Series 65 Mock exam 6 (Wrong answers)
All of the following factors have an inverse relationship to a bond's duration except A) time to maturity. B) coupon rate. C) yield to maturity. D) current yield.
A. The relationship between the time to maturity (length) and duration is a linear one. That is, the longer the time until the bond matures, the higher (longer) the duration - it is a direct relationship. Yields, on the other hand, have an inverse relationship with duration. That is, the higher the yield, the lower (shorter) the duration.
A new client indicates a desire to avoid investing in mid-cap stocks because of large losses suffered several years ago. What type of consideration would this be? A) Nonfinancial B) Systematic C) Financial D) Unsystematic
A. There are 2 basic investment considerations, financial and nonfinancial. The former deals largely with quantifiable items and the latter with attic attitudinal ones. Wanting to avoid a certain type of asset is generally considered to be attitudinal. The fact that the mid-cap stocks lost money is probably a systematic risk, but that isn't what the question is asking.
A registered investment adviser recommends a stock that will be sold to his client in a principal transaction. The broker-dealer that will sell the stock is also registered as an investment adviser and employs the investment adviser as an agent. This transaction A) requires both written disclosure to and the consent of the client prior to the completion of the transaction B) requires written disclosure to the client C) is prohibited D) requires the consent of the client
A. Under normal circumstances, when a broker-dealer acts as a principal in a trade, that fact is noted on the confirmation. However, in this case, because it is an investment adviser who is recommending the transaction, both written disclosure by the adviser and consent by the client are required prior to completion of the transaction, even when an adviser sells securities through an affiliated firm in a principal transaction.
When an analyst adds back the current year's depreciation to the net income, she is computing the company's A) earnings per share. B) cash flow from operations. C) net value of fixed assets. D) cash flow from investments.
B. Cash flow from operations is computed by adding the year's depreciation deduction to the net income.
A corporation sponsors a defined benefit pension plan. The assets of the plan are invested in a diversified portfolio of large-cap stocks. Which of the following options positions would be most appropriate if the corporation wished to protect their ability to meet their obligations to employees? A) Sell S&P 500 index puts B) Buy S&P 500 index puts C) Buy S&P 500 index calls D) Sell S&P 500 index calls
B. In a defined benefit plan, the corporation is assuming the investment risk. Regardless of the security, the best way to protect a long position is to buy a put, either on that security or on an index with a close correlation. In this case, with a portfolio of large-cap stocks, the S&P 500 index would seem to be the appropriate option to use.
With respect to the specific commodity that is the subject of the contract, all of the following are standardized parts to an exchange-traded futures contract except A) the time for delivery. B) the market price. C) the quantity. D) the quality.
B. It is the delivery price which is standardized, not the market price (that is continuously fluctuating). Exchange-traded futures contracts offer standardized quantities and qualities (grade of the commodity) as well as a standardized time for delivery.
Which of the following investments is not registered under the Investment Company Act of 1940? A) ETFs B) FACCs C) ETNs D) UITs
C. Exchange-traded notes, sometimes called equity-linked notes, are registered under the Securities Act of 1933 as debt instruments. All of the other choices are registered as investment companies under the Investment Company Act of 1940.
An investor purchases a Treasury note and the confirmation shows a price of $102.25. Rounded to the nearest cent, the investor's cost, excluding commissions, is A) $1,022.50. B) $102.25. C) $1,027.81. D) $1,020.25.
C. Treasury notes are quoted in 32nds where each 32nd equals $.3125. The 102 in the quote equals $1,020 and the 25/32 is an additional $7.81 bringing the total to $1,027.81.
Under the Uniform Securities Act, a civil suit to recover damages may not be brought by an advisory client if 1.more than 2 years ago, the client realized the advice rendered was improper 2.the adviser has died 3.the client willingly signed a statement waiving the adviser's compliance with the provision of the act on which the suit is based A) I, II, and III B) II and III C) I and II D) I only
D. The statute of limitations for civil cases is 2 years after discovery or 3 years after the event, whichever is sooner. The death of neither the adviser nor the client removes a cause of action for civil liability, and clients may not waive an adviser's compliance with the rules.
