Additional flashcards

Question 1

A transactional exemption would be offered when a sale is made by

Answer 1

Fiduciary, which includes court ordered guardian

-Not a custodian of a minors account UTMA account.-

Question 1

When saving money for a child’s college education, one consideration is the impact that those savings will have on the child’s eligibility for financial aid. Funds saved in which of the following vehicles has the most detrimental effect on financial aid?

Answer 1

Assets held in custodial accounts (UTMA or UGMA) are counted at 20% of their value, which compares unfavorably with the 5.64% valuation of Section 529 or Coverdell ESA assets. Please note: It is highly unlikely that you will need to know the percentages – but you will need to know that custodial accounts do not receive as beneficial treatment when applying for financial aid.

Question 2

An investor purchases $10,000 of A-rated debentures in early January. At the end of the year, $500 in interest has been received and the value of the investment is $9,500. If the investor is in the 25% tax bracket, the after-tax yield is

Answer 2

3.75%.

If the question had asked about total return, then the $500 unrealized loss would have been included, although there would have been no tax benefit to it because it is only a “paper” loss.

Question 3

Debt to equity equation

Answer 3

debt-to-equity ratio is computed by dividing the issuer’s long-term debt by their total capitalization

Question 4

ERISA regulation does not apply to

Answer 4

Government or public sector plans are not subject to the Employees Retirement Income Security Act of 1974.

ERISA rules only apply to private sector plans

Question 5

A mutual fund’s computed NAV on April 24 was $100 per share. On April 25, the portfolio realized gains of $2 per share and enjoyed $1 per share in unrealized appreciation. What would the NAV be on April 26 assuming an unchanged market?

Answer 5

$101 per share

Realized gains would be reflected in the NAV price at close of business day. Therefore, would be no change to the price. Unrealized would hit the next day.

Unrealized appreciation = impacts NAV

A mutual fund’s net asset value (NAV) per share is the fund’s total assets minus total liabilities (net asset) divided by the number of shares outstanding. The major asset is the fund’s portfolio. Portfolio securities are carried at their value as of the close of the markets (4:00 pm ET). As a result, unrealized appreciation (and depreciation) are part of the NAV. Therefore, when that gain (or loss) is realized, paper profit (or loss) is now real and there is no change to total assets. In the subject question, the realization of the $2-per-share gain has no effect, but the new $1 in unrealized appreciation increases the NAV by that amount.

Question 6

A sudden decrease in market interest rates will have the effect of increasing the trading price of an existing bond because

Answer 6

the present value of the bond’s future cash flows increases

Think about it - when interest rates go down, the coupon rate is fixed, therefore it has higher cashflow, to offset this, they RAISE the price of the bond. NOW THIS MAKES SENSE!!

Bond valuations using discounted cash flow take into consideration the present value of the bond’s future cash flows. That is, the greater the value of the interest payments to be received in the future, the higher the price of the bond. When market interest rates decline, because the coupon rate of the existing bond is fixed, the present value of those interest payments increases, creating a higher value for the bond. This is just the technical way for explaining why bond prices go up when interest rates go down.

Question 7

UTMAs taxed

Terry Bolton opens a UTMA for each of his sons, Josh, age 12, and Drake, age 14. Under current tax regulations (2023 and beyond), after deductions and exemptions, how will the income in the UTMAs be taxed?

Answer 7

Because the income on the UTMAs is not considered to be earned income, the kiddie tax rules apply. Currently, children younger than 19 having such income in excess of $2,500 are subject to tax at the parent’s marginal tax rate. That means if the parent is in the 32% income tax bracket, the children’s excess income will be taxed at 32%.

Question 8

A measurement of investment return that takes the time value of money into consideration is

Answer 8

IRR

Question 9

variable annuity units and payout

Answer 9

The number of annuity units is fixed when an annuitant starts the payout process, and the monthly payment will vary with the market value of the securities in the separate account portfolio. The value of accumulation units varies with the value of the portfolio, and the growth portion of the monthly payments is subject to income tax.

Question 10

A bond analyst notices that the yield spread between corporate bonds and government bonds is widening. This is typically predictive of

Answer 10

an economic slowdown

A widening yield spread shows that the difference in yield between corporate bonds and U.S. Treasury bonds is increasing. This is usually caused by a flight to quality, the pattern of investors moving their investments to the safety of Treasury securities.

