Final Exam 3 Flashcards
Which TWO of the following choices are differences between exchange-traded funds (ETFs) and exchange-traded notes (ETNs)?
ETNs carry credit risk that is tied to the issuer that backs the note and ETFs do not have issuer credit risk
ETFs may be sold short and ETNs may not
ETF returns are based on the performance of an index and ETNs pay a fixed coupon rate
ETNs have a maturity date and ETFs do not
QID: 1506633Mark For Review
A
I and III
B
I and IV
C
II and III
D
II and IV
I and IV
ETNs are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes because ETN returns are linked to the performance of a commodity, currency, or index, minus applicable fees. ETNs do not usually pay an annual coupon or specified dividend. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. Only ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer’s financial condition deteriorates, it can impact the value of the ETN negatively, regardless of how its underlying index performs.
Which of the following statements is TRUE concerning taxation of capital gains distributions from a Subchapter S Corporation?
QID: 1506595Mark For Review
A
The gain would be taxed as a capital gain at the corporate level and shareholders would receive a tax-free distribution
B
The gain would be exempt from corporate taxes, but would be taxable to the individual as a capital gain
C
The gain would be exempt from corporate taxes, but would be taxable to the individual as ordinary income
D
The gain would be taxable to both the corporation and individual as a capital gain
The gain would be exempt from corporate taxes, but would be taxable to the individual as a capital gain
A Subchapter S Corporation is treated as a partnership for tax purposes. It avoids corporate taxation and its shareholders are taxed based on the distributions from the corporation. The gain would be taxed only once, at the shareholder’s tax rate. A Subchapter S Corporation would report a proportional amount of the shareholder’s net capital gains on a K-1 tax form. The S Corporation would not pay corporate tax, while the shareholder would pay a capital gains tax based on her individual tax rate. The gain would not be taxable as ordinary income.
When is the internal rate of return (IRR) be used?
QID: 1506794Mark For Review
A
When determining the rate that makes the net present value of an investment zero
B
When estimating the future cash flows
C
When calculating a bond’s price relative to its yield
D
When measuring the profitability of an investment portfolio relative to the portfolio’s risk
When determining the rate that makes the net present value of an investment zero
The internal rate of return (IRR) is a rate that makes the present value of an investment equal to the market price of the investment. In other words, the IRR is the rate that makes the net present value (NPV) of an investment equal to zero.
The Dow Jones Industrial Average is considered an index of: QID: 1506665Mark For Review A Value stocks B Growth stocks C Large-capitalized stocks D NYSE stocks only
Large-capitalized stocks
For disclosure purposes on Form ADV, a felony (as compared to a misdemeanor) is defined by all of the following choices, EXCEPT:
QID: 1506805Mark For Review
A
An offense that’s punishable by a prison sentence of at least one year
B
An offense that’s punishable by a fine of at least $1,000
C
An offense that’s punishable by a fine of at least $500
D
A general court martial
An offense that’s punishable by a fine of at least $500
All the choices are considered felonies, except an offense that’s punishable by a fine of at least $500. A felony is an offense that’s punishable by a prison sentence of at least one year and/or a fine of at least $1,000. The term also includes a general court martial. A misdemeanor includes a special court martial or an offense that’s punishable by a prison sentence of less than one year and/or a fine of less than $1,000.
When is a broker-dealer required to deliver a prospectus? QID: 1506565Mark For Review A At the time of sale B By settlement date C No later than 24 hours after the sale D Prior to the sale
By settlement date
Broker-dealers are required to deliver prospectuses to purchasers of a new issue along with the confirmation, which is due by the settlement date.
Which of the following is TRUE of a Qualified Domestic Relations Order (QDRO)?
QID: 1506609Mark For Review
A
A QDRO is a court order that divides all jointly held property in the event of a divorce
B
A QDRO is a court order that requires one person involved in a divorce to provide for the payment of alimony or child support
C
A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a non-qualified retirement plan
D
A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a qualified retirement plan
A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a qualified retirement plan
A QDRO is a court order that is entered as a part of a property division in a divorce or legal separation that splits a qualified retirement plan or pension plan by recognizing joint marital ownership in the plan. The court may award all or a portion of the plan participant’s benefit to an alternative payee, such as a spouse, child, or other dependent of the plan participant.
Which of the following statements regarding the differences between an annual rebalancing strategy and a buy-and-hold strategy over a 30-year period is FALSE?
QID: 1506588Mark For Review
A
The tax and transactions costs will be lower with a buy and hold strategy
B
The buy and hold strategy is easier to manage than a rebalancing strategy
C
The risk in a buy and hold strategy portfolio will match the investor’s risk tolerance
D
The equity portion in a buy and hold portfolio could grow in relation to the fixed-income portion, whereas a rebalanced portfolio will remain balanced every year
The risk in a buy and hold strategy portfolio will match the investor’s risk tolerance
The risk levels in a buy and hold portfolio will rise and fall, while a rebalanced portfolio will be adjusted periodically to meet the investor’s risk tolerance. Rebalanced portfolios will also attempt to maintain the percentage of equity and debt in the portfolio, while buy and hold portfolios will allow the percentages to drift. One of the advantages of a buy and hold strategy is that transaction and tax expenses are minimized since there is generally no continuous buying and selling.
