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1. 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.
3. Sam was having difficulty selling his investments due to a lack of demand in the secondary market. What does that say about his investments?
a) Their market value was lower than their book value.
b) They have a high liquidity risk.
c) They may be subject to legislative risk.
d) They were fixed income securities.
B
Liquidity Risk is the risk that an asset may not quickly convert to cash at a fair price. Illiquid investments might not sell quickly or at a fair price due to low trading activity in the secondary market.
4. 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.
7. A registered representative’s client wants to place a trade that the representative believes is unsuitable. The registered representative should do which of the following?
a) Refuse to execute the trade and terminate the relationship with the client
b) Execute the trade and pass the client’s portfolio to another representative
c) Execute the trade and obtain a written statement from the client that this transaction was unsolicited.
d) Refuse to execute the trade because it will not meet the investor’s financial objectives
C
The registered representative should explain to the client that the trade is unsuitable. If the client still wants to enter the order, the registered representative may do so by marking the transaction unsolicited and asking the client to sign a statement saying that the transaction was unsolicited.
8. The dollar is strengthening against the Euro. Which are the probable causes?
a) Increasing imports/decreasing exports
b) Falling interest rates/rising prices
c) Rising interest rates/falling prices
d) Increasing exports/decreasing imports
C
Rising interest rates support a strengthening of the dollar compared to foreign currencies, and cause the prices of bonds and stocks to decline. Import/export levels are a consequence of the relative strength of the two currencies.
10. In a stock trading account, “churning” is defined as effecting transactions solely to generate commissions. A similar practice with regard to mutual funds is known as
a) Switching.
b) Matched Order.
c) Front Running.
d) Wash Trades.
A
Switching refers to the practice of periodically moving a client from one fund family to another for the purpose of generating commissions.
11. Bill is considering a mutual fund with a high portfolio turnover. Bill’s agent tells Bill that he should not expect
a) Greater transaction costs.
b) A higher sales load.
c) A higher expense ratio.
d) A higher capital gains distributions.
B
The sales load assessed by the fund is unrelated to portfolio turnover. The other three alternatives are symptoms of a fund with a high portfolio turnover.
12. The state administrator has the ability to cancel the registration of an individual who I. Has been found mentally incompetent by the courts. II. Has violated the USA. III. Cannot be located within a reasonable time and effort. IV. Has violated a fiduciary responsibility to one or more clients within the state.
a) I and II
b) I and III
c) II and III
d) III and IV
B
The state administrator has the ability to cancel an individual registration within the state if the individual has been found mentally incapacitated or cannot be located within a reasonable time period. It is important to remember that the administrator is not required to have a hearing in order to cancel registration under these circumstances.
13. The difference between CPI and noncore CPI is that
a) Noncore excludes food, clothing and fuel.
b) CPI excludes food and fuel.
c) Noncore CPI excludes food and fuel.
d) CPI excludes food, clothing and fuel
B
Core CPI excludes the cost of food and fuel and is the most closely followed.
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. Employer contributions made to a qualified plan
a) Are taxable as salary.
b) Are subject to vesting requirements.
c) Are taxable for employees above certain income levels.
d) Have no vesting requirement.
B
Qualified plans must have a vesting requirement. Vesting is when the employee actually has ownership interest in the plan.
16. 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.
17. 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.
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. Employer contributions made to a qualified plan
a) Are taxable as salary.
b) Are subject to vesting requirements.
c) Are taxable for employees above certain income levels.
d) Have no vesting requirement.
B
Qualified plans must have a vesting requirement. Vesting is when the employee actually has ownership interest in the plan.
16. 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.
17. 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.
18. A floor broker on the NYSE trading floor must work with whom in order to trade in a given security?
a) Specialist
b) Market maker
c) Registered secondary trader
d) Another floor broker
A
To execute a trade in given security, the floor broker must approach the specialist in that security, who will facilitate the trade.
19. An agent living in Iowa solicits a customer living in Minnesota about a security. The customer finally decides to purchase the security while on vacation in Florida. Which Administrator(s) has(have) authority over the transaction?
a) Iowa, Minnesota and Florida
b) Minnesota only
c) Minnesota and Florida only
d) Iowa and Florida only
A
The scope of authority is very broad for administrative jurisdiction. All three state Administrators have jurisdiction because some form of the transaction happened within their boundaries.
20. Publications reporting total return data for an investment should use the recommended reporting period of
a) 3 years and 5 years.
b) 5 years and 10 years.
c) 1 year, 5 years and the lesser of 10 years or life of the investment.
d) 1 year, 5 years and life of the investment.