This is commonly felt to be a prediction of a future recession or economic slowdown. During a slowdown, interest rates generally decline.

Question 11

The Uniform Securities Act requires that a balance sheet accompany an adviser’s brochure when the adviser

Answer 11

maintains custody of client assets or accepts substantial prepayments of fees.

Question 12

It is the Class C shares that have no front-end load, but they do have

Answer 12

a 1% CDSC for a period of one year.

Question 13

Keynesians advocate government intervention through

Answer 13

increased government spending, which in turn increases aggregate demand.

Question 14

Monetarist

Answer 14

the economy’s performance—its growth or contraction—can be regulated by changes in the money supply.

Question 15

Supply-side economics is a theory that maintains that

Answer 15

increasing the supply of goods and services is the engine of economic growth. Additionally, it advocates tax cuts as a way to encourage job creation, business expansion, and entrepreneurial activity.

Question 16

Canadian broker-dealers and their agents must be registered

Answer 16

in any state in which they wish to do business with exisiting clients who are temporarily in the state. The Uniform Securities Act provides for a form of limited registration for Canadian broker-dealers wishing to do business with their clients who are vacationing or otherwise traveling through the United States. In order to qualify for the limited registration, the broker-dealer must be properly licensed in its home province and its only dealing in the states is with an existing client.

Question 17

DERP Corporation’s 5% convertible debentures maturing in 2030 are currently selling for 120. The conversion price is $40. One would expect the DERP common stock to be selling

Answer 17

somewhat below $48 per share.

convertible securities generally sell at a slight premium over their parity price, the stock should have a current market value a bit less than $48 per share.

Question 18

AMT

Answer 18

Tax preference items include:

Deductions for accelerated depreciation/depletion
Net income from oil and gas properties
Excess intangible drilling costs
Interest on special private activity bonds reduced by any deduction (not allowable in computing the regular tax) which would have been allowable if such interest were included in gross income
Qualifying exclusion for small business stock
Capital gains from exercise of stock options
Investment tax credits

Alternative minimum tax (AMT) is the least tax that an individual or corporation must pay after all eligible exclusions, credits, and deductions have been taken. AMT is a mandatory supplement tax alternative to the standard income tax.

It uses many common itemized deductions and, therefore, impacts high-income earners mostly because it eliminates many of those deductions. A taxpayer that makes more than the AMT exemption amount and uses the deductions must calculate his taxes twice – one calculation for the regular income tax, and another for the AMT.

2 Individuals that have an adjusted gross income higher than the exemption ($71,700 for single/head of households and $111,700 for married filing jointly, as of 2019) must calculate the AMT, and pay the higher of both taxes calculated.

Question 19

Which of the following statements best describes an investment supervisory service as described by the Investment Advisers Act of 1940?

Answer 19

An investment supervisory service is an individualized service delivered to a specific client on a continual basis.

Question 20

investment counsel

Answer 20

Only when an investment adviser provides investment supervisory service, and the adviser’s principal business activity is the giving of advice, may the term investment counsel be used.

Question 21

A client has made both tax-deductible and nondeductible contributions to a traditional IRA. When distributions are taken from the IRA,

Answer 21

Pro rata basis, meaning, if the individual contributed $2,000 in after-tax amounts and $8,000 in pre-tax amounts, a distribution of $5,000 would be prorated to include $1,000 after-tax and $4,000 in pre-tax assets.

Think they would both be distributed at the same time.. same ratio

Question 22

Form ADV Part 2A is the brochure that investment advisers must deliver to clients; it

Answer 22

• fees
• investment policies
• types of investments made

Question 23

Is a person an investment advisor who deals exclusively with federal government issued or guaranteed issues

Answer 23

They are excludes from the definition of “investment adviser

Question 24

When the economy is headed downward, safety is the imperative, and nothing is as safe (at least for exam purposes) as

Answer 24

US Treasuries

Question 25

If a customer purchases shares in a municipal bond fund,

Answer 25

dividends are not taxed, but capital gains is taxed.

Think just like municipal bonds, interest is tax free, but in this case your principal is growing which isn’t tax free.

Question 26

excluded from the definition of a broker-dealer

Answer 26

issuer
bank
agent

IA’s are not excluded - think about it - they also purchase and sell on behalf of others - makes sense

Question 27

requiring prepayment of over

Answer 27

$1,200 in fees, six or more months in advance, an adviser is required to include an audited balance sheet with Part 2 of Form ADV, which must be filed with the SEC and made part of the adviser’s disclosure brochure.

