Final Exam 4

Question 1

Under the Uniform Securities Act, which of the following statements is/are TRUE of exempt securities?
Any security that is exempt under the Uniform Securities Act is also exempt under federal regulations
Any security that is exempt under federal regulations is also exempt under the Uniform Securities Act
Certain federal covered securities are required to notice file with the state Administrator
All Canadian securities are exempt from registration
QID: 1507411Mark For Review
A
I and III only
B
II and IV only
C
III only
D
I, II, and IV only

Answer 1

III only

Certain federal covered securities are required to notice file with the State Administrator. The notice filing provision applies to investment company securities and securities that are distributed through a Regulation D Rule 506 offering. A security can be exempt under federal law, but not state law, and vice versa. Only securities that are issued by some form of Canadian government are exempt from registration; the exemption does not apply to offerings made by Canadian corporations.

Question 2

Which bonds would have the greatest sensitivity to interest rate changes?
Bonds with long durations
Bonds with short durations
Bonds with high coupons
Bonds with low coupons
QID: 1507159Mark For Review
A
I and III
B   
I and IV
C
II and III
D
II and IV

Answer 2

I and IV

Duration is a measure (expressed in terms of years) of a bond’s price sensitivity to small changes in interest rates. The longer a bond’s duration, the greater its price sensitivity. Also, bonds with low coupons are more sensitive to interest changes than bonds with high coupons. Therefore, a change in rates will result in a greater percentage change in a bond’s value if it has a low coupon.

Question 3

Sally is self-employed and has established a Keogh plan for her retirement. She has one full-time employee, Tom, who is 25 and has worked for her for 7 months. When is Tom eligible to participate in the Keogh plan?
QID: 1506921Mark For Review
A
Immediately
B   
In 5 months
C
In 17 months
D
Never, since he is not self-employed

Answer 3

In 5 months

Employees of self-employed persons with a Keogh plan must be covered by the plan if they have worked for the employer for one year and are at least 21.

Question 4

On Tuesday, June 3, an IA discovers its net worth has fallen below the minimum requirement. When must the IA file a report of its financial condition with the Administrator?
QID: 1506905Mark For Review
A
On Tuesday, June 3
B   
On Wednesday, June 4
C   
On Thursday, June 5
D
On Friday, June 6

Answer 4

On Thursday, June 5

If an IA’s net worth is less than the required minimum, it must notify the Administrator by the close of the next business day (in this question, Wednesday, June 4). After notification is made, the IA must file a report of its financial condition by the next business (in this question, Thursday, June 5). Thereafter, the Administrator may require the IA to post a bond for the deficiency.

Question 5

An employee of a federally chartered bank would like to sell mutual funds to the bank’s current customers. Which of the following statements is TRUE?
QID: 1507139Mark For Review
A
The bank employee is exempt from the definition of an agent in this situation
B
The bank employee is exempt if the securities are sold only to current customers
C
The bank employee needs to be registered as an agent
D
The bank employee is exempt because of a safe harbor rule

Answer 5

The bank employee needs to be registered as an agent

Bank employees who solicit the sale of securities are considered agents of broker-dealers. The sale of mutual funds, which are considered securities, would cause the employee to meet the statutory definition of an agent.

Question 6

Paul wants to set up a pension plan for his small business but does not want to obligate the company to making set annual contributions, nor does he want a plan that will be complex or expensive to administer. Which plan would be the best choice for Paul's company?
QID: 1507140Mark For Review
A   
A SEP plan
B   
A Money Purchase plan
C
A 403(b) plan
D
A Coverdell IRA

Answer 6

A SEP plan

A simplified employee pension (SEP) plan is the best choice given this criteria. As the name implies, a SEP plan is simpler to administer and set up than some other types of pension plans. The employer is not required to make fixed annual contributions to the employee’s account. A Money Purchase plan requires an employer to make fixed annual contributions regardless of its cash flow. A 403(b) plan may be established only by certain tax-exempt organizations and public school systems. A Coverdell is an education savings plan, not a pension plan.

Question 7

While presenting a financial plan to a customer, an IAR talks about different types of risk. One of the primary risks mentioned by the IAR relates to the impact of current events, consumer confidence, and the general political climate. This risk is called:
QID: 1506910Mark For Review
A
Inflation risk
B   
Nonsystematic risk
C
Reinvestment risk
D   
Market risk

Answer 7

Market risk

Of the choices available, market risk is the best fit. Market risk is the general risk of investing in a given market or economy. Inflation is a form of systematic risk that affects all bonds. Nonsystematic, inflation, and reinvestment risks are not broad enough to cover the events mentioned.

