GET SOME TRES

Question 1

3. 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.

Answer 1

B

Tax liabilities belong to the minor in a custodian account.

Question 2

4. Which of the following is true regarding a 457 plan?

a) Growth is taxed each year.
b) Any funds are received tax free by employees.
c) It is for employees of governmental units and nonprofits
d) Contributions are not tax deductible.

Answer 2

C

Contributions are tax deductible; funds in the plan grow tax deferred. Funds are taxed as income when withdrawn.

Question 3

8. 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

Answer 3

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.

Question 4

9. What should an investor consider before establishing a 529 plan in a neighboring state?

a) Tax consequences for establishing the plan while the child is so young
b) The possible tax consequences of investing in an out-of-state plan
c) Which university the child would have to attend based on this particular 529 plan
d) Whether or not the child will attend college as the plan cannot be transferred after it is established

Answer 4

B

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.

Question 5

10. A firm is acting in the capacity of a broker and receiving a commission. The firm is performing as

a) An agent.
b) An investment adviser.
c) A dealer.
d) A principal.

Answer 5

A

A firm that brokers and charges a commission is acting as an agent.

Question 6

11. The Uniform Prudent Investor Act

a) Outlines permissible broker/dealer and investment adviser activity in UGMA/UTMA accounts.
b) Supersedes the Investment Advisers Act of 1940.
c) Sets standards by which investment advisers should manage discretionary accounts.
d) Sets broker/dealer conduct standards regarding handling of cash, margin and option accounts.

Answer 6

C

The Uniform Prudent Investor Act sets standards by which investment advisers should manage funds over which they exercise discretionary control

Question 7

14. 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

Answer 7

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.”

Question 8

15. All of the following sources of income may be used to contribute to an IRA EXCEPT

a) Spouse’s salary.
b) Alimony.
c) Gifts.
d) Wages.

Answer 8

C

Individuals with earned income may fund an IRA. Wages and salary are earned income and a spouse’s salary may be used to fund a spousal IRA. Gifts are not earned income.

Question 9

16. Which of the following is NOT exempt from state registration as a broker/dealer?

a) Banks, savings & loans, agents and issuers
b) A broker/dealer with no office in the state and whose only customers are institutional investors
c) A broker/dealer located within the state but whose only customers are institutional investors
d) All of the above are exempt.

Answer 9

C

A broker/dealer with an office in the state must be registered in that state.

Question 10

17. A corporation has issued 10 million shares of common stock that are currently trading for $5 per share. There are 2 million shares of treasury stock. What is the total value of outstanding common stock shares?

a) $8 million
b) $10 million
c) $40 million
d) $60 million

Answer 10

C

Ten million issued shares minus 2 million treasury shares equals 8 million shares outstanding. Eight million outstanding shares x $5 / share = $40 million. Remember: Outstanding Stock = Issued Shares - Treasury Stock

Question 11

18. If interest rates are falling, which statement is TRUE?

a) There is no relationship exists between appreciation rates of discount and premium bonds.
b) Discount bonds will appreciate faster than premium bonds.
c) Premium bonds will appreciate faster than discount bonds.
d) Both bonds will appreciate equally.

Answer 11

C

Premium bonds appreciate faster if rates are falling. High coupon bonds appreciate the most as new rates and existing yields fall. Low coupons depreciate the most if new rates and existing yields rise.

Question 12

19. 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

Answer 12

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.

Question 13

20. 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.

Answer 13

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.

Question 14

22. Which of the following securities acts governs the variable annuity separate account?

a) Dodd Frank
b) The Investment Company Act of 1940
c) The Trust Indenture Act of 1939
d) The Securities Exchange Act of 1934

Answer 14

B

The variable annuity separate account is considered an investment company under the Investment Company Act of 1940. The Trust Indenture Act of 1939 governs corporate bonds. The Securities Exchange Act of 1934 governs the people involved in the broker/dealer registered routes as well as the exchanges and the secondary markets. Dodd Frank is a recent act dealing with financial reform and does not address the variable annuities separate account.