Question 28

The longest initial maturity for U.S. T-bills is

Answer 28

52 weeks
shortest is 4 weeks

Question 29

What you can invest in IRA

Answer 29

Annuity, minted coins, stocks, bonds, mutual funds, annuities, unit investment trusts (UITs), exchange-traded funds (ETFs), and even real estate.

Not stamps or collectibles

Question 30

PF must be filed by

Answer 30

SEC-registered advisers with at least $150 million in private fund assets under management.

Form PF is the form used by those private fund managers who are registered with the SEC and whose private fund AUM reaches or exceeds the $150 million threshold. Exempt reporting advisers are, as the term implies, exempt from reporting. State-registered advisers don’t report on the form because, among other things, if they reached the $150 million mark, they’d have to register with the SEC.

Question 31

To be in the business of rendering investment advice

Answer 31

a person must regularly provide advice about securities and must be compensated for giving such advice. Those whose earnings are based on securities transactions are broker-dealers and/or agents.

Question 32

technical analyst

Answer 32

charts price and volume over time.

Question 33

the Administrator may only deny exempt security status to an issue of a nonprofit organization or an investment contract issued in connection with an employee benefit plan, never a U.S. government security or one issued by another state.

Question 34

Section 404(c)

Answer 34

s the fact that the plan must offer a selection of at least three investment choices with materially different risk and return characteristics.

Question 35

Under the USA, the term offer includes an attempt to dispose of securities for value or a solicitation of an offer to buy a security. Gifts, whether legal or not, are not considered an offer except when dealing with gifts of assessable stock.

Question 36

Under the NASAA Model Rule on Custody Requirements for Investment Advisers, an investment adviser (IA) would be permitted to maintain custody of customer cash and/or securities if

Answer 36

notification was given to the Administrator and custody was not prohibited by that state’s rules.

Question 37

Under the Investment Advisers Act of 1940, what is the maximum fine that may be imposed for violating the act?

Uniform Securities Act, which provides for penalties of

Answer 37

10k / 5 years

5k / 3 years

Question 38

A complex trust has the following income for the year: $1,500 in taxable interest, $2,000 in dividends (reinvested in the stock), and $3,000 in tax-exempt interest. In addition, the portfolio realized $3,500 in capital gains that were reinvested in the corpus. What is the distributable net income (DNI) for the trust?

DNI…

Answer 38

$6500

All investment income, regardless of source, will be considered DNI and will be included in the taxable income calculation to the trust unless distributed. That portion of the DNI representing tax-exempt interest maintains its tax-free status. Reinvested capital gains are not part of a trust’s DNI. The computation is: $1,500 in taxable interest + $2,000 in dividends (reinvestment means nothing here) + $3,000 in tax-exempt interest. This is a total of $6,500 of DNI. When distributed, only $3,500 will be taxable.

Question 39

capital market theory

Answer 39

• all market participants borrow and lend at the same risk-free rate
• All investors want to achieve a maximum return for minimum risk.
• There are no taxes or transaction costs.
• Market participants have the same expectations about the returns and standard deviations of all assets.

Question 40

senior securities

Answer 40

preferred stock and bonds

under the Investment Company Act of 1940, only closed end can offer these, not UIT or open end

Question 41

Responsiblity for liability on registration statement

Answer 41

Anyone who has signed the registration statement, anyone who is named in the statement as an expert, and every underwriter may be liable to the purchasers of the securities if the statement contains false information. Although a registration statement contains the names of stockholders who own 10% or more of the issue, they are not liable unless they fall into one of the other categories (officer, director, or expert). Anyone who sells the underlying security without providing a valid prospectus, uses a prospectus that is false, or omits material information is also civilly liable to the purchaser.

Question 42

Rule 144 of the Securities Exchange Act of 1934

Answer 42

The holding period requirement of Rule 144 applies to unregistered securities, no matter who the owner is.

Question 43

The distributable net income (DNI) of a simple trust would not include

Answer 43

Capital gains

It is capital gains that are reinvested in the corpus (body) of a simple trust which are not part of DNI. Although the interest on municipal bonds in not taxable, it is still included as part of the DNI.

Question 44

When one firm succeeds another, no fees are due until the renewal date. However, the successor firm must

Answer 44

file a consent to service of process at the time it registers

Think about it, that makes sense, because fee’s have ALREADY been paid, but they must comply with consent to service. That makes sense.