Question 8

Under the Uniform Securities Act, an institutional investor:
QID: 1507398Mark For Review
A
Has more than $2.2 million of net worth
B
Has a minimum of $1.1 million under management with an investment adviser
C
May be designated as such by rule or order of the Administrator
D
Is any financial institution or trust

Answer 8

May be designated as such by rule or order of the Administrator

The best answer to this question is that, by rule or order, the Administrator has the power to designate a person as an institutional investor. A client with net worth of more than $2.2 million or a client with a minimum of $1.1 million under management with an investment adviser is defined as a qualified client, not necessarily an institutional investor. Both financial institutions and trusts may be considered institutional investors, but there’s a financial requirement that must be met.

Question 9

An equity-indexed annuity is linked to the S&P 500 Index and has a spread of 2.5%. If the S&P returns 7.5% in one year, the annuity's rate of return will be:
QID: 1506904Mark For Review
A
2.5%
B   
5.0%
C   
7.5%
D
10%

Answer 9

5.0%

Some equity-indexed annuities have a spread, margin, or asset fee. These represent the amount that will be deducted from the returns generated by the underlying index to determine the contract’s returns. If the annuity had a spread of 2.5% and its underlying index returned 7.5%, then the annuity would be credited with 5% that year (7.5% - 2.5% = 5%).

Question 10

Which risk BEST measures the marketability of a security?
QID: 1507395Mark For Review
A
Market risk
B   
Liquidity risk
C   
Business risk
D
Systematic risk

Answer 10

Liquidity risk

Marketability (also referred to as liquidity) represents how easy or hard it is to buy or sell a security. As a result, liquidity risk is the best measure of marketability. Market risk, which is a type of systematic risk, is the risk of loss due to a decline in the entire market. Business risk is a type of non-systematic risk and causes losses due to the poor performance of one business or company.

Question 11

Closed-end fund shares:
QID: 1507405Mark For Review
A
Are marketable and have fixed capitalization
B
May only trade at their net asset value (NAV)
C
Can issue full or partial shares
D
Trade exclusively in the primary market and not on an exchange

Answer 11

Are marketable and have fixed capitalization

Closed-end funds typically issue a large number of shares at the time the fund is created. Thereafter, investors who want to sell their shares are required to sell them on an exchange because the fund will not redeem them directly. Since closed-end funds don’t regularly issue and redeem shares, their capitalization remains relatively fixed. Unlike mutual funds, closed-end don’t issue partial or factional shares.

Question 12

Real estate limited partnerships:
QID: 1506678Mark For Review
A   
Pass through both income and losses
B
Are typically exchange-traded
C
Are subject to double taxation
D   
Pass through only income

Answer 12

Pass through both income and losses

Real estate limited partnerships (RELPs), like all partnerships, pass through both income and losses to their partners. This tax treatment is preferential to C-Corporations which are subject to double taxation. RELPs are typically not listed on stock exchanges.

Question 13

An individual forms a broker-dealer as a sole proprietorship. Which of the following actions are required by the Administrator?
Filing Form BD
Submitting a Consent to Service of Process
Maintaining a minimum amount of net capital
Paying a filing fee
QID: 1507149Mark For Review
A
I, II, and IV only
B
II, III, and IV only
C
I only 
D  
I, II, III, and IV

Answer 13

I, II, III, and IV

Question 14

Which of the following investments pass through both income and losses to investors?
QID: 1507155Mark For Review
A
All SEC reporting companies
B   
A real estate limited partnership
C   
A regulated investment company
D
A real estate investment trust

Answer 14

A real estate limited partnership

A limited partnership is permitted to pass through both income and losses to its investors (partners). An SEC reporting company, a real estate investment trust, and a regulated investment company (e.g., a mutual fund) are able to pass through income, but are not able to pass through losses to its investors

Question 15

Under the Investment Advisers Act of 1940, when is a firm’s registration required to be renewed?
QID: 1506673Mark For Review
A
Within 30 days of the calendar year-end
B
Within 90 days of the adviser’s fiscal year-end
C
Within 30 days of the adviser’s fiscal year-end
D
Within 90 days of the calendar year-end

Answer 15

Within 90 days of the adviser’s fiscal year-end

Question 16

To measure the variability of returns on various investments, you would use which of the following metrics?
QID: 1507427Mark For Review
A   
CAPM
B
Standard duration
C
Correlation coefficient
D   
Standard deviation

Answer 16

Standard deviation

Standard deviation is used to measure the variation of returns from the weighted mean return of a security. The greater the standard deviation, the greater the risk.

