Series 65 - Missed Q's Review
A bond is convertible at $50 and is selling in the market for $1,080. At what price per share must the common stock be trading to be at parity with the bond?
$54 For questions that involve convertible securities, the first step is to find the conversion ratio (number of shares received upon conversion). The formula for finding conversion ratio is Par ÷ Conversion Price; therefore, the ratio is 20 to 1 ($1,000 ÷ $50). The second step is to determine the value at which the stock must be trading to be equal to the current market value of the bond. Since the bond's value is $1,080 and the investor is entitled to 20 shares, the parity price of the stock is $54 ($1,080 ÷ 20). Parity represents the price at which both the bond and the aggregate value of the stock are equal.
A corporation has the following financial information. $1 million in cash $2 million in accounts receivable $5 million of inventory $10 million of equipment $3 million in short-term debt $50 million in long-term debt $2 million accounts payable What is the corporation's current ratio?
1.6 Current ratio = current assets / current liabilities Current assets = cash, accounts receivable, inventory Current liabilities = short-term debt, accounts payable
An agent is soliciting investors for a private placement. Under the Uniform Securities Act, this is an exempt transaction as long as the agent doesn't offer the securities to more than:
10 retail investors during a 12-month period
Which TWO of the following are TRUE regarding the causes of inflation? 1. Demand-pull inflation occurs when the demand for money increases and pulls interest rates higher, causing inflation 2. Demand-pull inflation occurs when the demand for goods and services increases faster than supply, causing inflation 3. Cost-push inflation occurs when the increase in prices of raw materials leads to increasing retail prices, causing inflation 4. Cost-push inflation occurs when the cost of financing the national debt increases, causing rising interest rates and inflation
2. Demand-pull inflation occurs when the demand for goods and services increases faster than supply, causing inflation 3. Cost-push inflation occurs when the increase in prices of raw materials leads to increasing retail prices, causing inflation
Under the Uniform Securities Act, the statute of limitations for criminal violations of the Act is:
5 years.
When trading on margin, clients are required to deposit:
50% of the market value of the security The 1934 Securities Exchange Act, Regulation T, provided the Federal Reserve with the power to establish equity requirements when trading on margin. The current initial requirement when purchasing common stock is 50% of the market value of the security at the time of the transaction.
Which TWO of the following investments are NOT considered money-market instruments? A U.S. Treasury bill A money-market mutual fund A convertible debenture A tax anticipation note
A money-market mutual fund A convertible debenture Money-market securities are defined as debt instruments that have less than one year until maturity. U.S. Treasury bills and tax anticipation notes (TANs) are both short-term debt securities and are considered money-market instruments. A money-market mutual fund is an instrument that issues common shares which represent an investor's ownership interest in a portfolio of money-market securities. In other words, money-market mutual funds invest in, and maintain a portfolio of, money-market securities, but are not money-market securities themselves. Convertible debentures are debt securities; however, since the debenture's maturity is not provided in the answer, it should not be assumed to be one year or less. (14433)
A bond pays a 7% coupon. Later, a 9% coupon bond is issued. This bond is issued at:
A premium to the 7% bond A 9% bond would be more attractive to investors than one that pays 7%. Therefore, the price of the 7% bond would decline. This would result in the 9% bond being issued at a premium to the 7% bond. (62906)
A 70-year-old retiree is very risk-averse, but needs to generate investment income. She is not wealthy and is in a low tax bracket. Which of the following investments will BEST meet her needs? A. certificate of deposit B. A diversified portfolio of stocks with covered calls written against them C. A long-term municipal bond fund D. A growth mutual fund
A. Certificate of deposit Since the client is risk-averse, needs income, and is concerned about her principal fluctuating, the best choice is a certificate of deposit. All of the other choices are unsuitable because they are either too speculative or they are tax-free, which provides her with little benefit since she is in a low tax bracket.
An adviser is managing the portfolios of several clients who are invested in bonds. He anticipates that the economy is beginning to expand too rapidly and advises his clients to reallocate some of their holdings into money market instruments. What strategy is the adviser utilizing? A. Tactical asset allocation B. Strategic asset allocation C. Asset class recharacterizations D. Sector rotation
A. Tactical asset allocation. Tactical (active) asset allocation may be utilized by investors who believe that securities markets are not perfectly efficient. These investors may try to use an active strategy (i.e., market timing) to alter the portfolio's asset mix in an effort to take advantage of anticipated economic events. This market timing approach is primarily based on short-term decisions. On the other hand, periodically rebalancing a client's portfolio in an effort to maintain an optimal portfolio based on his risk tolerance and investment objectives is referred to as strategic (passive) asset allocation. Strategic asset allocators tend to view the market as efficient and market timing as ineffective, thereby taking a more long-term outlook. Sector rotation is an investment strategy that involves the movement of money from one industry or sector to another in an attempt to beat the market.
Which of the following statements is NOT TRUE concerning a customer who is short a security? A. The maximum gain is limited B. It is considered a speculative strategy C. The maximum loss is limited D. The customer is bearish
A. The maximum gain is limited A customer executing a short sale is anticipating a decrease in the market value of a security. This is known as a bearish strategy, and the customer is hoping to buy back the security or cover the short sale at a lower price. The maximum loss is not limited, i.e., it is unlimited since the customer would have a loss if the market value of the security increased, and there is no limit as to how high the price can rise. Short selling is considered a speculative strategy. The maximum gain is limited since the price of the stock cannot fall below zero.
