Readiness Exam #2

Question 1

Under Labor Department regulations and the Safe Harbor provisions of ERISA, in order for participants in the plan to be considered to have control in their investments, they must be given which of the following? I. At least three different investment options; II. Information to make an informed decision; III. The ability to change investments at least quarterly; IV. The ability to invest 100% in company stock

(A) I, II & III

(B) III only

(C) I, II & IV

(D) I & IV

Answer 1

A

Question 2

Under the Uniform Securities Act, which of the following are considered nonexempt securities?

(A) Municipal bonds

(B) Stocks of a railroad

(C) Treasury bills

(D) Stocks of a bank holding company

Answer 2

D

Question 3

If an adviser has custody of a client’s securities or funds, the adviser must provide for all of the following EXCEPT

(A) Send a list of all funds and/or securities held annually to the SEC or the Administrator.

(B) The securities and/or funds must be segregated and properly marked.

(C) Send an itemized list of all securities and/or funds held to the client at least every 3 months.

(D) All funds and/or securities be verified annually by an independent auditor.

Answer 3

A

Client securities or funds may not be commingled with those of the adviser. However, there is no need to send a list of the client’s holdings in an agent’s safekeeping to the Administrator or the SEC.

Question 4

Owning shares of convertible/exchangeable preferred stock allows the shareholder to convert shares into

(A) Bonds of the same issuer or a subsidiary of the issuer.

(B) Cumulative, participating preferred stock of the same issuer.

(C) Bonds of the same issuer.

(D) Common stock of the same issuer or an affiliate of the issuer.

Answer 4

D

Question 5

Under the Uniform Securities Act, broker/dealer firms seeking to register in this state must disclose which of the following?

(A) The complete background information on all its employees, regardless of job classification

(B) All misdemeanors

(C) Orders issued by other states

(D) The credit history of all its officers and directors

Answer 5

C

Question 6

With respect to the sale of federal covered securities, the Administrator may require all of the following EXCEPT

(A) A consent to service of process.

(B) A report of the value of the federal covered securities to be sold in this state.

(C) Registration.

(D) Copies of documents filed with the SEC.

Answer 6

C

Federal covered securities are subject to registration with the SEC but not the states. Instead, the issuer of a federal covered security must make a notice filing that includes copies of all documents filed with the SEC, pay a filing fee, file a consent to service of process form to create jurisdiction in this state, and provide a report indicating the value of the federal covered securities to be sold in this state.

Question 7

The basis for determining the inflation-adjusted rate of return is

(A) Internal rate of return.

(B) The consumer price index.

(C) 3-month CD rates.

(D) 3-month T-bill rates.

Answer 7

B

Question 8

Which of the following would be exempt from registration under the Uniform Securities Act? I. Government securities; II. Common stock of a national bank; III. Debt issue of Montreal, Canada; IV. Security listed on the New York Stock Exchange.

(A) III & IV

(B) I, II, III & IV

(C) I & II

(D) I, II & III

Answer 8

B

Question 9

A private placement of securities to a limited number of purchasers who are purchasing for investment purposes without any general advertising and commissions is a/an

(A) Non-exempt security.

(B) Exempt transaction.

(C) Non-exempt transaction.

(D) Exempt security.

Answer 9

B

Question 10

The trustee of a trust has chosen a money manager for the trust whose past performance numbers have been excellent. In the first year, the trust had a 20% return. In the second year, the performance was (-7)%. Which of the following is true regarding this situation?

(A) The trustee may be relieved of liability as it relates to the decisions or actions of the agent to whom the function was delegated.

(B) The trustee is fully responsible for the duties of the agent to whom the duty was delegated.

(C) The trustee has violated the Prudent Investor Act by delegating this function.

(D) Since the trustee has delegated this function, the trustee no longer has any responsibility.

Answer 10

A

Section 9 of the Prudent Investor Act addresses the delegation of investment and management functions. It states that a trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances. The trustee shall exercise reasonable care, skill, and caution in selecting an agent, establishing the scope and terms of the delegation consistent with the purpose and terms of the trust, and periodically reviewing the agent’s actions in order to monitor the agent’s performance and compliance with the terms of the delegation. A trustee who complies with these requirements is not liable to the beneficiaries or to the trust for decisions or actions of the agent to whom the function was delegated.

Question 11

American Depositary Receipts (ADRs) are

(A) Used to finance imports and exports.

(B) Used to facilitate the trading of foreign currencies.

(C) Used to facilitate the trading of U.S. securities in foreign markets.

(D) Receipts for foreign securities traded in U.S. markets.

Answer 11

D

ADRs are receipts for foreign securities that are held in trust by a U.S. bank in the foreign country. The purpose of an ADR is to facilitate the trading of foreign securities in U.S. markets.

Question 12

What is the purpose of looking at a stock’s moving average as opposed to just looking at its actual price?

(A) To determine whether the stock is a good buy

(B) To time the market

(C) To predict the future

(D) To define the trend and recognize changes in the trend

Answer 12

D

Question 13

Violations of the Securities Act of 1933 would include all of the following EXCEPT

(A) Prior to the effective date of the registration statement, accepting a firm buy order from a customer.

(B) A statement in the final prospectus which is a material misstatement.

(C) Delivering to a potential purchaser of mutual fund shares a prospectus which is out of date.

(D) Disclosing in the preliminary prospectus the pricing formula for the investment company shares.

Answer 13

D

Question 14

Under the USA, an EXEMPT security is exempt from which of the following? I. Advertising filing; II. Registration; III. Prospectus delivery requirements; IV. Anti-fraud rules

(A) I only

(B) I & II

(C) I, II & III

(D) I, II, III & IV

Answer 14

C

Question 15

The Administrator may do which of the following? I. Issue subpoenas; II. Issue orders; III. Issue injunctions; IV. Levy criminal penalties

(A) I only

(B) I & II

(C) I, II & III

(D) I, II, III & IV

Answer 15

B

The Administrator has broad powers but only a court of law can issue injunctions and levy criminal penalties. However, the Administrator may issue subpoenas and has order-making (or rulemaking) powers.

Question 16

The basis for measuring risk-adjusted return is the rate of return currently being paid on which of the following?

(A) Short-term certificates of deposit

(B) Long-term government bonds

(C) Short-term T-bills

(D) Commercial paper

Answer 16

C

Question 17

A municipal bond was issued in the customer state of residency with a par value of $1,000 and a nominal rate of 6.5%. If the investor is in a 25% federal tax bracket and a 10% state tax bracket, the investor’s after-tax yield would be approximately

(A) 6.50%.

(B) 23%.

(C) 85%.

(D) 88%.

Answer 17

A

Question 18

An investment adviser sends out a disclosure statement to prospects. Under NASAA’s Statement of Policy, it would be unethical if I. The adviser states that they are a registered investment adviser (RIA). II. The adviser states that they are SEC approved. III. The adviser omits the fact that their representatives do not hold college degrees. IV. The adviser neglects to include a list of clients for reference.

(A) I & II

(B) III & IV

(C) I, II, III & IV

(D) I only

Answer 18

A

Question 19

Which of the following is NOT exempt from the advertising filing requirements of the Uniform Securities Act?

(A) Municipal bonds

(B) U.S. Government securities

(C) Corporate securities

(D) Bank securities

Answer 19

C

Question 20

Which of the following is a suitable investment vehicle for a customer seeking both safety and liquidity?

(A) Treasury bills

(B) Variable annuities

(C) Common stocks

(D) High-yield bonds

Answer 20

A

Question 21

Registration of a firm as an investment adviser (IA) automatically registers the firm’s partners, officers, and directors as which of the following?

(A) Associated persons

(B) Agents

(C) Investment adviser representatives (IARs)

(D) Issuers

Answer 21

C

Question 22

All of the following are true about U.S. government Treasury bills EXCEPT

(A) The interest they earn is taxed at the federal level.

(B) They are money market instruments.

(C) They are sold at a discount.

(D) The interest they earn is taxed at the state level.

Answer 22

D

For this question, it helps to remember the saying, “They tax themselves but not each other.” The interest that is paid by U.S. government securities is taxable at the federal level but is tax free at the state level. With a municipal bond, the interest is taxable at the state level but tax free at the federal level.

Question 23

To reduce a client’s exposure to systematic risk in his stock portfolio, an adviser should consider which of the following?