The Federal Reserve Board foresees the probability of an overheated economy and the resumption of double-digit inflation. Therefore, the FRB takes actions to slow down the economy, including increasing the discount rate. Which of the following are likely effects of these moves? 1.An increase in the prime rate 2.An increase in bond yields and an accompanying decrease in bond prices 3.A slowdown in corporate growth 4.A decrease in corporate earnings A) III and IV B) I, II, III, and IV C) I and II D) I, III, and IV
B. The FRB attempts to slow the economy and decrease the money supply with a corresponding increase in interest rates. When interest rates rise, the prime rate increases, bond yields rise, and bond prices drop. Higher interest rates have a tendency to slow corporate growth, with a resulting slowdown in earnings; these events occur in this approximate sequence.
Which of the following U.S. government securities do NOT bear a stated interest rate but are sold at a discount through weekly auctions? A) TIPS B) Treasury bills C) Treasury bonds D) Treasury notes
B. Treasury bills bear no stated interest rate. They are sold at a discount through weekly auctions and are actively traded in the money market. Treasury notes and Treasury bonds both carry stated interest rates.
Under the Investment Company Act of 1940, which of the following statements about advisory contracts between an investment company and an outside adviser is TRUE? A) The contract must be established for a 1-year period and renewed annually thereafter. B) The initial contract is effective once approved by the board of directors. C) The contract may not be unilaterally assigned to another adviser. D) The contract may be in writing, or it may be oral if there are at least 2 witnesses to the agreement.
C. All contracts between an investment company and an outside adviser must be in writing and must contain certain provisions; these include that the contract may not be unilaterally assigned to another adviser. The initial contract may be for 2 years, but it is subject to annual reapproval by a majority vote of the outstanding shares or the board of directors, as well as a majority of the directors who are considered to be noninterested parties.
A client purchases 1,000 shares of the ABC Global Growth Fund when the NAV is $8.75 and the POP is $9.21. Three years later, the client makes a gift to her daughter when NAV is $9.50 and POP is $10.00, and the daughter elects to receive all distributions in cash. Two years later, she sells all shares when the NAV is $14.25 and POP is $15.00. What are the tax consequences of this sale? A) Long-term capital gain of $4,750 B) Long-term capital gain of $5,500 C) Long-term capital gain of $5,040 D) Long-term capital gain of $5,000
C. In the case of a gift of securities, the donee acquires the donor's cost basis, $9.21 per share. Sale (redemption) takes place at the NAV ($14.25) for a profit of $5.04 per share (times 1,000 shares).
Which of the following statements regarding the alternative minimum tax is TRUE? A) The tax bracket will determine whether the regular tax or the alternative tax is paid. B) The lesser of the regular tax or the alternative tax is paid. C) The excess of the alternative tax over the regular tax is added to the regular tax. D) The alternative minimum tax is added to the regular tax.
C. The excess of the alternative tax over the regular tax is added to the regular tax amount. The taxpayer does not have the option of paying the alternative tax or the regular tax depending on his tax bracket. The purpose of the alternative minimum tax is to ensure that certain taxpayers pay a tax consistent with their wealth and income.
Among investor objectives is preservation of capital. Which of the following would be most appropriate for inclusion in the portfolio of this kind of investor? A) A money market fund B) International funds C) Blue-chip stocks D) U.S. Treasury bonds
A. Preservation of capital means no fluctuations. Money market funds are the only logical choice here. True, the Treasury bonds do not have default risk, but because they can have maturities as long as 30 years, they are subject to interest rate risk.
