Cinco Flashcards
1. Which of the following is not a requirement of a qualified plan?
a) The plan must provide an offset for Social Security benefits.
b) The plan must be communicated to all employees.
c) The plan must be for the exclusive benefits of the employees and their beneficiaries.
d) The plan must be permanent, written and legally binding.
A
Plans must meet the general requirements established by IRS.
2. An employee quits her job where she has a balance of $10,000 in her employer-provided qualified plan. If she requests that the plan distribution is paid to her so that she can roll the proceeds into an IRA, how much will she receive from the plan administrator, and how long does she have to complete the tax-free rollover?
a) $8,000, 30 days
b) $8,000, 60 days
c) $10,000, 30 days
d) $10,000, 60 days
B
Because the employee has requested a distribution check, there will be a 20% withholding, and the participant has 60 days to reinvest it in an IRA to qualify as a tax-free rollover. The full amount of $10,000 must be reinvested, or the withheld amount of 20% will be considered a taxable distribution.
3. Which of the following is not a responsibility of the specialist?
a) Executing limit orders on behalf of other members for a portion of the floor broker’s commission
b) Dealing in over-the-counter securities with market makers on a fee basis
c) Maintaining the published quote and a fair and orderly market in one or more securities
d) Buying and selling for his own account to counteract temporary imbalances in supply and demand
B
Unlike the auction market in securities listed on an exchange such as the NYSE, an over-the-counter security may be bought and sold on a negotiated price basis from any number of market makers.
5. The following are examples of exempt transactions EXCEPT
a) A stock sale by a bankruptcy trustee.
b) A stock sale solicited by an agent.
c) A stock sale by an estate’s executor.
d) A stock sale to an insurance company.
B
A solicited stock sale by an agent is not an exempted transaction; however, an unsolicited transaction is exempt regardless of who the buyer is.
6. A letter of intent to allow an investor to qualify for sales discounts may be backdated how many days?
a) 30 days
b) 90 days
c) 180 days
d) Backdating is not allowed for sales discounts.
B
Letters of intent may be backdated up to 90 days to qualify for sales discounts.
7. Which of the following is NOT an exempt security under the USA?
a) Over-the-counter stock
b) AT&T stock
c) Security issued by Providian life insurance
d) Bond issued by Reading Railroad
A
Stock traded over the counter needs to be registered.
8. A customer’s right to be indemnified if defrauded in a securities transaction is known as the right of
a) Indemnification.
b) Rescission.
c) Recovery.
d) Compensation.
B
A customer’s right of rescission allows them to receive compensation if defrauded in a securities related transaction.
9. A mutual fund portfolio returned 3.5%, it has a beta of 1.5, and its benchmark index returned 3%. The alpha of the portfolio is
a) (-1.5).
b) (-1).
c) 1.5.
d) 2.
B
To calculate alpha multiply, the return of the benchmark index by the beta. The difference between the product and the portfolio return is the alpha: 0.03 x 1.5 = 4.5%, 3.5% - 4.5% = -1.
10. ABC broker/dealer bought DEF stock at 35 for its inventory position. Three months later, when the inter-dealer market for DEF was 32.50 - 33.25, the broker/dealer sold DEF stock to a customer from the inventory. What was the basis for the dealer’s markup?
a) 32.50
b) 33.25
c) 35
d) 36
B
The basis for a markup cannot be historical cost; it can only be the current inter-dealer ask, or offer price.
11. Civil liabilities may apply for which of the following violations? I. Failing to provide a prospectus to a customer when required; II. Making false statements or omitting material facts in a transaction; III. Stealing customer funds or securities; IV. Soliciting the sale of unregistered, nonexempt securities
a) III and IV
b) I and III
c) I and IV
d) II and III
C
Making false statements or omitting material facts in a transaction and stealing customer funds or securities constitute fraud and are subject to criminal penalties.
12. All of the following employees of a broker/dealer are considered an agent under the Uniform Securities Act (USA) with the EXCEPTION of a person who
a) Gives securities quotations over the phone.
b) Performs the function of accepting customer orders.
c) Transacts business only in exempt securities.
d) Transacts business only in nonexempt securities.
A
An agent is a person that effects a securities transaction. Giving a quotation does not effect a transaction and is exempt from the definition under the Act.