C
FINRA guidelines recommend that total return illustrations be provided for a minimum of 10 years or the lifetime of the investment, but also include the 1- and 5-year intervals for the sake of full disclosure.
21. Which of the following would be considered a broker/dealer in the state of Maine?
a) An issuer whose corporate headquarters is located in Maine
b) A brokerage firm located in New Hampshire doing business in Maine with residents of Maine
c) An agent working at a discount brokerage firm located in Maine
d) A brokerage firm with no office in Maine, selling municipal bonds to a bank located in Maine
B
A broker/dealer must register under the Uniform Securities Act (USA) in any state in which it transacts business unless an exemption is available.
22. An investment adviser is prohibited from doing all of the following EXCEPT
a) Sharing proportionately in the gains and losses in a customer account.
b) Charging a retainer fee.
c) Charging commissions on effected trades for the customer.
d) Transferring an advisory contract without the customer’s permission.
B
There are no restrictions on an investment adviser charging a retainer fee. Advisers cannot share in the gains and losses in an account or charge a commission on the trades since they are compensated on the total assets under management.
24. Which of the following is true regarding a portfolio manager’s style?
a) Within an allocation model, style is always the same.
b) Management style has little effect if asset allocation is chosen carefully.
c) The style a manager applies to the allocation model will create wide variances in performance.
d) Style is the more important than asset allocation.
C
The portfolio manager’s style will greatly affect his or her ability to achieve optimal results within a given allocation.
25. All of the statements below are true of hedge funds EXCEPT
a) They are mutual funds.
b) They use aggressive strategies to generate income and minimize losses in a down market.
c) Short selling and buying on margin are hedge fund strategies.
d) They are appropriate only for the experienced investor.
A
As defined by the Act of 1940, hedge funds are limited partnerships and not mutual funds.
26. 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.
27. In early October, a customer buys 100 shares of XYZ stock at $50 per share and, at the same time, writes an XYZ April 50 call option for a premium of $8 per share. Excluding commissions and dividends, what is the market price per share of XYZ stock at which the customer breaks even?
a) $42
b) $45
c) $50
d) $58
A
Breakeven is the price paid for the stock less the premium received. $50- $8 = $42.
28. What qualifies an individual to contribute to an IRA?
a) Earned income
b) Any income
c) Investment income
d) Retirement income
A
Anyone with earned income can have an IRA. An individual can contribute 100% of earned income up to a specified amount (currently $6,000). A married couple could contribute up to a specified amount ($12,000), even if only one had earned income, but each must have an account.
29. When an investment advisory contract has provisions that allow for early termination, contract assignment, or discretionary trading authority, such provisions must be
a) Endorsed by the client and the adviser and filed with the State Administrator.
b) Endorsed in a separate document and attached to the original contract.
c) Stated in clear terms that the client can understand.
d) Individually approved by the State Administrator prior to going into effect.
C
If an advisory contract has a provision for early termination, contract assignment, or discretionary trading authority, such provisions must be stated in clear terms that the client can understand.
30. Which one of the following statements regarding Coverdell Education Savings Accounts is correct?
a) Contributions are made with after-tax dollars and grow tax-deferred.
b) Contributions must cease when the beneficiary turns 30.
c) Funds not used for education may be rolled over into an IRA for the beneficiary.
d) All distributions are taxable to the beneficiary.
A
Contributions to a Coverdell are made with after-tax dollars and grow tax-deferred. Withdrawals are tax-free when used for qualified education expenses. Contributions are not permitted once the beneficiary turns 18 and the money must be used by age 30 or rolled over to a Coverdell for another qualified family member. Unused funds cannot be rolled into an IRA.
31. 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.
32. All the following are advantages of owning mutual fund shares EXCEPT
a) Tax-free capital gain distributions.
b) The reinvestment of dividends and capital gains at NAV.
c) Simplification of tax filing.
d) Easily accessible information about the fund.
A
The investor may reinvest capital gains with no additional sales charge; however, the investor would still be required to pay taxes on the capital gain distribution whether they receive the money or reinvest it. All the other statements are benefits of mutual fund ownership.
33. 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.
34. Which of the following is a key feature of the buy and hold strategy?
a) Lower portfolio turnover rate
b) Low potential for loss
c) Higher research and trading expenses
d) A more active approach to investing
A
The buy and hold strategy takes advantage of lower trading activity, employing a passive management style. Once purchased, investments are held with the objective of producing favorable results over time. Research and turnover are minimized, but investments are similar to those that active portfolios might contain.