Question 15

23. Which of the following are two key elements of effective diversification?

a) Diversification of both aggressive equities and conservative equities
b) Diversification among asset categories and within asset categories
c) Diversification in indexed and non-indexed funds
d) Diversification among fundamental and speculative investments

Answer 15

B

To be properly diversified, a portfolio should be diversified on two levels: among asset categories and within asset categories. The goal is to not only cover the spectrum of investment, thereby lowering overall market risk, but also to diversify sector risk by owning multiple investments with each sector. For example, the energy sector could be further diversified by energy storage, energy transportation and energy manufacturing.

Question 16

24. 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

Answer 16

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.”

Question 17

25. An investor likes the safety of a government bond fund, but will forfeit a portion of this safety for a slightly higher return. She would most likely choose which of the following?

a) Mortgage-backed security fund
b) High yield bond fund
c) Corporate bond fund
d) Growth and income fund

Answer 17

A

The MBS fund has less credit risk than a corporate bond fund because it generally invests in mortgage-backed securities, issued by a government agency. The other three funds have significantly more risk than the MBS fund.

Question 18

26. Your client is bearish on ABC stock. Which of the following option spreads might you recommend? I. Buy 1 ABC July 50 call, sell 1 ABC July 55 call. II. Buy 1 ABC July 55 call, sell 1 ABC July 50 call. III. Buy 1 ABC July 55 put, sell 1 ABC July 50 put. IV. Buy 1 ABC July 50 put, sell 1 ABC July 55 put.

a) I and IV
b) II and III
c) II and IV
d) III and IV

Answer 18

B

II and III are both bearish. II is a credit call and III a debit put spread.

Question 19

28. A broker/dealer that has no office in a state is not required to register to conduct business with which of the following?

a) Banks
b) Wealthy individuals
c) Corporations
d) Prospective clients who are nonresidents of the state

Answer 19

A

Broker/dealers with no office in a state may do business with institutional investors such as banks, other broker/dealers and insurance companies, and existing clients who are nonresidents of the state. They cannot do business with prospective clients even if the prospects are not residents of the state.

Question 20

29. All of the following are agency issues backed by government-guaranteed or insured mortgages, EXCEPT

a) Federal Home Loan.
b) SLMA.
c) FNMA.
d) GNMA.

Answer 20

B

Sallie Mae is Student Loan Marketing Association (SLMA) and does not deal in mortgages. The rest do.

Question 21

30. 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

Answer 21

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.

Question 22

31. The best definition of an annuity unit is

a) An assumption of a reasonable rate of return on the investments in the separate account.
b) A unit used to express the value of fixed annuities only.
c) An accounting measure that is created at the beginning of the annuity period and is used to determine the amount of future annuity payments.
d) A unit of ownership in the separate account that, when multiplied by the value of a unit, describes the account holders value during the accumulation phase.

Answer 22

B

During the annuity period, the current value of a fixed number of annuity units will determine the amount of each payment. The number of units is fixed at the time of annuitization.

Question 23

32. Railroad and common carrier issues regulated by the Interstate Commerce Commission are considered what type of securities?

a) Federal covered
b) Intrastate
c) Exempt
d) Nonexempt

Answer 23

C

Issues of railroads and common carriers regulated by the Interstate Commerce Commission are defined in the Act as exempt securities.

Question 24

33. 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

Answer 24

A

The agent must make a reasonable inquiry as to the client’s financial condition and resources.

Question 25

35. Sally’s portfolio is automatically set to rebalance each calendar quarter. She meets with her agent annually to reconsider the percentages of her portfolio which are devoted to various categories. Sally is practicing

a) Index investing.
b) Passive investing.
c) Strategic asset allocation.
d) Tactical asset management.

Answer 25

C

Strategic asset allocation is devoting various portions of a portfolio to the different asset classes and periodically rebalancing. Rebalancing involves adjusting the portfolio to return it to the original allocation percentages when it has gradually shifted due to uneven asset class performance.