(A) Beta

(B) Diversification

(C) Standard & Poor’s and Moody’s ratings

(D) Price/earnings ratios

Answer 23

A

Beta is a measure of a portfolio’s volatility as compared to the volatility of the overall market. Since systematic risk is risk associated with the overall market, lowering the client’s beta relative to that of the market should lower his or her exposure to market risk. Diversification, safety ratings, and price/earnings ratios should be considered when evaluating unsystematic risk, which is the risk associated with a particular issuer’s securities.

Question 24

A bond with a par value of $1,000 is selling in the market for $900. If the bond pays $45 a year in interest, the figure of 5% represents its

(A) Yield to maturity.

(B) Nominal rate.

(C) Coupon rate.

(D) Current yield.

Answer 24

D

To find the current yield on a bond, divide the annual interest ($45) by the bond’s current market price ($900), which would be 5%.

Question 25

Disciplinary proceedings under the Uniform Securities Act generally require the Administrator to provide which of the following? I. Opportunity for a hearing; II. Written findings of facts and conclusions of law; III. Appropriate prior notice

(A) I, II & III

(B) I & III

(C) II only

(D) II & III

Answer 25

A

Question 26

Investors buying a portfolio of long-term bonds are most concerned with which of the following risks?

(A) Interest rate

(B) Regulatory

(C) Inflation

(D) Liquidity

Answer 26

A

If interest rates go up in the economy, bond prices will drop in the secondary market, which can have a serious impact on investors. For example, many insurance companies invest their legal reserves in long-term bonds. If interest rates doubled, their portfolios would only be worth $0.50 on the dollar, which could severely impact their ability to write new business and to pay claims.

Question 27

A measure of investor confidence in the value of a stock is the

(A) Debt to asset ratio.

(B) Current ratio.

(C) Price/earnings ratio.

(D) Inventory turnover ratio.

Answer 27

C

Question 28

Tracking moving averages is used for which of the following purposes? I. Estimate future price fluctuations; II. Determine when to buy; III. Discover changes in a trend; IV. Determine when to sell

(A) II, III & IV

(B) I, II, III & IV

(C) I only

(D) I & II

Answer 28

A

A moving average is superimposed on a stock’s chart line by a technical analyst. Plotting moving averages makes it easier to notice a change in a trend. If the stock price penetrates the moving average on the upside after a downward trend, it is a signal to buy. If the stock price penetrates the moving average on the downside following an upward trend, it is a signal to sell.

Question 29

If the trustee of a complex trust seeks to make a distribution to the beneficiary within 65 days after the end of the trust’s tax year end, the distribution

(A) Is not a deductible distribution for the trust.

(B) Will be taxable to the beneficiary as if it were made on the last day of the tax year.

(C) Must be retained by the trust as undistributed income.

(D) Is taxable to the trust as retained income.

Answer 29

B

Question 30

A 60-year-old client has been making annual contributions to a traditional IRA over a period of years. The account value is now $200,000, which represents $50,000 in nondeductible contributions, $50,000 in deductible contributions, and $100,000 in earnings. If she withdraws $100,000 from the account, the tax treatment will be

(A) Nontaxable.

(B) $25,000 nontaxable, $75,000 taxable as ordinary income.

(C) $50,000 nontaxable, $50,000 taxable as ordinary income.

(D) All taxable as ordinary income.

Answer 30

B

If the client had funded the IRA entirely with deductible contributions, the cost basis would be zero and 100% of any distribution would be taxable as ordinary income. If the IRA was funded entirely with nondeductible contributions, only the earnings would be taxable upon distribution. Since she funded it with both in this case, the withdrawal is taxed proportionately.

Question 31

All of the following rollovers are permitted EXCEPT

(A) Roth IRA to Roth IRA.

(B) Traditional IRA to Roth IRA.

(C) Roth IRA to a 403(b) tax-sheltered annuity.

(D) Traditional IRA to another traditional IRA.

Answer 31

C

Roth IRAs may not be rolled over into traditional IRAs, tax-sheltered annuities (403(b) plans), or qualified pension plans. A traditional IRA may be rolled over into a Roth IRA without the 10% premature distribution penalty, but it is considered to be a taxable distribution.

Question 32

Under the Uniform Securities Act, if the order is in the public interest, the Administrator may deny a person’s application for registration for all of the following reasons EXCEPT

(A) Being barred from the securities industry by a state court.

(B) Conviction of a misdemeanor for assault 7 years ago.

(C) Being barred from the securities business by the SEC.

(D) Conviction of any felony.

Answer 32

B

Question 33

When a customer sells stock to a broker/dealer and the broker/dealer is purchasing for its own account, what price will the customer get for the stock?

(A) Ask price plus commission

(B) Bid price less the mark-down

(C) Ask price

(D) Bid price

Answer 33

B

Market makers enter bid and ask prices into the system. The ask price is the lowest price that any dealer will sell the stock at. The bid price is the most that any dealer is willing to buy the stock at. The only two numbers that really matter are the lowest ask and the highest bid. If the customer is going to sell the stock, what price will the customer get? The customer will get the bid price minus the mark-down. This makes sense since the bid is the most a dealer will buy at. When the broker/dealer is acting as an agent, they charge a commission. When the broker/dealer is acting as a principal, they charge a markup or markdown.

Question 34

When economic activity increases, the economy is said to be in which phase of the business cycle?

(A) Expansion

(B) Trough

(C) Contraction

(D) Peak

Answer 34

A

Question 35

An investor who bought shares of a growth fund and now needs current income should

(A) Redeem the shares and buy a deferred annuity.

(B) Redeem the shares and buy zero-coupon bonds.

(C) Start a withdrawal plan.

(D) Exchange the shares for shares of a bond fund in the same fund family.

Answer 35

D

Although it is not required by law, most mutual funds grant their investors the right of exchange. If granted, an investor whose investment objectives have changed may redeem his or her shares in one fund and move the money to another fund in the same family (or complex) without a sales charge. However, the IRS treats such an exchange as a redemption and repurchase, so taxes may be due.

Question 36

The gross domestic product (GDP) of the United States is defined as

(A) The difference between total imports and total exports for the USA.

(B) The market value of a market basket of goods produced in the USA.

(C) The market value of the goods and services produced by labor and property in the USA.

(D) The income from all goods and services sold in the USA.

Answer 36

C

Question 37

A document that governs the distribution of an investor’s assets after his or her death is a

(A) Will.

(B) Covenant.

(C) Power of attorney.

(D) Trust.

Answer 37

A

Question 38

A bond was purchased for $975 and sold one year later for $1,025. During the year, the bond paid $40 in interest. What was the investor’s total return?

(A) 3.90%

(B) 4.00%

(C) 9.00%

(D) 9.23%

Answer 38

D

Question 39

To find the holding period return, all of the following would be necessary EXCEPT the

(A) Sales price.

(B) Time held.

(C) Purchase price.

(D) Prime rate.

Answer 39

D

Question 40

A technical analyst would do which of the following? I. Make charts and graphs; II. Look to the past to predict the future; III. Plot support and resistance; IV. Chart a stock’s moving average

(A) I, II, III & IV

(B) I & III

(C) I & IV

(D) III only

Answer 40

A

Question 41

An investment adviser must obtain written discretionary authority within how many business days after the date of the first transaction placed pursuant to oral discretionary authority?

(A) 20 days

(B) 30 days

(C) 60 days

(D) 10 days

Answer 41

D

Question 42

The interest rate that large international banks dealing in Eurodollars charge each other for large loans is known as the

(A) LIBOR.

(B) Federal funds rate.

(C) Eurodollar rate.

(D) Discount rate.

Answer 42

A

Question 43

The S&P 500 is what kind of index?

(A) Earnings

(B) Growth

(C) Capitalization

(D) Price

Answer 43

C

Question 44

An investor buys a 5% bond with a 30-year maturity at par. Interest rates increase and the bond is now selling for $800. Assuming that the investor holds the bond until maturity and the principal is repaid as scheduled, what risk has the investor had?

(A) Purchasing power

(B) Market

(C) Business

(D) Interest rate

Answer 44

A

Fixed-income securities (such as bonds) have purchasing power (or inflation) risk. In this question, if the rate of inflation exceeds the bond’s fixed nominal interest rate of 5%, the investor is losing purchasing power. While a bond also has interest rate risk (or risk that the bond’s value will drop in the secondary market if interest rates in the economy go up), there is no interest rate risk on a bond if it is held to maturity and redeemed at its par value.

