STC COMEBACK
Investment companies must send financial reports to shareholders A. Monthly B. Annually C. Quarterly D. Semiannually
D. Investment company financial reports must be sent twice a year and must include a portfolio list, income statement, statement of compensation paid to the board of directors and the advisory board, and a statement of the total dollar amount of securities bought and sold during the period. One of these reports must be the audited annual report
If the owner of a non-profit organization wants to start a defined contribution plan for her employees, what retirement plan should she choose? A. A 401(k) plan B. A SEP C. A Keogh (HR-10) plan D. A 403(b) plan
D. Section 403(b) plans can be established by tax-exempt (i.e., non-profit) organizations and public schools. These plans are a type of defined contribution plan, which permits both employees and the employer to make contributions. Section 403(b) plans also give a tax-deduction on the contributions made and any gains or investment income are tax-deferred until the funds are withdrawn. The other choices are retirement plans that can be established by for profit organizations
In order to determine the lump-sum amount that a person will need at retirement, what elements are required for an investment adviser to make the projection? I. Life expectancy II. Inflation rate III. Current cash flow IV. Investment return A. I, II, and IV only B. I, II, III and IV C. II and III only D. I and II only
The three elements that are required to project the lump sum amount that a person will need at retirement are life expectancy, inflation rate, and investment return. However, the person's current cash flow is relevant, but only after the lump-sum estimation has been completed. For example, the current income of a 30-year old will not have an effect on the amount that she will need in order to retire at age 60.
A corporation has current assets of $150,000 and current liabilities of $75,000. The corporation uses cash to pay $35,000 in current liabilities. Which of the following statements is TRUE? A. Stockholders' equity increases B. The current ratio increases C. Bond interest coverage probably increases D. Working capital increases
B. When the $35,000 in current liabilities is paid in cash, current assets fall to $115,000 and liabilities fall to $40,000. The result is an increased current ratio of 2.875, compared to 2 before the payment. Working capital and stockholders' equity would stay the same. Bond interest coverage compares earnings before interest and taxes to the bond interest expense, and would not be affected in this case
If a customer buys a 6% bond maturing in 8 years on a 7.33 basis, the price of the bond is A. Below par B. Inverted C. At par D. Above par
A. A bond with a basis, greater than its coupon is trading at a discount, or below par
In order to perform a discounted cash flow estimation of the value of a bond, it would be necessary to know all of the following EXCEPT A. The parity price of the bond B. The future cash flow C. The number of interest payments D. The discount rate
A. In its simplest iteration, discounted cash flow is nothing more than taking all the money you are scheduled to receive over a given future period and adjusting that for the time value of money (the discount rate). Parity price is only relevant to convertible bonds
Currently, a company issues 5% Aaa/AAA debentures at par. Two years ago, the corporation issued 4% AAA-rated debentures at par. Which of the following statements regarding the outstanding 4% issue are TRUE? I. The dollar price per bond will be higher than par II. The dollar price per bond will be lower than par III. The current yield on the issue will be higher than the coupon IV. The current yield on the issue will be lower than the coupon A. II and III B. I and IV C. I and III D. II and IV
A. Interest rates in general have risen since the issuance of the 4% bonds, so the bond's price will be discounted to produce a higher current yield on the bonds. Remember that as interest rates go up, the price of outstanding debt securities goes down
Several years ago, an investor purchased an investment-grade bond with a 6% coupon. Today that bond is priced to yield 4.6% to maturity in 5 years. If the bond is called at par in one year, the bond's yield would be A. Less than 4.6% B. The coupon rate of 6% because it is called at par value C. 4.6% D. More than 4.6%
A. Let's take things in order. A bond with a 6% coupon is showing a YTM below 6%, the bond must be selling at a premium. When bonds selling at a premium are called in advance of the maturity date, the "loss" (the difference between the premium and the par value") is recognized sooner than expected. This results in a yield to call that is less than the YTM
A 69-year-old client of yours indicates that she is interested in changing the portfolio mix of her IRA. She wishes to sell most of the bonds in the account and replace them with 3x leveraged ETFs. You would probably infer from this that the client A. Has insufficient retirement savings B. Is risk adverse C. Has recently retired D. Is preparing for her minimum required distributions
A. Most studies have indicated that seniors with insufficient retirement savings attempt to compensate by being tempted to reach for higher returns to maximize retirement assets. They frequently do so without full consideration of the increased risk that comes along with the possibility of higher returns
The Uniform Securities Act prohibits: A. Soliciting orders for unregistered, non-exempt securities B. Charging extraordinary commissions on certain transactions C. Accepting unsolicited orders D. Maintaining discretionary accounts
A. Soliciting orders for unregistered, non-exempt securities is prohibited by the Uniform Securities Act. The Act permits broker-dealers to maintain discretionary accounts for customers, to charge fees for services performed in customer accounts, and to accept unsolicited orders
A securities market investment theory that attempts to derive the expected return on an assetbased upon the asset's systematic risk is A. The capital asset pricing model B. The efficient market hypothesis C. The Monte Carlo simulation D. The random walk theory