Question 26

37. Which of the following is true of the organizational structure of a balance sheet? I. It is arranged from current items at the top to long term items at the bottom. II. Liquid items appear on the left and illiquid and fixed items appear on the right. III. It follows an equation. IV. Leverage items follow equity items.

a) I and II
b) I and III
c) II and III
d) II and IV

Answer 26

B

The balance sheet follows the balance sheet equation, and it starts with current items at the top and flows to long term items below. Leverage (bonds) comes before equity (stock.)

Question 27

38. Which of the following are considered market manipulation? I. Matched orders; II. Wash trades; III. Stopping stock; IV. Wash sales

a) III and IV
b) I, II, III and IV
c) I and II
d) II and III

Answer 27

C

Matched orders and wash trades are market manipulation. Wash sales are trades in which tax losses are disallowed by the IRS. Stopping stock is when a DMM (specialist) guarantees the execution price for a customer order.

Question 28

39. An investor opens a mutual fund account with $3,000. After 45 days, she signs a letter of intent for a $10,000 breakpoint. Nine months later, she deposits $12,000 into the fund. Which of the following statements is true?

a) She will receive reduced sales charges on $10,000 worth of shares.
b) She will not receive any reduced sales charges.
c) She will receive reduced sales charges on $15,000 worth of shares.
d) She will receive reduced sales charges on $12,000 worth of shares.

Answer 28

C

Letters of intent are valid for 13 months and can be backdated up to 90 days prior to their signing. She will receive the reduced sales charges on the entire $15,000 worth of shares.

Question 29

40. Which efficient market hypothesis rejects both technical and fundamental analysis?

a) Strong hypothesis
b) Acid test hypothesis
c) Bilateral hypothesis
d) Semi-strong hypothesis

Answer 29

A

The strong hypothesis disregards all information (known and unknown) about a security. It rejects both technical and fundamental analysis.

Question 30

41. Which of the following will best describe the major difference between a defined benefit and a defined contribution plan?

a) Person making contributions
b) Amount of contributions made to the plan
c) Defined benefit plan is qualified
d) Person receiving benefits

Answer 30

A

In a define benefit plan (pension) the employer is making contributions to the plan for the “benefit” of the employee while the defined contribution plan allows both the employer and the employee to contribute to a plan for the employee.

Question 31

42. Pursuant to the Uniform Securities Act, a holding company stock is considered a(n)

a) Nonexempt security.
b) Federal covered security.
c) Unregistered security.
d) Exempt security.

Answer 31

A

A holding company is an entity formed to own and manage other companies and is nonexempt.

Question 32

43. Due to drought conditions, an experienced high net worth investor believes that the prices of a broad range of agricultural commodities will increase. Which of the following might be an appropriate investment for this investor?

a) Inverse agricultural sector total return ETN
b) Soybean futures
c) Agricultural sector total return ETN
d) Farm equipment limited partnership

Answer 32

C

An agricultural sector total return ETN would provide exposure to price increases in a range of agricultural products.

Question 33

44. Sarah has been an investor for the past 10 years, but has only made investments in government bonds and treasury bills and notes. She is now considering investments that are more risky but have a higher potential for a greater return. Which of the following indicators would give Sarah a way to compare her current investment and the investment she is considering for risk to return?

a) Risk-adjusted return
b) Net present value
c) Total return
d) Yield to maturity

Answer 33

A

The risk-adjusted return allows investors to compare investments that have different levels of risk for the equivalent ratio of return.

Question 34

45. 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

Answer 34

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.

Question 35

47. ERISA qualified pension plan fund managers’ fiduciary responsibilities regarding plan investments are determined by

a) “Prudent Man” rules in the state where the fund operates.
b) The Investment Company Act of 1940.
c) FINRA.
d) SEC.

Answer 35

A

When investing pension fund money, pension fund managers must follow the Prudent Man rules in the state where they operate.

Question 36

48. If an agent commits a violation of the Act, civil liabilities may be applied to the broker/dealer under what conditions?

a) If the broker/dealer, in the exercise of reasonable care, should have been aware of the action.
b) Never. The broker/dealer may only be held liable in cases of criminal liability.
c) Civil liabilities may not be applied to violations of the Uniform Securities Act.
d) Only if the agent’s manager knew of the action and did not act to prevent it.