Question 45

The best measurement of investment performance over a period of time is

(A) Holding period return.

(B) Inflation-adjusted return.

(C) Total return.

(D) Annualized return.

Answer 45

D

Question 46

The estate tax exclusion is an amount that

(A) The executor of the estate must declare as taxable income.

(B) The estate does not have to pay taxes on.

(C) The estate has to pay taxes on.

(D) The beneficiaries of an estate have to pay taxes on.

Answer 46

B

Question 47

Do Zero-Coupon Bonds Have Reinvestment Risk?

Answer 47

NO.
Reinvestment risk refers to the possibility that an investor will be unable to reinvest cash flows (e.g., coupon payments) at a rate comparable to their current rate of return. Zero-coupon bonds are the only fixed-income security to have no investment risk since they issue no coupon payments

Question 48

Which of the following is a characteristic of a zero-coupon bond?

(A) It has no reinvestment risk.

(B) Par value is guaranteed in the event of bankruptcy.

(C) Interest is tax deferred.

(D) It has little interest rate risk.

Answer 48

A

Question 49

Which type of business entity does NOT offer a direct flow-through of profits and losses to its owners?

(A) Partnership

(B) C corporation

(C) Limited liability company

(D) S corporation

Answer 49

B

Question 50

If interest rates in the economy go up, the yields on outstanding debt will do which of the following?

(A) Flatten

(B) Go down

(C) Remain unchanged

(D) Go up

Answer 50

D

Remember the teeter-totter: if interest rates go up, then yields go up and price goes down. When interest rates go up, any new bond being issued at that point would have to pay a higher coupon rate.

Question 51

An investment adviser has discretionary authority over all of their client accounts. The assets under management vary from $200,000 to $2,000,000. If the adviser elects to invest $50,000 from each of their client accounts in a limited partnership, they may have violated rules related to

(A) Custody.

(B) Control.

(C) Discretion.

(D) Suitability.

Answer 51

D

Question 52

A large corporation is under investigation by the federal government because it is suspected of being a monopoly. This is an example of what type of risk?

(A) Market

(B) Legislative

(C) Business

(D) Regulatory

Answer 52

D

Question 53

Which type of portfolio would be considered to be most volatile?

(A) 5% stocks, 95% bonds

(B) 90% stocks, 10% bonds

(C) 75% stocks, 25% bonds

(D) 50% stocks, 50% bonds

Answer 53

B

Question 54

Which of the following is true about required minimum distributions for traditional IRAs?

(A) They must begin by April 1 of the year in which the owner reaches age 59 ½

(B) They are mandatory as of April 1 following the calendar year in which the owner reaches age 70 ½

(C) They must begin whenever the individual retires

(D) They must be completed over a 5-year period

Answer 54

B

Question 55

54. Under ERISA, certain transactions are prohibited in order to prevent dealing with parties who may be in a position to exercise improper influence over the plan. Prohibited parties include which of the following? I. The employer; II. Plan fiduciaries; III. Service providers; IV. Relatives of parties in interest

a) I, II, III & IV
b) I only
c) I, II & III
d) II, III & IV

Answer 55

A

Under ERISA, fiduciaries of pension plans are prohibited from engaging in certain transactions with parties in interest, who are also known as prohibited parties.

Question 56

Estate taxes are due within how many months after death?

(A) 3 months

(B) 6 months

(C) 9 months

(D) 12 months

Answer 56

C

Estate taxes are due 9 months after a person’s death.

Question 57

If a customer invests $1,000 and receives $150 in dividends and $100 in appreciation, the customer’s 25% return is known as

(A) Total return.

(B) Expected return.

(C) Annualized return.

(D) Current yield.

Answer 57

A

Question 58

Which of the following shows an investor’s net worth?

(A) Statement of cash flows

(B) Balance sheet

(C) Quarterly statement

(D) Income statement

Answer 58

B

Question 59

A diversified portfolio of fixed income securities would have which of the following risks? I. Inflation; II. Interest rate; III. Business; IV. Market

(A) I, II, III & IV

(B) I & II only

(C) I & III only

(D) II & III only

Answer 59

B

A diversified portfolio of fixed income securities is subject to both inflation and interest rate risk. Inflation risk exists because the rate of inflation could exceed the fixed rate of return on the portfolio, which would result in a loss of purchasing power. Furthermore, if interest rates in the economy go up, the portfolio could lose value, which is known as interest rate risk. However, since the portfolio is diversified, most business risk (or performance risk) is eliminated. Market risk cannot be avoided by diversification but is more common to stock portfolios rather than bond portfolios.

Question 60

All of the following are required under the Prudent Investor Act EXCEPT

(A) Low-risk investments only.

(B) Diversification.

(C) Individual investment decision made in relationship to the portfolio as a whole.

(D) An analysis of risk/reward.

Answer 60

A

Section 3 of the Uniform Prudent Investor Act addresses the requirement of diversification. Under the Act, a trustee shall diversify the investments of the trust unless the trustee reasonably determines that because of special circumstances the purposes of the trust are better served without diversification. Section 2 of the Uniform Prudent Investor Act addresses the concept of standard of care, portfolio strategy, and risk and return objectives. This second section states that a trustee’s investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as part of an overall investment strategy having risk and return objectives reasonably suited to the trust.

Question 61

To find the present value of a bond, all of the following would need to be known EXCEPT

(A) Maturity date.

(B) Volatility.

(C) Par value.

(D) Coupon rate.

Answer 61

B

Question 62

All of the following are lagging economic indicators EXCEPT

(A) Interest rates.

(B) Unemployment rate.

(C) Building permits.

(D) Business spending.

Answer 62

C

Question 63

Which of the following bonds has the most interest rate risk?

(A) A 0% 20-year corporate bond selling at par

(B) A 5 and 3/4% 15-year muni bond selling at 97 and 7/8

(C) A 7 ½% 15-year corporate bond selling at 98 and 1/4

(D) An 8% 10-year corporate bond selling at 99

Answer 63

A

Question 64

Which of the following types of investments has the most interest rate risk?

(A) Certificates of deposit

(B) Treasury bills

(C) Treasury bonds

(D) Common stock

Answer 64

C

Question 65

Which of the following securities has a residual claim on corporate income and assets?

(A) Mortgage bonds

(B) Preferred stock

(C) Debenture

(D) Common stock

Answer 65

D

Question 66

If a customer inherits $100,000 worth of stock and sells it within the same year for $120,000, what are the tax implications?

(A) Zero inheritance tax, $20,000 long-term capital gain.

(B) Zero since inheritances are not taxable.

(C) $120,000 short-term capital gain.

(D) Zero inheritance tax, $20,000 short-term capital gain.

Answer 66

A

If a security is inherited, the cost basis to the beneficiary is “stepped-up” or “stepped-down” to the fair market value of the securities on the day of the decedent’s death. If the beneficiary sells the securities for more than the cost basis, the capital gain will be taxed at long-term capital gains rates, regardless of the holding period.

Question 67

Which of the following is FALSE?

(A) Passive investors invest in limited partnerships.

(B) A customer’s cash flow statement does not include the client’s assets.

(C) An agent may share commissions with any other agent.

(D) Limited partners have no active role in management.

Answer 67

C

Question 68

A grantor sets up a revocable trust but allows his spouse to withdraw funds. These funds would be taxable to

(A) The trustee.

(B) The spouse.

(C) No one.

(D) The grantor.

Answer 68

D

A grantor who retains certain interests in a trust he or she creates may be treated as the owner of all or part of the trust and thus taxed on the income of the trust in proportion to the ownership. If the trust income is distributed or held for the benefit of the grantor or the spouse, he or she will be treated as the owner of it and will be taxed accordingly.

Question 69

When is it permissible for an IA to get paid both a fee for investment advice and a commission?

(A) When the assets under management are over $750,000

(B) When verbally disclosed to the client

(C) Never

(D) When disclosed to the client in writing

Answer 69

D

Question 70

On a corporate balance sheet, all of the following are components of net worth (or stockholders’ equity) EXCEPT

(A) Value of the bonds at par.

(B) Value of the preferred stock at par.

(C) Retained earnings.

(D) Value of the common stock at par.

Answer 70

A

Question 71

Owners of all of the following types of companies have limited liability EXCEPT

(A) Limited partnerships.