Your friend is a licensed life insurance agent whose client wants to purchase a variable annuity. You are a licensed securities and insurance agent, and your friend wants you to sell the policy and split commissions with him. Splitting commissions A) in variable annuities is allowable only if the agents involved are both licensed to sell life insurance and maintain securities licenses with broker-dealers registered with the Administrator B) in variable annuities is allowable only if the agents involved are both licensed to sell life insurance and maintain their securities licenses at the same or affiliated broker-dealers C) would be allowable if the securities representative receives at least 60% of the commission and the insurance agent receives no more than 40% D) is an unethical trade practice
B. You must be licensed in both insurance and securities to sell variable annuities or to split commissions. Commissions on securities transactions may only be split with registered agents of the same or affiliated broker-dealers.
Which of the following statements is TRUE? A) A stock split increases the owner's proportionate share of the company. B) A growth company would be more likely to pay a cash dividend than a stock dividend. C) Dividends have a significant influence on the value of the corporation's stock. D) A corporation is required to pay a cash dividend to stockholders if the earnings are sufficient, especially if it is of preferred stock.
C. Dividends play a large role in what someone is willing to pay for the stock. For example, the dividend discount model (DDM) values a stock as the discounted present value of future dividends. A company is not required to pay dividends. A growth company will tend to pay no cash dividends but rather use the money for expansion.
Which of the following statements regarding a traditional IRA is true? A) Distributions before age of 59½ are subject to a 10% penalty in lieu of income taxes. B) Distributions without penalty may begin after the age of 59½ and must begin by April 1 of the year before an individual turns 72. C) Because contributions to a traditional IRA are not currently tax deductible, all qualifying withdrawals are tax free. D) The income and capital gains earned in the account are tax deferred until the funds are withdrawn.
D. The income and capital gains earned in the account are tax deferred until the funds are withdrawn. It is the Roth IRA that can have tax-free withdrawals. Distributions must begin by April 1 of the year after an individual turns 72, not before. If a distribution is taken before reaching age 59 1/2, it is subject to income tax plus a 10% penalty, not instead of (in lieu of) the taxes. If the question does not indicate an exception to the penalty, such as death or disability, there isn't one.
All of the following positions expose a customer to unlimited risk EXCEPT A) Short 2 XYZ uncovered puts B) Short 2 XYZ uncovered calls C) Short 200 shares of XYZ and short 2 XYZ puts D) Short 200 shares of XYZ
A. A put writer will lose money if the stock goes down, but the furthest it can drop is to zero. Therefore, the potential loss is not unlimited. All of the other positions expose the client to unlimited risk because a loss will occur if the stock price rises.
From the standpoint of diversification, which of the following would be considered the most conservative? A) A balanced fund B) An income fund C) A sector fund D) A growth fund
A. Balanced funds invest in a variety of investment vehicles; therefore, they have more diversification. Because of the diversification, they are better protected against downturns in the financial markets and are more conservative than the other choices listed.
If a client wanted an investment that would eliminate interest risk as to principal, you would recommend A) a bank-insured certificate of deposit B) a 91-day Treasury bill C) preferred stock D) TIPS
A. Because bank-insured CDs are nonnegotiable (we're not discussing the $100k minimum jumbos), there is no market fluctuation caused by changes in interest rates as with marketable securities. If you invest $10,000, you will always get back that $10,000 whenever you cash in the CD, regardless of current interest rates. This is true even when cashing in early. There may be a prepayment penalty, but that is considered separate from interest rate risk. TIPS offer inflation protection and preferred stock is interest rate sensitive in the same manner as a bond. The 91-day T-bill doesn't have much interest rate risk, but if an investor was to attempt to liquidate the holding prior to maturity and interest rates increased, there could be a loss.
What generally happens to outstanding fixed-income securities when the rate of inflation slows? A) Prices go up. B) Coupon rates go up. C) Yields go up. D) Short-term securities are affected the most.
A. When the rate of inflation slows and is expected to remain stable, coupons on new issue bonds will often decline to offer lower yields. The prices of outstanding bonds will go up to adjust to the lower yields on bonds of similar quality.