Answer 36

A

For violations of the act without willful intent, civil liabilities may apply to the person committing the violation as well as to “controlling persons” if, in the exercise of reasonable care, the controlling person should have been aware of the action.

Question 37

49. 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) II and III
b) II and IV
c) I and II
d) I and IV

Answer 37

B

ERISA 404(c) also requires explanation of how to give instructions, disclosure of all fees and expenses, and current prospectus for each investment alternative.

Question 38

51. When must form ADV-E be filed?

a) No later than December 31
b) Within 30 days of the day when the IA first takes custody of clients assets
c) Within 120 days of the audit
d) Within 30 days of the audit

Answer 38

C

Form ADV-E must be filed by the auditor of an IA with custody of clients assets within 120 days of the audit.

Question 39

52. Which of the following measures a corporation’s solvency?

a) Cash flow
b) Debt/equity ratio
c) Working capital
d) Profit margin

Answer 39

C

Working capital = current assets – current liabilities. It measures a corporation’s ability to meet current debt obligations.

Question 40

53. 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

Answer 40

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.

Question 41

54. An engineering report would be used for which of the following?

a) Hospital revenue bond
b) School bond
c) Project note
d) General obligation bond

Answer 41

A

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.

Question 42

55. 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.

Answer 42

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.

Question 43

56. A self-employed attorney has earned an income of $100,000 a year and her husband earns $30,000 a year as her accountant. How much can she contribute to a spousal option IRA?

a) $4,500
b) $6,000
c) $10,000
d) $11,000

Answer 43

B

They may each contribute $6,000.

Question 44

57. What is the primary purpose of a 401(k) plan?

a) To assure that persons over age 70½ are receiving sufficient minimum distributions from qualified plans
b) To distribute life insurance benefits to beneficiaries
c) To accumulate retirement savings
d) To save money for college education

Answer 44

C

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.

Question 45

58. 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.

Answer 45

B

All assets not passed on to a spouse are subject to estate taxes. This includes IRAs, annuities, Roth IRAs, and municipal bonds.

Question 46

60. Annualized return may be overstated or understated if

a) The risk-free rate of return is inaccurate.
b) NPV is understated.
c) The period that is measured contains seasonal extremes.
d) The assumed hurdle rate is overstated.

Answer 46

C

Since annualized return converts a brief period into an annualized return, that brief period must be representative of the entire year’s performance.

Question 47

61. Which of the following is true regarding an insurance company’s general account?

a) Though it is invested primarily in equities, by law it may not deal in options or margin trading.
b) It is conservatively invested because it holds assets associated with guaranteed insurance products.
c) It holds assets invested in products that require insurance and securities licensing of representatives that sell them.
d) Because it is conservatively invested, all investment risk is assumed by the investor.

Answer 47

B

Because the general account is invested to guarantee products such as whole life policies and fixed annuities, it is typically invested conservatively in long-term debt. A securities license is not required to sell guaranteed products.

Question 48

62. An investor bought 100 shares of XYZ stock at $55 in January of 20XX. Today, with the stock trading at $75, the investor donated it to a charitable institution. What are the tax consequences of this gift?

a) A $7,500 deduction is allowed.
b) The investor must pay a gift tax.
c) No deduction is allowed.
d) A $5,500 deduction is allowed.

Answer 48

A

The value of a charitable gift that is deductible by the donor is the appreciated value of the securities.

Question 49

63. An investor buys one DEF May 60 call for a premium of 6 and sells one DEF May 70 call for a premium of 3. Using this strategy, what would be the investor’s maximum gain?

a) $300
b) $600
c) $700
d) $1,000

Answer 49

C

Premium = -3 Market = -60 (call = right to buy) + 70 (call = duty to sell) = +10 minus 3 = 7 X 100 = $700 gain.

Question 50

64. If representatives of a federal covered adviser terminate their employment, who is required to inform the state administrator?

a) The federal covered adviser
b) The adviser representatives
c) Neither the adviser nor the representatives because the representatives are employed by a federal covered adviser
d) Both the adviser and the representatives

Answer 50

B

Because the adviser is federal covered, the adviser has no obligation to inform the state administrator. The representatives, however, are required to inform the administrator.