Question 17

Which of the following accounts do NOT ease probate?
QID: 1507396Mark For Review
A
Account with a transfer on death designation
B
Joint tenants with right of survivorship account
C
Trust account
D
Joint tenants in common account

Answer 17

Joint tenants in common account

Joint tenants in common is a type of joint account that’s split upon the death of one of the owners. At death, the decedent’s portion of a joint tenants in common account will go into her estate. At that point, the probate process will determine the distribution of the assets. All of the other accounts/ designations in the question make the probate process quicker and easier.

Question 18

Although an exempt reporting adviser (ERA) is not required to register, it must still satisfy which of the following requirements?
QID: 1506930Mark For Review
A
File Form ADV Part 2 with the SEC
B   
Notice file with the Administrator
C
Amend its ADV within 90 days if material information changes
D
Prepare an annual brochure

Answer 18

Notice file with the Administrator

Exempt reporting advisers are required to file Form ADV Part 1A with the SEC and must notice file with the Administrator. Any material information changes must be reported promptly. As is the case with other investment advisers, an ERA is required to amend its Form ADV within 90 days of its fiscal year end.

Question 19

An agent of a broker-dealer is soliciting investors for a Regulation D offering. A non-accredited investor asks if he can invest less than the minimum required amount. Which of the following statements is TRUE?
QID: 1506902Mark For Review
A
The non-accredited investor can invest less than the minimum required amount.
B
The non-accredited investor cannot participate in a Regulation D offering.
C
The non-accredited investor must invest at least the minimum required amount.
D
Only accredited investors are able to avoid investing the minimum required amount.

Answer 19

The non-accredited investor must invest at least the minimum required amount.

Securities that are sold under Regulation D are not required to be registered if they’re sold to accredited investors and/or up to 35 non-accredited investors. If investors want to purchase securities being distributed through a Regulation D offering (regardless of whether the investors are accredited or non-accredited), they’re required to invest the minimum required amount that’s established by the broker-dealer selling the securities. Investors are not permitted to invest less than the minimum required amount.

Question 20

Your client owns a portfolio of blue-chip equity securities and would like to increase the overall rate of return through the use of options. The most conservative strategy to achieve this objective is to:
QID: 1507153Mark For Review
A   
Write covered calls
B   
Buy calls
C
Write covered puts
D
Buy puts

Answer 20

Write covered calls

The most conservative strategy for the investor to achieve his objective is to write covered calls. The call premium received will increase the yield on his portfolio of stocks because it will add to the income generated by the dividends received from the stock.

Question 21

Which TWO of the following are TRUE regarding credit spreads?
Credit spreads represent the difference between the yields on various bonds and dividend paying stocks
Credit spreads represent the difference between yields on various bonds and Treasury securities
If a corporate bond yields 5.5% and a Treasury bond with a similar maturity yields 4.5% the credit spread is 2%
If a corporate bond yields 6% and a Treasury bond with a similar maturity yields 4.5% the credit spread is 1.5%
QID: 1506908Mark For Review
A
I and III
B
I and IV
C
II and III
D
II and IV

Answer 21

II and IV

A credit spread represents the difference in the yields of various bonds as compared to Treasury securities of similar maturities. If a corporate bond yields 6% and a Treasury bond with a similar maturity yields 4.5%, then the credit spread is 1.5%. Choice (III) is incorrect since the credit spread is 1% (the difference between 5.5% and 4.5%).

Question 22

Regarding the possession of funds held by investment advisers (IAs), which of the following is FALSE?
QID: 1506907Mark For Review
A
Client notification must be made immediately regarding the location where the firm will hold the funds
B
Client funds may only be held in an account that is established for that specific purpose
C
Client funds may be held by a qualified custodian that has met certain standards
D
Clients must receive a statement at least annually that discloses certain details of the funds held by the firm

Answer 22

Clients must receive a statement at least annually that discloses certain details of the funds held by the firm

Client account statements are sent on a quarterly basis and must include the amount of funds in the firm’s possession, a list of securities held in custody, a record of transactions, and all fees charged. If a custodian holds the assets (i.e., not the IA), the IA must have a reasonable belief that the statements are being provided.

Question 23

The term “layering” refers to:
QID: 1507145Mark For Review
A
The attainment of illicit funds
B
The blending of illicit money with legitimate money
C
The placement of illegal funds with a financial institution
D
The integration of laundered money back into the stream of commerce

Answer 23

The blending of illicit money with legitimate money

Layering is done to blend illegal funds with legal funds, then the funds are transferred between accounts to hide where the illegal funds were obtained. Once layering has occurred, money launderers will then integrate the illicit funds back into the stream of commerce (e.g., depositing in a bank account, spending it, etc.).