The common stock of companies within which industry sector would be most adversely affected by an increase in the general level of interest rates? A) The clothing industry B) The electronics industry C) The utilities industry D) The food industry
C. Utilities are generally very heavily funded with debt. If interest rates go up, their new debt will be at higher interest rates, causing lower earnings available for common stocks.
One of the differences between call options, rights, and warrants is that A) rights generally have the longest "life" of these 3. B) a corporation can't issue call options on its own stock. C) holders of call options stand to profit if the market price of the underlying stock increases. D) warrants generally have a strike price below the current market value of the underlying stock.
B. Although a corporation can issue stock rights and warrants, they cannot issue call options. Listed call options (the only type that will be on the exam), are issued by the Options Clearing Corporation (OCC). Although there are call options with weekly expiration, most expire in 9 months and rights rarely have a life longer than 45 days. Warrants, which generally have the longest time until expiration, are always issued with a strike price above the current market value of the underlying stock. At issuance, they only have time value. It is true that holders of call options stand to profit if the market price of the underlying stock increases, but so do the other 2 - they do not differ in that respect.
Beth Jamison is an agent and an IAR for Consolidated Wealth Planning, a FINRA member broker-dealer and SEC-registered investment adviser. An advisory client purchases 300 shares of RMBN and the sale is made from Consolidated's inventory. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers, A) the amount of commission charged for this transaction must be clearly disclosed B) Beth would not be required to obtain consent for this principal transaction if it was not the subject of a recommendation C) selling out of inventory to advisory clients would be considered an unethical business practice D) Beth must obtain consent of any advisory client whenever a sale is made as principal
B. When acting in the capacity of IA (or IAR), that is, when making recommendations or advising a client to purchase (or sell) a security, any transaction in which the firm is a principal requires disclosure in writing to and consent from the client prior to the completion of the trade. However, if merely accepting a client order (no advice rendered), consent is not required.
The state securities Administrator has the authority to A) issue a ruling under its authority with no requirement to publish that ruling B) amend or alter the Uniform Securities Act C) make, amend, or rescind rules, forms, and orders necessary to administer the USA D) issue and enforce an injunction against a registered party
C. A state securities Administrator may issue a ruling or order to comply with the blue-sky laws of the state and designate the use of certain forms, but he does not have authority to amend or alter the Uniform Securities Act itself. All rules and forms of the Administrator must be published. Only the courts can issue injunctions.
Among the reasons why a corporation might choose to utilize a deferred compensation plan for retirement planning would be A) the plans are nondiscriminatory B) current tax savings on money contributed to fund the plan C) compliance with ERISA D) employees who leave the company prior to retirement would not receive benefits
D. Deferred compensation plans are usually structured so that if the employee leaves prior to retirement or is terminated with cause, benefits are forfeited. These plans are discriminatory and there is no current tax saving, hence the term "deferred." As nonqualified plans, they do not have to comply with ERISA.
An advantage of dollar cost averaging is that it results in an average cost per share that is less than the stock's average price, assuming which of the following? 1.The price of the underlying shares fluctuates. 2.A set number of shares is purchased regularly. 3.A set dollar amount is invested regularly. 4.A set dollar amount of investments is maintained. A) I and II B) III and IV C) II and IV D) I and III
D. Dollar cost averaging results in a lower average cost per share, provided the share price fluctuates and the same number of dollars is invested at each interval (e.g., monthly).
An individual is currently registered as an agent with a broker-dealer. If the agent would like to offer wrap fee programs through the firm, all of the following statements are correct EXCEPT A) the agent would be defined as an investment adviser representative B) the agent would be defined as an investment adviser C) the broker-dealer would have to be registered as an investment adviser D) the agent would now come under a greater fiduciary responsibility
b. Once the broker-dealer decides to offer wrap fee programs, it is no longer excluded from the definition of an investment adviser and would become required to register on either the state or federal level. The agent would now become an IAR of the firm and, as such, would now carry the additional fiduciary responsibility incurred in the advisory business.