Question 51

66. A customer wants to give her daughter all of the shares in her growth mutual fund. Since the initial purchase of the shares, the value of the shares has increased steadily over the life of the investment. When the shares are gifted, the daughter’s cost basis will be

a) The initial NAV price Rhonda paid for the shares originally.
b) The NAV of the shares on the day they are “gifted” to her.
c) The same cost basis that Rhonda had for the shares.
d) The difference between the initial purchase price for the shares and the current NAV of the shares.

Answer 51

C

When a security is received as a gift, the cost basis depends on the relationship of the market value of the securities to the donor’s cost basis. If the market value is higher than the donor’s basis, the recipient’s cost basis is equal to the donor’s. If the market value is lower than the donor’s cost basis, the recipient’s basis is equal to the market value of the securities at the time of the gift.

Question 52

67. Which of the following is NOT a concern when executing a 1035 exchange?

a) Capital gains tax
b) Possible sales charges
c) Possible surrender charges
d) New surrender period

Answer 52

A

A 1035 exchange allows the policy holder to defer recognition and tax of any capital gain on the original product, so taxes are not a concern.

Question 53

68. Stimulating the economy through spending policies is known as

a) Open market.
b) Monetarism.
c) Keynesianism.
d) Supply side.

Answer 53

C

Both taxes and spending are Keynesianism, embracing the idea that the government should actively intervene in the economy to produce desired outcomes.

Question 54

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.

Answer 54

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.

Question 55

70. 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

Answer 55

B

The Federal Funds Rate is overnight (daily) borrowings by Fed reserve member banks.

Question 56

71. A school teacher is retiring after 20 years of service. During the past 10 years, she invested $10,000 in a 403(b) through a payroll deduction offered by the school. Her account is now worth $16,000. What is her cost basis?

a) $0
b) $6,000
c) $10,000
d) $16,000

Answer 56

A

The teacher has contributed to a qualified retirement plan; therefore, all the money she has invested is pre-tax. She has not paid taxes on any of the money yet, so her cost basis is $0, and she will be required to pay ordinary income taxes on the entire amount she withdraws.

Question 57

72. Which of the following annuity contract holders will incur a 10% penalty for an early lump-sum withdrawal from an IRA?

a) A contract holder who requires the funds for catastrophic medical expenses
b) A contract holder who is 55½ and has no hardship
c) A contract holder who is 45 years old and needs the money for a $5,000 down payment on a first home
d) A contract holder who is 50 years old and is totally disabled

Answer 57

B

Any nonqualified withdrawal made before the annuitant reaches age 59½ is termed a premature distribution and subject to a 10% penalty tax. The withdrawal amount is added to the individual’s ordinary income for that taxable year.

Question 58

74. 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.

Answer 58

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 %.

Question 59

77. The following are prohibited practices under the Uniform Securities Act (USA) EXCEPT

a) Commingling customer funds with agent funds.
b) Soliciting excessive trading to increase commissions.
c) Failing to disclose all known facts in a transaction.
d) Effecting private securities transactions for customers.

Answer 59

C

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.

Question 60

78. 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

Answer 60

B

Selling short is bearish and must be done in a margin account.

Question 61

79. On which of the following forms would a publicly held corporation file details concerning a 10% change in ownership with the SEC?

a) 8K
b) 8Q
c) 10K
d) 10Q

Answer 61

A

Annual information is filed on the 10K, quarterly information is filed on the 10Q, and details concerning significant changes are filed on the 8K.

Question 62

80. Which of the following is required in order for a plan to be “qualified”?

a) The plan must be formally written and communicated to the employees.
b) The plan must not be permanent.
c) The plan must be for the exclusive benefit of the employer.
d) The plan’s contribution formula is allowed to discriminate in favor of officers of the company.

Answer 62

A

The plan must be for the exclusive benefit of the employees and their beneficiaries, formally written and communicated to the employees, and the plan’s benefit or contribution formula cannot discriminate in favor of the so-called “prohibited group”: officers, stockholders, or highly paid employees. Participation in a plan may not be geared exclusively to the prohibited group. The plan must be permanent.