35. An investor purchases 10 bonds with a coupon rate of 6 percent. How much will the investor receive at maturity?
a) $1,030
b) $1,060
c) $10,300
d) $10,600
A 6 percent bond pays annual interest of $60 (1000 x 6 percent). This $60 annual interest is divided into semiannual payments of $30. At maturity, the investor receives the last semiannual interest payment of $30 and also receives the principal, or par of $1,000, for a total of $1,030 per bond. Since this investor owns 10 bonds, the investor receives a total of $10,300 ($1,030 x 10.)
36. Which of the following is not a responsibility of the specialist?
a) Executing limit orders on behalf of other members for a portion of the floor broker’s commission
b) Dealing in over-the-counter securities with market makers on a fee basis
c) Maintaining the published quote and a fair and orderly market in one or more securities
d) Buying and selling for his own account to counteract temporary imbalances in supply and demand
B
Unlike the auction market in securities listed on an exchange such as the NYSE, an over-the-counter security may be bought and sold on a negotiated price basis from any number of market makers.
37. A customer shorts 1 XYZ October 50 put for 2 and buys 1 XYZ October 60 put for 7. He will experience a profit from this position if: I. Both puts are exercised; II. The premium difference narrows to less than $5 per share; III. The premium difference widens to more than $5 per share.
a) I and II
b) I and III
c) II and III
d) II and IV
B
The position is a debit put spread. Debit profits from exercise and premiums widening.
38. The Administrator has the right to request examination of all broker/dealer records for the previous
a) 3-year period.
b) 5-year period.
c) 7-year period.
d) 10-year period.
Broker/dealers are required to maintain all customer files for 3 years, and the Administrator may examine all broker/dealer files.
39. Lump-sum distributions without penalty from qualified retirement plans may NOT be made to an individual for
a) Permanent disability.
b) 30 years of service with the company.
c) Person reaches age 59½.
d) Permanent retirement.
Lump-sum distributions cannot be made to a person for continuous service with a company, unless the person is also 59½ or older. Separation of service, death, retirement, disability, and attainment of age 59½ are the qualifying events eligible for lump sum distributions.
40. A 53-year-old individual who was laid off from his former company withdrew money from his traditional IRA despite immediately getting a new job with an increased salary. Which of the following is true?
a) The withdrawals will be taxed as ordinary income and subject to a 10% early withdrawal penalty.
b) All of the money he takes from his IRA will be tax-free because he was between jobs.
c) The withdrawals will be considered ordinary income and subject to a 15% penalty.
d) The IRS will not tax him on the withdrawals because his employer terminated him from his job prior to age 59½.
A
If withdrawals from an IRA are made prior to age 59½, the IRS will assess a 10% early withdrawal penalty, unless the withdrawals meet certain qualifications. The amount of the premature withdrawal from a traditional IRA is also taxed as ordinary income to the recipient when received.
41. An investment adviser’s compensation may come from
a) A percentage of capital gains in an account.
b) A percentage of all assets under management.
c) Commissions from trades effected for the customer.
d) All of the above
B
An investment adviser may only receive compensation from the total assets under management. He may not share in the gains and losses or receive a commission on transactions in the account.
42. An IA purchases stock for its own account from one of its institutional clients. This transaction is called a/an
a) Principal transaction.
b) Agency cross trade.
c) Institutional cross trade.
d) ECN trade.
A
In a principal transaction an IA buys a security from a client or sells a security from its own inventory to a client (whether an institution or a retail client). Principal transactions require written disclosure to the client and consent before the transaction is completed.
43. With regard to mutual funds, switching occurs when
a) The fund’s adviser “churns” the fund portfolio without discretionary authority.
b) The registered representative recommends moving assets from one fund family to another to generate commissions.
c) An investor frequently moves assets from one fund to another within a family of funds.
d) The rep recommends moving assets in or out of money market accounts based on market conditions.
Moving of fund assets between families of funds generates additional sales commissions that represent a cost to the customer. Such a recommendation is rarely appropriate and to do so for the purpose of generating commissions is a violation known as “switching.”
44. If the market price of the underlying securities remains the same, which two of the following investors would realize a loss? I. Buyer of an at-the-money put; II. Seller of an at-the-money put; III. Buyer of a straddle; IV. Seller of a straddle
a) II and IV
b) I and III
c) I and IV
d) II and III
For buyers of options, low volatility and the passing of time erode option premiums. An at-the-money put has no intrinsic value, so if the stock remains at or near the strike price, the premium will erode. At expiration, if it is at the money, it will expire worthless. Straddle holders need large moves in the underlying stock to make a profit, because they paid two premiums for the straddle.
46. 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.
47. 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.
