All Flashcards
If a call option’s strike price is lower than the underlying stock’s current market price…
it has intrinsic value because it could be sold for more than its purchase price.
if a call option’s strike price is higher than its current market price,
it has no intrinsic value.
An investor purchased an index annuity. The terms of the contract call for a 100% participation rate with 6% cap. If during the measurement period the index decreased by 4%, the investor’s account would…
Remain at the same level
An investor purchased an index annuity. The terms of the contract call for a 90% participation rate with 6% cap. If during the measurement period the index decreased by 5%, the investor’s account would…
Remain at the same level
The purchaser of an index annuity can see growth based on an underlying index CALCULATED in the following ways…
- Annual reset-compares index value at year begin/year end (point-to-point is a type)
- High-water mark: year begin/highest mark
- Averaging: often monthly average growth (can be best during volatile markets)
A conservative investor from Idaho in the 24% federal tax bracket and 4% state tax bracket seeks an income producing investment and needs your help choosing between:
A. 4.40% yielding general obligation bond from state of Idaho
B 6.60% yielding Treasury bond
C 8.60% yielding AAA-rated debenture
D. 6.60% yielding AA-rated convertible bond
Which investment should you recommend?
All the investments are suitable for a conservative investor, so C because it has the highest after tax yield
DDD Management Group is considering the introduction of fulcrum fees to their service list. All of the following clients would qualify for this type of compensation, EXCEPT:
A. A client that recently declared bankruptcy, but wins the lottery then invests $1.13 million with the adviser
B. A client that invests $1.24 million with the adviser while making a $50K salary
C. A client making a $650K annual salary
D. A client making $125K in annual salary and invests $1.5 million with the adviser
C. a client making $650K annually BECAUSE performance fees like this can only be charged of qualified clients (clients with at least $2.2 million net worth w/out primary residence OR at least $1.1 million invested with adviser)
Of the scenarios listed, which does not qualify as an exempt transaction according to the Uniform Securities Act?
A. Offer of non-registered securities to 10 or fewer retail investors
B. Transaction in an unregistered security between an issuer and an underwriter
C.
Unsolicited transaction for an unregistered security by a retail client
D. Sale of a Treasury bond to a retail client
D. Sale of a Treasury bond to a retail client
Exempt Transactions allow a non-exempt, unregistered security to be sold if the transaction occurs in a specific format. These are the exempt transactions the Uniform Securities Act (USA) allows:
- Private placements:
a. Offer made to 10 or fewer retail investors
b. Purchase made for investment purposes
c. No commissions to be collected from retail investors - Isolated nonissuer transactions
- Unsolicited nonissuer transactions
- Certain fiduciary transactions:
a. Estate executors and administrators
b. Sheriffs and marshals
c. Receiver
Trustee in bankruptcy
d. Guardians and conservators - Transactions between issuers and underwriters
Institutional transactions - Offer of pre-organization certificates:
No more than 10 subscribers
*Keep in mind the sale of an exempt security (e.g. a US government securities, bank securities, non profit securities) is not an exempt transaction. There’s no need to claim an exempt transaction for these securities because they’re already exempt based on what they are.
A 45 year old investor is looking for some advice on how to invest a $5,000 bonus they received into their IRA. The investor has a 20 year time horizon, a moderate tolerance for risk, and an objective of growth. Additionally, they don’t believe the extra costs associated with active management are worth it over long periods of time. What investment is the best recommendation?
A. S&P 500 index fund
B. Russell 2000 ETF
C. Balanced fund
D. Large cap growth fund
A. S&P 500 index fund
The investor is mid-age, has a long term time horizon (20 years), a growth objective and a moderate risk tolerance. The Russell 2000 ETF tracks the Russell 2000, a small cap index that is subject to high levels of risk. This choice can be eliminated.
The investor does not believe in active management, which involves paying higher fees (expense ratios) in return for portfolio managers to find the best investments in the market. Because it doesn’t mention an index, we can assume the large cap growth fund and balanced fund to be actively managed. Additionally, balanced funds typically invest a sizeable portion of assets into fixed income investments, and the investor did not specify income as an objective. These choices can be eliminated.
