Quattro Flashcards
2. Which of the following is not a priority for a fiduciary managing an account in compliance with the Prudent Man Rule?
a) Income
b) Speculation
c) Permanence
d) Safety
B
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.”
5. Money market fund returns will fluctuate in relation to the yields of
a) Passbook savings rates.
b) Treasury bills.
c) Series EE savings bonds.
d) U.S. government bonds.
B
The returns on money markets will fluctuate in relation to the yields of the fund’s underlying securities. Money markets invest in short term maturity securities such as Treasury bills, commercial paper, bank certificates of deposit, and banker’s acceptances. They do NOT invest in longer term U.S. government bonds nor do they invest in non-negotiable Series EE savings bonds. Passbook savings rates offered by banks on savings account deposits are unrelated to money market investment portfolios.
6. In September, Tatum sells her stocks from air conditioning manufacturers and buys stocks of snowmobile companies. This practice is called
a) Sector rotating.
b) Trend riding.
c) Rebalancing.
d) Asset allocation.
A
Sector rotating involves changing portfolio investments to favored market sectors based on economic conditions, or seasonal trends. Tatum is repositioning her portfolio from a slowing sector into an accelerating one.
7. 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
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).
8. A broker/dealer that is making a market in a particular security is said to be acting as
a) A principal.
b) An account executive.
c) A broker.
d) An issuer.
A
When a firm is a market maker in a security, that firm is selling from its own account, and acting as dealer or in a principal capacity.
10. To calculate the after-tax yield on an investment, an investor takes the return on investment and multiplies that number by the
a) Reciprocal of the investor’s tax bracket.
b) Number of years the investment was held.
c) Investor’s current tax bracket.
d) Current FED funds rate of return.
A
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. 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
B
They may each contribute $6,000.
13. Which of the following are true regarding municipal offerings? I. Revenue bonds are usually offered through competitive bidding. II. Revenue bonds are usually offered through a negotiated process. III. General obligation bonds are usually offered through competitive bidding. IV. General obligation bonds are usually offered through a negotiated process.
a) I and III
b) I and IV
c) II and III
d) II and IV
C
II and III are correct. A “competitive bid” process is often required for GO bonds; revenue bond issues are typically negotiated.
14. Which of the following best describes a benchmark portfolio?
a) Benchmark portfolios have rapid turnover.
b) A benchmark portfolio measures long term growth in constant dollars.
c) It establishes a baseline for comparison.
d) It is a commonly used forecasting tool.
C
Benchmark portfolios, or indices, are comparison tools which measure broad or narrow market performance.
15. On a bond purchased at a discount,
a) Yield-to-maturity is lower than yield-to-call.
b) Yield-to-maturity equals yield-to-call.
c) Yield-to-maturity is lower than nominal yield.
d) Yield-to-maturity is higher than yield-to-call.
A
On a discount bond, yield-to-call is the highest yield.
16. According to the Uniform Securities Act, investment adviser advertising must
a) Not violate the Investment Advisers Act of 1940.
b) Be submitted to FINRA within 10 days of first use.
c) Adhere to the advertising provisions of the USA.
d) Be pre-approved by the SEC.
A
Under the USA, investment adviser advertising that violates the Investments Adviser Act of 1940 is illegal.
17. 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.
19. Which of the following are true with regard to provisions under the Uniform Securities Act? I. Civil courts can impose criminal penalties. II. The Act provides for civil liabilities. III. The Act provides for criminal penalties.
a) I only
b) I and II
c) II and III
d) I, II and III
C
The Act provides for civil liabilities and criminal liabilities and penalties. Civil penalties are the judgment of the civil court system.
20. A security will be registered by qualification. What may an agent say to a prospective buyer?
a) The Administrator has approved the security as soon as the registration is effective.
b) The security will be registered in the State.
c) The issue is already selling quickly.
d) Since this is the most stringent registration process, the security is relatively safe.
B
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.
21. 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.
22. 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
B
The maximum 12b-1 fee a no-load mutual fund can charge is 0.25 of average net assets per year.
24. 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
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.
25. A bond with a 6 percent coupon is trading at a discount. Based on this information an investor could reasonably expect
a) At maturity the investor will receive par value minus the amount of the discount.
b) The yield to maturity will be less than 6 percent.
c) The current yield to exceed 6 percent.
d) The interest on a $1,000 bond to be less than $6.
C
If the bond is trading at a discount to par it indicates that market interest rates are greater than 6 percent; therefore, the bond’s price is below par ($1,000). Because the price is now lower, the current yield has increased. Annual interest payment/current bond price = current yield.
26. The Uniform Prudent Investor Act
a) Supersedes the Investment Advisers Act of 1940.
b) Sets standards by which investment advisers should manage discretionary accounts.
c) Sets broker/dealer conduct standards regarding handling of cash, margin and option accounts.
d) Outlines permissible broker/dealer and investment adviser activity in UGMA/UTMA accounts.
B
The Uniform Prudent Investor Act sets standards by which investment advisers should manage funds over which they exercise discretionary control
27. Which of the following is false regarding municipal bond taxation?
a) Municipal bond interest is tax free at the state level if the investor lives in the same state as the issuer.
b) Capital gains from municipal bond trading are taxed at the federal level.
c) Capital gains from municipal bond trading are tax free if the investor lives in the same state as the issuer.
d) Municipal bond interest is tax free at the federal level if the investor lives in the same state as the issuer.
C
Capital gains from municipal bond trading are always taxable at the federal and state level if applicable, regardless of the investor’s state of residence. Municipal bond interest is tax free at the federal level if the investor lives in the same state as the issuer and when the investor does not live in the same state as the issuer.
