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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.
An investment adviser is NOT required to deliver a brochure when providing
a) Advice to a client when the adviser does not have custody of the client’s assets.
b) Impersonal investment advice for less than $500 per year.
c) Investment advice to an individual with a net worth in excess of $2 million.
d) Investment advice to an institutional investor.
B
Advisers are not required to deliver a brochure if they enter into a contract with an investment company or for impersonal investment advice or if an adviser charges less than $500 a year.
If the yield curve is inverted, I. Short-term yields are less than long-term yields. II. Short-term yields are higher than long-term yields. III. Investors are lengthening maturities in their portfolios. IV. Investors are shortening maturities in their portfolios.
a) I and II
b) I and III
c) II and III
d) II and IV
(C) In an inverted curve, short-term rates are temporarily higher than long-term rates. Because of the inverted curve’s uncertainty, investors move from short-term to long-term yields.
6. XYZ stock is quoted at $45.20 X $45.25. How much is the spread?
a) $0.05
b) $0.50
c) $5.00
d) $50.00
A
The spread is the difference between the bid and ask; $45.25 - $45.20 = $0.05.
7. Any adviser that wants to exercise discretionary authority over a client’s account must do which of the following? I. Have written authorization from the client. II. Have approval to exercise such control by the administrator. III. File a Form ADV with the Securities Administrator. IV. Post a bond in the amount of the client’s account value.
a) I and II
b) I and III
c) II and III
d) II and IV
B
Any investment adviser that wishes to exercise discretionary authority over a client’s account must have authorization from the owner of that account, approval for such authority from the broker/dealer (not the administrator), and file a Form ADV for the account with the Securities Administrator.
8. Which of the following types of trusts provide the greatest tax benefits?
a) Revocable trusts
b) Insurance trusts
c) Irrevocable trusts
d) Testamentary trusts
C
Trusts may be established as either revocable or irrevocable; however, the greatest tax benefits are given to irrevocable trusts. Since this type of trust holds title to the assets, property in the trust bypasses probate, which in turn reduces estate taxes and administrative fees.
9. In order to comply with FinCEN’s anti-money laundering initiative, broker/dealers are required to
a) Have each employee fingerprinted.
b) Have the AML program approved by FINRA.
c) Designate an AML compliance officer.
d) Test the program internally with in-house staff.
C
As part of a broker/dealer’s responsibility to comply with AML initiatives, it is required to appoint a qualified AML compliance officer who must administer the AML program and ensure that all employees are aware of their duties. In addition, the broker/dealer must establish policies, procedures and internal controls based on an in-house risk assessment, provide ongoing training for employees, and have the program independently tested on a regular basis.
10. To calculate the after-tax yield on an investment, an investor takes the return on investment and multiplies that number by the
a) Current FED funds rate of return.
b) Reciprocal of the investor’s tax bracket.
c) Number of years the investment was held.
d) Investor’s current tax bracket.
B
The after-tax yield is calculated by multiplying the investor’s return by the reciprocal, or complement, of the investor’s tax bracket. The reciprocal is equal to 100% - tax rate %.
12. An investment adviser has identified what he perceives to be an excellent investment opportunity for some of his clients. He made calls to the selected clients and told them that he believes that the investment will have over 12% return this year and recommended they invest. Which of the following is true concerning the adviser’s statement?
a) This is considered an example of an adviser doing performance research which is part of the advisory services contract.
b) Such statements may not be made since they imply a specific performance of a security for which advice is being given.
c) The adviser may not make this kind of statement to his clients unless it is part of a portfolio of investments and not a single security.
d) The adviser has not violated any provisions of securities law as he was only stating an opinion and not giving formal advice.
B
An adviser may not make any statement that implies a specific performance of a security for which advice was given. An adviser may not guarantee a specific result based on advice given for a portfolio of investments.
13. When an agent of a broker/dealer files for state registration, the agent’s registration
a) Becomes effective in 30 days, unless the state administrator approves the registration earlier.
b) Becomes effective in 60 days, unless the state administrator notifies the broker/dealer that it is effective earlier.
c) Is effective immediately.
d) Becomes effective in 60 days.
A
When an agent applies for registration in a particular state, the registration becomes effective 30 days later unless the broker/dealer receives notification from the administrator that the agent is properly registered within the state before the 30-day period has elapsed. The administrator will contact the broker/dealer and not the agent directly.