Question 45

The only types of accounts that may have the Transfer on Death (TOD) designation are

Answer 45

individual, JTWROS, and TBE accounts. Minors cannot designate a beneficiary. Upon the death of a minor, any assets belong in the deceased’s estate.

Question 46

The rate of interest in excess of the pure time value of money

Answer 46

Risk premium

Question 47

The Uniform Securities Act empowers the Administrator to begin proceedings to revoke the registration of an investment adviser when certain violations are suspected. Which of the following is considered serious enough to warrant a revocation?

Question 48

Accumulation units are turned to

Answer 48

Annuity units when annuitized

Question 49

money market mutual fund

Answer 49

offered without sales loads or redemption fees

(which makes sense since it’s ‘garage’ money)

• Shares are offered without a sales charge
• All purchasers must receive a copy of the prospectus.

Question 50

The Sharpe ratio measures a stock’s

Answer 50

excess return earned compared to its total risk.

total risk.. duh think the equation

Fund return - risk free return (excess return) / standard deviation (total risk)

Question 51

The qualified dividend is taxed at 15%, and the short-term capital gain is taxed at the 32% rate. This is important because…

Answer 51

An investor purchased 200 shares of Affinage Refining Company (ARC) common stock at $63 per share. Over the next six months, two quarterly qualified dividends of $0.50 per share were paid. The investor liquidated the position at $66 per share. If the investor is in the 32% federal income tax bracket, the approximate after-tax return is

4.6%
NOT
4.3%

Question 52

Duration

Answer 52

Is volatility
It is expressed in YEARS (time) vs percentage

Question 53

Class l shares

Answer 53

are the best but only sold to institutional investors

Question 54

LEAPS

Answer 54

acronym for long-term equity anticipation securities, have expiration dates that can run more than three years compared with the nine months for standard option contracts

Question 55

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

Answer 55

Class B shares with a 12b-1 fee of 0.75% and a six-year declining CDSC after which they convert to Class A shares.

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. True, the 12b-1 charge is 0.50% higher than with the Class A shares, but that only lasts for the six-year period until the B shares convert to A shares. That is a 3% difference over the six 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—over a 15-year or longer period, that can remove the advantage the lack of a front-end load has to offer.

Question 56

Corporation tax on dividends

Answer 56

50%

so if it is a 6% dividend, they are taxed at 50% of that, then at their tax rate

Question 57

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

Answer 57

fees and expenses

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 lack of liquidity. As a result, there is a greater stringency when it comes to suitability, and this leads to stronger oversight by the regulators.

Question 58

One of the exemptions from registration under state and federal law applies to investment advisers to private funds. One characteristic of all private funds is that

Answer 58

they are not registered as investment companies.

Private funds lose that distinction if they become registered as investment companies under the Investment Company Act of 1940. It is the adviser to a private fund who has a limitation on the amount of AUM, not the fund. In some cases, specifically when using the 3(c)(7) exemption, there is no limit to the number of investors. In many cases, the advisers to these funds, although exempt from registration, are considered exempt reporting advisers and must file Form ADV Part 1 answering most of the questions on the form.

Question 59

A REIT is able to pass-through which of the following?

Answer 59

Taxable income from operations

Duh… This is how we get paid. Their income has to be distributed, I.e. 90% at least!

REITs are required to distribute a minimum of 90% of their taxable income from operations. Unlike the traditional flow-through vehicle, they do not pass through losses. When a gain is unrealized, there is nothing to distribute.

Question 60

inverse ETF uses

Answer 60

almost always use derivatives, such as options, and—in the case of a leveraged ETF—will use debt, primarily in the form of margin. Inverse ETFs do not engage in short selling; they are an alternative to selling short a specific index without the unlimited risk potential of the short sale.

Question 61

An Administrator does not have jurisdiction over an offer to sell that is made where?

Answer 61

Under the broadcast and publishing exceptions, the Administrator does not have jurisdiction if the offer is made in a TV or radio broadcast originating outside the state or in a newspaper published outside the state. Furthermore, if a newspaper is published inside a state but more than 2/3 of its circulation is outside the state, the Administrator does not have jurisdiction.

Question 62

Feasible set vs efficient frontier

Answer 62

feasible portfolio that provides the greatest expected return for a given amount of risk, or equivalently, the least risk for a given amount of expected return. This is also called an optimal portfolio.