Question 63

81. Which of the following are specifically excluded from the definition of a security? I. Fixed annuities; II. Commodities futures contracts; III. Multilevel distributorships; IV. Commodity Options contracts

a) I and II
b) I and III
c) II and III
d) II and IV

Answer 63

A

Fixed contracts and futures are not securities.

Question 64

82. A customer buys one ABC Mar 110 put at 8 and sells one ABC Mar 100 put at 1. Which two of the following describe the spread? I. Credit; II. Debit; III. Bearish; IV. Bullish

a) I and II
b) I and IV
c) II and III
d) II and IV

Answer 64

C

Long at the higher strike price indicates debit put spread, which is bearish.

Question 65

83. Incentive stock options differ from employee stock options in that I. Only employees are eligible to participate in incentive stock options. II. Incentive stock options are tax-qualified. III. Incentive options are written only on preferred stock. IV. Employee stock options require shareholder approval.

a) I and II
b) I and III
c) II and III
d) II and IV

Answer 65

A

Because incentive stock options are tax-qualified, the plan must be approved by company shareholders 1 year prior to the plan taking effect. Both plans deal with the employer’s common stock.

Question 66

84. You have been watching 2 OTC stocks for a period of time and have noted that the spreads between the bid and ask prices are quite different. What could you likely assume from this finding?

a) No conclusion should be drawn from this finding.
b) The stock with the more narrow spread is more active.
c) The stock with the wider spread is more active.
d) The stock with the more narrow spread will be a better long-term performer.

Answer 66

B

Generally, the more actively traded stock will have a narrower spread between the bid and ask price.

Question 67

85. Which of the following is true regarding estate taxes?

a) The estate tax applies to the sum of all assets excluding real estate and royalties.
b) Taxes are paid by the recipients.
c) Estates above a specified limit are taxed.
d) Assets are taxed, even if passed to a spouse.

Answer 67

C

Only estates above a specified limit (currently $5 million) are taxed.

Question 68

87. 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

Answer 68

A

To execute a trade in given security, the floor broker must approach the specialist in that security, who will facilitate the trade.

Question 69

88. 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

Answer 69

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.

Question 70

89. In accordance with the Uniform Gifts to Minors Act, a donor may

a) Give an unlimited amount of cash.
b) Include the value of collectibles in the account.
c) Only revoke gifts of cash.
d) Give cash gifts up to $15,000 annually.

Answer 70

A

There are no restrictions on the amount of cash that may be given to a minor under the Act; however, gift taxes may apply. All gifts are irrevocable.

Question 71

91. 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

Answer 71

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.

Question 72

92. Which of the following is FALSE regarding a client’s risk tolerance?

a) The risk tolerance associated with the investment is a non-financial consideration of an investment risk.
b) A 65-year-old retiree will have a higher risk tolerance than a 40-year-old professional.
c) It determines the investor’s degree of tolerance of negative changes in the portfolio.
d) The risk tolerance factor is more important when an investor has control over the purchase and sale of the investment.

Answer 72

B

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.

Question 73

93. Which of the following is true regarding audits and inspections of records of registered broker/dealers and investment advisers?

a) Investment advisers cannot be charged for an audit.
b) Reviews can be coordinated with representatives of the SEC and FINRA to avoid duplication of examinations.
c) The SEC, FINRA and administrators from other states must all inspect the records at the same time.
d) Audits may only be conducted with a written notice to the broker/dealer or investment adviser.

Answer 73

B

Audits and reviews can be conducted without prior notice, and the administrators may assess a reasonable charge for an audit or inspection. Reviews can be coordinated with representatives of the SEC, FINRA, or administrators from other states to avoid duplication of examinations.

Question 74

94. Publications reporting total return data for an investment should use the recommended reporting period of

a) 1 year, 5 years and the lesser of 10 years or life of the investment.
b) 1 year, 5 years and life of the investment.
c) 3 years and 5 years.
d) 5 years and 10 years.

Answer 74

A

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.