Which of the following is a risk-adjusted return? A. Standard deviation B. Beta C. Internal rate of return D. Alpha
Alpha The difference between an investment's expected return (as indicated by its hypothetical position on the Security Market Line) and its actual return is considered its alpha. An investment's alpha is also referred to as its risk-adjusted return. Some analysts believe that stocks with positive alphas represent buying opportunities, while negative alphas are signals to sell. Alpha is also used to evaluate the performance of portfolio managers. Managers whose portfolios show positive alphas are considered to be adding value with their management skills.
American vs European options
American-style options are able to be exercised by the owner at any time prior to its expiration. However, European-style options may only be exercised by the owner on the last trading day prior to expiration (third Friday of the month).
No-load fund requirements
An investment company (mutual fund) may be called a no-load fund only if it has no front-end sales charges, no contingent deferred sales charge, and a 12b-1 fee that is equal to or less than .25% of the fund's average asset value
Under the Investment Advisers Act, the form that is filed annually with the SEC and determines an adviser's continued eligibility for federal registration is called:
Annual updating amendment The Annual Updating Amendment is submitted to confirm that an SEC registered investment adviser is still eligible for federal registration. The form must be filed within 90 days after the end of the adviser's fiscal year
A common investment strategy is dollar cost averaging. The objective of using this method of investment is the:
Average price of the securities purchased will be more than the average cost of the securities over a long period
leading economic indicators.
Average workweek (manufacturing) Initial unemployment claims New orders for consumer goods and equipment Vendor performance Plant and equipment orders Building permits Interest rate spreads, 10-year Treasury bonds less federal funds Stock prices (S&P 500) The Money Supply (M2) Index of consumer expectations
Provided a broker-dealer has written procedures allowing for an agent to borrow or lend money to a customer, the agent may do so in all of the following situations, EXCEPT: A. A customer is a member of the agent's immediate family B. A customer is registered with a different broker-dealer than the agent C. A customer is a financial institution engaged in the business of making loans D. A customer has a personal relationship with the agent that exists outside their brokerage relationship
B. A customer is registered with a different broker-dealer than the agent An agent may make loans or borrow money from their immediate family members, or if the client is a financial institution—a bank—or the agent and the customer have a personal or business relationship outside their brokerage relationship. However, in order for an agent to borrow from another registered person, they both must be registered with the same broker-dealer.
Which of the following investments pass through both income and losses to investors? A. All SEC reporting companies B. A real estate limited partnership C. A regulated investment company D. A real estate investment trust
B. A real estate limited partnership
If an investment adviser makes material changes to its brochure, when does the adviser need to provide a summary of the changes to its clients? A. At the end of the current quarter B. At the adviser's year-end registration renewal C. At the end of the current month D. A summary is not required to be provided
B. At the adviser's year-end registration renewal According to a NASAA model rule, advisers are required to provide, or offer to provide, their clients with a summary of any material changes that have been made to their brochure within 120 days of the year-end. This is completed as a part of the adviser's registration renewal. Please note, during the year, advisers must update their Form ADV promptly (i.e., within 30 days) for any material changes, but the summary of changes is provided at the time of renewal.
An agent is registered in State A and provides financial services to an older client who lives in State A. The client's son, who lives in State B, calls the agent and indicates his intention to open an account, but wants to immediately place an order to buy 1,000 shares of XYZ stock. If the agent is not currently registered in State B, what course of action should he take? A. Open an account for the son using his mother's State A address B. Decline the order C. Ask the son if he is willing to wait for a few weeks while the agent registers in State B D. Conduct the trade through the client's account who lives in State A and then transfer the shares once he is registered in State B
B. Decline the order Since the broker-dealer is not registered in State B, the order from the son must be declined. A broker-dealer is only permitted to effect transactions in a state(s) in which it is registered.
Which of the following statements is FALSE regarding a broker-dealer acting as a market maker in a stock? A. It trades for its own account when buying and selling securities B. It makes money by charging commissions for executing transactions C. When making a market, it is acting as a principal D. It must be prepared to honor the prices it quotes unless it clearly qualifies them
B. It makes money by charging commissions for executing transactions As principals in transactions, market makers do not charge commissions. Commissions are charged when firms act as brokers (agents). However, in transactions with retail customers, market makers might charge a markup when selling (an increase in price above its offer price) and a markdown when buying from customers (a decrease below its bid price).
A client is in the 35% tax bracket. She has three children, ages 8, 12, and 16 and would like to invest in a 529 plan for the two oldest children. The client has $20,000 that she can invest in each account. If she anticipates her children will enter college at age 19, and will need $75,000 each for their college expenses over four years, an adviser would determine the future value of each account by inputting all of the following factors, EXCEPT the: A. Principal amount invested B. Rate of inflation C. Number of compounding periods D. Expected rate of interest
B. Rate of inflation
An investment adviser has $57.5 million under management. Among the firm's clients is a small, in-house family of funds whose shares are currently offered exclusively to the adviser's clients. What is the firm's status for registration requirements? A. The firm must register as both a state and federal adviser. B. The firm must register as an investment adviser with the SEC. C. The firm is an exempt adviser due to its in-house mutual fund advisory business and must file Form ADV-E (ADV Exempt) to maintain such status. D. The firm may register with either the SEC or each state in which it does business, until its assets under management exceed $110 million.