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. Buy 100 shares of ABC at 40 and sell an ABC April 45 call for 2. What is your maximum loss?
a) $3,800
b) $4,000
c) $4,200
d) $4,500
A
Purchase price of stock $40 - $2 premium received = $38 X 100 = $3,800.
16. Jennifer is saving for her first home. She plans to buy in about eight years. Which of the following investments is probably most appropriate?
a) Tax-free money market fund
b) Money market mutual fund
c) Investment grade, medium maturity corporate bonds
d) Growth stocks
C
Jennifer’s intermediate time frame is best served by high quality debt instruments. A money market mutual fund has a lower yield, and its added safety is appropriate for shorter time frames. Growth stocks are appropriate for a long time horizon of 10 years or more.
18. Dollar cost averaging plans have which of the following features? I. They are voluntary plans. II. They entail purchasing the same number of shares each period. III. Investors are penalized for missing subsequent investment periods. IV. The investor’s personal share cost will be lower than the share price over the period.
a) I and II
b) I and IV
c) II and III
d) III and IV
B
Dollar cost averaging is a voluntary investment plan with systematic investments of a fixed dollar amount at regular intervals, usually monthly or quarterly. There is no penalty to the investor for failure to make additional investments.
19. 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.
20. The following are prohibited practices under the Uniform Securities Act (USA) EXCEPT
a) Soliciting excessive trading to increase commissions.
b) Failing to disclose all known facts in a transaction.
c) Effecting private securities transactions for customers.
d) Commingling customer funds with agent funds.
B
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.
21. If an investor cannot specifically identify redeemed shares, IRS assumes that reporting will be on the basis of
a) First-In, First-Out.
b) Determined on a case by case basis.
c) Average cost.
d) Last-In, First-Out.
A
IRS assumes the First-In, First-Out accounting method when shares cannot be specifically identified.
23. If you own securities that represent an undivided interest in a fixed portfolio, with which type of investment company are you invested?
a) Closed-end management company
b) Face amount certificate
c) Unit Investment Trust
d) Open-end management company
C
The Unit Investment Trust (UIT) portfolio remains fixed for the life of the trust.
25. Which best describes the Federal Funds Rate?
a) Daily average rate of largest central banks
b) Daily average rate of reserve member banks
c) Weekly average rate of reserve banks
d) Weekly average rate of yield auctions of member banks
B
The Federal Funds Rate is overnight (daily) borrowings by Fed reserve member banks.
26. Vera is an agent at Dewey Securities. Vera’s church is selling bonds to finance a new sanctuary. Vera helps sell her church’s bonds on weekends. Which of the following is true? I. She may deduct a reasonable hourly rate as a charitable deduction on her taxes. II. She is guilty of selling away, which is grounds for termination and is a violation of the USA. III. She may sell the bonds with her employer’s permission. All Vera’s trades must be run through her employer’s books. IV. She may not sell the bonds under any circumstances.
a) II and III
b) II and IV
c) I and III
d) I and IV
A
Selling the bonds without the employer’s permission is selling away, which is a violation of the USA. In this example, if Dewey consents, Vera may sell the bonds, but all of her trades must be recorded on Dewey’s books.
27. Anita received equal quarterly 25 cent dividends on her Kabob stock last year. In addition, her shares appreciated from $20 to $27. Which of the following is true?
a) Anita will be taxed on $1 per share.
b) Anita will be taxed on $8 per share.
c) If Anita participates in a DRIP, she will pay no taxes on the reinvested dividends.
d) Anita will be taxed on $7.25 per share.
A
Anita will be taxed on last year’s dividend distributions whether she receives them or automatically reinvests through a dividend reinvestment program. Anita is not taxed on the appreciation (unrealized gain) until she sells her shares and realizes the gain.
29. An agent’s deliberate omission of a fact in a securities transaction constitutes fraud I. If a reasonable person would base a decision on the omitted information. II. Only if the information given was known to be true. III. Only if the offering is a new issue of a security. IV. If the information is relevant to an investment decision.
a) I and II
b) I and IV
c) II and III
d) II and IV
B
Omission of material information constitutes fraud if a reasonable person would make a decision based on the information, regardless if the offering was a primary offering or secondary market transaction.
32. An investor doubles her money by selling a security which she owned for eleven months. She will be
a) Taxed at a preferential capital gains rate.
b) Exempt from tax if she donates the proceeds to a nonprofit organization.
c) Taxed at her ordinary income tax rate.
d) Exempt from tax if this was a municipal bond.
