would be correct to state that A. both offer tax-deferred growth of earnings B. both require the salesperson to possess a securities and an insurance license C. the surrender charges on a mutual fund are usually higher than on a variable annuity D. the expense ratio of the variable annuity is usually higher than that of a comparable mutual fund
Answer: D. It is generally correct to state that variable annuities offer a way to accumulate funds on tax-deferred basis, although generally with operating expenses somewhat higher than mutual funds with the same investment objective. There is no tax-deferral with mutual funds and no insurance license is required to sell them. Only Class B and C shares have redemption fees, a form of surrender charge, and they are invariable lower and/or run for fewer years than annuity surrender charges.