The S&P 500 index fund tracks the S&P 500, which is an index primarily made of large cap (larger) company stock. While the stock market comes with risk, large cap companies are typically the safest investments given their size and improbability of bankruptcy (as compared to smaller companies). Additionally, index funds are passively managed, resulting in lower fees (expense ratios). This is the best choice.
A 39 year old investor is looking for some advice on how to invest a $7,000 bonus they received into their IRA. The investor has a 19 year time horizon, a moderate tolerance for risk, and an objective of growth. Additionally, they don’t believe the extra costs associated with active management are worth it over long periods of time. What investment is the best recommendation?
A. Large cap growth fund
B. Russell 2000 ETF
C. Balanced fund
D. S&P 500 index fund
A. S&P 500 index fund
The investor is mid-age, has a long term time horizon (20 years), a growth objective and a moderate risk tolerance. The Russell 2000 ETF tracks the Russell 2000, a small cap index that is subject to high levels of risk. This choice can be eliminated.
The investor does not believe in active management, which involves paying higher fees (expense ratios) in return for portfolio managers to find the best investments in the market. Because it doesn’t mention an index, we can assume the large cap growth fund and balanced fund to be actively managed. Additionally, balanced funds typically invest a sizeable portion of assets into fixed income investments, and the investor did not specify income as an objective. These choices can be eliminated.
The S&P 500 index fund tracks the S&P 500, which is an index primarily made of large cap (larger) company stock. While the stock market comes with risk, large cap companies are typically the safest investments given their size and improbability of bankruptcy (as compared to smaller companies). Additionally, index funds are passively managed, resulting in lower fees (expense ratios). This is the best choice.
An influencer is hired by a registered investment adviser to review their products and services. The opinion of the influencer is solely their own and their compensation is not contingent on a positive review. What statement is true?
A. The firm has neither adopted or entangled itself with the influencers content if the review is not written
B. The firm has adopted the influencer’s content
C. The firm has neither adopted or entangled itself with the influencer’s content because the review is unbiased
D. the firm has entangled itself with the influencer’s content
D. Adoption occurs when a firm endorses or approves third-party content, while entanglement occurs when the firm involves itself with the preparation of the third-party post. Paying an influencer to review a products and/or services is considered involvement in the preparation, regardless of whether the review is contingent on being positive.
Fulcrum fee
performance-based fee that adjusts up or down based on outperforming or underperforming a benchmark. These can be charged by a financial adviser or an asset manager to qualified clients to link outperformance (or lack thereof) to compensation
Qualified dividends are taxed at … depending on your tax bracket
0%, 15%, and 20%
Nonqualified dividends are taxed ____
at income tax rates.
An investor in the 37% tax bracket makes a $64,000 investment in a lifecycle fund on December 13, 2022. Over the next several months, the investor receives a total of $1,920 in qualified dividends, none of which is reinvested. On December 12, 2023, the investor redeems the fund for a total of $78,000. What is the investor’s after-tax return?
A. 15.67%
B. 16.18%
C. 20.8%
D. 21.3%
B. 16.18% Let’s explore the two primary forms of return in the question and factor taxes out. First, the investor receives $1,920 in qualified dividends, which are taxable at 20%* for this investor. An easy way to determine the after-tax return is to multiply the return by 100% minus the applicable tax rate (in decimal form). Therefore, this investor makes $1,536 in after-tax dividends ($1,920 x 0.80).
*Only investors at the highest tax brackets (35% and 37%) are subject to a 20% qualified dividend tax. For those at lower tax brackets, the qualified dividend tax rate is 15%.
Second, the investor also locked in a $14,000 capital gain (bought fund for $64,000, sold fund for $78,000). The gain is short term as the security has been held for one year or less. Short term capital gains are subject to the investor’s marginal income tax bracket, which is 37%. We’ll multiply the capital gain ($14,000) by 100% minus the tax bracket in decimal form (0.63) to obtain an after-tax capital gain of $8,820.