14. An agent hears a rumor that a large corporation will be launching a hostile takeover on a competitor. Based on the rumor, the agent liquidates all his clients’ positions. Which of the following is true?
a) This action is prohibited.
b) The agent must let the clients know they are selling based on a rumor.
c) As long as the agent informed his supervisor prior to the trades his actions are allowed.
d) None of the above is true.
A
Using hearsay to liquidate a position is a prohibited act. The agent should inform his supervisor but could not act on the rumor.
15. When comparing the IRR of two investments yielding the same amount, which provides the most value to an investor?
a) Lowest IRR as it represents the discounted value to investors.
b) The lower dollar value over the term of the investment.
c) Highest IRR above “0”.
d) The higher dollar value over the term of the investment.
C
The highest IRR (above zero) offers the most value to an investor. Zero represents breakeven and a value above zero represents value above the NPV of the amount invested.
17. An IA purchases stock for its own account from one of its institutional clients. This transaction is called a/an
a) Institutional cross trade.
b) ECN trade.
c) Principal transaction.
d) Agency cross trade.
C
In a principal transaction an IA buys a security from a client or sells a security from its own inventory to a client (whether an institution or a retail client). Principal transactions require written disclosure to the client and consent before the transaction is completed.
18. Which of the following circumstances would result in the assignment of an investment advisory contract?
a) A majority partner of the investment adviser buys out a minority partner.
b) An investment adviser representative who administers over half of the adviser’s client accounts resigns.
c) An investment adviser is bought out by a competitor.
d) A minority partner of the investment adviser retires.
C
According to NASAA Model Rules contract assignment includes a change in ownership of a majority of any class of voting securities, or a change in the majority interest of a partnership.
19. The equation for outstanding stock is
a) Authorized shares minus unissued shares.
b) Issued shares minus treasury stock.
c) Authorized shares minus treasury stock.
d) Issued shares minus unissued shares.
B
Outstanding Stock = Issued Shares – Treasury Stock. Remember that treasury stock, which is stock that has been issued (sold to the public) and subsequently bought back by the corporation, must be subtracted from the shares that have been issued.
20. Overlapping debt excludes the following, EXCEPT
a) Housing authority.
b) Hospital board.
c) School district.
d) Port authority.
C
Overlapping debt is general obligation debt. Of these municipal issuers only the school district debt is general obligation. It is backed by taxes.
21. Which statement is true concerning dollar cost averaging?
a) Dollar cost averaging protects the investor from a loss in a steadily declining market.
b) Dollar cost averaging is a way to reduce risk.
c) Dollar cost averaging allows the investor to buy the same number of shares per installment.
d) All of the above are true statements.
B
Dollar cost is a method to reduce risk because more shares are purchased in a down market (when the shares are cheaper) and fewer shares are purchased with the same amount of money in a rising market (when the shares are more expensive). The investors buy more when the price is low and less when the price is high. This practice levels out the cost basis of the shares over time providing a lower average share price, which minimizes overall investor risk. Dollar cost averaging cannot protect the investor from a loss in a steadily declining market and is not a guarantee of a profit.
22. The following are prohibited practices under the Uniform Securities Act (USA) EXCEPT
a) Commingling customer funds with agent funds.
b) Soliciting excessive trading to increase commissions.
c) Failing to disclose all known facts in a transaction.
d) Effecting private securities transactions for customers.
C
Failing to disclose all known facts is not a violation; the violation occurs from withholding material facts. Churning, commingling funds with customers’ funds, and effecting private security transactions are all prohibited under the Act.
23. On a bond purchased at a discount,
a) Yield-to-maturity is lower than yield-to-call.
b) Yield-to-maturity equals yield-to-call.
c) Yield-to-maturity is lower than nominal yield.
d) Yield-to-maturity is higher than yield-to-call.
A
On a discount bond, yield-to-call is the highest yield.
24. A broker/dealer that has no office in a state is not required to register to conduct business with which of the following?
a) Banks
b) Wealthy individuals
c) Corporations
d) Prospective clients who are nonresidents of the state
A
Broker/dealers with no office in a state may do business with institutional investors such as banks, other broker/dealers and insurance companies, and existing clients who are nonresidents of the state. They cannot do business with prospective clients even if the prospects are not residents of the state.
25. A technical analyst would be most interested in which indicator?
a) Current ratio
b) Quick ratio
c) 200-day moving average
d) Price earnings ratio
C
200-day moving averages are considered hallmark market trend indicators. Ratios are fundamental, not technical.