B. The firm must register as an investment adviser with the SEC. Although the investment adviser only has assets under management (AUM) of $57.5 million, it is deemed to be a federal covered adviser because one of its clients is a registered investment company (mutual fund). If an IA advises an investment company, the adviser's amount of assets under management may be disregarded and it is automatically a federal covered adviser. Another qualification for federal covered status is if an IA has assets under management of $110 million or more.
What information is not included on the registration application for a broker-dealer? A. Whether the broker-dealer is a partnership or corporation B. The names and addresses of the agents the broker-dealer intends to register C. The types of businesses in which the broker-dealer intends to engage D. The broker-dealer's current financial condition
B. The names and addresses of the agents the broker-dealer intends to register The names and addresses of the agents the broker-dealer intends to register are not required. The qualifications and history of any partner, officer, director, or controlling person are required.
A corporation's balance sheet lists intangible assets of $40 million, equipment of $5 million, and real estate of $30 million. The company also has cash of $20 million, inventory of $5 million, and receivables of $5 million. The corporation's equity is $65 million and it has $15 million of long-term debt. The total short-term liabilities are $25 million which consists of accounts and interest payable. Based on this information, what can be assumed about the company's long-term liquidity?
Based on the company's debt-to-capital and debt-to-equity ratios, it has sufficient long-term liquidity. Long-term liquidity can be measured by the debt-to-capital and debt-to-equity ratios. The debt-to-capital ratio is calculated by dividing a company's debt by its total capital, which consists of debt and equity [i.e., Debt-to-Capital = Debt ÷ (Debt + Equity)]. The debt-to-equity ratio is simply debt divided by equity (i.e., Debt to Equity = Debt ÷ Equity). The lower these two ratios are, the more long-term liquidity a corporation possesses. In most cases, companies will have more debt than equity. In this question, since the company has more equity than debt, it's incredibly liquid.
When is the latest time that a brochure can be provided to a new advisory client?
Before the client signs the advisory contract which gives discretionary authority to the advisory firm Investment advisors need to provide their brochure or Form ADV Part II by no later than the point at which the client signs a contract. If the brochure is provided when the contract is signed, investment advisers must allow their clients five business days to cancel without a penalty. (17088)
Which of the following is a benefit of owning a master limited partnership (MLP)? A. Double taxation B. Exempt from registration under the Securities Act of 1933 C. Exchange-listing D. Availability for all industries
C. Exchange-listing Master limited partnerships (MLPs) are limited partnerships, but they're interests are traded on an exchange (like a corporation's stock). As with any partnership, MLPs receive flow through of income, rather than the double taxation of a C-corporation. Because MLPs are exchange-traded, they must be registered with the SEC. MLPs can only be formed by companies in real estate or natural resources. In fact, most MLPs are in the oil and natural gas industries.
A client of an IA owns his own home and the title is in his name. If he wants to avoid probate when the property is transferred upon his death, the adviser may recommend which of the following? A. Transfer the title to his two children B. Do nothing since property is not subject to probate C. File a transfer on death (TOD) deed which identifies a specific beneficiary D. Transfer the title to a named beneficiary
C. File a transfer on death (TOD) deed which identifies a specific beneficiary In order to avoid probate upon the clients death, the IA may recommend filing a transfer-on-death (TOD) deed which names one or more specific beneficiaries.
According to the Uniform Securities Act of 1956, under which of the following circumstances is a registration statement NOT required to be filed for a promissory note? A. It's issued in maximum denominations of $50,000. B. It's secured by common or preferred stock of the issuer. C. It's payable in cash no more than nine months after its issuance. D. It must have received the highest credit rating that's assigned by a nationally recognized statistical rating organization (NRSRO).
C. It's payable in cash no more than nine months after its issuance. Promissory notes (e.g., commercial paper) are loans, just like bonds. These debt securities are exempt if they have nine months or less to maturity, they're issued in minimum denominations of $50,000, and they're rated in one of the three highest rating categories from a nationally recognized statistical rating organizations (NRSRO). Notice that $50,000 is the minimum denomination, not the maximum denomination. Any of the three highest ratings is sufficient; it doesn't need to necessarily be the highest. To be exempt from registration, there's no requirement for promissory notes to be secured. In fact, most are unsecured.
If an ERISA plan participant fails to specify how her savings are invested, the plan sponsor must: A. Invest in an FDIC insured certificate of deposit B. Purchase the highest yielding instruments that are backed by the full faith and credit of the U.S. Treasury C. Place the funds in a qualified default investment alternative D. Choose a suitable investment for the participant
C. Place the funds in a qualified default investment alternative When investors fail to select an investment in a qualified retirement account, the plan's sponsor must invest in a qualified default investment alternative (QDIA). The QDIA cannot assess any penalties for selecting another investment option later. In addition, the QDIA must be diversified and managed by an investment adviser or registered investment company.