Now, add up the total after-tax returns:
After-tax dividends: $1,536
After-tax capital gain: $8,820
Total: $10,356
Now, perform the after-tax return formula:
Total return = All after-tax returns ÷ Original cost
Total return = $10,356 ÷ $64,000
Total return = 16.18%
A customer submits an order to sell 300 shares of GS stock @ $209 stop $205 limit. Which of the following statements is TRUE?
A. Triggers at $209 or lower; fills at $205 or higher
B. Triggers at $209 or lower; fills at $205 or lower
C. Triggers at $209 or higher; fills at $205 or lower
D. Triggers at $209 or higher; fills at $205 or higher
A. When a sell stop limit order triggers, it becomes a sell limit order that specifies a specific price (or better) for that order. For this order to trigger, the market price of the stock must first fall to $209 or below. For the order to fill (execute), the market price must be $205 or abo
A customer submits an order to sell 400 shares of GS stock @ $408 stop $404 limit. Which of the following statements is TRUE?
A. Triggers at $408 or lower; fills at $404 or higher
B. Triggers at $408 or lower; fills at $404 or lower
C. Triggers at $408 or higher; fills at $404 or lower
D. Triggers at $408 or higher; fills at $404 or higher
A. When a sell stop limit order triggers, it becomes a sell limit order that specifies a specific price (or better) for that order. For this order to trigger, the market price of the stock must first fall to $408 or below. For the order to fill (execute), the market price must be $404 or above
A consultant provides ongoing advice to businesses in relation to managing assets in pension funds. What statement is true regarding this role and relevant registration responsibilities?
A. If providing advice on $100 million or more of assets, the consultant is eligible for SEC registration
B. If providing advice on $110 million or more of assets, the consultant must register with the SEC
C. If providing advice on $200 million or more of assets, the consultant is eligible for SEC registration
D. The consultant is excluded from registration
C. SEC Release IA-1092 explicitly defines pension consultant as an investment adviser, requiring them to register with either the SEC or the state administrator. The Dodd-Frank Wall Street Reform and Consumer Protection Act states pension consultants advising $200 million of assets or more are eligible for SEC registration. SEC registration is not mandatory for pension consultants.
A client emails their assigned agent to request a trade to be placed. Which of the following requests would require discretionary authority on the client’s account?
A. Buy 50 shares of DEF stock at the price you deem appropriate by the end of the day
B. Buy 450 shares of CCC common stock at the price you deem appropriate by the end of the week
C. Buy 800 shares of NOP stock if it falls to $135, and make the order good until the end of the month
D. Sell my TUV Bond Fund and reinvest the proceeds into GHI Stock Fund
B. A discretionary order, which requires trading authority (power of attorney) to be granted, is one that involves the investment professional choosing one of the following:
Asset (what security)
Amount (how much)
Action (buy or sell)
The professional may choose price and/or time of an order without being considered discretionary, as long as the price and/or time decision is made within one day. Making a price and/or time determination beyond one day requires trading authorization.
A discretionary order, which requires trading authority (power of attorney) to be granted, is one that involves the investment professional choosing one of the following:
Asset (what security)
Amount (how much)
Action (buy or sell)
The professional may choose price and/or time of an order without being considered discretionary, as long as the price and/or time decision is made within one day. Making a price and/or time determination beyond one day requires trading authorization.
POP
Public Offering Price
An option generally loses ___ of its time value during the first half of its life and the remaining ____ of its time value during the second half.
one- third; two-thirds
Time value ___ over time at an accelerating pace, a phenomenon known as time decay or time-value decay. An option price’s sensitivity to time decay is known as its ___.
decreases ; theta
To make a quantitative evaluation using the present value computation, which of the following is NOT needed?
A)Account value at the beginning of the period
B) Time period involved
C) Account value at the end of the period
D) Anticipated rate of return of the portfolio
A) Account value at the beginning of the period
Which of the following transactions is NOT included in the definition of exempt transaction under Section 402 (b) of the Uniform Securities Act?
