Exam 2 Flashcards
A client places an order with his broker to buy 100 shares of DEF at $33.35. The order may be executed at:
Any price below the order price
What is not true of hedge funds?
They are typically registered with the SEC under the Securities Act of 1933
Private pools that are typically sold under an exemption (Reg D Rule 506) and are therefore not required to register with the SEC under either of the Securities Act of 1933 or the Investment Company Act of 1940 - causing them not to be required to sell with a prospectus
Hedge funds
Modern hedge funds invest in a wide variety of
Financial instruments and employ a number of different agressive investment strategies
Hedge funds are typically available to
A limited range of professional or wealthy investors and that are often charged performance fees by the fund managers
What’s restricted stock?
Stock that’s not been registered with the SEC - typically sold under Reg D
Can’t be sold unless the shares have been held for at least 6 MO (if issuer is SEC-reporting company) or one YR (if issuer is non-reporting company)
A client is considering purchasing a fund of hedge funds. What is true concerning this investment?
These securities have higher management fees than hedge funds
A mutual fund that invests in unregistered, private hedge funds. Typically required to register with the SEC and are able to be sold to both accredited and non-accredited investors.
A fund of hedge funds
A broker-dealer has summer interns who are involved in sales and solicitations, but they are not paid. Are these interns considered agents and subject to registration?
They are, since anyone who represents a broker-dealer in effecting securities transactions is defined as an agent
Which of the following choices would not be permitted under a soft-dollar arrangement between an investment adviser and a broker-dealer?
Accounting fees
A call option is out-of-the-money (OTM) if the strike price is _____ the market price.
Above
An investor who believes in the Efficient Market Hypothesis most likely
Believes that the markets were too efficient to actively trade with superior results
A bond pays a 7% coupon. Later, a 9% coupon bond is issued. This bond is issued at:
A premium to the 7% bond
What is true regarding stock index options?
An exercise is settled by cash instead of the delivery of securities
A company has a noncumulative preferred stock outstanding that pays a $5 dividend per year. If dividends on the preferred stock were not paid last year but will be paid this year, how much should the preferred stockholder receive before common stockholders may receive dividends?
$5 since the preferred stock is noncumulative, which means that if the dividend is not paid, it does not accumulate to the next year
Partnerships, master limited partnerships (MLPs), limited liability companies (LLCs) and real estate investment trusts are all
Pass-through entities
These businesses are not required to pay taxes; instead, their profits flow through to their investors and these investors ultimately pay taxes.
Pass-through entities
What information is not included on the registration application for a broker-dealer?
The names and addresses of the agents the broker-dealer intends to register
What is required on the registration of a broker-dealer?
The qualifications and history of any partner, officer, director, or controlling person are required.
Used to protect organizations against disruptive events. Required to have written by broker-dealers and investment advisers. Must address operations, communications with employees, staff, and regulators, as well as the recovery of books and records.
Business continuity plans (BCPs)
An investor has a portfolio comprised of large-cap, mid-cap, and international equities. What is the investor LEAST exposed to?
Money-rate
Risk based on the fact that changing laws could have a negative impact on the business.
Regulatory risk
Risk that a business may not be profitable or may be unable to meet its goals.
Business risk
Risk more likely to be associated with bond portfolios.
Money-rate risk
What is the least relevant risk of owning digital assets?
Inflation
Risks of owning digital assets
Regulatory, liquidity, market
Initially set up as a blank check company with shares that are sold to investors in an initial public offering (IPO) and subsequently listed on an exchange. Post listing, manager will have two years to try to find another company to purchase using their investor’s cash.
Special purpose acquisition company (SPAC)
Consists of buying short-term and long-term bonds, but not intermediate-term bonds. The purchase of long-term bonds allows an investor to capture higher long-term interest rates. The short-term bond provides the opportunity to invest elsewhere if the bond market takes a downturn. There is no guarantee that any money made on the short end of the strategy will offset losses that could occur on the long end.
Barbell strategy
What is not true regarding barbell strategies?
Gains from the short-term maturities will offset losses in the long-term maturities
Would a person who pleaded guilty to stock manipulation five years ago be subject to statutory disqualification under the Securities Exchange Act of 1934?
Yes
The denial of an applicant for registration based on the past transgressions of the applicant, including violations of any securities or commodities law.
A statutory disqualification
In order to effect a private securities transaction, an agent of a broker-dealer
Must receive permission from his broker-dealer to effect the transaction
If a customer has two separate accounts (a managed account in which the adviser has been granted discretion, and the IRA that is nondiscretionary) and a minimum IRA distribution must be made today, what action should the investment adviser take if the customer is unavailable?