When considering estate planning needs, what can be said regarding Section 529 plans? A. Assets in the plan will be considered as part of the owner's estate for federal estate tax purposes B. The beneficiary will pay federal gift taxes on any distributions C. The plan participant maintains control of how the funds are distributed D. The plan participant gives up ownership of the account
C. The plan participant maintains control of how the funds are distributed One of the advantages of a Section 529 plan is that the plan participant, the parent, etc. is the account owner and maintains control of how the funds in the plan are distributed and to whom. The beneficiary does not have to pay federal taxes on qualified withdrawals and the assets in the plan are generally not considered part of the participant's estate for federal estate tax purposes.
An investment adviser representative is attempting to land a prospect as a new advisory client. To impress the potential client, the IAR shows him a list of names of her current clients. Which of the following statements is TRUE? A. This is permissible as long as the IAR does not reveal the investments in the clients' accounts B. This is permissible as long as none of the clients are known to the prospect C. This is permissible as long as the clients have given the IAR permission to use their names D. This is permissible as long as the advisory contract allows the IAR to disclose a list of client names
C. This is permissible as long as the clients have given the IAR permission to use their names
Which of the following choices would NOT meet the definition of an exempt transaction? A. A transaction by a trustee involved in a bankruptcy B. A transaction executed by a bona fide pledgee C. Transactions between an issuer and retail investors D. An unsolicited nonissuer transaction with a retail investor
C. Transactions between an issuer and retail investors Any transactions by trustees involved in a bankruptcy--sheriffs, marshals, guardians, and other fiduciaries are considered exempt transactions. Unsolicited nonissuer transactions whether with retail or institutional investors and transactions executed by a bona fide pledgee are also considered exempt transactions. However, transactions between issuers and retail investors are not exempt from registration. A transaction between an issuer and underwriter would be an exempt transaction.
Which of the following choices will eliminate a short position in a listed option? A. Opening sale B. Opening purchase C. Closing sale D. Closing purchase
Closing purchase
Under the Uniform Securities Act, which of the following persons is a broker-dealer in State B? A. An agent in State A who contacts a client in State B B. A corporation that sells commercial paper every other week in State B C. A broker-dealer that is registered in State A, where its only office is located, and has insurance companies as its only clients in State B D. A broker-dealer that is registered in State A, where its only office is located, and has only three retail clients who are residents of State B
D. A broker-dealer that is registered in State A, where its only office is located, and has only three retail clients who are residents of State B A broker-dealer registered in State A that has any retail clients who are residents of State B is required to be registered in State B. This is unlike investment advisers that are able to have no more than five non-institutional (retail) clients in a state in which they have no place of business. Regarding the other answers, agents and issuers (the corporation selling commercial paper) are not broker-dealers. Also, a broker-dealer that is registered in State A (where it's office is located), but with institutional clients in State B, is excluded from the definition of an investment adviser in State B.
All of the following would indicate inflationary pressure on the economy, EXCEPT: A. Rising retail sales figures B. Falling weekly jobless claims C. A rising consumer price index D. Falling industrial production
D. Falling industrial production A rising CPI is the definition of inflation. If retail sales figures are going up or jobless claims are falling, consumer demand should rise. These two situations are therefore inflationary. If industrial production is declining, the assumption is that the economy is slowing down.
In order to form a limited partnership, two or more people must: A. Elect to be taxed under Subchapter S B. File a registration statement with the SEC under Regulation A+ C. Agree to operate a business together D. File a certificate with the appropriate state or local official
D. File a certificate with the appropriate state or local official The only way to create a limited partnership is by filing a certificate (or other document) with a state or local agency. A general partnership, in contrast, is created whenever two or more people agree to form a partnership. The agreement does not even need to be in writing.
Which of the following statements about barbell strategies is NOT TRUE? A. The strategy consists of purchasing bonds with both short and long maturities, but no intermediate-term securities are included B. The short-term bonds will provide for quick cash to purchase new bonds upon maturity C. A barbell strategy is used to take advantage of potential interest-rate changes D. Gains from the short-term maturities will offset losses in the long-term maturities
D. Gains from the short-term maturities will offset losses in the long-term maturities Barbell strategies consists of buying short-term and long-term bonds, but not intermediate-term bonds. The purchase of long-term bonds allows an investor to capture higher long-term interest rates. The short-term bond provides the opportunity to invest elsewhere if the bond market takes a downturn. There is no guarantee that any money made on the short end of the strategy will offset losses that could occur on the long end of the barbell
What's a benefit of establishing a general partnership compared to establishing an S-corporation? A. The business can own property B. Efficient taxation C. Limited liability for owners D. General partnerships don't require incorporation with the state
D. General partnerships don't require incorporation with the state An advantage to establishing a general partnership compared to an S-corporation is that general partnerships are not required to file articles of incorporation. This filing is time consuming and expensive. Both types of business are tax efficient, since only the owners are required to pay taxes on the income (i.e., both are flow-through investments).
Under the Uniform Securities Act, which of the following statements is TRUE regarding the registration of investment advisers (IAs) and investment adviser representatives (IARs)? A. IARs are not required to be registered in a state as long as the IA is registered there. B. IARs that are giving advice about exempt securities don't need to be registered even if the IA is required to be registered. C. IARs are required to register in a state even if the IA is provided an exemption from registration there. D. IARs are required to be registered in a state even if the IA is registered there.