A. The CAPM attempts to describe the relationship between the systematic risk and the expected return of the asset in an effort to determine the asset's appropriate price
A client is interested in purchasing a REIT and asks you what the differences are between a listed REIT and an unlisted REIT. You could respond that all of the following are differences EXCEPT A. Fees and expenses B. Suitability requirements C. Liquidity D. Regulatory oversight
A. The internal operating costs of a REIT, such as management fees and administrative expenses, have nothing to do with where units of the REIT are traded. One of the major risks inherent in an unlisted REIT is the lack of liquidity. As a result, there is a greater stringency when it comes to suitability, and this leads to stronger oversight by regulators
The most common form of organizational structure for venture capital investment is the A. Limited partnership B. Corporate venture capital funds C. Venture capital fund of funds D. Limited liability company
A. The most common structure for venture capital is the limited partnership. This is true for virtually all private equity including hedge funds
Which formula is used to perform discounted cash flow analysis for a bond? A. Future value B. Present value C. Yield-to-maturity D. Duration
B. Discounted cash flow analysis is a method for estimating the current market price of a bond, project, or business. Discounted cash flow analysis involves estimating or projecting future income (i.e., cash flows) and discounting them back to their present value using the present value formula. Duration measures a bond's risk relative to interest rates and yield to maturity measures a bond's rate of return
A 35 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. A 20-year level term policy C. A whole life policy D. Variable annuity with an extended death benefit
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
Tammy Jones is retiring from her company next month on her 62nd birthday. Her 401(k) has $300k and offers her 4 different mutual funds. After calculating what she will receive from Social Security, she concludes that she will need an additional $500 a month to retain her current lifestyle. Which of the following would be most appropriate recommendation? A. Roll the money into a mutual fund withdrawal plan B. Roll the money into a traditional IRA C. Leave the money in her current 401(k) account D. Take a lump-sum distribution of the entire $300k
B. It would benefit Ms. Jones most to roll the money into a traditional IRA. By doing this she would defer paying taxes on the $300k - something she could not avoid if she took the lump-sum distribution or rolled the money into a mutual fund withdrawal plan. Although the decision to roll over into a self-directed IRA or leave the funds in the 401(k) plan, if permitted, is one worthy of consideration, with only 4 mutual funds being offered in Ms. Jones's 401(k) account, most would agree that the increased options available in the IRA make that the better choice
A professional tennis player comes to you seeking advice on setting up a trust. She is interested in giving to charity and also wants discretion as to when income is distributed to the beneficiaries, her parents. Which trust do you advise she use? A. Simple trust B. Complex trust C. Charitable remainder trust D. Charitable lead trust
B. Only a complex trust allows the two features that she requires. Simple trusts may not make charitable contributions, and they provide no discretion on income distribution. The two types of charitable trusts mentioned provide no ongoing discretion as to when income is distributed or who the beneficiaries are
A group of investors is starting a business to explore and drill for oil. All want to be actively involved in the business, but none want to be personally liable for the venture's debts. Which of the following business structures would meet their objectives? I. A limited partnership II. A general partnership III. A limited liability company IV. An S corporation A. I and II only B. III and IV only C. I only D. I, III, and IV only
B. Since none of the group is willing to be liable personally for the business's obligations, they cannot form a general partnership or a limited partnership. All general partners have unlimited liability for any obligations that the business incurs. A limited partnership requires at least one general partner. Also, they all want to be involved in management loses the shield of limited liability
Under the Uniform Securities Act, which of the following statements is NOT true regarding registration of securities? A. A post-effective amendment must be filed if there are any material changes in the information on file B. Registration statements that comply with the Uniform Securities Act automatically comply with requirements in the Investment Company Act of 1940 C. The Administrator may require the proceeds of the sale of securities be escrowed until sales reach a certain level D. The Administrator may require periodic sales and other reports to be filed
B. The Administrtaor may require certain reports to be filed and the registration statement and other offerings be updated as necessary. A post-effective amendment must be filed if there have been any material changes to information on file. Administrators may require the proceeds of the sale to be escrowed when it would take specific amounts of money to achieve the primary purpose of the offering. Registration of investment companies must comply with the Investment Company Act of 1940, and investment companies are not required to register with the state
Investment adviser representatives are often called upon to help clients select an appropriate mutual fund. When making a recommendation, which of the following would NOT be a consideration? A. The portfolio manager's tenure B. The fund's NAV per share C. The fund investment objective D. The fund's expense ratio
B. The price per share (NAV) of a fund is not a relevant factor when considering recommending a mutual fund. The fund's investment objective must align with that of the client and it is important to know if the fund's portfolio manager has just come aboard or has been managing the fund-for a number of years.
Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative handling the account can A. Place the securities in the trust fund in a noncustodial brokerage account B. Have a check drawn on the account payable to the trustee for trustee expenses C. Arrange to have the trust's funds pledged to support a loan for the trustee D. Have funds withdrawn from the account at the direction of the beneficiary
B. The trustee can be reimbursed for trustee expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can direct a withdrawal of funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial accounts, not in noncustodial accounts
David is the owner of a private company and his firm needs to raise capital in order to expand its e-commerce business. David's company will issue debt securities and has decided to avoid hiring an investment bank. Under the USA, in which situation will David's salespersons be exempt from registration as agents? A. If the company wants to raise capital and issues debt in minimum denominations of $25k that matures in 270 days B. If the company wants to raise capital and issues debt in minimum denominations of $100,000 that matures in 4 months C. If the company wants to raise capital and issues debt in minimum denominations of $100,000 that matures in less than one year D. If the company wants to raise capital and issues debt in minimum denominations of $100,000 that matures in two years
B. Under the USA, agent is defined as any individual who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. However, if an individual represents an issuer in effecting transactions, the individual is not considered an agent
Concerning index annuities and their method of crediting interest, which of the following is TRUE? A. Point to point offers the best return when the market has had a single drastic decline during the period B. High-water mark with look back offers the best return during periods of high volatility C. On average, annual reset has a higher participation rate than point to point D. Annual reset offers the best return regardless of market fluctuations
B. Using the annual high-water mark with look back will generally result in the highest return during periods of high volatility. The reason is because under this method, the highest anniversary value is used to determine the gain. In a volatile market, there is likely to be a high spike sometime during the period and that is the value used. The problem with point to point when there is a single drastic decline during the period is that the decline might occur at or just prior to the annual crediting computation. Annual reset does ignore the daily market fluctuations, but if the index is lower at the end of the year, there is nothing credited. In reality, annual reset has a lower participation rate than point to point
Under the Uniform Securities Act, an individual applying for an investment adviser representative registration may be required by the Administrator to: I. Pass an examination II. Pay a filing fee III. Maintain a minimum net capital A. I, II, and III B. I and II only C. I and III only D. II and III only
B. When an individual applies for an investment adviser representative registration, the Administrator may require the individual to pass an examination and pay a filing fee. Investment advisers and broker-dealers may be required to maintain a minimum net capital in addition to meeting the two previously mentioned requirements
Under the Uniform Securities Act, all of the following are considered to meet the definition of agent, EXCEPT: I. A sales representative of a broker-dealer who sells only securities that are covered under a federal exemption II. An assistant to a sales agent who accepts orders when the agent is unavailable III. A subsidiary of a bank that is registered as a broker-dealer and sells non-exempt securities to the public IV. A broker-dealer that sells only exempt securities within the state A. I and IV only B. I and II only C. III and IV only D. II and IV only
C. By definition, a sales representative of a broker-dealer is an agent. This is true regardless of whether the securities sold are covered under a federal exemption. Also, a sales assistant is considered an agent if she is authorized to accept client orders. Choices (III) and (IV) describe activities involving the broker-dealer (firm) and not an agent (individual)
A registered investment adviser, in his financial planning practice, recommends and sells proprietary products offered through a broker-dealer affiliated with his investment advisory firm. All of the following statements are true EXCEPT A. The adviser must state that the client may be subject to certain limitations because of this arrangement B. The adviser may collect fees for investment advice and commissions for executing trades C. The adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment D. This practice is ethical if full disclosure is made to all clients
C. In order for the investment adviser to sell securities pro
One would look at the average maturities when doing a cash flow analysis for A. Revenue bonds B. Subordinated debentures C. Mortgage-backed pass-through certificates D. Brady bonds
C. Mortgage-backed pass-through securities pass through interest and principal payments to their investors. The rate at which the cash flows are generated depends, among other things, on the rate at which the mortgages mature
Which of the following best describes ETNs and leveraged ETFs? A. Speculative investments B. Registered investment companies C. Alternative investments D. Forms of hedge funds
C. These are two popular alternative investments. Are they speculative? Yes, but there are many other speculative investments that are not considered alternative investments. The questions asks for the best description and, although it might seem like a close all