A) Isolated nonissuer transactions
B) Transactions between issuers and underwriters
C) the sale of Treasury bills to an individual client
D) Unsolicited nonissuer transactions effected through a broker-dealer
C) the sale of Treasury bills to an individual client
Under the antifraud provisions of the Investment Advisers Act of 1940, an investment adviser must disclose to clients …
A) the association between the investment adviser and the broker-dealer with whom the overall investment plan will be implemented
B) the number of clients with whom the adviser does business
C) that any transactions made ont he adviser’s own account are consistent with the advice given to clients
D) that the adviser has never been subject to disciplinary action or censure by the SEC
A) the association between the investment adviser and the broker-dealer with whom the overall investment plan will be implemented
A securities market investment theory that attempts to derive the expected return on an asset based upon the asset’s systematic risk is …
A) the capital asset pricing model (CAPM)
B) the Monte Carlo simulation
C) the efficient market hypothesis (EMH)
D) the random walk theory
A) the capital asset pricing model (CAPM)
Under the USA, a person who has passed the appropriate NASAA examination but whose license has not yet been issued can participate in…
A) prospecting for new clients in person
B) prospecting for new clients by mail
C) accepting unsolicited orders
D) filing payroll report
D) filing payroll report
One of your clients has reached his company’s mandatory retirement age of 67. He has been a participant in his employer’s 401(k) plan and his account is valued at $400,000. The account is funded with mutual funds and company stock. The cost basis of the company stock is $25,000 and it is currently worth $125,000. If he were to rollover the entire account into an IRA, the tax treatment would be …
A) no current tax, but any withdrawals representing the gain on the company stock would be taxed as long-term capital gains
B) no current tax, but any withdrawals would be taxed as ordinary income
B) no current tax, but any withdrawals would be taxes as ordinary income
Which of the following statements about 401(k) plans are CORRECT?
I. 401(K) plans are a type of defined benefit retirement plan.
II. An employee’s elective deferrals are made with pre-tax dollars
III. Earning on the contributions to a 401(k) accumulate on a tax-deferred basis
only II & III
One of your clients approaches you about setting up a trust. If your client assumes the role of grantor, what additional roles may be taken?
A) Trustee & beneficiary
B) Trustee
C) As the grantor, no other roles may be taken
D) Beneficiary
A) Trustee & beneficiary
A client with limited assets seeking additional income in retirement would probably find which of the following investment choices to be the least suitable?
A) ETNs
B) Treasury bonds
C) Insured bank CDs
D) ETFs
A) ETNs
Under the Uniform Securities Act, which of the following statements regarding the consent to service process is NOT true?
A) Only applicants whose principal office is in another state need to file a consent to service of process
B) A consent to service of process makes the legal process served on the Administrator as legally binding as the process served on the registrant personally
C) Investment advisers and investment adviser representatives must file a consent to service of process to become registered
D) A consent to service of process does not need to be supplied each time a registrant’s registration is renewed
A) Only applicants whose principal office is in another state need to file a consent to service of process
Under federal law, the statute of limitations for civil liability is …
1 year after discovery or 3 years after the action, whichever is sooner
Expressed as a percentage, what is the total return on a 1-year, newly issued (365 days to maturity) zero coupon debt obligation priced at 95?
5.26% (5 divided by 95)
Expressed as a percentage, what is the total return on a 1-year, newly issued (365 days to maturity) zero coupon debt obligation priced at 89?
12.3% (11 divided by 89)
Which of the following person are excluded from the definition of, or exempt from registration as, a broker-dealer under the Uniform Securities Act?