C
Because she held the investment for 1 year or less, the gain is short term, subject to tax at ordinary income rates.
34. A firm is acting in the capacity of a broker and receiving a commission. The firm is performing as
a) A principal.
b) An agent.
c) An investment adviser.
d) A dealer.
B
A firm that brokers and charges a commission is acting as an agent.
35. Which of the following is NOT true regarding the net present value?
a) It is used to calculate holding period return.
b) It works best for long-term investments.
c) It considers profits and losses from a today’s value perspective.
d) It expresses the future value of an investment in today’s dollars.
C
The Net Present Value (NPV) is the future value of an investment expressed in today’s dollars. The net present value considers the future cash flows from a today’s-value perspective. The net present value only considers cash flows but not profits and losses.
36. Mortality risk fees and operating expense risk fees are designed to
a) Pay state taxes owed by the insurance company.
b) Protect the contract holder from rising premium costs.
c) Protect the insurance company by offsetting unexpected costs.
d) Protect the annuitant against losses in the separate account.
C
These fees are deducted from the separate account to protect the insurance company against unexpected increases in operating costs and against annuitants who outlive their expected mortality.
37. Persons who are found guilty of insider trading violations are subject to all of the following penalties EXCEPT
a) Treble charges.
b) Imprisonment.
c) FINRA fines.
d) Civil lawsuits.
C
FINRA fines can only be assessed against FINRA members and their associates. All other violators may be subjected to any of the other penalties listed.
38. The SEC specifically requires which part of Form ADV to be written in “plain English”?
a) ADV Part 1
b) ADV Part 2A
c) Both Part 1 and Part 2
d) None of the above
B
Part 2A or a written brochure containing the information in Part 2A must be delivered to clients, and therefore must be written in narrative form in plain English.
39. DDI had a very good fourth quarter with a total return on its common stock of 39% for the year. Stan owns 500 shares of DDI and is in the 20% tax bracket for the year. Inflation was a modest 4% last year as well. What was Stan’s real return on his DDI investment?
a) 31%
b) 124%
c) 35%
d) 28%
C
Real return is an inflation-adjusted return; therefore, Stan had a 35% return (39% total return minus 4% inflation = 35% real return). Stan’s 20% tax bracket is irrelevant when determining real return.
40. A client buys a BAT July 40 put and sells a BAT April 40 put. The client would profit if this spread position
a) Narrows.
b) Expires.
c) Widens.
d) Narrows, then widens.
C
The option position is a calendar or horizontal spread. As in all spreads, one option leg is important and is netted against the other, less important leg. July has more time value than April. The April leg was sold. The spread is debit. Debit spreads benefit from premium widening.
41. 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.
42. Which of the following best describes the efficient market hypothesis?
a) Inefficiencies result from arbitrage opportunities.
b) Markets become more efficient over time.
c) Markets are efficient; no one can gain an advantage by using analysis or trends.
d) Inefficiencies are temporary.
C
In its purest interpretation, the efficient market hypothesis says that markets are efficient and no one can gain advantage by using analysis or trends.
44. 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.
45. A convertible preferred is convertible at $20 per share. The stock is currently selling on the market at $120. Which of the following are correct statements is correct?
a) The common stock must be selling at $24 to be at parity with the preferred stock.
b) The common stock must be selling at $20 to be at parity with the bond.
c) The preferred stock’s conversion ratio is 1:6.
d) It makes sense to convert at $22.
A
The conversion ratio is the par value of the preferred stock divided by the conversion price, or in this case, 1:5. It identifies the number of common shares received upon conversion. The parity price of the common stock is determined by dividing the conversion ratio into the market value of the preferred stock, or 120/5 = $24. It only makes sense to convert at a price above the parity price.
46. A security in which the payment of principal, interest, and/or dividends is assured is called a(an)
a) Non-issuer transaction.
b) Non-assessable security.
c) Guaranteed security.
d) Assessable security.
C
A guaranteed security is one in which the payment of principle, interest, and/or dividends is assured.
49. Which of the following is FALSE regarding a client’s risk tolerance?
a) The risk tolerance factor is more important when an investor has control over the purchase and sale of the investment.
b) The risk tolerance associated with the investment is a non-financial consideration of an investment risk.
c) A 65-year-old retiree will have a higher risk tolerance than a 40-year-old professional.
d) It determines the investor’s degree of tolerance of negative changes in the portfolio.