28. 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) $0
b) $75,000
c) $35,000
d) $20,000
A
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.
29. 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
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.
30. 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.
31. During an investigation the administrator may I. Subpoena records located in other states. II. Subpoena witnesses from any states. III. Convict for fraud. IV. Revoke registration on behalf of other state administrators.
a) I and II
b) I and III
c) II and IV
d) III and IV
A
During an investigation the administrator can subpoena records or witnesses within or outside the state. Administrators can also provide evidence to the proper authorities to file criminal charges.
32. If the Federal Reserve Board through the FOMC (Federal Open Market Committee) lowers the discount rate, which of the following will decline? I. T-Bill discount rate; II. Federal Funds rate; III. Prime rate; IV. Lending levels at banks
a) I and II
b) I and IV
c) II and III
d) II and IV
A
The T-Bill and the Fed Funds rates will decline. The prime rate may not, and lending levels increase when rates are lower.
34. Assuming that a bond is purchased at a discount, then
a) CY is greater than YTC.
b) CY is greater than YTM.
c) Nominal yield, or stated rate, is less than YTC.
d) Nominal yield is greater than YTC.
C
If a bond is selling at a discount, the current yield (CY) will be higher than the nominal (coupon) yield. The yield-to-maturity (YTM) will be even higher than the current yield, since the discount represents a profit earned at maturity. The yield to call (YTC) is the highest yield on a callable bond traded at a discount.
35. Which of the following is not affected by the declaration of a dividend?
a) Working capital
b) Net worth
c) Assets
d) Liabilities
C
The declaration of a dividend increases current liabilities and reduces retained earnings. There is no impact on cash (assets) until the dividend is paid. When current assets are unchanged and current liabilities increase, working capital decreases.
36. 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.
37. FINRA requires which of the following persons to sign the new account form?
a) Registered Representative
b) Account Owner
c) Approving Principal
d) All of the above
C
FINRA requires the principal who approves the account to sign the new account form. The account owner’s signature is not required by FINRA but is required by most broker/dealers.
38. 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) Such statements may not be made since they imply a specific performance of a security for which advice is being given.
b) 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.
c) The adviser has not violated any provisions of securities law as he was only stating an opinion and not giving formal advice.
d) This is considered an example of an adviser doing performance research which is part of the advisory services contract.
A
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.
39. Which of the following securities is NOT exempt from the USA?
a) A bond from a company listed on the NYSE
b) Municipal bonds
c) An intrastate offering of nonexempt securities
d) A stock listed on NASDAQ
C
Municipal bonds are exempt securities. Also, an issue of a company listed on a national exchange is exempt under the federal covered exemption, since these companies already adhere to stringent federal regulations. An intrastate offering is registered at the state level under the USA.
41. Which of the following types of trusts provide the greatest tax benefits?
a) Irrevocable trusts
b) Testamentary trusts
c) Revocable trusts
d) Insurance trusts
A
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.
42. Which of the following municipal entities does NOT issue overlapping debt?
a) School district
b) Turnpike authority
c) Park district
d) Library district
B
The turnpike authority issues self-supporting revenue debt, not general obligation.
43. A magazine published in New York contains an offer to sell a security. The magazine is also circulated in Pennsylvania. The offer to sell would come under the Act in which state?
a) Pennsylvania
b) New York
c) Both
d) All states
B
Jurisdiction for an offer to sell a security falls under the state where the media is published, even if the circulation is distributed to other states.
44. Which of the following is NOT a qualified exemption to the IRA early distribution rule and will incur a penalty?
a) To pay for excessive medical bills
b) At age 60 for retirement purposes
c) To purchase an investment property
d) For educational purposes
C
Withdrawing funds for an investment property is not one of the conditions that will waive the 10% early withdrawal penalty.
45. 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.
49. Which of the following is the price-to-book ratio?
a) Current assets / authorized shares
b) Current market price / book value per share
c) Current assets / book value per share
d) Current market price/ par value per share
B
The formula for the price-to-book ratio is current market price / (total assets-intangible assets-liabilities / number of outstanding shares)
50. An investor who wants to find background information on their Investment Adviser Representative will find it in
a) The investment advisory contract.
b) Form ADV Part 1.
c) Form ADV Part 2B.
d) Form S-1.
C
Form ADV Part 2B is used to provide information to clients and prospects about the investment adviser representative.
51. An investment adviser sells a security from inventory to a customer. Which of the following statements is true?
a) Principal trades between investment advisers and their customers are not permitted.
b) Such trades are not permitted without prior written customer consent.
c) The adviser may not charge a markdown on the customer’s subsequent sale of the security.
d) The adviser may not charge a markup on such trades without prior written customer consent.
B
An investment adviser may not execute trades from inventory (principal trades) with a customer unless it has prior written consent from that customer.
53. After ceasing operations, an Investment Adviser must maintain a surety bond for
a) 90 days.
b) 1 year.
c) 3 years.
d) 5 years.
C
An IA must maintain a surety bond for 3 years after it ceases operations.
54. Which of the following statements are true regarding surety bonds that may be required of agents, broker/dealers and investment advisers? I. They are normally only required if the registrant has custody of customer assets or discretionary authority. II. The required amount of the bond is usually $25,000. III. Bonds may not be required of investment advisers who meet minimum net worth requirements. IV. A cash or security deposit may be required in addition to the bond.
a) I and II
b) I and III
c) II and III
d) II and IV
B
Bonds are usually in the amount of $35,000. A cash or security deposit may be accepted instead of a bond, not required in addition to a bond.