D. IARs are required to be registered in a state even if the IA is registered there. Under the USA, it's unlawful for any registered investment adviser to employ an investment advisor representative unless the IAR is also registered.
Which of the following brochure delivery periods applies to investment advisers under the Uniform Securities Act? A. Clients must receive the adviser's brochure or ADV Part 2 at least 48 hours prior to signing a contract in order to rescind B. Clients must receive the adviser's brochure or ADV Part 2 five business days prior to signing a contract or the client has 48 hours to cancel without penalty C. If an ADV or brochure is not provided, clients must be given 10 days to rescind the contract D. If an ADV or brochure is not provided at least 48 hours prior to signing the contract, clients must be given five days to rescind without penalty
D. If an ADV or brochure is not provided at least 48 hours prior to signing the contract, clients must be given five days to rescind without penalty Under the Uniform Securities Act, all clients must receive the adviser's brochure or ADV Part 2 no later than the time they enter into an agreement with the adviser. If the client is not given anADV Part 2 or brochure at least 48 hours before signing the contract, then the contract must specify that the client has five days to rescind the contract.
An investment adviser has created promotional material that will be sent to five institutional clients. The material promotes a stock that's about to be listed on the Philadelphia Stock Exchange. Under the Uniform Securities Act, does the adviser's promotional material need to be filed with the state Administrator? A. Yes, because advisers must always file promotional material. B. Yes, because the advertisement is being sent to more than five investors. C. No, because the advertisement is not being disseminated publicly. D. No, because the security in the advertisement is exempt from registration under the Uniform Securities Act
D. No, because the security in the advertisement is exempt from registration under the Uniform Securities Act The Uniform Securities Act provides an exemption for filing advertisements related to securities that are either currently listed on an exchange or are approved to be listed on an exchange. Since the stock in this question is about to be listed on the Philadelphia Stock Exchange, the advertisement is not required to be filed with an Administrator.
An investment adviser (IA) has $475 million in assets under management. The IA offers to manage its clients' money in both discretionary accounts or in an investment pool that's registered with the SEC under the Investment Company Act of 1940. A newly hired investment adviser representative (IAR) works out of the IA's headquarters in California, but also has 12 clients who live in Texas. Where is the IAR required to register? A. With the SEC B. Only in Texas C. In California and Texas D. Only in California
D. Only in California Since the IA has over $110 million in assets under management and advises a registered investment company, it's a federal covered adviser (FCA). IARs who work for FCAs are only required to register in the state(s) in which they maintain a place of business. Since the IAR only works in California, he only needs to register in California. On the other hand, IARs of state registered IAs are required to register in any state(s) in which they maintain a place of business as well as any state(s) in which the IAR has more than five non-institutional clients. If this IAR was employed by a state-registered investment adviser, he would need to register in both California and Texas.
When analyzing a structured product, which of the following risks is of the LEAST concern? A. Credit risk B. Complexity risk C. Liquidity risk D. Regulatory risk
D. Regulatory risk Although all securities could have losses due to regulatory risk, structured products are not typically associated with it. Structured products are created by broker-dealers and are customized to fit the needs of specific investors. They're created as unsecured bonds, which means they have credit risk. The returns on a structured product can be based on a basket of equities, debt instruments, and derivates. As a result, predicting the returns in different market scenarios is complex. In addition, most structured products are not exchange-traded, which means that they also have liquidity risk.
An investment adviser has begun to experience difficulties in collecting fees from the accounts of clients that do not elect to have the fees deducted directly from their accounts. To compensate for this, the firm decides to raise its fees and require a larger up-front deposit from all new accounts for the upcoming year. To reward its current clients, the adviser waives the fee increase and does not change the terms of their contracts. What must the adviser do in this situation? A. The IA must update its Form ADV Part 2 and any customer disclosure documents within 90 days of its year-end B. The IA must make necessary changes to all of its disclosure documents and receive written consent from all of its current clients within 30 days C. The IA must notify all current clients of the new fees and update its Form ADV Part 2 within 60 days D. The IA must make all necessary changes and promptly file amendments to its Form
D. The IA must make all necessary changes and promptly file amendments to its Form ADV In this question, since the contracts of the current clients are not being changed, they are not required to be given written notification and the firm is not required to obtain their consent. However, since this is a material change to the business, the adviser's Form ADV must be updated and filed promptly. If a change is deemed to be routine, it may be filed within 90 days of the year-end.
All of the following statements are TRUE of covered call option writing, EXCEPT: A. The writer will have a short-term capital gain if the option expires unexercised B. The writer can increase the overall yield on his portfolio C. It is considered a conservative option strategy D. The premium received guarantees the writer cannot have a loss on the underlying security
D. The premium received guarantees the writer cannot have a loss on the underlying security All of the choices listed are true except the statement that the premium received guarantees that the writer cannot have a loss on the underlying security. The security can decline in price below the breakeven point (price of the stock minus the premium), causing the writer to have a loss on the stock. If the option expires, the writer will always have a short-term capital gain from the premium received.