An IA may charge a client an investment advisory fee for rendering investment advice while receiving compensation for effecting securities transactions related to such advice: A. Under no circumstances B. Only if the IA is also an agent of a broker-dealer C. Only if disclosed to the client D. But may only retain the greater amount of the two
C. Under NASAA's Model Rule on Prohibited Conduct of IAs, IARs, and federal covered advisers, this practice is acceptable if it is disclosed to the client before effecting transactions pursuant to the advice
Under the Investment Company Act of 1940, which of the following qualify for a discount in a mutual fund's sales charge? I. Mr. and Mrs. Jones each purchase $5,000 worth of shares; the fund offers a volume discount for a single purchase of $10,000 II. Neighbors Jan, Mickey, and Lee form an investment club; Jan places an order for $10,000 worth of shares to be held in their 3 names. The fund offers a volume discount for a $10,000 purchase III. Allen is the vice president of a firm under contract to provide investment advice to a mutual fund. he buys shares of that fund A. II and III B. I, II, and III C. I and II D. I and III
D. A husband and wife and all children under 21 qualify as a single person for the purposes of obtaining a quantity discount, as do corporations formed for a purpose other than obtaining such a discount and employee benefit plans. But other associations acting collectively, such as the members of an investment club, do not qualify as a single person for such a purpose. Discounts may also be made to directors, officers, partners, employees, or sales representatives of the fund, its investment adviser, or its principal underwriter
If a bond is currently selling for less than par, then: A. Its current yield is lower than its nominal yield B. Its current yield is equal to its nominal yield C. Interest rates are currently lower than when the bond was originally issues D. Its current yield is higher than its nominal yield
D. Bond yields and prices have an inverse (opposite) relationship. This means that as one increases, the other will decrease. Therefore, if a bond is selling at a discount (below par), its current yield will be higher than its nominal yield
What is the proper course of action for the fiduciary of a trust that has a portfolio made up of 10% cash and 90% stock of one company that has recently experienced a 40% market gain? A. Begin diversifying the equity portfolio B. Increase the cash position to 25% by taking some of the profits off the table C. Use the cash to acquire more shares of the stock D. Maintain the current allocation if, while acting in the capacity of trustee, he believes it aligns with the goal of the trust
D. In almost every trust question, the current answer will be that the trustee (fiduciary) has to follow the terms of the trust and meet the trust's goals and objectives
Nonsecurities derivatives include futures and forwards. Among the differences between futures and forwards is that futures contracts A. Are nonstandardized while forwards are B. Are preferred to forwards by producers C. Are not regulated by the CFTC while forwards are D. Are rarely exercised while forwards generally are
D. In the vast majority of the cases, futures contracts are closed out prior to expiration. That is one reason they are more popular with speculators than forwards. Because forwards are generally delivered, they are the preferred tool by producers and it is futures which are stan
The NASAA Model Rule on Custody Requirements for Investment Advisers require that an adviser with custody of client funds or securities do all of the following EXCEPT A. Deposit client funds into separate accounts and provide written notice to clients about the location of their assets B. Submit an audited balance sheet to the Administrator with Part 2A of Form ADV each year C. Submit an annual surprise audit conducted by an independent accountant D. Send monthly account statements to clients
D. Investment advisers with custody must send statements to clients on a quarterly basis
Which of the following mutual fund share classes generally has a 1% CDSC that is eliminated once the shares have been held for more than 1 year? A. Class B B. Class 1% C. Class A D. Class C
D. It is the Class C shares that have no front-end load, but they do have a 1% CDSC for a period of 1 year
When a customer wants income from an annuity and chooses the option of life with 20-year period certain, how will distributions be taxed? A. As capital gains based on LIFO accounting B. As ordinary income based on LIFO accounting C. As capital gains based on an exclusion ratio D. As ordinary income based on an exclusion ratio
D. Life with 20-year period certain is an annuitization option. When an annuity is annuitized, ordinary income taxes are paid based on an exclusion ratio (cost basis divided by expected return = how much of the distribution is a return of cost basis (the original principal invested), and not subject to income taxes). Testing note: Unless the question specifically mentions that the annuity is qualified, or gives you a clue, such as it is in a 403(b) plan, the annuity is always nonqualified
An agent registered with a broker-dealer in this state would be permitted to do all of the following EXCEPT A. Split commissions with another agent at an affiliated broker-dealer B. Solicit transactions in unregistered exempt securities C. Share in profits in an account with a customer with written permission of the customer and the broker-dealer D. Borrow money, with written permission of the customer and the broker-dealer, from an immediate family member who is a client