The efficient frontier is the set of all efficient portfolios. Obviously, an investor should choose a portfolio along the efficient frontier.

Question 63

Under the USA, the Administrator may do all of the following except

A)
mandate the method used to maintain and file records.
B)
conduct hearings in public, unless—at the Administrator’s discretion and with agreement of all parties—the Administrator decides otherwise.
C)
take jurisdiction over any person who sells or offers to sell either when the offer is made in the state or when an offer to buy is made and accepted in the state.
D)
prescribe form and content of financial statements required under the act.

Answer 63

The Uniform Securities Act does not grant the Administrator the power to make any specific bookkeeping method mandatory. The only requirement is that the books and records must accurately reflect the nature of the firm’s business.

Question 64

Alex is planning on registering as an agent for a broker-dealer. Which of the following would be the least likely requirement for a successful application?

Answer 64

Fingerprints are not a specific requirement of the Uniform Securities Act. We know we are dealing with state law because the term agent is used, and that term describes representatives of broker-dealers under state law. This is one of those cases where you have to remember this is a NASAA exam, not a FINRA exam (where fingerprints are generally required).

Question 65

registration as an agent

Answer 65

This question probably contains more detailed information than will be covered on the exam. Negative financial information, such as unsatisfied judgments or liens and bankruptcy filings, must be disclosed. Employment history for the past 10 years and residential history for the past 5 years must be shown. If, during the past 10 years, the applicant was a full-time student, then that must be shown, but that is the extent of educational information required.

Question 66

BD typically register w/

Answer 66

Both state & federal / SEC

Question 67

When a business registers as a broker-dealer with the Administrator, any agent who

Answer 67

is a partner, officer, or director, or a person occupying a similar status or performing similar functions, is automatically registered as an agent along with the firm’s effective registration as a broker-dealer. Other individuals employed for the purpose of representing the firm as agents are considered to be applying for registration after the firm’s license is effectiv

Question 68

Wrap fee accounts would tend to be most suitable for investors who follow

Answer 68

tactical approach to investing

avoid commissions and such

Question 69

beta is

Answer 69

relative systematic risk for stock or portfolio returns. A stock or portfolio with a beta of 1.0 would have the same systematic risk as the overall market.

Question 70

Formula methods of investing that involve selling equities in rising markets and buying them in falling markets would include

Answer 70

constant dollar plan
constant ratio plan

Question 71

Which of the following statements best represents a bond’s present value?

Answer 71

Present value is the sum of all the discounted future payments.

Question 72

Treasury STRIPS instead of Treasury Bonds, his major risk would be

Answer 72

Interest rate risk

Treasury STRIPS are zero-coupon bonds and, as such, have a longer duration than those paying semiannual interest. The longer the duration, the greater the interest rate risk. Because both are guaranteed by the U.S. government, there is no credit risk. Both have the same purchasing power risk, and there is no reinvestment risk with a zero-coupon bond.

Question 73

present value computation

Answer 73

future value, time period, and earnings rate are known.

Question 74

A popular tool used by analysts is discounted cash flow (DCF). Most use this tool to evaluate

Answer 74

the present value of future cash flows to determine an appropriate current value.

Question 75

ABC and MNO both have the same market price and shares outstanding for their common stock. If ABC’s P/E ratio is higher, that would indicate that

Answer 75

ABC’s net income is less than MNO’s.

If ABC’s P/E ratio is higher than MNO’s, then its earnings (defined as net income ÷ shares outstanding) is lower than MNO’s. Let’s use some hypothetical numbers to prove this. The stock price of both companies is $60 per share. Both companies have 1 million shares outstanding. The P/E ratio compares the market price ($60) to the earnings per share.

If ABC earned $5 per share and MNO earned $6 per share, their respective P/E ratios would be 12:1 ($60 ÷ $5) and 10:1 ($60 ÷ $6). From that we see, that given the same market price and the same number of shares outstanding, the higher the P/E ratio, the lower the earnings. Taking this one step further, if there was a third company with the same price and number shares and it had earnings per share of $1, the P/E ratio would be much higher at 60:1 ($60 ÷ $1). The information provided does not provide enough detail to know whether ABC or MNO had higher sales.

Question 76

five constraints is TTLLU (time horizon, taxes, liquidity, laws, unique)

Answer 76

time horizon, taxes, liquidity, laws, unique

Question 77

Under Rule 144, which of the following sales are subject to volume limitations?