A) I & II
B) III & IV
C) I, II, III, and IV
D) I, II, & IV
D) I, II, & IV
The bond strategy used most often by those with a target goal is …
A) the bullet strategy
B) the laddering strategy
C) the duration strategy
D) the barbell strategy
A) the bullet strategy
When an investor’s original value ($100) is subtracted from the ending value ($108), and then has the income received over that time period added to it ($2), which is then divided by the original cost (10/100), the result is …
A) expected return
B) annualized return
C) holding period return
D) internal rate of return
C) a 10% HOLDING period return
Under the Uniform Securities Act, which of the following investment advisers with no place of business in the state must register with the state as an investment adviser?
A) An adviser rendering advice to no more than 10 individual clients within a 12-month period
B) An adviser managing more than $110 million in assets
C) An adviser rendering advice to employee benefit plans with at least $1 million in assets
D) An adviser rendering advice solely to broker-dealers
A) An adviser rendering advice to no more than 10 individual clients within a 12-month period
If an investment adviser representative of a federal covered adviser that transacts business with a state terminates employment with that investment adviser, which of the following statements is TRUE?
A) No notice to the Administrator is required
B) Both the representative and the investment adviser must notify the Administrator
C) The investment adviser must notify the Administrator
D) The representative must notify the Administrator
D) The representative must notify the Administrator
A customer purchased a variable annuity from an agent 5 years ago with an initial investment of $200,000. The annuity’s surrender fee will expire in year 7, which coincides with the customer’s anticipated need for the funds. In the 5th year of the contract, the value of the annuity increased from $300,000 to $375,000. The agent notices that the general market is on the decline and recommends she enter a 1035 exchange of the variable contract for another, thus increasing her death benefit and locking it in at a higher minimum. This recommendation is
A) unsuitable because of surrender fees
B) suitable because of the increased death benefit
C) suitable because 1035 exchanges have no adverse tax consequences
D) unsuitable unless the customer agrees with the recommendation
A) unsuitable because of surrender fees
An investor begins contributing $600 on the third day of each month to a purchase plan for the KAPCO Total Return Fund. For the first six months, the per share prices were: $10, $12, $15, $20, $12, $8.
What is the investor’s breakeven point?
A) $12.50 per share
B) $11.80 per share
C) $8 per share
D) $12.83
B) $11.80 per share
The separate account subaccounts chosen by the purchaser of a variable life insurance policy have had outstanding performance over the past 15 years. There would generally be no tax implications in which of the following situations?
A) the death benefit is paid
B) A loan is taken equal to 95% of the policy’s cash value
C) The policy is surrendered
D) There is a cash withdrawal in excess of the cost basis
B) A loan is taken equal to 95% of the policy’s cash value
Which of the following individuals employed by an investment adviser would be required to be registered as an IAR?
A) A chief compliance officer (CCO) who has no sales duties
B) Night watchman
C) VP of human resources
D) An intern who receives no compensation at all
A) A chief compliance officer (CCO) who has no sales duties
Under the Investment Advisers Act of 1940, cash payment to a broker-dealer from an investment adviser in return for client referrals is …
permitted if the investment adviser makes certain disclosures to the clients and meets other requirements.
Watson wishes to place an order to buy 50 shares of a thinly traded stock priced at $8 per share. Because the stock is so thinly traded, Gilbraltar Securities feels it needs to charge Watson a commission of $100 to justify the time it must spend locating a seller of the stock. Which of the following statements best describes this action?
A) It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction, provided Gibraltar informed Watson of the $100 commission prior to the transaction and Watson chose to proceed with the trade
B)Gibraltar must get clearance from the Administrator before charging commission in amounts exceeding 10% of the value of the securities traded under the transaction
C) A commission of $100 on a transaction involving $400 worth of stock would generally not be deemed excessive
A) It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction, provided Gibraltar informed Watson of the $100 commission prior to the transaction and Watson chose to proceed with the trade
Mutual fund net asset value (NAV) represents a fund’s _____ value. A fund’s NAV is calculated by dividing the total value of all the cash and securities in a fund’s portfolio, less any liabilities, by the number of _____.
per share market; shares outstanding
Which of the following activities would have an effect on the NAV of a mutual fund?