Question 24

A broker-dealer is a syndicate member involved in a firm-commitment underwriting of a highly anticipated upcoming initial public offering (IPO). During the underwriting, the broker-dealer holds onto some of the shares in order to sell them at a later date since the shares are expected to rise in value. The broker-dealer’s conduct is:
QID: 1507156Mark For Review
A
Acceptable if the issuer approves of the trade
B
Unethical and prohibited under the Uniform Securities Act
C
Allowable only if the shares will be listed on a national exchange
D
Acceptable since the broker-dealer is accepting risk that the shares may fall in value

Answer 24

Unethical and prohibited under the Uniform Securities Act

This situation is known as withholding and is prohibited by both the Uniform Securities Act and the Securities Act of 1933. When a broker-dealer participates in a firm-commitment underwriting, it must sell the shares at the public offering price (POP) as soon as possible.

Question 25

Why would an investment adviser perform a capital needs analysis for a client?
QID: 1507416Mark For Review
A
To determine how much income the client will need at retirement
B
To determine how to best reduce the client’s tax liability
C
To determine how much disposable income the client has available to purchase insurance
D
To determine how much insurance the client needs in order to fund future financial goals

Answer 25

To determine how much insurance the client needs in order to fund future financial goals

Question 26

All of the following statements are TRUE of covered call option writing, EXCEPT:
QID: 1506911Mark For Review
A
The writer can increase the overall yield on his portfolio
B
It is considered a conservative option strategy
C
The premium received guarantees the writer cannot have a loss on the underlying security
D
The writer will have a short-term capital gain if the option expires unexercised

Answer 26

The premium received guarantees the writer cannot have a loss on the underlying security

All of the choices listed are true except the statement that the premium received guarantees that the writer cannot have a loss on the underlying security. The security can decline in price below the breakeven point (price of the stock minus the premium), causing the writer to have a loss on the stock. If the option expires, the writer will always have a short-term capital gain from the premium received.

Question 27

Which of the following statements is TRUE regarding the taxation of qualified cash dividends?
QID: 1506669Mark For Review
A
Qualified cash dividends are taxed at ordinary income rates in the year in which they’re paid.
B
Qualified cash dividends are tax-exempt.
C
Qualified cash dividends are not taxed in the year in which they’re paid, but the recipient will adjust his cost basis.
D
Qualified cash dividends are taxed at a maximum rate of 20% in the year in which they’re paid.

Answer 27

Qualified cash dividends are taxed at a maximum rate of 20% in the year in which they’re paid.

Qualified cash dividends are typically taxed at a maximum rate of 20% in the year in which they’re paid. Corporate bond interest is taxed at an investor’s ordinary income rate, municipal bond interest is typically tax exempt. Stock dividends, not cash dividends, will adjust an investor’s cost basis.

Question 28

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:
QID: 1506685Mark For Review
A   
Annual Updating Amendment
B
Consent to service of process
C   
ADV Part 2
D
ADV-W

Answer 28

Annual Updating Amendment

The Annual Updating Amendment is submitted to confirm that an SEC registered investment adviser is still eligible for federal registration. The form must be filed within 90 days after the end of the adviser’s fiscal year.

Question 29

If an investor is attempting to maximize her portfolio growth over a long period, what is her strategy called?
QID: 1507144Mark For Review
A
Investment income strategy
B
Buy-and hold-strategy
C   
Capital appreciation strategy
D
Day trading strategy

Answer 29

Capital appreciation strategy

Question 30

According to modern portfolio theory (MPT), the expected return of an investment is the:
QID: 1506903Mark For Review
A
Average return including realized and unrealized gains and losses, plus income over a measured time period
B
Market return on the investment adjusted by the beta of the stock or the portfolio
C
Possible returns on the investment weighted by the likelihood that return will occur
D
Standard deviation of gains and losses over the life of the investment

Answer 30

Possible returns on the investment weighted by the likelihood that return will occur

Question 31

According to the Uniform Securities Act, all of the following sales and advertising literature may be subject to filing with the Administrator, EXCEPT a(n):
QID: 1507160Mark For Review
A   
Prospectus for a limited partnership
B
Pamphlet for an oil and gas program
C
Brochure for a mining company
D   
Offering circular for an endowment policy

Answer 31

Offering circular for an endowment policy

The Administrator may require the filing of sales and advertising literature for securities investments. Limited partnerships, oil and gas programs, and mining companies issue securities. Endowment policies are insurance products, not securities.