Which of the following persons would be required to register as an investment adviser under the Uniform Securities Act? A. A federal covered adviser B. An accountant who provides investment advice that is incidental to her tax practice C. A bank's trust department that provides fee-based investment advice D. The publisher of a financial periodical that responds to each subscriber with personalized investment advice
D. The publisher of a financial periodical that responds to each subscriber with personalized investment advice Federal covered advisers and trust companies are not subject to registration under the Uniform Securities Act. Lawyers, accountants, teachers, engineers, and publishers are also exempt provided their securities advice is incidental and not timed and tailored to a specific client. If a publisher has tailored its investment advice it would be subject to registration.
An index option has been exercised. What is the writer of the option required to do to satisfy his obligation?
Deposit cash equal to the difference in the strike price and the value of the index.
A broker-dealer is participating in an initial public offering of a security that will be listed on Nasdaq. Which of the following documents is the broker-dealer required to deliver to a client who purchases the securities in the aftermarket immediately after the completion of the offering?
Final prospectus A client who purchases securities as part of an offering must receive either a final prospectus or a preliminary prospectus along with an additional document from the broker-dealer that executes the transaction. The final prospectus must be provided for a certain period after the completion of the offering (i.e., in the aftermarket). For an IPO, if the securities will be immediately listed on the NYSE or Nasdaq, the aftermarket prospectus requirement lasts for 25 days. For an IPO of a security that will be quoted in an over-the-counter market (e.g., on the Pink Open Market), the prospectus delivery requirement lasts for 90 days; however, it only lasts for 40 days for a subsequent (follow-on) offering of these securities.
Under the NASAA Recordkeeping Requirements for Investment Advisers Model Rule, all electronic communications and their amendments must be maintained by the adviser for how long if distributed directly or indirectly and to how many persons? A. Three years if sent to two or more persons B. Five years if sent to two or more persons C. Three years if sent to ten or more persons D. The life of the firm if sent to thirty-five or more persons
Five years if sent to two or more persons. According to NASAA Recordkeeping Requirements for Investment Advisers Model Rule, all investment adviser records must be maintained for not less than five years, the first two years in the principal office of the adviser, including those made by electronic media (Web sites, e-mail, etc.) if directly or indirectly sent to two or more persons. (75897)
Investment advisers (IAs) may accept discretionary orders:
For up to 10 days before receiving signed power of attorney Investment advisers may accept and execute discretionary orders for up to 10 days before obtaining written and signed powers of attorney. On the other hand, broker-dealers cannot accept discretionary orders until they've received written and signed powers of attorney from their customers.
Which of the following is the LEAST relevant risk of owning digital assets? A. Liquidity B. Regulatory C. Market D. Inflation
Inflation
Which TWO the following conditions are generally TRUE when the yield curve inverts? Interest rates are relatively low Interest rates are relatively high Interest rates are expected to fall Interest rates are expected to rise
Interest rates are relatively high Interest rates are expected to fall The yield curve often inverts when interest rates are relatively high but are expected to fall in the near future. In such an environment, investors prefer to lock in relatively high long-term rates. The increased demand for long-term debt drives these prices up (and their yields down), as compared to short-term debt, causing the yield curve to invert.
In order to effect a private securities transaction, an agent of a broker-dealer:
Must receive permission from his broker-dealer to effect the transaction In order to effect private securities transactions, agents need to disclose the transaction to their broker-dealer. If an agent is receiving compensation for the transaction, the broker-dealer must approve the private securities transaction as well. Failure to disclose or if necessary, receive permission, is a violation that's referred to as "selling away."
An individual opened a brokerage account and placed trades on his own. The transactions subsequently generated a 20% return for the individual, but also very large commissions. Is the broker-dealer in violation of industry rules?
No, because the broker-dealer is not soliciting the transactions. Since the individual's trades are unsolicited, the broker-dealer is not in violation of industry rules. If the broker-dealer had recommended or solicited the transactions, then it could be violating the churning rule due to the commissions being unusually large. Broker-dealers are typically not considered fiduciaries; however, investment advisers are always fiduciaries.
Barry McKenna's equity portfolio was strongly correlated to the performance of the S&P 500 Index. Barry was concerned that the S&P was overdue for a correction, so he liquidated the portfolio and moved to short-term Treasury securities that were yielding 2%. After one year, the S&P 500 returned 8%. What is the BEST term to describe the difference in the Treasuries and the S&P 500 as it relates specifically to Barry's situation? A. Systematic risk B. Opportunity cost C. Interest-rate risk D. Reinvestment risk
Opportunity cost The best choice here is opportunity cost. Opportunity cost is a term used in a variety of ways in economics. For purposes of the question, the focus here is on investment choices. Opportunity cost is the difference in return between an investment made and one that is not made. In this case, Barry invested in a Treasury and it returned 2% over the year. Barry gave up the opportunity of his old portfolio which returned 8%. In this situation, his opportunity costs are 6% (8% - 2%).
Future value calculation
Pn = P0(1 + r)n Pn = Future Value n = Number of compounding periods r = Rate of Interest P0 = Original Principal
In comparison to forward contracts, futures contracts are:
Readily transferable Unlike forward contracts, futures contracts are standardized agreements that are traded on exchanges and readily transferred. Forward contracts are not readily transferable since both parties to the original contract must agree before one of them may sell the contract to a third party.