C
Risk tolerance might be defined as the degree of uncertainty that investors can tolerate with regards to a negative change in the value of their portfolio. An investor’s risk tolerance typically varies according to age, investment experience, income requirements, and financial goals among other factors.
50. 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.
51. 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.
52. Which of the following is true of regional securities exchanges? I. Historically they were localized venues for smaller, regional stocks. II. They provide local trading of OTC securities. III. Several have closed or consolidated with national exchanges. IV. They were negotiated markets.
a) I and III
b) I and IV
c) II and III
d) II and IV
A
Regional exchanges are smaller, local exchanges. Regional exchanges provided an auction market for securities which it listed for trading.
53. Your client wrote 5 XYZ June 60 straddles @ $8.25. What is the potential maximum gain and loss?
a) Maximum gain is $4,125 and maximum loss is $25,875.
b) Maximum gain is $4,125 and maximum loss is $30,000.
c) Maximum gain is $4,125 and maximum loss is unlimited.
d) Maximum gain is unlimited and maximum loss is $4,125.
C
On a short straddle, the maximum gain is the premium received, $8.25 X 100 = $825 X 5 = $4,125, and the maximum loss is unlimited.
54. Which of the following best describes a double-barreled bond?
a) General obligation
b) Contingent liability
c) Moral obligation
d) Section 8-assisted
A
Double-barreled bonds are classified as general obligation debt, because they are backed by a revenue source which may or may not be adequate for debt service payments. The taxing authority of the issuer supplements any shortfall of revenue collections.
56. Which of the following statements regarding registration filing fees is false?
a) Fees may be waived only if there is a current surety bond in effect.
b) They are required with initial and renewal applications.
c) The Administrator may retain a portion of the fee if registration is denied or withdrawn.
d) Unless the fees are submitted, registration will not be granted or renewed.
A
The registration fee is required on all initial and renewal applications, and is not waived if a surety bond is in effect.
59. Ms. Curtis is a teacher in School District #12. The value of her TSA (Tax Sheltered Annuity) is $75,000. The district has contributed $35,000 and Ms. Curtis has contributed $20,000. What is Ms. Curtis’ cost basis?
a) $35,000
b) $20,000
c) $0
d) $75,000
C
Ms. Curtis’ contributions were made pre-tax, as were the employer contributions. Therefore, her cost basis is zero and all withdrawals will be taxed as income.
60. Which of the following are characteristics of BABs? I. They provide tax-free interest. II. They may provide a federal subsidy to the issuer. III. They may provide a tax credit to the investor. IV. They provide tax-free capital gains.
a) I and II
b) II and III
c) II and IV
d) III and IV
B
Interest on BABs is taxable, and capital gains from trading ALL bonds is taxable.
62. What is the time that an investor has actual ownership of the security called?
a) Vesting period
b) Retention period
c) Holding period
d) Ownership period
C
The holding period is the time an investor owns a security, counting from the trade date of purchase to the trade date of sale.
64. The issuer of which of the following uses “notice filing” to inform the state Administrator of a securities offering in the state?
a) Mutual fund shares
b) NASDAQ listed stocks
c) Initial Public Offering of stock
d) Intrastate offering of revenue bonds
A
Mutual funds file notice to sell shares in a state. IPOs must register (typically using registration by coordination); intrastate offerings use registration by qualification; and NASDAQ-listed stocks do not have to file notice or register.
65. Which of the following best fits the definition of an investment adviser?
a) Publisher of reports on securities
b) Bank
c) Broker/dealer whose advice is incidental to their business
d) Lawyer
A
The publisher is the best example of a person that engages in the business of advising on the merits and suitability of a security as a business. Lawyers and broker/dealers whose advice is incidental to their business, and do not receive fees solely for the advice given, are not considered investment advisers.
66. An engineering report would be used for which of the following?
a) Project note
b) General obligation bond
c) Hospital revenue bond
d) School bond
C
An engineering report or feasibility study would only be used in the analysis of a municipal revenue bond issue. School bonds, general obligation bonds, and project notes do not require feasibility studies.
67. A 50-year-old individual needs $20,000 for his child’s education, and wishes to withdraw the necessary funds from his traditional IRA. Which of the following statements is true concerning taxation on the withdrawal?
a) Regular income tax on withdrawals in excess of his basis will apply, but no penalty tax.
b) A 10% penalty tax will be assessed for early distribution.
c) The entire amount will be taxed as ordinary income.
d) The withdrawal will be subject to regular income tax and a 10% penalty tax.
