Fundamentals Practice Exam

Question 1

Which of the following statements concerning supply and/or demand is/are true?

1. If demand increases and supply simultaneously decreases, equilibrium price will rise.
2. There is an inverse relationship between price and quantity demanded.
3. If demand decreases and supply simultaneously increases, equilibrium price will fall.
4. If demand decreases and supply remains constant, equilibrium price will rise.
   a) 1, 2 and 3.
   b) 1 and 3.
   c) 2 and 4.
   d) 4 only.
   e) 1, 2, 3 and 4. Ifdemand increases and supply simultaneously decreases, equilibrium price will rise. Ifdemand decreases and supply simultaneously increases, equilibrium price will fall. Ifdemand decreases and supply remains constant, equilibrium price will rise

Answer 1

Answer: A

Statement 4 is false because equilibrium price will fall if demand decreases and supply remains constant.

Question 2

Your client is designing an educational investment program for her eight-year-old son. She expects to need the funds in about ten years when her AGI will be approximately $45,000. She wants to invest at least part of the funds in tax-exempt securities. Identify which investment(s) would yield tax-exempt interest on her federal return if the proceeds were used to finance her son’s education.

1. Treasury bills. 2. EE bonds. 3. GNMA funds. 4. Zero coupon Treasury bonds.
   a) 3 and 4.
   b) 1, 3 and 4.
   c) 2 and 3.
   d) 2 and 4.
   e) 2 only.

Answer 2

Answer: E

Only EE bonds are tax exempt if used for qualified education expenses

Question 3

Which combination of the following statements concerning federal law is correct?

1. The SecuritiesAct of1933 provides for protection frommisrepresentation, deceit, and other fraud in the sale ofnew securities.
2. The Securities Investor ProtectionAct of1970 is designed to protect individual investors from losses as a result of brokerage house failures.
3. The Investment Advisers Act of1940 requires that persons or firms advising others about securities investment must register with the Securities and Exchange Commission.
4. The Investment Advisers Act of1940 assures the investor safety of investment in companies engaged primarily in investing, reinvesting, and trading in securities.
   a) 1, 2 and 3.
   b) 1 and 3.
   c) 2 and 4.
   d) 2 and 3.
   e) 1, 2, 3 and 4.

Answer 3

Answer: A

Statement 4 is false because the Investment Advisors Act of 1940 requires an investment advisor to register with the SEC. It does not address investor safety with regards to trading in securities.

Question 4

How are taxes reported on the client’s cash flow statement?

Answer 4

As an expense.

A cash flow statement or statement of income and expenses consists of income less savings, fixed expenses, variable expenses and taxes.