(B) S corporations.

(C) Limited liability companies (LLCs).

(D) C corporations.

Answer 71

A

Question 72

The market capitalization of a company may be found by

(A) Dividing the number of shares outstanding by the market price of one share.

(B) Multiplying the market value of one share by the number of shares outstanding.

(C) Multiplying the par value of one share by the number of shares outstanding.

(D) Adding up the value of all the outstanding stocks and bonds.

Answer 72

B

Question 73

An investment adviser who has no place of business in the state may provide investment advice to which of the following without needing to be registered as an investment adviser? I. Investment companies; II. Pension plans; III. No more than 5 customers other than institutional investors in 12 consecutive months.

(A) I & II

(B) I, II & III

(C) II & III

(D) I & III

Answer 73

B

Question 74

Which of the following requires registration in this state?

(A) Shares of an insurance company

(B) Shares of a trust company

(C) Limited partnership units

(D) Shares of a bank

Answer 74

C

Question 75

Which of the following constitute(s) an offer and/or sale? I. Bona fide pledge or loan; II. Consequence of a judicially approved business reorganization; III. An offer of a warrant; IV. Stockholder-approved merger

(A) I, II & IV

(B) III only

(C) II only

(D) IV only

Answer 75

B

Question 76

If a broker/dealer firm hires an agent to sell an issuer’s new securities, the agent represents

(A) FINRA.

(B) The broker/dealer firm.

(C) The broker/dealer firm and the issuer.

(D) The issuer.

Answer 76

B

Although an agent may represent an issuer or a broker/dealer, if it is the broker/dealer who hires the agent to sell the securities, the agent represents the broker/dealer. An issuer who hires an agent to sell its own securities would not need to hire a broker/dealer since an agent may represent an issuer as well.

Question 77

All of the following are considered to be quantitative measurements of risk variability EXCEPT

(A) Beta.

(B) Standard deviation.

(C) Price/earnings ratio.

(D) Duration.

Answer 77

C

Question 78

All of the following are leading economic indicators EXCEPT

(A) Business spending.

(B) Average workweek of production workers.

(C) Building permits.

(D) Manufacturer’s new orders for consumer goods.

Answer 78

A

Question 79

Which of the following is true regarding a bond priced at 104?

(A) The bond’s yield to maturity will be lower than the current yield.

(B) The bond’s yield to maturity will be higher than the current yield.

(C) The bond’s yield to maturity will be equal to the current yield.

(D) The bond’s yield to call will be higher than the current yield.

Answer 79

A

Question 80

When selling securities in an offering, a broker/dealer must furnish a final prospectus to a customer no later than the

(A) Date of the confirmation.

(B) End of the fifth business day.

(C) Trade date.

(D) Settlement date.

Answer 80

A

Question 81

An institutional investor includes all of the following EXCEPT

(A) Mutual funds.

(B) An insurance company.

(C) A pension plan.

(D) An accredited investor.

Answer 81

D

Question 82

If the dollar depreciates, which of the following would benefit?

(A) United States government

(B) United States exporters

(C) United States importers

(D) Foreign exporters

Answer 82

B

Question 83

A securities firm that executes trades on behalf of customers on a commission basis and/or buys and sells securities for its own account as a principal and at its own risk is known as

(A) A broker/dealer.

(B) A market maker.

(C) An underwriter.

(D) A broker.

Answer 83

A

Question 84

Under NASAA’s Statement of Policy on Dishonest or Unethical Business Practices of Broker/Dealers and Agents, a broker/dealer selling securities in an offering may give which of the following to a client in lieu of a final prospectus?

(A) A summary of the important information contained in the prospectus

(B) A preliminary prospectus and an additional document, which together include all information set forth in the final prospectus

(C) Nothing may be given in lieu of a final prospectus.

(D) A statement of additional information

Answer 84

B

According to NASAA’s Statement of Policy, broker/dealers selling securities in an offering may give prospective customers a preliminary prospectus and an additional document, which together include all of the information set forth in the final prospectus in lieu of the final prospectus.

Question 85

The process of making changes to an asset allocation portfolio over time in an effort to bring it into line with the client’s original portfolio asset allocation model is known as

(A) Front running.

(B) Diversification.

(C) Shadowing.

(D) Rebalancing.

Answer 85

D

Question 86

A customer purchased $12,000 worth of stock in a margin account. If Regulation T is 60%, what is the customer’s equity?

(A) $4,000

(B) $6,000

(C) $7,200

(D) $12,000

Answer 86

C

Question 87

Assets in which of the following types of trusts are not included in the trustor’s estate for federal tax purposes?

(A) Revocable trust

(B) Living trust

(C) Testamentary trust

(D) Irrevocable trust

Answer 87

D

Question 88

A large manufacturing firm is considering upgrading its computer unit at a cost of $200,000. The upgraded computer will be useful for 5 years and provide cost savings of $75,000 a year. The current market value of the computer is $100,000. The cost of capital is 15%. All of the following are true EXCEPT I. The company will need to look at the investment’s net present value to determine whether it should go through with the upgrade. II. The company should not under any circumstances go through with the upgrade. III. The cost of capital is the cost of the company’s funds. IV. If the net present value is less than $100,000, then the project should not be pursued.

(A) II & IV

(B) IV only

(C) I & II

(D) I & III

Answer 88

A

For an investment to be worthwhile, the expected return on capital must be greater than the cost of capital. The cost of capital is the rate of return that capital could be expected to earn in an alternative investment of equivalent risk. The net present value formula would consider the initial amount invested ($200,000). The future savings are viewed as a positive cash flow of $75,000 a year for 5 years. The discount rate used in the net present value formula is the cost of capital given in the question, or 15%. A positive net present value (greater than zero) means it is an acceptable investment.

Question 89

All of the following are true about the delivery of Part 2 of Form ADV EXCEPT

(A) It is acceptable to deliver to an existing client a summary of material changes and the information necessary to access the full amended brochure.

(B) It must be delivered to all existing clients annually and semiannually.

(C) It must be delivered to all existing clients annually.

(D) It must be delivered to all prospective clients.

Answer 89

B

An investment adviser must annually deliver its brochure to all existing clients or at a minimum, deliver a summary of material changes and the information necessary to get a copy of the full brochure within 120 days of the end of the firm’s fiscal year. Part 2A of Form ADV must be delivered to all prospective clients at or prior to when the IA enters into a contract with the client for services.

Question 90

If the trustee of a simple trust does not distribute the income from the trust to the beneficiary by year end,

(A) The trust must pay the taxes on the undistributed income.

(B) Taxes are deferred until the year a distribution is made.

(C) No taxes liability will accrue against the trust or the beneficiary.

(D) The beneficiary must pay the taxes as though a distribution were made.

Answer 90

D

On a simple trust, all income is required to be distributed to the beneficiaries every year and must be reported by the beneficiaries, regardless of whether income was actually distributed to them by the trustee of the trust.

Question 91

An investor bought 100 shares of stock for $30 a share on June 30, 2016. On July 1, 2017, the investor sold the stock for $32 a share. During the one-year holding period, the rate of inflation was 3%, according to the consumer price index (CPI), and the investor received dividends of $1 per share. What was the investor’s total return?

(A) 7%

(B) 10%

(C) 57%

(D) 67%

Answer 91

B

Question 92

Who sets the prime rate?

(A) The Chairman of the Federal Reserve Board

(B) The Securities and Exchange Commission

(C) The banks

(D) The Federal Open Market Committee

Answer 92

C

The prime rate is the interest rate that banks set for their best commercial customers.

Question 93

If a client is interested in purchasing a stock with a market risk about the same as the overall market, the agent should recommend a stock with a beta of

(A) 0.75

(B) 1

(C) 1.25

(D) 2

Answer 93

B

Question 94

Under the Investment Company Act of 1940, which of the following is not considered to be an affiliated person of an investment company?

(A) The investment company’s investment adviser

(B) The investment company’s shareholders

(C) A person holding at least 5% of the voting securities

(D) An officer, director, partner, or employee of the investment company

Answer 94

B

Question 95

An investment adviser who reallocates portfolio asset classes based upon anticipated market changes is using a strategy known as

(A) Dollar-cost averaging.

(B) Indexing.

(C) Tactical asset allocation.

(D) Value investing.

Answer 95

C

Question 96

To find future value, all of the following information is needed EXCEPT the

(A) Rate of inflation.