Answer 77

Control persons are always subject to volume limitations

Question 78

Interspousal gifts to citizens of the United States, regardless of amount

Answer 78

are not subject to taxes

Question 79

The federal legislation that requires broker-dealers to verify the identity of any person opening an account is

Answer 79

the USA PATRIOT Act of 2001.

Question 80

GRAT risks

Answer 80

One of the risks in setting up a GRAT is that if the grantor dies during the term of the trust (usually 3–10 years), the assets put in the GRAT, plus any appreciation, are included in her estate.

Passes while trust is active, the original value plus any appreciation is taxed as part of the grantor’s estate.

Question 81

bona fide

Answer 81

sincere, real

Question 82

Index options hedge against

Answer 82

systematic risk

Question 83

Warrents with a bond

Warrants with a common stock

Answer 83

With a bond, has more value than a straight bond and is more attractive (marketable) to investors. Attaching warrants to a bond issue usually permits the bonds to be issued with a lower interest rate.

With common stock, permit the purchase of common stock of the issuer at a fixed price

Question 84

One of the ways in which U.S. government agency issues differ from those offered directly by the U.S. Treasury is that agency issues

Answer 84

typically carry higher returns than Treasury issues because of the lack of direct government backing.

Agencies, with only a few exceptions (GNMA being one), do not carry the direct backing of the U.S. Treasury. While they are quite safe, that lack of direct backing causes their yields to be somewhat higher. Agencies are never traded on the stock exchanges and their float is almost always smaller than Treasuries. Both are taxable on the federal level.

Question 85

Cash flow statement

Answer 85

think what is coming into the company vs what is going out of the company

operations, investments, and financing

Question 86

variable annuity expenses are

Answer 86

higher than those of a mutual fund with similar objectives

Makes sense, because if you think about it, more expenses involved with setting up an annuity, & there are guarantees and other features offered by the VA that a fund does not have and they have to be paid for.

The following is true: the ability to exchange funds between subaccounts without incurring a tax liability under IRS Code Section 1035

Question 87

alpha

Answer 87

Alpha is the difference in the expected return of the portfolio, given the portfolio’s beta and the actual return the portfolio achieved. The higher the alpha, the better the portfolio has done in achieving excess or abnormal returns. The risk of the portfolio associated with the macroeconomic factors that affect all risky assets is systematic risk. The portfolio’s average return in excess of the risk-free rate divided by the standard deviation in returns of the portfolio is the Sharpe ratio or measure. The measure of the variance in returns of a portfolio around its average return is the standard deviation.

Question 88

A QDRO is a judgment, decree, or order for a qualified retirement plan to pay child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant. The QDRO must contain certain specific information as stated in whose regulations?

Answer 88

IRS!

Question 89

Generally, an inverted yield curve is caused by

Answer 89

investors buying long-term bonds and selling short-term bonds.

First of all, what is an inverted yield curve? That is what we get when the yields on short-term debt are higher than the yields on long-term debt. Next, what happens to make the yield of a bond go up? When the price of the bond falls, the yield rises. Conversely, when the price of a bond rises, the yield falls. Finally, what causes the price of a security, any security, to go up or go down? Supply and demand in the marketplace. That is, when there are more buyers than sellers, that demand pushes the price up. Likewise, if there are more sellers than buyers, the price will go down. That’s the basic economics of supply and demand.

When investor demand is for long-term bonds, the price of those bonds will rise, causing the yields to fall. And, when investors are selling short-term bonds, that selling pressure causes the price to drop and the yields to increase.

That is what has happened in this question: more demand for the long-term, resulting in higher prices and lower yields, and more supply for the short-term, resulting in lower prices and higher yields.

Question 90

Which of the following phrases best describes a prudent investor?

Answer 90

Although all of these may have a fiduciary responsibility; the definition, as expressed in the Uniform Prudent Investor Act of 1994, requires reasonable care, skill, and caution.

Trustee who invests with reasonable care, skill, and caution

Question 91

Jefferson, Adams, and Washington (JAW) is a pension consulting firm whose only office is on Constitution Avenue in Washington, D.C. JAW has only one advisory client—a U.S. government employee pension fund with assets of $4 billion. What are this firm’s registration requirements?

Answer 91

It may choose to register with either the D.C. Administrator or the SEC.