26. ACE Financial is a registered investment adviser that accepts prepayment fees in excess of $500. ACE’s chief compliance officer notices on Tuesday that the firm’s capital has fallen below the minimum requirement. What steps must the officer take? I. Cease doing business until he can bring the net capital back to the required level; II. Inform the administrator of the deficiency by the end of business on Wednesday; III. File a report with the administrator by the end of business on Thursday; IV. Report the deficiency to FINRA by the end of business on Tuesday
a) I, II, III and IV
b) I and IV
c) II and III
d) II only
C
If the adviser’s net worth falls below the minimum requirement and it has taken prepayment fees, the adviser would be required to inform the state administrator by the end of the next business day, which would be Wednesday in this situation. Additionally, the adviser must file a report with the state securities administrator by the following business day, in this case Thursday.
27. According to the Uniform Securities Act, investment adviser advertising must
a) Be pre-approved by the SEC.
b) Not violate the Investment Advisers Act of 1940.
c) Be submitted to FINRA within 10 days of first use.
d) Adhere to the advertising provisions of the USA.
B
Under the USA, investment adviser advertising that violates the Investments Adviser Act of 1940 is illegal.
28. A U.S. government bond quoted at 108.06 - 109.09 has an asking price of
a) $108.60.
b) $1,081.88.
c) $1,092.81.
d) $1,099.00.
C
Bond prices are quoted at $1,000 par in 32nds, with each point worth $10. The ask price (the last price quoted) is $1,090 + (9/32 X $10) for a price of $1,092.81.
29. If an investor owns 150 shares of XYZ Corporation and the stock splits 3-for-2, how many additional shares will he own after the split?
a) 75
b) 100
c) 150
d) 225
A
The question asks about the number of additional shares, not the total number of shares. The investor would own 75 additional shares after the 3-for-2 stock split or a total of 225 shares. To calculate the new number of shares, multiply 150 by 3/2, which equals 225. To arrive at the additional number of shares: 225 – 150 = 75. Remember that when there is a stock split, the total number of shares increases and the price per share decreases.
30. Which of the following is not a characteristic of a hybrid REIT?
a) Invests in real property
b) Provides potential appreciation
c) Less diversified
d) Invests in mortgages
C
Because it invests in real property and mortgages, a hybrid REIT is more diversified. It provides both potential appreciation and income.
31. Which of the following is not a priority for a fiduciary managing an account in compliance with the Prudent Man Rule?
a) Income
b) Speculation
c) Permanence
d) Safety
B
The rule states that fiduciaries should manage accounts “not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.”
32. The formula for GDP is
a) Industrial production plus consumer spending plus imports.
b) Consumer, government and business spending plus exports minus imports.
c) Consumer, government and business spending plus exports.
d) Consumer and business spending plus exports minus imports.
B
Gross domestic product is a measure of our total national output of goods and services.
33. The amount of money that an investor will probably receive at a point in time in the future from an investment is referred to as
a) Rule of interest.
b) Systematic investment value.
c) Expected return.
d) Rate of return.
C
The amount of money that an investor projects to receive from an investment is commonly referred to as expected return.
34. A 53-year-old individual who was laid off from his former company withdrew money from his traditional IRA despite immediately getting a new job with an increased salary. Which of the following is true?
a) The withdrawals will be taxed as ordinary income and subject to a 10% early withdrawal penalty.
b) All of the money he takes from his IRA will be tax-free because he was between jobs.
c) The withdrawals will be considered ordinary income and subject to a 15% penalty.
d) The IRS will not tax him on the withdrawals because his employer terminated him from his job prior to age 59½.
A
If withdrawals from an IRA are made prior to age 59½, the IRS will assess a 10% early withdrawal penalty, unless the withdrawals meet certain qualifications. The amount of the premature withdrawal from a traditional IRA is also taxed as ordinary income to the recipient when received.
35. A letter mailed to the State Administrator indicating an issuer’s intent to sell securities in that state is considered registration by
a) Filing.
b) Assumption.
c) Coordination.
d) Qualification.
A
In registration by filing, issuers communicate their intention to sell securities in that state and that they meet the eligibility requirements.
36. All of the following are agency issues backed by government-guaranteed or insured mortgages, EXCEPT
a) Federal Home Loan.
b) SLMA.
c) FNMA.
d) GNMA.