C
Withdrawals from a traditional IRA are subject to regular taxation. In addition, a 10% premature withdrawal penalty is assessed on anyone withdrawing the money under age 59½. However, the penalty will be waived if the distribution is due to the owner’s death or disability, for medical or education expenses and first-time home ownership. The withdrawal is still subject to taxes as ordinary income.
68. Non-issuers engage in
a) Primary transactions.
b) Secondary transactions.
c) Neither primary nor secondary transactions.
d) Both primary and secondary transactions.
B
Non-issuers engage in secondary transactions.
71. If the prime interest rate increases, bond prices will generally
a) Move in parity with the prime rate.
b) Increase.
c) Decrease.
d) Remain the same.
C
Bond prices are inversely proportionate to interest rates; therefore, a rise in the prime rate will generally cause high-grade bond prices to fall.
72. A security will be registered by qualification. What may an agent say to a prospective buyer?
a) The security will be registered in the State.
b) The issue is already selling quickly.
c) Since this is the most stringent registration process, the security is relatively safe.
d) The Administrator has approved the security as soon as the registration is effective.
A
The making of any statement that a security is guaranteed, that it is approved, or that it is a hot sale is a violation of the Act. The only true statement that is not coercive is that the security is being registered.
73. In order of liquidation, which of the following has a residual claim to the assets of the corporation?
a) Common shareholders
b) General creditors
c) Secured bondholders
d) Preferred shareholders
A
Common shareholders are said to have a residual claim to assets. This means that common shareholders are the last to be paid per the order of bankruptcy liquidation. As owners, common shareholders take the most risk and also receive the greatest benefit if the company prospers.
74. All of the following are differences between qualified and nonqualified retirement plans EXCEPT
a) Taxation on accumulation.
b) Taxation of withdrawals.
c) Taxation of contributions.
d) IRS approval requirements.
A
Taxation on accumulation is deferred in both types of plans. The rest of the characteristics differ.
75. Geographical diversification of municipal investments can protect against all of the following EXCEPT
a) Increasing interest rates.
b) Default by one particular issuer.
c) Adverse legislation in one area.
d) Economic decline in one region.
A
Increasing interest rates affect all long-term debt negatively and can’t be diversified away by investing in municipal bond issues in different regions.
77. 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) Transacts business only in nonexempt securities.
b) Gives securities quotations over the phone.
c) Performs the function of accepting customer orders.
d) Transacts business only in exempt securities.
B
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.
78. An investor wishes to invest $50,000 into a diversified portfolio of stocks, bonds, and money market securities. He wants to shift the percentages invested in each category as market conditions change but does not believe he has the time or resources to make the appropriate adjustments. Which of the following mutual funds would best suit his objectives?
a) Target date fund
b) Strategic income fund
c) Asset allocation fund
d) S&P 500 index fund
C
Asset allocation funds hold a diversified portfolio of stocks, bonds and money market securities. The fund managers frequently use computer models to change the make-up of the portfolio in relation to current and projected market conditions.
80. The death benefit payable during the accumulation period of an annuity contract I. Is based on the greater of the gross payments to date or the value of the account at the time of death. II. Is not payable after annuity payments have started. III. Is the annuity feature that guarantees payments for the life of the annuitant. IV. Is available only with fixed annuity contracts.
a) III and IV
b) I and II
c) I and IV
d) II and III
B
The death benefit during the accumulation period protects the beneficiary in case the annuity owner dies before receiving annuity payments. After payments have begun, the annuity option chosen will determine what, if any, payments are made to the beneficiary upon the death of the annuitant.
81. The purpose of a Transfer on Death (T.O.D.) account is to
a) Bypass probate.
b) Avoid beneficiary designations.
c) Avoid estate taxes.
d) Avoid income taxes.
A
The purpose of a T.O.D account is to avoid probate. Upon the death of the account owner the account bypasses probate and passes directly to the account beneficiary.
82. A U.S. government bond quoted at 94.20 - 95.08 has a bid price of
a) $942.00.
b) $946.25.
c) $952.50.
d) $958.00.
B
Bonds are quoted at $1,000 par in 32nds, with each point worth $10. The bid price (the first price listed) is $940 + (20/32 X $10), which converts to $940 + $6.25 for a price of $946.25.