(B) Present value.

(C) Holding period.

(D) Interest rate.

Answer 96

A

Question 97

All of the following would cause the early withdrawal penalty to be waived on an IRA early withdrawal EXCEPT

(A) One month late mortgage payment.

(B) First time home buyer expenses.

(C) Unreimbursed medical expenses in excess of 10% of AGI.

(D) Higher educational expenses.

Answer 97

A

Question 98

Under the Uniform Securities Act, it is unlawful for any person to transact business in a state as an investment adviser (IA) unless: I. The IA is registered under the Uniform Securities Act. II. The IA is registered in another state and the only clients in this state are registered investment companies or insurance companies. III. The IA has no office in the state and does not direct business communications to more than 5 noninstitutional clients (the de minimis exemption).

Answer 98

A

Question 99

As defined in the Uniform Securities Act (USA), which of the following is NOT considered a security?

(A) Stock option

(B) Limited partnership unit

(C) Commodity option

(D) Fixed annuity

Answer 99

D

Question 100

Just before the economy makes a turning point at the end of an economic downturn, the economy is considered to be in an economic

(A) Recession.

(B) Trough.

(C) Expansion.

(D) Contraction.

Answer 100

B

Question 101

Macroeconomic policies of the Federal Reserve Board designed to stimulate the economy include all of the following EXCEPT

(A) Repurchasing U.S. government securities in the secondary market from banks and dealers.

(B) Lowering the discount rate.

(C) Reducing bank reserve requirements.

(D) Lowering the Regulation T initial margin requirements.

Answer 101

D

Question 102

Which of the following would be listed as income on a client’s tax return?

(A) Qualified dividends

(B) Inheritance from a friend

(C) Social security benefits

(D) Long-term care insurance benefits

Answer 102

A

Of those listed, only qualified dividends would be considered to be taxable income on a client’s tax return. Qualified dividends are generally those that are paid by U.S.-based corporations and mutual funds.

Question 103

A husband and wife are the grantors and trustees of a revocable trust. If the husband dies, the securities held in the trust

(A) Will go to the surviving spouse under the marital exemption.

(B) Must stay in the trust for the benefit of the beneficiaries.

(C) Will be distributed in accordance with the trust agreement.

(D) Must be sold with the proceeds distributed to the beneficiaries.

Answer 103

B

Question 104

A corporation that issued stock options to its employees might elect to buy call options on its own stock in order to reduce which of the following risks?

(A) Regulatory

(B) Liquidity

(C) Opportunity cost

(D) Business

Answer 104

D

Question 105

If a 65-year-old with an IRA dies before distributions begin, her spousal beneficiary

(A) Must take distributions over 5 years.

(B) Must take distributions of the expected lifespan of the decedent.

(C) May defer taxes by treating the IRA as inherited.

(D) Must take a lump-sum distribution.

Answer 105

C

Question 106

In order for a retirement plan to comply with the Safe Harbor Provision of ERISA, which of the following must occur? I. Participants must be given a choice of at least three diversified investment choices. II. Participants must be allowed to purchase company stock within the retirement plan. III. Participants must be allowed to change their investment allocations and transfer among investment accounts at least once every calendar quarter. IV. Participants must be educated as to how to select investments and change investment selections.

(A) I & IV

(B) I, III & IV

(C) II & IV

(D) I only

Answer 106

B

Question 107

Under NASAA’s Statement of Policy on Dishonest or Unethical Business Practices of Broker/Dealers and Agents, all of the following are considering market manipulation EXCEPT

(A) Charging unreasonable fees for the safekeeping and custody of securities.

(B) Effecting any transaction in a security which involves no change of beneficial ownership.

(C) Spreading false rumors.

(D) Effecting a series of transactions in any security for the purpose of inducing the purchase or sale of such security by others.

Answer 107

A

Under NASAA’s Statement of Policy, broker/dealer firms may not effect any transaction in or induce the purchase or sale of any security by means of any manipulative or deceptive device which may include: effecting any transaction in a security which involves no change in the beneficial ownership thereof; spreading false rumors; or effecting transactions in any security creating actual or apparent active trading in such security or raising or depressing the price of such security for the purpose of inducing the purchase or sale of such security by others. All of the above activities are considered to be market manipulation.

Question 108

If interest rates are stable, the best indicator of a bond’s value is its

(A) Current yield.

(B) Nominal yield.

(C) Yield to call.

(D) Yield to maturity.

Answer 108

B

Question 109

Under the Uniform Securities Act, applicants for registration as agents must disclose misdemeanors they have been convicted of during the last 10 years if they involve any aspect of which of the following? I. Securities business; II. Investment business; III. Banking business; IV. Insurance business.

(A) I & II

(B) II, III & IV

(C) I, II, III & IV

(D) I only

Answer 109

C

Question 110

Under the Uniform Securities Act, a security that is exempt from the registration requirements is also exempt from the: I. Requirements for filing of advertising and sales literature II. Anti-fraud provisions III. Civil liabilities provisions

(A) I only

(B) I & III

(C) II & III

(D) I, II & III

Answer 110

A

Question 111

If the beta on a portfolio is 1.25 as measured against the S&P 500 index, then the portfolio has

(A) 12.5% more risk than the index.

(B) The same amount of risk as the index.

(C) 25% less risk than the index.

(D) 25% more risk than the index.

Answer 111

D

Question 112

What causes a positive yield curve? I. The expectation that interest rates will rise in the future; II. The expectation that interest rates will be lowered in the future; III. The demand that investors have for a higher yield in a longer term instrument; IV. Excessive demand for long-term bonds

(A) II & IV

(B) II, III, & IV

(C) II only

(D) I & III

Answer 112

D

Question 113

What federal law governs pension plans?

(A) Uniform Prudent Investors Act

(B) ERISA

(C) What federal law governs pension plans?

(D) Securities Act of 1933

Answer 113

B

Question 114

If an investor’s primary investment objective is preservation of capital, which of the following products should an adviser recommend?

(A) Money market fund

(B) U.S. government bond fund

(C) Bond fund

(D) Income fund

Answer 114

A

Imagine a risk spectrum and look for the safest of these investments. A money market fund would be the most conservative and therefore the best at meeting the investment objective of preservation of capital.

Question 115

A customer purchased property to be held in a revocable trust for $450,000. Just prior to their death, they were offered $750,000 for the property which was appraised for $850,000. What is the value of the property in the trust for estate tax purposes?

(A) $850,000

(B) Zero since the property was held in trust

(C) $450,000

(D) $750,000

Answer 115

A

Question 116

Which of the following is NOT considered an equity security?

(A) Preferred stock

(B) Bonds

(C) Common stock

(D) American Depository Receipts

Answer 116

B

Question 117

On a corporate balance sheet, the formula current assets minus current liabilities may be used to find

(A) Book value.

(B) Current ratio.

(C) Net worth.

(D) Working capital.

Answer 117

D

Working capital finances the cash conversion cycle of a business, which is the time required to convert raw materials into finished goods, finished goods into sales, and accounts receivable into cash. On a company’s balance sheet, working capital may be found by subtracting current liabilities from current assets.

Question 118

A trustee managing a trust in accordance with the Prudent Investor Act will be evaluated regarding fiduciary duties on which basis?

(A) On the performance of the entire portfolio as a whole

(B) On individual transactions and the entire performance

(C) On the performance of individual transactions versus the S&P 500

(D) Each individual transaction

Answer 118

(A) On the performance of the entire portfolio as a whole

Question 119

An investor invests $2,000 today. After 5 years, the account balance is $4,000. What is the rate of return?

(A) 7.2%

(B) 14.4%

(C) 15%

(D) 18%

Answer 119

(B) 14.4%

Question 120

An underwriter is a broker/dealer who does all of the following EXCEPT

(A) Helps issuers register new issues with the proper regulatory authorities.

(B) Acts in the capacity of an investment banker.

(C) Helps issuers market shares to the public in the primary market.

(D) Makes trades in the secondary market on a commission basis.

Answer 120

(D) Makes trades in the secondary market on a commission basis.

Question 121

Under the Investment Advisers Act of 1940, which of the following meets the definition of an investment adviser? I. An accountant who advertises the availability of investment advice; II. An insurance agent who makes general recommendations about allocating financial resources to savings accounts, real estate, and securities but whose specific advice and income is related solely to sales of insurance policies; III. A financial planner who advises clients on whether municipal bonds, common stocks, or money market funds are most appropriate for their situation but who does not make recommendations regarding particular securities within those groups.