Take no action until the customer can be contacted
A corporation that has filed for bankruptcy is to be liquidated. Which of the following securities issued by that corporation has seniority in the liquidation process?
Mortgage bonds
When a corporation is liquidated, its assets are sold and the proceeds are distributed. What is the order in which securities issued by that corporation has seniority in the liquidation process?
- Secured creditors (i.e. mortgage bondholders)
- Unsecured creditors (i.e. debenture holders)
- Preferred stockholders
- Common stockholders
Securities which are created by financial institutions that customize returns and risks to fit the needs of specific investors. Legally created as debt instruments, but their rates of return are often linked to equities and derivatives.
Structured products - ETNs are one of the most popular types
According to the Investment Advisers Act of 1940, when is an investment adviser required to provide an audited balance sheet to its clients?
If it collects prepaid fees of more than $1,200, six months or more in advance of providing advisory services
According to the Uniform Securities Act, when is an investment adviser required to provide an audited balance sheet to its clients?
The firm collects/solicits prepaid fees of more than $500, six months or more in advance of the service
OR
The firm maintains custody or discretionary control of clients’ assets
While examining a client’s investment profile, an IAR determines that the client is able to tolerate a high degree of risk and does not anticipate the need to access invested funds for the next 25 years. What would be the best investment allocation for the client’s portfolio?
95% equities and 5% money-market instruments
An investor who has a long time horizon and is willing to tolerate high levels of risk may allocate a large percentage of her portfolio in stocks.
What is a benefit of a transfer on death (TOD) account designation?
The beneficiary avoids probate
Assets are still subject to the estate tax
An office of GTO Company is selling his company’s convertible debentures to the public. In this capacity, the officer is
An agent of the issuer
The DJ Industrial Average is considered an index of
Large-capitalized stocks
If Jane Brown annuitizes her nonqualified variable annuity, how will the series of payments be taxed?
Part of each payment is taxable earnings and part is a tax-free cost basis
Investment advisers (IAs) may accept discretionary orders
For up to 10 days before receiving signed power of attorney
Broker-dealers may accept discretionary orders
Only when they’ve received written and signed powers of attorney from their customers
If an investment advisor is making a material change to the business (i.e. changing their fee structure) that is not effecting current clients what must they do?
Promptly file amendments to its Form ADV
What can investment advisers include in their contracts with clients?
A guarantee of performance against a benchmark (fulcrum free); however, if it is not met, they will surrender their fee for the year
This fee arrangement may only be offered to investment companies and client with significant wealth
A firm will charge commission for the service of
Buying and selling securities on a client’s behalf
What does the dividend discount model take into account to estimate a company’s share price?
A corporation’s expected future dividends and a discount rate
What main characteristic qualified an American-style equity option to be described as a derivative security?
Its value is based on the valuation of another asset
How is a corporation permitted to borrow from a bank?
Through a revolving credit facility
Discounted cash flow is used to
determine the attractiveness of an investment
Outstanding shares
Company’s stock currently held by all its shareholders
If the Consumer Price Index (CPI) decreased by a greater rate than the yield on your investment
The purchasing power of the invested dollars would have increased
During a given period of time, the Consumer Price Index has decreased by 10% while the yield on your investment has decreased by 7% of its original rate. How has this affected the purchasing power of your investment?
Purchasing power has increased
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 wants to be personally liable for the venture’s debts. What business structures would meet their objectives?
A limited liability company
A S Corporation
Average workweek (manufacturing)
Initial unemployment claims
New orders for consumer goods and equipment
Vendor performance
Plant and equipment orders
Building permits
Interest rate spreads, 10-year Treasury bonds less federal funds
Stock prices (S&P 500)
The Money Supply (M2)
Index of consumer expectations
Leading economic indicators
What is true regarding digital assets?
Some are securities
What is a type of non-systematic risk?
Business risk
The USA provides an exemption for filing advertisements related to securities that are
Either currently listed on an exchange or are approved to be listed on an exchange
What is true regarding the characteristics of ESG investing?
Fiduciaries must utilize both financial and non-financial factors before investing
According to the Securities Act of 1933, a pooled investment fund is considered a federal covered security when it
Registers with the SEC under the Investment Company Act of 1940
What’s an exchange-traded fund (ETF)?
A portfolio of securities that’s registered as an investment company and can be bough and sold on an exchange
When comparing value stocks to growth stocks, one difference is that value stocks have what characteristic?
A low price-to-book value
The last dollar that a client earns each year would be taxed at their
Marginal tax rate
What shares are included when calculating a company’s market capitalization?