Question 75

98. A publically traded limited partnership is called

a) None of the above.
b) TLP traded limited partnership.
c) MLP or master limited partnership.
d) ETP electronically traded partnership.

Answer 75

C

Master Limited Partnerships are the publically traded version of a limited partnership.

Question 76

99. Short 200 shares of ABC at 56. Which would lower or offset your market risk? I. Buy ABC July 55 put; II. Sell ABC July 55 put; III. Buy ABC July 55 call; IV. Sell ABC July 55 call

a) I and III
b) I and IV
c) II and III
d) II and IV

Answer 76

C

For short stock, selling puts provides a partial hedge (and income) and buying calls is a hedge.

Question 77

100. All of the following are classified as an offer to sell a security EXCEPT

a) The gift of an assessable security.
b) A bonus security given as incentive to purchase another security.
c) The distribution of a stock dividend to owners of the security.
d) The offer of a warrant of an underlying security.

Answer 77

C

A dividend paid to a shareholder is excluded from the definition of a sale or offer to sell under the Act.

Question 78

102. What is the maximum 12-b1 fee a no-load mutual fund can charge?

a) 0.25 of average net assets per quarter
b) 0.25 of average net assets per year
c) 0.50 of average net assets per year
d) Zero

Answer 78

B

The maximum 12b-1 fee a no-load mutual fund can charge is 0.25 of average net assets per year.

Question 79

103. The quick ratio is

a) An inferior measure because it fails to consider inventory.
b) A more stringent measure than the current ratio.
c) A more lenient measure than the current ratio.
d) Less accurate than the current ratio because it does not consider the time value of money.

Answer 79

B

The quick ratio is a more stringent measure because it uses only cash equivalents (inventory is deducted) which are divided by current liabilities.

Question 80

104. What are the tax consequences of changing from one fund to another within a family of funds?

a) It is tax-deferred.
b) It is a taxable event because it is a purchase and sale.
c) It is not a taxable event.
d) It may not be a taxable event if exchanged at the same NAV.

Answer 80

B

The exchange privilege of a family of mutual funds normally permits the sale of the shares of one fund and the purchase of the shares of another fund to occur at net asset value. The tax consequence results from the sale of fund shares compared with their original purchase price.

Question 81

105. 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.

Answer 81

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.

Question 82

106. ABC Corporation originally authorized 1 million shares and has issued 600,000 shares. ABC Corporation has decided to buy 50,000 of their shares back and place them in treasury. How many shares are currently outstanding?

a) 400,000 shares
b) 550,000 shares
c) 600,000 shares
d) 1 million shares

Answer 82

B

The formula to calculate the number of outstanding shares is as follows: Total issued shares - Treasury stock = Number of outstanding shares (or in this scenario, 600,000 - 50,000 = 550,000 outstanding shares).

Question 83

107. The function of a prospectus in association with a variable contract is to

a) Demonstrate superior performance potential when compared to whole life policies.
b) Provide the consumer with complete information in order to make an informed decision.
c) Relate how the separate account performance can guarantee the death benefit and cash accumulation.
d) All of the above.

Answer 83

B

The main purpose of a prospectus with respect to a variable contract is to provide the consumer with complete and detailed information in an effort to assist them in making an informed decision.

Question 84

108. The broker call rate is based on

a) Rate governing bond call provisions.
b) Broker/dealer investment in Treasury Securities.
c) Rate banks charge broker/dealers for loans secured by securities.
d) Debit balances in customer margin accounts.

Answer 84

C

The broker call rate is the rate banks charge broker/dealers for loans to customers for margin account purchases.

Question 85

109. 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

Answer 85

A

The spread is the difference between the bid and ask; $45.25 - $45.20 = $0.05.

Question 86

110. A 35-year-old employee and first-time home buyer wishes to withdraw $10,000 from her IRA account for the purchase. This provision is available in

a) Traditional and Roth IRAs.
b) No IRA: buying a home is not a qualifying event.
c) Traditional IRAs only.
d) Roth IRAs only.

Answer 86

A

This hardship provision is available to owners of both traditional and Roth IRA accounts, without penalty.