(A) I & III

(B) II & III

(C) I, II & III

(D) I & II

Answer 121

(A) I & III

Question 122

A REIT may be set up to invest in which of the following?

(A) Bonds

(B) Mutual funds

(C) Construction loans

(D) Stocks

Answer 122

(C) Construction loans

Question 123

Which of the following is/are true regarding the use of solicitors? I. A person who has been found guilty of a misdemeanor in the past 10 years related to the securities industry may not be a solicitor; II. The use of solicitors is prohibited; III. The solicitor must give out both the IA’s brochure and the solicitor’s brochure; IV. The solicitor’s brochure must disclose the fee to be paid.

(A) III only

(B) I, II, III, & IV

(C) I, III, & IV

(D) I & IV

Answer 123

(C) I, III, & IV

Question 124

A 50-year-old client hires an investment adviser to manage his retirement portfolio. The time horizon for this investor’s portfolio should be

(A) However many years the investor plans to continue working.

(B) The investor’s lifetime.

(C) 12 years since the investor can take early Social Security benefits at age 62.

(D) 15 years since the investor can receive full Social Security benefits at age 65.

Answer 124

(B) The investor’s lifetime.

Question 125

Investment advisers often utilize technical analysis

(A) To analyze a company’s income statement and balance sheet.

(B) To determine a stock’s book value.

(C) To analyze computer industry stocks.

(D) Because historical trends repeat.

Answer 125

(D) Because historical trends repeat.

Question 126

A customer of a broker/dealer whose sole objective is income has granted discretionary authority to her agent. The agent purchases zero-coupon bonds for the account. This action is: I. Suitable; II. Unsuitable; III. Authorized; IV. Unauthorized

(A) II & III

(B) II & IV

(C) I & III

(D) I & IV

Answer 126

(A) II & III

Question 127

The passive approach to investing is best illustrated by which of the following?

(A) A mutual fund manager who attempts to duplicate the performance of the S&P 500 index

(B) A mutual fund manager who buys growth stocks in an attempt to generate capital gains

(C) A mutual fund manager who engages in market timing

(D) A mutual fund manager who utilizes technical analysis

Answer 127

(A) A mutual fund manager who attempts to duplicate the performance of the S&P 500 index

Question 128

An investor purchased 100 shares of common stock for $50 a share on July 1, 2016. On July 1, 2017, the investor sold the shares for $55 a share. During the 1-year holding period, the investor received $2 per share in dividends, but according to the consumer price index, inflation increased by 3%. What was the investor’s total return?

(A) 4%

(B) 10%

(C) 11%

(D) 14%

Answer 128

(D) 14%

Question 129

A limited partner who receives a direct flow through of operating losses from a limited partnership

(A) Can write them off up to a maximum of $3,000 a year.

(B) Cannot write them off.

(C) Can write them off against income from other sources.

(D) Can write them off only against passive income.

Answer 129

(D) Can write them off only against passive income.

Question 130

Investment advisers who have custody of their customers’ monies must do all EXCEPT

(A) Send the customer an itemized statement at least once a year.

(B) Have an independent accountant conduct a surprise audit of the client’s assets at least once a year.

(C) Notify the client of the location of the bank holding the account.

(D) Set up a separate bank account for each client.

Answer 130

A

Send the customer an itemized statement at least once a year.

Question 131

If a portfolio manager described his style as contrarian, the investor would expect that the manager would be doing which of the following?

(A) Sitting on the sidelines

(B) Selling when others are selling

(C) Following the crowd

(D) Buying when others are selling

Answer 131

CHOSE D

Question 132

3. If an adviser has custody of a client’s securities or funds, the adviser must provide for all of the following EXCEPT

a) Send a list of all funds and/or securities held annually to the SEC or the Administrator.
b) The securities and/or funds must be segregated and properly marked.
c) Send an itemized list of all securities and/or funds held to the client at least every 3 months.
d) All funds and/or securities be verified annually by an independent auditor.

Answer 132

A

Client securities or funds may not be commingled with those of the adviser. However, there is no need to send a list of the client’s holdings in an agent’s safekeeping to the Administrator or the SEC.

Question 133

6. With respect to the sale of federal covered securities, the Administrator may require all of the following EXCEPT

a) A consent to service of process.
b) A report of the value of the federal covered securities to be sold in this state.
c) Registration.
d) Copies of documents filed with the SEC.

Answer 133

C

Federal covered securities are subject to registration with the SEC but not the states. Instead, the issuer of a federal covered security must make a notice filing that includes copies of all documents filed with the SEC, pay a filing fee, file a consent to service of process form to create jurisdiction in this state, and provide a report indicating the value of the federal covered securities to be sold in this state.

Question 134

10. The trustee of a trust has chosen a money manager for the trust whose past performance numbers have been excellent. In the first year, the trust had a 20% return. In the second year, the performance was (-7)%. Which of the following is true regarding this situation?

a) The trustee may be relieved of liability as it relates to the decisions or actions of the agent to whom the function was delegated.
b) The trustee is fully responsible for the duties of the agent to whom the duty was delegated.
c) The trustee has violated the Prudent Investor Act by delegating this function.
d) Since the trustee has delegated this function, the trustee no longer has any responsibility.

Answer 134

A

Section 9 of the Prudent Investor Act addresses the delegation of investment and management functions. It states that a trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances. The trustee shall exercise reasonable care, skill, and caution in selecting an agent, establishing the scope and terms of the delegation consistent with the purpose and terms of the trust, and periodically reviewing the agent’s actions in order to monitor the agent’s performance and compliance with the terms of the delegation. A trustee who complies with these requirements is not liable to the beneficiaries or to the trust for decisions or actions of the agent to whom the function was delegated.

Question 135

11. American Depositary Receipts (ADRs) are

a) Used to finance imports and exports.
b) Used to facilitate the trading of foreign currencies.
c) Used to facilitate the trading of U.S. securities in foreign markets.
d) Receipts for foreign securities traded in U.S. markets.

Answer 135

D

ADRs are receipts for foreign securities that are held in trust by a U.S. bank in the foreign country. The purpose of an ADR is to facilitate the trading of foreign securities in U.S. markets.

Question 136

15. The Administrator may do which of the following? I. Issue subpoenas; II. Issue orders; III. Issue injunctions; IV. Levy criminal penalties

a) I only
b) I & II
c) I, II & III
d) I, II, III & IV

Answer 136

B

The Administrator has broad powers but only a court of law can issue injunctions and levy criminal penalties. However, the Administrator may issue subpoenas and has order-making (or rulemaking) powers.

Question 137

22. All of the following are true about U.S. government Treasury bills EXCEPT

a) The interest they earn is taxed at the federal level.
b) They are money market instruments.
c) They are sold at a discount.
d) The interest they earn is taxed at the state level.

Answer 137

D

For this question, it helps to remember the saying, “They tax themselves but not each other.” The interest that is paid by U.S. government securities is taxable at the federal level but is tax free at the state level. With a municipal bond, the interest is taxable at the state level but tax free at the federal level.

Question 138

23. To reduce a client’s exposure to systematic risk in his stock portfolio, an adviser should consider which of the following?

a) Beta
b) Diversification
c) Standard & Poor’s and Moody’s ratings
d) Price/earnings ratios

Answer 138

A

Beta is a measure of a portfolio’s volatility as compared to the volatility of the overall market. Since systematic risk is risk associated with the overall market, lowering the client’s beta relative to that of the market should lower his or her exposure to market risk. Diversification, safety ratings, and price/earnings ratios should be considered when evaluating unsystematic risk, which is the risk associated with a particular issuer’s securities.

Question 139

24. A bond with a par value of $1,000 is selling in the market for $900. If the bond pays $45 a year in interest, the figure of 5% represents its

a) Yield to maturity.
b) Nominal rate.
c) Coupon rate.
d) Current yield.

Answer 139

D

To find the current yield on a bond, divide the annual interest ($45) by the bond’s current market price ($900), which would be 5%.