Question 32

The rate of return that a mortgage company may earn over the life of a loan to a customer is the:
QID: 1507418Mark For Review
A   
Holding period rate of return
B
Real rate of return
C
Risk-free rate of return
D   
Expected rate of return

Answer 32

Holding period rate of return

The return that is earned over the life of an investment and/or a loan is referred to as the holding period rate of return. Since the question asks for the return over the life of the investment (i.e., the loan), the holding period rate of return is the best answer.

Question 33

Investor Jones begins the year with a portfolio of high-grade bonds and blue-chip stocks valued at $300,000. During the year he receives dividends and interest amounting to $11,345, all of which is reinvested. At year-end, the portfolio is valued at $325,435. The percentage return for the year for this portfolio is:
QID: 1506919Mark For Review
A   
8.5%
B   
12.3%
C
7.8%
D
3.7%

Answer 33

8.5%

The portfolio increased in value by $25,435, of which $11,345 represents interest and dividends. If the portfolio was valued at $300,000 at the beginning of the year, the return is 8.5% ($25,435 / $300,000).

Question 34

In which of the following situations does the registration of a broker-dealer result in an Administrator automatically registering an individual of the firm as an agent?
QID: 1506924Mark For Review
A
The individual is an attorney who represents the firm
B
The individual is a director of the broker-dealer and is actively engaged in the business of the firm
C
The individual is an agent of the broker-dealer and is registered in another state
D
The individual had been previously employed by the broker-dealer

Answer 34

The individual is a director of the broker-dealer and is actively engaged in the business of the firm

The registration of a broker-dealer in a state will automatically constitute the registration of an individual as an agent if this person is actively engaged in the business of the firm and is a partner, director, officer, or occupies a similar status.

Question 35

A Suspicious Activity Report (SAR) should be filed:
QID: 1507154Mark For Review
A
For transactions of more than $2,000
B
For transactions of $5,000 or more
C
Only for transactions of more than $10,000
D
Only for transactions of more than $25,000

Answer 35

For transactions of $5,000 or more

Question 36

A client has been watching a thinly traded stock and has noticed that it has not had any trading activity today. What type of risk is the MOST significant for this type of investment?
QID: 1507402Mark For Review
A
Business risk
B   
Liquidity risk
C
Inflation risk
D   
Market risk

Answer 36

Liquidity risk

If a security is thinly traded, it indicates that the market for that investment is illiquid. If an investment has a wide spread, it means the difference between the bid and ask prices is larger than normal. Market risk, or the risk that the market will affect a security’s value, is a real risk, but not the most significant one for a thinly traded stock. Even if the stock market increases, the stock itself may still be illiquid.

Question 37

An agent who is registered in State A contacts an individual investor in State B. The investor agrees to open an account and buy a security through the agent. If the broker-dealer is registered in State B, but the agent is not, the agent MAY:
QID: 1507138Mark For Review
A
Sell the security if it is registered in State B and the agent’s registration is pending in State B
B
Sell the security as long as the agent’s supervising principal is registered in the state
C
Sell the security if it is exempt
D
Not sell the security

Answer 37

Not sell the security

Question 38

Your client dies and leaves a sizable investment portfolio. Within two weeks of his death, the executor of his estate presents the proper documentation to you. She has you sell off the decedent’s portfolio, investing the proceeds in money-market instruments in anticipation of the distribution to the heirs of the estate. The value of the holdings declines substantially in the period between his death and their sale. For estate tax purposes, the assets will be valued:
QID: 1506914Mark For Review
A
Nine months after death, or at the time of death, whichever is less
B
At the time of death
C
At the time of sale
D
At the time of death or sale, whichever is greater

Answer 38

At the time of death

For estate tax purposes, assets are normally valued at the time of death. The date on which the assets are sold is not relevant.

Question 39

Which of the following statements BEST describes discounted cash flow?
QID: 1506913Mark For Review
A
The total value of an investment’s anticipated cash flows in today’s dollars
B
Purchasing power in the future will have more worth than cash today
C
Discounted cash flow uses depreciation and market-adjusted cash flows
D
A method used to measure the risk-adjusted return on a bond

Answer 39

The total value of an investment’s anticipated cash flows in today’s dollars

Discounted cash flow evaluates each coupon payment and the repayment of a bond’s principal at a present value, based on a rate of return. This makes it possible to evaluate a bond’s value against the investor’s desired rate of return. The sum of each of the discounted cash flows, plus the present value of the bond’s principal, determine the total value of the bond. By comparing this value to the current price of the bond, the adviser will be able to determine if the bond is an attractive investment for her client.