Question 87

111. An IA purchases stock for its own account from one of its institutional clients. This transaction is called a/an

a) Institutional cross trade.
b) ECN trade.
c) Principal transaction.
d) Agency cross trade.

Answer 87

C

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.

Question 88

113. Stanley is working with a client who recently received a lump-sum settlement from an insurance company. The only thing Stanley knows at this time is the amount that the client received. Which of the following best describes a non-financial consideration that Stanley should keep in mind in making any investment recommendation?

a) The capital needs that the client is currently faced with
b) The client’s attitude toward money and risk
c) The timeframe that the client has for retirement
d) The client’s current financial status and goals

Answer 88

B

The client’s attitude is an important non-financial consideration in any investment recommendation. Economic background, attitude toward money itself, level of investment experience, and ability to endure the volatility of the marketplace will determine, to an equal degree as the amount of money the client has to invest, what types of investment are suitable for the client.

Question 89

114. An investment adviser sells a security from inventory to a customer. Which of the following statements is true?

a) The adviser may not charge a markup on such trades without prior written customer consent.
b) Principal trades between investment advisers and their customers are not permitted.
c) Such trades are not permitted without prior written customer consent.
d) The adviser may not charge a markdown on the customer’s subsequent sale of the security.

Answer 89

C

An investment adviser may not execute trades from inventory (principal trades) with a customer unless it has prior written consent from that customer.

Question 90

116. Which statement is true concerning dollar cost averaging?

a) Dollar cost averaging protects the investor from a loss in a steadily declining market.
b) Dollar cost averaging is a way to reduce risk.
c) Dollar cost averaging allows the investor to buy the same number of shares per installment.
d) All of the above are true statements.

Answer 90

B

Dollar cost is a method to reduce risk because more shares are purchased in a down market (when the shares are cheaper) and fewer shares are purchased with the same amount of money in a rising market (when the shares are more expensive). The investors buy more when the price is low and less when the price is high. This practice levels out the cost basis of the shares over time providing a lower average share price, which minimizes overall investor risk. Dollar cost averaging cannot protect the investor from a loss in a steadily declining market and is not a guarantee of a profit.

Question 91

117. Issuers engage in

a) Primary transactions.
b) Secondary transactions.
c) Neither primary nor secondary transactions.
d) Both primary and secondary transactions.

Answer 91

A

When the issuer receives the money, it is a primary transaction.

Question 92

118. A common fund found in the indenture of a revenue bond that provides money for additions, expansions, and improvements is the

a) Operations and maintenance fund.
b) Construction fund.
c) Replacement and renewal fund.
d) Sinking fund.

Answer 92

C

Of the common funds that are found in the indenture of revenue bond, an operations and maintenance fund provides for monies to operate and maintain the facility. A debt service fund provides for service of the principal and interest payments. A replacement and renewal fund provides monies for additions, improvements, or expansions to the current facility if these are considered beneficial.

Question 93

120. When comparing the IRR of two investments yielding the same amount, which provides the most value to an investor?

a) The lower dollar value over the term of the investment.
b) Highest IRR above “0”.
c) The higher dollar value over the term of the investment.
d) Lowest IRR as it represents the discounted value to investors.

Answer 93

B

The highest IRR (above zero) offers the most value to an investor. Zero represents breakeven and a value above zero represents value above the NPV of the amount invested.

Question 94

125. Which of the following best describes a market order?

a) An order to purchase securities on a buy
b) An order to buy a security at the most advantageous price
c) An order to capitalize on the decline in the price of a security
d) A conditional order

Answer 94

B

A market order is an order to buy or sell a stated amount of a security at the most advantageous price obtainable after the order is given.

Question 95

127. 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

Answer 95

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.

Question 96

128. 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

Answer 96

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.

Question 97

130. Which of the following is false regarding diversification?

a) It generally allows more consistent returns and reduces the risk of significant losses in one sector.
b) It can be achieved by the small investor through the use of mutual funds.
c) It protects the investor against losses during prolonged bear market conditions.
d) It is most effective when applied within asset classes as well as among asset classes.

Answer 97

C

Diversification, though a very basic and important concept, neither assures a profit nor protects against loss.