Question 140

26. Investors buying a portfolio of long-term bonds are most concerned with which of the following risks?

a) Interest rate
b) Regulatory
c) Inflation
d) Liquidity

Answer 140

A

If interest rates go up in the economy, bond prices will drop in the secondary market, which can have a serious impact on investors. For example, many insurance companies invest their legal reserves in long-term bonds. If interest rates doubled, their portfolios would only be worth $0.50 on the dollar, which could severely impact their ability to write new business and to pay claims.

Question 141

28. Tracking moving averages is used for which of the following purposes? I. Estimate future price fluctuations; II. Determine when to buy; III. Discover changes in a trend; IV. Determine when to sell

a) II, III & IV
b) I, II, III & IV
c) I only
d) I & II

Answer 141

A

A moving average is superimposed on a stock’s chart line by a technical analyst. Plotting moving averages makes it easier to notice a change in a trend. If the stock price penetrates the moving average on the upside after a downward trend, it is a signal to buy. If the stock price penetrates the moving average on the downside following an upward trend, it is a signal to sell.

Question 142

30. A 60-year-old client has been making annual contributions to a traditional IRA over a period of years. The account value is now $200,000, which represents $50,000 in nondeductible contributions, $50,000 in deductible contributions, and $100,000 in earnings. If she withdraws $100,000 from the account, the tax treatment will be

a) Nontaxable.
b) $25,000 nontaxable, $75,000 taxable as ordinary income.
c) $50,000 nontaxable, $50,000 taxable as ordinary income.
d) All taxable as ordinary income.

Answer 142

B

If the client had funded the IRA entirely with deductible contributions, the cost basis would be zero and 100% of any distribution would be taxable as ordinary income. If the IRA was funded entirely with nondeductible contributions, only the earnings would be taxable upon distribution. Since she funded it with both in this case, the withdrawal is taxed proportionately.

Question 143

31. All of the following rollovers are permitted EXCEPT

a) Roth IRA to Roth IRA.
b) Traditional IRA to Roth IRA.
c) Roth IRA to a 403(b) tax-sheltered annuity.
d) Traditional IRA to another traditional IRA.

Answer 143

C

Roth IRAs may not be rolled over into traditional IRAs, tax-sheltered annuities (403(b) plans), or qualified pension plans. A traditional IRA may be rolled over into a Roth IRA without the 10% premature distribution penalty, but it is considered to be a taxable distribution.

Question 144

33. When a customer sells stock to a broker/dealer and the broker/dealer is purchasing for its own account, what price will the customer get for the stock?

a) Ask price plus commission
b) Bid price less the mark-down
c) Ask price
d) Bid price

Answer 144

B

Market makers enter bid and ask prices into the system. The ask price is the lowest price that any dealer will sell the stock at. The bid price is the most that any dealer is willing to buy the stock at. The only two numbers that really matter are the lowest ask and the highest bid. If the customer is going to sell the stock, what price will the customer get? The customer will get the bid price minus the mark-down. This makes sense since the bid is the most a dealer will buy at. When the broker/dealer is acting as an agent, they charge a commission. When the broker/dealer is acting as a principal, they charge a markup or markdown.

Question 145

35. An investor who bought shares of a growth fund and now needs current income should

a) Redeem the shares and buy a deferred annuity.
b) Redeem the shares and buy zero-coupon bonds.
c) Start a withdrawal plan.
d) Exchange the shares for shares of a bond fund in the same fund family.

Answer 145

D

Although it is not required by law, most mutual funds grant their investors the right of exchange. If granted, an investor whose investment objectives have changed may redeem his or her shares in one fund and move the money to another fund in the same family (or complex) without a sales charge. However, the IRS treats such an exchange as a redemption and repurchase, so taxes may be due.

Question 146

44. An investor buys a 5% bond with a 30-year maturity at par. Interest rates increase and the bond is now selling for $800. Assuming that the investor holds the bond until maturity and the principal is repaid as scheduled, what risk has the investor had?

a) Purchasing power
b) Market
c) Business
d) Interest rate

Answer 146

A

Fixed-income securities (such as bonds) have purchasing power (or inflation) risk. In this question, if the rate of inflation exceeds the bond’s fixed nominal interest rate of 5%, the investor is losing purchasing power. While a bond also has interest rate risk (or risk that the bond’s value will drop in the secondary market if interest rates in the economy go up), there is no interest rate risk on a bond if it is held to maturity and redeemed at its par value.

Question 147

49. If interest rates in the economy go up, the yields on outstanding debt will do which of the following?

a) Flatten
b) Go down
c) Remain unchanged
d) Go up

Answer 147

D

Remember the teeter-totter: if interest rates go up, then yields go up and price goes down. When interest rates go up, any new bond being issued at that point would have to pay a higher coupon rate.

Question 148

54. Under ERISA, certain transactions are prohibited in order to prevent dealing with parties who may be in a position to exercise improper influence over the plan. Prohibited parties include which of the following? I. The employer; II. Plan fiduciaries; III. Service providers; IV. Relatives of parties in interest

a) I, II, III & IV
b) I only
c) I, II & III
d) II, III & IV

Answer 148

A

Under ERISA, fiduciaries of pension plans are prohibited from engaging in certain transactions with parties in interest, who are also known as prohibited parties.

Question 149

55. Estate taxes are due within how many months after death?

a) 3 months
b) 6 months
c) 9 months
d) 12 months

Answer 149

C

Estate taxes are due 9 months after a person’s death.

Question 150

58. A diversified portfolio of fixed income securities would have which of the following risks? I. Inflation; II. Interest rate; III. Business; IV. Market

a) I, II, III & IV
b) I & II only
c) I & III only
d) II & III only

Answer 150

B

A diversified portfolio of fixed income securities is subject to both inflation and interest rate risk. Inflation risk exists because the rate of inflation could exceed the fixed rate of return on the portfolio, which would result in a loss of purchasing power. Furthermore, if interest rates in the economy go up, the portfolio could lose value, which is known as interest rate risk. However, since the portfolio is diversified, most business risk (or performance risk) is eliminated. Market risk cannot be avoided by diversification but is more common to stock portfolios rather than bond portfolios.

Question 151

59. All of the following are required under the Prudent Investor Act EXCEPT

a) Low-risk investments only.
b) Diversification.
c) Individual investment decision made in relationship to the portfolio as a whole.
d) An analysis of risk/reward.

Answer 151

A

Section 3 of the Uniform Prudent Investor Act addresses the requirement of diversification. Under the Act, a trustee shall diversify the investments of the trust unless the trustee reasonably determines that because of special circumstances the purposes of the trust are better served without diversification. Section 2 of the Uniform Prudent Investor Act addresses the concept of standard of care, portfolio strategy, and risk and return objectives. This second section states that a trustee’s investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as part of an overall investment strategy having risk and return objectives reasonably suited to the trust.

Question 152

65. If a customer inherits $100,000 worth of stock and sells it within the same year for $120,000, what are the tax implications?

a) Zero inheritance tax, $20,000 long-term capital gain.
b) Zero since inheritances are not taxable.
c) $120,000 short-term capital gain.
d) Zero inheritance tax, $20,000 short-term capital gain.

Answer 152

A

If a security is inherited, the cost basis to the beneficiary is “stepped-up” or “stepped-down” to the fair market value of the securities on the day of the decedent’s death. If the beneficiary sells the securities for more than the cost basis, the capital gain will be taxed at long-term capital gains rates, regardless of the holding period.

Question 153

67. A grantor sets up a revocable trust but allows his spouse to withdraw funds. These funds would be taxable to

a) The trustee.
b) The spouse.
c) No one.
d) The grantor.

Answer 153

D

A grantor who retains certain interests in a trust he or she creates may be treated as the owner of all or part of the trust and thus taxed on the income of the trust in proportion to the ownership. If the trust income is distributed or held for the benefit of the grantor or the spouse, he or she will be treated as the owner of it and will be taxed accordingly.

Question 154

75. If a broker/dealer firm hires an agent to sell an issuer’s new securities, the agent represents

a) FINRA.
b) The broker/dealer firm.
c) The broker/dealer firm and the issuer.
d) The issuer.

Answer 154

B

Although an agent may represent an issuer or a broker/dealer, if it is the broker/dealer who hires the agent to sell the securities, the agent represents the broker/dealer. An issuer who hires an agent to sell its own securities would not need to hire a broker/dealer since an agent may represent an issuer as well.