According to the Securities Act of 1933, a pooled investment fund is considered a federal covered security when it:
Registers with the SEC under the Investment Company Act of 1940 An investment pool is considered a federal covered security when recognized as an investment company under the Investment Company Act of 1940 and when its offering is registered with the SEC. Requesting an exemption or employing a federal covered adviser does not make an investment pool an investment company.
A broker-dealer has been selling unregistered, nonexempt securities in nonexempt transactions without the permission of the state securities Administrator. What action would the state Administrator most likely take?
Require the broker-dealer to offer letters of rescission In the absence of fraud, there is a violation if securities are illegally offered in a particular state when they should have been registered. The Administrator would most likely require the broker-dealer to offer a letter of rescission whereby the broker-dealer must offer to repurchase the securities at their original cost plus interest.
Registration by coordination is used in conjunction with which of the following Acts?
Securities Act of 1933
What are structured products?
Securities which are created by financial institutions that customize returns and risks to fit the needs of specific investors. Structured products are securities which are created by financial institutions (e.g., broker-dealers) and are often customized to fit the specific needs of customers. Although structured products are legally created as debt instruments, their rates of return are often linked to equities and derivatives. One of the most popular types of structured products is the exchange-traded note (ETN). Derivatives (e.g., options) are contracts that derive their value from an underlying security. REITs are investment trusts that manage portfolios of real estate investments. Swap contracts are agreements to exchange cash flows based on financial instruments.
Digital Assets
Sometimes defined as securities. Like any investment, digital assets must meet the four part Howey Test in order to meet the definition of a security. To determine whether an instrument is a security under the Howey Test, there must be an investment of money, in a common enterprises, with the expectation of profits, which are derived from the efforts of others. Since many digital assets are not investments in a business or enterprise that's managed by others, they don't meet the standards of the Howey Test. All instruments that are considered securities are subject to the anti-fraud provisions of the USA. Although digital assets could be sold in an exempt transaction, if they're sold publicly and are defined as securities, they're required to be registered.
restricted stock
Stock that's not been registered with the SEC
An investment adviser has begun to experience difficulties in collecting fees from the accounts of clients that do not elect to have the fees deducted directly from their accounts. To compensate for this, the firm decides to raise its fees and require a larger up-front deposit from all new accounts for the upcoming year. To reward its current clients, the adviser waives the fee increase and does not change the terms of their contracts. What must the adviser do in this situation?
The IA must make all necessary changes and promptly file amendments to its Form ADV. In this question, since the contracts of the current clients are not being changed, they are not required to be given written notification and the firm is not required to obtain their consent. However, since this is a material change to the business, the adviser's Form ADV must be updated and filed promptly. If a change is deemed to be routine, it may be filed within 90 days of the year-end.
What characteristic generally makes universal life insurance policies more attractive than other forms of life insurance?
The biggest benefit of a universal life insurance policy is the flexibility of the death benefit. If policyowners need additional coverage, they may increase the death benefit. Similarly, they may lower the coverage if their insurance needs decrease
Which of the following statements is NOT TRUE of hedge funds? a. They are typically registered with the SEC under the Securities Act of 1933. B. They are not sold with a prospectus. C. They are often sold under Regulation D Rule 506. D. They may charge performance fees
They are typically registered with the SEC under the Securities Act of 1933. Hedge funds are private investment pools that are typically sold under an exemption (Regulation D Rule 506) and are therefore not required to register with the SEC under either the Securities Act of 1933 or the Investment Company Act of 1940. Since hedge funds are not subject to the Act of 1933 or Act of 1940, they are not required to sell with a prospectus. The first hedge funds used leverage and short selling strategies in an attempt to outperform the market. Modern hedge funds invest in a wide variety of financial instruments and employ a number of different aggressive investment strategies. Hedge funds are typically available to a limited range of professional or wealthy investors and these investors are often charged performance fees by the fund managers.
Two agents (Agent X and Agent Y) work for the same brokerage firm that is located in State A. Agent X recently contacted a referral who currently works in State A, but maintains a primary residence in State B for tax purposes. Agent X is not registered in State B, but Agent Y is registered there. Since the account may be a multimillion dollar, actively traded account, Agent X wants to have the account serviced by Agent Y, with whom she will split the commissions. How should this be handled?
This is not permissible since Agent X is not registered in State B. For an agent to be permitted to split or divide commissions with another person, the other person must be a registered agent in the same state and be employed by the same broker-dealer or one that is under common control. A firm under common control includes an affiliate, subsidiary, or parent company. In this question, since both of the agents are not registered in State B, splitting commissions on transactions involving this client is not permitted.
How is a corporation permitted to borrow from a bank?
Through a revolving credit facility
If a bond is selling at a premium and is callable at par, how is the yield generally calculated?