84. When is a policyholder allowed to surrender a variable annuity contract?
a) During the grace period
b) During the annuity period
c) During the accumulation period
d) During either the accumulation or annuity period
C
A variable annuity can only be redeemed (surrendered) during the accumulation period. Once a settlement option is selected and the contract is annuitized (the annuity period), the choice is irrevocable.
86. Which of the following is true regarding trust accounts?
a) The Uniform Prudent Investor Act exempts trustee accounts.
b) Duplicate account information must be filed with the office of supervisory jurisdiction.
c) A system of checks and audits must be in place to protect the trust from fraudulent activities and potential conflicts of interest.
d) The trustee must update Form ADV Part II annually with the administrator.
C
The investment adviser must have a system of checks and audits must be in place to protect the trust from fraudulent activities and potential conflicts of interest.
87. Capital market theory I. Is based on the premise that capital markets are essential to economic growth. II. Blends the Keynesian and supply side economic theories. III. Adds validation to the analysis and selection of securities in a managed investment strategy. IV. Seeks to provide optimum returns as a given risk level.
a) I and III
b) I and IV
c) II and III
d) II and IV
A
Capital market theory sets the stage for investment management and adds validation to the analysis and selection of securities in a managed investment strategy. It is based on the premise that capital markets are essential to economic growth.
89. 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.
90. What is the primary purpose of a 401(k) plan?
a) To distribute life insurance benefits to beneficiaries
b) To accumulate retirement savings
c) To save money for college education
d) To assure that persons over age 70½ are receiving sufficient minimum distributions from qualified plans
B
A 401(k) is a qualified retirement plan that allows employees to take a reduction in their current salaries and earn tax deferred growth on retirement savings.
91. Under the Uniform Securities Act, which of the following are exempt securities? I. Issues of nonprofit or charitable organizations; II. Corporate stocks; III. Bank stocks; IV. Interests in limited partnerships
a) I and II
b) I and III
c) II and IV
d) III and IV
B
The Act defines corporate stocks, interests in limited partnerships, and bank holding company stocks as securities and requires them to be registered. Bank stocks are exempt.
93. If you buy a XYZ July 50 put for 7 and sell a XYZ July 40 put for 1, your position is I. Bullish. II. Bearish. III. Debit. IV. Credit.
a) I and III
b) I and IV
c) II and III
d) II and IV
C
You buy the higher, more valuable strike price of the put spread, so you establish the spread for a debit. A debit put spread is bearish.
94. An issuer sells a security to a financial institution. This is considered
a) An exempt security.
b) A nonexempt transaction.
c) An exempt transaction.
d) A non-issuer transaction.
C
Certain transactions between sophisticated parties that do not involve the public, such as the sale of a security by an issuer to a financial institution, are exempt transactions.
96. 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.
98. Buy 200 shares of XYZ at 35. Sell 2 XYZ June 40 calls for 2. Sell 2 XYZ June 30 puts for 1.50. What is the maximum loss?
a) $6,700
b) $7,000
c) $12,300
d) $13,000
C
The position should be treated as a covered call, long the stock, short the call, and a short put X 200. Long the stock at 35 = -35. Duty to buy on short put = -30 Market = -65. Premium received = +3 1/2 Breakeven is -61.50 X 200 = $12,300 loss
99. A high school student earned $1,200 last year while working at a fast food restaurant. He also earned $600 during the summer as a little league umpire. His trust account earned $800 in interest income. How much can this individual contribute to his IRA account for the year?
a) $600
b) $1,200
c) $1,800
d) $2,600
C
IRA contributions are based on earned income. In this case, the earned income for the year was $1,800, which is this individual’s maximum allowable contribution. The $800 interest income is unearned income, and is not eligible for calculating IRA contribution amounts.
100. A broker/dealer would need to file a Currency Transaction Report for which of the following transactions?
a) Multiple transactions by the same customer: one of $5,000 on one business day, and the other of $5,000 two days later
b) Single transaction involving $3,000 of currency
c) Single transaction involving $11,000 of currency
d) Multiple transactions on the same business day by the same customer: one of $3,000 and the other of $5,000
C
Broker/dealers are required to file the Currency Transaction Report (CTR) for single transactions involving currency that exceed $10,000, or multiple transactions during any one business day that total more than $10,000.