Question 155

83. Under NASAA’s Statement of Policy on Dishonest or Unethical Business Practices of Broker/Dealers and Agents, a broker/dealer selling securities in an offering may give which of the following to a client in lieu of a final prospectus?

a) A summary of the important information contained in the prospectus
b) A preliminary prospectus and an additional document, which together include all information set forth in the final prospectus
c) Nothing may be given in lieu of a final prospectus.
d) A statement of additional information

Answer 155

B

According to NASAA’s Statement of Policy, broker/dealers selling securities in an offering may give prospective customers a preliminary prospectus and an additional document, which together include all of the information set forth in the final prospectus in lieu of the final prospectus.

Question 156

87. A large manufacturing firm is considering upgrading its computer unit at a cost of $200,000. The upgraded computer will be useful for 5 years and provide cost savings of $75,000 a year. The current market value of the computer is $100,000. The cost of capital is 15%. All of the following are true EXCEPT I. The company will need to look at the investment’s net present value to determine whether it should go through with the upgrade. II. The company should not under any circumstances go through with the upgrade. III. The cost of capital is the cost of the company’s funds. IV. If the net present value is less than $100,000, then the project should not be pursued.

a) II & IV
b) IV only
c) I & II
d) I & III

Answer 156

A

For an investment to be worthwhile, the expected return on capital must be greater than the cost of capital. The cost of capital is the rate of return that capital could be expected to earn in an alternative investment of equivalent risk. The net present value formula would consider the initial amount invested ($200,000). The future savings are viewed as a positive cash flow of $75,000 a year for 5 years. The discount rate used in the net present value formula is the cost of capital given in the question, or 15%. A positive net present value (greater than zero) means it is an acceptable investment.

Question 157

88. All of the following are true about the delivery of Part 2 of Form ADV EXCEPT

a) It is acceptable to deliver to an existing client a summary of material changes and the information necessary to access the full amended brochure.
b) It must be delivered to all existing clients annually and semiannually.
c) It must be delivered to all existing clients annually.
d) It must be delivered to all prospective clients.

Answer 157

B

An investment adviser must annually deliver its brochure to all existing clients or at a minimum, deliver a summary of material changes and the information necessary to get a copy of the full brochure within 120 days of the end of the firm’s fiscal year. Part 2A of Form ADV must be delivered to all prospective clients at or prior to when the IA enters into a contract with the client for services.

Question 158

89. If the trustee of a simple trust does not distribute the income from the trust to the beneficiary by year end,

a) The trust must pay the taxes on the undistributed income.
b) Taxes are deferred until the year a distribution is made.
c) No taxes liability will accrue against the trust or the beneficiary.
d) The beneficiary must pay the taxes as though a distribution were made.

Answer 158

D

On a simple trust, all income is required to be distributed to the beneficiaries every year and must be reported by the beneficiaries, regardless of whether income was actually distributed to them by the trustee of the trust.

Question 159

91. Who sets the prime rate?

a) The Chairman of the Federal Reserve Board
b) The Securities and Exchange Commission
c) The banks
d) The Federal Open Market Committee

Answer 159

C

The prime rate is the interest rate that banks set for their best commercial customers.

Question 160

101. Which of the following would be listed as income on a client’s tax return?

a) Qualified dividends
b) Inheritance from a friend
c) Social security benefits
d) Long-term care insurance benefits

Answer 160

A

Of those listed, only qualified dividends would be considered to be taxable income on a client’s tax return. Qualified dividends are generally those that are paid by U.S.-based corporations and mutual funds.

Question 161

106. Under NASAA’s Statement of Policy on Dishonest or Unethical Business Practices of Broker/Dealers and Agents, all of the following are considering market manipulation EXCEPT

a) Charging unreasonable fees for the safekeeping and custody of securities.
b) Effecting any transaction in a security which involves no change of beneficial ownership.
c) Spreading false rumors.
d) Effecting a series of transactions in any security for the purpose of inducing the purchase or sale of such security by others.

Answer 161

A

Under NASAA’s Statement of Policy, broker/dealer firms may not effect any transaction in or induce the purchase or sale of any security by means of any manipulative or deceptive device which may include: effecting any transaction in a security which involves no change in the beneficial ownership thereof; spreading false rumors; or effecting transactions in any security creating actual or apparent active trading in such security or raising or depressing the price of such security for the purpose of inducing the purchase or sale of such security by others. All of the above activities are considered to be market manipulation.

Question 162

107. If interest rates are stable, the best indicator of a bond’s value is its

a) Current yield.
b) Nominal yield.
c) Yield to call.
d) Yield to maturity.

Answer 162

D

If interest rates have stabilized, then a bond is no longer subject to interest rate risk; therefore, the best indicator of the bond’s value would be its yield to maturity, which may be found by dividing the bond’s adjusted annual return by the bond’s average price. Remember, a bond held to maturity has no interest rate risk.

Question 163

113. If an investor’s primary investment objective is preservation of capital, which of the following products should an adviser recommend?

a) Money market fund
b) U.S. government bond fund
c) Bond fund
d) Income fund

Answer 163

A

Imagine a risk spectrum and look for the safest of these investments. A money market fund would be the most conservative and therefore the best at meeting the investment objective of preservation of capital.

Question 164

116. On a corporate balance sheet, the formula current assets minus current liabilities may be used to find

a) Book value.
b) Current ratio.
c) Net worth.
d) Working capital.

Answer 164

D

Working capital finances the cash conversion cycle of a business, which is the time required to convert raw materials into finished goods, finished goods into sales, and accounts receivable into cash. On a company’s balance sheet, working capital may be found by subtracting current liabilities from current assets.

Question 165

117. A trustee managing a trust in accordance with the Prudent Investor Act will be evaluated regarding fiduciary duties on which basis?

a) On the performance of the entire portfolio as a whole
b) On individual transactions and the entire performance
c) On the performance of individual transactions versus the S&P 500
d) Each individual transaction

Answer 165

A

There are two fiduciary standards governing the prudence of the individual investments selected by a fiduciary – the Prudent Investor Act and the Prudent Man Rule. The Prudent Investor Act, which was adopted in 1990, reflects a modern portfolio theory and total return approach to the exercise of fiduciary investment discretion. This approach allows fiduciaries to utilize modern portfolio theory to guide investment decisions and requires risk versus return analysis. Therefore, a fiduciary’s performance is measured on the performance of the entire portfolio rather than on individual investments.

Question 166

122. Which of the following is/are true regarding the use of solicitors? I. A person who has been found guilty of a misdemeanor in the past 10 years related to the securities industry may not be a solicitor; II. The use of solicitors is prohibited; III. The solicitor must give out both the IA’s brochure and the solicitor’s brochure; IV. The solicitor’s brochure must disclose the fee to be paid.

a) III only
b) I, II, III, & IV
c) I, III, & IV
d) I & IV

Answer 166

C

The use of solicitors is allowed under both state and federal law. An individual may not be used as a solicitor if he or she has been found guilty of any felony in the past 10 years or any misdemeanor involving the securities industry in the past 10 years. A solicitor referral arrangement must be in writing. Under the Investment Advisers Act of 1940 and the associated SEC rules, the solicitor is only allowed to refer clients to the registered investment adviser. If the solicitor is also registered as an IAR, then the solicitor may provide investment advice about a security or the securities market to a prospective or existing client. The solicitor is required to give 2 brochures to the client: a copy of the investment adviser’s brochure and a separate written solicitor disclosure.

Question 167

127. An investor purchased 100 shares of common stock for $50 a share on July 1, 2016. On July 1, 2017, the investor sold the shares for $55 a share. During the 1-year holding period, the investor received $2 per share in dividends, but according to the consumer price index, inflation increased by 3%. What was the investor’s total return?

a) 4%
b) 10%
c) 11%
d) 14%

Answer 167

D

Total return calculations on stock include both dividends and gains. In this case, the investor had a $5 capital gain plus $2 in dividends during the year for a total of $7. Divide $7 by the price paid for the stock ($50) to find the total return of 14%. Do not confuse total return with yield, which is based only on earnings. The investor’s yield was only 4%, which can be found by dividing the dividends earned ($2) by the price paid for the stock ($50) and disregarding the capital gain.

Question 168

129. Investment advisers who have custody of their customers’ monies must do all EXCEPT

a) Send the customer an itemized statement at least once a year.
b) Have an independent accountant conduct a surprise audit of the client’s assets at least once a year.
c) Notify the client of the location of the bank holding the account.
d) Set up a separate bank account for each client.

Answer 168

A