Precision Investment Partners is a broker-dealer registered in Tennessee. A recent restructuring at the firm caused a significant portion of the information on the firm’s last application filed with the Administrator to no longer be valid. What action must the firm take to be in compliance under the USA?
QID: 1506663Mark For Review
A
Precision must cease doing business until a new application is filed and approved by the Administrator
B
Precision must file an amendment to its application promptly
C
Precision should call the Administrator, but is not required to update its application until the firm’s annual licensing renewal date
D
Since Precision is already registered in Tennessee, it has a 90-day grace period to amend its application, provided the firm is in compliance with all current state securities laws
Precision must file an amendment to its application promptly
According to the Uniform Securities Act, if the information contained in any document filed with the Administrator becomes materially inaccurate or incomplete, an amendment must be filed by the registrant promptly.
When determining the risk premium on an investment, an investor would analyze the difference between:
QID: 1506645Mark For Review
A
The total return and the risk-free rate of return
B
The mean return and dollar-weighted return
C
The total return and annualized rate of return
D
The coupon rate of a bond and current interest rates
The total return and the risk-free rate of return
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. Which of the following business structures would meet their objectives? A limited partnership A general partnership A limited liability company An S Corporation QID: 1506796Mark For Review A I only B I and II only C III and IV only D I, III, and IV only
III and IV only
Since none of the group is willing to be liable personally for the business’s obligations, they cannot form a general partnership or a limited partnership. All general partners have unlimited liability for any obligations that the business incurs. A limited partnership requires at least one general partner. Also, they all want to be involved in management and a limited partner who becomes actively involved in management loses the shield of limited liability. A partnership is not an option for them. Either a limited liability company (LLC) or an S Corporation would allow all of them to take an active role in running the venture without incurring personal liability.
All of the following statements are TRUE regarding open-end and closed-end investment companies, EXCEPT:
QID: 1506581Mark For Review
A
Open-end fund shares are redeemable, but closed-end fund shares are not redeemable.
B
Open-end funds can issue full or partial shares, but closed-end funds can only issue full shares.
C
Open-end fund shares only trade at their NAV, but closed-end fund shares may trade either above or below their NAV.
D
Both open and closed-end funds have fixed capitalizations.
Both open and closed-end funds have fixed capitalizations.
Open-end investment companies (i.e., mutual funds) are always issuing and redeeming shares in the primary market. This means that their capitalization is always increasing as investors buy new shares, or decreasing as investors redeem old shares. Closed-end investment companies trade on exchange and have a fixed capitalization. Only open-end fund shares trade at their net asset value (NAV). Closed-end fund shares may trade either above or below their NAV depending on the supply and demand on the exchange.
Under the Uniform Securities Act, which of the following statements is TRUE regarding the posting of a surety bond by a broker-dealer?
QID: 1506564Mark For Review
A
It is used for the same purpose as a fidelity bond that is required by the SEC.
B
It is required of all broker-dealers that are registered in a state.
C
It is used to cover the costs of possible legal actions.
D
An Administrator may accept cash, securities, or real property in lieu of a bond.
It is used to cover the costs of possible legal actions.
A bond may be required by an Administrator to cover possible legal costs that arise from violations of the Uniform Securities Act. The Administrator may accept cash or securities in lieu of a bond; however, property may not be accepted.
A surety bond is not required of all broker-dealers; it is only required for those that have custody of or discretionary authority over client funds and securities and do not meet the minimum financial requirements.
Under the Uniform Securities Act, which of the following activities of an investment adviser would constitute impersonal advisory services?
QID: 1506653Mark For Review
A
Telling a client to buy municipal bonds in order to reduce her tax liability
B
Providing clients with a recommended list of mutual funds for their retirement accounts
C
Giving a client a list of mutual funds with the lowest expense ratios for the past five years
D
Telling a client that investment XYZ will meet her investment objectives
Giving a client a list of mutual funds with the lowest expense ratios for the past five years
Impersonal advisory services are those activities of an investment adviser that do not meet the specific needs or objectives of a client, or which do not render an opinion of the investment merits of a particular security.
A corporation has the following financial information: $3 million in cash $5 million in accounts receivable $8 million of inventory $7 million of equipment $2 million in short-term debt $40 million in long-term debt $4 million accounts payable
What’s the corporation’s current ratio?
QID: 1506658Mark For Review A 1:2 B 4:3 C 5:1 D 8:3
8:3
The current ratio is found by dividing the current assets by the current liabilities. In this question, current assets include cash, accounts receivables, and inventory, totaling $16 million ($3 million cash + $5 million accounts receivable + $8 million inventory).
Current liabilities include short-term debt and accounts payable, totaling $6 million ($2 million short-term debt + $4 million accounts payable). Therefore, the current ratio is 16:6 ($16 million ÷ $6 million). Since the ratio of 16:6 is not an appropriate ratio, it must be reduced. To reduce the ratio, the common denominator of 2 can be used. In other words, find the number of times 2 goes into 16 and the number of times it goes into 6. In this case 16:6 is reduced to 8:3. If reducing fractions is an uncomfortable exercise, the decimal method may be used. Since the current ratio can also be stated as 2.6 ($16 million ÷ $6 million), simply calculate the decimal version of the answer choices to determine which answer matches this number (e.g., 8 ÷ 3 = 2.6, which is the correct response, while 4 ÷ 3 = 1.33 and is incorrect).