To the call date The yield for a bond is generally calculated to the lower of either the yield to maturity or the yield to call. The yield to call measures the yield that would be earned if the bonds were called at the first call date and not held to the maturity date. If a bond is selling at a premium and is callable at par, yield to call will be lower than yield to maturity. If the bond is selling at a discount, the bond is quoted on a yield to maturity basis. If the bond sells at a premium and is callable at a premium, the yield might be to the final maturity or the call date, depending on the results of the calculation. (74744)
If a security has a low beta, it will:
Underperform the market when prices rise, outperform the market when prices fall
Which TWO of the following are TRUE concerning the relationship between a bond's yield to call and its yield to maturity? When a bond is priced at a discount, the yield to call will be greater than the yield to maturity When a bond is priced at a discount, the yield to call will be less than the yield to maturity When a bond is priced at a premium, a premium call price will increase the yield to call When a bond is priced at a premium, a premium call price will decrease the yield to call
When a bond is priced at a premium, a premium call price will increase the yield to call When a bond is priced at a discount, the yield to call will be greater than the yield to maturity When bonds are priced at a discount, the yield to call will be greater than the yield to maturity since the holder will be receiving no less than par value, at an earlier time. When bonds are priced at a premium, yields will decrease, but the yield to call may not fall as far as the yield to maturity if a call premium exists. To a certain extent, the call premium will offset the premium paid for the bond.
According to the Investment Advisers Act of 1940, when is an investment adviser required to provide an audited balance sheet to its clients? The USA?
When the adviser requires the prepayment of a fee that is greater than $1,200, six months or more in advance of providing service according to the Uniform Securities Act (state law), an adviser is required to provide clients with an audited balance sheet if 1) the firm collects/solicits prepaid fees of more than $500, six months or more in advance of the service, or 2) the firm maintains custody or discretionary control of clients' assets.
When would a variable annuity be most suitable for a client?
When the client wants capital appreciation or growth over a long period Variable annuities are suitable for clients who are willing to invest for the long term and want to invest in the markets. The investment objective of variable annuities is capital appreciation (growth). Since a variable annuity's performance is tied to the market, its return is unpredictable and is not based on inflation.
ABC Corporation has issued $100 million worth of bonds at $1,000 par value. The effect of the issuance of the bonds would be an increase in: Working capital Total liabilities Total assets Stockholders' equity
Working capital Total liabilities Total assets
Fund of hedge funds
a mutual fund that invests in unregistered, private hedge funds. Although hedge funds themselves are not required to register with the SEC, funds of hedge funds are typically required to register with the SEC and are able to be sold to both accredited and non-accredited investors. A fund of hedge funds typically has higher management fees. The fund of hedge funds is assessed a management fees by each hedge fund in which it invests and will also have its own investment adviser that assesses a management fee.
Alpha measures:
a way to measure risk that's association with a single investment, which is better known as non-systematic risk. On the other hand, systematic risk is associated with all investments and is measured by beta. Gamma and theta are both risk measurements, but they're specific to option contracts.
what is used to determine debt-to-equity
balance sheet The debt-to-equity ratio is the amount of debt issued by a company in comparison to the amount of shareholders equity. The higher the ratio, the more leveraged a company is. The ratio is calculated by taking total debt capital and dividing by equity capital, which are both found on the balance sheet.
Best way to hedge a long stock position:
buy a put option
A firm will charge a commission for the service of:
buying and selling securities on a client's behalf
The S&P 500 is a(an):
capitalization-weighted index Indexes that are cap-weighted calculate their value based on the total value of the stocks, rather than the per share price. Market capitalization is determined by multiplying a company's shares outstanding x the price per share.
Working capital formula
current assets - current liabilities
The spread is the
difference between the highest bid and lowest ask price
Closing sale liquidates an
existing long position
Closing purchase liquidates an
existing short position
The buyer of a straddle expects the market to ________, the seller (writer) of a straddle expects the market to _________
fluctuate, remain stable. The writer (seller) of a straddle (call and put) believes the stock's price will remain stable. The buyer of a straddle expects that the market price of the underlying stock will be volatile. (62717)
testamentary trust
goes into effect after the donor passes away. The assets are required to go through the probate process. Once the assets are put into the trust, the trustee (not the donor) manages the assets for the beneficiaries.
Demand-pull inflation
inflation is caused by a rise in the demand for goods and services that is not matched by an increase in the level of supply of goods and services. When the demand for any individual item increases in relation to its supply, its price will tend to rise. The same thing is true for the economy on a larger scale.
A dollar-weighted return is also referred to as:
internal rate of return
Opening purchase establishes a
long position
The Dow Jones (DJIA) is a
price-weighted index.
Using cloud storage is acceptable only if
regulators are given free access to records.
The Uniform Securities Act provides an exemption for filing advertisements -
related to securities that are either currently listed on an exchange or are approved to be listed on an exchange. Since the stock in this question is about to be listed on the Philadelphia Stock Exchange, the advertisement is not required to be filed with an Administrator.
Options: Buyers have_______, sellers have _______
rights, obligations
Stock index options -
settled with cash not affected by splits may be American or European Monthly expiration cycle
Opening sale establishes a
short position
Cost-push
states that when the price of raw materials increases, that leads to a corresponding increase in the cost of producing goods and services. These increased costs are passed on to the consumer in the form of higher prices.
Asset classes include
stocks, bonds, cash (and money-market instruments), commodities, and real estate. NOT annuities or indexes
Book value
total assets - total liabilities Notice that book value can also be referred to as total shareholders' equity.