102. An investment adviser representative has done extensive personal research on a pharmaceutical company. He wants to take advantage of what he considers an excellent growth opportunity by purchasing the company’s stock at the current market price; however, he has limited funds to do so. Under what circumstances may the IAR borrow funds from his clients to make the trade?
a) He may borrow the funds from any client that is an affiliate of the Investment Advisor and is willing to make the loan.
b) He may not borrow the funds to execute this transaction under any circumstances as it is a direct violation of the SEC bylaws.
c) If he has a client that has sufficient money market funds who is willing to make a brokerage loan against the account, he may set-up the loan.
d) He may borrow the funds from his pooled funds in his custodial account listed under his name for his clients’ funds.
A
It is inappropriate for an investment adviser or an investment adviser representative to borrow from or loan to clients any form of security or funds unless the client is a broker/dealer, an affiliate of the investment adviser, or a financial institution engaged in the lending business.
104. What should an investor consider before establishing a 529 plan in a neighboring state?
a) Whether or not the child will attend college as the plan cannot be transferred after it is established
b) Tax consequences for establishing the plan while the child is so young
c) The possible tax consequences of investing in an out-of-state plan
d) Which university the child would have to attend based on this particular 529 plan
C
When an investor establishes a 529 plan outside of his or her state, there could be tax consequences that would make the plan less attractive, including the loss of state income tax deductions. 529 plans do not limit a student’s choice of universities. If the child for whom a 529 plan is established decides not to attend college, the beneficiary can be changed to another person in the same family. Tax consequences are of no concern since earnings grow tax-deferred and withdrawals are tax-free when used for qualified education expenses. In fact, establishing a plan when a child is very young allows funds to grow for a longer period of time.
105. The Prime Care Fund is quoted at $25 - $26.70. The prospectus shows that the maximum sales charge for purchases of $25,000 to $49,999 is 4%. Approximately how many shares can a customer buy with $40,000?
a) 1,536
b) 1,438
c) 1,600
d) 1,498
A
To find the answer, first calculate the sales charge. $40,000 at 4% means $1,600 will be used for sales charges, leaving $38,400 left to purchase shares. $38,400 divided by the net asset value (NAV) of $25 will purchase 1,536 shares.
107. The quick ratio is
a) Less accurate than the current ratio because it does not consider the time value of money.
b) An inferior measure because it fails to consider inventory.
c) A more stringent measure than the current ratio.
d) A more lenient measure than the current ratio.
C
The quick ratio is a more stringent measure because it uses only cash equivalents (inventory is deducted) which are divided by current liabilities.
108. A portfolio with an expected compound return of 3.6% can be expected to double in value in how many years?
a) 12
b) 15
c) 20
d) 72
C
An investment at 3.6% doubles in 20 years. The calculation is 72 / 3.6 = 20 years.
111. Which of these issues one type of security only that pays monthly interest?
a) T-Note
b) Fannie Mae
c) Ginnie Mae
d) T-Bond
C
The best answer is the GNMA certificate which pays monthly interest. Fannie Mae also issues stock.
113. You sell short 100 shares of ABC at 25 and buy an ABC June 25 call for 4. You close your position with ABC at 20 and the call premium at $1. What is your gain or loss?
a) No gain/no loss
b) Gain of $200
c) Loss of $300
d) Loss of $100
B
Premium is -4 and market is +25 = +21. Call Premium is +1 and market is -20 = -19 +21 minus 19 = +2 X 100 shares = $200 gain
114. Which of the following does ERISA 404(c) require that plan sponsors provide to participants? I. Annual consultation with an investment adviser regarding asset allocation; II. Statement that the plan is intended to comply with ERISA section 404(c); III. 1-, 5-, and 10-year performance returns for each investment alternative; IV. Description of the risk and return characteristics of each investment alternative.
a) I and IV
b) II and III
c) II and IV
d) I and II
C
ERISA 404(c) also requires explanation of how to give instructions, disclosure of all fees and expenses, and current prospectus for each investment alternative.
115. The administrator may I. Initiate a private investigation. II. May require written statements under oath. III. May impose a jail sentence. IV. May enforce a subpoena.
a) I and II
b) I and IV
c) II and III
d) II and IV
A
The administrator petitions the court system to enforce subpoenas. The administrator refers criminal cases to the court system for prosecution.