D. Money may be never borrowed from a client, unless sometihng in the question indicates that the client is in the business of lending money or an affiliate of the firm. As a testing matter, that will only be banks or broker-dealers in margin accounts. Exempt securities are unregistered because they are exempt and solicitations for trades are
A registered investment company whose capitalization may include preferred stock and/or bonds is A. The open-end management investment company B. The face-amount certificate company C. The unit investment trust D. The closed-end management investment company
D. Only the closed-end company is legally permitted to issue senior securities (preferred stock and bonds)
Which of the following is (are) TRUE regarding violations of the Uniform Securities Act? I. The Administrator may issue a cease and desist order without a prior hearing II. Violators may incur a criminal penalty of a $5k fine or 3 years in jail, but not both III. There is no statute of limitations on the return of criminal indictments A. I and II B. I, II, and III C. II and III D. I only
D. The Administrator may issue a cease and desist order with or without a prior hearing. The statute of limitations on criminal violations is 5 years, not unlimited. Regarding the criminal penalties described, the amounts are correct - a $5k fine, 3 years in prison - but violators may face both, not just one or the other
A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are A. 100% tax free B. 100% taxable C. 100% tax deferred D. Partially a tax-free return of capital and partially taxable
D. The investor has already paid tax on the contributions, but the earnings have grown tax deferred. When the annuitization option is selected, each payment represents both capital and earnings. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income
According to the Uniform Securities Act, a sale is A. An attempt to transfer ownership of a security B. An offer of an equivalent contract C. A solicitation of an offer to buy D. A contract to transfer ownership of a security for value
D. There are 2 steps involved in a securities transaction, First comes the "offer". The USA defines that as follows: "offer" or "offer to sell" includes every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value. Before a sale can happen, someone has to try to make that sale, make the attempt, and that is the offer. If the attempt (the offer) is successful, we have a sale, technically defined in the USA as follows: "Sale" or "sell" includes every contract of sale of, contract to sell, or disposition of, a security of interest in a security for value.
An individual wishing to invest $15,000 into a mutual fund with the intent of having it remain invested for at least 15 years should probably purchase A. Class I shares with no load, no 12b-1 fee, and no CDSC B. Class C shares with a 12b-1 fee of .75% and a CDSC of 1% during the first year C. Class A shares with a 5.5% front-end load and a 12b-1 fee of .25% D. Class B shares with a 12b-1 fee of .75% and a 6-year declining CDSC after which they convert to Class A shares
D. There are several keys to answering this question. First is recognizing this is an individual investor. Although Class I shares generally offer the best deal, that share class is sold only to institutional investors. Next, we see that the size of the investment is $15,000. That is too small to reach any significant breakpoint. Finally, the client intends to hold the investment for at least 15 years so the CDSC attached to the Class B shares becomes irrelevant. Because the Class B shares are sold without a front-end load, all of the investor's money goes to work. That is a 3% difference over the 6 years, barely over half as much as the 5.5% front-end load. The Class C shares have no front-end load and the CDSC is unimportant here because it disappears after 1 year, but the 12b-1 fee never ends and, over a 15 year period, that can remove the advantage the lack of a front-end load has to offer
Under the Securities Act of 1934, the SEC may suspend all trading on an exchange A. Only if it has cause to believe that such suspension is necessary to prevent criminal violations that are about to occur on the exchange B. For 10 days, in its discretion C. Under no circumstances D. Only with prior notification to the president of the United States
D. To suspend all trading on an exchange, the SEC must first notify the president of the US. The SEC may summarily suspend trading in any nonexempt security for up to 10 days without prior notice
A customer in his 20s, who is not risk averse, is in the market for life insurance. His main worry is that what looks like a generous death benefit today may not be sufficient for a beneficiary 40 or 50 years from now. An investment adviser representative might consider recommending A. An aggressive, long-term strategy of investment in small-cap stocks B. Term life insurance C. Whole life insurance with the option of purchasing additional coverage D. Variable life insurance
D. Variable life insurance has the advantage of offering possible inflation protection for the death benefit. The insured assumes investment risk for this benefit, but pays a fixed schedule premium for the life of his contract
You have a 70-year old client who owns a whole life insurance policy. The face amount of the policy is $1 million and it currently has a cash value of $400,000. The client is interested in a life settlement. If the policy is accepted, the client would expect to receive A. The face amount plus the cash value B. The $1 million face amount C. Less than $400,000 D. More than $400,000 but less than $1 million
D. When a policy is sold through the life settlement process, the insured receives more than the cash value, but less than the face amount of the policy