I. Selling stocks in the portfolio
II. Auto reinvesting of dividends
III. Market appreciation of portfolio securities
IV. Market decline in the value of portfolio securities
III & IV
Which of the following would be deemed to be an assignment of an investment adviser’s contracts?
I. All of the stock in NLT Advisers, a corporation, is acquired by MMS Advisers, Inc.
II. The Lucky Seven Partnership is an investment adviser with 7 partners. Four of the partners make a fortune and decide to retire. They are replaced by new partners.
III. Albert is an investment adviser. His clients’ accounts are automatically debited monthly for his fee. Because of this steady cash flow, his banker readily accepts a pledge of these accounts as collateral for a loan.
I, II, III
Which of the following statements is (are) true?
I. A person with a place of business in the state who transacts business exclusively with banks & savings institutions is not an investment adviser under the Uniform Securities Act (USA)
II. A person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 who offers investment advice to individual investors residing in this state, and has less than $25 million in assets under management, is subject to the jurisdiction of the state Administrator.
III. A person included in the definition of an investment adviser under the Investment Advisers Act of 1940, who manages funds on a regular basis as a business headquartered in a state, is subject to payment of filing fees required by the state Administrator.
IV. Broker-dealers who supply incidental investment advice and make securities recommendations to customers who pay commissions for the execution of their trades are not investment advisers subject to state or federal registration.
III & IV … I isn’t true because it’s the banks themselves who are exempt, not people doing exclusive business with banks
A registered investment adviser has a fiduciary duty to disclose all real & potential conflicts of interests to clients. Which of the following are examples of conflicts that would require discloser?
I. A registered investment adviser spends about 33% of its time on investment advisory activities and the rest on managing rental real estate projects.
II. A registered investment adviser spends about 33% of its time on investment advisory activities and the rest supervising investment advisers at the firm
III. An investment adviser representative, who is also an insurance agent, may decide to recommend a particular insurance product based on an incentive to sell the product
IV. An investment adviser representative, who is also an agent with an unaffiliated broker-dealer, directs transactions to that firm
I, III, IV
Which of the following statements concerning market efficiency is least accurate?
A) If weak form market efficiency holds, technical analysis cannot be used to earn abnormal returns over the long run
B) An efficient market assumes one can generate abnormal returns with active portfolio management.
B)
An investment adviser is approached by an investment company that has 25 investors. The company would like to employ the adviser to manage its account. The IA is willing to do so, but proposes a compensation agreement that provides for a 20% share of the profits if performance exceeds a certain benchmark. In order for this to be acceptable …
A) the investment company must have net worth in excess of $2.2 million or at least $1.1 million in assets under management with the IA
B) the individual in charge of the investment company must be a qualified investor
C) a majority of the shareholders in the investment company must be qualified investors
D) all the shareholders in the investment company must be qualified investors
A) the investment company must have net worth in excess of $2.2 million or at least $1.1 million in assets under management with the IA
blotter (trade blotter or deal blotter)
a physical or digital record of all trades made over a period of time (usually one trading day) along with their relevant details.
Under the Uniform Securities Act, broker-dealers are required to prepare and maintain certain records. Which of the following statements reflects the position of the act?
I. A firm registered in more than one state must meet the recordkeeping requirements of the state where its principal office is located, even if those are less comprehensive than those of some of the other states where it is registered
II. A firm must maintain records of every email sent from the office by agents
III. A broker-dealer’s website is considered advertising
IV. Once a broker-dealer’s trade blotter has been posted, it may be discarded.
I & III
a stripped US Treasury bill/note/bond or STRIPS
zero coupon bonds sold by the US Treasury; there are no interest payments
An investor is considering a 10-year stripped US Treasury and a 10-year US Treasury note, both with a yield to maturity of 4.8%. Compared to the note, the strip has …
A) more interest rate risk & less liquidity risk
B) less reinvestment risk & more interest rate risk
C) more liquidity risk & less interest rate risk
D) more reinvestment risk and less interest rate risk
B) There is no interest to reinvest during the life of the bond, therefore, STRIPS do not experience reinvestment risk.