116. A registered investment adviser paid a large sum of money to settle a lawsuit. As a result, the firm’s net worth fell to $22,000. The adviser has discretion over customer accounts; however, the client’s funds are held at a large custodian bank. Under these circumstances, what is the adviser required to do?
a) Notify all of the clients that the adviser’s net worth has fallen below $35,000
b) Do nothing
c) File a report with the state administrator by the end of the next business day
d) File a report with the state administrator on the day that the net worth falls below $35,000
B
Because the adviser does not have custody of the client’s assets, the minimum capital requirement is $10,000, and the adviser is not required to do anything.
117. Which of the following is not a priority for a fiduciary managing an account in compliance with the Prudent Man Rule?
a) Speculation
b) Permanence
c) Safety
d) Income
A
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.”
118. ERISA qualified pension plan fund managers’ fiduciary responsibilities regarding plan investments are determined by
a) SEC.
b) “Prudent Man” rules in the state where the fund operates.
c) The Investment Company Act of 1940.
d) FINRA.
B
When investing pension fund money, pension fund managers must follow the Prudent Man rules in the state where they operate.
119. Stanley passes away, leaving most assets to his wife except for his IRA and his Roth IRA, which he leaves to his daughter. Which of the following is true?
a) Stanley’s daughter will pay taxes on the IRA but not the Roth IRA.
b) Stanley’s IRA and Roth IRA will be subject to taxation before his daughter receives them.
c) Stanley’s wife and daughter will each pay taxes on the assets that she receives.
d) All assets are taxed before they are distributed to Stanley’s wife and daughter.
B
All assets not passed on to a spouse are subject to estate taxes. This includes IRAs, annuities, Roth IRAs, and municipal bonds.
120. James, a young successful lawyer, is saving for retirement. Which of the following investments is probably most suitable?
a) Income fund
b) Growth fund
c) Tax-free bond fund
d) Corporate bond fund
B
Since James has a long investment horizon, he can absorb the added risk of stocks, especially growth stocks, which have historically provided higher yields. Bonds would be better suited to an intermediate investment horizon.
121. When must form ADV-E be filed?
a) Within 120 days of the audit
b) Within 30 days of the audit
c) No later than December 31
d) Within 30 days of the day when the IA first takes custody of clients assets
A
Form ADV-E must be filed by the auditor of an IA with custody of clients assets within 120 days of the audit.
123. An agent solicits a trade in a new client’s account. The trade must be broken a week later due to failure to pay. The agent I. Failed to determine the client’s financial condition and capabilities. II. Induced an excessive trade based on the client’s financial resources. III. Created an appropriate trading strategy for his client. IV. Provided all necessary information for the client to make an informed trading decision.
a) I and II
b) I and IV
c) II and III
d) III and IV
A
The agent must make a reasonable inquiry as to the client’s financial condition and resources.
124. Allison primarily invests in popular growing companies in the early phase of their lives. While these companies have promising futures, they haven’t established consistent earnings histories. Allison is what type of investor?
a) Income
b) Contrarian
c) Growth
d) Value
C
Popular companies are typically high priced, and without strong earnings histories they have high P/E and price-to-book ratios. Investing for long term appreciation rather than current income is growth investing.
125. Which of the following is true about a short sale of stock? I. It must be done in a margin account. II. It may be done in a margin account. III. It is bullish. IV. It is bearish.
a) I and III
b) I and IV
c) II and III
d) II and IV
B
Selling short is bearish and must be done in a margin account.
127. All other things being equal, a security issued by which of the following enterprises would probably have the lowest yield?
a) FHLMC
b) GNMA
c) SLMA
d) FNMA
B
Because GNMA is backed by the full faith and credit of the U.S. government, its yield would be lower than the other enterprises, which are not a direct obligation of the U.S. government.
128. What is the most commonly used FRB tool?
a) Fed funds rate
b) FOMC
c) Reserve requirement
d) Discount window
B
The Federal Open Market Committee meets approximately once a month and usually buys or sells treasury securities in the secondary market afterward. Because the reserve requirement is the most powerful FRB tool, it is least often used. FRB member banks borrow at the discount window from the central Federal Reserve Bank in New York. The fed funds interest rate is the rate FRB member banks charge each other for overnight loans.
130. If two securities have a correlation coefficient of 0, the securities prices would
a) Be moving in the same direction.
b) Be moving in opposite directions.
c) Be moving independent from each other.
d) Not be moving at all.
C
If the correlation coefficient is 0, then the two securities would have no correlation to each other as far as their price movement.