B
Sallie Mae is Student Loan Marketing Association (SLMA) and does not deal in mortgages. The rest do.
37. Disintermediation is
a) Large scale movement from the short to the long end of the yield curve.
b) Large scale investor movement from debt to equities
c) An investor purchasing a primary offering directly from the issuer rather than the syndicate.
d) Terminating an investment advisory contract between the issuer and the underwriter during the offering period.
A
Disintermediation occurs when investors leave the uncertainty of short term rates and lock in long term rates when the yield curve is inverted.
39. In a custodian account, the responsibility for tax liabilities from dividends, interest income, and capital gains belongs to the
a) Custodian.
b) Minor.
c) Minor’s parents or guardians.
d) All of the above.
B
Tax liabilities belong to the minor in a custodian account.
40. Which of the following securities is NOT exempt from the USA?
a) A bond from a company listed on the NYSE
b) Municipal bonds
c) An intrastate offering of nonexempt securities
d) A stock listed on NASDAQ
C
Municipal bonds are exempt securities. Also, an issue of a company listed on a national exchange is exempt under the federal covered exemption, since these companies already adhere to stringent federal regulations. An intrastate offering is registered at the state level under the USA.
41. One of the significant advantages of investing in mutual funds is
a) Automatic reinvestment of dividends and capital gains at POP.
b) Automatic reinvestment of dividends and capital gains at NAV.
c) Reinvestment of dividends and capital gains with no tax liability.
d) Reinvestment of dividends at a reduced sales charge and no capital gains tax.
B
The automatic reinvestment of dividends and capital gains with no additional sales charge is a benefit to the mutual fund investor. However, the IRS does charge taxes on the distribution, whether the investor receives the money or reinvests it.
42. In order for an Administrator to impose a penalty on an agent, the Administrator must
a) Give 30 days’ advance notice of the action.
b) Give the agent an opportunity for a hearing.
c) Give the agent the opportunity to withdraw his registration.
d) Any of the above would be correct.
B
The Administrator must give the agent the opportunity for a hearing within 15 days of the request.
43. For employers to keep pace with growing population, the benchmark for non-farm payroll growth is
a) 150,000 new jobs a month.
b) 125,000 new jobs a month.
c) 100,000 new jobs a week.
d) 225,000 new jobs a quarter.
B
For employment to keep pace with our growing population, the benchmark for non-farm payrolls is 125,000 new jobs a month. This is considered a coincident indicator.
44. An investor writes an XYZ May 25 put and buys an XYZ May 35 put. This position I. Is a credit spread; II. Is a debit spread; III. Loses money if premiums narrow; IV. Loses money if premiums widen.
a) II and III
b) II and IV
c) I and III
d) I and IV
A
Buy a 35 put and write a 25 put is a debit put spread. A higher strike price put is more expensive than the lower strike price put so the investor established the spread for a debit; the investor loses money if the spread narrows (goes down in value).
46. The quick ratio is
a) An inferior measure because it fails to consider inventory.
b) A more stringent measure than the current ratio.
c) A more lenient measure than the current ratio.
d) Less accurate than the current ratio because it does not consider the time value of money.
B
The quick ratio is a more stringent measure because it uses only cash equivalents (inventory is deducted) which are divided by current liabilities.
47. A customer has the objective of maximizing current income. Under which conditions would you recommend that the customer sell long-term debt positions and buy short-term obligations?
a) The yield curve is inverted.
b) The yield curve is bell-shaped.
c) The yield curve is positive.
d) The yield curve is normal.
A
An inverted yield curve means that short-term rates are high and long-term rates are lower. So to maximize current income, the investor will buy short-term debt and sell long-term bonds.
48. An Administrator can deny registration to a person who
a) Has a conviction for a securities violation from foreign country within last 5 years
b) Been convicted of misdemeanor shoplifting within the last 3 years in the Administrator’s state.
c) Has filed for bankruptcy within the last 5 years.
d) Lacks investment experience
A
An administrator can deny registration to a person convicted of a misdemeanor involving securities or has been convicted of any felony within the past 10 years.
49. The Rule of 72 identifies which of the following?
a) Length of time for an investment to double
b) Minimum required interest rate
c) Simple interest rate of return
d) Coefficient of the portfolio beta
A
The rule of 72 identifies the number of compounding periods required for an investment to double.