Under the provisions of the Dodd-Frank Act of 2010, pension consultants providing advisory services to employee benefit plans having at least $200 million of assets may register with the SEC (even though the consultant does not itself have those assets under management). JAW’s only client has $4 billion in assets, well in excess of the minimum of $200 million required to allow the firm to choose between state or SEC registration. Under the USA, the District of Columbia (along with Puerto Rico and any U.S. territory or possession) is included in the definition of state. If an investment adviser only gives advice on securities issued or guaranteed by the U.S. government, it is excluded from the definition of investment adviser and doesn’t register anywhere, but that is not the same as having the government as your only client.

Question 92

Incentive (qualified) options differ from nonqualified options in all of the following respects

Answer 92

• the holder of an ISO can recognize capital gain (loss) as a result of exercise and sale, whereas ordinary income (loss) is the result with an NSO.
• there is a maximum 10-year limit for exercising an ISO; no such time limit exists for an NSO.
• ISOs may only be granted to employees, while NSOs may be given to virtually anyone.

Question 93

matched orders

Answer 93

violate trading rules because they create the illusion of trading volume where such volume would not otherwise occur.

Question 94

There are no record keeping requirements for

Answer 94

agents or IARs.

Question 95

Country A develops a new product that is in high demand around the world, the likely effect of this would be

Answer 95

a trade surplus for Country A.

When exports exceed imports (the likely case here), it leads to a trade surplus. Invariably, that causes a positive balance of payments, which has the tendency to increase the value of that country’s currency relative to others. There is no way to know how this new product will impact the tax legislation of Country A.

Question 96

Issuance of which of the following would most likely increase the leverage in a company’s capital structure?

Answer 96

Bonds, think about it, they’re lending, it is borrowed money!

Question 97

Which of the following incorrectly states the relationship between NPV, IRR, and required return?

A)
If NPV > 0, then IRR > required return.

B)
If NPV > 0, then IRR < required return.

C)
If NPV = 0, then IRR = required return.

D)
If NPV < 0, then IRR < required return.

Answer 97

If NPV > 0, then IRR < required return.

Question 98

Written policies and procedures reasonably designed to safeguard customer information from cybersecurity threats would include all of the following except

A)
conducting periodic risk assessments.

B)
implementing a firewall.

C)
encrypting personally identifiable information.

D)
maintaining the minimum required cybersecurity insurance coverage.

Answer 98

D

All of these choices are important components of a broker-dealer’s or investment adviser’s cybersecurity program. However, there is no minimum insurance coverage specified by any of the regulatory bodies.

Question 99

One of the situations that investment adviser representatives may encounter is the death of a client. When that happens, orders may be accepted from

Answer 99

the trustee in intestacy or admin of estate

A durable power of attorney is dissolved upon the death of either principal to the power.

Question 100

Senior Wealth Advisers (SWA) is registered as an investment adviser in North and South Carolina with offices in Charlotte, North Carolina and Charleston, South Carolina. On occasion, one of their investment adviser representatives meets with clients who reside in North Augusta, South Carolina in a hotel room in Augusta, Georgia. The registration requirements of the Uniform Securities Act would

Answer 100

Neither have to register

The hotel room located in Georgia is being used only to meet with existing clients, so no registration in Georgia is necessary. If prospects were invited, registration of both persons would be required.

What if only one or two prospects were invited? Wouldn’t the de minimis exemption apply? No, because the moment a person who is not an existing client is involved, the hotel room becomes a place of business in the state and that eliminates use of the de minimis rule.

Question 101

Yankee bond

Answer 101

Yankee bonds are issued by non-U.S. entities in marketplaces inside the United States. The bonds are issued in U.S. dollars, meaning these foreign issuers will have currency risk if the dollar drops in value against their local currency.

Question 102

Health savings accounts (HSAs) offer the opportunity for employees to use pretax funds to pay for a wide range of medical expenses. Medical expenses included are all of the following except

A)
long-term care insurance premiums.

B)
long-term disability insurance premiums.

C)
health insurance coverage under COBRA.

D)
Medicare premiums for those age 65 or older.

Answer 102

long-term disability insurance premiums.

If an HSA may be used to pay long-term care (LTC) premiums, why can’t it be used for long-term disability premiums? The answer is in the first word of the name: health. Disability insurance is not health insurance. It is used to replace the income lost when one is unable to perform the labor required for their occupation.