Outstanding shares - these include those held by institutions, retail investors, restricted shares, and shares held by insiders, but do NOT include treasury stock
A stock traded infrequently would most likely have
A wide spread as the security might be difficult to acquire
European style options may be exercised only on the day the contract expires, the standardized expiration date is
The third Friday of the expiration month
A customer of a broker-dealer has purchased stock in a margin account. The customer’s exposure in the account is 50%. If the stock falls by 10%, what’s the customer’s percentage of loss in the account?
20%
If a bond is selling at a premium and is callable at par, how is the yield generally calculated?
To the call date
What is the benefit of discounting the cash flows of a fixed-income security?
It compares the price of a bond against the sum of the present values of the bond’s future payouts
When analyzing a structured product, which risk is the least concern?
Regulatory risk
A broker-dealer that stands ready to buy or sell a specific stock for its own inventory (its own account). The price it is willing to pay for the stock is its bid price, while its ask or offer price represents the price at which it is willing to sell stock (to other dealers). The difference between the bid and offer prices is the spread
A market maker
When an agent ends his employment with a broker-dealer, who must notify the Administrator about the agent’s employment and registration status?
Both the agent and the broker-dealer
Under the Investment Advisers Act, the form that is filed annually with the SEC and determines an adviser’s continued eligibility for federal registration is called
Annual Updating Amendment
A common investment strategy is dollar cost averaging. The objective of using this method of investment is the
Average price of the securities purchased will be more than the average cost of the securities over a long period
The difference between the highest bid and lowest ask price is the
Spread
What is not true regarding testamentary trusts?
The donor manages the assets in the trust
What is a benefit of limited liability companies (LLCs) relative to other types of business structures?
LLCs pass through both income and losses to their members (owners)
A mother creates a trust and deposits funds that will be used to pay for her children’s college educations. The IAR managing the assets will not take into consideration the
The amount of money that the grantor makes
What is a measure of non-systematic risk?
Alpha
What is not true regarding the activities of investment advisers?
When an adviser has been paid a fee to create a financial plan, the adviser must create the plan without consulting other professionals
Provided a broker-dealer has written procedures allowing for an agent to borrow or lend money to a customer, the agent cannot do so in the following situation
A customer is registered with a different broker-dealer than the agent
Fundamental analysis involves evaluating
Sales growth and other information from an issuer’s financial statements
What’s the purpose of IRMAA?
To increase Medicare premiums for high income individuals
What are the types of market efficiency under the Efficient Market Hypothesis?
Strong, weak, semi-strong
An agent is soliciting investors for a private placement under the USA, this is an exempt transaction as long as the agent doesn’t offer the securities to more than
10 retail investors during a 12-MO period
What is a benefit of owning a master limited partnership (MLP)?
Exchange-listing
What is true regarding an investment adviser that uses cloud storage for maintaining its books and records?
Using cloud storage is acceptable only if regulators are given free access to records
What would be used to determine the debt-to-equity ratio?
The balance sheet
What best defines the income-related monthly adjustment amount (IRMAA)?
It’s an increase in Medicare premiums for individuals with income over a certain limit
If a security has a low beta, it will
Underperform the market when prices rise
Outperform the market when prices fall
A disadvantage of limited partnerships
Potential assessments
What is suitable for an investor who wants an investment that’s marketable, highly liquid, and provides income?
Preferred stock
An investment adviser representative has discretionary authority over a client’s portfolio. The client’s objective is conservative growth. According to the UPIA, what is true regarding the use of equity derivatives in his portfolio?
Equity derivatives strategies may be appropriate as part of a conservative portfolio
Under the USA, the following persons is not considered an investment adviser representative
An employee of an advisory firm who provides administrative services that relates to portfolio selection
When executing a trade for a client, an agent inadvertently misrepresents the risks that are associated with US Treasury bonds. Under the USA, what is true?
This activity is unethical
Internal controls designed to protect the exchange of information between different departments of a broker-dealer that could create a conflict of interest
A Chinese Wall
What would not be considered an active portfolio management strategy?
Indexing
An accountant regularly refers clients to an investment adviser, who pays the accountant a referral fee for each client who opens an account with the investment adviser. The accountant
May be required to register as an investment adviser representative or solicitor
Which insurance policy allows the owner to skip her premium payments?
Universal life
An index option has been exercised. What is the writer of the option required to do to satisfy his obligation?
Deposit cash equal to the difference in the strike price and the value of the index
A dollar-weighted return is also referred to as
Internal rate of return
A blank check company that’s formed with the intention of buying shares in another company.
A SPAC
What term related to the graph of optimal portfolios resulting from a comparison of risk and return?
Efficient frontier
The results of discounted cash flow analysis would identify a potential purchasing opportunity when the value arrived at
Is higher than the current cost of the investment
Net present value is best described as the
Present value above cost
